AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2002APRIL 21, 2003

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                   FORM 20-F

         / /  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                       OR
               /X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 20012002
                                       OR
             / /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER: 1-14832
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                                 CELESTICA INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of registrant as specified in its charter)

                                ONTARIO, CANADA

                (JURISDICTION OF INCORPORATION OR ORGANIZATION)

                           12 CONCORDE PLACE1150 EGLINTON AVENUE EAST
                        TORONTO, ONTARIO, CANADA M3C 3R81H7
             (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                         ------------------------------

                   SECURITIES REGISTERED OR TO BE REGISTERED
                     PURSUANT TO SECTION 12(b)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)
------------------------ SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g)12(G) OF THE ACT: N/A ------------------------ SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)15(D) OF THE ACT: 10 1/2% Senior Subordinated Notes Due 2006 (TITLE OF CLASS) ------------------------------N/A ------------------------ 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.
190,642,482189,538,365 Subordinate Voting Shares 0 Preference Shares 39,065,950 Multiple Voting Shares
------------------------ 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/X/ No / / Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 / / Item 18 X/X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE -------- PART I..............................................................................I...................................................... 1 Item 1. Identity of Directors, Senior Management and Advisors...........Advisers............................................... 1 Item 2. Offer Statistics and Expected Timetable.........................Timetable......... 1 Item 3. Key Information.................................................Information................................. 1 A. Selected Financial Data.....................................Data......................... 1 B. Capitalization and Indebtedness............................. 4Indebtedness................. 5 C. Reasons for Offer and Use of Proceeds....................... 4Proceeds........... 5 D. Risk Factors................................................ 4Factors.................................... 5 Item 4. Information on the Company...................................... 12Company...................... 14 A. History and Development of the Company...................... 12Company.......... 14 B. Business Overview........................................... 13Overview............................... 14 C. Organizational Structure.................................... 25Structure........................ 26 D. Description of Property..................................... 25Property......................... 26 Item 5. Operating and Financial Review and Prospects.................... 26Prospects.... 27 A. Operating Results........................................... 28Results............................... 31 B. Liquidity and Capital Resources............................. 34Resources................. 35 C. Research and Development, Patents and Licenses, Etc......... 37Etc................................................. 39 D. Trend Information........................................... 37Information............................... 39 Item 6. Directors, Senior Management and Employees...................... 38Employees...... 39 A. Directors and Senior Management............................. 38Management................. 39 B. Compensation................................................ 42Compensation.................................... 44 C. Board Practices............................................. 47Practices................................. 49 D. Employees................................................... 48Employees....................................... 50 E. Share Ownership............................................. 48Ownership................................. 51 Item 7. Major Shareholders and Related Party Transactions............... 52Transactions........................................... 55 A. Major Shareholders.......................................... 52Shareholders.............................. 55 B. Related Party Transactions.................................. 54Transactions...................... 56 C. Interests of Experts and Counsel............................ 55Counsel................ 57 Item 8. Financial Information........................................... 55Information........................... 57 A. Consolidated Statements and Other Financial Information..... 55Information......................................... 57 B. Significant Changes......................................... 55Changes............................. 57 Item 9. The Offer and Listing........................................... 55Listing........................... 57 A. Offer and Listing Details................................... 55Details....................... 57 B. Plan of Distribution........................................ 57Distribution............................ 59 C. Markets..................................................... 58Markets......................................... 60 D. Selling Shareholders........................................ 58Shareholders............................ 60 E. Dilution.................................................... 58Dilution........................................ 60 F. Expense of the Issue........................................ 58Issue........................... 60 Item 10. Additional Information.......................................... 58Information......................... 60 A. Share Capital............................................... 58Capital................................... 60 B. Memorandum and Articles of Incorporation.................... 58Incorporation........ 60 C. Material Contracts..........................................Contracts.............................. 62 D. Exchange Controls...........................................Controls............................... 62 E. Taxation....................................................Taxation........................................ 62 F. Dividends and Paying Agents.................................Agents.................... 67 G. Statement by Experts........................................Experts............................ 67 H. Documents on Display........................................Display............................ 67 I. Subsidiary Information...................................... 68Information......................... 67 Item 11. Quantitative and Qualitative Disclosures about Market Risk......Risk............................................ 68 Item 12. Description of Securities Other than Equity Securities..........Securities............................................. 69 PART II............................................................................. 70II..................................................... 69 Item 13. Defaults, Dividend Arrearages and Delinquencies................. 70Delinquencies.......................................... 69 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds..................................................... 70Proceeds................... 69 Item 15. [RESERVED]...................................................... 70Controls and Procedures........................ 69 Item 16. [RESERVED]......................................................[Reserved]..................................... 69 PART III.................................................... 70 PART III............................................................................ 71 Item 17. Financial Statements............................................ 71Statements........................... 70 Item 18. Financial Statements............................................ 71Statements........................... 70 Item 19. Exhibits........................................................ 71Exhibits....................................... 70
i PART I IN THIS ANNUAL REPORT, "CELESTICA," THE "COMPANY," "WE," "US" AND "OUR" REFER TO CELESTICA INC. AND ITS SUBSIDIARIES. IN DECEMBER 1999, WECELESTICA 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.FEBRUARY 28, 2003. AT THAT DATE, THE NOON BUYING RATE IN NEW YORK CITY FOR CABLE TRANSFERS IN CANADIAN DOLLARS WAS U.S.$1.00=C$1.5955,1.4880, 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.FEBRUARY 28, 2003. 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 U.S. Securities Act, and section 21E of the Securities Exchange Act of 1934, as amended, or the U.S. 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""plans," or similar expressions. For those statements, we claim the protection of the safe harbor for forward-lookingforward- 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 levelchallenges of overall growth ineffectively managing our operations during uncertain economic conditions; the challenge of responding to lower-than-expected customer demand; the effects of price competition and other business and competitive factors generally affecting the electronics manufacturing services, or EMS, industry; lower-than-expected customer demand; component constraints; variability of our operating results among periods; our dependence on the computerinformation technology and communications industries; our dependence on a limited number of customers;customers and ouron industries affected by rapid technological change; component constraints; variability of operating results among periods; and the ability to manage expansion, consolidationour restructuring and the integrationshift of acquired businesses.production to lower cost geographies. We disclaim any intention or obligation to update or revise any forward-looking statements contained in this Annual Report or the documents incorporatedwe incorporate by reference herein, whether as a result of new information, future events, or otherwise. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORSADVISERS 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 Notenote 22 to the Consolidated Financial Statements.Statements in Item 18. 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;expense; - 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.contract; and - our net loss for the year ended December 31, 2002 would be $3.8 million greater due to non-cash charges for compensation expense, $27.8 million greater due to interest on convertible debt classified as a long-term liability rather than as an equity instrument, $26.5 million greater due to other charges, and $8.4 million less due to gain on repurchase of convertible debt.
YEAR ENDED DECEMBER 31 ----------------------------------------------------- 1997(1)--------------------------------------------------------- 1998(1) 1999(1) 2000(1) 2001(1) -------- -------- -------- --------2002(1) --------- --------- --------- --------- --------- (in millions, except per share amounts) CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA: Revenue.............................................. $2,006.6Revenue..................................... $3,249.2 $5,297.2 $9,752.1 $10,004.4 $8,271.6 Cost of sales........................................ 1,866.9sales............................... 3,018.7 4,914.7 9,064.1 9,291.9 --------7,715.8 -------- -------- -------- --------- -------- Gross profit......................................... 139.7profit................................ 230.5 382.5 688.0 712.5 555.8 Selling, general and administrative expenses......... 68.3expenses.................................. 130.5 202.2 326.1 341.4 298.5 Amortization of goodwill and intangible assets(2)................. 15.3................................. 45.4 55.6 88.9 125.0 95.9 Integration costs related to acquisitions(3)......... 13.3........................... 8.1 9.6 16.1 22.8 21.1 Other charges(4)..................................... 13.9............................ 64.7 -- -- 273.1 --------677.8 -------- -------- -------- --------- -------- Operating income (loss).............................. 28.9..................... (18.2) 115.1 256.9 (49.8) (537.5) Interest expense (income), net(5).................... 33.6........... 32.3 10.7 (19.0) (7.9) --------(1.1) -------- -------- -------- --------- -------- Earnings (loss) before income taxes.................. (4.7)taxes......... (50.5) 104.4 275.9 (41.9) (536.4) Income taxes......................................... 2.2tax expense (recovery)............... (2.0) 36.0 69.2 (2.1) --------(91.2) -------- -------- -------- --------- -------- Net earnings (loss).................................. $ (6.9)......................... $ (48.5) $ 68.4 $ 206.7 $ (39.8) ========$ (445.2) ======== ======== ======== ========= ======== Basic earnings (loss) per share(6)................... $ (0.10).......... $ (0.47) $ 0.41 $ 1.01 $ (0.26) $ (1.98) Diluted earnings (loss) per share(6)................. $ (0.10)........ $ (0.47) $ 0.40 $ 0.98 $ (0.26) $ (1.98) OTHER DATA: Capital expenditures................................. $ 32.1expenditures........................ $ 65.8 $ 211.8 $ 282.8 $ 199.3 $ 151.4
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AS AT DECEMBER 31 ----------------------------------------------------- 1997--------------------------------------------------------- 1998 1999 2000 2001 -------- -------- -------- --------2002 --------- --------- --------- --------- --------- (in millions) CONSOLIDATED BALANCE SHEET DATA: Cash and short-term investments...................... $ 106.1investments............. $ 31.7 $ 371.5 $ 883.8 $1,342.8 $1,851.0 Working capital...................................... $ 363.3capital(7).......................... $ 356.2 $1,000.2 $2,262.6 $2,339.8 $2,093.2 Capital assets....................................... $ 124.2assets.............................. $ 214.9 $ 365.4 $ 633.4 $ 915.1 $ 727.8 Total assets......................................... $1,347.3assets................................ $1,636.4 $2,655.6 $5,938.0 $6,632.9 $5,806.8 Total long-term debt, including current portion...... $ 518.9portion................................... $ 135.8 $ 134.2 $ 132.0 $ 147.4 $ 6.9 Shareholders' equity................................. $ 363.2equity........................ $ 859.3 $1,658.1 $3,469.3 $4,745.6 $4,203.6
- ------------------------- (1) The consolidated statements of earnings (loss) data for: 1997, 1998, 1999, 2000, 2001 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 20012002 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, and Accu-Tronics, Inc. acquired in September 1998 and a greenfield operation established in Tennessee in September 1998; 1999, 2000, 2001 and 20012002 include the results of operations of International Manufacturing Services, Inc., or IMS, 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, 2001 and 20012002 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; 2001 and 20012002 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 2001.2001; and 2002 includes the results of operations of certain assets of NEC Corporation in Miyagi and Yamanashi, Japan acquired in March 2002, and certain assets of Corvis Corporation in the United States acquired in August 2002. (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 washas not been amortized. Celestica has fully adopted these new standards as of January 1, 2002, and discontinued amortization of all existing goodwill. We also evaluated existing intangible assets, including estimates of remaining useful lives, and have reclassed $9.1 million from intellectual property to goodwill, as of January 1, 2002, to conform with the new criteria. Section 3062 required the completion of a transitional goodwill impairment evaluation within six months of adoption. Any transitional impairment would have been recognized as an effect of a change in accounting principle and would have been charged to opening retained earnings as of January 1, 2002. We completed the transitional goodwill impairment assessment during the second quarter of 2002, and determined that no impairment existed as of the date of adoption. Under U.S. GAAP, any transitional impairment charge would have been recognized in earnings as a cumulative effect of a change in accounting principle. 3 Effective January 1, 2002, we had unamortized goodwill of $1,137.9 million which is no longer being amortized. This change in accounting policy is not applied retroactively and the amounts presented for prior periods have not been restated for this change. The following table shows the impact of this change as if the policy had been applied retroactively to 2001:
YEAR ENDED DECEMBER 31 --------------------------- 2001 2002 ------------ ------------ (in millions, except per share amounts) Net loss as reported........................................ $ (39.8) $(445.2) Add back: goodwill amortization............................. 39.2 -- ------- ------- Net loss before goodwill amortization....................... $ (0.6) $(445.2) ======= ======= Basic loss per share: As reported................................................. $ (0.26) $ (1.98) Before goodwill amortization................................ $ (0.07) $ (1.98) Diluted loss per share: As reported................................................. $ (0.26) $ (1.98) Before goodwill amortization................................ $ (0.07) $ (1.98)
(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 includecomprised of (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 annual impairment assessment of long-lived assets, comprised primarily of a write-down of the carrying value of certain assets, primarily goodwill and intangible assets. In 2002, other charges totaled $677.8 million ($562.6 million after income taxes) comprised primarily of (a) a $385.4 million restructuring charge, (b) a non-cash write-down of $203.7 million relating to the annual goodwill impairment assessment, (c) a non-cash write-down of $81.7 million relating to the annual impairment assessment of long-lived assets, primarily a write-down of intangible assets, and (d) a $9.6 million charge for the premium paid and related deferred financing costs on the redemption of our Senior Subordinated Notes. (5) Interest expense (income) is comprised of interest expense incurred on indebtedness less interest income earned on cash and short-term investments. (6) WeIn 2001, we retroactively adopted retroactively the new CICA Handbook Section 3500, "Earnings per share"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 2002 -------- -------- -------- -------- -------- (in millions) Basic....................................................... 69.6 103.0 167.2 199.8 213.9 229.8 Diluted..................................................... 69.6 103.0 171.2 211.8 213.9 229.8
(7) Calculated as current assets less current liabilities. 4 EXCHANGE RATE INFORMATION The rate of exchange as of March 1, 2002February 28, 2003 for the conversion of Canadian dollars into United States dollars was U.S. $0.6268.$0.6720. The following table sets forth the exchange rates for the conversion of U.S.$1.00 into C$1.00 as at the end of the following fiscal periods and the average exchange rates for those periods (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.
1998 1999 2000 2001 2000 1999 1998 19972002 -------- -------- -------- -------- -------- Average(1)..................................................................................... 1.4836 1.4858 1.4855 1.5487 1.4855 1.4858 1.4836 1.38491.5704
MARCH FEBRUARY JANUARY DECEMBER NOVEMBER OCTOBER SEPTEMBER2003 2003 2003 2002 2002 2001 2001 2001 20012002 -------- -------- -------- -------- -------- ----------------- High.................................. 1.6110 1.6132 1.5956 1.6021 1.5867 1.57931.4905 1.5315 1.5798 1.5792 1.5903 1.5943 Low................................... 1.5885 1.5897 1.5633 1.5718 1.55791.4659 1.4880 1.5219 1.5478 1.5528 1.5610
- ------------ (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, 2002February 28, 2003 for the conversion of United States dollars into Canadian dollars was 1.59551.4880 (U.S.$1 = C$1.5955)1.4480). 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: - Thethe volume of orders received relative to our manufacturing capacity; - Fluctuationsfluctuations in material costs and the mix in material costs versus labor and manufacturing overhead costs; and - Variationsvariations 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 or sourcing plans, 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 of operations for a financial period: - Thethe level of price competition;competition as a result of the highly competitive nature of our business; - Ourour past experience in manufacturing a particular product; - Thethe degree of automation we use in the assembly process; 5 - Whetherwhether we are managing our inventories and fixed assets efficiently;effectively; - Theour customer and end-market concentrations; - the timing of our expenditures in anticipation of increased sales; - Customerincreased or unexpected expenses associated with the shifting of products between manufacturing locations, including transfer delays from higher cost locations; - customer product delivery requirements and shortages of components or labor; - the shifting of production by our customers from our operations, to one of our competitor's operations; and - Thethe 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 order appropriate levels of materials and 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 2001.2001, and $445.2 million in 2002. 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). In 2002, we incurred $21.1 million of integration costs related to acquisitions, $385.4 million of restructuring charges, a $285.4 million write-down of certain assets, primarily goodwill and intangible assets, and $9.6 million in deferred financing costs and debt redemption fees, with these charges totaling $701.5 million ($582.2 million after income taxes). We may not be profitable in future periods. Furthermore, if businessIn response to the continued limited visibility in end markets, we plan to further reduce our manufacturing capacity. The reduction in capacity will result in an estimated pre-tax restructuring charge of between $50.0 million and $70.0 million, to be recorded during 2003. If end-market conditions were to unexpectedly weaken significantly from current levels, we may have to undertake furtheradditional 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-marketsend markets that we serve. If global economic conditions in 6 the markets we serve do not improve, we may experience a continued material adverse impact on our business, operating results and financial condition. 5 THE WAR IN IRAQ, ACTS OF TERRORISM, AND OTHER POLITICAL AND ECONOMIC DEVELOPMENTS COULD ADVERSELY AFFECT OUR BUSINESS Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, sustained military action in Iraq, other conflicts in the Middle East and Asia, strained international relations arising from these conflicts and the related decline in consumer confidence and continued economic weakness, may hinder our ability to do business and may adversely affect our stock price. Any escalation in these events or similar future events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. These events have had and may continue to have an adverse impact on the U.S. and world economy in general and customer confidence and spending in particular, which in turn adversely affects our revenues and results of operations. The impact of these events on the volatility of the U.S. and world financial markets could increase the volatility in our stock price and may limit the capital resources available to us and our customers or suppliers. WE ARE UNCLEAR HOW THE SEVERE ACUTE RESPIRATORY SYNDROME (SARS) OUTBREAK WILL IMPACT OUR BUSINESS We, our suppliers, and our customers have manufacturing operations in Asia, the geographic region most directly affected by the current outbreak of the SARS virus. Existing bans being imposed by some employers on non-essential travel to this region could begin to impact business in that region, including postponement of factory maintenance and delay in customer qualification of our manufacturing facilities for new programs. The continuation of this disease outbreak in Asia, or its expansion in other regions where we or our customers or suppliers have operations, could also disrupt our manufacturing supply chain and adversely affect our operations through higher operating expenses, lower or delayed production volumes resulting in weaker than expected utilization of our facilities, and delays in product transfer activities from higher to lower cost facilities as we implement our restructuring programs. OUR RESULTS ARECAN BE AFFECTED BY LIMITED AVAILABILITY OF COMPONENTS A significant portion of our costs are in the form ofreflects 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.demand for our customers' end-market products. Our customers, in turn, depend substantially depend on the growth of the computerinformation technology and communications industries. These industries are characterized by rapidly changing technologies and shortshortening product life cycles. Recently theseThese industries have experiencedbeen experiencing severe revenue erosion, pricing and margin pressures, excess inventories, and increased difficulty in attracting capital. These factors affecting the computerinformation technology 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.customers. 7 WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS Our three largest customers in 20012002 were IBM Corporation, Sun Microsystems Inc., and Lucent Technologies Inc., which each represented more than 10% of our total 2002 revenue and collectively represented 48% of our total 2002 revenue. Our next seven largest customers collectively represented 37% of our total revenue in 2002. IBM Corporation, Sun Microsystems Inc., and Lucent Technologies Inc., our three largest customers in 2001, 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 fiveseven largest customers represented 32%29% of total 20002001 revenue. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenue. Our mix of business with customers in higher complexity communications and information technology products had a major impact on our results in 2002 as spending in these areas was adversely affected. We saw the biggest declines in revenues from our top 10 customers, which represent over 80% of our business. Other than in the case of asset acquisitions, otherwise known as "OEM divestitures," we generally we do not enter into long-term supply commitments with our customers. Instead, we bid on a project basis and have supply contracts or purchase orders in place for each project. We are dependent on customers to fulfill the terms associated with these orders and/or contracts. Significant reductions in, or the loss of, sales to any of our largest customers would have a material adverse effect on us. OEM divesturesdivestitures often entail long-term supply agreementagreements between ourselves and the OEM customer, and we are similarly dependent on customers to fulfill thetheir obligations associated withunder 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-marketsend markets and general order volume volatility has resulted, and may continue to result, in some of our customers delaying or canceling 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 higher productive assets and lower gross margins. WE FACE RISKS DUE TO EXPANSION ORARISING FROM THE 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,difficult economic climate, with the intention of improving utilization and realizing significant cost savings in the future. These initiatives have included changing the number and location of our production facilities, largely to align our capacity and infrastructure with anticipated customer demand, and to rationalize our footprint worldwide. This alignment includes transferring programs from higher cost geographies to lower cost geographies. 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 activitiesthese initiatives 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 MAY NOT BE ABLE TO RESTRUCTURE QUICKLY ENOUGH IN SOME OF OUR KEY MANUFACTURING REGIONS, SUCH AS EUROPE We have operations in multiple regions around the world. As a result, we are subject to different regulatory requirements governing how quickly we are able to reduce manufacturing capacity and terminate related employees. Restrictions on our ability to close under-performing facilities will result in higher expenses associated with carrying excess capacity and infrastructure during our restructuring activities. 8 CHANGES IN OUR INDUSTRY REQUIRE US TO MOVE A SIGNIFICANT PORTION OF OUR MANUFACTURING BASE TO LOWER COST REGIONS With the significant and severe weakness in technology end markets over the past two years, our customers require significant cost reductions in order to maintain sales and improve their financial performance. This environment has resulted in an accelerated movement of our production from higher cost regions such as North America and western Europe to lower cost regions such as Asia, Latin America and Central Europe. This accelerated move could impact current and future results by such factors as increasing the risks associated with transferring production to new regions where skills or experience may be more limited than in higher cost regions, higher operating expenses during the transition, and additional restructuring costs associated with the decrease in production levels in higher cost geographies. WE FACE ADDITIONAL RISKS DUE TO OUR INTERNATIONAL OPERATIONS During 2001, over 35%2002, approximately 40% of our revenue was derivedproduced 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.markets and, as we describe above, the shift of much of our production to lower cost geographies. 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: - Laborlabor unrest; - Unexpectedunexpected changes in regulatory requirements; - Tariffs,tariffs, import and export duties, value-added taxes and other barriers; - Lessless favorable intellectual property laws; - Difficultiesdifficulties in staffing and managing foreign sales and support operations; - Longerlonger accounts receivable payment cycles and difficulties in collecting payments; - Changeschanges in local tax rates and other potentially adverse tax consequences, including the cost of repatriation of earnings; - Lacklack of acceptance of localizedlocally manufactured products in other foreign countries; - Burdensburdens of complying with a wide variety of foreign laws, including changing import and export regulations which could erode our profit margins or restrict exports; - Adverseadverse changes in Canadian and U.S. trade policies with the other countries in which we maintain operations; - Politicalpolitical instability; 7 - Potential restrictionpotential restrictions on the transfer of funds; and - Inflexibleinflexible employee contracts that restrict our flexibility in responding to events of business downtowns.downturns; and - foreign exchange risks. We have either purchased or built manufacturing facilities in severalnumerous 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 and political turmoil and a significant devaluation of their currencies in the recent past. There is a risk that this period of economic and political 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. 9 OUR RECENT CAPACITY REDUCTION ACTIVITIES AND MANUFACTURING RESTRUCTURING PROGRAMS MAY IMPACT OUR ABILITY TO MEET THE GROWTH NEEDS OF OUR CUSTOMERS With the significant and severe weakness in technology end markets over the past two years, we have experienced poor asset utilization and responded by significantly reducing our manufacturing infrastructure. If our customers were to experience sharp and unforecasted improvements in demand, the removal of this infrastructure could potentially impact customer satisfaction and limit our ability to grow if we are not able to respond to higher volumes required by our customers. WE FACE FINANCIAL RISKS DUE TO FOREIGN CURRENCY FLUCTUATIONS The principal currenciescurrency in which we conduct our operations areis U.S. dollars,dollars. However, some of our subsidiaries transact business in foreign currencies, such as Canadian dollars, Mexican pesos, British pounds sterling, Euros, Singapore dollars, Japanese yen, Brazilian realreais, 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 1819 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 RecruitingThe recruitment of 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. ThreeTwo of our competitors, Flextronics International Sanmina-SCI Corporation and Solectron Corporation, each have annual revenuesrevenue in excess of $10.0 billion.$12.0 billion for fiscal 2002 and one of our competitors, Sanmina-SCI Corporation, has revenue in excess of $8.0 billion for fiscal 2002. 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, a greater production presence in lower cost geographies 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 couldhas caused and may continue to 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. The EMS industry has been experiencing an increase in excess manufacturing capacity. This has and will continue to exert additional pressures on pricing for components and services, thereby increasing the competitive pressures in the EMS industry. Excess capacity will limit the industries ability to attain economics of scale and other synergies. 10 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 CHANGETECHNOLOGY CHANGES 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 production and manufacturing processes in cost-effective and timely ways. Our process andmanufacturing processes, test development efforts, and design capabilities 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, ofadministrative practices and judicial decisions now in effect in the various countries in which we have assets or conduct activities. However, our tax position isbusiness, all of which are subject to review and possible challenge by taxing authorities and to possible changes in law, which may havechange or differing interpretations, possibly with 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 effects. 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 makeincur additional expenditures relating to environmental matters at any of the facilities. Achieving and maintaining compliance with present, changing, 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. 11 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 usually performed. TheThese assessments have not revealed any environmental liability that we believe, 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 of which we are not aware of.aware. 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,change the nature of our business, 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,February 28, 2003, we had 190,826,868189,102,903 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 3,976,2363,483,238 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 our 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,February 28, 2003, there were approximately 28,620,00033,497,000 subordinate voting shares reserved for issuance under our employee share purchase and option plans and for director compensation, 12 including outstanding options to purchase approximately 23,756,00025,536,000 shares. The issuances and/or 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 outstanding 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%84% 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'sOnex' 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 and if our shares cease to be widely held ("widely held" meaning that no one person owns more than 20% of the votes), 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,February 28, 2003, 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: - Quarterlyquarterly variations in our operations and financial results; - Announcementsannouncements by us or our competitors of technological innovations, new products, new contracts or acquisitions; - Changeschanges in our prices or the prices of our competitors' products and services; - Changeschanges in our product mix; - Changeschanges in our growth rate as a whole or for a particular portion of our business; - Generalgeneral conditions in the EMS industry; and - Systemicsystemic 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. 13 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 personsU.S., judgments which are obtained in a U.S. court.court against us or these persons. It may also be difficult for shareholders to enforce a U.S. judgment in Canada or to succeed in a lawsuitCanadian court, in Canadaa lawsuit 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,1150 Eglinton Avenue East, Toronto, Ontario, Canada M3C 3R81H7 and our telephone number is (416) 448-5800. Our webWeb site is http://www.celestica.com. Information on our webWeb site is not incorporated by reference in this Annual Report. We are a leading providerworld leader in the delivery of innovative electronics manufacturing services. We operate a highly sophisticated global manufacturing network with operations in Asia, Europe, and the Americas, providing a broad range of services to OEMs worldwide, with revenue for the year ended December 31, 2001leading OEMs. A recognized leader in excess of $10.0 billion. We provide a wide variety of productsquality, technology, 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, Celestica provides competitive advantage to customers by improving time-to-market, scalability, and power products. We operate facilities in North America, Europe, Asia and Latin America.manufacturing efficiency. 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 19971998 is included in note (1) to the Selected Financial Data table, see Item 3, "Key Information -- Selected Financial Data." In 2002, we completed the acquisition of: - certain manufacturing assets of NEC Corporation in Miyagi and Yamanashi, Japan; and - certain assets from Corvis Corporation in the United States. In connection with these acquisitions, we also entered into supply agreements. The aggregate purchase price for these acquisitions was $111.0 million. Certain information concerning capital expenditures, including acquisitions and financing activities, is set forth in Notesnotes 3, 9, 10, 11, and 20 to the Consolidated Financial Statements in Item 18.18, and Item 5, "Operating and Financial Review and Prospects -- Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain information concerning our divestiture activities, such as restructuring, is set forth in note 13 to the Consolidated Financial Statements in Item 18, in Item 4, "Information on the Company -- Description of Property," and Item 5, "Operating and Financial Review and Prospects -- Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 14 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,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, MalaysiaAmericas, Europe, and Japan.Asia. 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 leadingindustry-leading OEMs primarily in the computerinformation technology 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.100 OEMs. In the aggregate, our top ten customers represented 84%over 80% of revenue in 2001.2002. The products we manufacture can be found in a wide array of end-products,end products, including: cell phones and pagers, electronic metering devices, 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. 13 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,outsourcing, 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, four2002, two EMS providers -- Celestica, Sanmina-SCI Corporation, Flextronics International and Solectron Corporation -- each achieved total revenue in excess of $10.0$12.0 billion, and two EMS providers -- Celestica and Sanmina-SCI Corporation -- each achieved total revenue in excess of $8.0 billion. We see numerous industry vectors that are fueling continued growth in the EMS industry. These include the growingcontinuing trend of information technology and communications companies in North America to outsource their electronics manufacturing and to divest their manufacturing assets,assets; OEMs in Europe and Japan increasingly executingexecute an electronics manufacturing outsourcing strategy; the increasing adoption of an outsourcing strategy by the industrial, medical, military, and consumer electronics industries; and OEMs increasingly looking to the EMS industry to reduce their overall cost of goods sold and to provide full-system solutionsa full range of services including design, system build, order fulfillment, reverse logistics, and distribution. Weother related manufacturing and customer support services. In the current weak economic environment, the industry is dealing with the challenges of low utilization rates and the shifting of more production and manufacturing infrastructure to lower cost geographies. However, we believe that as the trend to outsourcing continues, OEMs will increasingly outsource more complex productsof their manufacturing and services.related services to EMS providers. This trend will favor larger EMS providers that have clear advantages of scale, financial strength, geographic diversity, technology and quality,leading supply chain capabilities, 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.15 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 fulfilmentfulfillment and distribution functions. By outsourcing EMStheir manufacturing and related 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 benefittingbenefiting 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 16 these complexities by outsourcing to EMS providers whichthat (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 whichthat possess sophisticated skills in manufacturing technology, and whichthat 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.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, andas well as back-end functions such as full system assembly, order fulfilment,fulfillment, worldwide distribution and after-sales support, including repair services. The complex nature of certain services such as front-end design and testing requirerequires a significant investment in highly trained engineering personnel. GLOBAL PRESENCE.COMPETITIVE COSTS. 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,market, and significantly reduce the total cost of an OEM's product. EMS providers are locatingthat have significant capability in lower-costlower cost regions such as Mexico, Asia, and Central Europe in order to complement their offerings by providingcan provide lower cost manufacturing solutions to their OEM customers for certain price-sensitive applications.customers. As a result of these trends, many large OEMs are beginningtend to work with a smaller number of EMS providers that, as worldwide suppliers, can meet their needs in multiple geographic markets.markets at the lowest cost. MARKET CONSOLIDATION The Company believes that larger EMS providers whichthat possess the above-noted attributes will be well positioned to take advantage of anticipated growth in the EMS industry.future outsourcing trend. 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.capabilities, and competitive costs. The EMS industry has experienced an increase incontinues to experience 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 17 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.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 computerinformation technology 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.leading OEMs. We are also committed to further diversification of our customer base and to 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.END MARKETS. Celestica has a diversified customer base whose products serve the communications, server, storage and other, workstation and personal computer industries. In 2001,2002, revenue by end-market users was as follows: communications -- 36%45%; servers -- 31%26%; storage and other -- 18%22%; and workstations and personal computer -- 15%7%. Celestica targets industry-leading OEMs, primarily in the information technology and communications sectors. In addition to this, Celestica's strategy is to mitigate risk byincludes increasing its diversification across end-markets.other end markets, such as aerospace, military, industrial, medical, consumer, and automotive, to reduce the risk of reliance on certain sectors. 18 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 whichthat 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. InWhile operating margins were relatively stable for the past we have improved ourtwo years, operating margins each year since 1998. Despitefell in 2002 as 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, amortizationresult of intangible assets, integration costs related to acquisitionsrevenue declines and other charges, divided by (ii) revenue.weaker facilities utilization. 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 withincompleting our worldwide network of facilities based on cost and technological complexities,restructuring program, (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.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 linkagelinkages 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, and 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-endfinal end products. Increasingly, OEMs require custom build-to-order system solutions with 19 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 thatCelestica 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 causecauses of failures typically relatesrelate 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-activepro active in working in partnership with suppliers and customers to implement resolutions. PACKAGING AND GLOBAL DISTRIBUTION.FULFILLMENT. 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,fulfillment, allowing us to ship worldwide and, in many cases, directly to the OEMs' end-customers.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 somestandards. Most of our Asian, Mexican and Czechprincipal 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 2001,2002, approximately 68%56% of Celestica's products were delivered to customersrevenue was produced 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,Asia and Europe and Asia generated approximately 62%, 29%23% and 9%21%, respectively, of Celestica's revenue in 2001.2002. A listing of our principal locations is included in Item 4, "Information on the Company -- Description of Property." We are focused on expanding our worldwide resources and capability. Additionally, wecapability in lower cost geographies. We believe that locating in lower cost geographic regions such as Central Europe and South AmericaAsia 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 Notenote 20 to the Consolidated Financial Statements in Item 18. SALES AND MARKETING Sales and marketing at Celestica is an integrated processset of processes designed to provide a single "face" to the customer worldwide. Celestica's coordination of efforts with key global accountscustomers has been enhanced by the creation of customer-focused units each headed by a group general manager to oversee the entire relationship with such customers. We have a global network comprised of direct sales people, customer service representatives, operational and project managers, and global account executives, and supply chain management, as well as our senior executives. Celestica's 20 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.customers and markets. Celestica has adopted a focused marketing approach targeted at creating profitable, strategic relationships with leading OEMs primarily in the computerinformation technology and communicationcommunications 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 computerinformation technology and communications sectors. Celestica supplies products and services to over 75100 OEMs, including such industry leaders as Avaya Inc., Cisco Systems Inc., Dell Computer Corporation, EMC Fujitsu,Corporation, Hewlett-Packard Corporation, IBM Corporation, Lucent Technologies Inc., Motorola Inc., NEC Corporation, and Sun Microsystems.Microsystems Inc. During 2002, Celestica's electronics products can be foundthree largest customers, IBM Corporation, Sun Microsystems Inc., and Lucent Technologies Inc., each represented in a wide arrayexcess of end-products, including: cell phones10% of total revenue 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.in the aggregate represented 48% of total revenue. During 2001, Celestica's three largest customers, IBM Corporation, Sun Microsystems Inc., and Lucent Technologies Inc., each represented in excess of 10% of total revenue and in the aggregate represented 55% of total revenue. During 2000, Celestica's twonext seven 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%37% of Celestica's total revenue in 20012002 (compared with 32%29% for the next fiveseven largest customers in 2000)2001). 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 (fromrange from one to three years).five years. There can be no assurance that these arrangements will be renewed. As a result of the weak economic environment, these supply agreements have been affected by order cancellations and rescheduling as our customers' base-business volumes have decreased. 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-activeproactive 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, weWe 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 ensuresensure speed of supply through the use of automated receiving and full-service distribution capabilities. During 2002, Celestica procured and managed over $8$6.0 billion in materials and related services. We 21 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.Celestica's operations. 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""supplier managed inventory" (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 or assembled 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 arecould be 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 NetworksCorporation, NEC Corporation, and other companies. We believe that we have secured access to all required technology that we are currently using inis material to the current 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.Celestica of the terms of the licensing agreement. COMPETITION The EMS industry is comprised of a large number of domestic and foreign companies, of which fourtwo companies, Celestica, Sanmina-SCI Corporation, Flextronics International and Solectron Corporation, each had annual revenue in excess of $10.0$12.0 billion for fiscal year 2002 and two companies, Celestica and Sanmina-SCI Corporation, each had revenue in 2001.excess of $8.0 billion for fiscal year 2002. We also face competition from current and prospective customers which evaluate our capabilities against the merits of manufacturing products internally. We compete with different 22 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 addedvalue-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. 21 HUMAN RESOURCES As of March 1,December 31, 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. Certain of our employees in the United Kingdom, France, Italy, Mexico, U.S., Japan and Brazil are represented by unions. 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 usually 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 we believe, 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 23 expected product sales covered by firm purchase orders is a meaningful measure of future sales, since orders may be rescheduled or canceled. 22 SEASONALITY Historically, CelesticaWith a significant exposure to information technology and communications infrastructure products, the Company has experienced some seasonal variationhistorically seen a level of seasonality in its quarterly revenue withpatterns. This seasonality has generally resulted in lower volumes in the Company's first quarter, gradually increasing throughout the year, culminating in higher revenue typically being highest in the fourth quarterquarter. Seasonality is also reflective of the mix and lowest incomplexity of the first quarter. See Item 5, "Operatingproducts manufactured. As a result of the current weak and Financial Reviewuncertain economic environment, it is difficult to predict the extent and Prospects -- Management's Discussion and Analysisimpact of Financial Condition and Results of Operations."seasonality on our business. 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
24 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.
23 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.PDA............................... "Personal Digital Assistant." A small form factor portable computing device. 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.............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.
2425 C. ORGANIZATIONAL STRUCTURE We conduct our business through subsidiaries operating on a worldwide basis. The following chart identifies our principal operatingcompanies are considered significant subsidiaries and each of whichthem 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)
wholly-owned: Celestica (U.S.) Inc., a Delaware corporation. Celestica Corporation, a Delaware corporation. Celestica Europe Inc., an Ontario corporation. Celestica Hong Kong Limited, a Hong Kong corporation. Celestica Liquidity Management Hungary Limited Liability Company, a Hungarian corporation. D. DESCRIPTION OF PROPERTY The following table sets forth summary information with respect tosummarizes our principal facilities allas of whichFebruary 28, 2003. Our facilities are used to manufacture printed circuit boards, assemble final systems and configuration, and for EMSother related manufacturing and customer support activities.
MANUFACTURING FACILITY SQUARE FOOTAGE OWNED/LEASED - -------- -------------- ------------- (in thousands) Toronto, Ontario............................................ 888 Owned Montreal, Quebec............................................ 180 Owned Oklahoma City, Oklahoma..................................... 723Oklahoma(1).................................. 430 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........................................Minnesota(1)..................................... 200 Leased Chippewa Falls, Wisconsin................................... 153127 Owned Salem, New Hampshire........................................ 112139 Leased San Jose, California........................................ 131 Leased Dallas, Texas............................................... 69 Leased Mt. Pleasant, Iowa.......................................... 69 Leased Milwaukie, Oregon........................................... 61 Leased Chelmsford, Massachusetts...................................Massachusetts(1)................................ 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 Monterrey, Mexico........................................... 214113 Owned Queretaro, Mexico........................................... 77 Leased Jaguariuna, Brazil.......................................... 142 Leased Shanghai, China............................................. 273 Owned Dongguan, China............................................. 172 Leased China(2).................................................... 208 Owned/Leased Shatin, Hong Kong........................................... 82 Leased Indonesia(3)(4)............................................. 46 Owned/Leased Johor Bahru, Malaysia(3).................................... 491 Leased
2526
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............................................. 310324 Owned Malaysia (2)................................................ 101 Owned/Malaysia.................................................... 40 Leased Singapore................................................... 307298 Leased Singapore................................................... 31665 Owned Laem Chabang, Thailand...................................... 422 Leased Japan(2).................................................... 566 Owned/Leased Rayong, Thailand............................................ 13241 Leased
- ------------ (1) As part of our restructuring plans, we have announced that we will close this site by the end of 2003. (2) This represents three facilities. (3) This represents two facilities. (4) As part of our restructuring plans, we have announced that we will close one of the two sites by the end of 2003. Celestica's principal executive office is located at 12 Concorde Place,1150 Eglinton Avenue East, Toronto, Ontario M3C 3R8. We own a 330,000 square foot facility adjacent to our Toronto, Ontario facility.1H7. 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 somestandards. Most of our Asian, Mexican and Czechprincipal facilities are also certified to the ISO 14001 (environmental) standards. The leases for our leased facilities expire between 20022003 and 2016.2056. Celestica currently expects to be able to extend the terms of expiring leases or to find replacement facilities on reasonable terms. As part of our restructuring plans, we have consolidated facilities and changed our strategic focus as to the number and geography of sites. We are rationalizing our footprint worldwide to increase the percentage of our facilities in lower cost geographies. See Item 5, "Operating and Financial Review and Prospects -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Operating Results" for additional information concerning our restructurings. 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. ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS. 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. AMONGTHESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: THE KEY FACTORS THAT COULD CAUSE SUCH DIFFERENCES ARE:CHALLENGES OF EFFECTIVELY MANAGING OUR OPERATIONS DURING UNCERTAIN ECONOMIC CONDITIONS; THE LEVELCHALLENGE OF OVERALL GROWTH IN THE ELECTRONICS MANUFACTURING SERVICES (EMS) INDUSTRY;RESPONDING TO LOWER-THAN-EXPECTED CUSTOMER DEMAND; COMPONENT CONSTRAINTS; OUR VARIABILITYTHE EFFECTS OF OPERATING RESULTS AMONG PERIODS;PRICE COMPETITION AND OTHER BUSINESS AND COMPETITIVE FACTORS GENERALLY AFFECTING THE EMS INDUSTRY; OUR DEPENDENCE ON THE COMPUTERINFORMATION TECHNOLOGY AND COMMUNICATIONS INDUSTRIES; OUR DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS;CUSTOMERS AND OURON INDUSTRIES AFFECTED BY RAPID TECHNOLOGICAL CHANGE; COMPONENT CONSTRAINTS; VARIABILITY OF OPERATING RESULTS AMONG PERIODS; AND THE ABILITY TO MANAGE EXPANSION, CONSOLIDATIONOUR RESTRUCTURING AND THE INTEGRATIONSHIFT OF ACQUIRED BUSINESSES.PRODUCTION TO LOWER COST GEOGRAPHIES. THESE AND OTHER RISKS AND UNCERTAINTIES AND FACTORS ARE DISCUSSED IN THE COMPANY'S FILINGS WITH SEDAR AND THE U.S. SECURITIES AND EXCHANGE COMMISSION. GENERALTHIS ANNUAL REPORT. SEE ITEM 3, "KEY INFORMATION -- RISK FACTORS." WE DISCLAIM ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. OVERVIEW Celestica is a leading provider ofworld leader in providing electronics manufacturing services to OEMs worldwide with 2001 revenue of $10.0 billion.in the information technology and communications industries. Celestica provides a wide variety of products and services to its customers, including the high-volume manufacture of complex PCAsprinted circuit board assemblies and the full 27 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,the Americas, Europe Asia and Latin America. 26 Asia. 2002 was a challenging year as the information technology and communications end markets remained weak. Revenue for 2002 was $8.3 billion, down 17% from $10.0 billion for 2001. The reduced demand for Celestica's products and services contributed to the decrease in revenue and margins for 2002. Revenue from existing customers decreased for the second consecutive year. Historically, acquisitions have contributed significantly to the Company's growth, with 2001 being the most active year for acquisitions, in terms of the number of acquisitions closed and the total purchase price. Growth from acquisitions in 2002, however, was minimal. Celestica continues to evaluate acquisition opportunities and anticipates that acquisitions will continue to contribute to its future growth. In 2001, the Company announced its first restructuring plan in response to the weakened end markets. The continued downturn into 2002 resulted in the Company announcing further restructuring actions, which it expects to complete by the end of 2003. The restructurings were focused on consolidating facilities and increasing capacity in lower cost geographies. The Company expects that it will have a better-balanced manufacturing footprint when all of the planned restructuring actions, including those announced in January 2003, are completed. See "-- Recent Developments." In the fourth quarter of 2002, Celestica recorded impairment losses totaling $285.4 million, in connection with its annual impairment tests of goodwill and long-lived assets, based on factors and conditions at the time the assessments were performed. Conditions in the marketplace deteriorated significantly from January 1, 2002, when the Company completed its evaluation of the transitional goodwill impairment, as required by the new goodwill standards. Future impairment tests may result in additional impairment charges. In 2002, management focused on reducing working capital, and increased its cash balance to its highest level in the Company's history. Cash earned from operations in 2002 fully funded the Company's 2002 acquisitions of $111.0 million, repayment of $130.0 million of subordinated debt, the repurchase of $32.5 million in capital stock and the repurchase of convertible debt for an aggregate purchase price of $100.3 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Celestica prepares its financial statements in accordance with generally accepted accounting principles which are generally accepted(GAAP) in Canada with a reconciliation to accounting principles generally accepted in the United States GAAP, as disclosed in Notenote 22 to the 2001 Consolidated Financial Statements. ACQUISITIONS A significant portionThe preparation of Celestica's growth has been generated by strengtheningfinancial 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 accounting policies and methods used in preparation of the financial statements are described in note 2 to the Consolidated Financial Statements. The Company evaluates its customer relationshipsestimates and increasingassumptions on a regular basis, based on historical experience and other relevant factors. Significant estimates are used in determining, but not limited to, the breadthallowance for doubtful accounts, inventory valuation, income tax valuation allowances, the fair value of reporting units for purposes of goodwill impairment tests, the useful lives and valuation of intangible assets, and restructuring charges. Actual results could differ materially from those estimates and assumptions. REVENUE RECOGNITION: Celestica derives most of its service offerings through facility and business acquisitions. 2000 ACQUISITIONS: In February and May, 2000, the Company acquired certain assetsrevenue 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.OEM customers. 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. 28 ALLOWANCE FOR DOUBTFUL ACCOUNTS: Celestica records an allowance for doubtful accounts related to accounts receivable that are considered to be impaired. The allowance is based on the Company's knowledge of the financial condition of its customers, the aging of the receivables, current business environment, customer and industry concentrations, and historical experience. A change to these factors could impact the estimated allowance and the provision for bad debts recorded in selling, general and administrative expenses. INVENTORY VALUATION: 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 regularly adjusts its inventory valuation based on shrinkage and management's estimates of net realizable value, taking into consideration factors such as inventory aging, future demand for the inventory, and the nature of the contractual agreements with customers and suppliers, including the ability to return inventory to them. A change to these assumptions could impact the valuation of inventory and have a resulting impact on margins. INCOME TAX VALUATION ALLOWANCE: Celestica records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management considers factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. GOODWILL: Celestica performs its annual goodwill impairment tests in the fourth quarter of each year, and more frequently if events or changes in circumstances indicate that an impairment loss may have been incurred. Impairment is tested at the reporting unit level by comparing the reporting unit's carrying amount to its fair value. The fair values of the reporting units are estimated using a combination of a market approach and discounted cash flows. The process of determining fair values is subjective and requires management to exercise judgment in making assumptions about future results, including revenue and cash flow projections at the reporting unit level, and discount rates. Celestica recorded an impairment loss in the fourth quarter of 2002. Future goodwill impairment tests may result in further impairment charges. INTANGIBLE ASSETS: Celestica performs its annual impairment tests on long-lived assets in the fourth quarter of each year, and more frequently if events or changes in circumstances indicate that an impairment loss may have been incurred. Celestica estimates the useful lives of intangible assets based on the nature of the asset, historical experience and the terms of any related supply contracts. The valuation of intangible assets is based on the amount of future net cash flows these assets are estimated to generate. Revenue and expense projections are based on management's estimates, including estimates of current and future industry conditions. A significant change to these assumptions could impact the estimated useful lives or valuation of intangible assets resulting in a change to amortization expense and impairment charges. RESTRUCTURING CHARGES: Celestica recorded restructuring charges in 2001 and 2002, relating to facility consolidations and workforce reductions. These charges are recorded based on detailed plans approved and committed to by management. The restructuring charges include employee severance and benefit costs, costs related to leased facilities that will be abandoned or subleased, owned facilities which are no longer used and will be held for disposition, cost of leased equipment that will be abandoned, impairment of owned equipment that will be held for disposition, and impairment of related intangible assets, primarily intellectual property. The recognition of these charges requires management to make certain judgments and estimates regarding the nature, timing and amount 29 associated with these plans. The estimates of future liability may change, requiring additional restructuring charges or a reduction of the liabilities already recorded. At the end of each reporting period, the Company evaluates the appropriateness of the remaining accrued balances. RECENT ACQUISITIONS A significant portion of Celestica's growth in prior years was generated by strengthening its customer relationships and increasing the breadth of its service offerings through asset and business acquisitions. The Company focused on investing strategically in acquisitions that better positioned the Company for future outsourcing opportunities. Celestica's most active year for acquisitions was 2001. The historical pace of Celestica's acquisitions did not continue in 2002 and may not continue in the future. As a result of the continued downturn in the economy, some of the sites acquired in prior years have been impacted by the Company's latest round of restructuring. Supply agreements entered into in connection with certain acquisitions were also affected by order cancellations and reschedulings as base-business volumes have decreased. See discussion below in "-- Results of Operations." 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. 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. In August 2001, Celestica acquired certain assets in Columbus, Ohio and Oklahoma City, Oklahoma from Lucent Technologies Inc. and signed a five-year supply agreement. The aggregate purchase 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. In August 2001, Celestica acquired Primetech Electronics Inc. (Primetech), an EMS provider in Canada. The purchase price for 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. 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 had approximately 9,000 employees at the date of acquisition. 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 for 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. 2002 ASSET ACQUISITIONS: In March 2002, the Company acquired certain assets located in Miyagi and Yamanashi, Japan from NEC Corporation. The Company signed a five-year supply agreement to provide a complete range of electronics manufacturing services for a broad range of NEC's optical backbone and broadband access equipment. In August 2002, the Company acquired certain assets from Corvis Corporation in the United States. The Company 30 signed a multi-year supply agreement with Corvis, which positioned Celestica as the exclusive manufacturer of Corvis' terrestrial optical networking products and sub-sea terminating equipment. The aggregate purchase price for these acquisitions in 2002 of $111.0 million was financed with cash and allocated to the net assets acquired, based on their relative fair values at the date of acquisition. 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 annual and quarterly operating results are primarily affected byvary from period to period as a result of the level and timing of customer orders, fluctuations in materials and other costs and the relative mix of value addvalue-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, geographic manufacturing mix and other factors, including price competition, manufacturing effectiveness and efficiency, the degree of automation used in the assembly process, the ability to manage labour, inventory and capital assets effectively, the timing of expenditures in anticipation of increasedforecasted sales levels, 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 quarterlabour and lowest in the first quarter. In 2001, weakother factors. Weak end-market conditions began to emerge in early to mid-2001 and have continued to weaken for the telecommunicationscommunications and information technology industriesindustries. This resulted in customers rescheduling andor canceling orders. This hasorders which negatively 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 2002 -------- -------- -------- Revenue.....................................................Revenue.............................................. 100.0% 100.0% 100.0% Cost of sales............................................... 92.8sales........................................ 92.9 92.9 93.3 ----- ----- ----- Gross profit................................................ 7.2profit......................................... 7.1 7.1 6.7 Selling, general and administrative expenses................ 3.8expenses......... 3.3 3.4 3.6 Amortization of goodwill and intangible assets........................... 1.0assets....... 1.0 1.3 1.2 Integration costs related to acquisitions...................acquisitions............ 0.2 0.2 0.2 Other charges...............................................charges........................................ 0.0 0.0 2.7 8.2 ----- ----- ----- Operating income (loss)..................................... 2.2.............................. 2.6 (0.5) (6.5) Interest expense (income), net.............................. 0.2income, net................................. (0.2) (0.1) (0.0) ----- ----- ----- Earnings (loss) before income taxes......................... 2.0taxes.................. 2.8 (0.4) (6.5) Income taxes................................................ 0.7taxes (recovery).............................. 0.7 0.0 (1.1) ----- ----- ----- Net earnings (loss)......................................... 1.3%.................................. 2.1% (0.4)% (5.4)% ===== ===== =====
ADJUSTED NET EARNINGS AsREVENUE Revenue decreased 17%, to $8,271.6 million in 2002 from $10,004.4 million in 2001, primarily due to a reduction in base-business volumes as a result of the significant numberprolonged weakened end-market conditions. Excess capacity in the EMS industry also put pressure on pricing for components and services, thereby reducing revenue. The visibility of end-market conditions remains limited. 31 Celestica manages its operations on a geographic basis. The three reporting segments are the Americas, Europe and Asia. Revenue from the Americas operations decreased 27%, to $4,640.8 million in 2002 from $6,334.6 million in 2001. Revenue from European operations decreased 40%, to $1,786.5 million in 2002 from $3,001.3 million in 2001. The Americas and European operations have been hardest hit by customer cancellations and delays of orders because of the downturn in end-market demand for their products, as well as the customers' demands for lower product manufacturing costs. As a result, the Company has initiated restructuring actions to reduce the manufacturing capacity in these geographies, which includes downsizing and closure of manufacturing facilities. The restructuring actions also include transferring programs from higher cost geographies to lower cost geographies. Revenue from Asian operations increased 113%, to $2,109.7 million in 2002 from $991.1 million in 2001. The increase in revenue from Asian operations is primarily due to acquisitions made by Celestica overand an increase in base-business volumes. The effect of 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 costs2002 acquisitions and the write-downshifting of goodwill and intangible assets) andprogram activities from other geographies are expected to increase revenue in 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 consideredAsian operations 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% ====== ====== ======
REVENUE2003. 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 businessbase-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. OrganicBase-business revenue declined in 2001 due to the softening of end-markets. The visibility of future end-market conditions is limited. 29 end markets. 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 thatThe following represents 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%end-market industries as a percentage 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.indicated periods:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 -------- -------- -------- Communications........................ 31% 36% 45% Servers............................... 33% 31% 26% Storage and other..................... 14% 18% 22% Workstations and PCs.................. 22% 15% 7%
The following customers represented more than 10% of total revenue for each of the indicated years:periods:
1999YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 --------- --------- ---------2002 -------- -------- -------- Sun Microsystems....................................Microsystems...................... X X X IBM.................................................IBM................................... X X X Lucent Technologies.................................Technologies................... X Hewlett-Packard..................................... X Cisco Systems....................................... X
Celestica's top-fivetop five customers represented in the aggregate 67%66% of total revenue in 20012002, compared to 67% in 2001 and 69% in 2000 and 68% in 1999.2000. 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 decreased 22%, to $555.8 million in 2002 from $712.5 million in 2001. Gross margin decreased to 6.7% in 2002 from 7.1% in 2001. Gross margins decreased 0.4% from prior year, primarily due to the significant reduction in business volumes and industry pricing pressures. The European operations were most adversely affected as they were operating at lower levels of utilization and higher fixed costs for the year. The volume reductions tended to impact higher value-added products, disproportionately, further adversely affecting 32 the European margins. In addition, costs for the European operations were higher than expected due to delays in transferring programs, the slower pace of restructuring and some process scrap and related inventory issues, in the latter part of the year. The margin declines in the European operations were offset partially by improved margins in the Americas and Asian operations. The Americas improved its operating efficiencies, had higher value-added product mix and benefited from restructuring actions. Asian margins improved on higher volumes and utilization rates. 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 the 2001 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, geographic manufacturing mix, start-up activity, new product introductions, and pricing within the electronics industry.industry, cost structure at individual sites and other factors. 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 labour and 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 decreased 13%, to $298.5 million (3.6% of revenue) in 2002 from $341.4 million (3.4% of revenue) in 2001. SG&A as a percentage of revenue increased as certain elements of expenses were fixed over this period. The decrease in SG&A, on an absolute basis, reflects the benefits from the Company's restructuring programs and a reduction in discretionary spending, which more than offset the increase in expenses due to operations acquired in the latter part of 2001 and in 2002. SG&A 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 decreasedincreased to $18.2 million (0.2% of revenue) in 2002, compared to $17.1 million (0.2% of revenue) in 2001 compared toand $19.5 million (0.2% of revenue) in 2000 and $19.7 million (0.4% of revenue) in 1999.2000. AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS AND AMORTIZATION Amortization of goodwill and intangible assets decreased 23%, to $95.9 million in 2002 from $125.0 million in 2001. Effective January 1, 2002, the Company fully adopted the new accounting standards for goodwill and discontinued amortization of all goodwill effective that date. Amortization of goodwill for 2001 was $39.2 million. See "-- Recent Accounting Developments." The decrease in amortization is the result of this change in accounting for goodwill, offset in part by the amortization of intangible assets arising from the 2001 and 2002 acquisitions. See note 2(q)(ii) to the Consolidated Financial Statements for the impact of the change in policy on net earnings (loss) and per share calculations. Amortization of goodwill and intangible assets increased 41%, to $125.0 million in 2001 from $88.9 million in 2000. ThisThe increase is attributable to the goodwill and 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 $21.1 million in 2002, compared to $22.8 million in 2001 compared toand $16.1 million in 2000 and $9.6 million in 1999.2000. The integration costs incurred in 20012002 primarily relate to the completion of the IBM acquisition from 2000Lucent, NEC Japan and the Avaya and MotorolaOmni 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.33 OTHER CHARGES OtherIn 2002, Celestica incurred $677.8 million in other charges, are non-recurring items or items that are unusual in nature. In 2001, Celestica incurredcompared to $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 result2001.
YEAR ENDED DECEMBER 31 ------------------------- 2001 2002 -------- -------- (in millions) 2001 restructuring.......................................... $237.0 $ 1.9 2002 restructuring.......................................... -- 383.5 2002 goodwill impairment.................................... -- 203.7 Other impairment............................................ 36.1 81.7 Deferred financing costs and debt redemption fees........... -- 9.6 Gain on sale of surplus land................................ -- (2.6) ------ ------ $273.1 $677.8 ====== ======
Further details 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 andcharges are subject to change. A further description of these charges is included in Notenote 13 to the Consolidated Financial Statements. As of December 31, 2002, the Company had announced two restructuring plans in response to the economic climate. These actions, which included reducing the workforce, consolidating facilities and changing the strategic focus of the number and geography of sites, were largely intended to align the Company's capacity and infrastructure to anticipated customer demand, as well as to rationalize its footprint worldwide. The 2001 restructuring plan amounted to $237.0 million. The 2002 restructuring plan amounted to $383.5 million. Cash outlays are funded from cash on hand. In January 2003, the Company announced a restructuring to further reduce its manufacturing capacity. See "-- Recent Developments." The Company has and expects to continue to benefit from the restructuring measures taken in 2001 and 2002 through margin improvements and reduced operating costs incosts. The Company has completed the upcoming year.major components of the 2001 restructuring plan, except for certain long-term lease and other contractual obligations. The Company expects to complete the major components of the 2002 restructuring plan by the end of 2002. Cash outlays are funded from cash on hand. Celestica did not incur2003, except for certain long-term lease and other contractual obligations. The Company continues to evaluate its cost structure relative to its revenue levels and has announced that it will take additional restructuring charges in 2000 or 1999.2003. See "-- Recent Developments." In the fourth quarter of 2002, the Company recorded a non-cash charge against goodwill of $203.7 million, in connection with its annual impairment assessments of goodwill. An independent third-party valuation confirmed the fair value of the reporting units and the impairment assessment. In the fourth quarter of 2002, the Company also recorded a non-cash charge of $81.7 million, primarily against intangible assets. In 2001, the Company recorded a non-cash charge of $36.1 million, primarily against goodwill and intangible assets. See note 7 to the Consolidated Financial Statements. The Company may continue to experience goodwill and intangible asset impairment charges in the future as a result of adverse changes in the electronics industry, customer demand and other market conditions, which may have a material adverse effect on the Company's financial condition. INTEREST INCOME, NET Interest income net of interest expense,in 2002 amounted to $17.2 million, compared to $27.7 million in 2001, and 2000 amounted to $7.9 million and $19.0 million, respectively. The Company incurred net interest expense of $10.7$36.8 million in 1999.2000. Interest income decreased in 2001for 2002 compared to 20002001, primarily due to the Company earning lower interest rates on its cash balance. In 2001 and 2000, the Company earned interestbalances. Interest income on its cash balance which more thanwas offset theby interest expense incurred on the Company's Senior Subordinated Notes.Notes and debt facilities, which has decreased from $19.8 million in 2001 to $16.1 million in 2002, due to the redemption of the Senior Subordinated Notes in August 2002. Interest expense is expected to decrease for 2003 as a result of the full-year effect of the redemption. 34 INCOME TAXES The Company's income tax recovery in 20012002 was $2.1$91.2 million, reflecting an effective tax recovery rate of 5%17%. This is compared to an income tax expenserecovery of $69.2$2.1 million in 2000,2001, reflecting an effective tax recovery rate of 25%, and an income tax expense of $36.0 million in 1999, reflecting an effective tax rate of 34%5%. The Company's effective tax rate decreased from 24% to 17% inis 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 20022004 and 2012. The 2001 effective tax ratebenefit arising from these incentives is impacted byapproximately $24.9 million, or $0.11 diluted per share for 2002 and $9.6 million, or $0.04 diluted per share for 2001. The Company expects 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. Celesticafuture based on the anticipated nature and conduct of its business and the tax laws, administrative practices and judicial decisions now in effect in the countries in which the Company has recognized aassets or conducts business, all of which are subject to change or differing interpretation, possibly with retroactive effects. The net deferred income tax asset as at December 31, 20012002 of $102.8$274.3 million comparedarises from available income tax losses and future income tax deductions. The Company's ability to $83.5 million at December 31, 2000. The net asset relates to the recognition of net operatinguse these income tax losses and future income tax deductions availableis dependent upon the operations of the Company in the tax jurisdictions in which such losses or deductions arose. Management records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset and tax planning strategies, management has determined that a valuation allowance of $76.6 million is required in respect of its deferred income tax assets as at December 31, 2002. No valuation allowance was required for the deferred income tax assets as at December 31, 2001. In order to reducefully utilize the net deferred income tax assets of $274.3 million, the Company will need to generate future years'taxable income of approximately $741.0 million. Based on the Company's current projection of taxable income for the periods in which the deferred income tax purposes. Celestica's current projections demonstrateassets are deductible, it is more likely than not that itthe Company will generate sufficient taxable income in the future to realize the benefit of thesethe net 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 as at December 31, 2002. UNAUDITED QUARTERLY FINANCIAL HIGHLIGHTS
2001 20002002 ----------------------------------------- ----------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- -------- -------- -------- (in millions, except per share amounts) Revenue........................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%$2,151.5 $2,249.2 $1,958.9 $1,911.9 Cost of Sales........................... $2,499.3 $2,468.5 $2,053.5 $2,270.7 $1,999.4 $2,087.2 $1,827.6 $1,801.6 Gross Profit %.......................... 7.2% 7.2% 6.8% 7.3% 7.1% 7.2% 6.7% 5.8% Net earnings (loss)................................. $ 54.8 $ 15.8 $ (38.7) $ (71.8) $ 26.139.7 $ 41.440.4 $ 55.7(90.6) $ 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%(434.7) Weighted average # of shares outstanding (in millions) -- basic...................basic............................ 203.6 207.0 218.1 227.1 190.1 202.7 203.0 203.2229.8 230.2 230.1 229.0 -- diluted(3)(5)...........diluted.......................... 223.1 225.5 218.1 227.1 199.5 211.9 220.0 222.6 Basic earnings236.8 236.0 230.1 229.0 Earnings (loss) per share........................share -- basic............................ $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ 0.140.15 $ 0.200.16 $ 0.26(0.40) $ 0.39 Diluted earnings (loss) per share(3)(5)..................(1.90) -- diluted.......................... $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ 0.130.15 $ 0.200.15 $ 0.25(0.40) $ 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(1.90)
- ------------- (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) ForCapital Resources" for information regarding the thirdimpact of foreign currency fluctuations on the Company. B. LIQUIDITY AND CAPITAL RESOURCES In 2002, operating activities provided Celestica with $982.8 million in cash, compared to $1,290.5 million in 2001. Cash was generated from earnings and fourth quarter of 2001, excludes the effect of options and convertible debt as they are anti-dilutivea reduction in working capital, primarily inventory, due to improved inventory management, and the loss. (4) For purposescollection of calculating diluted adjusted earnings per shareaccounts receivable. The Company will continue to focus on improving working capital management. Cash generated from operations was sufficient to fully fund the Company's investing and financing activities for 2002. 35 Investing activities for 2002 included capital expenditures of $151.4 million, and asset acquisitions of $111.0 million, offset in part by proceeds from the thirdsale of the Company's Columbus, Ohio facility and fourth quarterfrom the sale-leaseback of 2001,machinery and equipment. In 2002, Celestica redeemed the weighted average numberentire $130.0 million of shares outstanding Senior Subordinated Notes which were due in millions was 235.72006 and 244.5, respectively. (5) Shares outstanding and per share amounts for 2000 have been restated to reflectpaid the treasury stock method, retroactively applied. See "-- Recent Accounting Developments." CONVERTIBLE DEBT In August 2000, Celestica issuedcontractual premium of 5.25%, or $6.9 million, on redemption. The Company also reduced the leverage on its balance sheet by repurchasing Liquid Yield Option-TM- Notes (LYONs) in the open market. These LYONs, withhaving a principal amount at maturity of $1,813.6$222.9 million, payable August 1, 2020.were repurchased at an average price of $450.10 per LYON, for a total of $100.3 million. A gain of $6.7 million, net of taxes of $3.9 million, was recorded. See further details in note 10 to the Consolidated Financial Statements. The Company received gross proceedsmay, from time to time, purchase additional LYONs in the open market. Subsequent to year-end, the board of $862.9directors authorized the Company to spend up to an additional $100.0 million to repurchase LYONs, at management's discretion. This is in addition to the amounts authorized in October 2002, of which $48.0 million remains available for future purchases. The amount and incurred $12.5timing of future purchases cannot be determined at this time. In July 2002, Celestica filed a Normal Course Issuer Bid to repurchase up to 9.6 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 amountcancellation, over a period from August 1, 2002 to July 30, 2003. The shares will be purchased at maturity. Holdersthe market price at the time of purchase. The number of shares to be repurchased during any 30-day period may requirenot exceed 2% of the outstanding subordinate voting shares. A copy of our Notice relating to the Normal Course Issuer Bid may be obtained from Celestica, without charge, by contacting the Company's Investor Relations Department at clsir@celestica.com. In 2002, 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 orrepurchased 2.0 million 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 intoat a principal equity component (representing the present valueweighted average price of the notes) and an option component (representing the value$16.23 per share. All 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 yieldthese transactions were funded with cash 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 RESOURCEShand. 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 waswere the reduction of inventory due to better inventory management, strong accounts receivable collections and 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 "-- Recent Acquisitions." CelesticaThe Company fully funded the cash portion of its 2001 acquisitions with cash from operations and will continue to focus on improving working capital management.operations. 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. ForCAPITAL RESOURCES During the year, endedCelestica amended its credit facilities. At 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 completed2002, the LYONs offering, raising gross proceeds of $862.9 million less underwriting commissions of $19.4 million (pre-tax). CAPITAL RESOURCES Celestica hasCompany had two $250.0 million and onecredit facilities: a $500.0 million unsecured,four-year revolving term credit facilities totalling $1.0 billion, each provided byfacility and a syndicate of lenders$350.0 million revolving term credit facility which expire in 2005 and are available until2004, respectively. The Company elected to cancel its third credit facility which was originally entered into in July 2003, April 2004 and July 2005, respectively.1998. 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 $250.02002. Celestica and certain subsidiaries have uncommitted bank facilities which total $47.1 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 loansthat are denominated in Singapore dollars and are repayable through quarterly payments.available for operating requirements. 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 20022003 to be approximately $170.0 millionin the range of 1.5% to $220.0 million.2.0% of revenue. At December 31, 2001,2002, Celestica had committed $21.0$30.3 million in capital expenditures. In addition, Celestica regularly reviews acquisition opportunities, and therefore, may therefore require additional debt or equity financing. The Company has an arrangement to sell up to $400.0 million in accounts receivable under a revolving facility which is available until September 2004. As of year-end, the Company generated cash from the sale of 36 $320.5 million in accounts receivable. The terms of the arrangement provide that the purchaser may elect not to purchase receivables if Celestica's credit rating falls below a specified threshold. Celestica's credit rating is significantly above that threshold. 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. The Company has an exchange risk management policy in place to control its hedging programs and does not enter into speculative trades. At 34 December 31, 2001,2002, Celestica had forward foreign exchange contracts covering various currencies in an aggregate notional amount of $704.8$669.1 million with expiry dates up to May 2003.March 2004, except for one contract for $10.6 million that expires in January 2006. The fair value of these contracts at December 31, 2001,2002, was an unrealized lossgain of $7.4$18.9 million. Celestica's current hedging activity is designed to reduce the variability of its foreign currency costs and generally involves entering into contracts to selltrade U.S. dollars to purchasefor Canadian dollars, British pounds sterling, Mexican pesos, euros, ThailandThai baht, Singapore dollars, Brazilian reais, Japanese yen and Czech koruna at future dates. In general, these contracts extend for periods of less than 1819 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. See note 2(n) to the Consolidated Financial Statements. As at December 31, 2001,2002, the Company has contractual obligations that require future payments as follows:
TOTAL 2002 2003 2004 2005 2006 2007 THEREAFTER -------- -------- -------- -------- -------- -------- ---------- (in millions) Long-term debt............................ $147.4debt......................... $ 10.06.9 $ 4.52.7 $ 1.32.5 $ 0.7 $130.61.5 $ 0.30.1 $ 0.1 $-- Operating leases and license commitments............................. 359.4 104.1 81.3 38.0 26.4 20.4 89.2leases....................... 338.3 106.5 59.5 38.9 23.0 18.9 91.5
TheAs at December 31, 2002, the Company has a convertible instrumentinstruments, the LYONs, with aan outstanding principal amount at maturity of $1,813.6$1,590.6 million payable August 1, 2020. Holders of the instruments have the option to require Celestica to repurchase their LYONs on August 2, 2005, at a price of $572.82 per LYON, or a total of $911.1 million. The Company may elect to settle its repurchase obligation in cash or shares, or any combination thereof. See further details in Notenote 10 to the Consolidated Financial Statements. Under the terms of an existing real estate lease which expires in 2004, Celestica has the right to acquire the real estate at a purchase price equal to the lease balance which currently is approximately $37.3 million. In the event that the lease is not renewed, subject to certain conditions, Celestica may choose to market and complete the sale of the real estate on behalf of the lessor. If the highest offer received is less than the lease balance, Celestica would pay the lessor the lease balance less the gross sale proceeds, subject to a maximum of $31.5 million. In the event that no acceptable offers are received, Celestica would pay the lessor $31.5 million and return the property to the lessor. Alternatively, Celestica may choose to acquire the real estate at the expiration for a price equal to the then current lease balance. The future lease payments under this lease are included in the total operating lease commitments. As at December 31, 2001,2002, the Company has commitments that expire as follows:
TOTAL 2002 2003 2004 2005 2006 2007 THEREAFTER -------- -------- -------- -------- -------- -------- ---------- (in millions) Foreign currency contracts................ $704.8 $654.0 $50.8 $-- $--contracts............. $669.1 $621.5 $ 39.6 $ 5.3 $ 2.7 $-- $-- Letters of credit, letters of guarantee and guarantees.......... 24.1 24.1surety and performance bonds..... 61.2 37.6 1.0 16.9 -- -- -- -- --3.9 1.8
RECENT DEVELOPMENT On March 31, 2002,The Company has also provided routine indemnifications, whose terms range in duration and often are not explicitly defined. These guarantees may include indemnifications against adverse effects due to changes in tax laws and patent infringements by third parties. The maximum amounts from these indemnifications cannot be reasonably estimated. In some cases, the Company purchasedhas recourse against other parties to mitigate its risk of loss 37 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 affectthese guarantees. Historically, 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 changeCompany has not made significant payments relating to these factors could impactindemnifications. The Company expenses management related fees charged by its parent company. Management believes that the estimated allowance. Celestica valuesfees charged are reasonable in relation to the services provided. See note 15 to the Consolidated Financial Statements. RECENT DEVELOPMENTS In January 2003, the Company made the following announcements: In response to the continued limited visibility in end markets, the Company plans to further reduce its inventorymanufacturing capacity. The reduction in capacity will result in a pre-tax restructuring charge of between $50.0 million and $70.0 million, to be recorded during 2003, of which approximately 80% will be cash costs. The Company has, from time to time, purchased LYONs on a first-in, first-out basisthe open market. The Company has been authorized by the board of directors to spend up to an additional $100.0 million to repurchase LYONs, at management's discretion. This is in addition to the loweramounts authorized in October 2002, of cost and replacement costwhich $48.0 million remains available 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 purchases. 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, GOODWILL AND GOODWILL:OTHER INTANGIBLE ASSETS: In September 2001, the CICA issued Handbook Sections 1581, "Business Combinations" and 3062, "Goodwill and Other Intangible Assets." The newFASB issued similar standards mandate the purchase method of accounting for business combinationsin July 2001. See notes 2(q)(ii) 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 that22(k) 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.Consolidated Financial Statements. 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 beginningEffective January 1, 2002, for awards granted on or after that date. The Company's current accounting policies are consistent withthe Company adopted the new standard. 36 CICA Handbook Section 3870. See note 2(q)(iii) to the Consolidated Financial Statements. 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, effectiveIn 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 saleAcG-13. See note 2(r) 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.Consolidated Financial Statements. IMPAIRMENT OF LONG-LIVED ASSETS: In August 2001, FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations" and in October 2001, FASB issued StatementSFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,Assets." which retainsIn December 2002, the fundamental provisions ofCICA issued standards similar to SFAS 121No. 144. See notes 22(k) and 2(r) to the Consolidated Financial Statements. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In July 2002, FASB issued SFAS No. 146, "Accounting 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 isCosts Associated with Exit or Disposal Activities," effective for exit or disposal activities that are initiated after December 31, 2002. See note 22(k) to the Company's fiscal year commencingConsolidated Financial Statements. GUARANTEES: In November 2002, FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements." In December 2002, the CICA approved AcG-14 which harmonizes Canadian GAAP to the disclosure requirements of FIN 45. See notes 22(k) and 2(r) to the Consolidated Financial Statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 1, 2002,2003, FASB issued FIN 46, "Consolidation of Variable Interest Entities." See note 22(k) 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.Consolidated Financial Statements. 38 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,past two years, economic growth slowed and, in some regions of the world, the economy contracted. As a result,The demand for technology products fell significantly and Celestica's customers experienced commensurately reduced demand for their products. In turn, Celestica experienced reduced demand for electronicsthe manufacturing services. However, this downturn in demand was offset partially by an increase on the part of Celestica's customers to outsource their manufacturing.services that we provide. In 2002,2003, the economic environment continues to be uncertain, and Celestica continues to experience poorlimited visibility for customerin end-market demand. Given the difficult economic environment, Celestica has been focussedfocused 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 intendsefficiencies. We intend to continue these activities in 2002.2003. 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 electronicsincreased 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 - ---- -------- ----------------------------------------------------------------------------------- EUGENEEugene V. POLISTUK................ 55Polistuk................... 56 Chairman of the Board, Chief Executive Officer, and Director ANTHONYRobert L. Crandall................... 67 Director William A. Etherington............... 61 Director Richard S. Love...................... 65 Director Roger L. Martin...................... 46 Director Anthony R. Melman.................... 55 Director Michio Naruto........................ 67 Director Gerald W. Schwartz................... 61 Director Charles W. Szuluk.................... 60 Nominee to Board of Directors Don Tapscott......................... 55 Director J. Marvin M(a)Gee.................... 50 President and Chief Operating Officer Anthony P. PUPPI.................. 44Puppi..................... 45 Executive Vice President, Chief Financial Officer and 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.................. 49Thomas Tropea..................... 50 Vice Chair, Global Customer Units and Worldwide Marketing and Business Development ANDREW G. GORT.................... 49 ExecutiveStephen W. Delaney................... 43 President, Americas N.K. Quek............................ 55 President, Asia Peter J. Bar......................... 45 Vice President Global Supply Chain Management ALASTAIR KELLY.................... 57 Executive Vice President,and Corporate Development ARTHURController Arthur P. CIMENTO................. 44Cimento.................... 45 Senior Vice President, Corporate Strategies LISA J. COLNETT................... 44 SeniorElizabeth L. DelBianco............... 43 Vice President, Worldwide Process ManagementGeneral Counsel, and ChiefSecretary
39
NAME AGE POSITION WITH CELESTICA - ---- -------- ------------------------------------------------------------ Iain S. Kennedy...................... 41 Group Executive, Global Supply Chain and Information Officer STEPHEN DELANEY................... 42 Senior Vice President, U.S., Celestica Corporation IAINTechnology Donald S. KENNEDY................... 40 Senior Vice President, Integration DONALD S. MCCREESH................ 53McCreesh................... 54 Senior Vice President, Human Resources DANIELPaul Nicoletti....................... 35 Vice President and Corporate Treasurer Daniel P. SHEA.................... 45 Senior Vice PresidentShea....................... 46 Group Executive and Chief Technology Officer RAHUL SURI........................ 37Rahul Suri........................... 38 Senior Vice President, Mergers and Acquisitions PETER J. BAR...................... 44Corporate Development F. Graham Thouret.................... 48 Senior Vice President, and Corporate Controller ELIZABETH L. DELBIANCO............ 42 Vice President, General Counsel and Secretary F. GRAHAM THOURET................. 47 Vice President and Corporate TreasurerFinance
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 ofwith 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 beenAnd more recently, in 2002, Mr. Polistuk was inducted by the recipientUniversity of ELECTRONIC BUSINESS' Outstanding CEO award,Toronto into its Engineering Hall of Distinction for his contributions to engineering and most recently, undersociety. 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. PuppiPolistuk holds a Bachelor of Business AdministrationApplied Science degree in FinanceElectrical Engineering from the University of Toronto and a MasterDoctor of Business Administration degreeEngineering (Hon.) from York University in Ontario.Ryerson University. 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 1998.1998 and was appointed Lead Director in December 2002. 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 a corporate director serving on the boards of Celestica Inc. (since October 2001), Canadian Imperial Bank of Commerce, Dofasco Inc., MDS Inc. and AT&T Canada. He 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 degree 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 (electronics manufacturing) 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 at the University of Toronto and has been a director of Celestica since July 1998. Mr. Martin was formerly a director of Monitor Company, a Cambridge, Massachusetts based consulting firm, and is Chair of the Ontario Task Force on Competitiveness, Productivity, and Economic Progress. Mr. Martin also serves as a director foron the board of The Thomson Corporation, Ontario SuperBuild Corporation,serves on the Canadian Film Centreadvisory boards of Butterfield & Robinson and Social Capital Partners, is a founder of E-magine and serves as a trustee of theThe Hospital for Sick Children. Mr. Martin holds aan AB degree (cum laude) from Harvard College and a Master of Business Administration degree from the Harvard University Graduate School of Business Administration. 40 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.1984. He serves on the boards of various Onex subsidiaries. From 1977 to 1984, heDr. Melman was Senior Vice President of Canadian Imperial Bank of Commerce, responsible forin charge of worldwide merchant banking, project financing, acquisitions and other specialized financing activities. Prior to emigrating to Canada in 1977, Dr. Melmanhe had extensive merchant banking experience in South Africa and the United Kingdom.U.K. 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. He is also Chair of Fundraising for the Pediatric Oncology Group of Ontario (POGO). Dr. Melman holds a Bachelor of Science degree in Chemical Engineering from the University of The Witwatersrand, a Master of Business Administration (gold medallist)medalist) from University of Cape Town University and a Ph.D. in Finance from the University of The Witwatersrand. MICHIO NARUTO is the Chairman of Celestica Japan KK,had been Chairman of the Board of ICL plc,Fujitsu Services (formerly ICL) since 2002. He has been special representative of Fujitsu Ltd.since June 2000 and was Vice Chairman of Fujitsu until April 2000. Mr. Naruto is currently Chairman of Toyota Info Technology Center.InfoTechnology Center, a subsidiary of Toyota Motor Corporation. He has been a director of Celestica since October 2001. Mr. Naruto joined Fujitsu Limited in February 1962. In 1981, when Fujitsuthe company entered into athe technology agreement with ICL, he held the position of General Manager, Business Administration of International Operations. He was appointed to the board of Fujitsu Limited in 1985, in charge of International Operations. Later his responsibility in Fujitsu covered the ICL Business Group; Legal and Industry Relations; and, 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 Corporation 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.,what is now CanWest Global Communications Corp. He is a director of Onex, The Bank of Nova Scotia, LSG/Sky Chefs,Phoenix Entertainment Corp. and Vincor International Inc., and Phoenix Pictures Inc.Chairman of Loews Cineplex Entertainment Corp. Mr. Schwartz is also Vice Chairman and Membermember of the Executive Committee of Mount Sinai Hospital, and is a director, governor or trustee of a number of other organizations, including Junior Achievement of Toronto, Canadian Council of Christians and Jews, and The Board of Associates of the Harvard Business School. Mr. SchwartzSchool and The Simon Wiesenthal Center. He 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. CHARLES W. SZULUK, formerly an officer of The Ford Motor Company, was President of Visteon Automotive Systems, and a Group Vice President. From 1988 until 1999, he held positions of increasing responsibility with Ford, including General Manager, Electronics Division, and Vice President, Process Leadership and Information Systems. He retired from Ford in 1999. Prior to joining Ford, he spent 24 years with IBM Corporation in a variety of management and executive management positions. Mr. Szuluk holds a Bachelor of Science degree in Chemical Engineering from the University of Massachusetts and attended Union College of New York in Advanced Graduate Studies. DON TAPSCOTT is an internationally sought afterrespected 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, presidentPresident of New Paradigm Learning Corporation Chairman of Maptuit,-- a business strategy and education company he founded in 1992, 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.Health, and a fellow of the World Economic Forum. 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 was2001. Prior to that, he held the position of Executive Vice President, Worldwide Operations fromsince October 1999 to February 2001 and was1999. He joined the Company in January 1997, as Senior Vice President, Canada from January 1997 until October 1999.Canadian Operations. Mr. M(a)Gee joinedcurrently has 41 responsibility for global manufacturing operations. Before joining Celestica, Mr. M(a)Gee spent 18 years with IBM Canada in 1979 and, over the course of his career, haswhere he held a number of executive positions with IBM Canada'sin 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. ANTHONY P. PUPPI has been the Chief Financial Officer of Celestica since its establishment and was a director of Celestica from October 1996 to April 2002. 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, power systems, and plastics. 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. R. THOMAS TROPEA has been Vice Chair, Global Customer Units and Worldwide Marketing and Business Development of Celestica since February 2001 and2001. Prior to that, he was the Executive Vice President, Worldwide Marketing and Business Development fromsince October 1999, to February 2001andand was 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. GORTUniversity. STEPHEN W. DELANEY has been the ExecutivePresident, Americas of Celestica since September 2002. He is responsible for Celestica's operations in North and South America. Prior to that, Mr. Delaney was Senior Vice President, Supply Chain ManagementU.S. East Operations since February 2001January 2002, and was Senior Vice President, U.S. Central Operations from May 2001 to January 2002. Before joining Celestica, Mr. Delaney was the vice president and general manager of Interior and Exterior Systems Business at Visteon, where he was responsible for a division with 25 plants and 25,000 employees spanning 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. N. K. QUEK has been the President, Asia of Celestica since September 2002. He is responsible for Celestica's operations in China, Hong Kong, Indonesia, Japan, Malaysia, Singapore, and Thailand. Prior to that, Mr. Quek was Senior Vice President, Asia Operations. Before joining Celestica in 1999, he was the Senior Vice President of Celestica from October 1996 until February 2001. He is responsibleAsia Operations for global supply chain management, which includes Celestica's worldwide procurement procedures.IMS. Mr. Gort joined IBM Canada in 1969Quek has over 25 years direct high-tech experience and, over the course of his career, has held various managerial rolespositions at Intel, Seagate, National Semi-conductor, GE, SCI Systems and Siemens in new products, materials, planning, office systemsoperations, repair services, process engineering, quality assurance, and manufacturing products.power. Mr. GortQuek holds a Bachelor degree in Management Studies from the Management Institute of Singapore. PETER J. BAR has been Vice President and Corporate Controller of Celestica since February 1999. He joined Celestica in March 1998, as Vice President, Finance -- Power Systems. Prior to joining Celestica, Mr. Bar was the Director of Finance for the Personal Systems Group of IBM Canada. During his 14-year career in the information technology industry, he has served in several senior management positions for both IBM Canada, and IBM's headquarters in Armonk, New York. Mr. Bar holds a Bachelor of Arts degree in Economics and a Master of Business AdministrationCommerce 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 UniversityToronto and a Doctor of Science degree from Salford University.Chartered Accountants designation. 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 DELANEY42 ELIZABETH L. DELBIANCO joined Celestica Inc. 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 1997February 1998, 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 PresidentCounsel, 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.Secretary. She has overall responsibilityis responsible for the legal affairs of Celestica on a global basis, including all aspects of regulatory compliance and is also the Corporate Secretary.corporate governance. 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 University of Western Ontario. She is admitted to practice in Ontario and New York. IAIN S. KENNEDY has been a Senior Vice President of Celestica since 1996. He currently is responsible for Celestica's global supply chain management (SCM) and information technology (IT) organizations. As such, Mr. Kennedy is responsible for maintaining industry-leading SCM and IT performance, while continuing to deploy a competitive operational strategy across all functions and regions of the Company's sophisticated global manufacturing network. Previously, he was responsible for the integration of new acquisitions as well as South American operations from October 2000 until November 2002. Prior to that he led Celestica's Mergers and Acquisitions team from 1996 through September 2000. Mr. Kennedy joined IBM Canada in 1984, and, over the course of his career, has held a number of senior management positions in key areas of the business, including supply chain management, manufacturing operations, business development, and information technology as chief information officer from 1996 to 1998. 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. Ms. DelBiancoIn 1998, he was the recipient of Canada's Top 40 Under 40-TM- award in recognition of attaining a significant level of success before the age of 40. 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), one of North America's leading financial institutions. In 1988 he joined Northern Telecom, a global leader in telephony, data, wireless and wireline solutions for the Internet. There he held a number of senior human resource management positions. In 1993, he was named Senior Vice President, Human Resources, where he oversaw all global human resource operations for Nortel. Mr. McCreesh holds both a Bachelor of Psychology and a Master of Business Administration degree from McMaster University. PAUL NICOLETTI has been Vice President and Corporate Treasurer since September 2002. He is qualifiedresponsible for all corporate finance and treasury-related matters, in addition to practice lawglobal tax and investor relations. Previously, he was Vice President, Global Financial Operations since February 2001, where he led the regional financial organizations on a global basis. Prior to that, since August 1999, he was Vice President, Finance and was responsible for all financial aspects of Celestica's Canadian and Mexico EMS operations. Mr. Nicoletti joined IBM in 1989, and, over the course of his career, has held a number of senior financial roles in business development, planning, accounting, pricing, and financial strategies. He was responsible for leading all financial strategies and due diligence relating to the divestiture of Celestica from IBM. Mr. Nicoletti holds a Bachelor of Arts degree from the University of Western Ontario and New York.a Masters of Business Administration degree from York University. DANIEL P. SHEA has been a Senior Vice President of Celestica since October 1996, and has been the company's Chief Technology Officer since March 1998. In his current role as Group Executive and Chief Technology Officer, Mr. Shea is responsible for all activities including sales, business development, operations, and profit and loss associated with his global accounts, as well as all aspects of the Company's technology development. Mr. Shea joined IBM Canada in 1980, and, over the course of his career, has held a number of engineering management roles including quality, reliability, procurement, development and power systems. Mr. Shea holds a Bachelor of Applied Science degree in Electrical Engineering from the University of Toronto. RAHUL SURI has been a Senior Vice President of Celestica since July 2000. In his current role as Senior Vice President, Corporate Development, he is responsible for global mergers and acquisitions, as well as for pursuing, developing and implementing strategic corporate development opportunities with new and existing customers and partners. Mr. Suri has more than 13 years of mergers and acquisitions and corporate development experience. Prior to joining Celestica, he held a range of senior positions in the mergers and acquisitions field, including managing director of the M&A group at BMO Nesbitt Burns Investment Banking, and Partner at 43 Davies Ward Phillips & Vineberg, a leading M&A law firm. Mr. Suri was also a visiting professor at Queen's University Law School, Ontario for three years, where he taught advanced corporate law and mergers and acquisitions. In 1992, he served as policy advisor to the chairman and the executive director of the Ontario Securities Commission on policy and legal matters. Mr. Suri has a Master of Arts degree in law from Cambridge University, England. He is also a qualified barrister and solicitor in the Province of Ontario. F. GRAHAM THOURET has been a Senior Vice President of Celestica since September 2002. He is currently responsible for the Company's global finance organization. Prior to that, Mr. Thouret was Vice President and Corporate Treasurer of Celestica since October 1997. Prior to that,Before joining Celestica, he served as Vice Presidentvice president and Treasurertreasurer 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 (Gulf Canada) and investment banking.banking (Burns Fry). Mr. Thouret holds a Bachelor of Engineering (Honours) 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.of the Board of Directors attended and each meeting attended of a committee of the Board of Directors of which the Director is a member. 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 boardBoard of directors,Directors, to receive their fees in subordinate voting shares. Directors who joined the Board of Directors 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 purposesdirector compensation may not exceed an aggregate of 500,000 subordinate voting shares. The aggregate compensation paid in 20012002 by the CompanyCelestica to our directors in their capacity as directors was $50,000$60,000 and the right to receive, in the aggregate 18,482.41for 2002, 19,286 subordinate voting shares.shares (an aggregate of 77,830 subordinate voting shares from the initial public offering through 2002). 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.Board of Directors. In 2001, each of the2002, eligible directors waswere issued options to acquire 20,00010,000 subordinate voting shares pursuant to the Long-Term Incentive Plan. 80,000 options were issuedPlan, at an exercise price of $44.23 and 40,000 options were issued at an exercise price of $35.95.US$32.40. 44 As of March 1, 2002,February 28, 2003, 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 - ------------- -------------- 710,379210,000 $ 0.925 596,737 $ 5.00 399,190483,690 $ 8.75 69,700 $ 7.50 373,880293,880 C$ 18.90 30,000 $ 12.345 23,00028,600 C$ 20.625 80,000 C$ 31.85 70,000 $ 22.97 542,000486,000 C$ 57.845 60,000 $ 39.03 100,000 C$ 60.00 276,000251,000 C$ 86.50 62,00059,000 $ 56.1875 25,000 C$ 73.50 100,000 $ 50.00 526,400480,200 C$ 66.06 144,000149,000 $ 41.89 5,000 $ 40.06 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 50,000 $ 13.10 145,000 $ 18.66 482,000 C$ 29.11 3,000 C$ 23.29 10,000 $ 32.40
These options expire at various dates from November 4, 2005 through December 4, 2011.18, 2012. See Item 6(E), "-- Share Ownership -- Share Purchase and Option Plans" below. See Notenote 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, 20012002 (collectively, the "Named Executive Officers") for services rendered in all capacities during our two most recently completed financial years. 45 SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION AWARDS -------------- ANNUAL COMPENSATION(1)------------------------------ ------------------- SECURITIES ------------------------------- UNDER OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED(2) COMPENSATION(3) - --------------------------- -------- -------- --------- ---------------------- ------------------- --------------- ($) ($) (#) ($) Eugene V. Polistuk................................. 2001Polistuk...................... 2002 700,000 -- 150,000 210,737645,161 Chairman of the Board and Chief 2001 700,000 -- 150,000 225,962 Executive Officer 2000 550,000 1,300,000 100,000 193,029 J. Marvin M(a)Gee.................................. 2001 516,250Gee....................... 2002 525,000 -- 135,000 57,773110,000 31,589 President and Chief Operating Officer 2000 360,000 510,000 40,000 31,8092001 516,250 -- 135,000 61,947 Anthony P. Puppi...................................Puppi........................ 2002 400,000 -- 60,000 117,608 Executive Vice President, Chief 2001 400,000 -- 59,000 51,822 Executive Vice President, Chief55,565 Financial Officer 2000 370,000 524,000 35,000 47,121 and General Manager, Global Services R. Thomas Tropea................................... 2001Tropea........................ 2002 400,000 -- 59,000 10,20045,000 11,500 Vice Chair, Global Customer Units and 2001 400,000 -- 59,000 10,200 Worldwide 2000 350,000 495,000 35,000 5,100 Marketing and Business Development Stephen Delaney(4).................................W. Delaney...................... 2002 333,750 -- 75,000(4) 7,000 President, Americas 2001 204,694 150,000(5) 140,000(6) 154,500(7) Senior Vice President, U.S., Celestica Corporation204,694(5) 150,000(6) 140,000(7) 154,500(8)
- ------------------------- (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, 20012002 to Named Executive Officers." (3) Represents amounts set aside to provide benefits under Celestica's pension plans (see "--" -- Pension Plans"). (4) Includes 25,000 options granted to Mr. Delaney on October 1, 2002 when he assumed responsibility for the Americas. (5) 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)(6) 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)(7) Includes 100,000 options granted to Mr. Delaney upon joining Celestica. (7)(8) Includes $150,000 paid to Mr. Delaney at his date of hire. 44 upon joining Celestica. OPTIONS GRANTED DURING YEAR ENDED DECEMBER 31, 20012002 TO NAMED EXECUTIVE OFFICERS The following table sets out options to purchase subordinate voting shares granted by the CorporationCompany to the Named Executive Officers during the year ended December 31, 2001.2002.
SUBORDINATE MARKET VALUE OF SUBORDINATEVOTING SHARES % OF SUBORDINATE VOTING SHARES TOTAL OPTIONS SUBORDINATE VOTING SHARES UNDER OPTIONS GRANTED TO EXERCISESHARES ON THE NAME GRANTED(1) EMPLOYEES IN 2002 EXERCISE PRICE DATE OF GRANTED EMPLOYEES PRICE GRANT NAME (1) (#) IN 2001 ($/SHARE) ($/SHARE) EXPIRATION DATE - ---- ------------- ------------------ -------------- ---------- --------------- ---------------------------------- ----------------- (#) ($/share) ($/share) Eugene V. Polistuk..................Polistuk... 150,000 1.89%3.9% C$66.0629.11 C$66.0629.11 December 4, 20113, 2012 J. Marvin M(a)Gee................... 25,000 0.32%Gee.... 110,000 2.8% C$73.5029.11 C$73.50 March 1, 2011 110,000 1.39% C$66.06 C$66.0629.11 December 4, 20113, 2012 Anthony P. Puppi.................... 59,000 0.75%Puppi..... 60,000 1.5% C$66.0629.11 C$66.0629.11 December 4, 20113, 2012 R. Thomas Tropea.................... 59,000 0.75%Tropea..... 45,000 1.2% U.S.$41.8918.66 U.S.$41.8918.66 December 4, 20113, 2012 Stephen Delaney..................... 100,000 1.26%W. Delaney... 25,000 0.6% U.S.$50.0013.10 U.S.$50.00 April 20, 2011 40,000 0.51%13.10 October 1, 2012 50,000 1.3% U.S.$41.8918.66 U.S.$41.8918.66 December 4, 20113, 2012
- ------------------------- (1) Options vest in four equal annual instalments.installments. 46 OPTIONS EXERCISED DURING MOST RECENTLY COMPLETED FINANCIAL YEAR AND VALUE OF OPTIONS AT DECEMBER 31, 20012002 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, 20012002 and with respect to subordinate voting shares under option to the Named Executive Officers as at December 31, 2001.2002.
SUBORDINATE VALUE OF UNEXERCISED VOTING SHARES AGGREGATE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED ON VALUESUBORDINATE VOTING AGGREGATE DECEMBER 31, 20012002 DECEMBER 31, 2001(2)2002(2) SHARES ACQUIRED VALUE --------------------------------- --------------------------------- NAME ON EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLEEXERCISABLE(3) UNEXERCISABLE(3) EXERCISABLE(3) UNEXERCISABLE(3) - ---- ------------------ ----------- -------------- ----------- ------------------------- ----------------------------------------- -------------- ---------------- Eugene V. Polistuk...................... 44,607 $1,563,921 390,267/405,566(3) $9,828,562/$3,769,418Polistuk..... -- -- 598,333 347,500 $2,738,230 -- J. Marvin M(a)Gee.......................Gee...... -- -- 155,212/235,920(3) $3,672,565/252,382 248,750 $1,226,996 962,551 -- Anthony P. Puppi........................ 42,567 $1,701,264 126,395/161,170(3) $2,595,020/Puppi....... 14,869 $139,769 193,446 139,250 $1,367,221 483,210 -- R. Thomas Tropea........................Tropea....... -- -- 183,664/213,526(4) $4,474,479/271,302 170,888 $2,998,853 998,053 $249,513 Stephen Delaney.........................W. Delaney..... -- -- 35,000 180,000 -- /140,000(4) -- / --$ 25,000
- ------------------------- (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, 20012002 of $40.39.$14.10. (3) Options granted under the ESPO Plans and the Long-Term Incentive Plan. (4) Options granted under the Long-Term Incentive Plan.Exercisable options include options that vested January 1, 2003. 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)GeeThey 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. Mr. M(a)Gee participates only in the defined contribution portion of the Canadian Pension Plan. 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 to this plan on behalf of an employee 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 underCelestica currently contributes 6% of earnings annually on behalf of Mr. MaGee. Messrs. Polistuk and Puppi participate only in 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.Plan. The benefit provided under the defined benefit portion of the Canadian Pension Plan for each of the officers who participate in thethis plan is equal to the benefit entitlement accrued under the relevant IBM plan prior to October 22, 1996, the date Celestica was divested from IBM, plus the benefits earned under the Canadian Pension Plan since that date. The terms of the Canadian Pension Plan, which were accepted by certain employees when they transferred to Celestica, mirrored those of the IBM pension plan in place at the time of divestiture. The Plan is of a modified career average design with benefits based on a three-year earnings average to December 31 of a designated base year (the "Base Year"). In 2002, the Base Year was updated to December 31, 2001 and may be updated from time to time until December 31, 2009. The formula for calculating benefits for the period after October 22, 1996 is 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. 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 based on average earnings and years of service. 47 CANADIAN PENSION PLAN TABLE(1)(2)
YEARS OF SERVICE ----------------------------------------- EARNINGS AVERAGE 20 25 30 35 - ---------------- -------- -------- -------- -------- $ 400,000 $113,000 $142,000 $170,000 $170,000 $ 600,000 $171,000 $214,000 $257,000 $257,000 $ 800,000 $229,000 $287,000 $344,000 $344,000 $1,000,000 $287,000 $359,000 $431,000 $431,000 $1,200,000 $345,000 $432,000 $518,000 $518,000 $1,400,000 $403,000 $504,000 $605,000 $605,000 $1,600,000 $461,000 $577,000 $692,000 $692,000 $1,800,000 $519,000 $649,000 $779,000 $779,000
- ------------ (1) This table assumes total of retirement age and years of service is greater than or equal to 80. (2) All amounts are shown converted into U.S. dollars from Canadian dollars at an exchange rate of US$1.00 = C$1.4880. As at December 31, 2001,2002, Messrs. Polistuk and Puppi had completed 3334 and 2223 years of service, respectively. During the year ended December 31, 2001,2002, Celestica set asideaccrued an aggregate amount of $321,303$749,574 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, 20012002 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%20% of their total compensation. Celestica at its discretion, may make contributions for the benefit of eligible employees. During the year ended December 31, 2001,2002, Celestica contributed $14,700$18,500 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, 20012002 for the purpose of providing pension, retirement or similar benefits for Mr. Tropea.Messrs. Tropea and Delaney. 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. 48 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 threefour standing committees, of three directors, each with a specific mandate. The Executive Committee includes a majority of unrelatedindependent directors. The Audit Committee, Compensation Committee, Nominating and CompensationCorporate Governance Committee are each composed of unrelatedindependent directors. EXECUTIVE COMMITTEE Subject to the limitations set out in subsection 127(3) of the BUSINESS CORPORATIONS ACTBusiness 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.Polistuk, the majority of whom are independent. AUDIT COMMITTEE The Audit Committee which consists of Mr. Crandall, Mr. Etherington, Mr. Love, Mr. Martin and Mr. Melman, selectsTapscott, all of whom are independent directors. The Audit Committee has a well-defined mandate which, among other things, sets out its relationship with, and engages, on behalf of Celestica, the independent public accountants to audit Celestica's annual financial statements, and reviews and approves the planned scopeexpectations of, the annual audit.external auditors, including the establishment of the independence of the external auditors and approval of any non-audit mandates of the external auditor; the engagement, evaluation, remuneration and termination of the external auditor; its relationship with, and expectations of, the internal auditor function and its oversight of internal control; and the disclosure of financial and related information. The Audit Committee has direct communication channels with the internal and external auditors to discuss and review specific issues and has the authority to retain such independent advisors as it may consider appropriate. The Audit Committee annually reviews and approves the mandate and plan of the internal audit department. 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. 49 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. Crandall, Mr. Etherington, Mr. Love, Mr. Melman and Mr. Tapscott, and Mr. Etherington, all of whom are unrelated to Celestica. John Walter was a memberindependent directors. It is the responsibility of the Compensation Committee until his retirement fromto define and communicate compensation policy and principles that reflect and support the Company's strategic direction, business goals and desired culture. The mandate of the Compensation Committee includes the following: review and recommend to the Board of Directors in June, 2001.the Company's compensation strategy, including plan design, performance targets and program administration; recommend to the Board of Directors the compensation of the Chief Executive Officer based on the Board of Directors' assessment of the annual performance of the Chief Executive Officer; review and recommend to the Board of Directors the compensation of the Named Executive Officers and other senior managers whose compensation is subject to review by the Board of Directors; review the Company's succession plans for key executive positions; and review and approve material changes to the Company's organizational structure and human resource policies. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE The Nominating and Corporate Governance Committee consists of Mr. Walter is also unrelatedCrandall, Mr. Etherington, Mr. Love, Mr. Melman and Mr. Tapscott, all of whom are independent directors. The Nominating and Corporate Governance Committee recommends to Celestica. 47 the Board the criteria for selecting candidates for nomination to the Board and the individuals to be nominated for election by the shareholders. The Committee's mandate includes making recommendations to the Board relating to the Company's approach to corporate governance, developing the Company's corporate governance guidelines, assessing the performance of the Chief Executive Officer relative to corporate goals and objectives established by the Committee, and assessing the effectiveness of the Board of Directors and its committees. D. EMPLOYEES Celestica has over 40,000 permanent and temporary (contract) employees worldwide as of December 31, 2001.2002. 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 December 31, 2002........................................... 14,500 6,000 19,500
During the year ended December 31, 2001,2002, approximately 9,00010,000 temporary (contract) employees were engaged by Celestica worldwide. During the year ended December 31, 2001,2002, approximately 9,7004,600 employees, including temporary (contract) employees, were terminated as a result of restructuring actions announced during the year. See Notenote 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." 50 E. SHARE OWNERSHIP The following table sets forth certain information concerning the direct and beneficial ownership of shares of Celestica at March 1, 2002February 28, 2003 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."SVS", and Celestica's Liquid Yield Option-TM- Notes due 2020 are referred to as "LYONs."
MARCH 1, 2002 ------------------------------------------------ PERCENTAGE OF CLASS/PERCENTAGE PERCENTAGE ALL PERCENTAGE OF VOTING NAME OF BENEFICIAL OWNER(1) VOTING SHARES OF CLASS EQUITY SHARES VOTING POWER - --------------------------- --------------- -------------- -------------------------------------------- ---------- ---------------- ---------------- Eugene V. Polistuk................................... 512,826Polistuk(2)..................... 720,892 SVS */* * Anthony P. Puppi..................................... 235,401 SVS */* * Robert L. Crandall................................... 80,000Crandall(3)..................... 110,000 SVS */* * * 15,130 LYONs (4) * * * William E. Etherington............................... 10,000Etherington(5)................. 16,250 SVS */* * Mark L. Hilson(2)(3)................................. 438,792 SVS */* * Richard S. Love...................................... 75,000Love(6)........................ 105,000 SVS */* * * Roger L. Martin...................................... 43,000Martin(7)........................ 73,000 SVS */* * * Anthony R. Melman(2)(4)..............................Melman(8)(9)................... 450,000 SVS */* * * Gerald W. Schwartz(2)(5).............................Schwartz(8)(10)................. 39,065,950 MVS 100.0%/17.0% 83.7% 4,136,228 17.1% 83.8% 3,671,982 SVS 2.2%/1.8%1.9% 1.6% * Don Tapscott......................................... 63,000Tapscott(11).......................... 93,000 SVS */* * * J. Marvin M(a)Gee.................................... 205,212Gee......................... 308,632 SVS */* * * Anthony P. Puppi.......................... 293,667 SVS * * * R. Thomas Tropea..................................... 263,664Tropea.......................... 351,302 SVS */* * * Stephen Delaney...................................... 1,400W. Delaney........................ 61,657 SVS */* * * All directors and executive officers as a group (24(22 persons)(2)(3)(4)(5)(6)...........................(7)(8)(9)(10)(11)(12).... 39,065,950 MVS 100.0%/17.0% 83.7% 6,828,779 17.1% 83.8% 7,280,453 SVS 3.6%/3.0%3.8% 3.2% * Total percentage of all equity shares and total percentage of voting power....................... 20.0% 84.2%power................................. 20.3% 84.4%
- ------------ * 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,(2) Includes 598,333 subordinate voting shares subject to exercisable options. (3) Includes 100,000 subordinate voting shares subject to exercisable options. (4) Each LYON is convertible into 5.6748 subordinate voting shares at the address for each shareholder is: c/o Celestica Inc., 12 Concorde Place, Toronto, Ontario M3C 3R8. (2)option of the holder. (5) Includes 6,250 subordinate voting shares subject to exercisable options. (6) Includes 100,000 subordinate voting shares subject to exercisable options. (7) Includes 73,000 subordinate voting shares subject to exercisable options. (8) 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)(9) 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)(10) Includes 159,992188,744 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)51 (11) Includes 479,50093,000 subordinate voting shares subject to exercisable options. (12) Includes 425,200 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 535,186666,437 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.Incorporation." 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 options granted under the ESPO Plans were fully vested as of December 31, 2002. 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,February 28, 2003, approximately 7,0004,500 persons held options to acquire an aggregate of approximately 23,756,00025,536,000 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 February 28, 2003. 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...... 210,000 $0.925 June 13, 1996 June 13, 2006 596,737 $5.00 During 1997 April 8, 2007(1) 302,890 $7.50 - $8.752007 387,390 $7.50-$8.75 During 1997 and October 22, 1997 1998 April 29, 2008 to July 3, 2008 403,880 $12.345/472,480 C$18.90 January 1,18.90-$22.97 During 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, 1999to September 20, 2009 602,000546,000 $39.03/C$57.845 December 7, 1999 December 7, 2009 100,000 C$105,000 $40.06-C$60.00 May 26,During 2000 February 1, 2010 to May 26, 2010 338,000310,000 $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 670,400629,200 $41.89/C$66.06 December 4, 2001 December 4, 2011 680,000 $13.10-C$29.11 During 2002 October 1, 2012 to December 18, 2012 Directors who are not Executive Officers..........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 10,000 $32.40 April 21, 2002 April 21, 2012
52
NUMBER OF SUBORDINATE VOTING SHARES BENEFICIAL HOLDERS UNDER OPTION EXERCISE PRICE YEAR OF ISSUANCE DATE OF EXPIRY - ------------------ ------------- ----------------- ------------------ ------------------ All other Celestica Employees (other than IMS)IMS and Primetech) (more than 6,0004,000 persons in total)..... 3,741,079...................................... 3,108,372 $5.00 During 1997 April 8, 2007(2) 767,864 $7.50 - C$2007(1) 621,985 $7.50-C$14.05 During 1998 April 29, 2008 to November 9, 2008 715,295 $13.69 - C$726,945 $13.69-C$21.45 January 1, 1999 to January 1, 2009 to March 17, 1999 March 17, 2009 2,198,1752,162,075 $39.03/C$57.845 December 7, 1999 December 7, 2009 615,055 $13.65 - C$577,705 $13.65-C$53.75 During 1999 January 1, 2009 to December 31, 2009 1,118,289 $40.06 - C$1,040,416 $40.06-C$123.65 During 2000 January 1, 2010 to December 31, 2010 2,478,8552,332,290 $56.1875/C$86.50 December 5, 2000 December 5, 2010 1,388,050 $49.00 - C$1,223,292 $49.00-C$108.45 During 2001 January 1, 2011 to December 31, 2011 5,613,0205,286,348 $41.89/C$66.06 December 4, 2001 December 4, 2011 94,600 $40.76 - C$451,976 $13.10-C$70.81 January 1,During 2002 to January 1, 2012 to MarchDecember 31, 2012 2,713,228 $18.66/C$29.11 December 3, 2002 December 3, 2012 48,150 $11.76-C$18.12 January 1, 2002 March2003 to January 1, 20122013 to February 28, 2003 February 28, 2013 IMS Employees................. 953,562(3) $0.925 - 13.31(4)Employees(2)(3)........................... 509,434 $0.925-$13.31 December 30, 1998 June 13, 2006 to December 18, 2008 Primetech Employees(5)........Employees(4)........................ 31,793 C$47.73 June 29, 1998 June 29, 2003 60,05358,821 C$65.91 July 14, 1999 July 14, 2004 96,25093,500 C$97.73 - C$97.73-C$111.36 February 15, 2000 to February 15, 2005 to June 15, 2000 to June 15, 2005 32,56031,735 C$45.45 - C$45.45-C$67.05 January 10, 2001 to January 10, 2006 to March 16, 2001 to March 16, 2006
- ---------------------------- (1) Except for 10,140157,035 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)(3) The original exercise price for these options was based on the NASDAQ market price of IMS common stock at the date of issuance. (5)(4) 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 23,000,00029,000,000 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 LTIPPlan 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. 53 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 54 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, 2002February 28, 2003 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 PERCENTAGE OF CLASS/ALL PERCENTAGE OF NAME OF BENEFICIAL OWNER(1) VOTINGTYPE OF OWNERSHIP NUMBER OF SHARES OF CLASS EQUITY SHARES VOTING POWER - --------------------------- --------------- -------------- -------------------------------- --------------------- ---------------- ----------------- ---------------- Onex Corporation(2)(3)(4)............................... Direct and Indirect 39,065,950 MVS 100.0%/17.0% 83.7% 3,976,236 17.1% 83.8% 3,483,238 SVS 2.1%/1.7%1.8% 1.5% * Gerald W. Schwartz(2)(4)(5)............................. Direct and Indirect 39,065,950 MVS 100.0%/17.0% 83.7% 4,136,228 17.1% 83.8% Toronto, Ontario... 3,671,982 SVS 2.2%/1.8%1.9% 1.6% * 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% *power............................................................... 20.3% 84.4%
- ------------ * 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, 1,909,9801,540,734 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 404,128280,376 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 subsidiarycertain subsidiaries of Onex. In addition,Onex and 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 electof the debenture or, in the party tocase of an equity forward agreementsagreement, Onex does not elect to satisfy its obligationobligations in cash rather than delivering subordinate voting shares, if the issuer or the party to the equity forward agreements,Onex, as the case may be, does not havehold a sufficient number of subordinate voting shares to satisfy theits 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%84% 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,agreements, 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 number of shares thatowned by Onex, owns and thetogether with those shares Onex has the right to vote, would, if the shares were deliveredsuch delivery had occurred on March 1, 2002,February 28, 2003, represent in the aggregate 78% of the voting power of all Celestica shares.interest in our company. (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 159,992188,744 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 andor 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. HeOnex, 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 ofthe Celestica beneficiallyshares 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, 2002.55 HOLDERS On March 1, 2002,February 28, 2003, there were approximately 1,5491,777 holders of record of subordinate voting shares, of which approximately 337410 holders, holding approximately 44%46% 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,February 28, 2003, 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 Agreementan agreement under which Onex has agreed to provide management, administrative,certain 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 Agreementagreement equal to $2.0 million per year adjusted for changes in the Canadian consumer price index. The Management Services Agreementagreement 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 Agreementagreement 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,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 2001,2002, Celestica paid to Onex management fees of approximately $2.1$2.2 million. INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS As at March 1, 2002,February 28, 2003, Celestica had guaranteed $4,401,372$4,128,012 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 DURING OUTSTANDING AS AT NAME AND PRINCIPAL POSITION DURING 2001(1) MARCH 1, 2002(1) FEBRUARY 28, 2003(1)(2) - --------------------------- -------------- --------------------------------------- ------------------------- J. Marvin M(a)Gee........................................... $155,391 $155,391$ 166,618 $ 166,618 President and Chief Operating Officer R. Thomas Tropea............................................ $407,396 $407,396$ 436,828 $ 436,828 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 $280,998 Senior Vice President$ 301,299 $ 301,299 Group Executive and Chief Technology Officer Rahul Suri.................................................. $957,108 $957,108$ 1,026,254 $ 1,026,254 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 ControllerDevelopment
- ------------ (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 = L0.7047.1.4880. (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. 5456 No securities were purchased by any director or officer during 20012002 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, 2001.2002. 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 ofnote 23 to 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""TSX"). The market price range and trading volume of the subordinate voting shares on the NYSE and the TSETSX 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. In the following tables, subordinate voting shares are defined as "SVS." THE ANNUAL HIGH AND LOW MARKET PRICES FOR THE FOURFIVE MOST RECENT FISCAL YEARS(1)YEARS
NYSE ----------------------------------------------------------------- HIGH LOW VOLUME -------- --------------- ----------- Price(Price per Subordinate Voting ShareSVS) Year ended December 31, 1998 (from June 30, 1998)...........(1)........ $13.75 $ 5.19 22,165,800 Year ended December 31, 1999................................ 57.00 12.06 115,803,800 Year ended December 31, 1999................................ 57.00 12.06 115,803,8002000................................ 87.00 35.50 314,486,100 Year ended December 31, 2000................................ 87.00 35.50 314,486,1002001................................ 76.40 20.69 602,213,700 Year ended December 31, 2001................................ 76.40 20.69 602,213,7002002................................ 47.08 9.89 544,914,800
- ------------ (1) The SVS began trading on June 30, 1998. 57
TSE ---------------------------------TSX -------------------------------- HIGH LOW VOLUME -------- --------------- ----------- Price(Price per Subordinate Voting ShareSVS) Year ended December 31, 1998 (from June 30, 1998)...........(1)........ 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 Year ended December 31, 2002................................ 75.05 15.78 328,786,676
- ------------ (1) The subordinate voting sharesSVS 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(Price per Subordinate Voting ShareSVS) Year ended December 31, 20002001 First quarter............................................. $60.06 $37.56 75,117,400$76.40 $25.80 143,622,000 Second quarter............................................ 54.56 38.00 39,642,50063.25 24.00 166,006,300 Third quarter............................................. 84.00 48.69 80,355,20050.94 20.69 148,784,400 Fourth quarter............................................ 84.50 46.50 119,371,00048.40 25.41 143,801,000 Year ended December 31, 20012002 First quarter............................................. $76.40 $25.80 143,622,000$47.08 $31.50 141,144,200 Second quarter............................................ 63.25 24.00 166,006,30036.98 21.14 127,727,400 Third quarter............................................. 50.94 20.69 148,784,40026.70 12.95 153,867,600 Fourth quarter............................................ 48.40 25.41 143,801,00019.28 9.89 122,175,600
TSE ---------------------------------TSX -------------------------------- HIGH LOW VOLUME -------- --------------- ----------- Price(Price per Subordinate Voting ShareSVS) Year ended December 31, 2000 First quarter............................................. C$ 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$40.75 85,670,137 Second quarter............................................ 97.50 37.55 81,722,757 Third quarter............................................. 78.10 32.42 65,423,337 Fourth quarter............................................ 76.50 40.12 90,314,087 Year ended December 31, 2002 First quarter............................................. C$ 75.05 C$49.85 74,912,318 Second quarter............................................ 58.98 32.00 67,102,498 Third quarter............................................. 41.45 20.60 92,428,385 Fourth quarter............................................ 29.99 15.78 94,343,475
THE HIGH AND LOW MARKET PRICES FOR EACH MONTH FOR THE MOST RECENT SIX MONTHS
NYSE -------------------------------- HIGH LOW VOLUME -------- -------- ---------- Price------- ----------- (Price per Subordinate Voting ShareSVS) October 2001................................................ $40.50 $25.41 59,375,3002002................................................ $15.08 $ 9.89 57,744,300 November 2001............................................... 43.25 33.45 40,140,7002002............................................... 18.75 13.07 37,332,900 December 2001............................................... 48.40 38.57 44,285,0002002............................................... 19.28 13.38 27,098,400 January 2002................................................ 47.08 39.82 44,725,4002003................................................ 17.52 11.26 44,389,300 February 2002............................................... 42.75 32.64 48,792,0002003............................................... 12.40 10.31 27,387,400 March 2002.................................................. 41.60 32.52 47,626,8002003.................................................. 13.67 11.24 23,280,100
5658
TSETSX -------------------------------- HIGH LOW VOLUME -------- -------- ---------- Price------- ----------- (Price per Subordinate Voting ShareSVS) October 2001................................................2002................................................ C$64.2023.50 C$40.12 38,411,31615.78 40,853,685 November 2001............................................... 68.60 53.12 27,479,0852002............................................... 29.45 20.51 30,695,160 December 2001............................................... 76.50 60.76 24,423,6862002............................................... 29.99 20.80 22,794,630 January 2002................................................ 75.05 63.60 22,554,6392003................................................ 27.24 17.25 41,242,030 February 2002............................................... 67.85 52.20 23,792,1552003............................................... 18.73 15.77 28,779,217 March 2002.................................................. 65.50 51.89 28,565,5242003.................................................. 20.23 16.52 27,584,270
TheCelestica's Liquid Yield Option-TM- Notes due 2020, or LYONs, are listed on the NYSE. Liquid Yield Option-TM- Notes is a trademark of Merrill Lynch & Co., Inc. 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 TWOTHREE 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 Year ended December 31, 2002................................ 46.00 33.00
- ------------ (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)2001 First quarter............................................. $53.74 $35.48 Second quarter............................................ 48.82 34.56 Third quarter............................................. $55.83 $48.7544.24 35.82 Fourth quarter............................................ 55.24 40.0544.72 36.51 Year ended December 31, 20012002 First quarter............................................. $53.74 $35.48$41.00 $35.25 Second quarter............................................ 48.82 34.5646.00 34.00 Third quarter............................................. 44.24 35.8240.50 33.00 Fourth quarter............................................ 44.72 36.5144.50 39.25
- ------------ (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 $36.512002................................................ $40.50 $40.50 November 2001............................................... 42.60 40.552002............................................... 42.00 39.25 December 2001............................................... 44.72 42.222002............................................... 44.50 42.13 January 2002................................................ 53.74 34.562003................................................ 44.00 42.25 February 2002............................................... 44.83 41.732003............................................... 48.25 42.25 March 2002.................................................. 44.68 41.732003.................................................. 48.63 48.00
B. PLAN OF DISTRIBUTION Not applicable. 5759 C. MARKETS The subordinate voting shares are listed on the NYSE and the TSE.TSX. 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 2020LYONs are listed on the NYSE. In Canada, the LYONs are offered on a private placement basis through Merrill Lynch Pierce, Fenner & Smith IncorporatedCo., Inc. 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 ACTBusiness 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; 60 (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. 59 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 sharesThe rights and an unlimited number of multiple voting shares. MULTIPLE VOTING SHARES AND SUBORDINATE VOTING SHARES VOTING RIGHTS The holders ofpreferences attaching to our 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,described in the casesection entitled "Description of electionCapital Stock" of directors, by a plurality,our registration statement on Form F-3 (Reg. No. 333-69278), filed with the SEC on September 12, 2001. The rights and preferences attaching to our LYONs are described in the casesection entitled "Description of an amalgamation or amendments toLYONs" of our Rule 424(b) prospectus, filed with the articlesSEC on July 26, 2000, as part of Celestica,our registration statement on Form F-3 (Reg. No. 333-12338), filed with the SEC on July 24, 2000. Those sections are hereby incorporated 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 thereofreference 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. 60 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.this Annual Report. 61 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, 200019, 2001, Celestica Corporation Asset Purchase Celestica Corporation and $70acquired $200 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 and 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 the $179 million Electronics Inc. Agreement the shares of Primetech Electronics Inc. June 15, 2001 Celestica and Omni Industries Limited Merger Agreement Celestica acquired all of the $865 million theIndustries Limited Agreement shares of Omni Industries Limited July 24, 2001 Celestica Corporation and Asset Purchase Celestica Corporation acquired $570 million and Lucent Technologies Inc. Agreements acquired certain assets from Lucent in Technologies Inc. Columbus, Ohio and Oklahoma City, Oklahoma March 31, 2002 Celestica and NEC Stock Purchase Celestica acquired all the business $105 million Corporation Agreement operations of NEC Miyagi and NEC Yamanashi
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 ACTIncome Tax Act (Canada) (the "Canadian Tax Act") and the CANADA-UNITED STATES INCOME TAX CONVENTIONCanada-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 62 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,February 28, 2003, 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.Canada, which may differ significantly from the considerations described in this summary. 62 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., generally 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)real property 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. 63 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.United States 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 63 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,February 28, 2003, 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 64 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 64 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 65 election to treat the company as a "qualified electing fund" and did not make a mark-to-market election, each as described below, then: - Excessexcess 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.tax; - Thethe 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.above; and 65 - Aa 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 2002.2003. 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 2002,2003, 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 66 - 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 siteweb-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 siteweb-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:(http://www.sedar.com.) I. SUBSIDIARY INFORMATION Not applicable. 67 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, 2001,2002, Celestica had outstanding foreign exchange contracts to selltrade U.S. $379.5$282.7 million in exchange for Canadian dollars over a period of 1715 months at a weighted average exchange rate of U.S.$0.65,0.64. Celestica also had forward contracts to trade U.S. $56.6$10.6 million in exchange for Canadian dollars over a period of 37 months at a weighted average exchange rate of U.S. $0.63. In addition, Celestica had exchange contracts to trade U.S. $36.4 million in exchange for British pounds sterling over a 15-month13-month period at a weighted average exchange rate of U.S. $1.40,$1.45, U.S. $46.3$37.1 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$168.7 million in exchange for Euros over a 15-month period at a weighted average exchange rate of U.S. $0.88,$0.93, U.S. $24.2$27.6 million in exchange for Thai bahtSingapore dollars over a 12-month period at a weighted average exchange rate of U.S. $0.02$0.57, 64.5 million Brazilian reais in exchange for U.S. dollars over a 1-month period at a weighted average exchange rate of U.S. $0.30, U.S. $40.7 million in exchange for Japanese yen over a 1-month period at a weighted average exchange rate of U.S. $0.01, and U.S. $6.4$11.9 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, 2001,2002, these contracts had a fair value liabilityunrealized gain of U.S. $7.4$18.9 million.
DECEMBER 31, 2001 ---------------------------------------------------------- EXPECTED MATURITY DATE --------------------------------------------------------------------------------------------------------------------------- FAIR VALUE 2002 2003 2004 2005 2006 THEREAFTER TOTAL GAIN (LOSS) -------- -------- -------- -------- ---------- -------- ----------------------- FORWARD EXCHANGE AGREEMENTS Receive C$/Pay U.S.$ Contract amount.................................. $346.0 $33.5 $-- $379.5 $(10.9)amount (in millions)....... $261.0 $24.3 $5.3 $2.7 $ -- $293.3 $(2.9) Average exchange rate............................rate............... $ 0.650.64 $ 0.63 $0.63 $0.63 Receive THB/Pay U.S.$ 0.65Contract amount (in millions)....... $ 34.3 -- -- -- -- $ 34.3 $(0.4) Average exchange rate............... $ 0.02 Receive L/Pay U.S.$ Contract amount..................................amount (in millions)....... $ 52.534.7 $ 4.11.7 -- -- -- $ 56.636.4 $ 1.43.5 Average exchange rate............................rate............... $ 1.40 $1.371.45 $ 1.401.52 Receive Mexican Pesos/Pay U.S.$ Contract amount...amount (in millions)....... $ 46.337.1 -- -- -- -- $ 46.3 $ 2.237.1 $(1.5) Average exchange rate............................ $ 0.10rate............... $ 0.10 Receive Euro/Pay U.S.$ Contract amount.................................. $178.6 $13.2amount (in millions)....... $155.1 $13.6 -- $191.8 $ (0.6)-- -- $168.7 $19.5 Average exchange rate............................rate............... $ 0.88 $0.880.93 $ 0.880.99 Receive Baht/Singapore$/Pay U.S.$ Contract amount.............amount (in millions)....... $ 24.227.6 -- -- -- -- $ 24.2 $ 0.2 Average exchange rate............................ $ 0.02 $ 0.02 Receive Koruna/Pay U.S.$ Contract amount........... $ 6.4 -- -- $ 6.427.6 $ 0.3 Average exchange rate............................rate............... $ 0.03 0.57 Sell Reais/Receive U.S.$ 0.03 ------ ----- ------ ------ ------ Total.......................................... $654.0 $50.8 $-- $704.8Contract amount (in millions)....... $ (7.4) ====== ===== ====== ====== ======19.1 -- -- -- -- $ 19.1 $ 0.8 Average exchange rate............... $ 0.30 Receive Yen/Pay U.S.$ Contract amount (in millions)....... $ 40.7 -- -- -- -- $ 40.7 $(1.1) Average exchange rate............... $ 0.01
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----------------------------------------------------------------- FAIR VALUE 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE --------GAIN (LOSS) -------- -------- -------- -------- ---------- -------- ---------- (U.S.$ in millions)----------- Long-term debt Subordinate debt...................... Receive Koruna/Pay U.S.$ 0Contract amount (in millions)....... $ 011.9 -- -- -- -- $ 011.9 $ 0 $130.00.7 Average exchange rate............... $ 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 17.40.03 ------- ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ----------- Total............................. $621.5 $39.6 $5.3 $2.7 $ 10.0 $ 4.5 $ 1.3 $ 0.7 $130.6 $ 0.3 $147.4 $153.9-- $669.1 $18.9 ======= ====== ===== ===== ====== ====== ====== ====== ====== ====== ====== ===========
INTEREST RATE RISK Celestica's existing debt is comprised of capital lease commitments amounting to $6.9 million, which are not sensitive to changes in interest rates. CONVERTIBLE DEBT (LYONS) WeAs of December 31, 2002, we have issued convertible debtinstruments, with aan outstanding principal amount at maturity of $1.8$1.6 billion, payable August 1, 2020. At March 1, 2002, weWe 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]CONTROLS AND PROCEDURES Based on their evaluation of Celestica's disclosure controls and procedures as of a date within 90 days of the filing of this Annual Report, the Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective. There were no significant changes in Celestica's internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation. ITEM 16. [RESERVED] 7069 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 Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference...................................... F-3 Consolidated Balance Sheets as at December 31, 20002001 and 2001......................................................2002...................................................... F-4 Consolidated Statements of Earnings (Loss) for the years ended December 31, 1999, 2000, 2001 and 2001....................2002.................... F-5 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 2000, 2001 and 2001..............2002.............. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000, 2001 and 2001..........................2002.......................... 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-lawsBylaws 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 Restated Articles of Incorporation effective November 20, 2001 1.9 Bylaw No. 1(4) 1.91.10 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(6) 2.4 Second Amended and Restated Credit Agreement, dated as of June 8, 2001,December 17, 2002, between Celestica Inc., the subsidiaries of Celestica Inc., specified therein as Designated Subsidiaries, The Bank of Nova Scotia, as Administrative Agent, The BankCIBC World Markets, as Joint Lead Arranger and Syndication Agent, RBC Capital Markets, as Joint Lead Arranger and Co-Documentation Agent, Banc of Nova Scotia,America Securities LLC, as Canadian FacilityJoint Lead Arranger and Co-Documentation Agent, The Bank of Nova Scotia, as U.S. Facility Agent, The Bank of Nova Scotia, as U.K. Facility Agent,and 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) 2.11lenders
70
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.5 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,December 17, 2002, 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)Lenders 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)* 3.63.3 Amendment No. 1 to the Asset Purchase Agreement, dated as of May 4, 2001, by and between Avaya Inc. and Celestica Corporation(4) 3.73.4 Arrangement Agreement, dated as of May 31, 2001, between Celestica Inc. and Primetech Electronics Inc. 3.8(7)* 3.5 Merger Agreement, dated as of June 15, 2001, between Omni Industries Limited and Celestica Inc. 3.9(7)* 3.6 Asset Purchase Agreement, dated as of July 24, 2001, between Lucent Technologies Inc. and Celestica Corporation*Corporation(7)* 3.103.7 Asset Purchase Agreement, dated as of July 24, 2001, between Lucent Technologies Inc. and Celestica Corporation*Corporation(7)* 3.8 Stock Purchase Agreement, dated January 28, 2002, between NEC Corporation, NEC Miyagi, Ltd., NEC Yamanashi, Ltd., 1325091 Ontario Inc., and Celestica Inc.*
72
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.11* 3.9 Employment Agreement, dated as of October 22, 1996, by and between Celestica, Inc. and Eugene V. Polistuk(1) 3.123.10 Employment Agreement, dated as of October 22, 1996, by and between Celestica, Inc. and Anthony P. Puppi(1) 3.133.11 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) 3.153.12 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) 3.17Tropea(8) 3.13 D2D Employee Share Purchase and Option Plan (1997)(2) 3.183.14 Celestica 1997 U.K. Approved Share Option Scheme(1) 3.193.15 1998 U.S. Executive Share Purchase and Option Plan(11)Plan(9) 8.1 Subsidiaries of Registrant 99.1 Certification required by Section 906 of the Sarbanes-Oxley Act of 2002***
- ------------ * 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 thethis document have been redacted and filed separately with the Securities and Exchange Commission. *** Pursuant to Commission Release No. 33-8212, this certification will be treated as "accompanying" this Annual Report on Form 20-F and not "filed" as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be incorporated by reference into any filing under the Securities Act, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. (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). 71 (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)(7) Incorporated by reference to the Registration StatementAnnual Report on Form F-320-F of Celestica Inc. filed on September 10, 2001 (Registration No. 333-69278). (10)May 3, 2002. (8) Incorporated by reference to the Annual Report on Form 20-F of Celestica Inc. filed on May 18, 2000. (11)(9) Incorporated by reference to the Registration Statement on Form S-8 of Celestica Inc. filed on October 8, 1998 (Registration No. 333-9500). 7372 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 ------------------------------------------------------------------------------------------ Name: Elizabeth L. DelBianco VICE-PRESIDENT, GENERAL COUNSEL AND SECRETARYTitle: Vice President & General Counsel
Date: - , 2002 S-1April 21, 2003 73 CERTIFICATIONS I, Eugene V. Polistuk, certify that: 1. I have reviewed this annual report on Form 20-F of Celestica Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 21, 2003 /s/ EUGENE V. POLISTUK ------------------------------------------------------- Eugene V. Polistuk Chairman of the Board and Chief Executive Officer
74 CERTIFICATIONS I, Anthony P. Puppi, certify that: 1. I have reviewed this annual report on Form 20-F of Celestica Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 21, 2003 /s/ ANTHONY P. PUPPI ------------------------------------------------------- Anthony P. Puppi Executive Vice President, Chief Financial Officer and General Manager, Global Services
75 Consolidated Financial Statements of CELESTICA INC. Years ended December 31, 1999, 2000, 2001 and 20012002 (in millions of U.S. dollars) F-1 AUDITORS' REPORT To the Board of Directors of CELESTICA INC.Celestica Inc. We have audited the consolidated balance sheets of Celestica Inc. as at December 31, 20002001 and 20012002 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, 2001.2002. 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, weWe 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, 20002001 and 20012002 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 20012002 in accordance with Canadian generally accepted accounting principles. Toronto, Canada /s/ KPMG LLP JANUARY 21, 2002 CHARTERED ACCOUNTANTS Toronto, Canada /s/ KPMG LLP January 21, 2003 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 havehas a material effect on the comparability of the Company's financial statements, such as the changechanges described in note 2(n)2(q) 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.CICA Handbook Section 3870 -- Stock-based Compensation and Other Stock-based Payments. Our report to the shareholdersBoard of Directors of Celestica Inc. dated January 21, 20022003 is expressed in accordance with Canadian reporting standards which do not require a reference to such a changechanges 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 Toronto, Canada /s/ KPMG LLP January 21, 2003 Chartered Accountants
F-3 CELESTICA INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS OF U.S. DOLLARS)
AS AT DECEMBER 31 ------------------- 2000---------------------- 2001 2002 -------- -------- ASSETS Current assets: Cash and short-term investments........................... $ 883.8 $1,342.8 $1,851.0 Accounts receivable (note 4).............................. 1,785.7 1,054.1 785.9 Inventories (note 5)...................................... 1,664.3 1,372.7 775.6 Prepaid and other assets.................................. 138.8 177.3 115.1 Deferred income taxes..................................... 48.4 49.7 36.9 -------- -------- 4,521.0 3,996.6 3,564.5 Capital assets (note 6)..................................... 633.4 915.1 727.8 Goodwill from business combinations (note 7)................ 1,128.8 948.0 Intangible assets (note 7).................................. 578.3 1,556.0427.2 211.9 Other assets (note 8)....................................... 205.3 165.2 354.6 -------- -------- $5,938.0 $6,632.9 $5,806.8 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $1,730.4 $1,198.3 $ 947.2 Accrued liabilities....................................... 466.3 405.7 475.4 Income taxes payable...................................... 52.6 21.0 24.5 Deferred income taxes..................................... 7.7 21.8 21.5 Current portion of long-term debt (note 9)................ 1.4 10.0 2.7 -------- -------- 2,258.4 1,656.8 1,471.3 Long-term debt (note 9)..................................... 130.6 137.4 4.2 Accrued post-retirementpension and post-employment benefits (note 16).................. 38.1...... 47.3 77.2 Deferred income taxes....................................... 38.6 41.5 46.2 Other long-term liabilities................................. 3.04.3 4.3 -------- -------- 2,468.7 1,887.3 1,603.2 Shareholders' equity........................................ 3,469.3 4,745.6 4,203.6 -------- -------- $5,938.0 $6,632.9 $5,806.8 ======== ========
Commitments, contingencies and contingenciesguarantees (note 18) Subsequent event (note 21) Canadian and United States accounting policy differences (note 22) Subsequent events (note 23) 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 --------2002 -------- --------- -------- Revenue..................................................... $5,297.2 $9,752.1 $10,004.4 $8,271.6 Cost of sales............................................... 4,914.7 9,064.1 9,291.9 --------7,715.8 -------- --------- -------- Gross profit................................................ 382.5 688.0 712.5 555.8 Selling, general and administrative expenses................ 202.2 326.1 341.4 298.5 Amortization of goodwill and intangible assets (note 7).................. 55.6..... 88.9 125.0 95.9 Integration costs related to acquisitions (note 3).......... 9.6 16.1 22.8 21.1 Other charges (note 13)..................................... -- -- 273.1 --------677.8 -------- --------- 267.4-------- 431.1 762.3 --------1,093.3 -------- --------- -------- Operating income (loss)..................................... 115.1 256.9 (49.8) (537.5) Interest on long-term debt.................................. 17.3 17.8 19.8 16.1 Interest income, net........................................ (6.6) (36.8) (27.7) --------(17.2) -------- --------- -------- Earnings (loss) before income taxes......................... 104.4 275.9 (41.9) --------(536.4) -------- --------- -------- Income taxes (note 14): Current................................................... 30.7Current expense........................................... 80.1 25.8 16.6 Deferred (recovery)....................................... 5.3 (10.9) (27.9) --------(107.8) -------- --------- 36.0-------- 69.2 (2.1) --------(91.2) -------- --------- -------- Net earnings (loss)......................................... $ 68.4 $ 206.7 $ (39.8) ========$ (445.2) ======== ========= ======== Basic earnings (loss) per share (note 12)................... $ 0.41 $ 1.01 $ (0.26) $ (1.98) Diluted earnings (loss) per share (notes 2, 12)............. $ 0.40 $ 0.98 $ (0.26) $ (1.98) Weighted average number of shares outstanding (note 12) Basic (in millions)....................................... 167.2 199.8 213.9 229.8 Diluted (in millions) (note 2)............................ 171.2 211.8 213.9 229.8 Net earnings (loss) in accordance with U.S. GAAP (note 22)................................................. $ 66.5 $ 197.4 $ (51.3) $ (494.9) Basic earnings (loss) per share, in accordance with U.S. GAAP (note 22)....................................... $ 0.40 $ 0.99 $ (0.24) $ (2.15) Diluted earnings (loss) per share, in accordance with U.S. GAAP (note 22)....................................... $ 0.39 $ 0.96 $ (0.24) $ (2.15)
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 CONTRIBUTED EARNINGS TRANSLATION SHAREHOLDERS' (NOTE 10) (NOTE 11) SURPLUS (DEFICIT) ADJUSTMENT EQUITY ----------- ------------- ----------- --------- ----------- ------------- Balance -- December 31, 1998...............1999......... $-- $1,646.1 -$- $ 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$(4.1) $1,658.2 Convertible debt issued, net...............net......... 850.4 -- -- -- -- 850.4 Convertible debt accretion, net of tax.....tax................................ 10.1 -- -- (5.4) -- 4.7 Shares issued, net.........................net................... -- 749.3 -- -- -- 749.3 Net earnings for the year..................year............ -- -- -- 206.7 -- 206.7 ------------- -------- ---------- ------- ----- -------- Balance -- December 31, 2000...............2000......... 860.5 2,395.4 -- 217.5 (4.1) 3,469.3 Convertible debt accretion, net of tax.....tax................................ 26.3 -- -- (15.0) -- 11.3 Shares issued, net.........................net................... -- 1,303.6 -- -- -- 1,303.6 Currency translation.......................translation................. -- -- -- -- 1.2 1.2 Net loss for the year......................year................ -- -- -- (39.8) -- (39.8) ------------- -------- ---------- ------- ----- -------- Balance -- December 31, 2001............... $886.8 $3,699.0 $162.7 $(2.9) $4,745.6 ======2001......... 886.8 3,699.0 -- 162.7 (2.9) 4,745.6 Convertible debt accretion, net of tax................................ 28.7 -- -- (17.5) -- 11.2 Repurchase of convertible debt (note 10).......................... (110.9) -- -- 6.7 -- (104.2) Shares issued, net................... -- 8.5 -- -- -- 8.5 Repurchase of shares (note 11)....... -- (36.9) 5.8 (1.4) -- (32.5) Currency translation................. -- -- -- -- 20.2 20.2 Net loss for the year................ -- -- -- (445.2) -- (445.2) ------- -------- ---- ------- ----- -------- Balance -- December 31, 2002......... $ 804.6 $3,670.6 $5.8 $(294.7) $17.3 $4,203.6 ======= ======== ========== ======= ===== ========
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 --------2002 -------- --------- -------- CASH PROVIDED BY (USED IN): OPERATIONS: Net earnings (loss)......................................... $ 68.4....................................... $ 206.7 $ (39.8) $ (445.2) Items not affecting cash: Depreciation and amortization............................. 126.5amortization........................... 212.5 319.5 311.0 Deferred income taxes..................................... 5.3taxes................................... (10.9) (27.9) (107.8) Restructuring charges (note 13)......................... -- 98.6 194.5 Other charges (note 13).................................................................... -- -- 134.7 Other..................................................... (2.9)36.1 292.1 Other................................................... (4.4) 1.7 -------(6.1) -------- --------- -------- Cash from earnings.......................................... 197.3earnings........................................ 403.9 388.2 -------238.5 -------- --------- -------- Changes in non-cash working capital items: Accounts receivable....................................... (227.7)receivable..................................... (995.3) 887.2 Inventories............................................... (265.0)297.4 Inventories............................................. (656.7) 822.5 623.9 Other assets.............................................. 1.7assets............................................ (94.7) 45.7 26.1 Accounts payable and accrued liabilities.................. 194.6liabilities................ 1,230.4 (854.0) (202.7) Income taxes payable...................................... 4.7payable.................................... 27.3 0.9 -------(0.4) -------- --------- -------- Non-cash working capital changes.......................... (291.7) (489.0) 902.3 -------744.3 -------- --------- -------- Cash provided by (used in) operations..................... (94.4)operations....................... (85.1) 1,290.5 -------982.8 -------- --------- -------- INVESTING: Acquisitions, net of cash acquired........................ (64.8) (634.7) (1,299.7) (111.0) Purchase of capital assets................................ (211.8) (282.8) (199.3) (151.4) Proceeds on sale of capital assets........................ -- -- 71.6 Other..................................................... (0.6) (59.5) 1.4 -------(0.7) -------- --------- -------- Cash used in investing activities........................... (277.2) (977.0) (1,497.6) -------(191.5) -------- --------- -------- FINANCING: Bank indebtedness......................................... -- (8.6) (2.8) (1.6) Repayments of long-term debt.............................. (10.0) (2.2) (56.0) (146.5) Debt redemption fees (note 9)............................. -- -- (6.9) Deferred financing costs.................................. (1.5) (0.1) (3.9) (2.6) Issuance of convertible debt.............................. 862.9 -- 862.9 -- Convertible debt issue costs, pre-tax..................... -- (19.4) -- -- Repurchase of convertible debt (note 10).................. -- -- (100.3) Issuance of share capital................................. 758.2 766.6 737.7 7.4 Share issue costs, pre-tax................................ (34.3) (26.8) (10.0) -- Repurchase of capital stock (note 11)..................... -- -- (32.5) Other..................................................... (1.0) 2.0 1.1 -------(0.1) -------- --------- -------- Cash provided by (used in) financing activities....................... 711.4activities............. 1,574.4 666.1 -------(283.1) -------- --------- -------- Increase in cash............................................ 339.8 512.3 459.0 508.2 Cash, beginning of year..................................... 31.7 371.5 883.8 -------1,342.8 -------- --------- -------- Cash, end of year........................................... $ 371.5 $ 883.8 $ 1,342.8 =======$1,851.0 ======== ========= 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. Supplemental cash flow information (note 21) 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 computerinformation technology 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.States (U.S. GAAP). 2. SIGNIFICANT ACCOUNTING POLICIES: (A)(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)(b) 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, but not limited to, the allowance for doubtful accounts, inventory valuation, income tax valuation allowances, restructuring charges, the useful lives and valuation of intangible assets and the fair values of reporting units for purposes of goodwill impairment tests. Actual results could differ materially from those estimates and assumptions. (c) 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)(d) 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)(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts, which reduces the receivables to the amount management reasonably believes will be collected. A specific allowance is recorded against customer receivables that are considered to be impaired based on the Company's knowledge of the financial condition of its customers. In determining the amount of the allowance, the following factors are considered: the length of time the receivables have been outstanding, customer and industry concentrations, current business environment, and historical experience. (f) 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)In determining the net realizable value, the Company considers factors such as shrinkage, the aging and future demand of the inventory, past experience with specific customers, and the ability to redistribute inventory to other programs or return inventory to suppliers. F-8 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) (g) 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..............................................Buildings................................................... 25 years Buildings/leasehold improvements.......................improvements............................ Up to 25 years or term of lease Office equipment.......................................equipment............................................ 5 years Machinery and equipment................................equipment..................................... 5 years Software...............................................Software.................................................... 1 to 510 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(h) GOODWILL FROM BUSINESS COMBINATIONS: Prior to July 1, 2001, and other intangible assets areall goodwill was 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. Effective January 1, 2002, the Company discontinued amortization of all existing goodwill. These changes are a result of new accounting standards issued in 2001 which are summarized in note 2(q)(ii) -- Changes in accounting policies. Upon adopting these standards on January 1, 2002, the Company is required to evaluate goodwill annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is tested at the reporting unit level by comparing the reporting unit's carrying amount to its fair value. The fair values of the reporting units are estimated using a combination of a market approach and discounted cash flows. To the extent a reporting unit's carrying amount exceeds its fair value, an impairment of goodwill exists. Impairment is measured by comparing the fair value of goodwill, determined in a manner similar to a purchase price allocation, to its carrying amount. The Company conducted its annual goodwill assessment in the fourth quarter of 2002 and recorded an impairment charge. See notes 7 -- Goodwill and intangible assets and 13(c) -- Other charges. Prior to 2002, the Company assessed the recoverability of goodwill by comparing its carrying amount to its projected future net cash flows as described under note 2(j) -- Impairment of long-lived assets. (i) INTANGIBLE ASSETS: Intangible assets are comprised of intellectual property and other intangible assets. Intellectual property assets consist primarily of certain non-patented intellectual property and process technology, and are amortized but will be tested for impairment annually. See note 2(n). (G)on a straight-line basis over their estimated useful lives, to a maximum of 5 years. Other intangible assets consist primarily of customer relationships and contract intangibles, and represent the excess of cost over the fair value of tangible assets and intellectual property acquired in asset acquisitions. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, to a maximum of 10 years. (j) IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews long-livedcapital and intangible 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 ofcomparing 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. Anhas recorded impairment charges in the value of intellectual property2001 and other intangible assets is assessed based on projected future net cash flows.2002. 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)13(d) -- Other charges. (k) PENSION AND NON-PENSION, POST-RETIREMENTPOST-EMPLOYMENT BENEFITS: The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets. The cost of pensions and other retirementpost-employment 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, compensation levels at time of retirement, retirement ages of employees and expected health care costs. Changes in these assumptions could impact future pension expense. 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) isActuarial gains or losses exceeding 10% of a plan's accumulated benefit obligations or the fair market value of the plan assets at the beginning of the year are 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 20002001 and 2001.11 years for 2002. The average remaining service period of active employees covered by the other retirementpost-employment benefit plans is 21 years for 20002001 and 2001. (I)23 years for 2002. Curtailment gains or losses may arise from significant changes to a plan. Curtailment gains are offset against unrecognized losses and any excess gains and all curtailment losses are recorded in the period in which the curtailment occurs. F-9 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Pension assets are recorded as Other assets while pension liabilities are recorded as Accrued pension and post-employment benefits. (l) DEFERRED FINANCING COSTS: Costs relating to long-term debt are deferred in other assets and amortized over the term of the related debt andor debt facilities. (J)(m) INCOME TAXES: The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. When necessary, aA valuation allowance is recorded to reduce deferred income tax assets to an amount for which realizationthat, in the opinion of management, is more likely than not.not to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs. (K)(n) 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.rates prevailing during the month of the transaction. 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 in foreign currencies and foreign-currency denominated balances. The Company does not enter into derivatives for speculative purposes. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and at the end of each quarter, whether the derivatives that are used in hedged transactions are highly effective in offsetting changes in cash flows of hedged items. Gains and losses on hedges of firm commitments are included in the cost of the hedged transactionstransaction when they occur. Gains and losses on hedges of forecasted transactions are recognized in earnings in the same period and the same line item as the underlying hedged transaction. Foreign exchange translation gains and losses on forward contracts used to hedge foreign-currency denominated amounts are accrued on the balance sheet as current assets or current liabilities and are recognized currently in the income statement, offsetting the respective translation gains or losses on the foreign-currency denominated amounts. The Company does not enter into derivatives for speculative purposes. (L)forward premium or discount is amortized over the term of the forward contract. Gains and losses on hedged forecasted transactions are recognized in earnings immediately when the hedge is no longer effective or the forecasted transactions are no longer expected. (o) RESEARCH AND DEVELOPMENT: The Company annually incurs costs on activities that relaterelating to research and development activities 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 20012002 were $17.1 (2000$18.2 (2001 -- $19.5; 1999$17.1; 2000 -- $19.7)$19.5). No amounts have been capitalized. (M) USE OF ESTIMATES:(p) RESTRUCTURING CHARGES: The preparationCompany records restructuring charges relating to employee terminations, contractual lease obligations and other exit costs, based on detailed plans approved and committed to by management. The recognition of financial statements in conformity with generally accepted accounting principlesthese charges requires management to make estimatescertain judgments regarding the nature, timing and assumptions that affectamount associated with 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-9planned restructuring activities, including F-10 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (N)2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) estimating sublease income and the net recovery of equipment to be disposed of. At the end of each reporting period, the Company evaluates the appropriateness of the remaining accrued balances. (q) CHANGES IN ACCOUNTING POLICIES: (i) Earnings per share: As a result ofEffective 2001, the Company retroactively applied the new Canadian Institute of Chartered Accountants (CICA) Handbook Section 3500, "Earnings per share," which requires the Company is required to retroactively use of the treasury stock method for calculating diluted earnings per share. This change results in anThe diluted earnings per share calculation whichincludes employee stock options and the conversion of convertible debt instruments, if dilutive. The new standard is consistent with United StatesU.S. GAAP. Previously reported diluted earnings per share have been restated to reflect this change. See note 12 -- Earnings (loss) per share and weighted average shares outstanding. (ii) Business combinations, goodwill and goodwill:other intangible assets: 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 StatesU.S. GAAP. Effective July 1, 2001, and for the remainder of the fiscal year, goodwill acquired in business combinations completed after June 30, 2001, washas not been amortized. In addition, the new criteria for recognition of intangible assets apart from goodwill and the valuation of the shares issued in a business combination hashave been applied to business combinations completed after June 30, 2001. Upon full adoptionThe Company has fully adopted these new standards as of the standards beginning January 1, 2002, the Company will discontinueand discontinued amortization of all existing goodwill, evaluategoodwill. The Company also evaluated existing intangible assets, including estimates of remaining lives, and make any necessary reclassifications in orderhas reclassified $9.1 from intellectual property to goodwill, as of January 1, 2002, to conform with the new criteria for recognitioncriteria. Section 3062 requires the completion of intangible assets apart from goodwill and will test for impairment in accordance with the new standards. In connection with Section 3062'sa transitional goodwill impairment evaluation the Company is required to assess whether goodwill is impaired as of January 1, 2002. The Company has up towithin six months to determine the fair value of its reporting units and compare that toadoption. Impairment is identified by comparing the carrying amounts of the Company's reporting units.units with their fair values. To the extent a reporting unit's carrying amount exceeds its fair value, the Companyimpairment of goodwill must perform a second step to measurebe recorded by December 31, 2002. The impairment of goodwill is measured by comparing the amountfair value of impairmentgoodwill, determined in a manner similar to a purchase price allocation. This second step isallocation, to be completed no later than December 31, 2002.its carrying amount. Any transitional impairment will bewould have been recognized as an effect of a change in accounting principle and will bewould have been charged to opening retained earnings as of January 1, 2002. AsThe Company completed the transitional goodwill impairment assessment, and determined that no impairment existed as of December 31, 2001,the date of adoption. Effective January 1, 2002, the Company had unamortized goodwill of $1,128.8$1,137.9 which is no longer amortized. This change in accounting policy was not applied retroactively 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 $39.2amounts presented for 2001. Because of the extensive effort required to comply with the remaining provisions of Sections 1581 and 3062, the Company hasprior years have not estimatedbeen restated for this change. The following table shows the impact of these provisions on its financial statements, beyond discontinuing goodwill amortization. (O) RECENTLY ISSUEDthis change as if the policy had been applied retroactively to 2001 and 2000:
YEAR ENDED DECEMBER 31 ------------------------------ 2000 2001 2002 -------- -------- -------- Net earnings (loss) as reported............................. $206.7 $(39.8) $(445.2) Add back: goodwill amortization............................. 39.1 39.2 -- ------ ------ ------- Net earnings (loss) before goodwill amortization............ $245.8 $ (0.6) $(445.2) ====== ====== ======= Basic earnings (loss) per share: As reported............................................... $ 1.01 $(0.26) $ (1.98) Before goodwill amortization.............................. $ 1.20 $(0.07) $ (1.98) Diluted earnings (loss) per share: As reported............................................... $ 0.98 $(0.26) $ (1.98) Before goodwill amortization.............................. $ 1.16 $(0.07) $ (1.98)
F-11 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2. SIGNIFICANT ACCOUNTING PRONOUNCEMENTS:POLICIES: (CONTINUED) (iii) Stock-based compensation and other stock-based payments: In December 2001,Effective January 1, 2002, the Company adopted the new 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.to employees. 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 onwith the exerciseaddition of pro forma information. The standard requires the disclosure of pro forma net earnings and earnings per share information as if the Company had accounted for employee stock options is recorded as share capital.under the fair value method. The Company has applied the pro forma disclosure provisions of the new standard is effective for the Company's fiscal year beginning January 1, 2002 forto awards granted on or after that date.January 1, 2002. The pro forma effect of awards granted prior to January 1, 2002, has not been included. The fair value of the options issued by the Company during 2002 was determined using the Black-Scholes option pricing model. The Company used the following weighted average assumptions: risk-free rate of 5.14%; dividend yield of 0%; a volatility factor of the expected market price of the Company's current accounting policies are consistent withshares of 70%; and, an expected option life of 5 years. The weighted-average grant date fair value of options issued during the new standard.year was $12.02 per share. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to income over the vesting period, on a straight-line basis. For the year ended December 31, 2002, the Company's pro forma net loss is $447.4, pro forma basic loss per share is $1.99 and pro forma diluted loss per share is $1.99. See note 11(c) for a description of the stock option plans. (r) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: (i) Foreign currency translation and hedging relationships: Effective January 1, 2002, the CICA Handbookamended 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 iswas not impacted by this change. The CICA issued Accounting Guideline AcG-13 which establishes criteria for hedge accounting effective for the Company's 20032004 fiscal year. The Company has complied withreviewed 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(ii) Impairment or disposal of long-lived assets: In December 2002, the CICA issued Handbook Section 3063, "Impairment or Disposal of Long-Lived Assets" and revised Section 3475, "Disposal of Long-Lived Assets and Discontinued Operations." These sections supersede the write-down and disposal provisions of Section 3061, "Property, Plant and Equipment" and Section 3475, "Discontinued Operations." The new standards are consistent with U.S. GAAP. Section 3063 establishes standards for recognizing, measuring and disclosing impairment of long-lived assets held-for-use. An impairment is recognized when the carrying amount of an asset to be held and used, exceeds the projected future net cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. Section 3475 provides specific criteria for and requires separate classification for assets held-for-sale and for these assets to be measured at the lower of their carrying amounts or fair value, less costs to sell. Section 3475 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from operations. Section 3063 is effective for the Company's 2004 fiscal year, however, early application is permitted. Revised Section 3475 is applicable to disposal activities committed to by the Company after May 1, 2003, however, early application is permitted. The Company expects that the adoption of these standards will have no material impact on its financial position, results of operations or cash flows. (iii) Guarantees: In December 2002, the CICA approved Accounting Guideline AcG-14 which requires certain disclosures of obligations under guarantees, effective for the Company's first quarter of 2003. The guideline is generally consistent with the disclosure requirements for guarantees under U.S. GAAP. The guideline does not apply to product warranties or the measurement requirements under U.S. GAAP. The Company has disclosed its guarantees under U.S. GAAP in note 22(k). The Company expects that the adoption of this guideline will have no material impact on its financial position, results of operations or cash flows. F-12 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)(a) 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,Little Rock, 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)(b) BUSINESS COMBINATIONS: Omni: In October 2001, the Company acquired Omni Industries Limited (Omni), an electronics manufacturerEMS provider 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.France. In August 2001, the Company acquired Primetech Electronics Inc. (Primetech), an electronics manufacturerEMS provider 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. In 2002, the Company completed the valuations of certain assets relating to its 2001 business combinations, resulting in changes to the fair-value allocations of the purchase prices. Details of the final net assets acquired in these business combinations, at fair value, are as follows:
OTHER BUSINESS OMNI COMBINATIONS ---------------------- -------------- Current assets.............................................. $ 255.2260.7 $ 63.2 Capital assets.............................................. 91.8 46.3 Other long-term assets...................................... 4.1 0.1 Goodwill.................................................... 764.4 135.5777.5 136.2 Intellectual property....................................... 50.034.5 10.0 Liabilities assumed......................................... (299.7) (27.6)(302.8) (28.3) ------- ------ Net assets acquired......................................... $ 865.8 $227.5 ======= ====== Financed by: Cash......................................................Cash........................................................ $ 479.5 $ 46.8 Issuance of shares and options............................options.............................. 386.3 180.7 ------- ------ $ 865.8 $227.5 ======= ======
2002 ACQUISITIONS: (c) ASSET ACQUISITIONS: In March 2002, the Company acquired certain assets located in Miyagi and Yamanashi, Japan from NEC Corporation. In August 2002, the Company acquired certain assets from Corvis Corporation in the United States. The aggregate purchase price for these acquisitions of $111.0 was financed with cash and allocated to the net assets acquired, including intangible assets of $49.4, F-13 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 3. ACQUISITIONS: (CONTINUED) based on their relative fair values at the date of acquisition. The weighted-average useful life of these intangible assets is approximately six years. Integration costs related to acquisitions: The Company incurred costs of $22.8$21.1 in 2001 (20002002 (2001 -- $16.1; 1999$22.8; 2000 -- $9.6)$16.1) relating to the establishment of business processes, infrastructure and information systems for acquired operations. None of the integration costs incurred related to existing operations. The Company's 2002 restructuring actions have impacted some of the sites acquired in prior years. These actions have included workforce reductions and facility consolidations and closures. See note 13(b) -- Other charges. 4. ACCOUNTS RECEIVABLE: Accounts receivable are net of an allowance for doubtful accounts of $74.6$62.4 at December 31, 2001 (20002002 (2001 -- $40.7)$74.6). 5. INVENTORIES:
2000 2001 2002 ------------ ------------ Raw materials............................................... $1,298.5 $ 903.6 $ 479.8 Work in progress............................................ 215.2 220.6 101.0 Finished goods.............................................. 150.6 248.5 194.8 -------- -------- $1,664.3 $1,372.7 $ 775.6 ======== ========
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:
20002002 ------------------------------------------ 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 75.1 175.0Land........................................................ $ 66.0 $-- $ 66.0 Buildings................................................... 192.3 24.6 167.7 Buildings/leasehold improvements............................ 64.4 33.8 30.6 Office equipment............................................ 102.1 55.3 46.8 Machinery and equipment..................................... 618.2 319.2 299.0 Software.................................................... 202.9 85.2 117.7 -------- ------ ------ ------ $785.1 $206.8 $578.3 ======$1,245.9 $518.1 $727.8 ======== ====== ======
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 intangibleThe above amounts include $17.1 (2001 -- $13.3) of assets representunder capital lease and accumulated amortization of $4.0 (2001 -- $6.8) related thereto. Depreciation and rental expense for the excess of cost over the fair value of tangible assetsyear ended December 31, 2002 was $212.4 (2001 -- $192.8; 2000 -- $121.9) 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$117.3 (2001 -- $79.8; 2000 -- $46.7), respectively. F-14 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 7. GOODWILL FROM BUSINESS COMBINATIONS AND INTANGIBLE ASSETS: GOODWILL FROM BUSINESS COMBINATIONS: The following table details the changes in goodwill by reporting segment for the year ended December 31, 2002:
DECEMBER 31, RECLASS POST CLOSING IMPAIRMENT DECEMBER 31, 2001 (A) (B) (C) 2002 ------------- -------- ------------ ----------- ------------- Americas.......................................... $ 243.2 $ 1.8 $(2.1) $(127.2) $115.7 Europe............................................ 68.3 6.2 2.0 (76.5) -- Asia.............................................. 817.3 1.1 13.9 -- 832.3 -------- ----- ----- ------- ------ $1,128.8 $ 9.1 $13.8 $(203.7) $948.0 ======== ===== ===== ======= ====== ---------------
(a) The Company reclassed $9.1 from intellectual property to goodwill as of January 1, 2002, to conform with the new goodwill standards. See note 2(q)(ii). (b) The Company completed the valuations of certain assets relating to its 2001 business combinations. This resulted in changes to the fair-value allocation of the purchase price, and thus goodwill. (c) During the fourth quarter of 2002, the Company performed its annual goodwill impairment test in accordance with the new goodwill standards, Section 3062. See note 2(q)(ii). Prolonged declines in the information technology and communications end markets contributed to an impairment of goodwill in the fourth quarter as estimated fair values of the reporting units fell below their respective carrying values. The Company obtained independent valuations to support the fair values of its reporting units. The fair values of the reporting units were estimated using a combination of a market approach and discounted cash flows. Revenue and expense projections used in determining the fair value of the reporting units were based on management's estimates, including estimates of current and future industry conditions. Cash flows were discounted using a weighted average cost of capital. The Company recorded a goodwill impairment of $203.7. See note 13(c) -- Other charges. INTANGIBLE ASSETS:
2001 ------------------------------------------ ACCUMULATED NET BOOK COST AMORTIZATION VALUE ------------ ------------ ------------ Intellectual property....................................... $388.6 $143.9 $244.7 Other intangible assets..................................... 209.3 26.8 182.5 ------ ------ ------ $597.9 $170.7 $427.2 ====== ====== ======
2002 ------------------------------------------ ACCUMULATED NET BOOK COST AMORTIZATION VALUE ------------ ------------ ------------ Intellectual property....................................... $194.5 $118.9 $ 75.6 Other intangible assets..................................... 177.8 41.5 136.3 ------ ------ ------ $372.3 $160.4 $211.9 ====== ====== ======
F-15 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 7. GOODWILL FROM BUSINESS COMBINATIONS AND INTANGIBLE ASSETS: (CONTINUED) The following table details the changes in intangible assets for the year ended December 31, 2002:
ACQUISITIONS/ DECEMBER 31, RECLASS POST CLOSING IMPAIRMENT DECEMBER 31, 2001 AMORTIZATION (A) (B) (C) 2002 ------------- ------------ -------- ------------- ----------- ------------- Intellectual property.............. $244.7 $(72.0) $(9.1) $ 8.5 $ (96.5) $ 75.6 Other intangible assets............ 182.5 (23.9) -- 25.4 (47.7) 136.3 ------ ------ ----- ----- ------- ------ $427.2 $(95.9) $(9.1) $33.9 $(144.2) $211.9 ====== ====== ===== ===== ======= ====== ---------------
(a) The Company reclassed $9.1 from intellectual property to goodwill as of January 1, 2002, to conform with the new goodwill standards. See note 2(q)(ii). (b) Intangible assets increased during the year due to acquisitions, offset partially by post closing adjustments. (c) In the fourth quarter of 2002, the Company recorded an impairment charge totaling $144.2 to write-down intellectual property and other intangible assets, primarily in the Americas and European segments. The Company recorded $75.2 as restructuring charges primarily for intellectual property impaired due to the closure or consolidation of the related manufacturing facilities. An additional charge of $69.0 was recorded as "Other charges -- other impairment" to write-down certain intellectual property, and customer relationships and contracts that were impaired, in connection with the regular recoverability review of intangible assets. The impairment was measured as the excess of the carrying amount over the projected future net cash flows that these assets were expected to generate. See notes 13(b) and (d) -- Other charges. Amortization expense is as follows:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ Amortization of goodwill.................................... $39.1 $ 39.2 $-- Amortization of intellectual property....................... 39.1 68.8 72.0 Amortization of other intangible assets..................... 10.7 17.0 23.9 ----- ------ ----- $88.9 $125.0 $95.9 ===== ====== =====
Effective January 1, 2002, the Company discontinued amortization of all goodwill. See note 2(q)(ii) -- Changes in accounting policies. The Company estimates its future amortization expense as follows, based on existing intangible asset balances: 2003........................................................ $46.8 2004........................................................ 43.0 2005........................................................ 35.1 2006........................................................ 27.0 2007........................................................ 16.3 Thereafter.................................................. 43.7
8. OTHER ASSETS:
2000 2001 2002 ------------ ------------ Deferred pension (note 16).................................. $ 25.828.4 $ 28.431.2 Deferred income taxes....................................... 81.5 116.4 305.1 Commodity taxes recoverable................................. 78.3 10.7 10.9 Other....................................................... 19.7 9.7 7.4 ------ ------ $205.3 $165.2 $354.6 ====== ======
Amortization of deferred financing costs for the year ended December 31, 20012002, was $1.7 (2000$2.7 (2001 -- $1.7; 19992000 -- $1.5)$1.7). F-16 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 9. LONG-TERM DEBT:
2000 2001 2002 ------------ ------------ Global, unsecured, revolving credit facility due 2003 (a)... $-- $-- Global, unsecured,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 6.9 ------ ------ 132.0----- 147.4 6.9 Less current portion........................................ 1.4 10.0 2.7 ------ ------ $130.6----- $137.4 $ 4.2 ====== =========== ---------------
(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 permitspermitted 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 2001.2001 or 2002. Commitment fees in 20012002 were $0.4.$0.6. The Company elected to cancel this facility in December 2002. (b) In February 2000,December 2002, the Company renewedextended its second global, unsecured, revolving credit facility providing upfrom April 2004 to December 2004. Concurrent with this extension, the Company increased the facility from $250.0 of borrowings includingto $350.0. The facility includes a swing line$25.0 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 lineswing-line facility bearsbear interest at a base rate. There were no borrowings on this facility during 2000 and 2001.2001 or 2002. Commitment fees in 20012002 were $0.6.$2.6. (c) In July 2001, the Company entered into an unsecured, revolving credit facility providing up to $500.0 of borrowings including a swing line$75.0 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 lineswing-line facility bear interest at a base rate. There were no borrowings on this facility in 2001.2001 or 2002. Commitment fees in 20012002 were $0.5.$1.5. (d) TheIn August 2002, the Company redeemed the entire $130.0 of outstanding 10.5% Senior Subordinated Notes bear interest at 10.5%, are unsecured and are subordinated to the paymenta premium of all senior debt of the Company. The Senior Subordinated Notes may be redeemed at various premiums above face value.5.25%. See note 13(e). (e) Other long-term debt includes secured loan facilities of one of the Company's subsidiaries of which $13.0 iswas outstanding at December 31, 2001.2001, and capital lease obligations. All secured loans were repaid during 2002. The weighted average interest rate on these facilities in 2001 was 4.4%. The loans arewere denominated in Singapore Dollars and are repayable through quarterly payments. There were no commitment fees for 2001.2001 or 2002. The balance as at December 31, 2002, relates to capital lease obligations. As at December 31, 2001,2002, principal repayments due within each of the next five years on all long-term debt are as follows: 2002........................................................ $ 10.0 2003........................................................ 4.5$2.7 2004........................................................ 1.32.5 2005........................................................ 0.71.5 2006........................................................ 130.6 Thereafter.................................................. 0.30.1 2007........................................................ 0.1
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 restrictrequire the Company's abilityCompany to pay dividends.maintain certain financial ratios. 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. F-17 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 10. CONVERTIBLE DEBT: (CONTINUED) 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. During 2002, the Company paid $100.3 to repurchase LYONs with a principal amount at maturity of $222.9. The Company recognized a gain on the repurchase of these LYONs. The gain of $6.7, net of tax of $3.9, is recorded in retained earnings and apportioned between the principal equity and option components, based on their relative fair values compared to their carrying values. Consistent with the treatment of the periodic accretion charges, the gain on the principal equity component has been included in the calculation of basic and diluted earnings (loss) per share. See note 12. 11. CAPITAL STOCK: (A)(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)(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)................................(i)................................. 12.0 -- 12.0 -- Other share issuances (v)...........................(ii).......................... 1.1 -- 1.1 -- Issued as consideration for acquisitions (vi).......(iii)...... 13.2 -- 13.2 0.1 ----- ---- ----- ---- Balance December 31, 2001........................... 190.6 39.1 229.7 0.5 Repurchase of shares (iv)........................... (2.0) -- (2.0) -- Other share issuances (v)........................... 0.9 -- 0.9 -- ----- ---- ----- ---- Balance December 31, 2002........................... 189.5 39.1 228.6 0.5 ===== ==== ===== ====
F-15F-18 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 11. CAPITAL STOCK: (CONTINUED)
SUBORDINATE MULTIPLE SHARES TO TOTAL AMOUNT VOTING SHARES VOTING SHARES BE ISSUED AMOUNT ------ -------------- -------------- ------------- ------------- Balance December 31, 1999........................... $1,504.52000........................... $2,254.9 $138.8 $ 2.8 $1,646.11.7 $2,395.4 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)...........................(ii).......................... 29.2 -- -- 29.2 Issued as consideration for acquisitions (vi).......(iii)...... 562.8 -- 4.2 567.0 -------- ------ ----- -------- Balance December 31, 2001........................... $3,554.33,554.3 138.8 5.9 3,699.0 Repurchase of shares (iv)........................... (36.9) -- -- (36.9) Other share issuances (v)........................... 8.5 -- -- 8.5 -------- ------ ----- -------- Balance December 31, 2002........................... $3,525.9 $138.8 $ 5.9 $3,699.0$3,670.6 ======== ====== ===== ========
20002001 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)(ii) 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 employee stock options for cash of $23.7 and recorded a tax benefit of $5.5. (vi)(iii) 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)2002 CAPITAL TRANSACTIONS: (iv) In July 2002, the Company filed a Normal Course Issuer Bid to repurchase over the next 12 months, at its discretion, up to 5% of the total outstanding shares, or 9.6 million subordinate voting shares, for cancellation. During 2002, the Company repurchased 2.0 million subordinate voting shares at a weighted average price of $16.23 per share. (v) During 2002, the Company issued 0.9 million subordinate voting shares, primarily as a result of the exercise of employee stock options, for $7.4 and recorded a tax benefit of $1.1. (c) STOCK OPTION PLANS: (I) LONG-TERM INCENTIVE PLAN(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 23.029.0 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(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-16F-19 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 11. CAPITAL STOCK: (CONTINUED) 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 =====Granted..................................................... 3.9 $19.93 Exercised................................................... (0.9) $ 7.42 Cancelled................................................... (0.8) $41.49 ---- Outstanding at December 31, 2002............................ 26.1 $30.51 ==== Shares reserved for issuance upon exercise of stock options or awards (in millions)................................... 28.8 =====33.9 ====
The following options were outstanding as at December 31, 2001:2002:
WEIGHTED WEIGHTED RANGE OF OUTSTANDING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE REMAINING PLAN EXERCISE PRICES OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE LIFE ---- --------------- -------------- -------------- -------------- --------------------------- ---------------- ------------- ---------------- ---------- (in millions) (in millions) (years) ESPO................. $ 5.00$5.00 - $ 7.50 5.34.6 $ 5.34 3.94.6 $ 5.42 65.34 5 LTIP................. $ 8.75$8.75 - $13.69 1.7 $12.16 0.9 $11.96 71.6 $12.09 1.2 $12.02 6 $13.10 - $25.75 3.6 $18.58 -- -- 10 $24.18 - $24.18 0.8 $24.18 0.40.6 $24.18 87 $24.91 - $36.89 0.8 $30.58$54.15 1.4 $41.16 0.4 $41.16 9 $32.22 - $44.38 0.3 $37.91 -- -- 10 $39.03 - $39.03 2.92.8 $39.03 1.42.1 $39.03 87 $41.89 - $41.89 6.46.1 $41.89 -- -- 10 $44.23 - $54.15 0.6 $49.46 -- --1.5 $41.89 9 $55.40 - $60.06 4.1$56.19 3.9 $55.96 1.02.0 $55.96 9 $73.04 - $74.90 0.1 $73.42 -- -- 98 Other................ $ 0.93$0.93 - $13.31 1.00.8 $ 5.73 0.95.50 0.8 $ 5.67 55.50 4 Other................ $29.73 - $72.84 0.2 $46.28 -- -- 50.2 $46.28 4 ---- 23.9---- 26.1 13.4 ==== ====
F-17F-20 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 12. EARNINGS (LOSS) PER SHARE:SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING: The following table sets forth the calculation of basic and diluted earnings (loss) per share:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Numerator: Net earnings (loss)....................................... $ 68.4 $206.7 $(39.8) $(445.2) Convertible debt accretion, net of tax.................... -- (5.4) (15.0) (17.5) Gain on repurchase of convertible debt, net of tax(1)..... -- -- 8.3 ------ ------ ------------- Earnings (loss) available to common shareholders.......... $ 68.4 $201.3 $(54.8) $(454.4) Denominator: Weighted average shares -- basic (in millions)............ 167.2 199.8 213.9 229.8 Effect of dilutive securities (in millions): Employee stock options(1)options(2)............................... 4.0 7.8 -- -- Convertible debt........................................ 4.2 -- 4.2 -- ------ ------ ------------- Weighted average shares -- diluted (in millions)(2)(3)....... 171.2 211.8 213.9 229.8 Earnings (loss) per share: Basic..................................................... $ 0.41 $ 1.01 $(0.26) Diluted................................................... $ 0.40(1.98) Diluted................................................... $ 0.98 $(0.26) $ (1.98) ---------------
(1) For 19992002, the gain on the principal equity component of the convertible debt repurchase of $8.3 is included in the calculation of basic and diluted loss per share. See note 10. (2) For 2000, excludes the effect of 3.4 million and 3.3 million "out of the money" options respectively, as they are anti-dilutive. (2)(3) For 2001 and 2002, excludes the effect of all options and convertible debt as they are anti-dilutive due to the loss. 13. OTHER CHARGES:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Restructuring2001 restructuring (a)........................................... $--...................................... $-- $237.0 Other$ 1.9 2002 restructuring (b)......................................................................................... -- -- 383.5 2002 goodwill impairment (c)................................ -- -- 203.7 Other impairment (d)........................................ -- 36.1 81.7 Deferred financing costs and debt redemption fees (e)....... -- -- 9.6 Gain on sale of surplus land................................ -- -- (2.6) ------ ------ ------ $-- $-- $273.1 ======$677.8 ====== ====== ---------------======
(a) Restructuring:2001 RESTRUCTURING: The Company recorded a pre-tax restructuring charge of $237.0 in 2001, in response to a slowing end market.markets. The Company's restructuring plan focused on facility consolidations and a workforce reduction. The following table details the components of the 2001 restructuring charge:charge and the adjustments in 2002, as the Company executed its plan:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Employee termination costs.................................. $-- $-- $ 90.7 $(4.1) Lease and other contractual obligations..................... -- -- 35.3 11.4 Facility exit costs and other............................... -- -- 12.4 (2.7) Asset impairment (non-cash)................................. -- -- 98.6 (2.7) ------ ------ ------ $------- $-- $237.0 $ 1.9 ====== ====== ===========
F-18F-21 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 13. OTHER CHARGES: (CONTINUED) The following table details the activity inthrough the accrued restructuring liability:
LEASE EMPLOYEE AND EMPLOYEE OTHER FACILITY EXIT TERMINATION CONTRACTUAL EXIT COSTS AND COSTS OBLIGATIONS AND OTHER TOTAL ------------ ------------ ------------------------- ------------ Balance at January 1, 2001............................. $-- $-- -$- $-- Provision.............................................. 90.7 35.3 12.4 138.42002............................. $ 39.5 $ 33.7 $ 9.5 $ 82.7 Cash payment........................................... (51.2) (1.6) (2.9) (55.7)payments.......................................... (35.4) (13.0) (6.8) (55.2) Adjustments............................................ (4.1) 11.4 (2.7) 4.6 ------ ----------- ----- ------ Balance at December 31, 2001...........................2002........................... $-- $ 39.5 $33.732.1 $-- $ 9.5 $ 82.732.1 ====== =========== ===== ======
Employee terminations were made across all geographic regions of the Company with the majority pertaining to manufacturing and plant employees. A total of 12,04111,925 employees have been identifiedterminated relating to be terminated,the 2001 restructuring plan. The adjustment to lease and other contractual obligations relates primarily to changes in estimates and revised timing of which 9,711 employees were terminated during 2001. The remaining termination costs are expected to be paid out during 2002.sublease recoveries. The non-cash charges for asset impairment reflectsreflected 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 completehas completed the major components of the 2001 restructuring plan, by the end of 2002, except for certain long-term lease and other contractual obligations. (b) Other:2002 RESTRUCTURING: In 2001,response to the prolonged difficult end-market conditions, the Company announced a new restructuring plan for the consolidation of facilities and a workforce reduction. The Company recorded a non-cashpre-tax restructuring charge of $36.1. This is comprised of a write-down$383.5. The following table details the components of the carrying value of certain assets, primarily goodwill and intangible assets. 14. INCOME TAXES:2002 restructuring charge:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999--------------------------------------- 2000 2001 ------------ ------------ ------------2002 ----------- ----------- ----------- Income (loss) before tax: Canadian operations....................................... $ 84.8 $179.4 $ 34.7 Foreign operations........................................ 19.6 96.5 (76.6)Employee termination costs.................................. $-- $-- $128.8 Lease and other contractual obligations..................... -- -- 51.7 Facility exit costs and other............................... -- -- 8.5 Asset impairment (non-cash)................................. -- -- 194.5 ------ ------ ------ $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) $(27.9)$-- $-- $383.5 ====== ====== ======
F-19The following table details the activity through the accrued restructuring liability:
LEASE EMPLOYEE AND OTHER FACILITY TERMINATION CONTRACTUAL EXIT COSTS COSTS OBLIGATIONS AND OTHER TOTAL ----------- ----------- ----------- ----------- Balance at January 1, 2002................................ $-- $-- $-- $-- Provision................................................. 128.8 51.7 8.5 189.0 Cash payments............................................. (41.7) (1.7) (0.7) (44.1) ------ ----- ----- ------ Balance at December 31, 2002.............................. $ 87.1 $50.0 $ 7.8 $144.9 ====== ===== ===== ======
Employee terminations were made primarily in the Americas with the majority pertaining to manufacturing and plant employees. A total of 5,900 employees have been identified to be terminated, of which 2,410 employees were terminated during 2002. The remaining termination costs are expected to be paid out during 2003. F-22 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 13. OTHER CHARGES: (CONTINUED) The non-cash charges for 2002 for asset impairment reflect the write-down of certain long-lived assets primarily in the Americas that have become impaired as a result of the rationalization of facilities. The asset impairments relate to 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 2002 restructuring plan by the end of 2003, except for certain long-term lease and other contractual obligations. (c) 2002 GOODWILL IMPAIRMENT: In 2002, the Company recorded a non-cash charge against goodwill of $203.7, in connection with its annual impairment assessment as described in notes 2(h) and 7. (d) OTHER IMPAIRMENT: In 2002, the Company recorded a non-cash charge of $81.7, in connection with its annual impairment assessment of long-lived assets, comprised primarily of a write-down of intangible assets. In 2001, the Company recorded a non-cash charge of $36.1, in connection with its annual impairment assessment of long-lived assets comprised primarily of a write-down of goodwill and intangible assets. (e) DEFERRED FINANCING COSTS AND DEBT REDEMPTION FEES: In 2002, the Company paid a premium associated with the redemption of the Senior Subordinated Notes and expensed related deferred financing costs. See note 9(d). 14. INCOME TAXES:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ Earnings (loss) before income tax: Canadian operations....................................... $179.4 $ 34.7 $(190.1) Foreign operations........................................ 96.5 (76.6) (346.3) ------ ------ ------- $275.9 $(41.9) $(536.4) ====== ====== ======= Current income tax expense (recovery): Canadian operations....................................... $ 51.2 $ 17.2 $ (4.6) Foreign operations........................................ 28.9 8.6 21.2 ------ ------ ------- $ 80.1 $ 25.8 $ 16.6 ====== ====== ======= Deferred income tax expense (recovery): Canadian operations....................................... $ 33.0 $ (5.4) $ (15.2) Foreign operations........................................ (43.9) (22.5) (92.6) ------ ------ ------- $(10.9) $(27.9) $(107.8) ====== ====== =======
F-23 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 14. INCOME TAXES: (CONTINUED) The overall income tax provision differs from the provision computed at the statutory rate as follows:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Combined Canadian federal and provincial income tax rate.... 44.6% 44.0% 42.1% 38.6% ------ ------ ------------- Income taxes (recovery) based on earnings (loss) before income taxes at statutory rates........................... $ 46.6 $121.4 $(17.7) $(207.1) Increase (decrease) resulting from: Manufacturing and processing deduction.................... (8.1) (17.7) (5.0) 5.8 Foreign income taxed at lower rates....................... (11.4) (43.9) (2.9) (19.2) Amortization and write-down of non-deductible costs...................... 9.5goodwill and intangible assets....................................... 8.9 15.4 44.2 Other, including large corporations tax................... (0.6) 0.5 8.1 8.5 Change in valuation allowance............................. -- -- 76.6 ------ ------ ------------- Income tax expense (recovery)............................. $ 36.0............................... $ 69.2 $ (2.1) $ (91.2) ====== ====== =============
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 income tax assets and liabilities are comprised of the following as at December 31, 20002001 and 2001:2002:
2000 2001 ------------ ------------2002 ----------- ----------- Deferred income tax assets: Income tax effect of net operating losses carried forward.................................................forward..... $ 52.5 $ 51.9 $162.9 Accounting provisions not currently deductible............ 21.6 63.534.4 43.9 Capital, intangible and other assets...................... 6.7 17.0 143.9 Share issue and convertible debt issue costs.............. 23.0 17.2 9.5 Restructuring accruals.................................... 29.1 53.2 Other..................................................... 1.8 4.5 5.2 ------ ------ 154.1 418.6 Valuation allowance....................................... -- (76.6) ------ ------ Total deferred income tax assets................................... 105.6assets............................ 154.1 ====== ======342.0 ------ ------ Deferred income tax liabilities: Capital, intangible and other assets...................... (12.4) (37.7) (54.2) Deferred pension asset.................................... (8.9) (9.1) (10.0) Other..................................................... (0.8) (4.5) (3.5) ------ ------ Total deferred income tax liabilities.............................. (22.1)liabilities....................... (51.3) (67.7) ------ ------ Deferred income tax asset, net.............................. $ 83.5 $102.8 $274.3 ====== ======
The net deferred income tax asset arises from available income tax losses and future income tax deductions. The Company's ability to use these income tax losses and future income tax deductions is dependent upon the operations of the Company in the tax jurisdictions in which such losses or deductions arose. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset and tax planning strategies, the Company has determined that a valuation allowance of $76.6 is required in respect of its deferred income tax assets as at December 31, 2002. No valuation allowance was required for the deferred income tax assets as at December 31, 2001. In order to fully utilize the net deferred income tax assets of $274.3, the Company will need to generate future taxable income of approximately $741.0. Based on the Company's current projection of taxable income for the periods in which the deferred income tax assets are deductible, it is more likely than not that the Company will realize the benefit of the net deferred income tax assets as at December 31, 2002. F-24 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 14. INCOME TAXES: (CONTINUED) Celestica intends to indefinitely re-invest income from all of its foreign subsidiaries. The aggregate amount of undistributed earnings of Celestica's foreign subsidiaries for which no deferred income tax liability has been recorded is approximately $283.4 as at December 31, 2002. Celestica has been granted tax incentives, including tax holidays, for its Czech Republic, China, Malaysia, Thailand and Singapore subsidiaries. The tax benefit arising from these incentives is approximately $24.9, or $0.11 diluted per share for 2002, $9.6, or $0.04 diluted per share for 2001, and $15.8, or $0.07 diluted per share for 2000. These tax incentives expire between 20022004 and 2012, and are subject to certain conditions with which the Company expects to comply. As at December 31, 2001,2002, the Company had $340.0operating losses of non-capital (net operating) losses,$589.9; a portion of the income tax benefits of which havethese losses has been recognized inon 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 allsummary of the deferred tax assets will not be realized. The ultimate realizationoperating loss carryforwards by year of deferred tax assetsexpiry 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)as follows:
YEAR OF EXPIRY AMOUNT -------------- -------- 2005........................................................ $ 0.1 2006........................................................ 1.7 2007........................................................ 131.6 2008........................................................ 3.2 2009........................................................ 7.4 2010-2022................................................... 176.5 Indefinite.................................................. 269.4 ------ $589.9 ======
15. RELATED PARTY TRANSACTIONS: In 2001,2002, the Company expensed acquisition and management related fees of $2.1 (2000$2.2 (2001 -- $2.1; 19992000 -- $2.0)$2.1) and capitalized acquisition related fees of $Nil (2000(2001 -- $0.5; 1999$Nil; 2000 -- $Nil)$0.5) 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-RETIREMENTPOST-EMPLOYMENT BENEFIT PLANS: The Company provides various pension and non-pension post-retirementpost-employment benefit plans for its employees. Non-pension post-retirement benefits are available to all Company retirees. ThePension benefits include medical, surgical, hospitalization coverage,traditional pension plans, as well as supplemental health, dental and group life insurance.pension plans. 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 theMaximum pension retirement benefits for employees participating in 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' pensionable earnings. Non-pension post-employment benefits are available to retired and terminated employees. The Company has funded the plans over the past four yearsbenefits include termination benefits, medical, surgical, hospitalization coverage, supplemental health, dental and group life insurance. The Company's pension funding policy is to contribute amounts sufficient to meet minimum local statutory funding requirements that are based on actuarial calculations to maintain the planscalculations. The Company may make additional discretionary contributions based on a fully funded basis.actuarial assessments. The most recent statutory pension actuarial valuations were completed as at March and April 20002000. In 2002, actuarial reviews of all defined benefit plans were completed. Contributions made by the Company to support ongoing plan obligations have been included in the deferred asset or liability accounts on the consolidated balance sheet. Contributions to pension fund assets are invested primarily in fixed income and equity securities and assets are valued at market value. The Company's non-pension post-employment benefits are currently unfunded. The most recent actuarial valuation for non-pension, post-employment benefits was completed in January 2001.2002. The Company accrues the expected costs of providing non-pension, post-retirementpost-employment 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-21F-25 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.16. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS: (CONTINUED) The following information is provided ontable provides a summary of the estimated financial position of the Company's 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 otherand non-pension post-employment 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:plans:
PENSION PLANS OTHER BENEFIT PLANS YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 --------------------------------- --------------------------------- 1999------------------------- ------------------------- 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Plan assets, beginning of year.............................. $188.6 $174.5 $-- $-- Employer contributions.................................... 10.1 13.5 3.8 6.1 Actual return on assets................................... (13.1) (21.9) -- -- Voluntary employee contributions.......................... 2.1 4.6 -- 0.1 Effect of acquisitions.................................... -- 4.8 -- -- Benefits paid............................................. (5.2) (10.5) (3.8) (6.2) Foreign currency exchange rate changes...................... (8.0) 9.9 -- -- ------ ------ ------ ------ Plan assets, end of year.................................... $174.5 $174.9 $-- $-- ====== ====== ====== ======
PENSION PLANS OTHER BENEFIT PLANS YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ------------------------- ------------------------- 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Accrued benefit obligations (ABO), beginning of year........ $170.3 $179.1 $ 47.7 $ 56.4 Reclassification of supplemental plan..................... -- 4.9 -- (4.9) Service cost.............................................. 8.6 7.2 7.6 9.7 Interest cost............................................. 11.3 12.5 2.0 2.5 Voluntary employee contributions.......................... 2.1 4.6 -- 0.1 Actuarial (gains) / losses................................ (1.9) 14.0 3.2 8.2 Plan amendments........................................... 1.9 -- -- (0.3) Effect of acquisitions.................................... -- 22.8 1.1 0.9 Effect of curtailments.................................... -- 1.3 -- (1.1) Benefits paid............................................. (5.2) (10.5) (3.8) (6.2) Foreign currency exchange rate changes.................... (8.0) 14.6 (1.4) 0.1 ------ ------ ------ ------ Accrued benefit obligations, end of year.................... $179.1 $250.5 $ 56.4 $ 65.4 ====== ====== ====== ====== Deficit of plan assets over accrued benefit obligations..... $ (4.6) $(75.6) $(56.4) $(65.4) Unrecognized actuarial losses............................... 33.0 87.3 9.1 7.7 ------ ------ ------ ------ Deferred (accrued) pension cost............................. $ 28.4 $ 11.7 $(47.3) $(57.7) ====== ====== ====== ======
The following table reconciles the deferred (accrued) pension balances to that reported as of December 31, 2002:
OTHER PENSION BENEFIT PLANS PLANS TOTAL ------------ ------------ ------------ Accrued pension and post-employment benefits................ $(19.5) $(57.7) $(77.2) Deferred pension assets (note 8)............................ 31.2 -- 31.2 ------ ------ ------ $ 11.7 $(57.7) $(46.0) ====== ====== ======
F-26 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 16. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS: (CONTINUED)
PENSION PLANS OTHER BENEFIT PLANS YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ------------------------------------------ ------------------------------------------ 2000 2001 19992002 2000 2001 --------- --------- --------- --------- --------- ---------2002 ------------ ------------ ------------ ------------ ------------ ------------ Plan cost:Net plan expense: Service cost -- benefits earned....................... $ 6.5cost................ $ 7.5 $ 8.6 $ 1.27.2 $ 1.5 $ 7.6 $ 9.7 Interest cost on projected benefit obligations........ 9.0cost............... 10.6 11.3 1.112.5 1.5 2.0 Actual2.5 Expected return on plan assets.......................... (30.0) (1.5) 13.1 -- -- -- Amortization of past service costs.................... -- 2.4 (5.8)assets... (13.9) (14.0) (13.7) -- -- -- Net amortization and deferral......................... 18.6 (15.0) (21.4) 1.4of actuarial (gains)/losses............ (0.2) (0.1) 1.6 0.3 0.8 --------- --------- --------- --------- --------- ---------0.5 ------ ------ ------ ------ ------ ------ 4.0 5.8 7.6 3.3 10.4 12.7 Defined contribution pension plan expense................ 12.8 18.9 21.9 -- -- -- Curtailment loss.............. -- -- 2.9 -- -- 1.7 ------ ------ ------ ------ ------ ------ Total......................... $ 4.116.8 $ 4.024.7 $ 5.8 $ 3.732.4 $ 3.3 $ 10.4 ========= ========= ========= ========= ========= =========$ 14.4 ====== ====== ====== ====== ====== ======
PENSION PLANS OTHER BENEFIT PLANS YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ------------------------------------------ ------------------------------------------ 2000 2001 2002 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ ------------ Actuarial assumptions (percentages): Weighted average discount rate for projected benefit obligations......................................... 6.0 -obligations................. 6.5 6.5 - 7.0 5.8 - 7.8 6.5 - 8.0 7.0 - 8.0 7.0 - 7.86.2 5.5 7.5 7.3 6.9 Weighted average rate of compensation increase........ 3.5 -increase....... 4.0 4.5 4.0 4.5 4.5 4.5 4.55.0 Weighted average expected long-term rate of return on plan assets.........................................assets................. 7.4 7.5 7.3 - 7.5 7.3 - 7.8 -- -- -- Healthcare cost trend rate............................rate.... -- -- -- 5.0 6.4 10.5
OTHER BENEFIT PLANS YEAR ENDED DECEMBER 31 --------------------------- 2001 2002 ------------ ------------ Sensitivity re: healthcare trend rate for non-pension, post-employment benefits: 1% Increase Effect on ABO............................................. $ 5.1 - 7.4 5.1 - 6.8 3.5 - 8.0$ 5.3 Effect on service cost and interest cost.................. 0.9 1.2 1% Decrease Effect on ABO............................................. (4.0) (4.2) Effect on service cost and interest cost.................. (0.7) (1.0)
A one-percentage point increaseIn 2002, the Company assumed net pension liabilities relating to an acquisition in Japan from NEC Corporation. Regulatory funding restrictions preclude the Company from fully funding the plan. The plan has an accumulated benefit obligation of $31.3 in excess of its plan assets of $6.8. At the time of closing the acquisition, the Company received amounts to cover the unfunded liabilities. The Company has a pension plan with an accumulated benefit obligation of $123.2 that is in excess of plan assets of $83.7. The Company has a supplemental retirement plan that has an accumulated benefit obligation of $8.7 and decrease inno plan assets. In 2002, 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 forplan was reclassified from other benefit plans forto pension plans. In 2002, the year ended December 31, 2001. F-22Company incurred net curtailment losses due to the rationalization of facilities. These losses are included as restructuring charges in note 13(b). F-27 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) TheIn 2001, the fair valuesvalue of the Company's long-term debt, including the current portion thereof, isSenior Subordinated Notes was 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, 20002001, and 2001,2002, are as follows:
DECEMBER 31, 20002001 DECEMBER 31, 20012002 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ------------ ------------ Senior Subordinated Notes and other long-term debt......... $130.0 $135.2 $143.0 $149.5 $ 6.9 $ 6.9 Foreign currency contracts -- asset (liability)............ -- 7.5(7.4) -- (7.4)18.9
DERIVATIVES AND HEDGING ACTIVITIES: The Company has entered into foreign currency contracts to hedge foreign currency risk relating to cash flow and cash position 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 transactionsexposures being hedged. The counterparties to the contracts are multinational commercial banks, and therefore, the credit risk of counterparty non-performance is remote.low. As at December 31, 2001,2002, the Company had outstandingforward foreign exchange contracts to sell $379.5trade $282.7 in U.S. dollars in exchange for Canadian dollars over a period of 1715 months at a weighted average exchange rate of U.S. $0.65.$0.64. The Company also had forward contracts to trade $10.6 in exchange for Canadian dollars over a period of 37 months at a weighted average exchange rate of U.S. $0.63. In addition, the Company had exchange contracts to sell $191.8trade $168.7 in exchange for euros over a period of 15 months at a weighted average exchange rate of U.S. $0.88, $56.6$0.93, $36.4 in exchange for British pounds sterling over a period of 1513 months at a weighted average exchange rate of U.S. $1.40, $46.3$1.45, $37.1 in exchange for Mexican pesos over a period of 12 months at a weighted average exchange rate of U.S. $0.10, $24.2$27.6 in exchange for Thailand bahtSingapore dollars over a period of 12 months at a weighted average exchange rate of U.S. $0.02$0.57, 64.5 Brazilian reais in exchange for U.S. dollars over a period of 1 month at a weighted average exchange rate of U.S. $0.30, $40.7 in exchange for Japanese yen over a period of 1 month at a weighted average exchange rate of U.S. $0.01, and $6.4$11.9 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, 2001,2002, these contracts had a fair valuefair-value asset of $18.9 (2001 -- liability of $7.4 (2000 -- asset of $7.5)$7.4). 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, CONTINGENCIES AND CONTINGENCIES:GUARANTEES: 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$106.5 2004........................................................ 38.0 -- 38.059.5 2005........................................................ 26.4 -- 26.438.9 2006........................................................ 20.4 -- 20.423.0 2007........................................................ 18.9 Thereafter.................................................. 89.2 -- 89.291.5
F-23F-28 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 18. COMMITMENTS, CONTINGENCIES AND GUARANTEES: (CONTINUED) Contingent liabilities in the form of letters of credit, letters of guarantee, and surety and performance bonds, are provided to various third parties. These guarantees cover various payments including customs and excise taxes, utility commitments and certain bank guarantees. At December 31, 2002, these liabilities, including guarantees of employee share purchase loans, amounted to $24.1$61.2 (2001 -- $24.1). In addition to the above guarantees, the Company has also provided routine indemnifications, whose terms range in duration and often are not explicitly defined. These guarantees may include indemnifications against adverse effects due to changes in tax laws and patent infringements by third parties. The maximum amounts from these indemnifications cannot be reasonably estimated. In some cases, the Company has recourse against other parties to mitigate its risk of loss from these guarantees. Historically, the Company has not made significant payments relating to these indemnifications. Under the terms of an existing real estate lease, which expires in 2004, Celestica has the right to acquire the real estate at December 31, 2001 (2000 -- $12.0).a purchase price equal to the lease balance, which currently is approximately $37.3. In the event that the lease is not renewed, subject to certain conditions, Celestica may choose to market and complete the sale of the real estate on behalf of the lessor. If the highest offer received is less than the lease balance, Celestica would pay the lessor the lease balance less the gross sale proceeds, subject to a maximum of $31.5. In the event that no acceptable offers are received, Celestica would pay the lessor $31.5 and return the property to the lessor. Alternatively, Celestica may choose to acquire the real estate at the expiration for a price equal to the then current lease balance. The future lease payments under this lease are included in the total operating lease commitments. 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 2002, three customers individually comprised 17%, 16% and 15% of total revenue across all geographic segments. At December 31, 2002, one customer represented 28% of total accounts receivable. 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 goodwill and 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.reporting segment:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ REVENUE Americas.................................................... $3,587.5 $6,542.7 $ 6,334.6 $4,640.8 Europe...................................................... 1,108.6 2,823.3 3,001.3 1,786.5 Asia........................................................ 710.2 871.6 991.1 2,109.7 Elimination of inter-segment revenue........................ (109.1) (485.5) (322.6) --------(265.4) -------- --------- $5,297.2-------- $9,752.1 $10,004.4 $8,271.6 ======== ========= ======== =========
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-24F-29 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 20. SEGMENTED INFORMATION: (CONTINUED)
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999EBIAT 2000 2001 2002 ----- ------------ ------------ ------------ Americas.................................................... $200.1 $ 192.9 $ 157.7 Europe...................................................... 121.1 128.5 (11.5) Asia........................................................ 40.7 49.7 111.1 ------ ------- ------- 361.9 371.1 257.3 Interest, net............................................... 19.0 7.9 1.1 Amortization of goodwill and intangible assets.............. (88.9) (125.0) (95.9) Integration costs related to acquisitions................... (16.1) (22.8) (21.1) Other charges............................................... -- (273.1) (677.8) ------ ------- ------- Earnings (loss) before income taxes......................... $275.9 $ (41.9) $(536.4) ====== ======= =======
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ CAPITAL EXPENDITURES Americas.................................................... $138.0 $154.0 $107.9 $ 90.0 Europe...................................................... 29.1 86.9 55.4 28.0 Asia........................................................ 44.7 41.9 36.0 33.4 ------ ------ ------ $211.8 $282.8 $199.3 $151.4 ====== ====== ======
AS AT DECEMBER 31 --------------------------- 2000 2001 2002 ------------ ------------ TOTAL ASSETS Americas.................................................... $3,444.6 $3,408.2 $2,894.1 Europe...................................................... 1,904.7 1,626.3 1,047.6 Asia........................................................ 588.7 1,598.4 1,865.1 -------- -------- $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$5,806.8 ======== ======== CAPITAL ASSETS Americas.................................................... $ 327.0468.0 $ 468.0281.1 Europe...................................................... 216.0 279.1 231.9 Asia........................................................ 90.4 168.0 214.8 -------- -------- $ 633.4915.1 $ 915.1727.8 ======== ========
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 2002 ------------ ------------ ------------ REVENUE Canada...................................................... 43% 28% 20% 15% United States............................................... 22% 30% 35% 37% Italy....................................................... -- 10% 13% 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-25F-30 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 21. SUPPLEMENTAL CASH FLOW INFORMATION:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ Paid during the year: Interest.................................................. $15.9 $ 20.7 $22.0 Taxes..................................................... $55.0 $ 89.0 $25.5 Non-cash financing activities: Convertible debt accretion, net of tax.................... $ 5.4 $ 15.0 $17.5 Shares issued for acquisitions............................ $-- $567.0 $--
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")(GAAP) as applied in Canada. The significant differences between Canadian and United StatesU.S. 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 StatesU.S. GAAP:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Net earnings (loss) in accordance with Canadian GAAP........ $68.4 $206.7 $(39.8) $(445.2) Compensation expense (a).................................... (1.9) (2.5) (3.2) (3.8) Interest expense on convertible debt, net of tax of $9.5 (2000 -- $3.8) (b)........................................ --........ (6.8) (17.7) (27.8) Gain on repurchase of convertible debt, net of tax (b)...... -- -- 8.4 Other charges, net of tax (c).......................................................................... -- -- (2.7) (26.5) Gain on foreign exchange contract, net of tax of $3.6 (d)... --........... -- 12.1 ------- ------ ------ ------- Net earnings (loss) in accordance with United States GAAP... $66.5U.S. GAAP............ $197.4 $(51.3) $(494.9) Other comprehensive income:income (loss): Cumulative effect of a change in accounting policy, net of tax of $1.9 (e)........................................... --................................................... -- 5.6 -- Net lossgain (loss) on derivatives designated as hedges, net of tax of $3.2 (e)..................................................................................................... -- -- (11.7) 21.8 Minimum pension liability, net of tax of $6.4 (f).............................. -- -- (14.9) (23.6) Foreign currency translation adjustment..................... (3.5) -- 1.2 -----20.2 ------ ------ ------- Comprehensive income (loss) in accordance with United States GAAP...................................................... $63.0U.S. GAAP.... $197.4 $(71.1) =====$(476.5) ====== ====== =======
The following table sets forthdetails the computation of United StatesU.S. GAAP basic and diluted earnings (loss) per share:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Earnings (loss) available to shareholders -- basic.......... $ 66.5 $197.4 $(51.3) Add:$(494.9) Add back: Interest expense on convertible debt, net of tax.......tax (if dilutive)............................................. 6.8 -- 6.8 17.7-- ------ ------ ------------- Earnings (loss) available to shareholders -- diluted........ $ 66.5 $204.2 $(33.6)$(51.3) $(494.9) ====== ====== ======= Weighted average shares -- basic (in millions).............. 167.2 199.8 213.9 229.8 Weighted average shares -- diluted (in millions)(1)......... 171.2 211.8 213.9 229.8 Basic earnings (loss) per share............................. $ 0.400.99 $(0.24) $ 0.99 $(0.24)(2.15) Diluted earnings (loss) per share........................... $ 0.39 $ 0.96 $(0.24) ---------------$ (2.15)
------------------- (1) For 2001 and 2002, excludes the effect of options and convertible debt as they are anti-dilutive due to the loss. F-26F-31 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: (CONTINUED) The cumulative effect of these adjustments on shareholders' equity of the Company is as follows:
AS AT DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Shareholders' equity in accordance with Canadian GAAP....... $1,658.2 $3,469.3 $4,745.6 $4,203.6 Compensation expense (a).................................... (8.1) (10.6) (13.8) (17.6) Capital stock (a)........................................... 6.1 8.6 11.8 15.6 Interest expense on convertible debt, net of tax (b)........ -- (6.8) (24.5) (52.3) Convertible debt (b)........................................ -- (860.5) (886.8) (804.6) Convertible debt accretion, net of tax (b).................. -- 5.4 20.4 37.9 Gain on repurchase of convertible debt for Canadian GAAP (b)....................................................... -- -- (6.7) Gain on repurchase of convertible debt for U.S. GAAP (b).... -- -- 8.4 Other charges (c)........................................... -- -- (2.7) (29.2) Gain on foreign exchange contract, net of tax (d)........... -- --12.1 12.1 Net lossgain (loss) on cash flow hedges (e)................................................. -- -- (6.1) 15.7 Minimum pension liability, net of tax (f)................... -- -- (14.9) (38.5) -------- -------- -------- Shareholders' equity in accordance with United States GAAP...................................................... $1,656.2U.S. GAAP........... $2,605.4 $3,841.1 $3,344.4 ======== ======== ======== ---------------
(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 StatesU.S. 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 StatesU.S. GAAP the Company has and will recordrecorded 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 StatesU.S. 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.expense of $27.8, net of tax of $13.9 (2001 -- $17.7, net of tax of $9.5; 2000 -- $6.8, net of tax of $3.8). In 2002, the Company reported a gain on the repurchase of a portion of convertible debt. Under Canadian GAAP, the gain is recorded to retained earnings. Under U.S. GAAP, the Company records the gain through income of $8.4, net of $4.2 in taxes. (c) In 2001,2002, the Company recorded a chargeimpairment charges to write-down goodwill,certain assets, primarily intangible assets, which was measured using undiscounted cash flows. United StatesU.S. GAAP requires the use of discounted cash flows, resulting in an additional charge of $2.7.$26.5, net of tax of $2.0 (2001 -- $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 StatesU.S. 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 StatesU.S. 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 effective for 2001 for purposes of the United StatesU.S. 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 (less $1.9 in taxes) and a corresponding credit to other comprehensive income as a cumulative effect, type adjustment to reflect the initial F-32 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: (CONTINUED) mark-to-market on the foreign currency contracts pursuant to United StatesU.S. GAAP. At December 31, 2001, the Company has recorded a liability of $7.4 and a corresponding gross adjustment of $14.9 (less $3.2 in taxes) to other comprehensive income and earnings. At December 31, 2002, the Company has recorded thean asset of $18.9 (less $3.2 in taxes) and a corresponding adjustmentsgain of $26.3 (less $4.5 in taxes) to other comprehensive income and earnings. It is expected that $7.0$18.8 of net lossesgains reported in accumulated other comprehensive income will be reclassified into earnings during the period ended December 31, 2002.2003. 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 StatesU.S. GAAP, the Company is required to record an additional minimum pension liability for onethree 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 $23.6, net of tax of $12.0 (2001 -- one plan for $14.9, net of tax of $6.4.$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 STATESU.S. GAAP: (a) Stock based(g) Stock-based compensation: TheUnder U.S. GAAP, 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 valuefair-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. Forperiod, on a straight-line basis, and was determined using the year ended December 31, 2001,Black-Scholes option pricing model with 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):following weighted average assumptions:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 2000 2001 2002 ------------ ------------ ------------ Risk-free rate.............................................. 5.4% 5.4% 5.1% Dividend yield.............................................. 0.0% 0.0% 0.0% Volatility factor of the expected market price of the Company's shares.......................................... 70.0% 70.0% 70.0% Expected option life (in years)............................. 7.5 7.5 5.0 Weighted-average grant date fair values of options issued... $40.49 $34.31 $12.02
The pro forma disclosure for U.S. GAAP is as follows:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ Net earnings (loss) in accordance with U.S. GAAP, as reported.................................................. $197.4 $(51.3) $(494.9) Deduct: Stock-based compensation costs using fair-value method, net of tax........................................ (21.2) (45.8) (87.7) ------ ------ ------- Pro forma net earnings (loss) in accordance with U.S. GAAP................................................. $176.2 $(97.1) $(582.6) ====== ====== ======= Earnings (loss) per share: Basic -- as reported...................................... $ 0.99 $(0.24) $ (2.15) Basic -- pro forma........................................ $ 0.88 $(0.45) $ (2.54) Diluted -- as reported.................................... $ 0.96 $(0.24) $ (2.15) Diluted -- pro forma...................................... $ 0.86 $(0.45) $ (2.54)
F-33 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: (CONTINUED) (h) Accumulated other comprehensive loss:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ Opening balance of accumulated net gain on cash flow hedges.................................................... $-- $-- $--$ (6.1) Cumulative effect of a change in accounting policy, net of tax (e)................................................ --................................................... -- 5.6 -- Net lossgain (loss) on derivatives designated as hedges (e)............ --..... -- (11.7) -----21.8 ----- ------ ------ Closing balance of accumulated net loss on cash flow hedges............................................... --balance............................................. -- (6.1) 15.7 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) Foreign currency translation gain........................... -- 1.2 20.2 ----- ------ ------ Closing balance............................................. (4.1) (2.9) 17.3 Opening balance of minimum pension liability................ -- -- (14.9) Minimum pension liability, net of tax (f)................... -- (14.9) (23.6) ----- ------ ------ Closing balance............................................. -- (14.9) (38.5) ----- ----------- ------ Accumulated other comprehensive loss........................ $(4.1) $(4.1) $(23.9) $ (5.5) ===== =========== ======
(c)(i) Under United StatesU.S. GAAP, the subtotal "cash from earnings" would be excluded from the consolidated statements of cash flows. (d)(j) Warranty liability: The Company records a liability for future warranty costs based on management's best estimate of probable claims under its product warranties. The accrual is based on the terms of the warranty, which vary by customer and product, and historical experience. The Company regularly evaluates the appropriateness of the remaining accrual. The following table details the changes in the warranty liability: Balance at January 1, 2002.................................. $18.1 Accrual in excess of claims incurred........................ 5.6 ----- Balance at December 31, 2002................................ $23.7 =====
(k) New United States accounting pronouncements: In July 2001, the FASB issued StatementSFAS No. 141, "Business Combinations"Combinations," and StatementSFAS No. 142, "Goodwill and Intangible Assets."Assets" which the Company fully adopted effective January 1, 2002. These statements are substantially consistent with CICA Sections 1581 and 3062 (refer to note 2(n)2(q)) except that, under United StatesU.S. GAAP, any transitional impairment charge iswould have been recognized in earnings as a cumulative effect of a change in accounting principle. Under Canadian GAAP, the cumulative adjustment iswould have been recognized in opening retained earnings. In October 2001, FASB issued Statement No. 144 "Accounting forThere was no impact to the Impairment or Disposal of Long-Lived Assets," which retains the fundamental provisions of SFAS 121 for recognizing and measuringCompany as no transitional 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.charges were recognized. In August 2001, SFAS No. 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 No. 143 is effective for the Company's fiscal year commencing January 1, 2003. The Company expects the adoption of these standardsthis standard will have no material impact on its financial position, results of operations or cash flows. F-28In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which retains the fundamental provisions of SFAS No. 121 for recognizing and measuring impairment losses of long-lived assets other than goodwill. SFAS No. 144 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from ongoing operations. The Company prospectively adopted SFAS No. 144 effective January 1, 2002. In May 2002, FASB issued SFAS No. 145, "Rescission of FASB Nos. 4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections." SFAS No. 145 requires that certain gains and losses from extinguishment of debt no longer qualify as extraordinary. The Company has early adopted SFAS No. 145 commencing January 1, 2002. F-34 CELESTICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) [EXHIBIT INDEX]22. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES: (CONTINUED) In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 recognizes the liability for an exit or disposal activity only when the costs are incurred and can be measured at fair value. Currently, a commitment to an exit or disposal plan is sufficient to record the majority of the costs. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company expects the adoption of this standard will not have a material impact on its existing restructuring plans as these plans were initiated under an exit plan that meets the criteria of Emerging Issues Task Force No. 94-3. In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), which requires certain disclosures of obligations under guarantees. The disclosure requirements of FIN 45 are effective for the Company's year ended December 31, 2002. Effective for 2003, FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee. The Company has adopted the disclosure requirements in its 2002 consolidated financial statements. See notes 18 and 22(j). The Company has not determined the impact of the measurement requirements of FIN 45. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The consolidation provisions of FIN 46 are effective for all newly created entities created after January 31, 2003, and are applicable to existing entities as of the Company's third quarter beginning July 1, 2003. It is possible that the Company's variable interests in the real estate assets subject to the lease arrangement disclosed in note 18 will be subject to the consolidation provisions of FIN 46. The Company has not determined the impact, however, any difference between the asset and liability on initial measurement would be accounted for as a cumulative effect of change in accounting policy in the 2003 statement of earnings. Refer to note 18. 23. SUBSEQUENT EVENTS: In January 2003, the Company made the following announcements: In response to the continued limited visibility in end markets, the Company plans to further reduce its manufacturing capacity. The reduction in capacity will result in a pre-tax restructuring charge of between $50.0 and $70.0, to be recorded during 2003. The Company has, from time to time, purchased LYONs on the open market. The Company has been authorized by the board of directors to spend up to an additional $100.0 to repurchase LYONs, at management's discretion. This is in addition to the amounts authorized in October 2002, of which $48.0 remains available for future purchases. 24. COMPARATIVE INFORMATION: The Company has reclassified certain prior year information to conform to the current year's presentation. F-35
EXHIBIT NUMBER DESCRIPTIONExhibit Index Exhibit Number Description - ------- -------------------- ----------------------------------------------------------------- 1. Articles of Incorporation and by-lawsBylaws 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 Restated Articles of Incorporation effective November 20, 2001 1.9 Bylaw No. 1(4) 1.91.10 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 formsa form of the Outstanding Notes)(8) 2.10(6) 2.4 Second Amended and Restated Credit Agreement, dated as of July 8, 2001,December 17, 2002, 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, TheCIBC World Markets, as Joint Lead Arranger and Syndication Agent, RBC Capital Markets, as Joint Lead Arranger and Co-Documentation Agent, Bank of Nova Scotia,America Securities LLC, as U.S. FacilityJoint Lead Arranger and Co-Documentation Agent, The Bank of Nova Scotia, as U.K. Facility Agent,and 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 - ------- ----------- 2.112.5 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,December 17, 2002, 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)Lenders 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)* 3.63.3 Amendment No. 1 to the Asset Purchase Agreement, dated as of May 4, 2001, by and between Avaya Inc. and Celestica Corporation(4)
Exhibit Number Description - --------- ----------------------------------------------------------------- 3.4 Arrangement 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(7)* 3.5 Merger Agreement, dated as of June 15, 2001, between Omni Industries Limited and Celestica Inc. 3.9(7)* 3.6 Asset Purchase Agreement, dated as of July 24, 2001, between Lucent Technologies Inc. and Celestica Corporation*Corporation(7)* 3.103.7 Asset Purchase Agreement, dated as of July 24, 2001, between Lucent Technologies Inc. and Celestica Corporation*Corporation(7)* 3.113.8 Asset Purchase Agreement, dated January 8, 2002, between NEC Corporation, NEC Miyagi, Ltd., NEC Yamanashi, Ltd., 1325091 Ontario Inc., and Celestica Inc.** 3.9 Employment Agreement, dated as of October 22, 1996, by and between Celestica, Inc. and Eugene V. Polistuk(1) 3.123.10 Employment Agreement, dated as of October 22, 1996, by and between Celestica, Inc. and Anthony P. Puppi(1) 3.133.11 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 - ------- ----------- 3.153.12 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) 3.17Tropea(8) 3.13 D2D Employee Share Purchase and Option Plan (1997)(2) 3.183.14 Celestica 1997 U.K. Approved Share Option Scheme(1) 3.193.15 1998 U.S. Executive Share Purchase and Option Plan(11)Plan(9) 8.1 Subsidiaries of Registrant 99.1 Certification required by Section 906 of the Sarbanes-Oxley Act of 2002***
- ----------------------- * 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. *** Pursuant to Commission Release No. 33-8212, this certification will be treated as "accompanying" this Annual Report on Form 20-F and not "filed" as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be incorporated by reference into any filing under the Securities Act, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. (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)(7) Incorporated by reference to the Registration StatementAnnual Report on Form F-320-F of Celestica Inc. filed on September 10, 2001 (Registration No. 333-69278). (10)May 3, 2002. (8) Incorporated by reference to the Annual Report on Form 20-F of Celestica Inc. filed on May 18, 2000. (11)(9) Incorporated by reference to the Registration Statement on Form S-8 of Celestica Inc. filed on October 8, 1998 (Registration No. 333-9500).