AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2002
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER: 1-14832
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CELESTICA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
12 CONCORDE PLACE
TORONTO, ONTARIO, CANADA M3C 3R8
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:
Subordinate Voting Shares The Toronto Stock Exchange
(TITLE OF CLASS) The New York Stock Exchange
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Liquid Yield Option-TM- Notes due 2020 The New York Stock Exchange
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
N/A
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SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT:
10 1/2% Senior Subordinated Notes Due 2006
(TITLE OF CLASS)
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Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
190,642,482 Subordinate Voting Shares 0 Preference Shares
39,065,950 Multiple Voting Shares
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 Item 18 X
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TABLE OF CONTENTS
PAGE
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PART I.............................................................................. 1
Item 1. Identity of Directors, Senior Management and Advisors........... 1
Item 2. Offer Statistics and Expected Timetable......................... 1
Item 3. Key Information................................................. 1
A. Selected Financial Data..................................... 1
B. Capitalization and Indebtedness............................. 4
C. Reasons for Offer and Use of Proceeds....................... 4
D. Risk Factors................................................ 4
Item 4. Information on the Company...................................... 12
A. History and Development of the Company...................... 12
B. Business Overview........................................... 13
C. Organizational Structure.................................... 25
D. Description of Property..................................... 25
Item 5. Operating and Financial Review and Prospects.................... 26
A. Operating Results........................................... 28
B. Liquidity and Capital Resources............................. 34
C. Research and Development, Patents and Licenses, Etc......... 37
D. Trend Information........................................... 37
Item 6. Directors, Senior Management and Employees...................... 38
A. Directors and Senior Management............................. 38
B. Compensation................................................ 42
C. Board Practices............................................. 47
D. Employees................................................... 48
E. Share Ownership............................................. 48
Item 7. Major Shareholders and Related Party Transactions............... 52
A. Major Shareholders.......................................... 52
B. Related Party Transactions.................................. 54
C. Interests of Experts and Counsel............................ 55
Item 8. Financial Information........................................... 55
A. Consolidated Statements and Other Financial Information..... 55
B. Significant Changes......................................... 55
Item 9. The Offer and Listing........................................... 55
A. Offer and Listing Details................................... 55
B. Plan of Distribution........................................ 57
C. Markets..................................................... 58
D. Selling Shareholders........................................ 58
E. Dilution.................................................... 58
F. Expense of the Issue........................................ 58
Item 10. Additional Information.......................................... 58
A. Share Capital............................................... 58
B. Memorandum and Articles of Incorporation.................... 58
C. Material Contracts.......................................... 62
D. Exchange Controls........................................... 62
E. Taxation.................................................... 62
F. Dividends and Paying Agents................................. 67
G. Statement by Experts........................................ 67
H. Documents on Display........................................ 67
I. Subsidiary Information...................................... 68
Item 11. Quantitative and Qualitative Disclosures about Market Risk...... 68
Item 12. Description of Securities Other than Equity Securities.......... 69
PART II............................................................................. 70
Item 13. Defaults, Dividend Arrearages and Delinquencies................. 70
Item 14. Material Modifications to the Rights of Security Holders and Use
of Proceeds..................................................... 70
Item 15. [RESERVED]...................................................... 70
Item 16. [RESERVED]...................................................... 70
PART III............................................................................ 71
Item 17. Financial Statements............................................ 71
Item 18. Financial Statements............................................ 71
Item 19. Exhibits........................................................ 71
i
PART I
IN THIS ANNUAL REPORT, "CELESTICA," THE "COMPANY," "WE," "US" AND "OUR"
REFER TO CELESTICA INC. AND ITS SUBSIDIARIES.
IN DECEMBER 1999, WE COMPLETED A TWO-FOR-ONE SPLIT OF OUR SUBORDINATE VOTING
SHARES AND MULTIPLE VOTING SHARES BY WAY OF A STOCK DIVIDEND. WE HAVE RESTATED
ALL HISTORICAL SHARE AND PER SHARE INFORMATION TO REFLECT THE EFFECTS OF THIS
TWO-FOR-ONE SPLIT ON A RETROACTIVE BASIS, EXCEPT WHERE WE SPECIFICALLY STATE
OTHERWISE.
IN THIS ANNUAL REPORT, ALL DOLLAR AMOUNTS ARE EXPRESSED IN UNITED STATES
DOLLARS, EXCEPT WHERE WE STATE OTHERWISE. UNLESS WE STATE OTHERWISE, ALL
REFERENCES TO "U.S.$" OR "$" ARE TO U.S. DOLLARS AND ALL REFERENCES TO "C$" ARE
TO CANADIAN DOLLARS. UNLESS WE INDICATE OTHERWISE, ANY REFERENCE IN THIS ANNUAL
REPORT TO A CONVERSION BETWEEN U.S.$ AND C$ OR BETWEEN U.S.$ AND L IS GIVEN AS
OF MARCH 1, 2002. AT THAT DATE, THE NOON BUYING RATE IN NEW YORK CITY FOR CABLE
TRANSFERS IN CANADIAN DOLLARS WAS U.S.$1.00=C$1.5955, AS CERTIFIED FOR CUSTOMS
PURPOSES BY THE FEDERAL RESERVE BANK OF NEW YORK.
UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS ANNUAL REPORT IS
STATED AS OF MARCH 1, 2002.
FORWARD-LOOKING STATEMENTS
Item 4, "Information on the Company," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 5 and other
sections of this Annual Report contain forward-looking statements within the
meaning of section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, including (without limitation) statements
concerning possible or assumed future results of operations of Celestica
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "estimates," "intends," "plans" or similar expressions. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the U.S. Private Securities Litigation Reform Act of
1995.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. You should understand that the
following important factors, in addition to those discussed in Item 3, "Key
Information -- Risk Factors," and elsewhere in this Annual Report, could affect
our future results and could cause those results to differ materially from those
expressed in such forward-looking statements: the level of overall growth in the
electronics manufacturing services industry; lower-than-expected customer
demand; component constraints; variability of our operating results among
periods; our dependence on the computer and communications industries; our
dependence on a limited number of customers; and our ability to manage
expansion, consolidation and the integration of acquired businesses.
We disclaim any intention or obligation to update or revise any
forward-looking statements contained in this Annual Report or the documents
incorporated by reference herein, whether as a result of new information, future
events or otherwise.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
You should read the following selected financial data together with Item 5,
"Operating and Financial Review and Prospects," the Consolidated Financial
Statements in Item 18 and the other information in this Annual Report. The
selected financial data is derived from the consolidated financial statements
for the years we present.
1
The Consolidated Financial Statements have been prepared in accordance with
Canadian generally accepted accounting principles, or GAAP. These principles
conform in all material respects with U.S. GAAP except as described in Note 22
to the Consolidated Financial Statements. For all the years presented, the
selected financial data is prepared in accordance with Canadian GAAP. The
differences between the line items under Canadian GAAP and those as determined
under U.S. GAAP are not significant except that, under U.S. GAAP:
- our net loss for the year ended December 31, 1998 would be $6.2 million
greater due to non-cash charges for compensation expense and the loss on
extinguishment of debt amounting to $14.3 million, net of income tax,
would be treated as an extraordinary loss;
- our net earnings for the year ended December 31, 1999 would be
$1.9 million less due to non-cash charges for compensation expense;
- our net earnings for the year ended December 31, 2000 would be
$2.5 million less due to non-cash charges for compensation expense and
$6.8 million less due to interest on the convertible debt we issued in
August 2000, in the principal amount of $1,813.6 million, that would be
classified as a long-term liability rather than as an equity instrument;
and
- our net loss for the year ended December 31, 2001 would be $3.2 million
greater due to non-cash charges for compensation expense, $17.7 million
greater due to interest on convertible debt classified as a long-term
liability rather than as an equity instrument, $2.7 million greater due to
other charges and $12.1 million less due to the gain on a foreign exchange
contract.
YEAR ENDED DECEMBER 31,
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1997(1) 1998(1) 1999(1) 2000(1) 2001(1)
-------- -------- -------- -------- ---------
(in millions, except per share amounts)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA:
Revenue.............................................. $2,006.6 $3,249.2 $5,297.2 $9,752.1 $10,004.4
Cost of sales........................................ 1,866.9 3,018.7 4,914.7 9,064.1 9,291.9
-------- -------- -------- -------- ---------
Gross profit......................................... 139.7 230.5 382.5 688.0 712.5
Selling, general and administrative expenses......... 68.3 130.5 202.2 326.1 341.4
Amortization of intangible assets(2)................. 15.3 45.4 55.6 88.9 125.0
Integration costs related to acquisitions(3)......... 13.3 8.1 9.6 16.1 22.8
Other charges(4)..................................... 13.9 64.7 -- -- 273.1
-------- -------- -------- -------- ---------
Operating income (loss).............................. 28.9 (18.2) 115.1 256.9 (49.8)
Interest expense (income), net(5).................... 33.6 32.3 10.7 (19.0) (7.9)
-------- -------- -------- -------- ---------
Earnings (loss) before income taxes.................. (4.7) (50.5) 104.4 275.9 (41.9)
Income taxes......................................... 2.2 (2.0) 36.0 69.2 (2.1)
-------- -------- -------- -------- ---------
Net earnings (loss).................................. $ (6.9) $ (48.5) $ 68.4 $ 206.7 $ (39.8)
======== ======== ======== ======== =========
Basic earnings (loss) per share(6)................... $ (0.10) $ (0.47) $ 0.41 $ 1.01 $ (0.26)
Diluted earnings (loss) per share(6)................. $ (0.10) $ (0.47) $ 0.40 $ 0.98 $ (0.26)
OTHER DATA:
Capital expenditures................................. $ 32.1 $ 65.8 $ 211.8 $ 282.8 $ 199.3
2
AS AT DECEMBER 31,
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1997 1998 1999 2000 2001
-------- -------- -------- -------- ---------
(in millions)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments...................... $ 106.1 $ 31.7 $ 371.5 $ 883.8 $1,342.8
Working capital...................................... $ 363.3 $ 356.2 $1,000.2 $2,262.6 $2,339.8
Capital assets....................................... $ 124.2 $ 214.9 $ 365.4 $ 633.4 $ 915.1
Total assets......................................... $1,347.3 $1,636.4 $2,655.6 $5,938.0 $6,632.9
Total long-term debt, including current portion...... $ 518.9 $ 135.8 $ 134.2 $ 132.0 $ 147.4
Shareholders' equity................................. $ 363.2 $ 859.3 $1,658.1 $3,469.3 $4,745.6
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(1) The consolidated statements of earnings (loss) data for:
1997, 1998, 1999, 2000 and 2001 include the results of operations of
Design-to-Distribution Limited acquired effective January 1997, the assets
acquired from Hewlett-Packard Company in Colorado and New England in July,
August and October 1997 and Ascent Power Technologies Inc. acquired in
October 1997;
1998, 1999, 2000 and 2001 include the results of operations of the
manufacturing operation acquired from Madge Networks N.V. in February 1998,
the manufacturing operation acquired from Lucent Technologies Inc. in
April 1998, Analytic Design, Inc. acquired in May 1998, the manufacturing
operation acquired from Silicon Graphics Inc. in June 1998,
Accu-Tronics, Inc. acquired in September 1998 and a greenfield operation
established in Tennessee in September 1998;
1999, 2000 and 2001 include the results of operations of International
Manufacturing Services, Inc. acquired December 1998, Signar SRO acquired in
April 1999, greenfield operations established in Brazil and Malaysia in
June 1999, VXI Electronics, Inc. acquired in September 1999, the assets
acquired from Hewlett-Packard's Healthcare Group in October 1999, EPS
Wireless, Inc. acquired in December 1999 and certain assets acquired from
Fujitsu-ICL Systems Inc. in December 1999;
2000 and 2001 include the results of operations of the assets of the
Enterprise System Group and the Microelectronics Division of IBM in
Minnesota and in Italy acquired in February and May 2000, respectively, NDB
Industrial Ltda. acquired in June 2000, Bull Electronics Inc. acquired in
August 2000 and NEC Technologies (UK) Ltd. acquired in November 2000; and
2001 includes the results of operations of Excel Electronics, Inc. acquired
in January 2001, certain assets of Motorola Inc. in Ireland and Iowa
acquired in February 2001, certain assets of a repair facility of N.K.
Techno Co., Ltd. in Japan acquired in March 2001, certain assets of
Avaya Inc. in Arkansas and Colorado acquired in May 2001, Sagem CR s.r.o.
acquired in June 2001, certain assets of Avaya Inc. in France acquired in
August 2001, certain assets of Lucent Technologies Inc. in Ohio and Oklahoma
acquired in August 2001, Primetech Electronics Inc. acquired in August 2001
and Omni Industries Limited acquired in October 2001.
(2) Effective January 1, 1998, we revised the estimated useful life of our
goodwill and intellectual property for accounting purposes from 20 years
each to 10 years and 5 years, respectively.
In 2001, the Canadian Institute of Chartered Accountants (CICA) approved
Handbook Sections 1581 "Business combinations" and 3062 "Goodwill and other
intangible assets." The new standards mandate the purchase method of
accounting for business combinations and require that the value of the
shares issued in a business combination be measured using the average share
price for a reasonable period before and after the date the terms of the
acquisition are agreed to and announced. Previously, the consummation date
was used to value the shares issued in a business combination. The new
standards are substantially consistent with U.S. GAAP.
Effective July 1, 2001 and for the remainder of the fiscal year, goodwill
acquired in business combinations completed after June 30, 2001 was not
amortized.
(3) These costs include costs to implement new information systems and
processes, including salary and other costs directly related to the
integration activities in newly acquired facilities.
(4) In 1997, other charges include a $13.9 million ($8.7 million after income
taxes) credit loss relating to a customer which filed for bankruptcy.
In 1998, other charges totaled $64.7 million ($51.5 million after income
taxes), comprised of non-cash charges of $35.0 million relating to the
write-down of intellectual property, $6.8 million of goodwill which became
impaired as a result of the merger with IMS, a write-off of deferred
financing fees and debt redemption fees of $17.8 million relating to the
prepayment of debt with the net proceeds of our initial public offering and
other charges of $5.1 million.
In 2001, other charges totaled $273.1 million ($226.4 million after income
taxes) and include (a) a $237.0 million restructuring charge, comprised of
employee termination costs of $90.7 million, termination of lease and other
contractual obligations of $35.3 million, facility exit and other costs of
$12.4 million and non-cash asset impairment of $98.6 million and (b) a
non-cash charge of $36.1 million relating to the write-down of the carrying
value of certain assets, primarily goodwill and intangible assets.
(5) Interest expense (income) is comprised of interest expense incurred on
indebtedness less interest income earned on cash and short-term investments.
(6) We adopted retroactively the new CICA Handbook Section 3500 "Earnings per
share" which requires the retroactive use of the treasury stock method for
calculating diluted earnings per share. This change results in an earnings
per share calculation which is consistent with U.S. GAAP.
3
For purposes of the basic and diluted earnings (loss) per share
calculations, the weighted average number of shares outstanding were:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in millions)
Basic....................................................... 69.6 103.0 167.2 199.8 213.9
Diluted..................................................... 69.6 103.0 171.2 211.8 213.9
EXCHANGE RATE INFORMATION
The rate of exchange as of March 1, 2002 for the conversion of Canadian
dollars into United States dollars was U.S. $0.6268. The following table sets
forth the exchange rates for the conversion of U.S.$1.00 into C$1.00 at the end
of the following fiscal periods and the average exchange rates (based upon the
average of the exchange rates on the last day of each month during the periods).
The rates of exchange set forth herein are shown as, or are derived from, the
reciprocals of the noon buying rates in New York City for cable transfers
payable in Canadian dollars, as certified for customs purposes by the Federal
Reserve Bank of New York. The source of this data is the Federal Reserve
Statistical Releases.
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Average(1)............................................... 1.5487 1.4855 1.4858 1.4836 1.3849
FEBRUARY JANUARY DECEMBER NOVEMBER OCTOBER SEPTEMBER
2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- ---------
High.................................. 1.6110 1.6132 1.5956 1.6021 1.5867 1.5793
Low................................... 1.5885 1.5897 1.5633 1.5718 1.5579 1.5528
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(1) Calculated by using the averages of the exchange rates as of the last day of
each month during the period.
The rate of exchange as of March 1, 2002 for the conversion of United States
dollars into Canadian dollars was 1.5955 (U.S.$1 = C$1.5955).
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
SHAREHOLDERS AND PROSPECTIVE INVESTORS IN CELESTICA SHOULD CAREFULLY
CONSIDER EACH OF THE FOLLOWING RISKS AND ALL OF THE OTHER INFORMATION SET FORTH
IN THIS ANNUAL REPORT. THE RISKS AND UNCERTAINTIES WE DESCRIBE BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT CURRENTLY
KNOWN TO US OR THAT WE CURRENTLY BELIEVE TO BE IMMATERIAL MAY ALSO ADVERSELY
AFFECT OUR BUSINESS.
OUR OPERATING RESULTS FLUCTUATE
Our annual and quarterly results have fluctuated in the past. The reasons
for these fluctuations may similarly affect us in the future. Our operating
results may fluctuate in the future as a result of many factors, including:
- The volume of orders received relative to our manufacturing capacity;
- Fluctuations in material costs and the mix in material costs versus labor
and manufacturing overhead costs; and
- Variations in the level and timing of orders placed by a customer due to
the customer's attempts to balance its inventory, changes in the
customer's manufacturing strategy and variation in demand for the
4
customer's products. These changes can result from life cycles of customer
products, competitive conditions and general economic conditions.
Any one of the following factors or combinations of these factors could also
affect our results for a financial period:
- The level of price competition;
- Our past experience in manufacturing a particular product;
- The degree of automation we use in the assembly process;
- Whether we are managing our inventories and fixed assets efficiently;
- The timing of our expenditures in anticipation of increased sales;
- Customer product delivery requirements and shortages of components or
labor; and
- The timing of, and the price we pay for, our acquisitions and related
integration costs.
In addition, most of our customers typically do not commit to firm
production schedules for more than 30 to 90 days in advance. Accordingly, we
cannot forecast the level of customer orders with certainty. This makes it
difficult to schedule production and maximize utilization of our manufacturing
capacity. In the past, we have been required to increase staffing, purchase
materials and incur other expenses to meet the anticipated demand of our
customers. Sometimes these anticipated orders from certain customers have failed
to materialize, and sometimes delivery schedules have been deferred as a result
of changes in the customer's business needs. On other occasions, customers have
required rapid and sudden increases in production which have placed an excessive
burden on our manufacturing capacity. Deferred delivery schedules result in a
delay, and may result in a reduction in our revenue from these customers, and
also may lead to excess capacity at affected facilities. Also, certain customers
may be unable to pay us or otherwise meet their commitments under their
agreements or purchase orders with us.
Any of these factors or a combination of these factors could have a material
adverse effect on our results of operations.
Historically, our fourth quarter revenue has been highest and our first
quarter revenue has been lowest. Prospective investors should not rely on
results of operations in any past period to indicate what our results will be
for any future period.
WE HAVE HAD RECENT OPERATING LOSSES
We generated net earnings in each of the years from 1993 through 1996 and in
1999 and 2000. We recorded net losses of $6.9 million in 1997, $48.5 million in
1998 and $39.8 million in 2001. In 1997, we incurred $13.3 million of
integration costs related to acquisitions and a $13.9 million credit loss, with
these charges totaling $27.2 million ($17.0 million after income taxes). In
1998, we incurred $8.1 million of integration costs related to acquisitions, a
$41.8 million write-down of intellectual property and goodwill, a write-off of
deferred financing fees and debt redemption fees of $17.8 million and
$5.1 million of charges related to the acquisition of International
Manufacturing Services, Inc., or IMS, with these charges totaling $72.8 million
($56.5 million after income taxes). In 2001, we incurred $22.8 million of
integration costs related to acquisitions, $237.0 million of restructuring
charges and a $36.1 million write-down of certain assets, primarily goodwill and
intangible assets, with these charges totaling $295.9 million ($245.2 million
after income taxes). We may not be profitable in future periods. Furthermore, if
business conditions were to unexpectedly weaken significantly from current
levels, we may have to undertake further restructuring activities, thereby
further reducing profitability in future periods.
WE ARE EXPOSED TO CHANGES IN GENERAL ECONOMIC CONDITIONS
As a result of unfavorable general economic conditions and reduced demand
for technology capital goods, our sales have been particularly volatile in
recent quarters. Specifically, since the first fiscal quarter of 2001, we have
seen declines in the demand for products in the end-markets that we serve. If
global economic conditions in the markets we serve do not improve, we may
experience a material adverse impact on our business, operating results and
financial condition.
5
OUR RESULTS ARE AFFECTED BY LIMITED AVAILABILITY OF COMPONENTS
A significant portion of our costs are in the form of component purchases. A
majority of the products we manufacture require one or more components that we
order from sole-source suppliers of these particular components. Supply
shortages for a particular component can delay production of all products using
that component or cause price increases in the services we provide. In addition,
at various times there have been industry-wide shortages of electronic
components. Such shortages, or future fluctuations in material costs, may have a
material adverse effect on our business or cause our results of operations to
fluctuate from period to period. Also, we rely on a variety of common carriers
for materials transportation and route materials through various world ports. A
work stoppage, strike or shutdown of a major port or airport could result in
manufacturing and shipping delays or expediting charges, which could have a
material adverse effect on our results of operations.
WE DEPEND ON CERTAIN INDUSTRIES
Our financial performance depends on our customers' continued growth,
viability, financial stability and the cyclicality of end-markets. Our
customers, in turn, substantially depend on the growth of the computer and
communications industries. These industries are characterized by rapidly
changing technologies and short product life cycles. Recently these industries
have experienced revenue erosion, pricing and margin pressures, and increased
difficulty in attracting capital. These factors affecting the computer and
communications industries in general, and the impact these factors might have
from time to time on our customers in particular, could continue to have a
material adverse effect on our business.
WE FACE CUSTOMER CREDIT RISK
We generate significant accounts receivable and inventory balances in
connection with providing manufacturing services to our customers. We may
encounter significant delays or defaults in payments owed to us by customers for
whom we have manufactured products.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS
Our three largest customers in 2001 were IBM, Sun Microsystems Inc. and
Lucent Technologies, which each represented more than 10% of our total 2001
revenue and collectively represented 55% of our total 2001 revenue. Our next
five largest customers collectively represented 24% of our total revenue in
2001. IBM and Sun Microsystems Inc., our two largest customers in 2000, each
represented more than 10% of our total 2000 revenue and collectively represented
46% of our total 2000 revenue. Our next five largest customers represented 32%
of total 2000 revenue. We expect to continue to depend upon a relatively small
number of customers for a significant percentage of our revenue.
Other than in the case of asset acquisitions, otherwise known as "OEM
divestitures," generally, we do not enter into long-term supply commitments with
our customers. Instead, we bid on a project basis and have supply contracts in
place for each project. We are dependent on customers to fulfill the terms
associated with these contracts. Significant reductions in, or the loss of,
sales to any of our largest customers would have a material adverse effect on
us. OEM divestures often entail long-term supply agreement between ourselves and
the OEM customer, and we are similarly dependent on customers to fulfill the
obligations associated with these contracts.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION
Our customers are increasingly dependent on EMS providers for new product
introductions and rapid response times to volume requirements. We generally do
not obtain firm, long-term purchase commitments from our customers and we often
experience reduced lead-times in customers' orders. Customers may cancel their
orders, change production quantities or delay production for a number of
reasons. The uncertain economic condition of our customers' end-markets and
general order volume volatility has resulted, and may continue to result, in
some of our customers delaying the delivery of some of the products we
manufacture for them, and placing purchase orders for lower volumes of products
than previously anticipated. Cancellation, reduction, or delays by a significant
customer, or by a group of customers, would seriously harm our results of
operations by reducing the volumes of products manufactured and delivered by us
for the customers in that period. Such order changes could also cause a delay in
the repayment to us for inventory expenditures we incurred in preparation
6
for the customer orders. Order cancellations and delays could also lower asset
utilization, resulting in lower gross margins.
WE FACE RISKS DUE TO EXPANSION OR RESTRUCTURING OF OUR OPERATIONS
New operations, whether foreign or domestic, can require significant
start-up costs and capital expenditures. As we continue to expand our domestic
and international operations, we may not be able to successfully generate
revenue necessary to recover start-up and operating costs. The successful
operation of an acquired business requires effective communication and
cooperation between us and our new employees, including cooperation in product
development and marketing. This cooperation may not occur or a disruption in one
or more sectors of our business may result. In addition, we may not be able to
retain key technical, management, sales and other personnel of an acquired
business for any significant length of time, and we may not realize any of the
other anticipated benefits of an acquisition. Furthermore, additional
acquisitions would require investment of financial resources and may require
debt financing or dilutive equity financing. We may not consummate any
acquisitions in the future. If we do, any debt or equity financing required for
any acquisition may not be available on terms acceptable to us.
We have undertaken numerous initiatives to restructure and reduce our
capacity in response to the recent downturn in demand, with the intention of
realizing significant cost savings in the future. The process of restructuring
entails, among other activities, moving product production between facilities,
reducing staff levels, realigning our business processes and reorganizing our
management. Any failure to successfully execute the aforementioned activities
can have a material adverse impact on our results. If, in the future, our
customer demand falls, or we are required to reduce prices, at a rate exceeding
the rate at which we are able to reduce our costs, this could have a material
adverse impact on our operating results.
WE FACE ADDITIONAL RISKS DUE TO OUR INTERNATIONAL OPERATIONS
During 2001, over 35% of our revenue was derived from locations outside of
North America. In addition, we purchased material from international suppliers
for much of our business, including our North American business. We believe that
our future growth depends in large part on our ability to increase our business
in international markets. We will continue to expand our operations outside of
North America. This expansion will require significant management attention and
financial resources. To increase international sales in subsequent periods, we
must establish additional foreign operations, hire additional personnel and
establish additional international facilities. We may not expand or even
maintain our international sales. If the revenue we generate from foreign
activities is inadequate to offset the expense of maintaining foreign offices
and activities, our profitability will be adversely affected. International
operations are subject to inherent risks, which may adversely affect us,
including:
- Labor unrest;
- Unexpected changes in regulatory requirements;
- Tariffs, import and export duties, value-added taxes and other barriers;
- Less favorable intellectual property laws;
- Difficulties in staffing and managing foreign sales and support
operations;
- Longer accounts receivable payment cycles and difficulties in collecting
payments;
- Changes in local tax rates and other potentially adverse tax consequences,
including the cost of repatriation of earnings;
- Lack of acceptance of localized products in foreign countries;
- Burdens of complying with a wide variety of foreign laws, including
changing import and export regulations which could erode our profit
margins or restrict exports;
- Adverse changes in Canadian and U.S. trade policies with the other
countries in which we maintain operations;
- Political instability;
7
- Potential restriction on the transfer of funds; and
- Inflexible employee contracts that restrict our flexibility in responding
to events of business downtowns.
We have either purchased or built manufacturing facilities in several Asian
countries, including Thailand, Malaysia, China, Indonesia and Singapore, and are
subject to the significant political, economic and legal risks associated with
doing business in these countries. For instance, under its current leadership,
the Chinese government has instituted a policy of economic reform which has
included encouraging foreign trade and investment and greater economic
decentralization. However, the Chinese government may discontinue or change
these policies, and these policies may not be successful. Moreover, despite
progress in developing its legal system, China does not have a comprehensive and
highly developed system of laws, particularly as it relates to foreign
investment activities and foreign trade. Enforcement of existing and future laws
and contracts is uncertain, and implementation and interpretation of such laws
may be inconsistent. As the Chinese legal system develops, new laws and changes
to existing laws may adversely affect foreign operations in China. While Hong
Kong has had a long history of promoting foreign investment, its incorporation
into China means that the uncertainty related to China and its policies may now
also affect Hong Kong. Thailand and Indonesia have also had a long history of
promoting foreign investment but have experienced economic turmoil and a
significant devaluation of their currencies in the recent past. There is a risk
that this period of economic turmoil may result in the reversal of current
policies encouraging foreign investment and trade, restrictions on the transfer
of funds overseas, employee turnover, labor unrest or other domestic economic
problems that could adversely affect us.
WE FACE FINANCIAL RISKS DUE TO FOREIGN CURRENCY FLUCTUATIONS
The principal currencies in which we conduct our operations are
U.S. dollars, Canadian dollars, Mexican pesos, British pounds sterling, Euros,
Brazilian real and the Thai baht. We may sometimes enter into hedging
transactions to minimize our exposure to foreign currency and interest rate
risks. Our current hedging activity is designed to reduce the variability of our
foreign currency costs and consists of contracts to purchase or sell these
foreign currencies at future dates. In general, these contracts extend for
periods of less than 18 months. Our hedging transactions may not successfully
minimize foreign currency risk.
INTEREST RATE DECREASES WILL REDUCE INTEREST INCOME ON OUR PORTFOLIO OF CASH
EQUIVALENTS AND SHORT-TERM INVESTMENTS
The primary objective of our investment activities is to preserve principal
while, at the same time, maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations, certificates of deposit and money market funds. If
interest rates, and therefore interest income, were to fall significantly there
may be a material adverse impact on our financial results.
WE DEPEND ON HIGHLY SKILLED PERSONNEL
Recruiting personnel for the EMS industry is highly competitive. We believe
that our future success will depend, in part, on our ability to continue to
attract and retain highly skilled executive, technical and management personnel.
We generally do not have employment or non-competition agreements with our
employees. To date we have been successful in recruiting and retaining
executive, managerial and technical personnel. However, the loss of services of
certain of these employees could have a material adverse effect on us.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY
We are in a highly competitive industry. We compete against numerous
domestic and foreign companies. Three of our competitors, Flextronics
International, Sanmina-SCI Corporation and Solectron Corporation, each have
annual revenues in excess of $10.0 billion. We also face indirect competition
from the manufacturing operations of our current and prospective customers,
which continually evaluate the merits of manufacturing products internally
rather than using EMS providers. Some of our competitors have more
geographically diversified international operations, as well as substantially
greater manufacturing, financial, procurement, research and development and
marketing resources than we have. These competitors may create alliances and
rapidly acquire significant market share. Accordingly, our current or potential
competitors may develop or acquire services comparable or superior to those we
develop, combine or merge to form significant competitors,
8
or adapt more quickly than we will to new technologies, evolving industry trends
and changing customer requirements. Competition could cause price reductions,
reduced profits or losses or loss of market share, any of which could materially
and adversely affect us. We may not be able to compete successfully against
current and future competitors and the competitive pressures that we face may
materially adversely affect us.
WE DEPEND ON THE CONTINUING TREND OF OUTSOURCING BY OEMS
Future growth in our revenue depends on new outsourcing opportunities in
which we assume additional manufacturing and supply chain management
responsibilities from OEMs. To the extent that these opportunities are not
available, either because OEMs decide to perform these functions internally or
because they use other EMS providers, our future growth will be limited.
WE MAY BE UNABLE TO KEEP PACE WITH PROCESS AND TEST DEVELOPMENT CHANGE
We continue to evaluate the advantages and feasibility of new manufacturing
processes. Our future success will depend in part upon our ability to develop
and to market manufacturing services which meet changing customer needs, to
maintain technological leadership and to successfully anticipate or respond to
technological changes in manufacturing processes in cost-effective and timely
ways. Our process and test development efforts may not be successful.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE
Our customers compete in markets that are characterized by rapidly changing
technology, evolving industry standards and continuous improvements in products
and services. These conditions frequently result in short product life cycles.
Our success will depend largely on the success achieved by our customers in
developing and marketing their products. If technologies or standards supported
by our customers' products become obsolete or fail to gain widespread commercial
acceptance, our business could be materially adversely affected.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY
We believe that certain of our proprietary intellectual property rights and
information give us a competitive advantage. Accordingly, we have taken, and
intend to continue to take, appropriate steps to protect this proprietary
information. These steps include signing non-disclosure agreements with
customers, suppliers, employees and other parties and implementing rigid
security measures. Our protection measures may not be sufficient to prevent the
misappropriation or unauthorized disclosure of our property or information.
There is also a risk that infringement claims may be brought against us or
our customers in the future. If someone does successfully assert an infringement
claim, we may be required to spend significant time and money to develop a
manufacturing process that does not infringe upon the rights of such other
person or to obtain licenses for the technology, process or information from the
owner. We may not be successful in such development or any such licenses may not
be available on commercially acceptable terms, if at all. In addition, any
litigation could be lengthy and costly and could adversely affect us even if we
are successful in such litigation.
WE ARE SUBJECT TO THE RISK OF INCREASED INCOME TAXES
Our business operations are carried on in a number of countries, including
countries where:
- tax incentives have been extended to encourage foreign investment; or
- income tax rates are low.
We develop our tax position based upon the anticipated nature and conduct of
our business and our understanding of the tax laws of the various countries in
which we have assets or conduct activities. However, our tax position is subject
to review and possible challenge by taxing authorities and to possible changes
in law, which may have retroactive effect. We cannot determine in advance the
extent to which some jurisdictions may require us to pay taxes or make payments
in lieu of taxes.
9
OUR COMPLIANCE WITH ENVIRONMENTAL LAWS COULD BE COSTLY
Like others in similar businesses, we are subject to extensive environmental
laws and regulations in numerous jurisdictions. Our environmental policies and
practices have been designed to ensure compliance with these laws and
regulations consistent with local practice. Future developments and increasingly
stringent regulation could require us to make additional expenditures relating
to environmental matters at any of the facilities. Achieving and maintaining
compliance with present and changing future environmental laws could restrict
our ability to modify or expand our facilities or continue production. This
compliance could also require us to acquire costly equipment or to incur other
significant expenses.
Some of our operating sites have a history of industrial use. Soil and
groundwater contamination have occurred at some of our facilities. Certain
environmental laws impose liability for the costs of removal or remediation of
hazardous or toxic substances on an owner, occupier or operator of real estate,
even if such person or company was not aware of or responsible for the presence
of such substances. In addition, in some countries in which we have operations,
any person or company who arranges for the disposal or treatment of hazardous or
toxic substances at a disposal or treatment facility may be liable for the costs
of removal or remediation of such substances at such facility, whether or not
the person or company owns or operates the facility. From time to time we
investigate, remediate and monitor soil and groundwater contamination at certain
of our operating sites. In certain instances where soil or groundwater
contamination existed prior to our ownership or occupation of a site, landlords
or former owners have contractually retained responsibility and liability for
the contamination and its remediation. However, failure of such former owners or
landlords to perform, as the result of financial inability or otherwise, could
result in our company being required to remediate such contamination.
Except for facilities we acquired in the Omni transaction, we obtained
Phase I or similar environmental assessments, or reviewed recent assessments
initiated by others, for most of the manufacturing facilities that we own or
lease at the time we either acquired or leased such facilities. Typically, these
assessments include general inspections without soil sampling or groundwater
analysis. Where contamination is suspected, usually Phase II intrusive
environmental assessments (including soil and/or groundwater testing) are
performed. The assessments have not revealed any environmental liability that,
based on current information, we believe will have a material adverse effect on
us, in part because of the contractual retention of liability for some
contamination and its remediation by landlords and former owners. Our
assessments may not reveal all environmental liabilities and current assessments
are not available for all facilities. Consequently, there may be material
environmental liabilities we are not aware of. In addition, ongoing clean up and
containment operations may not be adequate for purposes of future laws. The
conditions of our properties could be affected in the future by the conditions
of the land or operations in the vicinity of the properties (such as the
presence of underground storage tanks). These developments and others (such as
increasingly stringent environmental laws, increasingly strict enforcement of
environmental laws by governmental authorities, or claims for damage to property
or injury to persons resulting from the environmental, health or safety impact
of our operations) may cause us to incur significant costs and liabilities that
could have a material adverse effect on us.
OUR LOAN AGREEMENTS CONTAIN RESTRICTIVE COVENANTS
Certain of our outstanding loan agreements contain financial and operating
covenants that limit our management's discretion with respect to certain
business matters. Among other things, these covenants restrict our ability and
our subsidiaries' ability to incur additional debt, create liens or other
encumbrances, make certain payments (including dividends) and investments, sell
or otherwise dispose of assets and merge or consolidate with other entities.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our subordinate voting shares in the public market, or the
issuance of subordinate voting shares upon the exercise of stock options or
otherwise, could adversely affect the market price of the subordinate voting
shares.
As of March 1, 2002, we had 190,826,868 subordinate voting shares and
39,065,950 multiple voting shares outstanding. All of the subordinate voting
shares are freely transferable without restriction or further
10
registration under the U.S. Securities Act, except for shares held by our
affiliates (as defined in the U.S. Securities Act). Shares held by our
affiliates include all of the multiple voting shares and 3,976,236 subordinate
voting shares held by Onex. An affiliate may not sell shares in the United
States unless the sale is registered under the U.S. Securities Act or an
exemption from registration is available. Rule 144 adopted under the
U.S. Securities Act permits our affiliates to sell shares in the United States
subject to volume limitations and requirements relating to manner of sale,
notice of sale and availability of current public information with respect to
Celestica.
In addition, as of March 1, 2002, there were approximately 28,620,000
subordinate voting shares reserved for issuance under our employee share
purchase and option plans and for director compensation, including outstanding
options to purchase approximately 23,756,000 shares. The sale of such shares
could adversely affect the market price of the subordinate voting shares.
OUR COMPANY IS CONTROLLED BY ONEX CORPORATION
Onex owns, directly or indirectly, all of the multiple voting shares and
less than 1% of the outstanding subordinate voting shares. The number of shares
owned by Onex, together with those shares Onex has the right to vote, represent
84.0% of the voting interest in Celestica and approximately 2% of the
outstanding subordinate voting shares. Accordingly, Onex exercises a controlling
influence over our business and affairs and has the power to determine all
matters submitted to a vote of our shareholders where our shares vote together
as a single class. Onex has the power to elect our directors and to approve
significant corporate transactions such as certain amendments to our articles of
incorporation, mergers, amalgamations, plans of arrangement and the sale of all
or substantially all of our assets. Onex's voting power could have the effect of
deterring or preventing a change in control of our company that might otherwise
be beneficial to our other shareholders. Under our revolving credit facilities,
if Onex ceases to control Celestica our lenders could demand repayment. Gerald
W. Schwartz, the Chairman, President and Chief Executive Officer of Onex and one
of our directors, owns shares with a majority of the voting rights of the shares
of Onex. Mr. Schwartz, therefore, effectively controls our affairs. For
additional information about our principal shareholders, please turn to
Item 7(A), "Major Shareholders."
In private placements outside of the United States, certain subsidiaries of
Onex have offered exchangeable debentures due 2025 that are exchangeable and
redeemable under certain circumstances during their 25-year term for 9,214,320
subordinate voting shares. In addition, 1,757,467 subordinate voting shares may
be delivered, at the option of Onex or certain persons related to Onex, to
satisfy the obligations of such persons under equity forward agreements. If the
issuers of the exchangeable debentures elect or the party to the equity forward
agreements elects to deliver solely subordinate voting shares and no cash upon
the exchange or redemption, or at maturity or acceleration, of the debentures or
the settlement of the equity forward agreement, as the case may be, the number
of shares owned by Onex, together with those shares Onex has the right to vote,
would, if such delivery had occurred on March 1, 2002, represent in the
aggregate 78% of the voting interest in our company.
POTENTIAL VOLATILITY OF SHARE PRICE
The markets for our subordinate voting shares are highly volatile. The
trading price of subordinate voting shares could fluctuate widely in response
to:
- Quarterly variations in our operations and financial results;
- Announcements by us or our competitors of technological innovations, new
products, new contracts or acquisitions;
- Changes in our prices or the prices of our competitors' products and
services;
- Changes in our product mix;
- Changes in our growth rate as a whole or for a particular portion of our
business;
- General conditions in the EMS industry; and
- Systemic fluctuations in the stock markets.
11
The stock markets have fluctuated widely in the past. The securities of many
technology companies, including companies in the EMS industry, have experienced
extreme price and volume fluctuations, which often have been unrelated to the
companies' operating performance. These broad market fluctuations may adversely
affect the market price of the subordinate voting shares.
POTENTIAL UNENFORCEABILITY OF CIVIL LIABILITIES AND JUDGMENTS
We are incorporated under the laws of the Province of Ontario, Canada. Most
of our directors, controlling persons and officers and certain of the experts
named in this Annual Report are residents of Canada. Also, a substantial portion
of our assets and the assets of these persons are located outside of the United
States. As a result, it may be difficult for shareholders to initiate a lawsuit
within the United States against these non-U.S. residents, or to enforce
judgments in the United States against us or these persons which are obtained in
a U.S. court. It may also be difficult for shareholders to enforce a
U.S. judgment in Canada or to succeed in a lawsuit in Canada based only on
U.S. securities laws.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Celestica was incorporated in Ontario, Canada under the name Celestica
International Holdings Inc. on September 27, 1996. Since that date, we have
amended our articles of incorporation on various occasions principally to modify
our corporate name and our share capital. Our legal name and commercial name is
Celestica Inc. We are a corporation domiciled in the Province of Ontario, Canada
and operate under the Ontario Business Corporations Act. Our principal executive
offices are located at 12 Concorde Place, Toronto, Ontario, Canada M3C 3R8 and
our telephone number is (416) 448-5800. Our web site is www.celestica.com.
Information on our web site is not incorporated by reference in this Annual
Report.
We are a leading provider of electronics manufacturing services to
OEMs worldwide, with revenue for the year ended December 31, 2001 in excess of
$10.0 billion. We provide a wide variety of products and services to our
customers, including the high-volume manufacture of complex PCAs and the full
system assembly of final products. In addition, we are a leading-edge provider
of design, repair and engineering services, supply chain management and power
products. We operate facilities in North America, Europe, Asia and Latin
America.
As an important IBM manufacturing unit, Celestica provided manufacturing
services to IBM for more than 75 years. In 1993, we began providing EMS services
to non-IBM customers. In October 1996, Celestica was purchased from IBM by an
investor group, led by Onex, which included our management.
OUR ACQUISITIONS
In 2001, we completed the following acquisitions, significantly enhancing
our geographic reach, expanding our customer base of leading OEMs and broadening
our service offering capabilities:
- Excel Electronics, Inc. enhanced our prototype service offering in the
southern United States;
- certain manufacturing assets of Motorola Inc. in Mt. Pleasant, Iowa and
Dublin, Ireland expanded our business relationship with Motorola;
- certain assets relating to a repair business of N.K. Techno Co. Ltd.
expanded our presence in Japan;
- certain assets from Avaya Inc. in Little Rock, Arkansas, Denver, Colorado
and Saumur, France positioned us as Avaya's primary outsourcing partner in
the area of printed circuit board systems assembly, test, repair and
supply chain management for a broad range of their telecommunications
products;
- Sagem CR s.r.o. in the Czech Republic enhanced our presence in central
Europe and positioned us as Sagem's primary EMS provider;
- Primetech Electronics Inc. provided us with additional high complexity
manufacturing capability and an expanded global customer base;
12
- certain assets from Lucent Technologies Inc. in Columbus, Ohio and
Oklahoma City, Oklahoma positioned us as the leading EMS provider for
Lucent's North American switching, access and wireless networking systems
products; and
- Omni Industries Limited significantly enhanced our EMS presence in Asia.
In 2001, we also established a greenfield operation in Singapore. We
continue to seek strategic acquisitions and greenfield opportunities.
A listing of our acquisitions since 1997 is included in note (1) to the
Selected Financial Data table, see Item 3, "Key Information -- Selected
Financial Data."
Certain information concerning capital expenditures is set forth in Notes 3
and 20 to the Consolidated Financial Statements in Item 18.
B. BUSINESS OVERVIEW
Our goal is to be the "partner of choice" in EMS. We believe we are uniquely
positioned to achieve this goal given our position as one of the major EMS
providers worldwide and our widely recognized skills in our core areas of
competency. The Company's strategy is to (i) maintain our leadership position in
the areas of technology, quality and supply chain management, (ii) develop
profitable, strategic relationships with industry leaders, (iii) continually
expand the range of the services we provide to OEMs, (iv) diversify our customer
base, serving a wide variety of end-markets, (v) selectively pursue strategic
acquisitions, and (vi) steadily improve our operating margins. We believe that
the successful implementation of this strategy will allow us to achieve superior
financial performance and enhance shareholder value.
We have operations in the United States, Canada, Mexico, United Kingdom,
Ireland, Italy, Thailand, China, Hong Kong, Czech Republic, Brazil, Singapore,
Malaysia and Japan. We provide a wide variety of products and services to our
customers, including the manufacture, assembly and test of complex printed
circuit assemblies, or PCAs, and the full system assembly of final products. In
addition, we provide a broad range of EMS services from product design to
worldwide distribution and after-sales support.
Celestica targets industry leading OEMs primarily in the computer and
communications sectors. Celestica supplies products and services to over
75 OEMs, including such industry leaders as Avaya Inc., Cisco Systems Inc., Dell
Computer Corporation, EMC Corporation, Fujitsu, Hewlett-Packard Company,
International Business Machines Corporation, Lucent Technologies Inc.,
Motorola Inc., NEC Corporation and Sun Microsystems Inc. In the aggregate, our
top ten customers represented 84% of revenue in 2001. The products we
manufacture can be found in a wide array of end-products, including: cell phones
and pagers, hubs and switches, LAN and WAN networking cards, laser printers,
mainframe computers, mass storage devices, medical products, modems, multimedia
peripherals, PBX switches, personal computers, PDAs, photonic devices, routers,
scalable processors, servers, switching products, token ring products, video
broadcasting equipment, wireless base stations, wireless loop systems and
workstations.
Our principal competitive advantages are our advanced capabilities and
leadership in the areas of technology, quality and supply chain management. We
are an industry leader in a wide range of advanced manufacturing technologies,
using established and emerging process technologies. Our state-of-the-art
manufacturing facilities are organized as customer focused factories, which have
dedicated manufacturing lines and customer teams. This approach enhances
customer satisfaction and manufacturing flexibility. We believe our test
capabilities are among the best in the industry and enable us to produce highly
reliable products, including products that are critical to the functioning of
our customers' products and systems. Our size, geographic reach and leading
expertise in supply chain management allow us to purchase materials effectively
and to deliver products to customers faster, thereby reducing overall product
costs and reducing the time to market.
We believe that our highly skilled workforce gives us a distinct competitive
advantage. Through innovative compensation and broad-based employee stock
ownership, we have developed a unique entrepreneurial, participative and
team-based culture. We employ over 2,800 engineers.
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ELECTRONICS MANUFACTURING SERVICES INDUSTRY
OVERVIEW
The EMS industry is comprised of companies that provide a range of
manufacturing services to OEMs. The industry (i) has experienced rapid growth in
the past and has potential for strong growth in the future as the market for
technology, as a whole, grows, (ii) is highly fragmented and (iii) is poised for
continuing consolidation due to the advantages of scale and geographic
diversity. In 2001, four EMS providers -- Celestica, Sanmina-SCI Corporation,
Flextronics International and Solectron Corporation -- achieved total revenue in
excess of $10.0 billion.
We see numerous industry vectors that are fueling continued growth in the
EMS industry. These include the growing trend of information technology and
communications companies in North America to outsource their electronics
manufacturing and to divest their manufacturing assets, OEMs in Europe and Japan
increasingly executing an electronics outsourcing strategy, and
OEMs increasingly looking to the EMS industry to provide full-system solutions
including system build and distribution.
We believe that, as the trend to outsourcing continues, OEMs will
increasingly outsource more complex products and services. This trend will favor
larger EMS providers that have clear advantages of scale, geographic diversity,
technology and quality, and is expected to lead to a sustained period of
consolidation in the EMS industry.
The EMS industry is highly diverse, with providers serving OEMs in a broad
range of industry segments. The computer and communications sectors are the
largest industry opportunities for EMS companies primarily due to rapidly
changing product technologies and shortening product life cycles. These industry
dynamics have caused many computer and communications OEMs to outsource design,
assembly, test and worldwide distribution functions to their EMS partners.
EVOLUTION OF THE EMS INDUSTRY
Historically, OEMs were fully integrated. They invested heavily in
manufacturing assets, establishing facilities around the world to support the
manufacture, service and distribution of their products. Since the 1970s, the
EMS market has evolved significantly. In the early stages of development of the
EMS industry, EMS companies acted as subcontractors and performed simple
material assembly functions mainly on a consignment basis for
OEMs. Accordingly, the relationship between OEMs and EMS providers tended
originally to be transactional in nature.
Significant advancements in manufacturing process technology in the 1980s
enabled EMS companies to provide cost savings to OEMs while at the same time
increasing the quality of their products. Furthermore, as the capabilities of
EMS companies expanded, an increasing number of OEMs adopted and became
increasingly reliant upon manufacturing outsourcing strategies. In recent years,
large sophisticated EMS companies have further expanded their capabilities to
include providing services in support of their OEM customers, ranging from
design to advanced manufacturing, final distribution and after-sales support.
For the services they provide, the larger EMS companies generally have a lower
cost structure, superior technological know-how and more advanced manufacturing
processes relative to most of the OEM customers they serve. In this environment,
OEMs have begun increasingly to outsource front-end design functions as well as
back-end full system assembly, product test, test development, order fulfilment
and distribution functions.
By outsourcing EMS services, OEMs are able to focus on their core
competencies, including product development, sales, marketing and customer
service, while leveraging the expertise of EMS providers for design,
procurement, assembly and test operations and supply chain management. As a
result, larger, more sophisticated EMS providers have established strong
strategic relationships with many of their OEM customers.
The Company believes that the principal reasons OEMs establish relationships
with EMS providers include the following:
DECREASE TIME TO MARKET. Electronics products are experiencing increasingly
shorter product life cycles, requiring OEMs to continually reduce the time
required to bring products to market. OEMs can significantly improve product
development cycles and enhance time to market by benefitting from the expertise
and
14
infrastructure of EMS providers. This includes capabilities relating to design,
quick-turn prototype development and rapid ramp-up of new products to high
volume production, with the critical support of worldwide supply chain
management.
REDUCE OPERATING COSTS AND INVESTED CAPITAL. As electronics products have
become more technically advanced, the manufacturing process has become
increasingly automated, requiring greater levels of investment in capital
equipment. EMS companies enable OEMs to gain access to advanced manufacturing
facilities, supply chain management and engineering capabilities, additional
capacity, greater flexibility for both product ramp-up and changeover and the
economies of scale which EMS companies provide. As a result, OEMs can reduce
overall operating costs, working capital and capital investment requirements.
FOCUS RESOURCES ON CORE COMPETENCIES. The electronics industry is
experiencing greater levels of competition and rapid technological change. In
this environment, many OEMs are seeking to focus on their core competencies of
product development, sales, marketing and customer service, and to outsource
design, manufacturing and related requirements to their EMS partners.
ACCESS LEADING MANUFACTURING TECHNOLOGIES. Electronics products and
electronics manufacturing technology have become increasingly sophisticated and
complex, making it difficult for many OEMs to maintain the necessary
technological expertise and focus required to efficiently manufacture products
internally. By working closely with EMS providers, OEMs gain access to high
quality manufacturing expertise and capabilities in the areas of advanced
process, interconnect and test technologies.
UTILIZE EMS COMPANIES' PROCUREMENT, INVENTORY MANAGEMENT AND LOGISTICS
EXPERTISE. OEMs who manufacture internally are faced with greater complexities
in planning, procurement and inventory management due to frequent design
changes, short product life cycles and product demand fluctuations. OEMs can
address these complexities by outsourcing to EMS providers which (i) possess
sophisticated supply chain management capabilities, and (ii) can leverage
significant component procurement advantages to lower product costs.
IMPROVE ACCESS TO GLOBAL MARKETS. OEMs are generally increasing their
international activities in an effort to expand sales through access to foreign
markets. EMS companies with worldwide capabilities are able to offer such
OEMs global manufacturing solutions, to meet local content requirements,
distribute products efficiently around the world and lower costs.
KEY SUCCESS FACTORS
Celestica believes that the following are the key success factors for EMS
providers seeking to establish and expand relationships with leading OEMs:
SOPHISTICATED TECHNOLOGICAL CAPABILITIES. The desire among OEMs to increase
product performance, functionality and quality is driving a requirement for
increasingly complex assembly and test technologies. EMS companies which possess
sophisticated skills in manufacturing technology, and which continually innovate
and develop advanced assembly and test techniques, provide a competitive
advantage to their OEM customers. We believe that as the trend to outsourcing
continues, OEMs will increasingly outsource more complex products.
LARGE-SCALE AND FLEXIBLE PRODUCTION CAPACITY. Increasingly, leading
OEMs are seeking to outsource large-scale manufacturing programs. Generally
those EMS providers that can meet the volume and sensitive time-to-market
requirements associated with these programs will be able to exploit these
opportunities. EMS providers must be of a certain scale and diversity to be
awarded large-scale programs, as OEMs are often seeking partners with the
resources to support simultaneous product launches in multiple geographic
markets.
GLOBAL SUPPLY CHAIN MANAGEMENT SKILLS. EMS providers must possess the
skills required to optimize many aspects of the OEM's global supply chain, from
managing a sophisticated supplier base, component selection and cost-effective
procurement to inventory management and rapid distribution direct to
end-customers. Therefore, EMS providers who lack the sophisticated material
resource planning and information technology systems necessary to effectively
optimize the supply chain will be significantly disadvantaged in the
marketplace.
15
BROAD SERVICE OFFERING. In order to establish strategic relationships with
OEM customers, EMS companies must be able to effectively provide a broad
portfolio of services. These services include front-end product design and
design for manufacturability, component selection and procurement, quick-turn
prototyping, PCA test, product assurance and failure analysis and back-end
functions such as full system assembly, order fulfilment, worldwide distribution
and after-sales support, including repair services. The complex nature of
certain services such as front-end design and testing require a significant
investment in highly trained engineering personnel.
GLOBAL PRESENCE. EMS companies with global plant networks can simplify and
shorten an OEM's supply chain and significantly reduce the time it takes to
bring products to market. Additionally, EMS providers are locating in lower-cost
regions such as Mexico, Asia and Central Europe in order to complement their
offerings by providing lower cost manufacturing solutions to their OEM customers
for certain price-sensitive applications. As a result of these trends, many
large OEMs are beginning to work with a smaller number of EMS providers that, as
worldwide suppliers, can meet their needs in multiple geographic markets.
MARKET CONSOLIDATION
The Company believes that larger EMS providers which possess the above-noted
attributes will be well positioned to take advantage of anticipated growth in
the EMS industry. Conversely, the Company believes that smaller providers who
seek to serve leading OEMs, and compete directly with larger EMS providers, will
generally be disadvantaged due to a lack of scale and their difficulty in
meeting OEM requirements relating to technology, capacity, supply chain
management, broad service offerings and global manufacturing capabilities.
The EMS industry has experienced an increase in large-scale acquisition
activity in recent years, primarily through the sale of facilities and
manufacturing operations from OEMs to larger EMS providers. OEMs have tended to
award these opportunities to larger EMS providers that possess the capital,
management expertise and advanced systems required to integrate the acquired
business effectively as the acquiror in most cases becomes an important supplier
to the OEM post-acquisition. For the EMS provider, these acquisitions have been
driven by the need for additional capacity or capability, a desire to enter new
geographic or product markets and services, or a desire to establish or further
develop a customer relationship with a particular OEM.
Given this environment, Celestica believes that the EMS industry may
experience significant consolidation, driven by the continued trend among
OEMs to outsource large-volume programs to leading EMS providers, the continued
disposition of OEM manufacturing assets to these companies and acquisition
activity among EMS businesses themselves.
CELESTICA'S STRATEGY
Celestica's goal is to be the "partner of choice" in EMS. To achieve this
goal, Celestica works closely with OEM customers to proactively identify and
fulfill each of their requirements, and exceed their expectations in areas such
as price, delivery, quality, reliability and serviceability. By deploying the
following strategy, we believe that Celestica will maximize customer
satisfaction and achieve superior financial performance and enhance shareholder
value:
LEVERAGE LEADERSHIP IN TECHNOLOGY, QUALITY AND SUPPLY CHAIN MANAGEMENT. We
are committed to maintaining our leadership position in the areas of technology,
quality and supply chain management. Our modern plants and leading technological
capabilities enable us to produce complex and highly sophisticated products to
meet the rigorous demands of our OEM customers. The Company's Customer Gateway
Centre strategy provides customer access to the Company's broad base of
services, capabilities, skills, geographic coverage and larger production
facilities. Our commitment to quality in all aspects of our business allows us
to deliver consistently reliable products to our OEM customers. The systems and
processes associated with our leadership in supply chain management enable us to
rapidly ramp operations to meet customer needs, flexibly shift capacity in
response to product demand fluctuations, and effectively distribute products
directly to end-customers. We often work closely with many suppliers to
influence component design for the benefit of OEM customers. We have been
recognized through numerous customer and industry achievement awards.
DEVELOP AND ENHANCE RELATIONSHIPS WITH LEADING OEMS. Celestica seeks
profitable, strategic relationships with industry leaders in the computer and
communications sectors. To this end, we pursue opportunities which
16
exploit our competitive advantages in the areas of technology, quality and
supply chain management. This strategy has allowed us to establish strong
manufacturing relationships with OEMs such as Avaya, Cisco Systems, Dell, EMC,
Fujitsu-ICL, Hewlett-Packard, IBM, Lucent Technologies, Motorola, NEC, Nortel
Networks and Sun Microsystems. We are committed to further diversification of
our customer base and expanding our global presence as required by our
customers.
BROADEN SERVICE OFFERINGS. We continually expand the breadth and depth of
the services we provide to OEMs. Although we traditionally offered our services
in connection with the production of higher-end and more complex products, we
have significantly broadened our offering of services to facilitate the
manufacture of a broader spectrum of products and to support the full product
lines of leading OEMs. In the past few years, we have acquired additional
capabilities in prototyping and PCA design, embedded system design, full system
assembly and repair services. We will continue to broaden our design services
capabilities in order to increase the value of services to our customers.
Furthermore, we will continue to establish in key locations in order to better
serve customers' requirements. We will expand our capabilities and service
offerings on a global basis as required by our customers.
DIVERSIFY END-MARKETS. Celestica has a diversified customer base whose
products serve the communications, server, storage and other, workstation and
personal computer industries. In 2001, revenue by end-market users was as
follows: communications -- 36%; servers -- 31%; storage and other -- 18%; and
workstations and personal computer -- 15%. Celestica's strategy is to mitigate
risk by increasing diversification across end-markets.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. Celestica has completed numerous
acquisitions. We will continue selectively to seek acquisition opportunities in
order to (i) further develop strategic relationships with leading OEMs,
(ii) expand our capacity and capability, (iii) diversify into new market
sectors, (iv) broaden our service offerings and (v) optimize our global
positioning. Celestica has developed and deployed a comprehensive integration
strategy which includes establishing a common culture at all locations with
broad-based workforce participation, providing a single marketing "face" to
customers worldwide, deploying common information technology platforms,
leveraging global procurement and transferring best practices among operations
worldwide.
INCREASE OPERATING EFFICIENCY. In the past, we have improved our operating
margins each year since 1998. Despite a difficult market environment in 2001, we
were able to maintain our operating margins at the same level as 2000. These
margins are measured by Celestica as (i) net earnings before interest, income
taxes, amortization of intangible assets, integration costs related to
acquisitions and other charges, divided by (ii) revenue. Management is committed
to applying our proven strategies and processes to enhance margins in our newly
acquired operations around the world. Additionally, we are executing our plan to
improve overall financial margins by (i) optimizing the allocation of production
within our worldwide network of facilities based on cost and technological
complexities, (ii) leveraging corporate procurement capabilities to lower
materials costs, (iii) increasing utilization of recently acquired facilities to
take advantage of significant operating leverage, (iv) deploying corporate cost
reduction and productivity enhancement initiatives on a global basis,
(v) consistently applying best practices among our operations worldwide, and
(vi) compensating our employees based in part on the achievement of earnings
targets. In addition, we will continue our intensive focus on maximizing asset
turnover which, combined with the margin enhancements described above, we
believe will increase our return on invested capital.
CELESTICA'S BUSINESS
EMS SERVICES
Celestica is positioned as a value-added provider within the EMS industry
with a full spectrum of products and services to capitalize on the extensive
technological know-how and intellectual capital within Celestica. We believe
that our ability to deliver this wide spectrum of services to our OEM customers
provides us with a competitive advantage over EMS providers focused in few
service areas. Celestica offers a full range of manufacturing services including
those discussed below.
17
SUPPLY CHAIN MANAGEMENT. We utilize our fully integrated enterprise
resource planning and supply chain management system to enable us to optimize
materials management from supplier to end-customer. Effective management of the
supply chain is critical to the success of OEMs as it directly impacts the time
required to deliver product to market and the capital requirements associated
with carrying inventory.
DESIGN. Celestica's design team works with OEM product developers in the
early stages of product development. The design team uses advanced design tools
to enable new product ideas to progress from electrical and ASIC design to
simulation and physical layout to design for manufacturability. Electronic
linkages between the customer, the design group and the manufacturing group at
Celestica help to ensure that new designs are released rapidly, smoothly and
cohesively into production.
PROTOTYPING. Prototyping is a critical stage in the development of new
products which is enhanced by linkage between OEM and EMS engineers. Celestica's
prototyping and new product introduction centers, referred to as "Customer
Gateway Centres," are strategically located, enabling us to provide a quick
response to customer demands facilitating greater collaboration between our
engineers and those customers providing a seamless entry to our larger
manufacturing facilities.
PRODUCT ASSEMBLY AND TEST. We use sophisticated technology in the assembly
and testing of our products, and have continually made significant investments
in developing new assembly and test process techniques and improving product
quality, reducing cost and improving delivery time to customers. Celestica works
independently and with customers and suppliers to develop leading assembly and
test technologies.
FULL SYSTEM ASSEMBLY. Celestica provides full system assembly services to
OEMs. These services require sophisticated logistics capabilities to rapidly
procure components, assemble products, perform complex testing and distribute
products to customers around the world. Celestica's full system assembly
services involve combining a wide range of sub-assemblies (including PCA) and
employing advanced test techniques to various sub-assemblies and final-end
products. Increasingly, OEMs require custom build-to-order system solutions with
very short lead times. We are focused on exploiting this trend through our
advanced supply chain management capabilities.
PRODUCT ASSURANCE. We believe we are one of the few EMS companies that
provides product assurance to our OEM customers. Celestica's product assurance
team performs product life testing and full circuit characterization to ensure
that designs meet or exceed required specifications. Celestica is accredited as
a National Testing Laboratory capable of testing to international standards
(E.G., Canadian Standards Association and Underwriters Laboratories). Celestica
believes that this service allows customers to attain product certification
significantly faster than is customary in the EMS industry.
FAILURE ANALYSIS. Celestica's extensive failure analysis capabilities
concentrate on identifying the root cause of failures and determining corrective
action. Root cause of failures typically relates to inherent component defects
or design robustness deficiencies. Products are subjected to various
environmental extremes, including temperature, humidity, vibration, voltage and
rate of use, and field conditions are simulated in failure analysis laboratories
which also employ advanced electron microscopes, spectrometers and other
advanced equipment. We are proficient in discovering failures before products
are shipped and, more importantly, our highly qualified engineers are very
pro-active in working in partnership with suppliers and customers to implement
resolutions.
PACKAGING AND GLOBAL DISTRIBUTION. Celestica designs and tests packaging of
products for bulk shipment or single end-customer use. We have a sophisticated
integrated system for managing complex international order fulfilment, allowing
us to ship worldwide and, in many cases, directly to the OEMs' end-customers.
AFTER-SALES SUPPORT. Celestica offers a wide range of after-sales support
services. This support can be individualized to meet each customer's
requirements and includes field failure analysis, product upgrades, repair and
engineering change management.
18
QUALITY MANAGEMENT
One of our strengths has been our ability to consistently deliver high
quality services and products. Celestica has an extensive quality management
system that focuses on continual process improvement and achieving high customer
satisfaction. Celestica employs a variety of advanced statistical engineering
techniques and other tools to assist in improving product and service quality.
All of our principal facilities are ISO certified to ISO 9001 or ISO 9002
standards and our environmental management systems at our Toronto, Little Rock,
Fort Collins, Denver, Foothill Ranch, Columbus, Oklahoma City, Chippewa Falls,
Mt. Pleasant, United Kingdom, Ireland, France and Italian facilities and some of
our Asian, Mexican and Czech facilities are also certified to the ISO 14001
(environmental) standards.
We believe that our success is directly linked to high customer
satisfaction. As such, a portion of the compensation of employees is based on
the results of extensive customer satisfaction surveys conducted on Celestica's
behalf by an independent consultant.
GEOGRAPHIES
In 2001, approximately 68% of Celestica's products were delivered to
customers in North America. Celestica produces products in the United States,
Canada, Mexico, United Kingdom, Ireland, Italy, Thailand, China, Hong Kong,
Czech Republic, Brazil, Singapore, Malaysia and Japan. Facilities in the
Americas, Europe and Asia generated approximately 62%, 29% and 9%, respectively,
of Celestica's revenue in 2001. We are focused on expanding our worldwide
resources and capability. Additionally, we believe that locating in lower cost
geographic regions such as Central Europe and South America complements our
service offerings by providing lower cost manufacturing solutions to our OEM
customers for certain price-sensitive applications.
Certain information concerning geographic segments is set forth in Note 20
to the Consolidated Financial Statements in Item 18.
SALES AND MARKETING
Sales and marketing at Celestica is an integrated process designed to
provide a single "face" to the customer worldwide. Celestica's coordination of
efforts with key global accounts has been enhanced by the creation of
customer-focused units each headed by a general manager to oversee the entire
relationship with such customers. We have a global network comprised of direct
sales people, customer service representatives, project managers and global
account executives, as well as our senior executives. Celestica's sales
resources are directed at multiple management and staff levels within target
accounts. We also use independent sales representatives in certain geographic
areas. Sales offices are located in proximity to key OEMs.
Celestica has adopted a focused marketing approach targeted at creating
profitable, strategic relationships with leading OEMs primarily in the computer
and communication sectors. To this end, we are selective as to the nature and
type of business we pursue in order to position ourselves as a value-added
provider within the EMS industry.
CUSTOMERS
Celestica targets industry-leading customers primarily in the computer and
communications sectors. Celestica supplies products and services to over
75 OEMs, including such industry leaders as Avaya, Cisco Systems, Dell, EMC,
Fujitsu, Hewlett-Packard, IBM, Lucent Technologies, Motorola, NEC and Sun
Microsystems. Celestica's electronics products can be found in a wide array of
end-products, including: cell phones and pagers, hubs and switches, LAN and WAN
networking cards, laser printers, mainframe computers, mass storage devices,
medical products, modems, multimedia peripherals, PBX switches, personal
computers, PDAs, photonic devices, routers, scalable processors, servers,
switching products, token ring products, video broadcasting equipment, wireless
base stations, wireless loop systems and workstations.
During 2001, Celestica's three largest customers, IBM, Sun Microsystems and
Lucent Technologies, each represented in excess of 10% of total revenue and in
the aggregate represented 55% of total revenue. During 2000, Celestica's two
largest customers, IBM and Sun Microsystems, each represented in excess of 10%
of total revenue and in the aggregate represented 46% of total revenue.
Celestica's next five largest customers
19
represented approximately 24% of Celestica's total revenue in 2001 (compared
with 32% for the next five largest customers in 2000).
We generally enter into supply arrangements in connection with our
acquisition of facilities from OEMs. These arrangements generally govern the
conduct of business between the parties relating to, among other things, the
manufacture of products which were previously produced at that facility by the
seller itself. Such arrangements, which in certain instances contain limited
overhead contribution provisions or limited revenue or product volume
guarantees, are for short-term periods (from one to three years). There can be
no assurance that these arrangements will be renewed.
TECHNOLOGY AND RESEARCH AND DEVELOPMENT
We use advanced technology in the assembly and testing of the products we
manufacture. We believe that our processes and skills are among the most
sophisticated in the industry, which provides us with advantages over many of
our smaller and less sophisticated competitors.
Our customer-focused factories include predominantly SMT lines, which are
highly flexible and are continually reconfigured to meet customer-specific
product requirements. In addition to expertise in conventional SMT technology,
Celestica has extensive capabilities across a broad range of specialized
assembly process technologies, including chip on board, chip scale packaging,
flip chip attach, tape automated bonding, wire bonding, multi-chip module, ball
grid array, micro ball grid array, tape ball grid array and column grid array.
We also work with a wide range of substrate types from thin flexible printed
circuit boards to highly complex, dense multilayer boards.
Our assembly capabilities are complemented by advanced test capabilities.
Technologies include high speed functional testing, burn-in, vibration, radio
frequency, in-circuit and in-situ dynamic thermal cycling stress testing. We
believe that our inspection technology, which includes X-ray laminography,
three-dimensional laser paste volumetric inspection and scanning electron
microscopy, is among the most sophisticated in the EMS industry. Furthermore,
Celestica employs internally-developed automated robotic technology to perform
in-process repair.
Our ongoing research and development activities include the development of
processes and test technologies as well as some focused product development.
Celestica is pro-active in developing manufacturing techniques which take
advantage of the latest component and product designs and packaging. For
example, NASA selected Celestica to work with engineers in our jet propulsion
laboratory to evaluate the robustness, quality and reliability of chip scale
size packaging for use on space vehicles. Furthermore, we often work with
industry groups to advance the state of technology in the industry.
SUPPLY CHAIN MANAGEMENT
Celestica has strong relationships with a broad range of suppliers. We use
electronic data interchange with our key suppliers and ensures speed of supply
through the use of automated receiving and full-service distribution
capabilities. Celestica procured and managed over $8 billion in materials and
related services. We view this size of procurement as an important competitive
advantage as it enhances our ability to obtain better pricing, influence
component packaging and design and obtain supply of components in constrained
markets.
We utilize two fully integrated enterprise systems which provide
comprehensive information on our logistics, financial and engineering support
functions. One system is used in Asia, Brazil and Europe and the other system is
common throughout the rest of Celestica. These systems provide management with
the data required to manage the logistical complexities of the business. These
systems are augmented by and integrated with other applications such as shop
floor controls, component database management and design tools.
We employ a strategy of risk minimization relative to our inventory and
generally order materials and components only to the extent necessary to satisfy
existing customer orders. Celestica has implemented specific inventory
management strategies with certain suppliers such as "line-side stocking"
(pulling inventory at the production line on an as-needed basis) and "real-time
component pricing" (the ability to obtain the advantage of the most recent price
change in component pricing) designed to minimize the risk to us of cost
fluctuations. In
20
providing contract manufacturing services to our customers, we are largely
protected from the risk of fluctuations in inventory costs, as these costs are
generally passed through to customers.
Almost all of the products manufactured by Celestica require one or more
components, one or more of which may be ordered from a sole-source supplier, and
most full system assemblies require one or more components that are ordered from
a sole-source supplier. Some of these components are rationed in response to
supply shortages. We attempt to ensure continuity of supply of these components.
In cases where unanticipated customer demand or supply shortages occur, we
attempt to arrange for alternative sources of supply, where available, or to
defer planned production in response to the anticipated unavailability of the
critical components. In some cases, supply shortages will substantially curtail
production of all full system assemblies using a particular component. In
addition, at various times there have been industry-wide shortages of electronic
components. There can be no assurance that such shortages, or future
fluctuations in material cost, will not have a material adverse effect on our
results of operations, business, prospects and financial condition.
INTELLECTUAL PROPERTY
We hold licenses to various technologies which we acquired in connection
with acquisitions from Fujitsu-ICL, Hewlett-Packard, IBM, Madge Networks and
other companies. We believe that we have secured access to all required
technology that we are currently using in the conduct of our business.
Technology developed under IBM's ownership for use by us in our current
business is licensed to us by IBM pursuant to a "know-how" license acquired in
connection with the acquisition of Celestica, which allows us to employ this
technology at no further cost. Also, as part of the acquisition, we entered into
a patent license agreement with IBM to provide us with the use of IBM patents
relevant to the operation of our business. The license fee generally is fixed
for products manufactured in Canada and is payable over the initial term of the
agreement. We are negotiating an extension to the original agreement which
expired on December 31, 2001.
We regard our manufacturing processes and certain designs as proprietary
trade secrets and confidential information. We rely largely upon a combination
of trade secret laws, non-disclosure agreements with our customers and suppliers
and our internal security systems, confidentiality procedures and employee
confidentiality agreements to maintain the trade secrecy of our designs and
manufacturing processes. Although we take steps to protect our trade secrets,
there can be no assurance that misappropriation will not occur.
Celestica currently has a limited number of patents and patent applications
pending. However, we believe that the rapid pace of technological change makes
patent protection less significant than such factors as the knowledge and
experience of management and personnel and our ability to develop, enhance and
market manufacturing services.
We license some technology from third parties which we use in providing
manufacturing services to our customers. We believe that such licenses are
generally available on commercial terms from a number of licensors. Generally,
the agreements governing such technology grant to Celestica non-exclusive,
worldwide licenses with respect to the subject technology and terminate upon a
material breach by Celestica.
COMPETITION
The EMS industry is comprised of a large number of domestic and foreign
companies, of which four companies, Celestica, Sanmina-SCI Corporation,
Flextronics International and Solectron Corporation, each had annual revenue in
excess of $10.0 billion in 2001. We also face competition from current and
prospective customers which evaluate our capabilities against the merits of
manufacturing products internally. We compete with different companies depending
on the type of service or geographic area. Certain of our competitors may have
greater manufacturing, financial, research and development and marketing
resources than we do. We believe that the primary basis of competition in our
targeted markets is manufacturing technology, quality, responsiveness, the
provision of value added services and price. To remain competitive, we believe
we must continue to provide technologically advanced manufacturing services,
maintain quality levels, offer flexible delivery schedules, deliver finished
products on a reliable basis and compete favorably on the basis of price.
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HUMAN RESOURCES
As of March 1, 2002, we employ over 40,000 permanent and temporary
(contract) employees worldwide. A significant percentage of our permanent
employees have post-secondary education and more than 2,800 are engineers. The
only Celestica employees that are unionized are certain of our employees in the
United Kingdom, Italy, Mexico, U.S. and Brazil. Given the variable nature of our
project flow and the quick response time required by our customers, it is
critical that we be able to quickly ramp-up and ramp-down our production to
maximize efficiency. To achieve this, our strategy has been to employ a skilled
temporary labor force, as required.
Culturally, Celestica is team-oriented, values-driven, empowerment-based,
dynamic and results-oriented, with an overriding sensitivity to customer service
and quality at all levels. This environment is a critical factor for us to be
able to fully utilize the intellectual capital of our employees. We have never
experienced a work stoppage or strike. We believe that our employee relations
are good.
ENVIRONMENTAL MATTERS
Celestica is subject to extensive environmental, health and safety laws and
regulations, including measures relating to the release, use, storage,
treatment, transportation, discharge, disposal and remediation of contaminants,
hazardous substances and wastes, as well as practices and procedures applicable
to the construction and operation of our plants. We believe that we are in
compliance in all material respects with current environmental laws. However,
there can be no assurance that we will not experience difficulties with our
efforts to maintain material compliance at our facilities, or to comply either
with currently applicable environmental laws or environmental laws as they
change in the future, or that our continued compliance efforts (or failure to
comply with applicable requirements) will not have a material adverse effect on
our results of operations, business, prospects and financial condition. Our need
to comply with present and changing future environmental laws could restrict our
ability to modify or expand our facilities or continue production and could
require us to acquire costly equipment or to incur other significant expense.
Some of our operating sites have a history of industrial use. As is typical
for such businesses, soil and groundwater contamination has occurred. We from
time to time investigate, remediate and monitor soil and groundwater
contamination at certain of our operating sites.
Except for the facilities we acquired in the Omni transaction, Phase I
or similar environmental assessments (which involve general inspections without
soil sampling or ground water analysis) were obtained for most of the
manufacturing facilities leased or owned by Celestica in connection with our
acquisition or lease of such facilities. Where contamination is suspected,
usually Phase II intrusive environmental assessments (including soil and/or
groundwater testing) are performed. We expect to conduct such environmental
assessments in respect of future property acquisitions where consistent with
local practice. These environmental assessments have not revealed any
environmental liability that, based on current information, we believe will have
a material adverse effect on our results of operations, business, prospects or
financial condition, nor are we aware that we have any such material
environmental liability, in part because of the contractual retention of
liability for some contamination and its remediation by landlords and former
owners at some sites. It is possible that our assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which we are not presently aware or that future changes in law or enforcement
standards will cause us to incur significant costs or liabilities in the future.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM customers
typically do not make firm orders for delivery of products more than 30 to
90 days in advance. We do not believe that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales, since
orders may be rescheduled or canceled.
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SEASONALITY
Historically, Celestica has experienced some seasonal variation in revenue,
with revenue typically being highest in the fourth quarter and lowest in the
first quarter. See Item 5, "Operating and Financial Review and
Prospects -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GLOSSARY
ASIC.............................. "Application specific integrated circuit." A device which
combines several functions into one silicon chip, allowing a
reduction in space and power consumption.
Ball grid array................... A silicon chip packaging technique that provides high
interconnection density at a low cost, high thermal
electrical performance, high reliability and high card
assembly yields. This technology uses an array of solder
balls to connect the silicon chip to the printed circuit
board.
Chip on board..................... A generic term for the use of unpackaged or "bare" silicon
that is attached to the surface of the printed circuit
board. The "bare" silicon is often sealed with an epoxy to
strengthen reliability. Chip on board allows for space
savings as well as faster signal processing speeds. Examples
of chip on board are flip chip attach, tape automated
bonding and wire bonded chips.
Consignment....................... An outsourcing method in which the outsourcing company
provides most or all of the materials required for the
products, and the EMS provider supplies only the
manufacturing service.
EMS............................... Electronics manufacturing services.
Flip chip attach.................. A type of chip on board that involves attaching the "bare"
silicon directly to the printed circuit board using solder.
Full system assembly.............. The assembly of a variety of PCAs and other
subassemblies/components into a final product, such as a
server, workstation or personal computer. Full system
assembly typically includes the testing and distribution of
the final product.
In-circuit test................... One of the first electrical tests performed on completed
PCAs, where small portions of the PCAs can be individually
tested down to the silicon chip level.
In-situ dynamic thermal cycling
stress testing.................. The electrical testing of PCAs while varying temperature, in
an effort to uncover potential defects in assembly and
electronics components.
Interconnect technology........... The series of techniques used to electrically connect
silicon chips, substrates and other electronics components
together to create a functional product.
LAN............................... "Local area network." Multiple computers linked together to
facilitate shared communications in a local or office
environment.
Multi-chip module................. A packaging technique that combines multiple silicon chips
together into a single functional device.
OEM............................... Original equipment manufacturer.
PBX switch........................ "Private branch exchange switch." A switch used in a
telephone system consisting of central office trunks, a
switchboard and extension telephones which may be
interconnected with the trunks or with each other through
the switchboard and associated equipment. These switches are
typically used within a single company, office or building.
PDAs.............................. "Personal Digital Assistant." A small form factor portable
computing device.
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PCAs.............................. "Printed circuit assemblies." Printed circuit boards which
are populated with various electronics components to form
functional products.
Photonic devices.................. Communications equipment used in an optical network
utilizing fiber optic technology for the transmission of
information.
Scalable processor................ A processor system that allows for the combination of
multiple microprocessors together to provide significantly
higher processing power and speed.
Scanning electron microscope...... A device providing magnification of a material's surface up
to 40,000 times and allowing in-depth surface analysis.
SMT............................... "Surface mount technology." A manufactured technology for
attaching electronics components directly onto the surface
of printed circuit boards.
Substrate......................... Also referred to as a "printed circuit board" or "board." A
substrate acts as a carrier to provide very dense wiring
between silicon chips. A substrate can take the form of
ceramic, plastic, film or fibreglass sheets with embedded
copper wiring.
Tape automated bonding............ A type of chip on board that involves attaching "bare"
silicon through a mass bonding method. The silicon possesses
gold- or tin-plated copper lead frames which are mounted
directly to the printed circuit board.
Tape ball grid array.............. A ball grid array silicon chip which is packaged on a thin
tape/film carrier.
Three-dimensional laser paste
volumetric inspection............. An inspection system that uses a laser light source and a
camera for image capture in a controlled process. It is used
to measure the volume of solder paste that has been screened
onto a printed circuit board in order to ensure solder
quality.
Token ring........................ A type of LAN technology.
Turnkey........................... An outsourcing method that turns over to the EMS provider
all aspects of manufacturing, including the procurement of
materials.
WAN............................... "Wide area network." A communications network that covers a
wide geographic area, such as a province, state or country.
Wire bonding...................... A method of attaching a "bare" silicon chip on a board. This
process involves ultrasonically bonding fine aluminum wire
(the size of a human hair) from the silicon chip to the PCB.
This procedure is often performed in a clean room
environment.
Wireless base stations............ A base station transmitter used in digital cellular
telephone networks. This is the electrical communication
device that links a cellular telephone to the telephone
network.
Wireless loop system.............. A system providing wireless communications between the
telephone network box on a residential street and all of the
homes in the neighborhood, eliminating buried telephone
cable to homes. This system can also be used in an office
campus environment.
X-ray laminography................ An inspection process used for examining the quality of
solder joints in an array package like ball grid array and
column grid array. The technique is very similar to that of
a CAT scan in the medical industry. The assembly is x-rayed
in slices down through the solder joints, and the images are
compared to a known good image for solder quality.
24
C. ORGANIZATIONAL STRUCTURE
We conduct our business through subsidiaries operating on a worldwide basis.
The following chart identifies our principal operating subsidiaries, each of
which is wholly-owned.
DESCRIPTION OF ORGANIZATIONAL CHART
Celestica
Inc.
(Ontario)
Celestica Celestica Celestica (U.S.) Celestica Omni Industries Celestica Celestica de
International Inc. Montreal Inc. Inc. (Delaware) Europe Inc. Limited Hong Kong Monterrey
(Ontario) (Canada) (Ontario) (Singapore) Limited S.A. de C.V.
(Hong Kong) (Mexico)
Celestica Celestica Celestica
Corporation (UK) Holdings Italia S.r.l.
(Delaware) Limited (Italy)
(United Kingdom)
Celestica Limited
(United Kingdom)
D. DESCRIPTION OF PROPERTY
The following table sets forth summary information with respect to our
principal facilities, all of which are used for EMS activities.
MANUFACTURING
FACILITY SQUARE FOOTAGE OWNED/LEASED
-------- -------------- -------------
(in thousands)
Toronto, Ontario............................................ 888 Owned
Montreal, Quebec............................................ 180 Owned
Oklahoma City, Oklahoma..................................... 723 Leased
Denver, Colorado............................................ 300 Leased
Columbus, Ohio.............................................. 476 Owned
Little Rock, Arkansas....................................... 424 Owned
Foothill Ranch, California.................................. 237 Leased
Fort Collins, Colorado...................................... 200 Leased
Rochester, Minnesota........................................ 200 Leased
Chippewa Falls, Wisconsin................................... 153 Owned
Salem, New Hampshire........................................ 112 Leased
San Jose, California........................................ 131 Leased
Dallas, Texas............................................... 69 Leased
Mt. Pleasant, Iowa.......................................... 69 Leased
Milwaukie, Oregon........................................... 61 Leased
Chelmsford, Massachusetts................................... 37 Leased
Raleigh, North Carolina..................................... 26 Leased
Austin, Texas............................................... 51 Leased
Kidsgrove, England.......................................... 375 Owned
Telford, England............................................ 50 Owned
Vimercate, Italy............................................ 550 Owned
Santa Palombo, Italy........................................ 150 Owned
Dublin, Ireland............................................. 210 Owned
Saumur, France.............................................. 142 Owned
Rajecko, Czech Republic..................................... 170 Owned
Kladno, Czech Republic...................................... 166 Owned
Monterrey, Mexico........................................... 214 Leased
25
MANUFACTURING
FACILITY SQUARE FOOTAGE OWNED/LEASED
-------- -------------- -------------
(in thousands)
Mexico (2).................................................. 152 Leased
Monterrey, Mexico........................................... 113 Owned
Jaguariuna, Brazil.......................................... 142 Leased
Shanghai, China............................................. 383 Owned
Dongguan, China............................................. 172 Leased
China (3)................................................... 122 Owned/Leased
Shatin, Hong Kong........................................... 123 Leased
Indonesia (3)............................................... 48 Owned/Leased
Johor Bahru, Malaysia....................................... 546 Leased
Kulim, Malaysia............................................. 310 Owned
Malaysia (2)................................................ 101 Owned/Leased
Singapore................................................... 307 Leased
Singapore................................................... 316 Owned
Laem Chabang, Thailand...................................... 422 Leased
Rayong, Thailand............................................ 132 Leased
Celestica's principal executive office is located at 12 Concorde Place,
Toronto, Ontario M3C 3R8. We own a 330,000 square foot facility adjacent to our
Toronto, Ontario facility. All of our principal facilities are ISO certified to
ISO 9001 or ISO 9002 standards and our environmental management systems at our
Toronto, Little Rock, Fort Collins, Denver, Foothill Ranch, Columbus, Oklahoma
City, Chippewa Falls, Mt. Pleasant, United Kingdom, Ireland, France and Italian
facilities and some of our Asian, Mexican and Czech facilities are also
certified to the ISO 14001 (environmental) standards.
The leases for our leased facilities expire between 2002 and 2016. Celestica
currently expects to be able to extend the terms of expiring leases or to find
replacement facilities on reasonable terms.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CELESTICA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS IN ITEM 18.
CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS BELIEVES, ANTICIPATES, ESTIMATES,
EXPECTS, AND WORDS OF SIMILAR IMPORT, CONSTITUTE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. AMONG THE KEY
FACTORS THAT COULD CAUSE SUCH DIFFERENCES ARE: THE LEVEL OF OVERALL GROWTH IN
THE ELECTRONICS MANUFACTURING SERVICES (EMS) INDUSTRY; LOWER-THAN-EXPECTED
CUSTOMER DEMAND; COMPONENT CONSTRAINTS; OUR VARIABILITY OF OPERATING RESULTS
AMONG PERIODS; OUR DEPENDENCE ON THE COMPUTER AND COMMUNICATIONS INDUSTRIES; OUR
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; AND OUR ABILITY TO MANAGE
EXPANSION, CONSOLIDATION AND THE INTEGRATION OF ACQUIRED BUSINESSES. THESE AND
OTHER FACTORS ARE DISCUSSED IN THE COMPANY'S FILINGS WITH SEDAR AND THE
U.S. SECURITIES AND EXCHANGE COMMISSION.
GENERAL
Celestica is a leading provider of electronics manufacturing services to
OEMs worldwide with 2001 revenue of $10.0 billion. Celestica provides a wide
variety of products and services to its customers, including the high-volume
manufacture of complex PCAs and the full system assembly of final products. In
addition, the Company is a leading-edge provider of design, repair and
engineering services, supply chain management and power products. Celestica
operates facilities in North America, Europe, Asia and Latin America.
26
Celestica prepares its financial statements in accordance with accounting
principles which are generally accepted in Canada with a reconciliation to
accounting principles generally accepted in the United States, as disclosed in
Note 22 to the 2001 Consolidated Financial Statements.
ACQUISITIONS
A significant portion of Celestica's growth has been generated by
strengthening its customer relationships and increasing the breadth of its
service offerings through facility and business acquisitions.
2000 ACQUISITIONS:
In February and May, 2000, the Company acquired certain assets from the
Enterprise Systems Group and Microelectronics Division of IBM in Rochester,
Minnesota and Vimercate and Santa Palomba, Italy, respectively, for a total
purchase price of $470.0 million. The purchase price, including capital assets,
working capital and intangible assets, was financed with cash on hand. The
Company signed two three-year strategic supply agreements with IBM to provide a
complete range of electronics manufacturing services. The Rochester, Minnesota
operation provides printed circuit board assembly and test services. The
Vimercate operation provides printed circuit board assembly services and the
Santa Palomba operation provides system assembly services. Approximately 1,800
employees joined Celestica from the IBM acquisition.
In June 2000, Celestica acquired NDB Industrial Ltda., NEC Corporation's
wholly-owned manufacturing subsidiary in Brazil. The Company signed a five-year
supply agreement to manufacture NEC communications network equipment for the
Brazilian market. Approximately 680 employees joined Celestica. This acquisition
enhanced the Company's presence in South America and put Celestica in a
leadership position with communications and internet infrastructure customers.
In August 2000, the Company acquired Bull Electronics Inc., the North American
contract manufacturing operation of Groupe Bull of France. In November 2000,
Celestica acquired NEC Technologies (UK) Ltd., in Telford, UK. The aggregate
price for these three acquisitions in 2000 was $169.8 million. In 2000,
Celestica also established a greenfield operation in Singapore.
2001 ASSET ACQUISITIONS:
In February 2001, Celestica acquired certain manufacturing assets in Dublin,
Ireland and Mt. Pleasant, Iowa from Motorola Inc. and signed supply agreements
for two and three years, respectively. This acquisition expanded the Company's
business relationship with Motorola, a leading telecom wireless customer. In
March 2001, Celestica acquired certain assets relating to N.K.
Techno Co. Ltd's repair business, which expanded the Company's presence in
Japan, and established a greenfield operation in Shanghai. In May 2001,
Celestica acquired certain assets from Avaya Inc. in Little Rock, Arkansas and
Denver, Colorado and in August 2001, acquired certain assets in Saumur, France.
The Company signed a five-year supply agreement with Avaya which positioned
Celestica as Avaya's primary outsourcing partner in the area of printed circuit
board, system assembly, test, repair and supply chain management for a broad
range of its telecommunications products. In August 2001, Celestica acquired
certain assets in Columbus, Ohio and Oklahoma City, Oklahoma from Lucent
Technologies Inc. The Company signed a five-year supply agreement with Lucent,
which positions Celestica as the leading EMS provider for Lucent's North
American switching, access and wireless networking systems products.
The aggregate price for these asset acquisitions in 2001 of $834.1 million
was financed with cash.
2001 BUSINESS COMBINATIONS:
In January 2001, Celestica acquired Excel Electronics, Inc. through a merger
with Celestica (U.S.) Inc. which enhanced the Company's prototype service
offering in the southern region of the United States. In June 2001, Celestica
acquired Sagem CR s.r.o., in the Czech Republic, from Sagem SA, of France, which
enhanced the Company's presence in central Europe and positioned Celestica as
Sagem's primary EMS provider. In August 2001, Celestica acquired Primetech
Electronics Inc. (Primetech), an electronics manufacturer in Canada. This
acquisition provided Celestica with additional high complexity manufacturing
capability and an expanded global customer base. The purchase price for
Primetech was financed primarily with
27
the issuance of 3.4 million subordinate voting shares and the issuance of
options to purchase 0.3 million subordinate voting shares of the Company.
In October 2001, Celestica acquired Omni Industries Limited (Omni). Omni is
an EMS provider, headquartered in Singapore, with locations in Singapore,
Malaysia, China, Indonesia and Thailand and has approximately 9,000 employees.
Omni provides printed circuit board assembly and system assembly services, as
well as other related supply chain services including plastic injection molding
and distribution. Omni manufactures products for industry leading OEMs in the
PC, storage and communications sectors. The acquisition significantly enhanced
Celestica's EMS presence in Asia. The purchase price of Omni of $865.8 million
was financed with the issuance of 9.2 million subordinate voting shares and the
issuance of options to purchase 0.3 million subordinate voting shares of the
Company and $479.5 million in cash.
The aggregate purchase price for these business combinations in 2001 was
$1,093.3 million, of which $526.3 million was financed with cash.
The Company is in the process of obtaining third-party valuations of certain
assets for the Primetech and Omni acquisitions. The fair value allocations of
the purchase price are subject to refinement and could result in adjustments
between goodwill and other net assets.
Consistent with its past practices and as a normal course of business,
Celestica may at any time be engaged in ongoing discussions with respect to
several possible acquisitions of widely varying sizes, including small single
facility acquisitions, significant multiple facility acquisitions and corporate
acquisitions. Celestica has identified several possible acquisitions that would
enhance its global operations, increase its penetration in several industries
and establish strategic relationships with new customers. There can be no
assurance that any of these discussions will result in a definitive purchase
agreement and, if they do, what the terms or timing of any agreement would be.
Celestica expects to continue any current discussions and actively pursue other
acquisition opportunities.
A. OPERATING RESULTS
Celestica's revenue and margins can vary from period to period as a result
of the level of business volumes, seasonality of demand, component supply
availability and the timing of acquisitions. There is no certainty that the
historical pace of Celestica's acquisitions will continue in the future.
Celestica's contractual agreements with its key customers generally provide
a framework for its overall relationship with the customer. Celestica recognizes
product revenue upon shipment to the customer as performance has occurred, all
customer specified acceptance criteria have been tested and met, and the
earnings process is considered complete. Actual production volumes are based on
purchase orders for the delivery of products. These orders typically do not
commit to firm production schedules for more than 30 to 90 days in advance.
Celestica minimizes its risk relative to its inventory by ordering materials and
components only to the extent necessary to satisfy existing customer orders.
Celestica is largely protected from the risk of inventory cost fluctuations as
these costs are generally passed through to customers.
Celestica's annual and quarterly operating results are primarily affected by
the level and timing of customer orders, fluctuations in materials costs and
relative mix of value add products and services. The level and timing of
customers' orders will vary due to customers' attempts to balance their
inventory, changes in their manufacturing strategies, variation in demand for
their products and general economic conditions. Celestica's annual and quarterly
operating results are also affected by capacity utilization and other factors,
including price competition, manufacturing effectiveness and efficiency, the
degree of automation used in the assembly process, the ability to manage
inventory and capital assets effectively, the timing of expenditures in
anticipation of increased sales, the timing of acquisitions and related
integration costs, customer product delivery requirements and shortages of
components or labour. Historically, Celestica has experienced some seasonal
variation in revenue, with revenue typically being highest in the fourth quarter
and lowest in the first quarter. In 2001, weak end-market conditions in the
telecommunications and information technology industries resulted in customers
rescheduling and canceling orders. This has impacted Celestica's results of
operations.
28
The table below sets forth certain operating data expressed as a percentage
of revenue for the years indicated:
YEAR ENDED DECEMBER 31
--------------------------------
1999 2000 2001
-------- -------- --------
Revenue..................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 92.8 92.9 92.9
----- ----- -----
Gross profit................................................ 7.2 7.1 7.1
Selling, general and administrative expenses................ 3.8 3.3 3.4
Amortization of intangible assets........................... 1.0 1.0 1.3
Integration costs related to acquisitions................... 0.2 0.2 0.2
Other charges............................................... 0.0 0.0 2.7
----- ----- -----
Operating income (loss)..................................... 2.2 2.6 (0.5)
Interest expense (income), net.............................. 0.2 (0.2) (0.1)
----- ----- -----
Earnings (loss) before income taxes......................... 2.0 2.8 (0.4)
Income taxes................................................ 0.7 0.7 0.0
----- ----- -----
Net earnings (loss)......................................... 1.3% 2.1% (0.4)%
===== ===== =====
ADJUSTED NET EARNINGS
As a result of the significant number of acquisitions made by Celestica over
the past few years, management of Celestica uses adjusted net earnings as a
measure of operating performance on an enterprise-wide basis. Adjusted net
earnings exclude the effects of acquisition-related charges (most significantly,
amortization of intangible assets and integration costs related to
acquisitions), other charges (most significantly, restructuring costs and the
write-down of goodwill and intangible assets) and the related income tax effect
of these adjustments. Adjusted net earnings is not a measure of performance
under Canadian GAAP or U.S. GAAP. Adjusted net earnings should not be considered
in isolation or as a substitute for net earnings (loss) prepared in accordance
with Canadian GAAP or U.S. GAAP or as a measure of operating performance or
profitability. Adjusted net earnings does not have a standardized meaning
prescribed by GAAP and is not necessarily comparable to similar measures
presented by other companies. The following table reconciles net earnings (loss)
to adjusted net earnings:
YEAR ENDED DECEMBER 31
--------------------------------
1999 2000 2001
-------- -------- --------
(in millions)
Net earnings (loss)......................................... $ 68.4 $206.7 $(39.8)
Amortization of intangible assets........................... 55.6 88.9 125.0
Integration costs related to acquisitions................... 9.6 16.1 22.8
Other charges............................................... -- -- 273.1
Income tax effect of above.................................. (10.6) (7.6) (60.5)
------ ------ ------
Adjusted net earnings....................................... $123.0 $304.1 $320.6
====== ====== ======
As a percentage of revenue................................ 2.3% 3.1% 3.2%
====== ====== ======
REVENUE
Revenue increased 3%, to $10,004.4 million in 2001 from $9,752.1 million in
2000. Acquisition revenue grew by 14%, offset by an 11% decline in base business
volumes. The acquisition growth was a result of strategic acquisitions in the
communications industry, primarily in the U.S. and Asia. The Company defines
acquisition revenue as revenue from businesses acquired in the preceding
12 months. Organic revenue declined in 2001 due to the softening of end-markets.
The visibility of future end-market conditions is limited.
29
Revenue from the Americas operations decreased 3% to $6,334.6 million in
2001 from $6,542.7 million in 2000 primarily due to continued end-market
softening which was partially offset by acquisitions. Revenue from European
operations increased 6% to $3,001.3 million in 2001 from $2,823.3 million in
2000 due to the flow through of the IBM acquisition from 2000 and from the 2001
acquisitions, partially offset by the general industry downturn. Revenue from
Asian operations increased 14% to $991.1 million in 2001 from $871.6 million in
2000 primarily due to the Omni acquisition offset in part by the general
industry downturn. Inter-segment revenue in 2001 was $322.6 million, compared to
$485.5 million in 2000. We expect that the Americas and Asian operations will
benefit in the future from the flow through of the 2001 acquisitions.
Revenue from customers in the communications industry in 2001 was 36% of
revenue compared to 31% and 25% of revenue in 2000 and 1999, respectively.
Revenue from customers in the server-related business in 2001 was 31% compared
to 33% and 25% of revenue in 2000 and 1999, respectively. Revenue in the
communications industry benefited from our recent acquisitions.
Revenue increased 84%, to $9,752.1 million in 2000 from $5,297.2 million in
1999. This increase resulted from growth achieved both organically and through
strategic acquisitions. This growth was driven by customers in the
communications and server industries. Organic revenue growth in 2000 was 50% and
represented approximately 59% of the total year-over-year growth. Organic growth
came from growth in existing business and new customers across all geographic
segments. The IBM acquisition accounted for the majority of the acquisition
growth in 2000. Revenue from the Americas operations grew 82%, to
$6,542.7 million in 2000 from $3,587.5 million in 1999. Revenue from European
operations grew 155%, to $2,823.3 million in 2000 from $1,108.6 million in 1999.
The Italian facilities generated over half of Europe's increase from the prior
year, with the remainder due to an overall increase in Europe's base business.
Revenue from Asian operations increased 23%, to $871.6 million in 2000 from
$710.2 million in 1999. Inter-segment revenue in 2000 was $485.5 million,
compared to $109.1 million in 1999.
The following customers represented more than 10% of total revenue for each
of the indicated years:
1999 2000 2001
--------- --------- ---------
Sun Microsystems.................................... X X X
IBM................................................. X X
Lucent Technologies................................. X
Hewlett-Packard..................................... X
Cisco Systems....................................... X
Celestica's top-five customers represented in the aggregate 67% of total
revenue in 2001 compared to 69% in 2000 and 68% in 1999. The Company is
dependent upon continued revenue from its top customers. There can be no
assurance that revenue from these or any other customers will not increase or
decrease as a percentage of total revenue either individually or as a group. Any
material decrease in revenue from these or other customers could have a material
adverse effect on the Company's results of operations. See notes 17
(concentration of risk) and 19 to the Consolidated Financial Statements.
GROSS PROFIT
Gross profit increased 4%, to $712.5 million in 2001 from $688.0 million in
2000. Gross margin was 7.1% in 2001, consistent with 2000. Margins were
maintained due to continued focus on costs and supply chain initiatives and the
benefits of restructuring actions.
Gross profit increased 80%, to $688.0 million in 2000 from $382.5 million in
1999. Gross margin decreased to 7.1% in 2000 from 7.2% in 1999. Gross margin
decreased as a result of a change in product mix and start-up costs for new
programs, particularly in Mexico.
For the foreseeable future, the Company's gross margin is expected to depend
primarily on product mix, production efficiencies, utilization of manufacturing
capacity, start-up activity, new product introductions and pricing within the
electronics industry. Over time, gross margins at individual sites and for the
Company as a whole are expected to fluctuate. Changes in product mix, additional
costs associated with new product
30
introductions and price erosion within the electronics industry could adversely
affect the Company's gross margin. Also, the availability of raw materials,
which are subject to lead time and other constraints, could possibly limit the
Company's revenue growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased 5% to
$341.4 million (3.4% of revenue) in 2001 from $326.1 million (3.3% of revenue)
in 2000. The increase in expenses was primarily due to operations acquired
during 2000 and 2001.
SG&A increased 61%, in 2000 to $326.1 million (3.3% of revenue) from
$202.2 million (3.8% of revenue) in 1999. The increase in expenses was a result
of increased staffing levels and higher selling, marketing and administrative
costs to support sales growth, as well as the impact of expenses incurred by
operations acquired during 1999 and 2000.
Research and development costs decreased to $17.1 million (0.2% of revenue)
in 2001 compared to $19.5 million (0.2% of revenue) in 2000 and $19.7 million
(0.4% of revenue) in 1999.
INTANGIBLE ASSETS AND AMORTIZATION
Amortization of intangible assets increased 41%, to $125.0 million in 2001
from $88.9 million in 2000. This increase is attributable to the intangible
assets arising from the 2000 and 2001 acquisitions.
Amortization of intangible assets increased 60%, to $88.9 million in 2000
from $55.6 million in 1999. This increase is attributable to the intangible
assets arising from the 1999 and 2000 acquisitions, with the largest portion
relating to the IBM and NEC acquisitions.
At December 2001, intangible assets represented 23% of Celestica's total
assets compared to 10% at December 2000. The increase is due principally to the
Omni acquisition.
Effective July 1, 2001, the Company adopted the new accounting standards for
"Business Combinations" and "Goodwill and Other Intangible Assets" as they
relate to acquisitions consummated after June 30, 2001. Accordingly, the
goodwill related to the acquisitions of Primetech and Omni has not been
amortized. Effective January 1, 2002, amortization will be discontinued for all
other goodwill. Amortization expense in 2001 related to goodwill was
$39.2 million. See "-- Recent Accounting Developments."
INTEGRATION COSTS RELATED TO ACQUISITIONS
Integration costs related to acquisitions represent one-time costs incurred
within 12 months of the acquisition date, such as the costs of implementing
compatible information technology systems in newly acquired operations,
establishing new processes related to marketing and distribution processes to
accommodate new customers and salaries of personnel directly involved with
integration activities. All of the integration costs incurred related to newly
acquired facilities, and not to the Company's existing operations.
Integration costs were $22.8 million in 2001 compared to $16.1 million in
2000 and $9.6 million in 1999. The integration costs incurred in 2001 primarily
relate to the completion of the IBM acquisition from 2000 and the Avaya and
Motorola acquisitions.
Integration costs vary from period to period due to the timing of
acquisitions and related integration activities. Celestica expects to incur
additional integration costs in 2002 as it completes the integration of its 2001
acquisitions. Celestica will incur future additional integration costs as the
Company continues to make acquisitions as part of its growth strategy.
OTHER CHARGES
Other charges are non-recurring items or items that are unusual in nature.
In 2001, Celestica incurred $273.1 million in other charges. $237.0 million
relates to restructuring, of which approximately 40% is non-cash. The remainder
of $36.1 million relates to a non-cash charge to write-down the carrying value
of certain assets, primarily goodwill and intangible assets.
31
The Company has been impacted by numerous order reductions, reschedulings
and cancellations since the beginning of fiscal 2001, which the Company believes
is consistent with the EMS industry in general. The Company has taken
restructuring actions to resolve surpluses as a result of the end-market
slowdown.
These restructuring actions include facility consolidations and workforce
reductions. Employee terminations were made across all geographic regions with
the majority being manufacturing and plant employees. The Company took a
non-cash charge to write-down certain long-lived assets across all geographic
regions, which became impaired as a result of the rationalization of facilities.
These asset impairments relate to goodwill and other intangible assets,
machinery and equipment, buildings and improvements. The restructuring charge
includes a number of estimates and assumptions based on information available at
the time and are subject to change.
A further description of these charges is included in Note 13 to the
Consolidated Financial Statements.
The Company expects to benefit from the restructuring measures through
margin improvements and reduced operating costs in the upcoming year. The
Company expects to complete the major components of the restructuring plan by
the end of 2002. Cash outlays are funded from cash on hand.
Celestica did not incur other charges in 2000 or 1999.
INTEREST INCOME, NET
Interest income, net of interest expense, in 2001 and 2000 amounted to
$7.9 million and $19.0 million, respectively. The Company incurred net interest
expense of $10.7 million in 1999. Interest income decreased in 2001 compared to
2000 due to the Company earning lower interest rates on its cash balance. In
2001 and 2000, the Company earned interest income on its cash balance which more
than offset the interest expense incurred on the Company's Senior Subordinated
Notes.
INCOME TAXES
The Company's income tax recovery in 2001 was $2.1 million, reflecting an
effective tax recovery rate of 5%. This is compared to an income tax expense of
$69.2 million in 2000, reflecting an effective tax rate of 25%, and an income
tax expense of $36.0 million in 1999, reflecting an effective tax rate of 34%.
The Company's effective tax rate decreased from 24% to 17% in the second
quarter of 2001 as a result of the mix and volume of business in lower tax
jurisdictions within Europe and Asia. These lower tax rates include tax holidays
and tax incentives that Celestica has negotiated with the respective tax
authorities which expire between 2002 and 2012. The 2001 effective tax rate is
impacted by the occurrence of losses in the third and fourth quarters, which are
tax benefited at a lower tax rate. Notwithstanding the anomaly created by these
losses in determining the year-to-date tax rate, the Company's current tax rate
of 17% is expected to continue for the foreseeable future.
Celestica has recognized a net deferred tax asset at December 31, 2001 of
$102.8 million compared to $83.5 million at December 31, 2000. The net asset
relates to the recognition of net operating losses and future income tax
deductions available to reduce future years' income for income tax purposes.
Celestica's current projections demonstrate that it will generate sufficient
taxable income in the future to realize the benefit of these deferred income tax
assets in the carry-forward periods. A portion of the net operating losses have
an indefinite carry forward period. The other portion will expire over a 20-year
period commencing in 2005.
32
UNAUDITED QUARTERLY FINANCIAL HIGHLIGHTS
2001 2000
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(in millions, except share amounts)
Revenue........................ $2,692.6 $2,660.7 $2,203.0 $2,448.2 $1,612.3 $2,091.9 $2,600.1 $3,447.8
EBIAT(1)....................... $ 104.3 $ 105.8 $ 70.1 $ 90.9 $ 52.6 $ 72.3 $ 98.4 $ 138.6
%(1)........................... 3.9% 4.0% 3.2% 3.7% 3.3% 3.5% 3.8% 4.0%
Net earnings (loss)............ $ 54.8 $ 15.8 $ (38.7) $ (71.8) $ 26.1 $ 41.4 $ 55.7 $ 83.5
Adjusted net earnings(2)....... $ 87.3 $ 93.1 $ 64.7 $ 75.5 $ 39.5 $ 63.7 $ 83.9 $ 117.0
%.............................. 3.2% 3.5% 2.9% 3.1% 2.4% 3.0% 3.2% 3.4%
Weighted average # of shares
outstanding (in millions)
-- basic................... 203.6 207.0 218.1 227.1 190.1 202.7 203.0 203.2
-- diluted(3)(5)........... 223.1 225.5 218.1 227.1 199.5 211.9 220.0 222.6
Basic earnings (loss) per
share........................ $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ 0.14 $ 0.20 $ 0.26 $ 0.39
Diluted earnings (loss) per
share(3)(5).................. $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ 0.13 $ 0.20 $ 0.25 $ 0.38
Diluted adjusted earnings per
share(4)(5).................. $ 0.39 $ 0.41 $ 0.27 $ 0.31 $ 0.20 $ 0.30 $ 0.38 $ 0.53
-------------
(1) Earnings before interest, amortization of intangible assets, income taxes,
integration costs related to acquisitions and other charges, which is also
referred to as our operating margins.
(2) Net earnings (loss) adjusted for amortization of intangible assets,
integration costs related to acquisitions and other charges, net of related
income taxes. Adjusted net earnings is not a GAAP measure. See "-- Adjusted
net earnings."
(3) For the third and fourth quarter of 2001, excludes the effect of options and
convertible debt as they are anti-dilutive due to the loss.
(4) For purposes of calculating diluted adjusted earnings per share for the
third and fourth quarter of 2001, the weighted average number of shares
outstanding in millions was 235.7 and 244.5, respectively.
(5) Shares outstanding and per share amounts for 2000 have been restated to
reflect the treasury stock method, retroactively applied. See "-- Recent
Accounting Developments."
CONVERTIBLE DEBT
In August 2000, Celestica issued LYONs with a principal amount at maturity
of $1,813.6 million, payable August 1, 2020. The Company received gross proceeds
of $862.9 million and incurred $12.5 million in underwriting commissions, net of
tax of $6.9 million. No interest is payable on the LYONs and the issue price of
the LYONs represents a yield to maturity of 3.75%. The LYONs are subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The LYONs are convertible at any time at the option of the holder, unless
previously redeemed or repurchased, into 5.6748 subordinate voting shares for
each $1,000 principal amount at maturity. Holders may require the Company to
repurchase all or a portion of their LYONs on August 2, 2005, August 1, 2010 and
August 1, 2015 and the Company may redeem the LYONs at any time on or after
August 1, 2005 (and, under certain circumstances, before that date). The Company
is required to offer to repurchase the LYONs if there is a change in control or
a delisting event. Generally, the redemption or repurchase price is equal to the
accreted value of the LYONs. The Company may elect to pay the principal amount
at maturity of the LYONs, or the repurchase price that is payable in certain
circumstances, in cash or subordinate voting shares or any combination thereof.
The Company has recorded the LYONs as an equity instrument pursuant to
Canadian GAAP. The LYONs are bifurcated into a principal equity component
(representing the present value of the notes) and an option component
(representing the value of the conversion features of the notes). The principal
equity component is accreted over the 20-year term through periodic charges to
retained earnings. Under U.S. GAAP, the LYONs are classified as a long-term
liability and, accordingly, the accrued yield on the LYONs during any period (at
3.75% per year) is classified as interest expense for that period.
33
To calculate basic earnings (loss) per share for Canadian GAAP, the
accretion of the convertible debt is deducted from net earnings (loss) for the
period to determine earnings available to shareholders.
B. LIQUIDITY AND CAPITAL RESOURCES
In 2001, operating activities provided Celestica with $1,290.5 million in
cash principally from earnings and a reduction in working capital. The primary
factors contributing to the positive cash flow for the year was the reduction of
inventory due to better inventory management, strong accounts receivable
collections, the sale of $400.0 million in accounts receivable under a revolving
facility which is available until September 2004 offset by a decrease in
accounts payable and accrued liabilities. Investing activities in 2001 included
capital expenditures of $199.3 million and $1,299.7 million for acquisitions.
See "-- Acquisitions." Celestica fully funded the cash portion of its 2001
acquisitions with cash from operations and will continue to focus on improving
working capital management. The Company's 2001 financing activities included the
issuance in May of 12.0 million subordinate voting shares for gross proceeds of
$714.0 million less expenses and underwriting commissions of $10.0 million
(pre-tax) and the repayment of $56.0 million of debt acquired in connection with
the acquisition of Omni.
For the year ended December 31, 2000, Celestica's operating activities
utilized $85.1 million in cash. Investing activities in 2000 included capital
expenditures of $282.8 million and $634.7 million for acquisitions. In
March 2000, Celestica issued 16.6 million subordinate voting shares for gross
proceeds of $757.4 million less expenses and underwriting commissions of
$26.8 million (pre-tax). In August 2000, Celestica completed the LYONs offering,
raising gross proceeds of $862.9 million less underwriting commissions of
$19.4 million (pre-tax).
CAPITAL RESOURCES
Celestica has two $250.0 million and one $500.0 million unsecured, revolving
credit facilities totalling $1.0 billion, each provided by a syndicate of
lenders and are available until July 2003, April 2004 and July 2005,
respectively. The credit facilities permit Celestica and certain designated
subsidiaries to borrow funds directly for general corporate purposes (including
acquisitions) at floating rates. Under the credit facilities: Celestica is
required to maintain certain financial ratios; its ability and that of certain
of its subsidiaries to grant security interests, dispose of assets, change the
nature of its business or enter into business combinations, is restricted; and a
change in control is an event of default. No borrowings were outstanding under
the revolving credit facilities at December 31, 2001.
Effective April 19, 2002, the maturity of one of the $250.0 million credit
facilities has been extended from April 2004 to April 2005. Concurrent with this
extension, Celestica elected to reduce the facility to $210.0 million from
$250.0 million.
In addition, there is an incurrence covenant contained in Celestica's Senior
Subordinated Notes due 2006. This covenant is based on Celestica's fixed charge
coverage ratio, as defined in the indenture governing the Senior Subordinated
Notes. Celestica was in compliance with this debt covenant as at December 31,
2001.
A subsidiary of the Company has secured loan facilities of which
$13.0 million was outstanding at December 31, 2001. The weighted average
interest rates on these facilities in 2001 was 4.4%. The loans are denominated
in Singapore dollars and are repayable through quarterly payments.
Celestica believes that cash flow from operating activities, together with
cash on hand and borrowings available under its credit facilities, will be
sufficient to fund currently anticipated working capital, planned capital
spending and debt service requirements for the next 12 months. The Company
expects capital spending for 2002 to be approximately $170.0 million to
$220.0 million. At December 31, 2001, Celestica had committed $21.0 million in
capital expenditures. In addition, Celestica regularly reviews acquisition
opportunities, and may therefore require additional debt or equity financing.
Celestica prices the majority of its products in U.S. dollars, and the
majority of its material costs are also denominated in U.S. dollars. However, a
significant portion of its non-material costs (including payroll, facilities
costs and costs of locally sourced supplies and inventory) are denominated in
various currencies. As a result, Celestica may experience transaction and
translation gains or losses because of currency fluctuations. At
34
December 31, 2001, Celestica had forward foreign exchange contracts covering
various currencies in an aggregate notional amount of $704.8 million with expiry
dates up to May 2003. The fair value of these contracts at December 31, 2001,
was an unrealized loss of $7.4 million. Celestica's current hedging activity is
designed to reduce the variability of its foreign currency costs and involves
entering into contracts to sell U.S. dollars to purchase Canadian dollars,
British pounds sterling, Mexican pesos, euros, Thailand baht and Czech koruna at
future dates. In general, these contracts extend for periods of less than
18 months. Celestica may, from time to time, enter into additional hedging
transactions to minimize its exposure to foreign currency and interest rate
risks. There can be no assurance that such hedging transactions, if entered
into, will be successful.
As at December 31, 2001, the Company has contractual obligations that
require future payments as follows:
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
(in millions)
Long-term debt............................ $147.4 $ 10.0 $ 4.5 $ 1.3 $ 0.7 $130.6 $ 0.3
Operating leases and license
commitments............................. 359.4 104.1 81.3 38.0 26.4 20.4 89.2
The Company has a convertible instrument with a principal amount at maturity
of $1,813.6 million payable August 1, 2020. The Company may elect to settle in
cash or shares or any combination thereof. See further details in Note 10
to the Consolidated Financial Statements.
As at December 31, 2001, the Company has commitments that expire as follows:
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
(in millions)
Foreign currency contracts................ $704.8 $654.0 $50.8 $-- $-- $-- $--
Letters of credit and guarantees.......... 24.1 24.1 -- -- -- -- --
RECENT DEVELOPMENT
On March 31, 2002, the Company purchased from NEC Corporation certain
manufacturing assets in Miyagi and Yamanashi, Japan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Significant estimates are used in determining the allowance for doubtful
accounts, inventory valuation and the useful lives of intangible assets. Actual
results could differ materially from those estimates and assumptions.
Celestica records an allowance for doubtful accounts for estimated credit
losses based on customer and industry concentrations and the Company's knowledge
of the financial condition of its customers. A change to these factors could
impact the estimated allowance.
Celestica values its inventory on a first-in, first-out basis at the lower
of cost and replacement cost for production parts and at the lower of cost and
net realizable value for work in progress and finished goods. Celestica adjusts
its inventory valuation based on estimates of net realizable value and
shrinkage. A change to these assumptions could impact the valuation of
inventory.
Celestica's estimate of the useful life of intangible assets reflects the
periods in which the projected future net cash flows are generated. A
significant change in the projected future net cash flows could impact the
estimated useful life.
35
RECENT ACCOUNTING DEVELOPMENTS
EARNINGS PER SHARE:
As a result of the new Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3500 "Earnings per share," the Company was required to
retroactively use the treasury stock method for calculating diluted earnings per
share. This change results in an earnings per share calculation which is
consistent with United States GAAP. Previously reported diluted earnings per
share have been restated to reflect this change.
BUSINESS COMBINATIONS AND GOODWILL:
In September 2001, the CICA issued Handbook Sections 1581 "Business
Combinations" and 3062 "Goodwill and Other Intangible Assets." The new standards
mandate the purchase method of accounting for business combinations and require
that goodwill no longer be amortized but instead be tested for impairment at
least annually. The standards also specify criteria that intangible assets must
meet to be recognized and reported apart from goodwill. The standards require
that the value of the shares issued in a business combination be measured using
the average share price for a reasonable period before and after the date the
terms of the acquisition are agreed to and announced. Previously, the
consummation date was used to value the shares issued in a business combination.
The new standards are substantially consistent with United States GAAP.
Effective July 1, 2001 and for the remainder of the fiscal year, goodwill
acquired in business combinations completed after June 30, 2001, was not
amortized. In addition, the criteria for recognition of intangible assets apart
from goodwill and the valuation of the shares issued in a business combination
has been applied to business combinations completed after June 30, 2001.
Upon full adoption of the standards beginning January 1, 2002, the Company
will discontinue amortization of all existing goodwill, evaluate existing
intangible assets and make any necessary reclassifications in order to conform
with the new criteria for recognition of intangible assets apart from goodwill
and will test for impairment in accordance with the new standards.
In connection with Section 3062's transitional goodwill impairment
evaluation, the Company is required to assess whether goodwill is impaired as of
January 1, 2002. The Company has up to six months to determine the fair value of
its reporting units and compare that to the carrying amounts of the reporting
units. To the extent a reporting unit's carrying amount exceeds its fair value,
the Company must perform a second step to measure the amount of impairment in a
manner similar to a purchase price allocation. This second step is to be
completed no later than December 31, 2002. The change to assessing fair value by
reporting unit could result in an impairment charge. Any transitional impairment
will be recognized as an effect of a change in accounting principle and will be
charged to opening retained earnings as of January 1, 2002.
As of December 31, 2001, the Company had unamortized goodwill of
$1,128.8 million and unamortized other intangible assets including intellectual
property of $427.2 million, all of which are subject to the transitional
provisions of Sections 1581 and 3062. Amortization expense related to goodwill
was $39.2 million for 2001. Because of the extensive effort required to comply
with the remaining provisions of Sections 1581 and 3062, the Company has not
estimated the impact of these provisions on its financial statements, beyond
discontinuing goodwill amortization.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS:
In December 2001, the CICA issued Handbook Section 3870, which establishes
standards for the recognition, measurement, and disclosure of stock-based
compensation and other stock-based payments made in exchange for goods and
services provided by employees and non-employees. The standard requires that a
fair value based method of accounting be applied to all stock-based payments to
non-employees and to employee awards that are direct awards of stock, that call
for settlement in cash or other assets or are stock appreciation rights that
call for settlement by the issuance of equity instruments. However, the new
standard permits the Company to continue its existing policy of recording no
compensation cost on the grant of stock options to employees. Consideration paid
by employees on the exercise of stock options is recorded as share capital. The
standard is effective for the Company's fiscal year beginning January 1, 2002
for awards granted on or after that date. The Company's current accounting
policies are consistent with the new standard.
36
FOREIGN CURRENCY TRANSLATION AND HEDGING RELATIONSHIPS:
CICA Handbook Section 1650 has been amended to eliminate the deferral and
amortization of foreign currency translation gains and losses on long-lived
monetary items, effective January 1, 2002, with retroactive restatement of prior
periods. The Company is not impacted by this change. The CICA issued Accounting
Guideline AcG-13, which establishes criteria for hedge accounting effective for
the Company's 2003 fiscal year. The Company has complied with the requirements
of AcG-13 and has determined that all of its current hedges will continue to
qualify for hedge accounting when the guideline becomes effective.
TRANSFER OF RECEIVABLES:
In March 2001, the CICA issued Accounting Guideline AcG-12, which applies to
transfers of receivables after June 30, 2001. AcG-12 requires that transfers of
receivables in which the transferor surrenders control over the assets, be
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets, are received in exchange. The Company's
current accounting policies are consistent with the new standard.
IMPAIRMENT OF LONG-LIVED ASSETS:
In October 2001, FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which retains the fundamental
provisions of SFAS 121 for recognizing and measuring impairment losses of
long-lived assets other than goodwill. Statement 144 also broadens the
definition of discontinued operations to include all distinguishable components
of an entity that will be eliminated from ongoing operations. This Statement is
effective for the Company's fiscal year commencing January 1, 2002, to be
applied prospectively. In August 2001, SFAS 143 "Accounting for Asset Retirement
Obligations" was approved and requires that the fair value of an asset
retirement obligation be recorded as a liability, at fair value, in the period
in which the Company incurs the obligation. SFAS 143 is effective for the
Company's fiscal year commencing January 1, 2003. The Company expects the
adoption of these standards will have no material impact on its financial
position, results of operations or cash flows.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Certain information concerning research and development and intellectual
property is set forth in "-- Operating Results -- Selling, general and
administrative expenses" and in Item 4, "Information of the Company -- Business
Overview -- Celestica's Business -- Technology and Research and Development."
D. TREND INFORMATION
During the last year, economic growth slowed and, in some regions of the
world, contracted. As a result, demand for technology products fell
significantly, and Celestica's customers experienced commensurately reduced
demand for their products. In turn, Celestica experienced reduced demand for
electronics manufacturing services. However, this downturn in demand was offset
partially by an increase on the part of Celestica's customers to outsource their
manufacturing. In 2002, the economic environment continues to be uncertain, and
Celestica continues to experience poor visibility for customer demand. Given the
difficult economic environment, Celestica has been focussed on re-aligning
capacity to match current levels of product demand, generating increased levels
of cash flow, and improving operating efficiencies, including the reduction of
inventory levels. Celestica intends to continue these activities in 2002. There
continues to be a significant number of outsourcing opportunities and Celestica
is well positioned to participate further in the trend towards increasing levels
of electronics outsourcing by OEMs. If, however, economic conditions were to
deteriorate significantly beyond current expectations, Celestica would likely
continue reducing capacity to match reduced levels of demand.
37
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Each director of Celestica is elected by the shareholders to serve until the
next annual meeting or until a successor is elected or appointed. Executive
officers of Celestica are appointed annually and serve at the discretion of the
board of directors. The following table sets forth certain information regarding
the directors and senior officers of Celestica.
NAME AGE POSITION WITH CELESTICA
---- -------- -----------------------
EUGENE V. POLISTUK................ 55 Chairman of the Board, Chief Executive Officer and Director
ANTHONY P. PUPPI.................. 44 Executive Vice President, Chief Financial Officer, General
Manager, Global Services and Director
ROBERT L. CRANDALL................ 66 Director
WILLIAM A. ETHERINGTON............ 60 Director
MARK L. HILSON.................... 44 Director
RICHARD S. LOVE................... 64 Director
ROGER L. MARTIN................... 45 Director
ANTHONY R. MELMAN................. 54 Director
MICHIO NARUTO..................... 66 Director
GERALD W. SCHWARTZ................ 60 Director
DON TAPSCOTT...................... 54 Director
J. MARVIN M(A)GEE................. 49 President and Chief Operating Officer
R. THOMAS TROPEA.................. 49 Vice Chair, Global Customer Units and Worldwide Marketing
and Business Development
ANDREW G. GORT.................... 49 Executive Vice President, Global Supply Chain Management
ALASTAIR KELLY.................... 57 Executive Vice President, Corporate Development
ARTHUR P. CIMENTO................. 44 Senior Vice President, Corporate Strategies
LISA J. COLNETT................... 44 Senior Vice President, Worldwide Process Management and
Chief Information Officer
STEPHEN DELANEY................... 42 Senior Vice President, U.S., Celestica Corporation
IAIN S. KENNEDY................... 40 Senior Vice President, Integration
DONALD S. MCCREESH................ 53 Senior Vice President, Human Resources
DANIEL P. SHEA.................... 45 Senior Vice President and Chief Technology Officer
RAHUL SURI........................ 37 Senior Vice President, Mergers and Acquisitions
PETER J. BAR...................... 44 Vice President and Corporate Controller
ELIZABETH L. DELBIANCO............ 42 Vice President, General Counsel and Secretary
F. GRAHAM THOURET................. 47 Vice President and Corporate Treasurer
The following is a brief biography of each of Celestica's directors and
senior officers:
EUGENE V. POLISTUK is the founder, Chairman of the Board of Directors and
Chief Executive Officer of Celestica. He has been the Chief Executive Officer of
Celestica since its establishment in 1994, and was Celestica's President until
February 2001. Since 1986, Mr. Polistuk has been instrumental in charting
Celestica's transformation and executing the company's successful evolution from
its early history as an operating unit of IBM, to a standalone company, to a
$10.0 billion public company and leader in the electronics manufacturing
services industry. Previously, Mr. Polistuk spent 25 years with IBM Canada,
where, over the course of his career,
38
he managed all key functional areas of the business. Mr. Polistuk holds a
Bachelor of Applied Science degree in Electrical Engineering from the University
of Toronto and an Honorary Doctorate in Engineering from Ryerson University in
2001. In 1994, he was presented with the "2T5 Meritorious Service Medal" in
recognition of his meritorious service in and for the profession, by his peers
in the University of Toronto Engineering Alumni Association. He has been the
recipient of ELECTRONIC BUSINESS' Outstanding CEO award, and most recently,
under Mr. Polistuk's leadership, Celestica has been recognized as the number one
ranking company on BUSINESSWEEK'S 2001 Info Tech 100 list, and as CANADIAN
BUSINESS' Company of the Year in the publication's 2001 Tech 100 issue.
ANTHONY P. PUPPI has been the Chief Financial Officer of Celestica since its
establishment and a director of Celestica since October 1996. He was appointed
Executive Vice President in October 1999 and General Manager, Global Services in
January 2001. Mr. Puppi is responsible for Celestica's global financial
activities, as well as a number of global services businesses, including design,
repair and power systems. From 1980 to 1992, he held positions of increasing
financial management responsibility with IBM Canada. Mr. Puppi holds a Bachelor
of Business Administration degree in Finance and a Master of Business
Administration degree from York University in Ontario.
ROBERT L. CRANDALL is the retired Chairman of the Board and Chief Executive
Officer of AMR Corporation/ American Airlines Inc. Mr. Crandall has been a
director of Celestica since July 1998. He is also a director of Allied World
Assurance Company, Anixter International Inc., the Halliburton Company and i2
Technologies Inc. He also serves on the International Advisory Board of American
International Group Inc. Mr. Crandall holds a Bachelor of Science degree from
the University of Rhode Island and a Master of Business Administration degree
from the Wharton School of the University of Pennsylvania.
WILLIAM A. ETHERINGTON is the former Senior Vice President and Group
Executive, Sales and Distribution, IBM Corporation and Chairman, President and
Chief Executive Officer of IBM World Trade Corporation. Mr. Etherington has been
a director of Celestica since October 2001. After joining IBM Canada in 1964,
Mr. Etherington ran successively larger portions of the company's business in
Canada, Latin America, Europe and from the corporate office in Armonk,
New York. He retired from IBM after a 37-year career. Mr. Etherington holds a
Bachelor of Science in Electrical Engineering and a Doctor of Laws (Hon.) Degree
from the University of Western Ontario.
MARK L. HILSON is a Vice President of Onex and has acted as a director of
Celestica since October 1996. Mr. Hilson joined Onex in 1988 and was appointed
Vice President in 1993. Prior to 1988, he was an associate in the Mergers &
Acquisitions Group at Merrill Lynch. Mr. Hilson is also a director of Magnatrax
Corporation, Unitive Inc., Vincor International Inc. and a governor of Wilfrid
Laurier University and the Shaw Festival. Mr. Hilson holds an Honours Bachelor
of Business Administration (gold medallist) from Wilfrid Laurier University and
a Master of Business Administration (George F. Baker Scholar) from the Harvard
University Graduate School of Business Administration.
RICHARD S. LOVE is a former Vice President of Hewlett-Packard and a former
General Manager of the Computer Order Fulfillment and Manufacturing Group for
Hewlett-Packard's Computer Systems Organization. Mr. Love has been a director of
Celestica since July 1998. From 1962 until 1997, he held positions of increasing
responsibility with Hewlett-Packard, becoming Vice President in 1992. He is a
former director of HMT Technology Corporation and the Information Technology
Industry Council. Mr. Love holds a Bachelor of Science degree in Business
Administration and Technology from Oregon State University and a Master of
Business Administration degree from Fairleigh Dickinson University.
ROGER L. MARTIN is Dean and Professor of Strategy at the University of
Toronto's Joseph L. Rotman School of Management and has been a director of
Celestica since July 1998. Mr. Martin was formerly a director of Monitor Company
and is Chair of the Ontario Task Force on Competitiveness, Productivity, and
Economic Progress. Mr. Martin also serves as a director for Thomson Corporation,
Ontario SuperBuild Corporation, the Canadian Film Centre and a trustee of the
Hospital for Sick Children. Mr. Martin holds a AB degree (cum laude) from
Harvard College and a Master of Business Administration degree from the Harvard
University Graduate School of Business Administration.
ANTHONY R. MELMAN is a Vice President of Onex and has been a director of
Celestica since October 1996. Dr. Melman joined Onex in 1984 and is actively
involved in negotiating acquisitions, divestitures, and the
39
financing thereof. He serves on the boards of various Onex subsidiaries. From
1977 to 1984, he was Senior Vice President of Canadian Imperial Bank of
Commerce, responsible for worldwide merchant banking, project financing,
acquisitions and other specialized financing activities. Prior to emigrating to
Canada in 1977, Dr. Melman had extensive merchant banking experience in South
Africa and the United Kingdom. Dr. Melman is also a director of The Baycrest
Centre Foundation, The Baycrest Centre for Geriatric Care, the University of
Toronto Asset Management Corporation and a member of the Board of Governors of
Mount Sinai Hospital. Dr. Melman holds a Bachelor of Science from the University
of The Witwatersrand, a Master of Business Administration (gold medallist) from
Cape Town University and a Ph.D. in Finance from the University of The
Witwatersrand.
MICHIO NARUTO is the Chairman of Celestica Japan KK, Chairman of the Board
of ICL plc, special representative of Fujitsu Ltd. and Chairman of Toyota Info
Technology Center. He has been a director of Celestica since October 2001.
Mr. Naruto joined Fujitsu Limited in February 1962. In 1981, when Fujitsu
entered into a technology agreement with ICL, he held the position of General
Manager, Business Administration of International Operations. He was appointed
to the board of Fujitsu in 1985, in charge of International Operations. Later
his responsibility in Fujitsu covered the ICL Business Group; Legal and Industry
Relations; External Affairs and Export Control. In his current capacity, he
attends various international conferences as special representative of Fujitsu
and also takes a role as chairman of Fujitsu Research Institute. Mr. Naruto
holds a Bachelor of Laws degree from the University of Tokyo.
GERALD W. SCHWARTZ is the Chairman of the Board, President and Chief
Executive Officer of Onex and has been a director of Celestica since July 1998.
Prior to founding Onex in 1983, Mr. Schwartz was a co-founder (in 1977) of
CanWest Capital Corp., now CanWest Global Communications Corp. He is a director
of Onex, The Bank of Nova Scotia, LSG/Sky Chefs, Inc. and Phoenix Pictures Inc.
Mr. Schwartz is also Vice Chairman and Member of the Executive Committee of
Mount Sinai Hospital and is a director, governor, or trustee of a number of
other organizations, including Junior Achievement, Canadian Council of
Christians and Jews and The Board of Associates of the Harvard Business School.
Mr. Schwartz holds a Bachelor of Commerce degree and a Bachelor of Laws degree
from the University of Manitoba, a Master of Business Administration degree from
the Harvard University Graduate School of Business Administration and a Doctor
of Laws (Hon.) from St. Francis Xavier University.
DON TAPSCOTT is an internationally sought after authority, consultant and
speaker on business strategy and organizational transformation. He is the author
of several widely read books on the application of technology in business.
Mr. Tapscott is the co-founder of Digital 4Sight, a company that researches and
designs new business models for Global 2000 organizations, president of
New Paradigm Learning Corporation, Chairman of Maptuit, and an adjunct Professor
of Management at the University of Toronto's Joseph L. Rotman School of
Management. He is also a founding member of the Committee of Advisers of the
Business and Economic Roundtable on Addiction and Mental Health. Mr. Tapscott
has been a director of Celestica since September 1998. He holds a Bachelor of
Science degree in Psychology and Statistics and a Master of Education degree,
specializing in Research Methodology, as well as a Doctor of Laws (Hon.) from
the University of Alberta.
J. MARVIN M(A)GEE has been the President and Chief Operating Officer of
Celestica since February 2001 and was the Executive Vice President, Worldwide
Operations from October 1999 to February 2001 and was Senior Vice President,
Canada from January 1997 until October 1999. Mr. M(a)Gee joined IBM Canada in
1979 and, over the course of his career, has held a number of executive
positions with IBM Canada's manufacturing and development operations, with
assignments in Canada and the United States. Mr. M(a)Gee holds a Bachelor of
Science degree in Mechanical Engineering from the University of New Brunswick
and a Master of Business Administration degree from McMaster University.
R. THOMAS TROPEA has been Vice Chair, Global Customer Units and Worldwide
Marketing and Business Development since February 2001 and was the Executive
Vice President, Worldwide Marketing and Business Development from October 1999
to February 2001and Senior Vice President of Marketing and Business Development
from August 1998 to October 1999. Mr. Tropea has responsibility for global
marketing and business development. He joined Celestica after an extensive
career with Northern Telecom and has over 18 years of experience in the
telecommunications industry in North America and Europe, working in critical
40
areas such as sales, finance, business development, investor relations and
manufacturing operations. Mr. Tropea holds a Master of Business Administration
degree from the University of Toronto and a Bachelor of Commerce degree from
Carleton University in Ottawa, Ontario.
ANDREW G. GORT has been the Executive Vice President Supply Chain Management
since February 2001 and was a Senior Vice President of Celestica from
October 1996 until February 2001. He is responsible for global supply chain
management, which includes Celestica's worldwide procurement procedures.
Mr. Gort joined IBM Canada in 1969 and, over the course of his career, has held
various managerial roles in new products, materials, planning, office systems
and manufacturing products. Mr. Gort holds a Bachelor of Arts degree in
Economics and a Master of Business Administration degree from the University of
Toronto.
ALASTAIR KELLY has been the Executive Vice President, Corporate Development
since October 1999 and was the Senior Vice President, Celestica Europe from
January 1997 until October 1999. Mr. Kelly joined Design to Distribution Limited
in 1994 and, over the course of his career, has had experience in the computer,
telecommunications and electronics manufacturing sectors. Mr. Kelly holds a
Master of Arts degree in Psychology from Aberdeen University and a Doctor of
Science degree from Salford University.
ARTHUR P. CIMENTO joined Celestica in September 1999 as Senior Vice
President, Corporate Strategies. Prior to joining Celestica, he was at
McKinsey & Co., a leading international management consulting firm, with a
client portfolio focused on electronics operations. Mr. Cimento joined McKinsey
in 1988, was elected a Principal in 1993, and held leadership positions in
McKinsey's Operations and Electronics practices. Before joining McKinsey,
Mr. Cimento held management positions in several engineering services firms. He
is a director of the San Francisco Chamber of Commerce. Mr. Cimento holds both a
Bachelor of Science and a Master of Science degree in Mechanical Engineering
from the Massachusetts Institute of Technology.
LISA J. COLNETT has been a Senior Vice President of Celestica since
October 1996. In her current role as Senior Vice-President, Worldwide Process
Management, and Chief Information Officer, she is responsible for key corporate
functions, including IT. Prior to that, Ms. Colnett headed the Memory Division
of Celestica. Ms. Colnett joined IBM Canada in 1981 and, over the course of her
career, has had experience in materials logistics, cost engineering, site
logistics and manufacturing management. Ms. Colnett holds a Bachelor of Business
Administration degree from the University of Western Ontario.
STEPHEN DELANEY joined Celestica in May 2001 and is a Senior Vice President
responsible for Celestica's U.S. East operations. Prior to joining Celestica,
Mr. Delaney was the Vice President and general manager of Interior and Exterior
Systems Business at Visteon, responsible for a division with 25 plants and
25,000 people in North and South America, Europe and Asia. Prior to joining
Visteon in 1997 as Vice President of Supply, Mr. Delaney held executive and
senior management roles in the operations of AlliedSignal's Electronic Systems
business, Ford's Electronics Division, and IBM's Telecommunications division.
Mr. Delaney holds a Masters degree in Business Administration from Duke
University in North Carolina and a Bachelor of Science degree in Industrial
Engineering from Iowa State University.
IAIN S. KENNEDY has been a Senior Vice President of Celestica since
October 1996. He currently is responsible for Celestica's integration of
acquisitions and South America. Prior to that, he was Senior Vice President,
Mergers and Acquisitions from 1996 through 2000. He began his career with
IBM Canada in 1984 and, over the course of his career, has held a number of key
management positions in areas of the business including: supply chain,
manufacturing operations, business development and information technology as
chief information officer. Mr. Kennedy holds a Bachelor of Science degree in
Computer Science from the University of Western Ontario and a Master of Business
Administration (Ivey Scholar) degree from the Richard Ivey School of Business,
University of Western Ontario.
DONALD S. MCCREESH joined Celestica in August 1999 as Senior Vice President,
Human Resources. Prior to joining Celestica, he was the Executive Vice President
of Human Resources at the Canadian Imperial Bank of Commerce (CIBC). Prior to
joining CIBC in 1997, Mr. McCreesh was at Northern Telecom, where he held a
number of senior human resource management positions. Mr. McCreesh holds both a
Bachelor of Psychology and a Master of Business Administration degree from
McMaster University.
DANIEL P. SHEA has been a Senior Vice President of Celestica since
October 1996 and has been Chief Technology Officer since March 1998. He is also
the General Manager, Hewlett-Packard Global Account and
41
previously was President, Power Systems Division of Celestica where he was
responsible for all aspects of Celestica's power systems business. Mr. Shea
joined IBM Canada in 1980 and, over the course of his career, has held a number
of engineering management roles, such as quality, reliability, procurement and
power systems. Mr. Shea holds a Bachelor of Applied Science degree in Electrical
Engineering from the University of Toronto.
RAHUL SURI has been the Senior Vice President, Mergers and Acquisitions,
since July 2000. He is responsible for Celestica's corporate mergers and
acquisitions activities. Prior to joining Celestica, Mr. Suri was a Managing
Director in the M&A Group at BMO Nesbitt Burns Investment Banking. Prior to
that, he was a partner at the Canadian law firm Davies Ward Phillips &
Vineberg LLP. Mr. Suri was also a visiting professor at Queen's University Law
School, Ontario for several years, where he taught corporate law and mergers and
acquisitions. In 1992, Mr. Suri served as an adviser to the Chairman and the
Executive Director of the Ontario Securities and Exchange Commission on policy
and legal matters. Mr. Suri holds a Master of Arts degree in Law from Cambridge
University, England.
PETER J. BAR has been Vice President and Corporate Controller of Celestica
since February 1999. Mr. Bar joined Celestica in March 1998 as the
Vice President, Finance-Power Systems. From 1984 to 1998, Mr. Bar held positions
of increasing responsibility with the finance group at IBM Canada. Mr. Bar holds
a Bachelor of Commerce degree from the University of Toronto and a Chartered
Accountant designation.
ELIZABETH L. DELBIANCO has been Vice President and General Counsel of
Celestica since February 1998. She has overall responsibility for the legal
affairs of Celestica and is also the Corporate Secretary. Ms. DelBianco came to
Celestica following a 13-year career as a senior corporate legal advisor in the
telecommunications industry. Ms. DelBianco holds a Bachelor of Arts degree from
the University of Toronto, a Bachelor of Laws degree from Queen's University,
and a Master of Business Administration degree from the Richard Ivey School of
Business, University of Western Ontario. Ms. DelBianco is qualified to practice
law in Ontario and New York.
F. GRAHAM THOURET has been Vice President and Corporate Treasurer of
Celestica since October 1997. Prior to that, he served as Vice President and
Treasurer of Dominion Textile Inc., a public company with international
manufacturing and marketing operations. Mr. Thouret has also held senior
management positions in the oil and gas industry and investment banking.
Mr. Thouret holds a Bachelor of Engineering degree from McGill University and a
Master of Science degree in Management from the Massachusetts Institute of
Technology.
There are no family relationships among any of the foregoing persons, and
there are no arrangements or understandings with any person pursuant to which
any of our directors or members of senior management were selected.
B. COMPENSATION
AGGREGATE COMPENSATION OF DIRECTORS AND OFFICERS
Directors who are not officers or employees of Celestica or Onex receive
compensation for their services as directors. These directors receive an annual
retainer fee of $25,000 and a fee of $2,500 for each meeting attended. Meetings
of directors are expected to occur at least quarterly. In lieu of receiving such
retainer and attendance fees in cash, these directors may elect, at the time
they are first elected or appointed to Celestica's board of directors, to
receive their fees in subordinate voting shares. Directors who joined the Board
at or about the time of Celestica's initial public offering receive an annual
retainer and per meeting fee of 2,860 and 286 subordinate voting shares
respectively. Under the Directors' Compensation Plan adopted in July 2001, the
number of shares to be paid to other eligible directors in lieu of cash is
calculated, in the case of meeting fees, by dividing the cash fee that would
otherwise be payable by the closing price of subordinate voting shares on the
NYSE on the date of the meeting, and, in the case of annual retainer fees, by
dividing the cash amount that would otherwise be payable quarterly by the
closing price of subordinate voting shares on the NYSE on the last day of the
quarter. Each director has the right to elect to defer payment of his fees.
Grants of subordinate voting shares for such purposes may not exceed an
aggregate of 500,000 subordinate voting shares. The aggregate compensation paid
in 2001 by the Company to our directors in their capacity as directors was
$50,000 and the right to receive, in the aggregate, 18,482.41 subordinate voting
shares. The delivery of these shares was deferred until the respective directors
cease to be directors of Celestica. See "-- Long-Term Incentive Plan."
42
Mr. Crandall, in his capacity as Chairman of the Executive Committee, also
receives an annual grant of 10,000 Performance Units convertible into
subordinate voting shares upon his retirement from the Board.
In 2001, each of the eligible directors was issued options to acquire 20,000
subordinate voting shares pursuant to the Long-Term Incentive Plan. 80,000
options were issued at an exercise price of $44.23 and 40,000 options were
issued at an exercise price of $35.95.
As of March 1, 2002, senior officers and directors as a group held options
to purchase a total of the following numbers of subordinate voting shares at the
purchase price per share indicated below:
NUMBER OF
SUBORDINATE PURCHASE PRICE
VOTING SHARES PER SHARE
------------- --------------
710,379 $ 5.00
399,190 $ 8.75
69,700 $ 7.50
373,880 C$ 18.90
30,000 $ 12.345
23,000 C$ 20.625
80,000 C$ 31.85
70,000 $ 22.97
542,000 C$ 57.845
60,000 $ 39.03
100,000 C$ 60.00
276,000 C$ 86.50
62,000 $ 56.1875
25,000 C$ 73.50
100,000 $ 50.00
526,400 C$ 66.06
144,000 $ 41.89
40,000 C$ 34.50
40,000 $ 23.41
40,000 C$ 72.60
40,000 $ 48.69
40,000 C$ 66.78
40,000 $ 44.23
40,000 $ 35.95
These options expire at various dates from November 4, 2005 through
December 4, 2011. See Item 6(E), "-- Share Ownership -- Share Purchase and
Option Plans" below. See Note 11 to the Consolidated Financial Statements in
Item 18 for further information about options.
43
REMUNERATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth the compensation of the Chief Executive
Officer of Celestica and the four other most highly compensated executive
officers of Celestica during the year ended December 31, 2001 (collectively, the
"Named Executive Officers") for services rendered in all capacities during our
two most recently completed financial years.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------------- UNDER OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(2) COMPENSATION(3)
--------------------------- -------- -------- --------- -------------- ---------------
($) ($) (#) ($)
Eugene V. Polistuk................................. 2001 700,000 -- 150,000 210,737
Chairman of the Board and Chief Executive Officer 2000 550,000 1,300,000 100,000 193,029
J. Marvin M(a)Gee.................................. 2001 516,250 -- 135,000 57,773
President and Chief Operating Officer 2000 360,000 510,000 40,000 31,809
Anthony P. Puppi................................... 2001 400,000 -- 59,000 51,822
Executive Vice President, Chief Financial Officer 2000 370,000 524,000 35,000 47,121
and General Manager, Global Services
R. Thomas Tropea................................... 2001 400,000 -- 59,000 10,200
Vice Chair, Global Customer Units and Worldwide 2000 350,000 495,000 35,000 5,100
Marketing and Business Development
Stephen Delaney(4)................................. 2001 204,694 150,000(5) 140,000(6) 154,500(7)
Senior Vice President, U.S., Celestica
Corporation
-------------
(1) Excludes perquisites and other personal benefits because such compensation
did not exceed 10% of the total annual salary and bonus for any of the Named
Executive Officers.
(2) See table under "Options Granted During Year Ended December 31, 2001 to
Named Executive Officers."
(3) Represents amounts set aside to provide benefits under Celestica's pension
plans (see "-- Pension Plans").
(4) Mr. Delaney joined Celestica in May 2001. The amount specified represents
Mr. Delaney's salary from his date of hire to the end of the year.
(5) Represents the amount Celestica agreed to pay to Mr. Delaney at his date of
hire as a bonus for the year ended December 31, 2001.
(6) Includes 100,000 options granted to Mr. Delaney upon joining Celestica.
(7) Includes $150,000 paid to Mr. Delaney at his date of hire.
44
OPTIONS GRANTED DURING YEAR ENDED DECEMBER 31, 2001 TO NAMED EXECUTIVE OFFICERS
The following table sets out options to purchase subordinate voting shares
granted by the Corporation to the Named Executive Officers during the year ended
December 31, 2001.
MARKET VALUE OF
SUBORDINATE % OF SUBORDINATE
VOTING SHARES TOTAL OPTIONS VOTING SHARES
UNDER OPTIONS GRANTED TO EXERCISE ON THE DATE OF
GRANTED EMPLOYEES PRICE GRANT
NAME (1) (#) IN 2001 ($/SHARE) ($/SHARE) EXPIRATION DATE
---- ------------- -------------- ---------- --------------- ----------------
Eugene V. Polistuk.................. 150,000 1.89% C$66.06 C$66.06 December 4, 2011
J. Marvin M(a)Gee................... 25,000 0.32% C$73.50 C$73.50 March 1, 2011
110,000 1.39% C$66.06 C$66.06 December 4, 2011
Anthony P. Puppi.................... 59,000 0.75% C$66.06 C$66.06 December 4, 2011
R. Thomas Tropea.................... 59,000 0.75% U.S.$41.89 U.S.$41.89 December 4, 2011
Stephen Delaney..................... 100,000 1.26% U.S.$50.00 U.S.$50.00 April 20, 2011
40,000 0.51% U.S.$41.89 U.S.$41.89 December 4, 2011
-------------
(1) Options vest in four equal annual instalments.
OPTIONS EXERCISED DURING MOST RECENTLY COMPLETED FINANCIAL YEAR AND VALUE OF
OPTIONS AT DECEMBER 31, 2001 FOR NAMED EXECUTIVE OFFICERS
The following table sets out certain information with respect to options to
purchase subordinate voting shares that were exercised by Named Executive
Officers during the year ended December 31, 2001 and with respect to subordinate
voting shares under option to the Named Executive Officers as at December 31,
2001.
SUBORDINATE VALUE OF UNEXERCISED
VOTING SHARES AGGREGATE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 2001 DECEMBER 31, 2001(2)
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------- ----------- ------------------------- -------------------------
Eugene V. Polistuk...................... 44,607 $1,563,921 390,267/405,566(3) $9,828,562/$3,769,418
J. Marvin M(a)Gee....................... -- -- 155,212/235,920(3) $3,672,565/$1,226,996
Anthony P. Puppi........................ 42,567 $1,701,264 126,395/161,170(3) $2,595,020/$1,367,221
R. Thomas Tropea........................ -- -- 183,664/213,526(4) $4,474,479/$2,998,853
Stephen Delaney......................... -- -- -- /140,000(4) -- / --
-------------
(1) Based on the closing price of the underlying shares on The New York Stock
Exchange on the date of exercise of the options.
(2) Based on the closing price of the subordinate voting shares on The New York
Stock Exchange on December 31, 2001 of $40.39.
(3) Options granted under the ESPO Plans and the Long-Term Incentive Plan.
(4) Options granted under the Long-Term Incentive Plan.
PENSION PLANS
Messrs. Polistuk, Puppi and M(a)Gee each participate in Celestica's
non-contributory pension plan (the "Canadian Pension Plan"). The Canadian
Pension Plan has a defined benefit and a defined contribution portion and
provides for a maximum of 30 years' service and retirement eligibility at the
earlier of 30 years' service or age 55.
Mr. M(a)Gee is enrolled in the defined contribution portion of the Canadian
Pension Plan. Messrs. Polistuk and Puppi participate only in the defined benefit
portion of the Canadian Pension Plan. Messrs. Polistuk, Puppi and M(a)Gee also
participate in an unregistered supplementary pension plan (the "Supplementary
Plan") that provides benefits equal to the difference between the benefits
determined in accordance with the formula set out in the Canadian Pension Plan
and Canada Customs and Revenue Agency maximum pension benefits.
The defined contribution portion of the Canadian Pension Plan allows
employees to choose how Celestica contributions are invested on their behalf
within a range of investment options provided by third party fund
45
managers. Celestica's contributions range from 3% of earnings to a maximum of
6.75% of earnings based on the number of years of service. Retirement benefits
depend upon the performance of the investment options chosen.
The following table sets forth the estimated aggregate annual benefits
payable under the defined benefit portion of the Canadian Pension Plan and the
Supplementary Plan for Messrs. Polistuk and Puppi.
CANADA PENSION PLAN TABLE(1)(2)
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
EARNINGS AVERAGE ($) OF SERVICE OF SERVICE OF SERVICE OF SERVICE OF SERVICE
-------------------- ---------- ---------- ---------- ---------- ----------
300,000.......................................... $30,000 $40,000 $ 65,000 $ 95,000 $ 95,000
400,000.......................................... $39,000 $52,000 $ 84,000 $124,000 $124,000
500,000.......................................... $48,000 $64,000 $103,000 $153,000 $153,000
600,000.......................................... $57,000 $76,000 $123,000 $181,000 $181,000
------------
(1) This table assumes total of retirement age and years of service is greater
than or equal to 80.
(2) All amounts shown are converted into U.S. dollars from Canadian dollars at
an exchange rate of U.S.$1.00 = C$1.5911.
The benefit provided under the defined benefit portion of the Canadian
Pension Plan for each of the officers who participate in the plan is equal to
the benefit entitlement accrued under the relevant IBM plan prior to
October 22, 1996 plus the greater of 1.2% of earnings (salary and bonus) or 0.9%
of earnings up to the yearly maximum pensionable earnings ("YMPE") level, plus
1.45% of earnings above the YMPE. The defined benefit portion of the Canadian
Pension Plan is of a modified career average design with pre-1999 benefits based
on the three-year earnings average at December 31, 1998. The defined benefit
portion of the Canadian Pension Plan also provides for supplementary early
retirement benefits from the date of early retirement to age 65.
As at December 31, 2001, Messrs. Polistuk and Puppi had completed 33 and
22 years of service, respectively.
During the year ended December 31, 2001, Celestica set aside an aggregate
amount of $321,303 to provide pension benefits for Messrs. Polistuk, Puppi and
M(a)Gee pursuant to the Canadian Pension Plan. No other amounts were set aside
or accrued by Celestica during the year ended December 31, 2001 for the purpose
of providing pension, retirement or similar benefits for Messrs. Polistuk, Puppi
and M(a)Gee pursuant to any other plans.
Messrs. Tropea and Delaney participate in the "U.S. Plan." The U.S. Plan
qualifies as a deferred salary arrangement under section 401 of the Internal
Revenue Code (United States). Under the U.S. Plan, participating employees may
defer a portion of their pre-tax earnings not to exceed 15% of their total
compensation. Celestica, at its discretion, may make contributions for the
benefit of eligible employees.
During the year ended December 31, 2001, Celestica contributed $14,700 to
the U.S. Plan for the benefit of Messrs. Tropea and Delaney. Except as described
above, no other amounts were set aside or accrued by Celestica during the year
ended December 31, 2001 for the purpose of providing pension, retirement or
similar benefits for Mr. Tropea.
EMPLOYMENT AGREEMENTS
Messrs. Polistuk and Puppi each entered into an employment agreement with
Celestica as of October 22, 1996. Mr. Tropea entered into an employment
agreement with Celestica as of June 30, 1998. Each agreement provides for the
executive's base salary and for benefits in accordance with Celestica's
established benefit plans for employees from time to time. Each agreement
provides for the executive to receive an amount equivalent to 36 months' salary
if Celestica terminates the executive's employment, other than for cause,
subject to reduction if the executive earns replacement earnings during such
period from other sources.
46
INDEMNIFICATION AGREEMENTS
Celestica and certain of our subsidiaries have entered into indemnification
agreements with certain of the directors and officers of Celestica and our
subsidiaries. These agreements generally provide that Celestica or the
subsidiary of Celestica which is a party to the agreement, as applicable, will
indemnify the director or officer in question (including his or her heirs and
legal representatives) against all costs, charges and expenses incurred by him
or her in respect of any civil, criminal or administrative action or proceeding
to which he or she is made a party by reason of being or having been a director
or officer of such corporation or a subsidiary thereof, provided that (a) he or
she has acted honestly and in good faith with a view to the best interests of
the corporation, and (b) in the case of a criminal or administrative proceeding
that is enforced by a monetary penalty, he or she had reasonable grounds for
believing that his or her conduct was lawful.
C. BOARD PRACTICES
Members of the Board of Directors are elected until the next annual meeting
or until their successors are elected or appointed.
Except for the right to receive deferred compensation (see Item 6(B),
"Compensation"), no director is entitled to benefits from Celestica when they
cease to serve as a director.
BOARD COMMITTEES
The Board of Directors has established three standing committees of three
directors, each with a specific mandate. The Executive Committee includes a
majority of unrelated directors. The Audit Committee and Compensation Committee
are each composed of unrelated directors.
EXECUTIVE COMMITTEE
Subject to the limitations set out in subsection 127(3) of the BUSINESS
CORPORATIONS ACT (Ontario), the Board of Directors has delegated to the
Executive Committee the powers to consider and approve certain matters relating
to the management of Celestica subject to any regulations or restrictions that
may from time to time be made or imposed upon the Executive Committee by the
Board of Directors. The members of the Executive Committee are Mr. Crandall,
Mr. Melman and Mr. Polistuk.
AUDIT COMMITTEE
The Audit Committee, which consists of Mr. Love, Mr. Martin and Mr. Melman,
selects and engages, on behalf of Celestica, the independent public accountants
to audit Celestica's annual financial statements, and reviews and approves the
planned scope of the annual audit. The Audit Committee has direct communication
channels with the auditors to discuss and review specific issues as appropriate.
The Audit Committee's duties include the responsibility for reviewing financial
statements with management and the auditors, monitoring the integrity of the
Celestica's management information systems and internal control procedures, and
reviewing the adequacy of the Celestica's processes for identifying and managing
risk.
COMPENSATION COMMITTEE
The Compensation Committee approves Celestica's executive compensation
policies and establishes remuneration levels of Celestica's executive officers
and performs such functions as provided for under Celestica's employee benefit
programs and executive compensation programs. The Compensation Committee
consists of Mr. Melman, Mr. Tapscott and Mr. Etherington, all of whom are
unrelated to Celestica. John Walter was a member of the Compensation Committee
until his retirement from the Board of Directors in June, 2001. Mr. Walter is
also unrelated to Celestica.
47
D. EMPLOYEES
Celestica has over 40,000 permanent and temporary (contract) employees
worldwide as of December 31, 2001. The following table sets forth information
concerning our employees by geographic location:
NUMBER OF EMPLOYEES
------------------------------
DATE AMERICAS EUROPE ASIA
---- -------- -------- --------
December 31, 1999........................................... 10,600 3,000 4,900
December 31, 2000........................................... 16,000 6,000 7,000
December 31, 2001........................................... 17,500 7,500 15,000
During the year ended December 31, 2001, approximately 9,000 temporary
(contract) employees were engaged by Celestica worldwide. During the year ended
December 31, 2001, approximately 9,700 employees, including temporary (contract)
employees, were terminated as a result of restructuring actions announced during
the year. See Note 13 to the Consolidated Financial Statements in Item 18
for further information on the restructuring.
Certain information concerning employees is set forth in Item 4,
"Information on the Company -- Business Overview -- Human Resources."
E. SHARE OWNERSHIP
The following table sets forth certain information concerning the direct and
beneficial ownership of shares of Celestica at March 1, 2002 by each director
who holds shares and each of the Named Executive Officers and all directors and
executive officers of Celestica as a group. Unless otherwise noted, the address
of each of the shareholders named below is Celestica's principal executive
office. In this table, multiple voting shares are referred to as "MVS" and
subordinate voting shares are referred to as "SVS."
MARCH 1, 2002
------------------------------------------------
PERCENTAGE OF
CLASS/ALL PERCENTAGE OF
NAME OF BENEFICIAL OWNER(1) VOTING SHARES EQUITY SHARES VOTING POWER
--------------------------- --------------- -------------- -------------
Eugene V. Polistuk................................... 512,826 SVS */* *
Anthony P. Puppi..................................... 235,401 SVS */* *
Robert L. Crandall................................... 80,000 SVS */* *
William E. Etherington............................... 10,000 SVS */* *
Mark L. Hilson(2)(3)................................. 438,792 SVS */* *
Richard S. Love...................................... 75,000 SVS */* *
Roger L. Martin...................................... 43,000 SVS */* *
Anthony R. Melman(2)(4).............................. 450,000 SVS */* *
Gerald W. Schwartz(2)(5)............................. 39,065,950 MVS 100.0%/17.0% 83.7%
4,136,228 SVS 2.2%/1.8% *
Don Tapscott......................................... 63,000 SVS */* *
J. Marvin M(a)Gee.................................... 205,212 SVS */* *
R. Thomas Tropea..................................... 263,664 SVS */* *
Stephen Delaney...................................... 1,400 SVS */* *
All directors and executive officers as a group
(24 persons)(3)(4)(5)(6)........................... 39,065,950 MVS 100.0%/17.0% 83.7%
6,828,779 SVS 3.6%/3.0% *
Total percentage of all equity shares and total
percentage of voting power....................... 20.0% 84.2%
------------
* Less than 1%.
(1) As used in this table, "beneficial ownership" means sole or shared power to
vote or direct the voting of the security, or the sole or shared investment
power with respect to a security (I.E., the power to dispose, or direct a
disposition, of a security). A person is deemed
48
at any date to have "beneficial ownership" of any security that such person
has a right to acquire within 60 days of such date. Certain shares subject
to options granted pursuant to management investment plans of Onex are
included as owned beneficially by named individuals, although the exercise
of these options is subject to Onex meeting certain financial targets. More
than one person may be deemed to have beneficial ownership of the same
securities. Unless otherwise indicated, the address for each shareholder is:
c/o Celestica Inc., 12 Concorde Place, Toronto, Ontario M3C 3R8.
(2) The address of such shareholders is: c/o Onex Corporation, 161 Bay Street,
P.O. Box 700, Toronto, Ontario, Canada M5J 2S1.
(3) Includes 20,000 subordinate voting shares beneficially owned by
Mr. Hilson's spouse (as to which Mr. Hilson disclaims beneficial ownership),
26,000 subordinate voting shares beneficially owned by a trust the
beneficiaries of which are members of Mr. Hilson's family (as to which
Mr. Hilson disclaims beneficial ownership) and 277,326 subordinate voting
shares owned by Onex which are subject to options granted to Mr. Hilson
pursuant to certain management investment plans of Onex.
(4) Includes 274,588 subordinate voting shares owned by Onex which are subject
to options granted to Mr. Melman pursuant to certain management investment
plans of Onex.
(5) Includes 159,992 subordinate voting shares owned by a company controlled by
Mr. Schwartz and all of the shares of Celestica beneficially owned by Onex,
of which 1,077,500 subordinate voting shares are subject to options granted
to Mr. Schwartz pursuant to certain management incentive plans of Onex.
Mr. Schwartz, a director of Celestica, is the Chairman of the Board,
President and Chief Executive Officer of Onex and controls Onex through his
ownership of shares, with a majority of the voting rights attaching to all
shares of Onex. Accordingly, Mr. Schwartz may be deemed to be the beneficial
owner of shares of Celestica beneficially owned by Onex.
(6) Includes 479,500 subordinate voting shares held by Towers Perrin Share Plan
Services, in trust for Celestica Employee Nominee Corporation as agent for
and on behalf of individual Celestica executives, pursuant to the provisions
of Celestica employee benefit plans, and 535,186 subordinate voting shares
which are subject to options.
MVS and SVS have different voting rights. See Item 10, "Additional
Information -- Memorandum and Articles of Incorporation -- Multiple Voting
Shares and Subordinate Voting Shares."
SHARE PURCHASE AND OPTION PLANS
We have issued subordinate voting shares and have granted options to acquire
subordinate voting shares for the benefit of certain of our employees and
executives pursuant to various employee share purchase and option plans in
effect prior to our initial public offering (the "ESPO Plans"). No further
options or subordinate voting shares (other than pursuant to outstanding
options) may be issued under these ESPO Plans.
Pursuant to the ESPO Plans, employees and executives of Celestica were
offered the opportunity to purchase subordinate voting shares and, in connection
with such purchase, receive options to acquire an additional number of
subordinate voting shares based on the number of subordinate voting shares
acquired by them under the ESPO Plans (on average, approximately 1.435 options
for each subordinate voting share acquired under the ESPO Plans). In each case,
the exercise price for the options is equal to the price per share paid for the
corresponding subordinate voting shares acquired under the ESPO Plans.
Upon the completion of Celestica's initial public offering, certain options
became exercisable. The balance of the options issued under the ESPO Plans vest
over a period of five years beginning December 31, 1998. All subordinate voting
shares acquired by employees under the ESPO Plans are held either by the
employee, or by Towers Perrin Share Plan Services in trust for Celestica
Employee Nominee Corporation as agent for and on behalf of such employees.
As at March 1, 2002, approximately 7,000 persons held options to acquire an
aggregate of approximately 23,756,000 subordinate voting shares. Most of these
options were issued pursuant to the ESPO and LTIP Plans. The following table
sets forth information with respect to options outstanding as at March 1, 2002.
49
OUTSTANDING OPTIONS
NUMBER OF
SUBORDINATE
VOTING SHARES
BENEFICIAL HOLDERS UNDER OPTION EXERCISE PRICE YEAR OF ISSUANCE DATE OF EXPIRY
------------------ ------------- ------------------- -------------------- -------------------
Executive Officers
(15 persons in total)....... 710,379 $5.00 During 1997 April 8, 2007(1)
302,890 $7.50 - $8.75 During 1998 April 29, 2008 to
July 3, 2008
403,880 $12.345/C$18.90 January 1, 1999 January 1, 2009
23,000 C$20.625 February 11, 1999 February 11, 2009
80,000 C$31.85 July 2, 1999 July 2, 2009
70,000 $22.97 September 20, 1999 September 20, 2009
602,000 $39.03/C$57.845 December 7, 1999 December 7, 2009
100,000 C$60.00 May 26, 2000 May 26, 2010
338,000 $56.1875/C$86.50 December 5, 2000 December 5, 2010
25,000 C$73.50 March 1, 2001 March 1, 2011
100,000 $50.00 April 20, 2001 April 20, 2011
670,400 $41.89/C$66.06 December 4, 2001 December 4, 2011
Directors who are not
Executive Officers.......... 166,000 $8.75 During 1998 July 7, 2008
80,000 $23.41/C$34.50 July 7, 1999 July 7, 2009
80,000 $48.69/C$72.60 July 7, 2000 July 7, 2010
80,000 $44.23/C$66.78 July 7, 2001 July 7, 2011
40,000 $35.95 October 22, 2001 October 22, 2011
All other Celestica Employees
(other than IMS) (more than
6,000 persons in total)..... 3,741,079 $5.00 During 1997 April 8, 2007(2)
767,864 $7.50 - C$14.05 During 1998 April 29, 2008 to
November 9, 2008
715,295 $13.69 - C$21.45 January 1, 1999 to January 1, 2009 to
March 17, 1999 March 17, 2009
2,198,175 $39.03/C$57.845 December 7, 1999 December 7, 2009
615,055 $13.65 - C$53.75 During 1999 January 1, 2009 to
December 31, 2009
1,118,289 $40.06 - C$123.65 During 2000 January 1, 2010 to
December 31, 2010
2,478,855 $56.1875/C$86.50 December 5, 2000 December 5, 2010
1,388,050 $49.00 - C$108.45 During 2001 January 1, 2011 to
December 31, 2011
5,613,020 $41.89/C$66.06 December 4, 2001 December 4, 2011
94,600 $40.76 - C$70.81 January 1, 2002 to January 1, 2012 to
March 1, 2002 March 1, 2012
IMS Employees................. 953,562(3) $0.925 - 13.31(4) December 30, 1998 June 13, 2006 to
December 18, 2008
Primetech Employees(5)........ 31,793 C$47.73 June 29, 1998 June 29, 2003
60,053 C$65.91 July 14, 1999 July 14, 2004
96,250 C$97.73 - C$111.36 February 15, 2000 to February 15, 2005
June 15, 2000 to June 15, 2005
32,560 C$45.45 - C$67.05 January 10, 2001 to January 10, 2006 to
March 16, 2001 March 16, 2006
-------------
(1) Except for 10,140 options which expire on November 4, 2005.
(2) Except for 289,740 options which expire on November 4, 2005.
(3) Represents options outstanding under certain stock option plans that were
assumed by Celestica on December 30, 1998.
(4) The original exercise price for these options was based on the NASDAQ market
price of IMS common stock at the date of issuance.
(5) Represents options outstanding under certain stock option plans that were
assumed by Celestica on August 3, 2001.
50
Our compensation philosophy is predicated on the belief that broadly-based
employee participation in share ownership is critical to maintain a common
entrepreneurial culture and motivation throughout our operational units and
across functional and geographic boundaries. Accordingly, prior to the
completion of our initial public offering, we established the Long-Term
Incentive Plan and the Employee Share Ownership Plan.
LONG-TERM INCENTIVE PLAN
Under the Long-Term Incentive Plan (the "Plan"), the board of directors of
Celestica may in its discretion grant from time to time stock options,
performance shares, performance share units and stock appreciation rights
("SARs") to directors, permanent employees and consultants ("eligible
participants") of Celestica, our subsidiaries and other companies or
partnerships in which Celestica has a significant investment ("affiliated
entities").
Under the Plan, up to 23,000,000 subordinate voting shares of Celestica may
be issued from treasury. At the annual special meeting of Celestica shareholders
held April 17, 2002, shareholders approved an increase to the number of
subordinate voting shares that may be issued from treasury under the Plan to
29,000,000. The number of subordinate voting shares which may be issued from
treasury under the Plan to directors is limited to 2,000,000. In addition,
Celestica may satisfy obligations under the Plan by acquiring subordinate voting
shares in the market. The LTIP limits the number of subordinate voting shares
which may be reserved for issuance to insiders or any one participant pursuant
to options or rights granted pursuant to the Plan, together with subordinate
voting shares reserved for issuance under any other employee-related plan of
Celestica or options for services granted by Celestica, to 10% and 5%,
respectively, of the aggregate issued and outstanding subordinate voting shares
and multiple voting shares of Celestica.
The exercise price for any stock option issued under the Plan will not be
less than the market price of the subordinate voting shares on the day preceding
the date of grant, except that options to acquire subordinate voting shares were
issued to directors and an officer substantially concurrently with the
completion of the initial public offering with an exercise price equal to the
initial public offering price ($8.75). Options issued under the Plan may be
exercised during a period determined under the Plan, which may not exceed ten
years. The Plan also provides that, unless otherwise determined by the board of
directors, options will terminate within specified time periods following the
termination of employment of an eligible participant with Celestica or our
affiliated entities. The exercise of options may be subject to vesting
conditions, including specific time schedules for vesting and performance-based
conditions such as share price and financial results. The grant to, or exercise
of options by, an eligible participant may also be subject to certain share
ownership requirements.
Celestica may arrange for financial assistance, by way of loans or
otherwise, to eligible participants to acquire subordinate voting shares upon
the exercise of options under the Plan, on such terms and conditions as the
board of directors determines.
Under the Plan, eligible participants may be granted SARs, a right to
receive a cash amount equal to the difference between the market price of the
subordinate voting shares at the time of the grant and the market price of such
shares at the time of exercise of the SAR. Such amounts may also be payable by
the issuance of subordinate voting shares. SARs may be granted under the Plan on
a one-for-one or other basis in tandem with option grants, in which case it may
be a term of the option and the SAR that the exercise of one results in the
cancellation of the other. The exercise of SARs may also be subject to
conditions similar to those which may be imposed on the exercise of stock
options.
Upon the issuance of performance units, eligible participants will be
entitled to receive grants of subordinate voting shares, with such shares to be
issued at the then market price of subordinate voting shares. The issue of such
shares may be subject to vesting requirements similar to those described above
with respect to the exercisability of options and SARs, including such time or
performance-based conditions as may be determined by the board of directors in
its discretion. The number of subordinate voting shares which may be issued from
the treasury of Celestica under the performance unit program is limited to
2,000,000 and the number of subordinate voting shares which may be issued
pursuant to the performance unit program to any one person shall not exceed 1%
of the aggregate issued and outstanding subordinate voting shares and multiple
voting shares of Celestica.
51
The interests of any participant under the Plan or in any option, rights or
performance unit shall not be transferable by him or her except to a spouse or a
personal holding company or family trust controlled by the participant, the
shareholders or beneficiaries of which, as the case may be, are any combination
of the participant, the participant's spouse, the participant's minor children
and the participant's minor grandchildren, subject to applicable stock exchange
rules.
The Plan, or the terms of any option, SAR or performance unit granted
thereunder, can be amended by the board of directors, subject to obtaining any
required regulatory approvals and participant and shareholder approval where so
required. Participation in the Plan by eligible participants is not a condition
of employment of an eligible participant. Celestica may appoint a trustee or
administrator to perform certain functions under the Plan and the board of
directors may delegate its rights and duties under the Plan to a committee of
the board of directors or one or more specified officers.
EMPLOYEE SHARE OWNERSHIP PLAN
The purpose of the Employee Share Ownership Plan ("ESOP") is to enable
eligible employees and directors ("Eligible Participants") of Celestica to
acquire subordinate voting shares, so as to encourage continued employee
interest in the operation, growth and development of Celestica, as well as to
provide an additional investment opportunity to employees and directors. The
ESOP enables Eligible Participants to acquire subordinate voting shares from
shares acquired by an administrator in the market. Under the ESOP, an Eligible
Participant who is an employee may elect to contribute an amount by deduction
from each regular payroll, representing no more than 10% of his or her
compensation. A participant who is a director may elect to designate all or a
portion of his or her cash retainer fees, meeting fees, committee or similar
fees as a contribution under the ESOP. Celestica will contribute 25% of the
amount of the contributions of employees, up to a maximum total for each
contribution of 1% of the employee's compensation for the relevant payroll
period. Unless otherwise determined by Celestica, no Celestica contribution
shall be made for contributions by directors. The ESOP provides for vesting
conditions relating to shares acquired under the ESOP using Celestica
contributions. Under the ESOP, following each payroll period, an administrator
acquires in the market subordinate voting shares for the purposes of satisfying
purchases by Eligible Participants under the ESOP, using funds contributed by
employees and Celestica. The ESOP also provides that participation in the Plan
by Eligible Participants is not a condition of employment of an Eligible
Participant.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information concerning the direct and
beneficial ownership of the shares of Celestica at March 1, 2002 by each person
known to Celestica to own beneficially, directly or indirectly, 5% or more of
the subordinate voting shares or the multiple voting shares. Unless otherwise
noted, the address of each of the shareholders named below is our principal
executive office. In this table, multiple voting shares are referred to as "MVS"
and subordinate voting shares are referred to as "SVS."
MARCH 1, 2002
------------------------------------------------
PERCENTAGE OF
CLASS/ALL PERCENTAGE OF
NAME OF BENEFICIAL OWNER(1) VOTING SHARES EQUITY SHARES VOTING POWER
--------------------------- --------------- -------------- -------------
Onex Corporation(2)(3)(4)............................ 39,065,950 MVS 100.0%/17.0% 83.7%
3,976,236 SVS 2.1%/1.7% *
Gerald W. Schwartz(2)(4)(5).......................... 39,065,950 MVS 100.0%/17.0% 83.7%
4,136,228 SVS 2.2%/1.8% *
Total percentage of all equity shares and total
percentage of voting power....................... 18.8% 84.0%
AIM Management Group Inc.(6)(7)...................... 21,620,297 SVS 11.3%/9.4% 1.9%
Janus Capital Corporation(8)(9)...................... 9,947,680 SVS 5.2%/4.3% *
------------
* Less than 1%.
52
(1) As used in this table, "beneficial ownership" means sole or shared power to
vote or direct the voting of the security, or the sole or shared investment
power with respect to a security (I.E., the power to dispose, or direct a
disposition, of a security). A person is deemed at any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days of such date. Certain shares subject to options
granted pursuant to management investment plans of Onex are included as
owned beneficially by named individuals, although the exercise of these
options is subject to Onex meeting certain financial targets. More than one
person may be deemed to have beneficial ownership of the same securities.
(2) The address of such shareholders is: c/o Onex Corporation, 161 Bay Street,
P.O. Box 700, Toronto, Ontario, Canada M5J 2S1.
(3) Includes 11,635,958 multiple voting shares held by wholly-owned subsidiaries
of Onex, 1,909,980 subordinate voting shares held by Towers Perrin Share
Plan Services in trust for Celestica Employee Nominee Corporation, as agent
for and on behalf of certain executives and employees of Celestica pursuant
to certain of Celestica's employee share purchase and option plans, 33,754
subordinate voting shares representing an undivided interest of
approximately 10.2% in 330,872 subordinate voting shares, and 404,128
subordinate voting shares directly or indirectly held by certain officers of
Onex which Onex has the right to vote.
Of these shares, 9,214,320 subordinate voting shares may be delivered, at
the issuer's option, upon the exercise or redemption, or at maturity or
acceleration, of exchangeable debentures due 2025 issued by a subsidiary of
Onex. In addition, 1,757,467 subordinate voting shares may be delivered, at
the option of Onex or certain persons related to Onex, to satisfy the
obligations of such persons under equity forward agreements. If a debenture
is exercised or an equity forward agreement is settled and the issuer does
not elect or the party to an equity forward agreements does not elect to
satisfy its obligation in cash rather than delivering subordinate voting
shares, if the issuer or the party to the equity forward agreements, as the
case may be, does not have sufficient subordinate voting shares to satisfy
the obligations, the requisite number of multiple voting shares held by such
person will immediately be converted into subordinate voting shares, which
shares will be delivered to satisfy such obligations.
The shares Onex owns and the shares Onex has the right to vote represent in
the aggregate 84.0% of the voting power of all Celestica shares. If the
issuer of the exchangeable debentures due 2025 or the party to the equity
forward agreement, as the case may be, elects to deliver solely subordinate
voting shares and no cash upon the exchange or redemption, or at maturity or
acceleration, of the debentures or at the settlement of the equity forward
agreement, as the case may be, the shares that Onex owns and the shares Onex
has the right to vote would, if the shares were delivered on March 1, 2002,
represent in the aggregate 78% of the voting power of all Celestica shares.
(4) Multiple voting shares and subordinate voting shares have different voting
rights. Information concerning voting rights is set forth in Item 10,
"Additional Information -- Memorandum and Articles of
Incorporation -- Multiple Voting Shares and Subordinate Voting Shares."
(5) Includes 159,992 subordinate voting shares owned by a company controlled by
Mr. Schwartz and all of the shares of Celestica beneficially owned by Onex,
or in respect of which Onex exercises control and direction, of which
1,077,500 subordinate voting shares are subject to options granted to
Mr. Schwartz pursuant to certain management incentive plans of Onex.
Mr. Schwartz is a director of Celestica and the Chairman of the Board,
President and Chief Executive Officer of Onex. He controls Onex through his
ownership of shares with a majority of the voting rights attaching to all
shares of Onex. Accordingly, Mr. Schwartz may be deemed to be the beneficial
owner of shares of Celestica beneficially owned by Onex.
(6) The address of such shareholder is: 11 Greenway Plaza, Suite 100, Houston,
Texas 77046.
(7) The information concerning this shareholder's ownership of subordinate
voting shares was obtained from the shareholder's Schedule 13G filed with
the Securities and Exchange Commission on February 6, 2002.
(8) The address of such shareholder is: 100 Fillmore Street, Denver, Colorado
80206-4923.
(9) The information concerning this shareholder's ownership of subordinate
voting shares was obtained from the shareholder's Schedule 13G filed with
the Securities and Exchange Commission on February 8, 2002.
HOLDERS
On March 1, 2002, there were approximately 1,549 holders of record of
subordinate voting shares, of which approximately 337 holders, holding
approximately 44% of the outstanding subordinate voting shares, were resident in
the United States.
On March 1, 2002, there was one holder of record of the Senior Subordinated
Notes; the holder of record was in the United States.
On March 1, 2002, there was one holder of record of the Liquid Yield
Option-TM- Notes due 2020; the holder of record was in the United States.
53
B. RELATED PARTY TRANSACTIONS
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Celestica and Onex are parties to a Management Services Agreement under
which Onex has agreed to provide management, administrative, strategic planning,
financial and support services to Celestica of such nature as Celestica may
reasonably request from time to time having regard to Onex's experience,
expertise and personnel or the personnel of its subsidiaries, as the case may
be. Celestica has agreed to pay Onex certain fees under the Management Services
Agreement equal to $2.0 million per year adjusted for changes in the Canadian
consumer price index. The Management Services Agreement also provides that if
Celestica uses Onex management personnel to provide investment banking or
financial advice in connection with any acquisition, Onex will be entitled to
receive fees consistent in the determination of the board of directors of
Celestica with fees typically paid for financial advice in such circumstances to
investment bankers or other expert advisors at arm's-length to Celestica. The
Management Services Agreement has a term of five years, commencing July 7, 1998,
with automatic renewal for successive one-year periods thereafter, subject to
termination on 12 months' prior written notice at any time after the initial
five-year term by the directors of Celestica who are independent of Celestica
and Onex, and provided that in any event the Management Services Agreement, and
the rights of Onex to receive fees (other than accrued and unpaid fees), will
terminate 30 days after the first day upon which Onex ceases to hold at least
one multiple voting share. During 2001, Celestica paid to Onex management fees
of approximately $2.1 million.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
As at March 1, 2002, Celestica had guaranteed $4,401,372 aggregate
indebtedness of certain officers and employees of Celestica incurred in
connection with the purchase of subordinate voting shares. The following table
sets forth details of such guarantees by Celestica of indebtedness of the
directors and officers of Celestica.
INDEBTEDNESS OF SENIOR OFFICERS UNDER SECURITIES PURCHASE PROGRAMS
LARGEST AMOUNT AMOUNT
OUTSTANDING OUTSTANDING AS AT
NAME AND PRINCIPAL POSITION DURING 2001(1) MARCH 1, 2002(1)(2)
--------------------------- -------------- --------------------
J. Marvin M(a)Gee........................................... $155,391 $155,391
President and Chief Operating Officer
R. Thomas Tropea............................................ $407,396 $407,396
Vice Chair, Global Customer Units and Worldwide Marketing
and Business Development
Alastair Kelly.............................................. $134,805 nil
Executive Vice President, Corporate Development
Daniel P. Shea.............................................. $280,998 $280,998
Senior Vice President and Chief Technology Officer
Rahul Suri.................................................. $957,108 $957,108
Senior Vice President, Mergers and Acquisitions
F. Graham Thouret........................................... $ 97,383 nil
Vice President and Corporate Treasurer
Peter J. Bar................................................ $ 92,957 nil
Vice President and Corporate Controller
------------
(1) All amounts shown are converted into U.S. dollars from Canadian dollars at
an exchange rate of U.S.$1.00 = C$1.5955 and from British pounds sterling at
an exchange rate of $1.00 = L0.7047.
(2) All guaranteed amounts incur interest at a rate equal to certain commercial
banks' prime lending rates. The security for each of the guaranteed amounts
is the purchased subordinate voting shares.
54
No securities were purchased by any director or officer during 2001 with the
financial assistance of Celestica. No director, officer or employee was indebted
to Celestica other than in connection with securities purchase programs during
the year ended December 31, 2001.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18, "Financial Statements."
LITIGATION
We are not a party to any legal proceedings which, if decided adversely,
could reasonably be expected to have a material adverse effect on the results of
operations, business, prospects or financial condition of Celestica.
DIVIDEND POLICY
We have not declared or paid any dividends to our shareholders. We will
retain earnings for general corporate purposes to promote future growth; as
such, the board of directors does not anticipate paying any dividends for the
foreseeable future. Celestica's board of directors will review this policy from
time to time, having regard to our financial condition, financing requirements
and other relevant factors. In addition, our Senior Subordinated Notes due 2006
include a covenant restricting our ability to pay dividends, and our credit
facilities contain financial covenants that may indirectly restrict our ability
to pay dividends.
B. SIGNIFICANT CHANGES
See Note 21 of the Consolidated Financial Statements in Item 18
for information on significant changes.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
MARKET INFORMATION
The subordinate voting shares are listed on The New York Stock Exchange (the
"NYSE") and The Toronto Stock Exchange (the "TSE"). The market price range and
trading volume of the subordinate voting shares on the NYSE and the TSE for the
periods indicated are set forth in the following tables, which have been
restated to reflect the effect of the 1999 two-for-one stock split on a
retroactive basis.
THE ANNUAL HIGH AND LOW MARKET PRICES FOR THE FOUR MOST RECENT FISCAL YEARS(1)
NYSE
---------------------------------
HIGH LOW VOLUME
-------- -------- -----------
Price per
Subordinate
Voting Share
Year ended December 31, 1998 (from June 30, 1998)........... $13.75 $ 5.19 22,165,800
Year ended December 31, 1999................................ 57.00 12.06 115,803,800
Year ended December 31, 2000................................ 87.00 35.50 314,486,100
Year ended December 31, 2001................................ 76.40 20.69 602,213,700
TSE
---------------------------------
HIGH LOW VOLUME
-------- -------- -----------
Price per
Subordinate
Voting Share
Year ended December 31, 1998 (from June 30, 1998)........... C$ 21.13 C$ 8.00 33,833,130
Year ended December 31, 1999................................ 82.75 18.40 142,584,064
Year ended December 31, 2000................................ 128.25 51.05 202,303,300
Year ended December 31, 2001................................ 114.00 32.42 323,130,318
------------
(1) The subordinate voting shares began trading on June 30, 1998.
55
THE HIGH AND LOW MARKET PRICES FOR EACH FULL FISCAL QUARTER FOR THE TWO MOST
RECENT FISCAL YEARS
NYSE
---------------------------------
HIGH LOW VOLUME
-------- -------- -----------
Price per
Subordinate
Voting Share
Year ended December 31, 2000
First quarter............................................. $60.06 $37.56 75,117,400
Second quarter............................................ 54.56 38.00 39,642,500
Third quarter............................................. 84.00 48.69 80,355,200
Fourth quarter............................................ 84.50 46.50 119,371,000
Year ended December 31, 2001
First quarter............................................. $76.40 $25.80 143,622,000
Second quarter............................................ 63.25 24.00 166,006,300
Third quarter............................................. 50.94 20.69 148,784,400
Fourth quarter............................................ 48.40 25.41 143,801,000
TSE
---------------------------------
HIGH LOW VOLUME
-------- -------- -----------
Price per
Subordinate
Voting Share
Year ended December 31, 2000
First quarter............................................. C$ 87.40 C$54.00 61,429,900
Second quarter............................................ 79.90 57.85 41,617,200
Third quarter............................................. 123.65 72.60 43,279,500
Fourth quarter............................................ 128.00 70.80 55,976,600
Year ended December 31, 2001
First quarter............................................. C$114.00 C$40.75 85,670,137
Second quarter............................................ 97.50 37.55 81,722,757
Third quarter............................................. 78.10 32.42 65,423,337
Fourth quarter............................................ 76.50 40.12 90,314,087
THE HIGH AND LOW MARKET PRICES FOR EACH MONTH FOR THE MOST RECENT SIX MONTHS
NYSE
--------------------------------
HIGH LOW VOLUME
-------- -------- ----------
Price per
Subordinate
Voting Share
October 2001................................................ $40.50 $25.41 59,375,300
November 2001............................................... 43.25 33.45 40,140,700
December 2001............................................... 48.40 38.57 44,285,000
January 2002................................................ 47.08 39.82 44,725,400
February 2002............................................... 42.75 32.64 48,792,000
March 2002.................................................. 41.60 32.52 47,626,800
56
TSE
--------------------------------
HIGH LOW VOLUME
-------- -------- ----------
Price per
Subordinate
Voting Share
October 2001................................................ C$64.20 C$40.12 38,411,316
November 2001............................................... 68.60 53.12 27,479,085
December 2001............................................... 76.50 60.76 24,423,686
January 2002................................................ 75.05 63.60 22,554,639
February 2002............................................... 67.85 52.20 23,792,155
March 2002.................................................. 65.50 51.89 28,565,524
The LYONs are listed on the NYSE. The market price range of the LYONs on the
NYSE for the periods indicated are set forth in the following tables.
THE ANNUAL HIGH AND LOW MARKET PRICES FOR THE LYONS FOR THE TWO MOST RECENT
FISCAL YEARS
NYSE
-------------------
HIGH LOW
-------- --------
Year ended December 31, 2000 (from August 1, 2000)(1)....... $55.83 $40.05
Year ended December 31, 2001................................ 53.74 34.56
------------
(1) The LYONs began trading on August 1, 2000.
THE HIGH AND LOW MARKET PRICES FOR THE LYONS FOR EACH FULL FISCAL QUARTER FOR
THE TWO MOST RECENT FISCAL YEARS
NYSE
-------------------
HIGH LOW
-------- --------
Year ended December 31, 2000 (from August 1, 2000)(1)
Third quarter............................................. $55.83 $48.75
Fourth quarter............................................ 55.24 40.05
Year ended December 31, 2001
First quarter............................................. $53.74 $35.48
Second quarter............................................ 48.82 34.56
Third quarter............................................. 44.24 35.82
Fourth quarter............................................ 44.72 36.51
------------
(1) The LYONs began trading on August 1, 2000.
THE HIGH AND LOW MARKET PRICES FOR THE LYONS FOR EACH MONTH FOR THE MOST RECENT
SIX MONTHS
NYSE
-------------------
HIGH LOW
-------- --------
October 2001................................................ $41.41 $36.51
November 2001............................................... 42.60 40.55
December 2001............................................... 44.72 42.22
January 2002................................................ 53.74 34.56
February 2002............................................... 44.83 41.73
March 2002.................................................. 44.68 41.73
B. PLAN OF DISTRIBUTION
Not applicable.
57
C. MARKETS
The subordinate voting shares are listed on the NYSE and the TSE.
Celestica's 10 1/2% Senior Subordinated Notes due 2006 are eligible for
trading on the Private Offerings, Resales and Trading through Automated Linkages
(PORTAL) market. The Senior Subordinated Notes are not listed on any securities
exchange or quoted through NASDAQ. We have not been able to obtain information
as to the sales prices of the Senior Subordinated Notes.
Celestica's Liquid Yield Option-TM- Notes (LYONs) due 2020 are listed on the
NYSE. In Canada, the LYONs are offered on a private placement basis through
Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates. Liquid
Yield Option-TM- Notes is a trademark of Merrill Lynch & Co., Inc.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSE OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF INCORPORATION
ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS
The BUSINESS CORPORATIONS ACT (Ontario), or the OBCA, requires Celestica to
call an annual shareholders' meeting not later than 15 months after holding the
last preceding annual meeting and permits Celestica to call a special
shareholders' meeting at any time. In addition, in accordance with the OBCA, the
holders of not less than 5% of Celestica's shares carrying the right to vote at
a meeting sought to be held may requisition our directors to call a special
shareholders' meeting for the purposes stated in the requisition. Celestica is
required to mail a notice of meeting and management information circular to
registered shareholders not less than 21 days and not more than 50 days prior to
the date of any annual or special shareholders' meeting. These materials also
are filed with Canadian securities regulatory authorities and the SEC. Our
by-laws provide that a quorum of two shareholders in person or represented by
proxy holding or representing by proxy not less than 35% of Celestica's issued
shares carrying the right to vote at the meeting is required to transact
business at a shareholders' meeting. Shareholders, and their duly appointed
proxies and corporate representatives, as well as our auditors, are entitled to
be admitted to our annual and special shareholders' meetings.
ARTICLES OF INCORPORATION
Celestica's articles of incorporation do not place any restrictions on
Celestica's objects and purposes.
CERTAIN POWERS OF DIRECTORS
The OBCA requires that every director who is a party to a material contract
or transaction or a proposed material contract or transaction with a company, or
who is a director or officer of, or has a material interest in, any person who
is a party to a material contract or transaction or a proposed material contract
or transaction with the company, shall disclose in writing to the company or
request to have entered in the minutes of the meetings of directors the nature
and extent of his or her interest, and shall refrain from voting in respect of
the
58
material contract or transaction or proposed material contract or transaction
unless the contract or transaction is:
(a) an arrangement by way of security for money lent to or obligations
undertaken by the director for the benefit of the corporation or an
affiliate;
(b) one relating primarily to his or her remuneration as a director,
officer, employee or agent of the corporation or an affiliate;
(c) one for indemnity of or insurance for directors as contemplated under
the OBCA; or
(d) one with an affiliate.
However, a director who is prohibited by the OBCA from voting on a material
contract or proposed material contract may be counted in determining whether a
quorum is present for the purpose of the resolution, if the director disclosed
his or her interest in accordance with the OBCA and the contract or transaction
was reasonable and fair to the corporation at the time it was approved.
Celestica's by-laws provide that the directors shall from time to time
determine by resolution the remuneration to be paid to the directors, which
shall be in addition to the salary paid to any officer or employee of Celestica
who is also a director. The directors may also by resolution award special
remuneration to any director in undertaking any special services on Celestica's
behalf other than the normal work ordinarily required of a director of
Celestica. The by-laws provide that confirmation of any such resolution by
Celestica's shareholders is not required.
The by-laws provide that the directors may:
(a) borrow money upon the credit of Celestica;
(b) limit or increase the amount to be borrowed;
(c) issue, reissue, sell or pledge bonds, debentures, notes or other
securities or debt obligations of Celestica;
(d) issue, sell or pledge such bonds, debentures, notes or other securities
or debt obligations for such sums and at such prices as may be deemed
expedient; and
(e) mortgage, hypothecate, charge, pledge or otherwise create a security
interest in all or any currently owned or subsequently acquired real and
personal, movable and immovable, property of Celestica, and Celestica's
undertaking and rights to secure any such bonds, debentures, notes or
other securities or debt obligations, or to secure any of Celestica's
present or future borrowing, liability or obligation.
The directors may, by resolution, amend or repeal any by-laws that regulate
the business or affairs of Celestica. The OBCA requires the directors to submit
any such amendment or repeal to Celestica's shareholders at the next meeting of
shareholders, and the shareholders may confirm, reject or amend the amendment or
repeal.
ELIGIBILITY TO SERVE AS A DIRECTOR
The by-laws provide that every director shall be an individual 18 or more
years of age and that no one who is of unsound mind and has been so found by a
court in Canada or elsewhere or who has the status of a bankrupt shall be a
director. There is no provision of the articles of incorporation or by-laws
imposing a requirement for retirement or non-retirement of directors under an
age limit requirement. The OBCA requires that a majority of the directors of
Celestica be resident Canadians.
The OBCA provides that unless the articles of a corporation otherwise
provide, a director of a corporation is not required to hold shares issued by
the corporation. There is no provision in the articles of incorporation imposing
a requirement that a director hold any shares issued by Celestica.
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AUTHORIZED CAPITAL OF CELESTICA
Celestica's authorized capital consists of an unlimited number of preference
shares issuable in series, an unlimited number of subordinate voting shares and
an unlimited number of multiple voting shares.
MULTIPLE VOTING SHARES AND SUBORDINATE VOTING SHARES
VOTING RIGHTS
The holders of subordinate voting shares and multiple voting shares are
entitled to notice of and to attend all meetings of shareholders and to vote at
all such meetings together as a single class, except in respect of matters where
only the holders of shares of one class or series of shares are entitled to vote
separately pursuant to applicable law. The subordinate voting shares carry one
vote per share and the multiple voting shares carry 25 votes per share.
Generally, all matters to be voted on by shareholders must be approved by a
simple majority (or, in the case of election of directors, by a plurality, and
in the case of an amalgamation or amendments to the articles of Celestica, by
two-thirds) of the votes cast in respect of multiple voting shares and
subordinate voting shares held by persons present in person or by proxy, voting
together as a single class. The holders of multiple voting shares are entitled
to one vote per share held at meetings of holders of multiple voting shares at
which they are entitled to vote separately as a class.
DIVIDENDS
The subordinate voting shares and the multiple voting shares are entitled to
share ratably, as a single class, in any dividends declared by the board of
directors of Celestica, subject to any preferential rights of any outstanding
preference shares in respect of the payment of dividends. Dividends consisting
of subordinate voting shares and multiple voting shares may be paid only as
follows: (i) subordinate voting shares may be paid only to holders of
subordinate voting shares, and multiple voting shares may be paid only to
holders of multiple voting shares; and (ii) proportionally with respect to each
outstanding subordinate voting share and multiple voting share.
CONVERSION
Each multiple voting share is convertible at any time at the option of the
holder thereof into one subordinate voting share.
Multiple voting shares will be converted automatically into subordinate
voting shares upon any transfer thereof, except (i) a transfer to Onex or any
affiliate of Onex or (ii) a transfer of 100% of the outstanding multiple voting
shares to a purchaser who also has offered to purchase all of the outstanding
subordinate voting shares for a per share consideration identical to, and
otherwise on the same terms as, that offered for the multiple voting shares, and
the multiple voting shares held by such purchaser thereafter shall be subject to
the provisions relating to conversion as if all references to Onex were
references to such purchaser. In addition, if (i) any holder of any multiple
voting shares ceases to be an affiliate of Onex or (ii) Onex and its affiliates
cease to have the right, in all cases, to exercise the votes attached to, or to
direct the voting of, any of the multiple voting shares held by Onex and its
affiliates, such multiple voting shares shall convert automatically into
subordinate voting shares on a one-for-one basis. For these purposes,
(i) "Onex" includes any successor corporation resulting from an amalgamation,
merger, arrangement, sale of all or substantially all of its assets, or other
business combination or reorganization involving Onex, provided that such
successor corporation beneficially owns directly or indirectly all multiple
voting shares beneficially owned directly or indirectly by Onex immediately
prior to such transaction and is controlled by the same person or persons as
controlled Onex prior to the consummation of such transaction; (ii) a
corporation shall be deemed to be a subsidiary of another corporation if, but
only if, (a) it is controlled by that other, or that other and one or more
corporations each of which is controlled by that other, or two or more
corporations each of which is controlled by that other, or (b) it is a
subsidiary of a corporation that is that other's subsidiary; (iii) "affiliate"
means a subsidiary of Onex or a corporation controlled by the same person or
company that controls Onex; and (iv) "control" means beneficial ownership of, or
control or direction over, securities carrying more than 50% of the votes that
may be cast to elect directors if those votes, if cast, could elect more than
50% of the directors. For these purposes, a person is deemed to beneficially own
any security which is beneficially owned by a corporation controlled by such
person.
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In addition, if at any time the number of outstanding multiple voting shares
shall represent less than 5% of the aggregate number of the outstanding multiple
voting shares and subordinate voting shares, all of the outstanding multiple
voting shares shall be automatically converted at such time into subordinate
voting shares on a one-for-one basis.
Onex, which owns all of the outstanding multiple voting shares, has entered
into an agreement with Computershare Trust Company of Canada, as trustee for the
benefit of the holders of the subordinate voting shares, that has the effect of
preventing transactions that otherwise would deprive the holders of subordinate
voting shares of rights under applicable provincial take-over bid legislation to
which they would have been entitled in the event of a take-over bid for the
multiple voting shares if the multiple voting shares had been subordinate voting
shares.
MODIFICATION, SUBDIVISION AND CONSOLIDATION
Any modification to the provisions attaching to either the subordinate
voting shares or the multiple voting shares requires the separate affirmative
vote of two-thirds of the votes cast by the holders of subordinate voting shares
and multiple voting shares, respectively, voting as separate classes. The
Company may not subdivide or consolidate the subordinate voting shares or the
multiple voting shares without at the same time proportionally subdividing or
consolidating the shares of the other class.
CREATION OF OTHER VOTING SHARES
The Company may not create any class or series of shares or issue any shares
of any class or series (other than subordinate voting shares) having the right
to vote generally on all matters that may be submitted to a vote of shareholders
(except matters for which applicable law requires the approval of holders of
another class or series of shares voting separately as a class or series)
without the separate affirmative vote of two-thirds of the votes cast by the
holders of the subordinate voting shares and the multiple voting shares,
respectively, voting as separate classes.
RIGHTS ON DISSOLUTION
With respect to a distribution of assets in the event of a liquidation,
dissolution or winding-up of Celestica, whether voluntary or involuntary, or any
other distribution of the assets of Celestica for the purposes of winding up our
affairs, holders of subordinate voting shares and multiple voting shares will
share ratably as a single class in assets available for distribution to holders
of subordinate voting shares and multiple voting shares after payment in full of
the amounts required to be paid to holders of preference shares, if any.
OTHER RIGHTS
Neither the subordinate voting shares nor the multiple voting shares are
redeemable, nor do the holders of such shares have pre-emptive rights to
purchase additional shares.
All of the outstanding subordinate voting shares and all of the outstanding
multiple voting shares will be fully paid and non-assessable.
PREFERENCE SHARES
The articles of Celestica permit the issuance of preference shares in
series, without further approval of shareholders. The number of preference
shares of each series and the designation, rights, privileges, restrictions and
conditions attaching to the shares of each series, including, without
limitation, any voting rights (other than general voting rights), any rights to
receive dividends or any terms of redemption, shall be determined by the board
of directors. The holders of the preference shares are entitled to dividends in
priority to the holders of multiple voting shares, the subordinate voting shares
or other shares ranking junior to the preference shares. With respect to a
distribution of assets in the event of a liquidation, dissolution or winding-up
of Celestica, whether voluntary or involuntary, or any other distribution of the
assets of Celestica for the purposes of winding up our affairs, the preference
shares rank in priority to the multiple voting shares, the subordinate voting
shares and any other shares ranking junior to the preference shares.
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Additional information concerning the rights and limitations of shareholders
found in Celestica's articles of incorporation is hereby incorporated by
reference to our registration statement on Form F-4 (Reg. No. 333-9636).
C. MATERIAL CONTRACTS
The following table summarizes each material contract, other than contracts
entered into in the ordinary course of business, to which Celestica or any
member of Celestica's group is a party, for the two years immediately preceding
the publication of this Annual Report:
APPROXIMATE
DATE PARTIES TYPE TERMS AND CONDITIONS CONSIDERATION
-------------------------- -------------------------- ------------------- -------------------------- -------------
February 9, 2000, amended Celestica, Celestica Quota (Share) Celestica and Celestica $335 million
February 28, 2000 and Europe Inc., IBM Purchase Agreement Europe Inc. acquired all
May 31, 2000 Italia S.p.A. and IBM the voting stock of WCE
Semea Servizi Italia S.R.L.
Finanziari S.p.A.
June 22, 2000 Celestica and NEC do Acquisition Celestica acquired all the $123 million
Brasil S.A. Agreement shares of NDB
Industrial Ltda.
December 5, 2000 Celestica Corporation, Asset Purchase Celestica Corporation and $70 million
Celestica Ireland Limited, Agreement Celestica Ireland Limited
Motorola, Inc. and acquired certain assets
Motorola B.V. from Motorola, Inc. and
Motorola B.V. in Dublin,
Ireland and Mt. Pleasant,
Iowa
February 19, 2001, amended Celestica Corporation and Asset Purchase Celestica Corporation $200 million
May 4, 2001 Avaya, Inc. Agreement acquired certain assets
from Avaya in Denver,
Colorado and Little Rock,
Arkansas
May 31, 2001 Celestica and Primetech Arrangement Celestica acquired all of $179 million
Electronics Inc. Agreement the shares of Primetech
Electronics Inc.
June 15, 2001 Omni Industries Limited Merger Agreement Celestica acquired all of $865 million
the shares of Omni
Industries Limited
July 24, 2001 Celestica Corporation and Asset Purchase Celestica Corporation $570 million
Lucent Technologies Inc. Agreements acquired certain assets
from Lucent in Columbus,
Ohio and Oklahoma City,
Oklahoma
D. EXCHANGE CONTROLS
Canada has no system of exchange controls. There are no Canadian
restrictions on the repatriation of capital or earnings of a Canadian public
company to non-resident investors. There are no laws of Canada or exchange
restrictions affecting the remittance of dividends, interest, royalties or
similar payments to non-resident holders of Celestica's securities, except as
described under Item 10(E), "-- Taxation," below.
E. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable to a person (a "U.S. Holder") who acquires
subordinate voting shares and who, for purposes of the INCOME TAX ACT (Canada)
(the "Canadian Tax Act") and the CANADA-UNITED STATES INCOME TAX CONVENTION
(1980) (the "Tax Treaty"), at all relevant times is resident in the United
States and is neither resident nor deemed to be resident in Canada, deals at
arm's length and is not affiliated with the Company, holds such subordinate
voting
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shares as capital property, and does not use or hold, and is not deemed to use
or hold, the subordinate voting shares in carrying on business in Canada.
Special rules, which are not discussed in this summary, may apply to a
U.S. Holder that is a financial institution (as defined in the Canadian
Tax Act), or is an insurer that carries on an insurance business in Canada and
elsewhere.
This summary is based on the current provisions of the Tax Treaty, the
Canadian Tax Act and the regulations thereunder, all specific proposals to amend
the Canadian Tax Act or the regulations publicly announced by the Minister of
Finance (Canada) prior to March 1, 2002, and Celestica's understanding of the
current published administrative practices of the Canada Customs and Revenue
Agency.
This summary is not exhaustive of all possible Canadian federal income tax
considerations and, except as mentioned above, does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account the tax legislation
or considerations of any province or territory of Canada or any jurisdiction
other than Canada.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER, AND
NO REPRESENTATION WITH RESPECT TO THE CANADIAN FEDERAL INCOME TAX CONSEQUENCES
TO ANY PARTICULAR HOLDER IS MADE. CONSEQUENTLY, U.S. HOLDERS OF SUBORDINATE
VOTING SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME
TAX CONSEQUENCES TO THEM HAVING REGARD TO THEIR PARTICULAR CIRCUMSTANCES.
All amounts relevant in computing a U.S. Holder's liability under the
Canadian Tax Act are to be computed in Canadian dollars.
TAXATION OF DIVIDENDS
By virtue of the Canadian Tax Act and the Tax Treaty, dividends (including
stock dividends) on subordinate voting shares paid or credited or deemed to be
paid or credited to a U.S. Holder who is the beneficial owner of such dividend
will be subject to Canadian non-resident withholding tax at the rate of 15% of
the gross amount of such dividends. Under the Tax Treaty, the rate of
withholding tax on dividends is reduced to 5% if that U.S. Holder is a company
that beneficially owns at least 10% of the voting stock of Celestica. Moreover,
under the Tax Treaty, dividends paid to certain religious, scientific, literary,
educational or charitable organizations and certain pension organizations that
are resident in, and generally exempt from tax in, the U.S., are exempt from
Canadian non-resident withholding tax. Provided that certain administrative
procedures are observed by such an organization, Celestica would not be required
to withhold such tax from dividends paid or credited to such organization.
DISPOSITION OF SUBORDINATE VOTING SHARES
A U.S. Holder will not be subject to tax under the Canadian Tax Act in
respect of any capital gain realized on the disposition or deemed disposition of
subordinate voting shares unless the subordinate voting shares constitute or are
deemed to constitute "taxable Canadian property" (as defined in the Canadian
Tax Act) (other than treaty-protected property, as defined in the Canadian
Tax Act) at the time of such disposition. Shares of a corporation resident in
Canada that are listed on a prescribed stock exchange for purposes of the
Canadian Tax Act will be "taxable Canadian property" under the Canadian Tax Act
if, at any time during the five-year period immediately preceding the
disposition or deemed disposition of the share, the non-resident, persons with
whom the non-resident did not deal at arm's length, or the non-resident together
with such persons owned 25% or more of the issued shares of any class or series
of shares of the corporation that issued the shares. For this purpose, a person
is considered to own any shares in respect of which the person has or had an
option or other interest therein. Provided they are listed on a prescribed stock
exchange for purposes of the Canadian Tax Act, subordinate voting shares
acquired by a U.S. Holder generally will not be taxable Canadian property to a
U.S. Holder unless the foregoing 25% ownership threshold applies to the
U.S. Holder with respect to Celestica. Even if the subordinate voting shares are
taxable Canadian property to a U.S. Holder, they generally will be
treaty-protected property if the value of such shares at the time of disposition
is not derived principally from "real property" (as defined in the Canadian
Tax Act) situated in Canada. Consequently, any gain realized by the U.S. Holder
upon the disposition of the subordinate voting shares generally will be exempt
from tax under the Canadian Tax Act.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material United States federal income
tax consequences to United States Holders (as defined below) of subordinate
voting shares. A United States Holder is a citizen or resident of the United
States, a corporation or partnership or limited liability company created or
organized in or under the laws of the United States or of any political
subdivision thereof, an estate, the income of which is includible in gross
income for U.S. federal income tax purposes regardless of its source, or a
trust, if either (i) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
U.S. persons have the authority to control all substantial decisions of the
trust or (ii) the trust has made an election under applicable U.S. Treasury
regulations to be treated as a U.S. Person. This summary is for general
information purposes only. It does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to your decision to
purchase, hold or dispose of subordinate voting shares. This summary considers
only United States Holders who will own subordinate voting shares as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"). In this context, the term "capital
assets" means, in general, assets held for investment by a taxpayer. Material
aspects of U.S. federal income tax relevant to non-United States Holders are
also discussed below.
This discussion is based on current provisions of the Internal Revenue Code,
current and proposed Treasury regulations promulgated thereunder and
administrative and judicial decisions as of March 1, 2002, all of which are
subject to change, possibly on a retroactive basis. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to any
particular United States Holder based on the United States Holder's individual
circumstances. In particular, this discussion does not address the potential
application of the alternative minimum tax or U.S. federal income tax
consequences to United States Holders who are subject to special treatment,
including taxpayers who are broker-dealers or insurance companies, taxpayers who
have elected mark-to-market accounting, individual retirement and other
tax-deferred accounts, tax-exempt organizations, financial institutions or
"financial services entities," taxpayers who hold subordinate voting shares as
part of a straddle, "hedge" or "conversion transaction" with other investments,
taxpayers owning directly, indirectly or by attribution at least 10% of the
voting power of our share capital, and taxpayers whose functional currency (as
defined in Section 985 of the Internal Revenue Code) is not the U.S. dollar.
This discussion does not address any aspect of U.S. federal gift or estate
tax or state, local or non-U.S. tax laws. Additionally, the discussion does not
consider the tax treatment of persons who hold subordinate voting shares through
a partnership or other pass-through entity. For U.S. federal income tax
purposes, income earned through a foreign or domestic partnership or similar
entity is generally attributed to its owners. You are advised to consult your
own tax advisor with respect to the specific tax consequences to you of
purchasing, holding or disposing of the subordinate voting shares.
TAXATION OF DIVIDENDS PAID ON SUBORDINATE VOTING SHARES
In the event that Celestica pays a dividend, and subject to the discussion
of the passive foreign investment company (PFIC) rules below, a United States
Holder will be required to include in gross income as ordinary income the amount
of any distribution paid on subordinate voting shares, including any Canadian
taxes withheld from the amount paid, on the date the distribution is received,
to the extent that the distribution is paid out of our current or accumulated
earnings and profits as determined for U.S. federal income tax purposes. In
addition, distributions of the Company's current or accumulated earnings and
profits will be foreign source passive income for U.S. foreign tax credit
purposes and will not qualify for the dividends-received deduction available to
corporations. Distributions in excess of such earnings and profits will be
applied against and will reduce the United States Holder's tax basis in the
subordinate voting shares and, to the extent in excess of such basis, will be
treated as capital gain.
Distributions of current or accumulated earnings and profits paid in
Canadian dollars to a United States Holder will be includible in the income of
the United States Holder in a dollar amount calculated by reference to the
exchange rate on the date the distribution is received. A United States Holder
who receives a distribution of Canadian dollars and converts the Canadian
dollars into U.S. dollars subsequent to receipt will have foreign exchange gain
or loss based on any appreciation or depreciation in the value of the Canadian
dollar against the U.S. dollar. Such gain or loss will generally be ordinary
income and loss and will generally be U.S. source gain or
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loss for U.S. foreign tax credit purposes. United States Holders should consult
their own tax advisors regarding the treatment of a foreign currency gain or
loss.
United States Holders will generally have the option of claiming the amount
of any Canadian income taxes withheld either as a deduction from gross income or
as a dollar-for-dollar credit against their U.S. federal income tax liability,
subject to specified conditions and limitations. Individuals who do not claim
itemized deductions, but instead utilize the standard deduction, may not claim a
deduction for the amount of the Canadian income taxes withheld, but these
individuals generally may still claim a credit against their U.S. federal income
tax liability. The amount of foreign income taxes that may be claimed as a
credit in any year is subject to complex limitations and restrictions, which
must be determined on an individual basis by each shareholder. The total amount
of allowable foreign tax credits in any year cannot exceed the pre-credit
U.S. tax liability for the year attributable to foreign source taxable income. A
United States Holder will be denied a foreign tax credit with respect to
Canadian income tax withheld from dividends received on subordinate voting
shares to the extent that he or she has not held the subordinate voting shares
for at least 16 days of the 30-day period beginning on the date which is
15 days before the ex-dividend date or to the extent that he or she is under an
obligation to make related payments with respect to substantially similar or
related property. Instead, a deduction may be allowed. Any days during which a
United States Holder has substantially diminished his or her risk of loss on his
or her subordinate voting shares are not counted toward meeting the 16-day
holding period.
TAXATION OF DISPOSITION OF SUBORDINATE VOTING SHARES
Subject to the discussion of the PFIC rules below, upon the sale, exchange
or other disposition of subordinate voting shares, a United States Holder will
recognize capital gain or loss in an amount equal to the difference between his
or her adjusted tax basis in his or her shares and the amount realized on the
disposition. A United States Holder's adjusted tax basis in the subordinate
voting shares will generally be the initial cost, but may be adjusted for
various reasons including the receipt by such United States Holder of a
distribution that was not made up wholly of earning and profits as described
above under the heading "Taxation of Dividends Paid on Subordinate Voting
Shares." A United States Holder that uses the cash method of accounting
calculates the dollar value of the proceeds received on the sale date as of the
date that the sale settles, while a United States Holder who uses the accrual
method of accounting is required to calculate the value of the proceeds of the
sale as of the "trade date," unless he or she has elected to use the settlement
date to determine his or her proceeds of sale. Capital gain from the sale,
exchange or other disposition of shares held more than one year is long-term
capital gain and is eligible for a maximum 20% rate of taxation for
non-corporate taxpayers. Special rules (and generally lower maximum rates) apply
to non-corporate taxpayers in lower tax brackets. Further preferential tax
treatment may be available for non-corporate taxpayers who dispose of
subordinate voting shares held for over five years. Gain or loss recognized by a
United States Holder on a sale, exchange or other disposition of subordinate
voting shares generally will be treated as U.S. source income or loss for
U.S. foreign tax credit purposes. The deductibility of a capital loss recognized
on the sale, exchange or other disposition of subordinate voting shares is
subject to limitations. A United States Holder who receives foreign currency
upon disposition of subordinate voting shares and converts the foreign currency
into U.S. dollars subsequent to receipt will have foreign exchange gain or loss
based on any appreciation or depreciation in the value of the foreign currency
against the U.S. dollar. United States Holders should consult their own tax
advisors regarding the treatment of a foreign currency gain or loss.
TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY
A non-U.S. corporation will be a PFIC if, in general, either (i) 75% or more
of its gross income in a taxable year, including the pro rata share of the gross
income of any U.S. or foreign company in which it is considered to own 25% or
more of the shares by value, is passive income or (ii) 50% or more of its assets
in a taxable year, averaged over the year and ordinarily determined based on
fair market value and including the pro rata share of the assets of any company
in which it is considered to own 25% or more of the shares by value, are held
for the production of, or produce, passive income. Passive income includes
amounts derived by reason of the temporary investment of funds raised in a
public offering. If we were a PFIC and a United States Holder did not make an
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election to treat the company as a "qualified electing fund" and did not make a
mark-to-market election, each as described below, then:
- Excess distributions by Celestica to a United States Holder would be taxed
in a special way. "Excess distributions" are amounts received by a United
States Holder with respect to subordinate voting shares in any taxable
year that exceed 125% of the average distributions received by the United
States Holder from the company in the shorter of either the three previous
years or his or her holding period for his or her shares before the
present taxable year. Excess distributions must be allocated ratably to
each day that a United States Holder has held subordinate voting shares. A
United States Holder must include amounts allocated to the current taxable
year and to any non-PFIC years in his or her gross income as ordinary
income for that year. A United States Holder must pay tax on amounts
allocated to each prior taxable PFIC year at the highest rate in effect
for that year on ordinary income and the tax is subject to an interest
charge at the rate applicable to deficiencies for income tax.
- The entire amount of gain that is realized by a United States Holder upon
the sale or other disposition of shares will also be considered an excess
distribution and will be subject to tax as described above.
- A United States Holder's tax basis in shares that were acquired from a
decedent will not receive a step-up to fair market value as of the date of
the decedent's death but instead will be equal to the decedent's tax
basis, if lower.
The special PFIC rules will not apply to a United States Holder if the
United States Holder makes an election to treat the company as a "qualified
electing fund" in the first taxable year in which he or she owns subordinate
voting shares and if we comply with reporting requirements. Instead, a
shareholder of a qualified electing fund is required for each taxable year to
include in income a pro rata share of the ordinary earnings of the qualified
electing fund as ordinary income and a pro rata share of the net capital gain of
the qualified electing fund as long-term capital gain, subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge. We have agreed to supply United States Holders with the information
needed to report income and gain pursuant to this election in the event that we
are classified as a PFIC. The election is made on a shareholder-by-shareholder
basis and may be revoked only with the consent of the Internal Revenue Service.
A shareholder makes the election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, to a timely filed U.S. federal
income tax return. Even if an election is not made, a shareholder in a PFIC who
is a United States Holder must file a completed IRS Form 8621 every year.
A United States Holder who owns PFIC shares that are publicly traded could
elect to mark the shares to market annually, recognizing as ordinary income or
loss each year an amount equal to the difference as of the close of the taxable
year between the fair market value of the PFIC shares and the United States
Holder's adjusted tax basis in the PFIC shares. If the mark-to-market election
were made, then the rules set forth above would not apply for periods covered by
the election. The subordinate voting shares would be treated as publicly traded
for purposes of the mark-to-market election and, therefore, such election would
be made if Celestica were classified as a PFIC. A mark-to-market election is,
however, subject to complex and specific rules and requirements, and United
States Holders are strongly urged to consult their tax advisors concerning this
election if we are classified as a PFIC.
We believe that we will not be a PFIC for 2002. Based on our current
business plan, we do not expect to become a PFIC in the foreseeable future.
These conclusions rest at least in part on factual issues, including a
determination as to value of assets and projections as to our revenue. We cannot
assure you that our actual revenues, including our revenues for the remainder of
2002, will be as projected or that a determination as to non-PFIC status would
not be challenged by the Internal Revenue Service. Moreover, the tests for
determining PFIC status are applied annually, and it is difficult to make
accurate predictions of future income and assets, which are relevant to the
determination as to whether we will be a PFIC in the future. A United States
Holder who holds subordinate voting shares during a period in which we are a
PFIC will be subject to the PFIC rules, even if we cease to be a PFIC, unless he
or she has made a qualifying electing fund election. If we were determined to be
a PFIC with respect to a year in which we had not thought that we would be so
treated, the information needed to enable United States Holders to make a
qualifying electing fund election would not have been provided. United States
Holders are strongly urged to consult their tax advisors about the PFIC rules,
66
including the consequences to them of making a mark-to-market or qualifying
electing fund elections with respect to subordinate voting shares in the event
that we are treated as a PFIC.
TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS OF SUBORDINATE VOTING SHARES
Except as described in "Information Reporting and Back-up Withholding"
below, a non-United States Holder of subordinate voting shares will not be
subject to U.S. federal income or withholding tax on the payment of dividends
on, and the proceeds from the disposition of, subordinate voting shares unless:
- the item is effectively connected with the conduct by the non-United
States Holder of a trade or business in the United States and, in the case
of a resident of a country that has an income treaty with the United
States, such item is attributable to a permanent establishment in the
United States;
- the non-United States Holder is an individual who holds the subordinate
voting shares as a capital asset and is present in the United States for
183 days or more in the taxable year of the disposition and does not
qualify for an exemption; or
- the non-United States Holder is subject to tax pursuant to the provisions
of U.S. tax law applicable to U.S. expatriates.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
United States Holders generally are subject to information reporting
requirements and back-up withholding at a current rate of 30% (which rate will
be reduced over the next four years in accordance with recently enacted tax
legislation) with respect to dividends paid in the United States and on proceeds
paid from the disposition of shares, unless the United States Holder (i) is a
corporation or comes within certain other exempt categories and demonstrates
this fact when so required, or (ii) provides a correct taxpayer identification
number, certifies that it is not subject to backup withholdings, and otherwise
complies with applicable requirements of the backup withholding rules.
Non-United States Holders generally are not subject to information reporting
or back-up withholding with respect to dividends paid on or upon the disposition
of shares, provided in some instances that the non-United States Holder provides
a taxpayer identification number, certifies to his foreign status or otherwise
establishes an exemption.
The amount of any back-up withholding will be allowed as a credit against
U.S. federal income tax liability and may entitle the Holder to a refund,
provided that required information is furnished to the Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
Any statement in this Annual Report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to this Annual Report, the contract or document is deemed to modify
our description. You must review the exhibits themselves for a complete
description of the contract or document.
You may review a copy of our filings with the SEC, including exhibits and
schedules filed with this Annual Report, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of such materials from the
Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. The SEC
maintains a
67
Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. We began to file electronically with the SEC in November 2000.
You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above and you may also access some
of them electronically at the Web site set forth above. These SEC filings are
also available to the public from commercial document retrieval services.
We also file reports, statements and other information with the Canadian
Securities Administrators, or the CSAs, and these can be accessed electronically
at the CSAs' System for Electronic Document Analysis and Retrieval web-site at
http://www.sedar.com.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EXCHANGE RATE RISK
Celestica has entered into foreign currency contracts to hedge foreign
currency risk. These financial instruments include, to varying degrees, elements
of market risk in excess of amounts recognized in the balance sheets. As at
December 31, 2001, Celestica had outstanding foreign exchange contracts to sell
U.S. $379.5 million in exchange for Canadian dollars over a period of 17 months
at a weighted average exchange rate of U.S.$0.65, U.S. $56.6 million in exchange
for British pounds sterling over a 15-month period at a weighted average
exchange rate of U.S. $1.40, U.S. $46.3 million in exchange for Mexican pesos
over a period of 12 months at a weighted average rate of exchange of
U.S. $0.10, U.S. $191.8 million in exchange for Euros over a 15-month period at
a weighted average exchange rate of U.S. $0.88, U.S. $24.2 million in exchange
for Thai baht over a 12-month period at a weighted average exchange rate of
U.S. $0.02 and U.S. $6.4 million in exchange for Czech koruna over a 12-month
period at a weighted average exchange rate of U.S. $0.03. The table below
provides information about Celestica's foreign currency contracts. The table
presents the notional amounts and weighted average exchange rates by expected
(contractual) maturity dates. These notional amounts generally are used to
calculate the contractual payments to be exchanged under the contracts. At
December 31, 2001, these contracts had a fair value liability of
U.S. $7.4 million.
DECEMBER 31, 2001
----------------------------------------------------------
EXPECTED MATURITY DATE
----------------------------------------------------------
FAIR VALUE
2002 2003 THEREAFTER TOTAL GAIN (LOSS)
-------- -------- ---------- -------- ------------
FORWARD EXCHANGE AGREEMENTS
Receive C$/Pay U.S.$
Contract amount.................................. $346.0 $33.5 $-- $379.5 $(10.9)
Average exchange rate............................ $ 0.65 $0.63 $ 0.65
Receive L/Pay U.S.$
Contract amount.................................. $ 52.5 $ 4.1 -- $ 56.6 $ 1.4
Average exchange rate............................ $ 1.40 $1.37 $ 1.40
Receive Mexican Pesos/Pay U.S. $ Contract amount... $ 46.3 -- -- $ 46.3 $ 2.2
Average exchange rate............................ $ 0.10 $ 0.10
Receive Euro/Pay U.S.$
Contract amount.................................. $178.6 $13.2 -- $191.8 $ (0.6)
Average exchange rate............................ $ 0.88 $0.88 $ 0.88
Receive Baht/Pay U.S.$ Contract amount............. $ 24.2 -- -- $ 24.2 $ 0.2
Average exchange rate............................ $ 0.02 $ 0.02
Receive Koruna/Pay U.S.$ Contract amount........... $ 6.4 -- -- $ 6.4 $ 0.3
Average exchange rate............................ $ 0.03 $ 0.03
------ ----- ------ ------ ------
Total.......................................... $654.0 $50.8 $-- $704.8 $ (7.4)
====== ===== ====== ====== ======
68
INTEREST RATE RISK
Celestica's existing debt is predominantly at fixed rates. The table below
provides information about Celestica's financial instruments that are sensitive
to changes in interest rates.
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- -------- ----------
(U.S.$ in millions)
Long-term debt
Subordinate debt...................... $ 0 $ 0 $ 0 $ 0 $130.0 $ 0 $130.0 $136.5
Fixed rate.......................... 10.5% 10.5% 10.5% 10.5% 10.5%
All other obligations (including
capital leases)..................... 10.0 4.5 1.3 0.7 0.6 0.3 17.4 17.4
------ ------ ------ ------ ------ ------ ------ ------
Total............................. $ 10.0 $ 4.5 $ 1.3 $ 0.7 $130.6 $ 0.3 $147.4 $153.9
====== ====== ====== ====== ====== ====== ====== ======
CONVERTIBLE DEBT (LYONS)
We have issued convertible debt with a principal amount at maturity of
$1.8 billion, payable August 1, 2020. At March 1, 2002, we were not exposed to
interest rate risk on this debt because (i) the issue price represents a fixed
yield to maturity, (ii) the principal payable at maturity is fixed and
(iii) the conversion ratio into subordinate voting shares of Celestica is fixed.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
69
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
70
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements have been filed as part of this Annual
Report:
PAGE
--------
Auditors' Report............................................ F-2
Consolidated Balance Sheets as at December 31, 2000 and
2001...................................................... F-4
Consolidated Statements of Earnings (Loss) for the years
ended December 31, 1999, 2000 and 2001.................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 2000 and 2001.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001.......................... F-7
Notes to the Consolidated Financial Statements.............. F-8
ITEM 19. EXHIBITS
The following exhibits have been filed as part of this Annual Report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1. Articles of Incorporation and by-laws as currently in
effect:
1.1 Certificate and Articles of Incorporation(1)
1.2 Certificate and Articles of Amendment effective October 22,
1996(1)
1.3 Certificate and Articles of Amendment effective January 24,
1997(1)
1.4 Certificate and Articles of Amendment effective October 8,
1997(1)
1.5 Certificate and Articles of Amendment effective April 29,
1998(2)
1.6 Articles of Amendment effective June 26, 1998(3)
1.7 Restated Articles of Incorporation effective June 26,
1998(3)
1.8 Bylaw No. 1(4)
1.9 Bylaw No. 2(1)
2. Instruments defining rights of holders of equity or debt
securities:
2.1 See Certificate and Articles of Incorporation and amendments
thereto identified above.
2.2 Form of Subordinate Voting Share Certificate(5)
2.3 Indenture, dated as of November 18, 1996, by and among
Celestica International Inc., Celestica, Inc., Celestica
Corporation and The Chase Manhattan Bank, as Trustee
(including forms of the Outstanding Notes and Exchange
Notes)(6)
2.4 Guarantee Agreement, dated as of November 18, 1996, between
Celestica, Inc. and The Chase Manhattan Bank, as Trustee(6)
2.5 Guarantee Agreement, dated as of November 18, 1996, between
Celestica Corporation and The Chase Manhattan Bank, as
Trustee(6)
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.6 Supplemental Indenture, dated as of July 7, 1998, among
Celestica International Inc., Celestica Inc. and The Chase
Manhattan Bank, as Trustee(3)
2.7 Supplemental Indenture, dated as of May 26, 2000, between
Celestica Inc. and The Chase Manhattan Bank, as Trustee(7)
2.8 Indenture, dated as of August 1, 2000, between
Celestica Inc. and The Chase Manhattan Bank, as Trustee
(including a form of the Outstanding Notes)(8)
2.10 Amended and Restated Credit Agreement, dated as of June 8,
2001, between Celestica Inc., the subsidiaries of
Celestica Inc., specified therein as Designated
Subsidiaries, The Bank of Nova Scotia, as Administrative
Agent, The Bank of Nova Scotia, as Canadian Facility Agent,
The Bank of Nova Scotia, as U.S. Facility Agent, The Bank of
Nova Scotia, as U.K. Facility Agent, the financial
institutions named in Schedule A as Canadian lenders, the
financial institutions named in Schedule B as U.S. lenders,
and the financial institutions named in Schedule C as
U.K. lenders(9)
2.11 Amended and Restated Revolving Term Credit Agreement, dated
as of June 8, 2001, between Celestica Inc., the subsidiaries
of Celestica Inc., specified therein as Designated
Subsidiaries, The Bank of Nova Scotia, as Administrative
Agent, The Bank of Nova Scotia, as Canadian Facility Agent,
The Bank of Nova Scotia, as U.S. Facility Agent, The Bank of
Nova Scotia, as U.K. Facility Agent, the financial
institutions named in Schedule A as Canadian lenders, the
financial institutions named in Schedule B as U.S. lenders,
and the financial institutions named in Schedule C as
U.K. lenders(9)
2.12 Four Year Revolving Term Credit Agreement, dated as of
July 31, 2001, among Celestica Inc. and Celestica
International Inc., as Borrowers, The Bank of Nova Scotia,
as Administrative Agent, and the financial institutions
named therein, as Lenders(9)
3. Certain Contracts:
3.1 Management Services Agreement, dated as of July 7, 1998,
among Celestica Inc., Celestica North America Inc. and Onex
Corporation(5)
3.2 Quota (Share) Purchase Agreement, dated February 9, 2000,
between Celestica Inc., Celestica Europe Inc., IBM
Italia S.p.A. and IBM Semea Servizi Finanziari S.p.A.(4)*
3.3 Quota Purchase Agreement, dated June 22, 2000, between NEC
do Brasil S.A. and Celestica Inc.(4)*
3.4 Amended and Restated Asset Purchase Agreement, dated as of
December 5, 2000, between Celestica Corporation, Celestica
Ireland Limited, Motorola, Inc. and Motorola B.V.(4)*
3.5 Asset Purchase Agreement, dated as of February 19, 2001, by
and between Avaya Inc. and Celestica Corporation(4)*
3.6 Amendment No. 1 to the Asset Purchase Agreement, dated as of
May 4, 2001, by and between Avaya Inc. and Celestica
Corporation(4)
3.7 Arrangement Agreement, dated as of May 31, 2001, between
Celestica Inc. and Primetech Electronics Inc.
3.8 Merger Agreement, dated as of June 15, 2001, between Omni
Industries Limited and Celestica Inc.
3.9 Asset Purchase Agreement, dated as of July 24, 2001, between
Lucent Technologies Inc. and Celestica Corporation**
3.10 Asset Purchase Agreement, dated as of July 24, 2001, between
Lucent Technologies Inc. and Celestica Corporation**
72
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.11 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Eugene V. Polistuk(1)
3.12 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Anthony P. Puppi(1)
3.13 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Daniel P. Shea(1)
3.14 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Douglas C. McDougall(1)
3.15 Employment Agreement, dated as of June 30, 1998, by and
between Celestica Inc. and R. Thomas Tropea(10)
3.16 Celestica, Inc. -- Celestica Retirement Plan (Canada)(2)
3.17 D2D Employee Share Purchase and Option Plan (1997)(2)
3.18 Celestica 1997 U.K. Approved Share Option Scheme(1)
3.19 1998 U.S. Executive Share Purchase and Option Plan(11)
8.1 Subsidiaries of Registrant
------------
* Request for confidential treatment granted. Confidential portions of this
document have been redacted and filed separately with the Securities and
Exchange Commission.
** Confidential treatment requested. Confidential portions of the document have
been redacted and filed separately with the Securities and Exchange
Commission.
(1) Incorporated by reference to the Registration Statement on Form F-1 of
Celestica Inc. filed on April 29, 1998 (Registration No. 333-8700).
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-1 of Celestica Inc. filed on June 1, 1998 (Registration
No. 333-8700).
(3) Incorporated by reference to the Registration Statement on Form F-1 of
Celestica Inc. filed on February 16, 1999 (Registration No. 333-10030).
(4) Incorporated by reference to the Annual Report on Form 20-F of
Celestica Inc. filed on May 22, 2001.
(5) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form F-1 of Celestica Inc. filed on June 25, 1998 (Registration
No. 333-8700).
(6) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-4 of Celestica International Inc. filed on March 5, 1997
(Registration No. 333-6308).
(7) Incorporated by reference to the Registration Statement on Form F-3 of
Celestica Inc. filed on July 11, 2000 (Registration No. 333-12272).
(8) Incorporated by reference to the Current Report on Form 6-K of
Celestica Inc. for the month of August, 2000.
(9) Incorporated by reference to the Registration Statement on Form F-3 of
Celestica Inc. filed on September 10, 2001 (Registration No. 333-69278).
(10) Incorporated by reference to the Annual Report on Form 20-F of
Celestica Inc. filed on May 18, 2000.
(11) Incorporated by reference to the Registration Statement on Form S-8 of
Celestica Inc. filed on October 8, 1998 (Registration No. 333-9500).
73
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
CELESTICA INC.
By: /s/ ELIZABETH L. DELBIANCO
----------------------------------------------
Elizabeth L. DelBianco
VICE-PRESIDENT, GENERAL COUNSEL AND SECRETARY
Date: - , 2002
S-1
Consolidated Financial Statements of
CELESTICA INC.
Years ended December 31, 1999, 2000 and 2001
(in millions of U.S. dollars)
F-1
AUDITORS' REPORT
To the Board of Directors of
CELESTICA INC.
We have audited the consolidated balance sheets of Celestica Inc. as at
December 31, 2000 and 2001 and the consolidated statements of earnings (loss),
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
With respect to the consolidated financial statements for each of the years
in the two year period ended December 31, 2001, we conducted our audits in
accordance with Canadian generally accepted auditing standards and United States
generally accepted auditing standards. With respect to the consolidated
financial statements for the year ended December 31, 1999, we conducted our
audit 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,
2000 and 2001 and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 2001 in accordance with
Canadian generally accepted accounting principles.
Toronto, Canada /s/ KPMG LLP
JANUARY 21, 2002 CHARTERED ACCOUNTANTS
F-2
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that have a material effect on the comparability
of the Company's financial statements, such as the change described in
note 2(n) to the financial statements relating to the adoption by the Company of
CICA Handbook Section 1581 -- Business Combinations and CICA Handbook
Section 3062 -- Goodwill and Other Intangible Assets, as required for goodwill
and intangible assets resulting from business combinations consummated after
June 30, 2001. Our report to the shareholders dated January 21, 2002 is
expressed in accordance with Canadian reporting standards which do not require a
reference to such a change in accounting principles in the auditors' report when
the change is properly accounted for and adequately disclosed in the financial
statements.
Toronto, Canada /s/ KPMG LLP
JANUARY 21, 2002 CHARTERED ACCOUNTANTS
F-3
CELESTICA INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF U.S. DOLLARS)
AS AT DECEMBER 31
-------------------
2000 2001
-------- --------
ASSETS
Current assets:
Cash and short-term investments........................... $ 883.8 $1,342.8
Accounts receivable (note 4).............................. 1,785.7 1,054.1
Inventories (note 5)...................................... 1,664.3 1,372.7
Prepaid and other assets.................................. 138.8 177.3
Deferred income taxes..................................... 48.4 49.7
-------- --------
4,521.0 3,996.6
Capital assets (note 6)..................................... 633.4 915.1
Intangible assets (note 7).................................. 578.3 1,556.0
Other assets (note 8)....................................... 205.3 165.2
-------- --------
$5,938.0 $6,632.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,730.4 $1,198.3
Accrued liabilities....................................... 466.3 405.7
Income taxes payable...................................... 52.6 21.0
Deferred income taxes..................................... 7.7 21.8
Current portion of long-term debt (note 9)................ 1.4 10.0
-------- --------
2,258.4 1,656.8
Long-term debt (note 9)..................................... 130.6 137.4
Accrued post-retirement benefits (note 16).................. 38.1 47.3
Deferred income taxes....................................... 38.6 41.5
Other long-term liabilities................................. 3.0 4.3
-------- --------
2,468.7 1,887.3
Shareholders' equity........................................ 3,469.3 4,745.6
-------- --------
$5,938.0 $6,632.9
======== ========
Commitments and contingencies (note 18)
Subsequent event (note 21)
Canadian and United States accounting policy differences (note 22)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CELESTICA INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------
1999 2000 2001
-------- -------- ---------
Revenue..................................................... $5,297.2 $9,752.1 $10,004.4
Cost of sales............................................... 4,914.7 9,064.1 9,291.9
-------- -------- ---------
Gross profit................................................ 382.5 688.0 712.5
Selling, general and administrative expenses................ 202.2 326.1 341.4
Amortization of intangible assets (note 7).................. 55.6 88.9 125.0
Integration costs related to acquisitions (note 3).......... 9.6 16.1 22.8
Other charges (note 13)..................................... -- -- 273.1
-------- -------- ---------
267.4 431.1 762.3
-------- -------- ---------
Operating income (loss)..................................... 115.1 256.9 (49.8)
Interest on long-term debt.................................. 17.3 17.8 19.8
Interest income, net........................................ (6.6) (36.8) (27.7)
-------- -------- ---------
Earnings (loss) before income taxes......................... 104.4 275.9 (41.9)
-------- -------- ---------
Income taxes (note 14):
Current................................................... 30.7 80.1 25.8
Deferred (recovery)....................................... 5.3 (10.9) (27.9)
-------- -------- ---------
36.0 69.2 (2.1)
-------- -------- ---------
Net earnings (loss)......................................... $ 68.4 $ 206.7 $ (39.8)
======== ======== =========
Basic earnings (loss) per share (note 12)................... $ 0.41 $ 1.01 $ (0.26)
Diluted earnings (loss) per share (notes 2, 12)............. $ 0.40 $ 0.98 $ (0.26)
Weighted average number of shares outstanding (note 12)
Basic (in millions)....................................... 167.2 199.8 213.9
Diluted (in millions) (note 2)............................ 171.2 211.8 213.9
Net earnings (loss) in accordance with U.S. GAAP
(note 22)................................................. $ 66.5 $ 197.4 $ (51.3)
Basic earnings (loss) per share, in accordance with
U.S. GAAP (note 22)....................................... $ 0.40 $ 0.99 $ (0.24)
Diluted earnings (loss) per share, in accordance with
U.S. GAAP (note 22)....................................... $ 0.39 $ 0.96 $ (0.24)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CELESTICA INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS OF U.S. DOLLARS)
FOREIGN
CONVERTIBLE RETAINED CURRENCY TOTAL
DEBT CAPITAL STOCK EARNINGS TRANSLATION SHAREHOLDERS'
(NOTE 10) (NOTE 11) (DEFICIT) ADJUSTMENT EQUITY
----------- ------------- --------- ----------- -------------
Balance -- December 31, 1998............... $-- $ 912.1 $(52.2) $(0.6) $ 859.3
Shares issued, net......................... -- 734.0 -- -- 734.0
Currency translation....................... -- -- -- (3.5) (3.5)
Net earnings for the year.................. -- -- 68.4 -- 68.4
------ -------- ------ ----- --------
Balance -- December 31, 1999............... -- 1,646.1 16.2 (4.1) 1,658.2
Convertible debt issued, net............... 850.4 -- -- -- 850.4
Convertible debt accretion, net of tax..... 10.1 -- (5.4) -- 4.7
Shares issued, net......................... -- 749.3 -- -- 749.3
Net earnings for the year.................. -- -- 206.7 -- 206.7
------ -------- ------ ----- --------
Balance -- December 31, 2000............... 860.5 2,395.4 217.5 (4.1) 3,469.3
Convertible debt accretion, net of tax..... 26.3 -- (15.0) -- 11.3
Shares issued, net......................... -- 1,303.6 -- -- 1,303.6
Currency translation....................... -- -- -- 1.2 1.2
Net loss for the year...................... -- -- (39.8) -- (39.8)
------ -------- ------ ----- --------
Balance -- December 31, 2001............... $886.8 $3,699.0 $162.7 $(2.9) $4,745.6
====== ======== ====== ===== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CELESTICA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31
-------------------------------
1999 2000 2001
-------- -------- ---------
CASH PROVIDED BY (USED IN):
OPERATIONS:
Net earnings (loss)......................................... $ 68.4 $ 206.7 $ (39.8)
Items not affecting cash:
Depreciation and amortization............................. 126.5 212.5 319.5
Deferred income taxes..................................... 5.3 (10.9) (27.9)
Other charges (note 13)................................... -- -- 134.7
Other..................................................... (2.9) (4.4) 1.7
------- -------- ---------
Cash from earnings.......................................... 197.3 403.9 388.2
------- -------- ---------
Changes in non-cash working capital items:
Accounts receivable....................................... (227.7) (995.3) 887.2
Inventories............................................... (265.0) (656.7) 822.5
Other assets.............................................. 1.7 (94.7) 45.7
Accounts payable and accrued liabilities.................. 194.6 1,230.4 (854.0)
Income taxes payable...................................... 4.7 27.3 0.9
------- -------- ---------
Non-cash working capital changes.......................... (291.7) (489.0) 902.3
------- -------- ---------
Cash provided by (used in) operations..................... (94.4) (85.1) 1,290.5
------- -------- ---------
INVESTING:
Acquisitions, net of cash acquired........................ (64.8) (634.7) (1,299.7)
Purchase of capital assets................................ (211.8) (282.8) (199.3)
Other..................................................... (0.6) (59.5) 1.4
------- -------- ---------
Cash used in investing activities........................... (277.2) (977.0) (1,497.6)
------- -------- ---------
FINANCING:
Bank indebtedness......................................... -- (8.6) (2.8)
Repayments of long-term debt.............................. (10.0) (2.2) (56.0)
Deferred financing costs.................................. (1.5) (0.1) (3.9)
Issuance of convertible debt.............................. -- 862.9 --
Convertible debt issue costs, pre-tax..................... -- (19.4) --
Issuance of share capital................................. 758.2 766.6 737.7
Share issue costs, pre-tax................................ (34.3) (26.8) (10.0)
Other..................................................... (1.0) 2.0 1.1
------- -------- ---------
Cash provided by financing activities....................... 711.4 1,574.4 666.1
------- -------- ---------
Increase in cash............................................ 339.8 512.3 459.0
Cash, beginning of year..................................... 31.7 371.5 883.8
------- -------- ---------
Cash, end of year........................................... $ 371.5 $ 883.8 $ 1,342.8
======= ======== =========
Supplemental information
Paid during the year:
Interest.................................................. $ 17.2 $ 15.9 $ 20.7
Taxes..................................................... $ 26.1 $ 55.0 $ 89.0
Non-cash financing activities:
Convertible debt accretion, net of tax (note 10).......... $ -- $ 5.4 $ 15.0
Shares issued for acquisitions............................ $ -- $ -- $ 567.0
Cash is comprised of cash and short-term investments.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS:
The primary operations of the Company include providing a full range of
electronics manufacturing services including design, prototyping, assembly,
testing, product assurance, supply chain management, worldwide distribution
and after-sales service to its customers primarily in the computer and
communications industries. The Company has operations in the Americas,
Europe and Asia.
The Company's accounting policies are in accordance with accounting
principles generally accepted in Canada and, except as outlined in note 22,
are, in all material respects, in accordance with accounting principles
generally accepted in the United States.
2. SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION:
These consolidated financial statements include the accounts of the
Company and its subsidiaries. The results of subsidiaries acquired during
the year are consolidated from their respective dates of acquisition. The
Company's business combinations are accounted for using the purchase
method. Inter-company transactions and balances are eliminated on
consolidation.
(B) REVENUE:
Revenue is comprised of product sales and service revenue earned from
engineering, design and repair services. Revenue from product sales is
recognized upon shipment of the goods. Service revenue is recognized as
services are performed.
(C) CASH AND SHORT-TERM INVESTMENTS:
Cash and short-term investments include cash on account, demand deposits
and short-term investments with original maturities of less than three
months.
(D) INVENTORIES:
Inventories are valued on a first-in, first-out basis at the lower of
cost and replacement cost for production parts and at the lower of cost
and net realizable value for work in progress and finished goods. Cost
includes materials and an application of relevant manufacturing
value-add.
(E) CAPITAL ASSETS:
Capital assets are carried at cost and amortized over their estimated
useful lives on a straight-line basis. Estimated useful lives for the
principal asset categories are as follows:
Buildings.............................................. 25 years
Buildings/leasehold improvements....................... Up to 25 years or term of lease
Office equipment....................................... 5 years
Machinery and equipment................................ 5 years
Software............................................... 1 to 5 years
(F) INTANGIBLE ASSETS:
Intangible assets are comprised of goodwill, intellectual property
including process technology, and other intangible assets. Goodwill
acquired in business combinations with acquisition dates prior to
July 1, 2001 and other intangible assets are amortized on a straight-line
basis over 10 years and intellectual property over 5 years. Goodwill
acquired in business combinations subsequent to June 30, 2001 has not
been amortized, but will be tested for impairment annually. See
note 2(n).
(G) IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews long-lived assets for impairment on a regular basis
or whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of capital
assets is assessed by comparison of the carrying amount to the projected
future net cash flows the long-lived assets are expected to generate.
The Company assesses the recoverability of enterprise level goodwill by
determining whether the unamortized goodwill balance can be recovered
through undiscounted projected future net cash flows of the acquired
operation. An impairment in the value of intellectual property and other
intangible assets is assessed based on projected future net cash flows.
See note 2(n).
F-8
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(H) PENSION AND NON-PENSION, POST-RETIREMENT BENEFITS:
The Company accrues its obligations under employee benefit plans and the
related costs, net of plan assets. The cost of pensions and other
retirement benefits earned by employees is actuarially determined using
the projected benefit method pro-rated on service and management's best
estimate of expected plan investment performance, salary escalation,
retirement ages of employees and expected health care costs. For the
purpose of calculating the expected return on plan assets, those assets
are valued at fair value. Past service costs arising from plan amendments
are amortized on a straight-line basis over the average remaining service
period of employees active at the date of amendment. The net actuarial
gain (loss) is amortized over the average remaining service period of
active employees. The average remaining service period of active
employees covered by the pension plans is 14 years for 2000 and 2001. The
average remaining service period of active employees covered by the other
retirement benefit plans is 21 years for 2000 and 2001.
(I) DEFERRED FINANCING COSTS:
Costs relating to long-term debt are deferred in other assets and
amortized over the term of the related debt and debt facilities.
(J) INCOME TAXES:
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. When necessary, a valuation allowance is recorded to reduce
tax assets to an amount for which realization is more likely than not.
The effect of changes in tax rates is recognized in the period in which
the rate change occurs.
(K) FOREIGN CURRENCY TRANSLATION AND HEDGING:
The functional currency of the majority of the Company's subsidiaries is
the United States dollar. For such subsidiaries, monetary assets and
liabilities denominated in foreign currencies are translated into
U.S. dollars at the year-end rate of exchange. Non-monetary assets and
liabilities denominated in foreign currencies are translated at historic
rates and revenue and expenses are translated at average exchange rates
prevailing during the month of the transaction. Exchange gains or losses
are reflected in the consolidated statements of earnings (loss).
The accounts of the Company's self-sustaining foreign operations, for
which the functional currency is other than the U.S. dollar are
translated into U.S. dollars using the current rate method. Assets and
liabilities are translated at the year-end exchange rate and revenue and
expenses are translated at average exchange rates. Gains and losses
arising from the translation of financial statements of foreign
operations are deferred in the "foreign currency translation adjustment"
account included as a separate component of shareholders' equity.
The Company enters into forward exchange contracts to hedge the cash flow
risk associated with certain firm purchase commitments and forecasted
transactions. Gains and losses on hedges of firm commitments are included
in the cost of the hedged transactions when they occur. Gains and losses
on hedges of forecasted transactions are recognized in earnings in the
same period as the underlying hedged transaction. The Company does not
enter into derivatives for speculative purposes.
(L) RESEARCH AND DEVELOPMENT:
The Company annually incurs costs on activities that relate to research
and development which are expensed as incurred unless development costs
meet certain criteria for capitalization. Total research and development
costs recorded in selling, general and administrative expenses for 2001
were $17.1 (2000 -- $19.5; 1999 -- $19.7). No amounts have been
capitalized.
(M) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Significant estimates are used in
determining the allowance for doubtful accounts, inventory valuation and
the useful lives of intangible assets. Actual results could differ
materially from those estimates and assumptions.
F-9
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(N) CHANGES IN ACCOUNTING POLICIES:
Earnings per share:
As a result of the new Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3500 "Earnings per share," the Company is required to
retroactively use the treasury stock method for calculating diluted
earnings per share. This change results in an earnings per share
calculation which is consistent with United States GAAP. Previously
reported diluted earnings per share have been restated to reflect this
change.
Business combinations and goodwill:
In September 2001, the CICA issued Handbook Sections 1581 "Business
Combinations" and 3062 "Goodwill and Other Intangible Assets." The new
standards mandate the purchase method of accounting for business
combinations and require that goodwill no longer be amortized but instead
be tested for impairment at least annually. The standards also specify
criteria that intangible assets must meet to be recognized and reported
apart from goodwill. The standards require that the value of the shares
issued in a business combination be measured using the average share
price for a reasonable period before and after the date the terms of the
acquisition are agreed to and announced. Previously, the consummation
date was used to value the shares issued in a business combination. The
new standards are substantially consistent with United States GAAP.
Effective July 1, 2001 and for the remainder of the fiscal year, goodwill
acquired in business combinations completed after June 30, 2001 was not
amortized. In addition, the criteria for recognition of intangible assets
apart from goodwill and the valuation of the shares issued in a business
combination has been applied to business combinations completed after
June 30, 2001.
Upon full adoption of the standards beginning January 1, 2002, the
Company will discontinue amortization of all existing goodwill, evaluate
existing intangible assets and make any necessary reclassifications in
order to conform with the new criteria for recognition of intangible
assets apart from goodwill and will test for impairment in accordance
with the new standards.
In connection with Section 3062's transitional goodwill impairment
evaluation, the Company is required to assess whether goodwill is
impaired as of January 1, 2002. The Company has up to six months to
determine the fair value of its reporting units and compare that to the
carrying amounts of the reporting units. To the extent a reporting unit's
carrying amount exceeds its fair value, the Company must perform a second
step to measure the amount of impairment in a manner similar to a
purchase price allocation. This second step is to be completed no later
than December 31, 2002. Any transitional impairment will be recognized as
an effect of a change in accounting principle and will be charged to
opening retained earnings as of January 1, 2002.
As of December 31, 2001, the Company had unamortized goodwill of $1,128.8
and unamortized other intangible assets including intellectual property
of $427.2, all of which are subject to the transitional provisions of
Sections 1581 and 3062. Amortization expense related to goodwill was
$39.2 for 2001. Because of the extensive effort required to comply with
the remaining provisions of Sections 1581 and 3062, the Company has not
estimated the impact of these provisions on its financial statements,
beyond discontinuing goodwill amortization.
(O) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Stock-based compensation and other stock-based payments:
In December 2001, the CICA issued Handbook Section 3870, which
establishes standards for the recognition, measurement, and disclosure of
stock-based compensation and other stock-based payments made in exchange
for goods and services provided by employees and non-employees. The
standard requires that a fair value based method of accounting be applied
to all stock-based payments to non-employees and to employee awards that
are direct awards of stock, that call for settlement in cash or other
assets or are stock appreciation rights that call for settlement by the
issuance of equity instruments. However, the new standard permits the
Company to continue its existing policy of recording no compensation cost
on the grant of stock options to employees. Consideration paid by
employees on the exercise of stock options is recorded as share capital.
The standard is effective for the Company's fiscal year beginning
January 1, 2002 for awards granted on or after that date. The Company's
current accounting policies are consistent with the new standard.
Foreign currency translation and hedging relationships:
CICA Handbook Section 1650 has been amended to eliminate the deferral and
amortization of foreign currency translation gains and losses on
long-lived monetary items, effective January 1, 2002, with retroactive
restatement of prior periods. The Company is not impacted by this change.
The CICA issued Accounting Guideline AcG-13 which establishes criteria
for hedge accounting effective for the Company's 2003 fiscal year. The
Company has complied with the requirements of AcG-13 and has determined
that all of its current hedges will continue to qualify for hedge
accounting when the guideline becomes effective.
F-10
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS:
2000 ACQUISITIONS:
(A) IBM:
In February and May, 2000, the Company acquired certain assets from the
Enterprise Systems Group and Microelectronics Division of IBM in
Rochester, Minnesota and Vimercate and Santa Palomba, Italy,
respectively. The total purchase price of $470.0 was financed with cash.
(B) OTHER ACQUISITIONS:
In June 2000, the Company acquired 100% of the issued and outstanding
shares of NDB Industrial Ltda. in Brazil from NEC Corporation. In
August 2000, the Company acquired 100% of the issued and outstanding
shares of Bull Electronics Inc. in Lowell, Massachusetts from Groupe
Bull. In November 2000, the Company acquired 100% of the issued and
outstanding shares of NEC Technologies (UK) Ltd. in Telford, U.K. from
NEC Corporation. The total purchase price for these acquisitions of
$169.8 was financed with cash.
Details of the net assets acquired in these acquisitions, at fair value,
are as follows:
OTHER
IBM ACQUISITIONS
----------- ------------
Current assets.............................................. $ 301.1 $ 86.5
Capital assets.............................................. 98.2 35.1
Other long-term assets...................................... 2.3 --
Goodwill and intellectual property.......................... 213.9 74.1
Other intangible assets..................................... 12.2 --
Liabilities assumed......................................... (157.7) (25.9)
------- ------
Net assets acquired......................................... $ 470.0 $169.8
======= ======
Other intangible assets represent the excess of purchase price over the
fair value of tangible assets and intellectual property acquired in asset
acquisitions.
2001 ACQUISITIONS:
(C) ASSET ACQUISITIONS:
In February 2001, the Company acquired certain assets located in Dublin,
Ireland and Mt. Pleasant, Iowa from Motorola Inc. In March 2001, the
Company acquired certain assets of a repair facility in Japan from N.K.
Techno Co., Ltd. In May 2001, the Company acquired certain assets in
Littlerock, Arkansas and Denver, Colorado from Avaya Inc., and in
August 2001, acquired certain assets in Saumur, France. In August 2001,
the Company acquired certain assets in Columbus, Ohio and Oklahoma City,
Oklahoma from Lucent Technologies Inc. The total purchase price for these
acquisitions of $834.1 was financed with cash and was allocated to the
net assets acquired, including intangible assets of $195.7, based on
their relative fair values at the date of acquisition.
(D) BUSINESS COMBINATIONS:
Omni:
In October 2001, the Company acquired Omni Industries Limited (Omni), an
electronics manufacturer headquartered in Singapore. This acquisition
significantly enhanced the Company's presence in Asia. The purchase price
of $865.8 was financed with the issuance of 9.2 million subordinate
voting shares and the issuance of options to purchase 0.3 million
subordinate voting shares of the Company and $479.5 in cash. The goodwill
recorded for Omni is not tax deductible. The Company is in the process of
obtaining third-party valuations of certain assets. The fair value
allocation of the purchase price is subject to refinement.
Other business combinations:
In January 2001, the Company acquired Excel Electronics, Inc. through a
merger with Celestica (US) Inc., a subsidiary of the Company. This
acquisition expanded the Company's presence in the southern United
States. In June 2001, the Company acquired Sagem CR s.r.o., in the Czech
Republic, from Sagem SA, of France, which positions Celestica as Sagem's
primary EMS provider. In August 2001, the Company acquired Primetech
Electronics Inc. (Primetech), an electronics manufacturer in Canada. This
acquisition provided the Company with additional high complexity
manufacturing capability and an expanded global customer
F-11
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
base. The purchase price of Primetech was financed primarily with the
issuance of 3.4 million subordinate voting shares and the issuance of
options to purchase 0.3 million subordinate voting shares of the Company.
The Company is in the process of obtaining third-party valuations of
certain assets. The fair value allocation of the purchase price is
subject to refinement.
The value of the shares issued in the Primetech and Omni acquisitions was
determined based on the average market price of the shares for a
reasonable period before and after the date the terms of the acquisitions
were agreed to and announced.
Details of the net assets acquired in these business combinations, at
fair value, are as follows:
OTHER BUSINESS
OMNI COMBINATIONS
-------------- --------------
Current assets.............................................. $ 255.2 $ 63.2
Capital assets.............................................. 91.8 46.3
Other long-term assets...................................... 4.1 0.1
Goodwill.................................................... 764.4 135.5
Intellectual property....................................... 50.0 10.0
Liabilities assumed......................................... (299.7) (27.6)
------- ------
Net assets acquired......................................... $ 865.8 $227.5
======= ======
Financed by:
Cash...................................................... $ 479.5 $ 46.8
Issuance of shares and options............................ 386.3 180.7
------- ------
$ 865.8 $227.5
======= ======
Integration costs related to acquisitions:
The Company incurred costs of $22.8 in 2001 (2000 -- $16.1; 1999 -- $9.6)
relating to the establishment of business processes, infrastructure and
information systems for acquired operations. None of the integration
costs incurred related to existing operations.
4. ACCOUNTS RECEIVABLE:
Accounts receivable are net of an allowance for doubtful accounts of $74.6
at December 31, 2001 (2000 -- $40.7).
5. INVENTORIES:
2000 2001
------------ ------------
Raw materials............................................... $1,298.5 $ 903.6
Work in progress............................................ 215.2 220.6
Finished goods.............................................. 150.6 248.5
-------- --------
$1,664.3 $1,372.7
======== ========
6. CAPITAL ASSETS:
2000
------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------ ------------ ------------
Land........................................................ $ 18.0 $-- $ 18.0
Buildings................................................... 131.9 8.7 123.2
Buildings/leasehold improvements............................ 42.8 9.1 33.7
Office equipment............................................ 64.5 25.4 39.1
Machinery and equipment..................................... 510.2 152.4 357.8
Software.................................................... 76.9 15.3 61.6
------ ------ ------
$844.3 $210.9 $633.4
====== ====== ======
F-12
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
2001
------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------ ------------ ------------
Land........................................................ $ 53.3 $-- $ 53.3
Buildings................................................... 258.8 17.4 241.4
Buildings/leasehold improvements............................ 66.0 24.8 41.2
Office equipment............................................ 86.8 40.2 46.6
Machinery and equipment..................................... 727.2 291.2 436.0
Software.................................................... 136.6 40.0 96.6
-------- ------ ------
$1,328.7 $413.6 $915.1
======== ====== ======
The above amounts include $13.3 (2000 -- $8.1) of assets under capital lease
and accumulated amortization of $6.8 (2000 -- $6.1) related thereto.
Depreciation and rental expense for the year ended December 31, 2001 was
$192.8 (2000 -- $121.9; 1999 -- $69.5) and $79.8 (2000 -- $46.7;
1999 -- $21.1), respectively.
7. INTANGIBLE ASSETS:
2000
------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------ ------------ ------------
Goodwill.................................................... $434.1 $104.0 $330.1
Other intangible assets..................................... 100.9 27.7 73.2
Intellectual property....................................... 250.1 75.1 175.0
------ ------ ------
$785.1 $206.8 $578.3
====== ====== ======
2001
------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------ ------------ ------------
Goodwill.................................................... $1,261.1 $132.3 $1,128.8
Other intangible assets..................................... 209.3 26.8 182.5
Intellectual property....................................... 388.6 143.9 244.7
-------- ------ --------
$1,859.0 $303.0 $1,556.0
======== ====== ========
Other intangible assets represent the excess of cost over the fair value of
tangible assets and intellectual property acquired in asset acquisitions.
The intellectual property primarily represents the cost of certain
non-patented intellectual property and process technology.
Amortization expense is as follows:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Amortization of goodwill.................................... $31.1 $39.1 $ 39.2
Amortization of other intangible assets..................... 8.3 10.7 17.0
Amortization of intellectual property....................... 16.2 39.1 68.8
----- ----- ------
$55.6 $88.9 $125.0
===== ===== ======
F-13
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
8. OTHER ASSETS:
2000 2001
------------ ------------
Deferred pension (note 16).................................. $ 25.8 $ 28.4
Deferred income taxes....................................... 81.5 116.4
Commodity taxes recoverable................................. 78.3 10.7
Other....................................................... 19.7 9.7
------ ------
$205.3 $165.2
====== ======
Amortization of deferred financing costs for the year ended December 31,
2001 was $1.7 (2000 -- $1.7; 1999 -- $1.5).
9. LONG-TERM DEBT:
2000 2001
------------ ------------
Global, unsecured, revolving credit facility due 2003 (a)... $-- $--
Global, unsecured, revolving credit facility due 2004 (b)... -- --
Unsecured revolving credit facility due 2005 (c)............ -- --
Senior Subordinated Notes due 2006 (d)...................... 130.0 130.0
Other (e)................................................... 2.0 17.4
------ ------
132.0 147.4
Less current portion........................................ 1.4 10.0
------ ------
$130.6 $137.4
====== ======
---------------
(a) Concurrently with the initial public offering on July 7, 1998, the
Company entered into a global, unsecured, revolving credit facility
providing up to $250.0 of borrowings. The credit facility permits the
Company and certain designated subsidiaries to borrow funds for general
corporate purposes (including acquisitions). Borrowings under the
facility bear interest at LIBOR plus a margin and are repayable in
July 2003. There were no borrowings on this facility during 2000 and
2001. Commitment fees in 2001 were $0.4.
(b) In February 2000, the Company renewed its second global, unsecured,
revolving credit facility providing up to $250.0 of borrowings including
a swing line facility that provides for short-term borrowings up to a
maximum of seven days. The credit facility permits the Company and
certain designated subsidiaries to borrow funds for general corporate
purposes (including acquisitions). The revolving facility is repayable in
April 2004. Borrowings under the facility bear interest at LIBOR plus a
margin except that borrowings under the swing line facility bears
interest at a base rate. There were no borrowings on this facility during
2000 and 2001. Commitment fees in 2001 were $0.6.
(c) In July 2001, the Company entered into an unsecured, revolving credit
facility providing up to $500.0 of borrowings including a swing line
facility that provides for short-term borrowings up to a maximum of seven
days. The credit facility permits the Company and certain designated
subsidiaries to borrow funds for general corporate purposes (including
acquisitions). The revolving facility is repayable in July 2005.
Borrowings under the facility bear interest at LIBOR plus a margin except
that borrowings under the swing line facility bear interest at a base
rate. There were no borrowings on this facility in 2001. Commitment fees
in 2001 were $0.5.
(d) The Senior Subordinated Notes bear interest at 10.5%, are unsecured and
are subordinated to the payment of all senior debt of the Company. The
Senior Subordinated Notes may be redeemed at various premiums above face
value.
(e) Other long-term debt includes secured loan facilities of one of the
Company's subsidiaries of which $13.0 is outstanding at December 31,
2001. The weighted average interest rate on these facilities in 2001 was
4.4%. The loans are denominated in Singapore Dollars and are repayable
through quarterly payments. There were no commitment fees for 2001.
As at December 31, 2001, principal repayments due within each of the next
five years on all long-term debt are as follows:
2002........................................................ $ 10.0
2003........................................................ 4.5
2004........................................................ 1.3
2005........................................................ 0.7
2006........................................................ 130.6
Thereafter.................................................. 0.3
F-14
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
The unsecured, revolving credit facilities have restrictive covenants
relating to debt incurrence and sale of assets and also contain financial
covenants that indirectly restrict the Company's ability to pay
dividends. A change of control is an event of default. The Company's
Senior Subordinated Notes due 2006 include a covenant restricting the
Company's ability to pay dividends.
10. CONVERTIBLE DEBT:
In August 2000, Celestica issued Liquid Yield Option-TM- Notes (LYONs) with
a principal amount at maturity of $1,813.6, payable August 1, 2020. The
Company received gross proceeds of $862.9 and incurred $12.5 in underwriting
commissions, net of tax of $6.9. No interest is payable on the LYONs and the
issue price of the LYONs represents a yield to maturity of 3.75%. The LYONs
are subordinated in right of payment to all existing and future senior
indebtedness of the Company.
The LYONs are convertible at any time at the option of the holder, unless
previously redeemed or repurchased, into 5.6748 subordinate voting shares
for each one thousand dollars principal amount at maturity. Holders may
require the Company to repurchase all or a portion of their LYONs on
August 2, 2005, August 1, 2010 and August 1, 2015 and the Company may redeem
the LYONs at any time on or after August 1, 2005 (and, under certain
circumstances, before that date). The Company is required to offer to
repurchase the LYONs if there is a change in control or a delisting event.
Generally, the redemption or repurchase price is equal to the accreted value
of the LYONs. The Company may elect to pay the principal amount at maturity
of the LYONs or the repurchase price that is payable in certain
circumstances, in cash or subordinate voting shares or any combination
thereof.
Pursuant to Canadian generally accepted accounting principles, the LYONs are
recorded as an equity instrument and bifurcated into a principal equity
component (representing the present value of the notes) and an option
component (representing the value of the conversion features of the notes).
The principal equity component is accreted over the 20-year term through
periodic charges to retained earnings.
11. CAPITAL STOCK:
(A) AUTHORIZED:
An unlimited number of subordinate voting shares, which entitle the
holder to one vote per share, and an unlimited number of multiple voting
shares, which entitle the holder to twenty-five votes per share. Except
as otherwise required by law, the subordinate voting shares and multiple
voting shares vote together as a single class on all matters submitted to
a vote of shareholders, including the election of directors. The holders
of the subordinate voting shares and multiple voting shares are entitled
to share ratably, as a single class, in any dividends declared subject to
any preferential rights of any outstanding preferred shares in respect of
the payment of dividends. Each multiple voting share is convertible at
any time at the option of the holder thereof into one subordinate voting
share. The Company is also authorized to issue an unlimited number of
preferred shares, issuable in series.
(B) ISSUED AND OUTSTANDING:
TOTAL
SUBORDINATE
AND MULTIPLE
SUBORDINATE MULTIPLE VOTING SHARES SHARES TO
NUMBER OF SHARES (IN MILLIONS) VOTING SHARES VOTING SHARES OUTSTANDING BE ISSUED
------------------------------ -------------- -------------- -------------- -------------
Balance December 31, 1999........................... 146.3 39.1 185.4 0.5
Equity offering (i)................................. 16.6 -- 16.6 --
Other share issuances (ii).......................... 1.3 -- 1.3 --
Issued as consideration for acquisitions (iii)...... 0.1 -- 0.1 (0.1)
----- ---- ----- ----
Balance December 31, 2000........................... 164.3 39.1 203.4 0.4
Equity offering (iv)................................ 12.0 -- 12.0 --
Other share issuances (v)........................... 1.1 -- 1.1 --
Issued as consideration for acquisitions (vi)....... 13.2 -- 13.2 0.1
----- ---- ----- ----
Balance December 31, 2001........................... 190.6 39.1 229.7 0.5
===== ==== ===== ====
F-15
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
SUBORDINATE MULTIPLE SHARES TO TOTAL
AMOUNT VOTING SHARES VOTING SHARES BE ISSUED AMOUNT
------ -------------- -------------- ------------- -------------
Balance December 31, 1999........................... $1,504.5 $138.8 $ 2.8 $1,646.1
Equity offering, net of issue costs (i)............. 740.1 -- -- 740.1
Other share issuances (ii).......................... 9.2 -- -- 9.2
Issued as consideration for acquisitions (iii)...... 1.1 -- (1.1) --
-------- ------ ----- --------
Balance December 31, 2000........................... 2,254.9 138.8 1.7 2,395.4
Equity offering, net of issue costs (iv)............ 707.4 -- -- 707.4
Other share issuances (v)........................... 29.2 -- -- 29.2
Issued as consideration for acquisitions (vi)....... 562.8 -- 4.2 567.0
-------- ------ ----- --------
Balance December 31, 2001........................... $3,554.3 $138.8 $ 5.9 $3,699.0
======== ====== ===== ========
2000 CAPITAL TRANSACTIONS:
(i) In March 2000, the Company issued 16.6 million subordinate voting
shares for gross cash proceeds of $757.4 and incurred $17.3 in share
issue costs, net of tax of $9.5.
(ii) During 2000, pursuant to employee share purchase and option plans
and LTIP awards, the Company issued 1.3 million subordinate voting
shares as a result of the exercise of options for cash of $9.2.
(iii) During 2000, the Company issued 0.1 million of reserved shares at
an ascribed value of $1.1 for $0.2 cash. As at December 31, 2000,
0.4 million subordinate voting shares remain reserved for issuance
at an ascribed value of $1.7.
2001 CAPITAL TRANSACTIONS:
(iv) In May 2001, the Company issued 12.0 million subordinate voting
shares for gross cash proceeds of $714.0 and incurred $6.6 in share
issuance costs, net of tax of $3.4.
(v) During 2001, pursuant to employee share purchase and option plans
and LTIP awards, the Company issued 1.1 million subordinate voting
shares as a result of the exercise of options for cash of $23.7 and
recorded a tax benefit of $5.5.
(vi) In 2001, the Company issued 12.7 million subordinate voting shares,
as consideration for acquisitions, for an ascribed value of $558.5
and reserved 0.6 million shares at an ascribed value of $8.5.
During 2001, the Company issued 0.5 million of reserved shares at
an ascribed value of $4.3. As at December 31, 2001, 0.5 million
subordinate voting shares remain reserved for issuance at an
ascribed value of $5.9.
(C) STOCK OPTION PLANS:
(I) LONG-TERM INCENTIVE PLAN (LTIP)
The Company established the LTIP prior to the closing of its initial
public offering. Under this plan, the Company may grant stock options,
performance shares, performance share units and stock appreciation
rights to directors, permanent employees and consultants ("eligible
participants") of the Company, its subsidiaries and other companies or
partnerships in which the Company has a significant investment. Under
the LTIP, up to 23.0 million subordinate voting shares may be issued
from treasury. Options are granted at prices equal to the market value
of the day prior to the date of the grant and are exercisable during a
period not to exceed ten years from such date.
(II) EMPLOYEE SHARE PURCHASE AND OPTION PLANS (ESPO)
The Company has ESPO plans that were available to certain of its
employees and executives. As a result of the establishment of the LTIP,
no further options or shares may be issued under the ESPO plans.
Pursuant to the ESPO plans, employees and executives of the Company were
offered the opportunity to purchase, at prices equal to market value,
subordinate voting shares and, in connection with such purchase, receive
options to acquire an additional number of subordinate voting shares
based on the number of subordinate voting shares acquired by them under
the ESPO plans. The exercise price for the options is equal to the price
per share paid for the corresponding subordinate voting shares acquired
under the ESPO plans.
F-16
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Stock option transactions were as follows:
WEIGHTED AVERAGE
NUMBER OF OPTIONS (IN MILLIONS) SHARES EXERCISE PRICE
------------------------------- -------- ----------------
Outstanding at December 31, 1998............................ 11.5 $ 5.41
Granted..................................................... 5.2 $30.05
Exercised................................................... (1.7) $ 8.25
Cancelled................................................... (0.4) $ 7.37
-----
Outstanding at December 31, 1999............................ 14.6 $14.84
Granted..................................................... 4.2 $55.40
Exercised................................................... (1.4) $ 6.85
Cancelled................................................... (0.2) $ 7.33
-----
Outstanding at December 31, 2000............................ 17.2 $25.16
Granted/assumed............................................. 8.5 $42.54
Exercised................................................... (1.6) $14.89
Cancelled................................................... (0.2) $23.36
-----
Outstanding at December 31, 2001............................ 23.9 $31.67
=====
Cash consideration received on options exercised............ $23.7
=====
Shares reserved for issuance upon exercise of stock options
or awards (in millions)................................... 28.8
=====
The following options were outstanding as at December 31, 2001:
WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE EXERCISABLE AVERAGE REMAINING
PLAN EXERCISE PRICES OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE LIFE
---- --------------- -------------- -------------- -------------- -------------- ----------
(in millions) (in millions) (years)
ESPO................. $ 5.00 - $ 7.50 5.3 $ 5.34 3.9 $ 5.42 6
LTIP................. $ 8.75 - $13.69 1.7 $12.16 0.9 $11.96 7
$24.18 - $24.18 0.8 $24.18 0.4 $24.18 8
$24.91 - $36.89 0.8 $30.58 -- -- 10
$39.03 - $39.03 2.9 $39.03 1.4 $39.03 8
$41.89 - $41.89 6.4 $41.89 -- -- 10
$44.23 - $54.15 0.6 $49.46 -- -- 9
$55.40 - $60.06 4.1 $55.96 1.0 $55.96 9
$73.04 - $74.90 0.1 $73.42 -- -- 9
Other................ $ 0.93 - $13.31 1.0 $ 5.73 0.9 $ 5.67 5
Other................ $29.73 - $72.84 0.2 $46.28 -- -- 5
----
23.9
====
F-17
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
12. EARNINGS PER SHARE:
The following table sets forth the calculation of basic and diluted earnings
(loss) per share:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Numerator:
Net earnings (loss)....................................... $ 68.4 $206.7 $(39.8)
Convertible debt accretion, net of tax.................... -- (5.4) (15.0)
------ ------ ------
Earnings (loss) available to common shareholders.......... $ 68.4 $201.3 $(54.8)
Denominator:
Weighted average shares -- basic (in millions)............ 167.2 199.8 213.9
Effect of dilutive securities (in millions):
Employee stock options(1)............................... 4.0 7.8 --
Convertible debt........................................ -- 4.2 --
------ ------ ------
Weighted average shares -- diluted (in millions)(2)....... 171.2 211.8 213.9
Earnings (loss) per share:
Basic..................................................... $ 0.41 $ 1.01 $(0.26)
Diluted................................................... $ 0.40 $ 0.98 $(0.26)
---------------
(1) For 1999 and 2000, excludes the effect of 3.4 million and 3.3 million
"out of the money" options, respectively, as they are anti-dilutive.
(2) For 2001, excludes the effect of options and convertible debt as they
are anti-dilutive due to the loss.
13. OTHER CHARGES:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Restructuring (a)........................................... $-- $-- $237.0
Other (b)................................................... -- -- 36.1
------ ------ ------
$-- $-- $273.1
====== ====== ======
---------------
(a) Restructuring:
The Company recorded a pre-tax restructuring charge of $237.0 in 2001, in
response to a slowing end market. The Company's restructuring plan
focused on facility consolidations and a workforce reduction. The
following table details the components of the restructuring charge:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Employee termination costs.................................. $-- $-- $ 90.7
Lease and other contractual obligations..................... -- -- 35.3
Facility exit costs and other............................... -- -- 12.4
Asset impairment (non-cash)................................. -- -- 98.6
------ ------ ------
$-- $-- $237.0
====== ====== ======
F-18
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following table details the activity in the accrued restructuring
liability:
LEASE AND
EMPLOYEE OTHER FACILITY EXIT
TERMINATION CONTRACTUAL COSTS AND
COSTS OBLIGATIONS OTHER TOTAL
------------ ------------ ------------- ------------
Balance at January 1, 2001............................. $-- $-- -$- $--
Provision.............................................. 90.7 35.3 12.4 138.4
Cash payment........................................... (51.2) (1.6) (2.9) (55.7)
------ ----- ----- ------
Balance at December 31, 2001........................... $ 39.5 $33.7 $ 9.5 $ 82.7
====== ===== ===== ======
Employee terminations were made across all geographic regions of the
Company with the majority pertaining to manufacturing and plant
employees. A total of 12,041 employees have been identified to be
terminated, of which 9,711 employees were terminated during 2001. The
remaining termination costs are expected to be paid out during 2002.
The non-cash charges for asset impairment reflects the write-down of
certain long-lived assets across all geographic regions that have become
impaired as a result of the rationalization of facilities. The asset
impairments relate to goodwill and intangible assets, machinery and
equipment, buildings and improvements. The assets were written down to
their recoverable amounts using estimated cash flows.
The Company expects to complete the major components of the restructuring
plan by the end of 2002, except for certain long-term lease contractual
obligations.
(b) Other:
In 2001, the Company recorded a non-cash charge of $36.1. This is
comprised of a write-down of the carrying value of certain assets,
primarily goodwill and intangible assets.
14. INCOME TAXES:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Income (loss) before tax:
Canadian operations....................................... $ 84.8 $179.4 $ 34.7
Foreign operations........................................ 19.6 96.5 (76.6)
------ ------ ------
$104.4 $275.9 $(41.9)
====== ====== ======
Current income tax expense:
Canadian operations....................................... $ 25.4 $ 51.2 $ 17.2
Foreign operations........................................ 5.3 28.9 8.6
------ ------ ------
$ 30.7 $ 80.1 $ 25.8
====== ====== ======
Deferred income tax expense (recovery):
Canadian operations....................................... $ 14.4 $ 33.0 $ (5.4)
Foreign operations........................................ (9.1) (43.9) (22.5)
------ ------ ------
$ 5.3 $(10.9) $(27.9)
====== ====== ======
F-19
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
The overall income tax provision differs from the provision computed at the
statutory rate as follows:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Combined Canadian federal and provincial income tax rate.... 44.6% 44.0% 42.1%
------ ------ ------
Income taxes (recovery) based on earnings (loss) before
income taxes at statutory rates........................... $ 46.6 $121.4 $(17.7)
Increase (decrease) resulting from:
Manufacturing and processing deduction.................... (8.1) (17.7) (5.0)
Foreign income taxed at lower rates....................... (11.4) (43.9) (2.9)
Amortization of non-deductible costs...................... 9.5 8.9 15.4
Other, including large corporations tax................... (0.6) 0.5 8.1
------ ------ ------
Income tax expense (recovery)............................. $ 36.0 $ 69.2 $ (2.1)
====== ====== ======
Deferred income taxes are recognized for future income tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their tax bases. Deferred tax assets
and liabilities are comprised of the following as at December 31, 2000 and
2001:
2000 2001
------------ ------------
Deferred tax assets:
Income tax effect of net operating losses carried
forward................................................. $ 52.5 $ 51.9
Accounting provisions not currently deductible............ 21.6 63.5
Capital, intangible and other assets...................... 6.7 17.0
Share issue and convertible debt issue costs.............. 23.0 17.2
Other..................................................... 1.8 4.5
------ ------
Total deferred tax assets................................... 105.6 154.1
====== ======
Deferred tax liabilities:
Capital, intangible and other assets...................... (12.4) (37.7)
Deferred pension asset.................................... (8.9) (9.1)
Other..................................................... (0.8) (4.5)
------ ------
Total deferred tax liabilities.............................. (22.1) (51.3)
------ ------
Deferred income tax asset, net.............................. $ 83.5 $102.8
====== ======
Celestica has been granted tax incentives, including tax holidays, for its
Czech Republic, China, Malaysia, Thailand and Singapore subsidiaries. These
tax incentives expire between 2002 and 2012, and are subject to certain
conditions with which the Company expects to comply.
As at December 31, 2001, the Company had $340.0 of non-capital (net
operating) losses, the income tax benefits of which have been recognized in
the financial statements. A portion of these losses have an indefinite
carryforward period. The other portion of these losses will expire over a
20-year period commencing in 2005.
The Company also has net capital losses amounting to $11.5, and has
recognized the benefit of these losses in the financial statements.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, the character of the tax asset and tax planning
strategies in making this assessment. In order to fully realize the deferred
tax assets, the Company will need to generate future taxable income of
approximately $295.0. Based upon projections of future taxable income over
the periods in which the deferred tax assets are deductible, management
believes that it is more likely than not that the Company will realize the
benefits of these assets.
F-20
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
15. RELATED PARTY TRANSACTIONS:
In 2001, the Company expensed acquisition and management related fees of
$2.1 (2000 -- $2.1; 1999 -- $2.0) and capitalized acquisition related fees
of $Nil (2000 -- $0.5; 1999 -- $Nil) charged by its parent company.
Management believes that the fees charged were reasonable in relation to the
services provided.
16. PENSION AND NON-PENSION POST-RETIREMENT BENEFIT PLANS:
The Company provides various pension and non-pension post-retirement benefit
plans for its employees. Non-pension post-retirement benefits are available
to all Company retirees. The benefits include medical, surgical,
hospitalization coverage, supplemental health, dental and group life
insurance. Certain employees participate in defined benefit plans; all other
employees participate in defined contribution plans.
The following information is provided with respect to the defined
contribution plans:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Period cost, plans providing pension benefits............... $8.6 $12.8 $18.9
==== ===== =====
For the defined benefit pension plans, actuarial estimates are based on
projections of employees' compensation levels at the time of retirement.
Maximum retirement benefits are based upon the employees' best three
consecutive years' earnings. The Company has funded the plans over the past
four years based on actuarial calculations to maintain the plans on a fully
funded basis. The most recent actuarial valuations were completed as at
March and April 2000 and January 2001. The Company accrues the expected
costs of providing non-pension, post-retirement benefits during the periods
in which the employees render service.
The estimated present value of accrued plan benefits and the estimated
market value of the net assets available to provide for these benefits at
December 31, 2000 and 2001 are as follows:
PENSION PLANS OTHER BENEFIT PLANS
--------------------------- ---------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Plan assets, at fair value................................. $188.6 $174.5 $-- $--
Projected benefit obligations.............................. 170.3 179.1 47.7 56.4
------ ------ ------ ------
Excess (deficit) of plan assets over projected benefit
obligations.............................................. 18.3 (4.6) (47.7) (56.4)
Unamortized past service costs............................. -- -- 4.3 4.1
Unrecognized net loss from past experience and effects of
changes in assumptions................................... 9.7 33.6 5.3 5.0
Foreign currency exchange rate changes..................... (2.2) (0.6) -- --
------ ------ ------ ------
Deferred amount............................................ $ 25.8 $ 28.4 $(38.1) $(47.3)
====== ====== ====== ======
The Company has one pension plan with accumulated benefit obligations in
excess of plan assets. This plan has an accumulated benefit obligation of
$114.2 and plan assets of $95.1.
The Company continues to make contributions to support ongoing plan
obligations; these contributions have been included in the deferred pension
amount on the consolidated balance sheets.
F-21
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Pension fund assets consist primarily of fixed income and equity securities,
valued at market value. The following information is provided on pension
fund assets:
PENSION PLANS
---------------------------
2000 2001
------------ ------------
Opening plan assets......................................... $191.1 $188.6
Actual return on plan assets................................ 1.5 (13.1)
Foreign currency exchange rate changes...................... (11.1) (8.0)
Contributions by employees.................................. 2.1 2.1
Contributions by employer................................... 7.5 10.1
Benefits paid............................................... (2.5) (5.2)
------ ------
$188.6 $174.5
====== ======
Vested benefit obligations.................................. $100.6 $174.6
====== ======
Accumulated benefit obligations............................. $143.2 $174.6
====== ======
There are no assets recorded for the other benefit plans.
Projected benefit obligations are outlined below:
PENSION PLANS OTHER BENEFIT PLANS
--------------------------- ---------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Opening projected benefit obligations...................... $147.3 $170.3 $17.5 $47.7
Service cost............................................... 7.5 8.6 1.5 7.6
Interest cost.............................................. 10.6 11.3 1.5 2.0
Benefits paid.............................................. (2.5) (5.2) (0.2) (3.8)
Actuarial gains and losses................................. 7.3 -- 0.4 4.6
Plan amendments............................................ -- 1.9 0.7 --
Acquisitions............................................... -- -- 26.3 1.1
Changes in assumptions..................................... 7.4 (1.9) 0.5 (1.4)
Foreign currency exchange rate changes..................... (7.3) (5.9) (0.5) (1.4)
------ ------ ----- -----
$170.3 $179.1 $47.7 $56.4
====== ====== ===== =====
Net plan expense is outlined below:
PENSION PLANS OTHER BENEFIT PLANS
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------------------- ---------------------------------
1999 2000 2001 1999 2000 2001
--------- --------- --------- --------- --------- ---------
Plan cost:
Service cost -- benefits earned....................... $ 6.5 $ 7.5 $ 8.6 $ 1.2 $ 1.5 $ 7.6
Interest cost on projected benefit obligations........ 9.0 10.6 11.3 1.1 1.5 2.0
Actual return on plan assets.......................... (30.0) (1.5) 13.1 -- -- --
Amortization of past service costs.................... -- 2.4 (5.8) -- -- --
Net amortization and deferral......................... 18.6 (15.0) (21.4) 1.4 0.3 0.8
--------- --------- --------- --------- --------- ---------
$ 4.1 $ 4.0 $ 5.8 $ 3.7 $ 3.3 $ 10.4
========= ========= ========= ========= ========= =========
Actuarial assumptions (percentages):
Weighted average discount rate for projected benefit
obligations......................................... 6.0 - 6.5 6.5 - 7.0 5.8 - 7.8 6.5 - 8.0 7.0 - 8.0 7.0 - 7.8
Weighted average rate of compensation increase........ 3.5 - 4.0 4.0 4.5 4.5 4.5 4.5
Weighted average expected long-term rate of return on
plan assets......................................... 7.5 7.3 - 7.5 7.3 - 7.8 -- -- --
Healthcare cost trend rate............................ -- -- -- 5.1 - 7.4 5.1 - 6.8 3.5 - 8.0
A one-percentage point increase and decrease in the assumed healthcare cost
trend rate would increase by $0.9 and decrease by $0.7 the service cost and
increase by $5.1 and decrease by $4.0 the accumulated obligation for other
benefit plans for the year ended December 31, 2001.
F-22
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
17. FINANCIAL INSTRUMENTS:
FAIR VALUES:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
(a) The carrying amounts of cash, short-term investments, accounts
receivable, accounts payable and accrued liabilities approximate fair
value due to the short-term nature of these instruments.
(b) The fair values of the Company's long-term debt, including the current
portion thereof, is estimated based on the current trading value, where
available, or with reference to similarly traded instruments with similar
terms.
(c) The fair values of foreign currency contract obligations are estimated
based on the current trading value, as quoted by brokers active in these
markets.
The carrying amounts and fair values of the Company's financial instruments,
where there are differences at December 31, 2000 and 2001, are as follows:
DECEMBER 31, 2000 DECEMBER 31, 2001
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Senior Subordinated Notes and other long-term debt......... $130.0 $135.2 $143.0 $149.5
Foreign currency contracts -- asset (liability)............ -- 7.5 -- (7.4)
DERIVATIVES AND HEDGING ACTIVITIES:
The Company has entered into foreign currency contracts to hedge foreign
currency risk relating to cash flow exposures. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains
on transactions being hedged. The counterparties to the contracts are
multinational commercial banks and therefore the credit risk of counterparty
non-performance is remote. As at December 31, 2001, the Company had
outstanding foreign exchange contracts to sell $379.5 in exchange for
Canadian dollars over a period of 17 months at a weighted average exchange
rate of U.S. $0.65. In addition, the Company had exchange contracts to sell
$191.8 in exchange for euros over a period of 15 months at a weighted
average exchange rate of U.S. $0.88, $56.6 in exchange for British pounds
sterling over a period of 15 months at a weighted average exchange rate of
U.S. $1.40, $46.3 in exchange for Mexican pesos over a period of 12 months
at a weighted average exchange rate of U.S. $0.10, $24.2 in exchange for
Thailand baht over a period of 12 months at a weighted average exchange rate
of U.S. $0.02 and $6.4 in exchange for Czech koruna over a period of
12 months at a weighted average exchange rate of U.S. $0.03. At
December 31, 2001, these contracts had a fair value liability of $7.4
(2000 -- asset of $7.5).
CONCENTRATION OF RISK:
The Company is a turnkey manufacturer of sophisticated electronics for
original equipment manufacturers engaged in the electronics manufacturing
industry. Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily inventory repurchase obligations
of customers, accounts receivable and cash equivalents. The Company performs
ongoing credit evaluations of its customers' financial conditions. In
certain instances, the Company obtains letters of credit from its customers.
The Company considers its concentrations of credit risk in determining its
estimates of reserves for potential credit losses. The Company maintains
cash and cash equivalents in high quality short-term investments or on
deposit with major financial institutions.
18. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases and license commitments that require future
payments as follows:
OPERATING LICENSE
LEASES COMMITMENTS TOTAL
------------ ------------- ------------
2002........................................................ $103.5 $0.6 $104.1
2003........................................................ 81.3 -- 81.3
2004........................................................ 38.0 -- 38.0
2005........................................................ 26.4 -- 26.4
2006........................................................ 20.4 -- 20.4
Thereafter.................................................. 89.2 -- 89.2
F-23
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Contingent liabilities in the form of letters of credit and guarantees,
including guarantees of employee share purchase loans, amounted to $24.1 at
December 31, 2001 (2000 -- $12.0).
In the normal course of operations the Company may be subject to litigation
and claims from customers, suppliers and former employees. Management
believes that adequate provisions have been recorded in the accounts where
required. Although it is not possible to estimate the extent of potential
costs, if any, management believes that the ultimate resolution of such
contingencies would not have a material adverse effect on the financial
position of the Company.
19. SIGNIFICANT CUSTOMERS:
During 2001, three customers individually comprised 23%, 21% and 11% of
total revenue across all geographic segments. At December 31, 2001, two
customers represented 14% and 26% of total accounts receivable.
During 2000, two customers individually comprised 25% and 21% of total
revenue across all geographic segments. At December 31, 2000, two customers
represented 21% and 26% of total accounts receivable.
During 1999, three customers individually comprised 25%, 18% and 12% of
total revenue across all geographic segments. At December 31, 1999, two
customers represented 14% and 15% of total accounts receivable.
20. SEGMENTED INFORMATION:
The Company's operations fall into one dominant industry segment, the
electronics manufacturing services industry. The Company manages its
operations, and accordingly determines its operating segments, on a
geographic basis. The performance of geographic operating segments is
monitored based on EBIAT (earnings before interest, income taxes,
amortization of intangible assets, integration costs related to acquisitions
and other charges). The Company monitors enterprise-wide performance based
on adjusted net earnings, which is calculated as net earnings (loss) before
amortization of intangible assets, integration costs related to acquisitions
and other charges, net of related income taxes. Inter-segment transactions
are reflected at market value.
The following is a breakdown of: revenue; EBIAT, adjusted net earnings
(which is after income taxes); capital expenditures; total assets;
intangible assets; and capital assets by operating segment. Certain
comparative information has been restated to reflect changes in the
management of operating segments.
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
REVENUE
Americas.................................................... $3,587.5 $6,542.7 $ 6,334.6
Europe...................................................... 1,108.6 2,823.3 3,001.3
Asia........................................................ 710.2 871.6 991.1
Elimination of inter-segment revenue........................ (109.1) (485.5) (322.6)
-------- -------- ---------
$5,297.2 $9,752.1 $10,004.4
======== ======== =========
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
EBIAT
Americas.................................................... $114.2 $200.1 $ 192.9
Europe...................................................... 42.8 121.1 128.5
Asia........................................................ 23.3 40.7 49.7
------ ------ -------
180.3 361.9 371.1
Interest, net............................................... (10.7) 19.0 7.9
Amortization of intangible assets........................... (55.6) (88.9) (125.0)
Integration costs related to acquisitions................... (9.6) (16.1) (22.8)
Other charges............................................... -- -- (273.1)
------ ------ -------
Earnings (loss) before income taxes......................... $104.4 $275.9 $ (41.9)
====== ====== =======
Adjusted net earnings....................................... $123.0 $304.1 $ 320.6
====== ====== =======
F-24
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
CAPITAL EXPENDITURES
Americas.................................................... $138.0 $154.0 $107.9
Europe...................................................... 29.1 86.9 55.4
Asia........................................................ 44.7 41.9 36.0
------ ------ ------
$211.8 $282.8 $199.3
====== ====== ======
AS AT DECEMBER 31
---------------------------
2000 2001
------------ ------------
TOTAL ASSETS
Americas.................................................... $3,444.6 $3,408.2
Europe...................................................... 1,904.7 1,626.3
Asia........................................................ 588.7 1,598.4
-------- --------
$5,938.0 $6,632.9
======== ========
INTANGIBLE ASSETS
Americas.................................................... $ 307.8 $ 516.4
Europe...................................................... 196.6 165.6
Asia........................................................ 73.9 874.0
-------- --------
$ 578.3 $1,556.0
======== ========
CAPITAL ASSETS
Americas.................................................... $ 327.0 $ 468.0
Europe...................................................... 216.0 279.1
Asia........................................................ 90.4 168.0
-------- --------
$ 633.4 $ 915.1
======== ========
The following table details the Company's external revenue allocated by
manufacturing location among foreign countries exceeding 10%:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
REVENUE
Canada...................................................... 43% 28% 20%
United States............................................... 22% 30% 35%
Italy....................................................... -- 10% 13%
United Kingdom.............................................. 19% 17% 11%
21. SUBSEQUENT EVENT:
In January 2002, the Company entered into an agreement with NEC Corporation
to purchase certain manufacturing assets in Miyagi and Yamanashi, Japan.
This acquisition is expected to close in the first quarter of 2002.
F-25
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES:
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles ("GAAP") as applied
in Canada. The significant differences between Canadian and United States
GAAP and their effect on the consolidated financial statements of the
Company are described below:
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS):
The following table reconciles net earnings (loss) as reported in the
accompanying consolidated statements of earnings (loss) to net earnings
(loss) that would have been reported had the consolidated financial
statements been prepared in accordance with United States GAAP:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Net earnings (loss) in accordance with Canadian GAAP........ $68.4 $206.7 $(39.8)
Compensation expense (a).................................... (1.9) (2.5) (3.2)
Interest expense on convertible debt, net of tax of $9.5
(2000 -- $3.8) (b)........................................ -- (6.8) (17.7)
Other charges (c)........................................... -- -- (2.7)
Gain on foreign exchange contract, net of tax of $3.6 (d)... -- -- 12.1
----- ------ ------
Net earnings (loss) in accordance with United States GAAP... $66.5 $197.4 $(51.3)
Other comprehensive income:
Cumulative effect of a change in accounting policy, net of
tax of $1.9 (e)........................................... -- -- 5.6
Net loss on derivatives designated as hedges, net of tax of
$3.2 (e).................................................. -- -- (11.7)
Minimum pension liability, net of tax of $6.4 (f)........... -- -- (14.9)
Foreign currency translation adjustment..................... (3.5) -- 1.2
----- ------ ------
Comprehensive income (loss) in accordance with United States
GAAP...................................................... $63.0 $197.4 $(71.1)
===== ====== ======
The following table sets forth the computation of United States GAAP basic
and diluted earnings (loss) per share:
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Earnings (loss) available to shareholders -- basic.......... $ 66.5 $197.4 $(51.3)
Add: Interest expense on convertible debt, net of tax....... -- 6.8 17.7
------ ------ ------
Earnings (loss) available to shareholders -- diluted........ $ 66.5 $204.2 $(33.6)
Weighted average shares -- basic (in millions).............. 167.2 199.8 213.9
Weighted average shares -- diluted (in millions)(1)......... 171.2 211.8 213.9
Basic earnings (loss) per share............................. $ 0.40 $ 0.99 $(0.24)
Diluted earnings (loss) per share........................... $ 0.39 $ 0.96 $(0.24)
---------------
(1) For 2001, excludes the effect of options and convertible debt as they
are anti-dilutive due to the loss.
F-26
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
The cumulative effect of these adjustments on shareholders' equity of the
Company is as follows:
AS AT DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Shareholders' equity in accordance with Canadian GAAP....... $1,658.2 $3,469.3 $4,745.6
Compensation expense (a).................................... (8.1) (10.6) (13.8)
Capital stock (a)........................................... 6.1 8.6 11.8
Interest expense on convertible debt, net of tax (b)........ -- (6.8) (24.5)
Convertible debt (b)........................................ -- (860.5) (886.8)
Convertible debt accretion, net of tax (b).................. -- 5.4 20.4
Other charges (c)........................................... -- -- (2.7)
Gain on foreign exchange contract, net of tax (d)........... -- -- 12.1
Net loss on cash flow hedges (e)............................ -- -- (6.1)
Minimum pension liability, net of tax (f)................... -- -- (14.9)
-------- -------- --------
Shareholders' equity in accordance with United States
GAAP...................................................... $1,656.2 $2,605.4 $3,841.1
======== ======== ========
---------------
(a) In 1998, the Company amended the vesting provisions of 6.2 million
employee stock options issued in 1997 and 1998. Under the previous
vesting provisions, such options vested based on the achievement of
earnings targets. A portion of these options now vest over a specified
time period and the balance vested on completion of the initial public
offering in 1998. Under United States GAAP, this amendment required a new
measurement date for purposes of accounting for compensation expense,
resulting in a charge equal to the aggregate difference between the fair
value of the underlying subordinate voting shares at the date of the
amendment and the exercise price for such options. As a result, under
United States GAAP the Company has and will record an aggregate $15.6
non-cash stock compensation charge to be reflected in earnings and
capital stock over the vesting period as follows: 1998 -- $4.2;
1999 -- $1.9; 2000 -- $2.5; 2001 -- $3.2; 2002 -- $3.8. No similar charge
is required to be recorded by the Company under Canadian GAAP.
(b) Under Canadian GAAP, the Company recorded the convertible debt as an
equity instrument and recorded accretion charges to retained earnings.
Under United States GAAP, the convertible debt was recorded as a
long-term liability and, accordingly, the Company recorded the accretion
charges and amortization of debt issue costs to interest expense.
(c) In 2001, the Company recorded a charge to write-down goodwill, which was
measured using undiscounted cash flows. United States GAAP requires the
use of discounted cash flows, resulting in an additional charge of $2.7.
(d) In 2001, the Company entered into a forward exchange contract to hedge
the cash portion of the purchase price for the Omni acquisition. The
transaction does not qualify for hedge accounting treatment under SFAS
No. 133 which specifically precludes hedges of forecasted business
combinations. As a result, the gain on the exchange contract of $15.7,
less tax of $3.6, is recognized in income for United States GAAP. For
Canadian GAAP, the gain on the contract was included in the cost of the
acquisition, resulting in a goodwill value that is $15.7 lower for
Canadian GAAP than United States GAAP.
(e) The Financial Accounting Standards Board (FASB) has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138 which amends SFAS No. 133. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. The
standard requires that all derivatives be recorded on the balance sheet
at fair value. The Company has implemented SFAS No. 133 for 2001 for
purposes of the United States GAAP reconciliation. The Company enters
into forward exchange contracts to hedge certain forecasted cash flows.
The contracts are for periods consistent with the forecasted
transactions. All relationships between hedging instruments and hedged
items, as well as risk management objectives and strategies, are
documented. Changes in the spot value of the foreign currency contracts
that are designated, effective and qualify as cash flow hedges of
forecasted transactions are reported in accumulated other comprehensive
income and are reclassified into the same component of earnings and in
the same period as the hedged transaction is recognized. Accordingly, on
January 1, 2001, the Company recorded an asset in the amount of $7.5 and
a corresponding credit to other comprehensive income as a cumulative
effect type adjustment to reflect the initial mark-to-market on the
foreign currency contracts pursuant to United States GAAP. At
December 31, 2001, the Company has recorded a liability of $7.4 and has
recorded the corresponding adjustments to other comprehensive income and
earnings. It is expected that $7.0 of net losses reported in accumulated
other comprehensive income will be reclassified into earnings during the
period ended December 31, 2002. Under Canadian GAAP, the derivative
instruments are not marked to market and the related, off-balance sheet
gains and losses are recognized in earnings in the same period as the
hedged transactions.
(f) Under United States GAAP, the Company is required to record an
additional minimum pension liability for one of its plans to reflect the
excess of the accumulated benefit obligations over the fair value of the
plan assets. Other comprehensive income has been charged with $14.9, net
of tax of $6.4. No such adjustments are required under Canadian GAAP.
F-27
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OTHER DISCLOSURES REQUIRED UNDER UNITED STATES GAAP:
(a) Stock based compensation:
The Company measures compensation costs related to stock options granted
to employees using the intrinsic value method as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted
by SFAS No. 123. However, SFAS No. 123 does require the disclosure of
pro forma net earnings (loss) and earnings (loss) per share information
as if the Company had accounted for its employee stock options under the
fair value method prescribed by SFAS No. 123. Accordingly, the fair value
of the options issued was determined using the Black-Scholes option
pricing model with the following assumptions: risk-free rate of 5.4%
(2000 -- 5.4%; 1999 -- 5%), dividend yield of 0%, a volatility factor of
the expected market price of the Company's shares of 70% (2000 -- 70%;
1999 -- 47%); and a weighted-average expected option life of 7.5 years in
2001 (2000 -- 7.5 years; 1999 -- 5 years). The weighted-average grant
date fair values of options issued in 2001 was $34.31 per share
(2000 -- $40.49 per share; 1999 -- $10.24 per share). For purposes of
pro forma disclosures, the estimated fair value of the options is
amortized to income over the vesting period. For the year ended
December 31, 2001, the Company's United States GAAP pro forma loss is
$97.1 and basic loss per share is $0.45 (2000 -- earnings of $176.2 and
$0.88 per share; 1999 -- earnings of $52.3 and $0.31 per share).
(b) Accumulated other comprehensive income (loss):
YEAR ENDED DECEMBER 31
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Opening balance of accumulated net gain on cash flow
hedges.................................................... $-- $-- $--
Cumulative effect of a change in accounting policy, net
of tax (e)................................................ -- -- 5.6
Net loss on derivatives designated as hedges (e)............ -- -- (11.7)
----- ----- ------
Closing balance of accumulated net loss on cash
flow hedges............................................... -- -- (6.1)
Opening balance of foreign currency translation account..... (0.6) (4.1) (4.1)
Foreign currency translation gain (loss).................... (3.5) -- 1.2
----- ----- ------
Closing balance of foreign currency translation account..... (4.1) (4.1) (2.9)
Minimum pension liability, net of tax (f)................... -- -- (14.9)
----- ----- ------
Accumulated other comprehensive loss........................ $(4.1) $(4.1) $(23.9)
===== ===== ======
(c) Under United States GAAP, the subtotal "cash from earnings" would be
excluded from the consolidated statements of cash flows.
(d) New United States accounting pronouncements:
In July 2001, the FASB issued Statement No. 141 "Business Combinations"
and Statement No. 142 "Goodwill and Intangible Assets." These statements
are substantially consistent with CICA Sections 1581 and 3062 (refer to
note 2(n)) except that under United States GAAP, any transitional
impairment charge is recognized in earnings as a cumulative effect of a
change in accounting principle. Under Canadian GAAP, the cumulative
adjustment is recognized in opening retained earnings.
In October 2001, FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which retains the
fundamental provisions of SFAS 121 for recognizing and measuring
impairment losses of long-lived assets other than goodwill. Statement 144
also broadens the definition of discontinued operations to include all
distinguishable components of an entity that will be eliminated from
ongoing operations. This Statement is effective for the Company's fiscal
year commencing January 1, 2002, to be applied prospectively. In
August 2001, SFAS 143 "Accounting for Asset Retirement Obligations" was
approved and requires that the fair value of an asset retirement
obligation be recorded as a liability, at fair value, in the period in
which the Company incurs the obligation. SFAS 143 is effective for the
Company's fiscal year commencing January 1, 2003. The Company expects the
adoption of these standards will have no material impact on its financial
position, results of operations or cash flows.
F-28
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
[EXHIBIT INDEX]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1. Articles of Incorporation and by-laws as currently in
effect:
1.1 Certificate and Articles of Incorporation(1)
1.2 Certificate and Articles of Amendment effective October 22,
1996(1)
1.3 Certificate and Articles of Amendment effective January 24,
1997(1)
1.4 Certificate and Articles of Amendment effective October 8,
1997(1)
1.5 Certificate and Articles of Amendment effective April 29,
1998(2)
1.6 Articles of Amendment effective June 26, 1998(3)
1.7 Restated Articles of Incorporation effective June 26,
1998(3)
1.8 Bylaw No. 1(4)
1.9 Bylaw No. 2(1)
2. Instruments defining rights of holders of equity or debt
securities:
2.1 See Certificate and Articles of Incorporation and amendments
thereto identified above.
2.2 Form of Subordinate Voting Share Certificate(5)
2.3 Indenture, dated as of November 18, 1996, by and among
Celestica International Inc., Celestica, Inc., Celestica
Corporation and The Chase Manhattan Bank, as Trustee
(including forms of the Outstanding Notes and Exchange
Notes)(6)
2.4 Guarantee Agreement, dated as of November 18, 1996, between
Celestica, Inc. and The Chase Manhattan Bank, as Trustee(6)
2.5 Guarantee Agreement, dated as of November 18, 1996, between
Celestica Corporation and The Chase Manhattan Bank, as
Trustee(6)
2.6 Supplemental Indenture, dated as of July 7, 1998, among
Celestica International Inc., Celestica Inc. and The Chase
Manhattan Bank, as Trustee(3)
2.7 Supplemental Indenture, dated as of May 26, 2000, between
Celestica Inc. and The Chase Manhattan Bank, as Trustee(7)
2.8 Indenture, dated as of August 1, 2000, between
Celestica Inc. and The Chase Manhattan Bank, as Trustee
(including forms of the Outstanding Notes)(8)
2.10 Amended and Restated Credit Agreement, dated as of July 8,
2001, between Celestica Inc., the subsidiaries of
Celestica Inc., specified therein as Designated
Subsidiaries, The Bank of Nova Scotia, as Administrative
Agent, The Bank of Nova Scotia, as Canadian Facility Agent,
The Bank of Nova Scotia, as U.S. Facility Agent, The Bank of
Nova Scotia, as U.K. Facility Agent, the financial
institutions named in Schedule A as Canadian lenders, the
financial institutions named in Schedule B as U.S. lenders,
and the financial institutions named in Schedule C as
U.K. lenders(9)
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.11 Amended and Restated Revolving Term Credit Agreement, dated
as of June 8, 2001, between Celestica Inc., the subsidiaries
of Celestica Inc., specified therein as Designated
Subsidiaries, The Bank of Nova Scotia, as Administrative
Agent, The Bank of Nova Scotia, as Canadian Facility Agent,
The Bank of Nova Scotia, as U.S. Facility Agent, The Bank of
Nova Scotia, as U.K. Facility Agent, the financial
institutions named in Schedule A as Canadian lenders, the
financial institutions named in Schedule B as U.S. lenders,
and the financial institutions named in Schedule C as
U.K. lenders(9)
2.12 Four Year Revolving Term Credit Agreement, dated as of
July 31, 2001, among Celestica Inc. and Celestica
International Inc., as Borrowers, The Bank of Nova Scotia,
as Administrative Agent, and the financial institutions
named therein, as Lenders.(9)
3. Certain Contracts:
3.1 Management Services Agreement, dated as of July 7, 1998,
among Celestica Inc., Celestica North America Inc. and Onex
Corporation(5)
3.2 Quota (Share) Purchase Agreement, dated February 9, 2000,
between Celestica Inc., Celestica Europe Inc., IBM
Italia S.p.A. and IBM Semea Servizi Finanziari S.p.A.(4)*
3.3 Quota Purchase Agreement, dated June 22, 2000, between NEC
do Brasil S.A. and Celestica Inc.(4)*
3.4 Amended and Restated Asset Purchase Agreement, dated as of
December 5, 2000, between Celestica Corporation, Celestica
Ireland Limited, Motorola, Inc. and Motorola B.V.(4)*
3.5 Asset Purchase Agreement, dated as of February 19, 2001, by
and between Avaya Inc. and Celestica Corporation(4)*
3.6 Amendment No. 1 to the Asset Purchase Agreement, dated as of
May 4, 2001, by and between Avaya Inc. and Celestica
Corporation(4)
3.7 Arrangement Agreement, dated May 31, 2001, between
Celestica Inc. and Primetech Electronics Inc.
3.8 Merger Agreement, dated as of June 15, 2001, between Omni
Industries Limited and Celestica Inc.
3.9 Asset Purchase Agreement, dated as of July 24, 2001, between
Lucent Technologies Inc. and Celestica Corporation**
3.10 Asset Purchase Agreement, dated as of July 24, 2001, between
Lucent Technologies Inc. and Celestica Corporation**
3.11 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Eugene V. Polistuk(1)
3.12 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Anthony P. Puppi(1)
3.13 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Daniel P. Shea(1)
3.14 Employment Agreement, dated as of October 22, 1996, by and
between Celestica, Inc. and Douglas C. McDougall(1)
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.15 Employment Agreement, dated as of June 30, 1998, by and
between Celestica Inc. and R. Thomas Tropea(10)
3.16 Celestica, Inc. -- Celestica Retirement Plan (Canada)(2)
3.17 D2D Employee Share Purchase and Option Plan (1997)(2)
3.18 Celestica 1997 U.K. Approved Share Option Scheme(1)
3.19 1998 U.S. Executive Share Purchase and Option Plan(11)
8.1 Subsidiaries of Registrant
------------
* Request for confidential treatment granted. Confidential portions of this
document have been redacted and filed separately with the Securities and
Exchange Commission.
** Confidential treatment requested. Confidential portions of this document
have been redacted and filed separately with the Securities and Exchange
Commission.
(1) Incorporated by reference to the Registration Statement on Form F-1 of
Celestica Inc. filed on April 29, 1998 (Registration No. 333-8700).
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-1 of Celestica Inc.
filed on June 1, 1998 (Registration No. 333-8700).
(3) Incorporated by reference to the Registration Statement on Form F-1 of
Celestica Inc. filed on February 16, 1999 (Registration No. 333-10030).
(4) Incorporated by reference to the Annual Report on Form 20-F of
Celestica Inc. filed on May 22, 2001.
(5) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form F-1 of Celestica Inc.
filed on June 25, 1998 (Registration No. 333-8700).
(6) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-4 of Celestica International Inc.
filed on March 5, 1997 (Registration No. 333-6308).
(7) Incorporated by reference to the Registration Statement on Form F-3 of
Celestica Inc. filed on July 11, 2000 (Registration No. 333-12272).
(8) Incorporated by reference to the Current Report on Form 6-K of
Celestica Inc. for the month of August, 2000.
(9) Incorporated by reference to the Registration Statement on Form F-3 of
Celestica Inc. filed on September 10, 2001 (Registration No. 333-69278).
(10) Incorporated by reference to the Annual Report on Form 20-F of
Celestica Inc. filed on May 18, 2000.
(11) Incorporated by reference to the Registration Statement on Form S-8 of
Celestica Inc. filed on October 8, 1998 (Registration No. 333-9500).