EXHIBIT 2
> CAE ANNUAL REPORT 2005
SELECTED FINANCIAL INFORMATION
SELECTED ANNUAL INFORMATION
FOR THE PAST FIVE YEARS
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(Unaudited— amounts in millions except per
share amounts)
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2005
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2004
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2003
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2002
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2001
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Revenue
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$
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986.2
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$
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938.4
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$
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976.8
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$
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1,010.7
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$
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820.3
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(Loss) earnings from continuing
operations
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(304.7
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)
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47.4
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113.9
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133.0
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99.3
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Net (loss) earnings
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(199.9
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)
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64.0
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117.2
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149.5
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106.1
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Financial position:
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Total assets
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$
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1,699.7
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$
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2,308.7
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$
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2,356.5
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$
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2,378.4
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$
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1,366.8
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Total net debt
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285.8
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529.6
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757.1
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822.2
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108.7
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Per share:
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(Loss) earnings from continuing
operations
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$
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(1.23
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)
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$
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0.20
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$
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0.52
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$
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0.61
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$
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0.46
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Net (loss) earnings
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(0.81
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)
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0.27
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0.53
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0.69
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0.49
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Dividends
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0.10
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0.12
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0.12
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0.11
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0.10
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Shareholders’ equity
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2.64
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3.94
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3.42
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2.81
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2.13
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SELECTED QUARTERLY FINANCIAL
INFORMATION
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(Unaudited— amounts in millions, except
share amounts and per share amounts)
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Q1
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Q2
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Q3
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Q4
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Fiscal 2003
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Revenue
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$
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244.7
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214.7
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246.9
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270.5
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Earnings from continuing operations
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$
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33.2
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18.2
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27.9
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34.6
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Basic earnings per share from continuing
operations
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$
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0.15
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0.08
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0.13
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0.16
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Diluted earnings per share from continuing
operations
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$
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0.15
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0.08
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0.13
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0.16
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Net earnings
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$
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37.4
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23.3
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31.5
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25.0
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Basic earnings per share
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$
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0.17
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0.11
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0.14
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0.11
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Diluted earnings per share
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$
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0.17
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0.11
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0.14
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0.11
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Average number of shares outstanding, in
millions
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219.3
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219.4
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219.4
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219.4
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Average exchange rate, 1 US dollar to Canadian
dollar
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$
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1.56
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1.56
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1.57
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1.51
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Fiscal 2004
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Revenue
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$
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208.9
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213.2
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255.2
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261.1
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Earnings from continuing operations
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$
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12.2
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11.0
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14.5
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9.7
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Basic earnings per share from continuing
operations
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$
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0.06
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0.05
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0.05
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0.04
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Diluted earnings per share from continuing
operations
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$
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0.06
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0.05
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0.05
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0.04
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Net earnings
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$
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13.2
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15.1
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21.4
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14.3
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Basic earnings per share
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$
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0.06
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0.07
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0.09
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0.05
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Diluted earnings per share
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$
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0.06
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0.07
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0.09
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0.05
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Average number of shares outstanding, in
millions
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219.7
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220.0
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246.5
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246.6
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Average exchange rate, 1 US dollar to Canadian
dollar
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$
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1.40
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1.38
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1.32
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1.32
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Fiscal 2005
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Revenue
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$
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230.9
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235.1
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257.5
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262.7
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Earnings (loss) from continuing
operations
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$
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18.9
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12.8
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(345.7
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)
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9.3
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Basic earnings (loss) per share from
continuing operations
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$
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0.08
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0.05
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(1.40
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)
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0.04
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Diluted earnings (loss) per share from
continuing operations
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$
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0.08
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0.05
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(1.40
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)
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0.04
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Net earnings (loss)
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$
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24.3
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14.0
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(347.0
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)
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108.8
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Basic earnings (loss) per share
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$
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0.10
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0.06
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(1.40
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)
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0.44
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Diluted earnings (loss) per
share
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$
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0.10
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0.05
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(1.40
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)
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0.44
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Average number of shares outstanding, in
millions
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246.7
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246.8
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247.0
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247.8
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Average exchange rate, 1 US dollar to Canadian
dollar
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$
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1.36
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1.31
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1.22
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1.23
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> 42
> CAE ANNUAL REPORT 2005
MANAGEMENT
AND AUDITORS’ REPORTS
MANAGEMENT’S STATEMENT
OF RESPONSIBILITY
The consolidated financial
statements contained in this Annual Report are the responsibility
of management, and have been prepared in accordance with Canadian
generally accepted accounting principles and include when necessary
some estimates based on management best judgment. Financial
information presented elsewhere in the Annual Report is under
management responsibilities and consistent with that contained in
the accompanying financial statements.
CAE’s policy
is to maintain internal accounting and administrative systems,
combined with disclosure control of high quality consistent with
reasonable cost. Such systems are designed to provide reasonable
assurance as to the reliability of financial information and the
safeguarding of assets.
The
Board of Directors is responsible for ensuring that Management
fulfils its responsibilities for financial reporting and is
ultimately responsible for reviewing and approving the consolidated
financial statements through its Audit Committee, consisting solely
of outside directors, which reviews the consolidated financial
statements and reports thereon to the Board. The Committee meets
periodically with the external auditors, internal auditors and
management to review their respective activities and to satisfy
itself that each party is properly discharging its
responsibilities. Both external auditors and internal auditors have
free access to the Committee, with or without management, to
discuss the scope of their audits, the adequacy of the system of
internal controls and financial reporting.
The
financial statements have been reviewed by the Audit Committee and,
together with the other required information in the Annual Report,
approved by the Board of Directors. In addition, the consolidated
financial statements have been audited by PricewaterhouseCooper
LLP, whose report is provided below.
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(Signed)
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(Signed)
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R.E.
Brown
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A.
Raquepas
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President and
Chief Executive Officer
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Vice President,
Finance and Chief Financial Officer
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Montreal,
Canada
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May 10,
2005
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AUDITORS’
REPORT
To the Shareholders of CAE
Inc.
We have audited the consolidated balance sheets of CAE Inc. as at
March 31, 2005 and 2004, and the consolidated statements of
earnings, retained earnings and cash flows for each of the years in
the three-year period ended March 31,2005. 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.
We
conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.
In
our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at March 31, 2005 and 2004, and the results of its
operations and cash flows for each of the years in the three-year
period ended March 31, 2005 in accordance with Canadian
generally accepted accounting principles.
(Signed)
Chartered Accountants, Montreal, Canada
May 10, 2005
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 has a material effect on the
comparability of the company’s financial statements, such as
the changes described in Note 1 to the consolidated financial
statements. Our report to the shareholders dated May 10, 2005
is expressed in accordance with Canadian reporting standards which
do not require a reference to such a change in accounting
principles in the auditors’ report when the change is
properly accounted for and adequately disclosed in the financial
statements.
(Signed)
Chartered Accountants, Montreal, Canada
May 10, 2005
43 >
> CAE ANNUAL REPORT 2005
CONSOLIDATED BALANCE SHEETS
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As at March
31 (amounts in millions of Canadian dollars)
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2005
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2004
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Assets
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Current assets
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Cash and cash equivalents
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$
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57.1
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$
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54.7
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Accounts receivable (Note 5)
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255.7
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316.5
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Inventories (Note 6)
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101.0
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147.7
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Prepaid expenses
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17.8
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19.6
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Income taxes recoverable
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58.5
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52.0
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Future income taxes (Note 15)
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2.5
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1.8
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Current assets held for sale (Note 3)
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5.8
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89.8
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498.4
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682.1
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Restricted cash
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0.9
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7.0
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Property, plant and equipment, net (Note
7)
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792.2
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780.0
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Future income taxes (Note 15)
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101.0
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89.0
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Intangible assets (Note 8)
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20.2
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129.2
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Goodwill (Note 9)
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92.1
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300.7
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Other assets (Note 10)
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137.4
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180.8
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Long-term assets held for sale (Note
3)
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57.5
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139.9
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$
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1,699.7
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$
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2,308.7
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Liabilities and Shareholders’
Equity
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Current liabilities
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Accounts payable and accrued
liabilities
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$
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312.8
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$
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322.0
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Deposits on contracts
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93.5
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69.3
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Long-term debt due within one year (Note
11)
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35.3
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8.8
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Future income taxes (Note 15)
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19.6
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51.1
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Current liabilities related to assets held for
sale (Note 3)
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7.8
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54.5
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469.0
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505.7
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Long-term debt (Note 11)
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307.6
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575.5
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Deferred gains and other long-term liabilities
(Note 16)
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179.8
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171.0
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Future income taxes (Note 15)
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38.3
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77.5
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Long-term liabilities related to assets held for
sale (Note 3)
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53.4
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60.2
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1,048.1
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1,389.9
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Shareholders’ Equity
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Capital stock (Note 12)
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373.8
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367.5
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Contributed surplus (Note 13)
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3.3
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1.3
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Retained earnings
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340.8
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562.1
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Currency translation adjustment (Note
22)
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(66.3
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)
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(12.1
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)
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651.6
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918.8
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$
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1,699.7
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$
|
2,308.7
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Contingencies and commitments
(Notes 18 and 20)
The accompanying notes form an
integral part of these consolidated financial
statements.
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Approved by the
Board:
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(Signed)
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(Signed)
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R.E.
Brown
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L.R.
Wilson
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Director
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Director
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> 44
> CAE ANNUAL REPORT 2005
CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
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Years ended
March 31 (amounts in millions of Canadian dollars, except per share
amounts)
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2005
|
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2004
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2003
|
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Revenue
|
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|
|
|
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|
Civil Simulation and Training
|
|
$
|
520.2
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|
$
|
461.8
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|
$
|
517.2
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|
|
Military Simulation and Training
|
|
|
466.0
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|
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476.6
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|
|
|
459.6
|
|
|
|
|
|
|
|
|
|
$
|
986.2
|
|
|
|
$
|
938.4
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|
|
$
|
976.8
|
|
|
|
|
|
|
|
Earnings from continuing operations before
interest and income taxes
|
|
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|
|
|
|
|
Civil Simulation and Training (Note
23)
|
|
$
|
47.6
|
|
|
|
$
|
39.0
|
|
|
$
|
115.6
|
|
|
Military Simulation and Training (Note
23)
|
|
|
47.2
|
|
|
|
|
51.6
|
|
|
|
78.8
|
|
|
Impairment of goodwill, tangible and intangible
assets (Note 4)
|
|
|
(443.3
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
Restructuring Costs (Note 24)
|
|
|
(24.5
|
)
|
|
|
|
(9.3
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
before interest and income taxes
|
|
$
|
(373.0
|
)
|
|
|
$
|
81.3
|
|
|
$
|
194.4
|
|
|
Interest on long-term debt (Note
11A(ix))
|
|
|
37.8
|
|
|
|
|
28.0
|
|
|
|
31.6
|
|
|
Other interest expense (income), net (Note
11A(ix))
|
|
|
(5.7
|
)
|
|
|
|
(5.6
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
before income taxes
|
|
$
|
(405.1
|
)
|
|
|
$
|
58.9
|
|
|
$
|
166.3
|
|
|
Income tax (recovery) expense (Note
15)
|
|
|
(100.4
|
)
|
|
|
|
11.5
|
|
|
|
52.4
|
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations
|
|
$
|
(304.7
|
)
|
|
|
$
|
47.4
|
|
|
$
|
113.9
|
|
|
Results of discontinued operations (Note
3)
|
|
|
104.8
|
|
|
|
|
16.6
|
|
|
|
3.3
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(199.9
|
)
|
|
|
$
|
64.0
|
|
|
$
|
117.2
|
|
|
|
|
|
|
|
Basic (loss) earnings per share from
continuing operations
|
|
$
|
(1.23
|
)
|
|
|
$
|
0.20
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from
continuing operations
|
|
$
|
(1.23
|
)
|
|
|
$
|
0.20
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.81
|
)
|
|
|
$
|
0.27
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
Diluted (loss) earnings per
share
|
|
$
|
(0.81
|
)
|
|
|
$
|
0.27
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
247.1
|
|
|
|
|
233.2
|
|
|
|
219.4
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
March 31 (amounts in millions of Canadian dollars)
|
|
2005
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
Retained earnings at beginning of year as
previously reported
|
|
$
|
562.1
|
|
|
|
$
|
531.2
|
|
|
$
|
440.4
|
|
|
Change in accounting policy (Note 1)
|
|
|
3.3
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Retained earnings at beginning of
year
|
|
|
565.4
|
|
|
|
|
531.2
|
|
|
|
440.4
|
|
|
Share issue costs (2004-net of taxes of
$2.4 million)
|
|
|
—
|
|
|
|
|
(5.1
|
)
|
|
|
—
|
|
|
Net (loss) earnings
|
|
|
(199.9
|
)
|
|
|
|
64.0
|
|
|
|
117.2
|
|
|
Dividends
|
|
|
(24.7
|
)
|
|
|
|
(28.0
|
)
|
|
|
(26.4
|
)
|
|
|
|
|
|
|
Retained earnings at end of year
|
|
$
|
340.8
|
|
|
|
$
|
562.1
|
|
|
$
|
531.2
|
|
|
|
|
|
|
The accompanying notes form an
integral part of these consolidated financial
statements.
45 >
> CAE ANNUAL REPORT 2005
CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED STATEMENTS OF
CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
March 31 (amounts in millions of Canadian dollars)
|
|
2005
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(199.9
|
)
|
|
|
$
|
64.0
|
|
|
$
|
117.2
|
|
|
Results of discontinued operations
|
|
|
(104.8
|
)
|
|
|
|
(16.6
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations
|
|
|
(304.7
|
)
|
|
|
|
47.4
|
|
|
|
113.9
|
|
|
Adjustments to reconcile earnings to cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill, tangible and intangible
assets (Note 4)
|
|
|
443.3
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization
|
|
|
82.0
|
|
|
|
|
71.4
|
|
|
|
65.1
|
|
|
Future income taxes
|
|
|
(113.9
|
)
|
|
|
|
(2.9
|
)
|
|
|
16.2
|
|
|
Investment tax credits
|
|
|
(29.2
|
)
|
|
|
|
(9.2
|
)
|
|
|
28.2
|
|
|
Stock based compensation (Note 13)
|
|
|
2.0
|
|
|
|
|
1.3
|
|
|
|
—
|
|
|
Other
|
|
|
20.9
|
|
|
|
|
(6.3
|
)
|
|
|
(18.4
|
)
|
|
Decrease (increase) in non-cash working
capital (Note 17)
|
|
|
85.6
|
|
|
|
|
(100.2
|
)
|
|
|
(64.7
|
)
|
|
|
|
|
|
|
Net cash provided by continuing operating
activities
|
|
|
186.0
|
|
|
|
|
1.5
|
|
|
|
140.3
|
|
|
Net cash provided by discontinued operating
activities
|
|
|
21.6
|
|
|
|
|
4.2
|
|
|
|
14.6
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
207.6
|
|
|
|
|
5.7
|
|
|
|
154.9
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of businesses (Note 2)
|
|
|
(13.8
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from disposal of discontinued
operations (Note 3)
|
|
|
239.4
|
|
|
|
|
22.3
|
|
|
|
25.0
|
|
|
Short-term investments, net
|
|
|
—
|
|
|
|
|
2.6
|
|
|
|
18.8
|
|
|
Capital expenditures
|
|
|
(118.0
|
)
|
|
|
|
(86.8
|
)
|
|
|
(224.2
|
)
|
|
Proceeds from sale and leaseback of
assets
|
|
|
43.8
|
|
|
|
|
122.5
|
|
|
|
127.0
|
|
|
Deferred development costs
|
|
|
(9.9
|
)
|
|
|
|
(12.7
|
)
|
|
|
(13.3
|
)
|
|
Deferred pre-operating costs
|
|
|
(1.7
|
)
|
|
|
|
(6.6
|
)
|
|
|
(7.6
|
)
|
|
Other assets
|
|
|
(2.4
|
)
|
|
|
|
(4.8
|
)
|
|
|
(27.5
|
)
|
|
|
|
|
|
|
Net cash provided by (used in) continuing
investing activities
|
|
|
137.4
|
|
|
|
|
36.5
|
|
|
|
(101.8
|
)
|
|
Net cash used in discontinued investing
activities
|
|
|
(5.8
|
)
|
|
|
|
(12.0
|
)
|
|
|
(32.6
|
)
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
131.6
|
|
|
|
|
24.5
|
|
|
|
(134.4
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds of long-term debt
|
|
|
267.7
|
|
|
|
|
514.9
|
|
|
|
250.0
|
|
|
Repayments of long-term debt
|
|
|
(588.5
|
)
|
|
|
|
(650.4
|
)
|
|
|
(326.3
|
)
|
|
Dividends paid
|
|
|
(24.0
|
)
|
|
|
|
(27.4
|
)
|
|
|
(26.2
|
)
|
|
Capital stock issuances (Note 12)
|
|
|
3.6
|
|
|
|
|
176.4
|
|
|
|
3.5
|
|
|
Share issue costs
|
|
|
—
|
|
|
|
|
(7.5
|
)
|
|
|
—
|
|
|
Other
|
|
|
0.7
|
|
|
|
|
1.4
|
|
|
|
(14.1
|
)
|
|
|
|
|
|
|
Net cash (used in) provided by continuing
financing activities
|
|
|
(340.5
|
)
|
|
|
|
7.4
|
|
|
|
(113.1
|
)
|
|
Net cash provided by discontinued financing
activities
|
|
|
3.2
|
|
|
|
|
10.4
|
|
|
|
18.7
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities
|
|
|
(337.3
|
)
|
|
|
|
17.8
|
|
|
|
(94.4
|
)
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
and cash equivalents
|
|
|
(2.3
|
)
|
|
|
|
(3.2
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
|
(0.4
|
)
|
|
|
|
44.8
|
|
|
|
(71.7
|
)
|
|
Cash and cash equivalents at beginning of
year
|
|
|
61.9
|
|
|
|
|
17.1
|
|
|
|
88.8
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
61.5
|
|
|
|
$
|
61.9
|
|
|
$
|
17.1
|
|
|
|
|
|
|
|
Cash and cash equivalents related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
57.1
|
|
|
|
$
|
54.7
|
|
|
$
|
13.5
|
|
|
Discontinued operations
|
|
|
4.4
|
|
|
|
|
7.2
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
$
|
61.5
|
|
|
|
$
|
61.9
|
|
|
$
|
17.1
|
|
|
|
|
|
|
Supplementary Cash Flow
Information (Note 17)
The accompanying notes form an
integral part of these consolidated financial
statements.
> 46
> CAE ANNUAL REPORT 2005
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years ended March 31,
2005, 2004 and 2003 (amounts in millions of Canadian
dollars)
NOTE 01.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF
OPERATIONS
CAE Inc designs and provides
simulation equipment and services and develops integrated training
solutions for the military, commercial airlines, business aircraft
operators and aircraft manufacturers.
CAE’s flight
simulators replicate aircraft performance in normal and abnormal
operations and a comprehensive set of environmental conditions,
utilizing visual systems with an extensive database of airports,
other landing areas and flying environments and motion and sound
cues to create a fully immersive training environment. The Company
offers a full range of flight training devices based on the same
software used in its simulators. CAE also operates a global network
of training centres in locations around the world.
CAE’s
operations are broken down into two operating segments; Military
Simulation and Training (“Military”) and Civil
Simulation and Training (“Civil”).
Prior to the sale
of its Marine Controls division in the fourth quarter of fiscal
2005 the Company also provided simulators and training services for
sea and land-based activities and supplied marine automation
systems for military and civil applications.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND FINANCIAL STATEMENT PRESENTATION
The accounting policies of CAE
Inc. and its subsidiaries (“CAE” or “the
Company”) conform, in all material respect, to Canadian
generally accepted accounting principles (“GAAP”) as
defined by the Canadian Institute of Chartered Accountants
(“CICA”). These accounting principles are different in
some respects from United States generally accepted accounting
principles (“U.S. GAAP”). The significant differences
are described in Note 27.
On
April 1, 2004, the Company adopted CICA Handbook
Sections 1100, Generally Accepted Accounting Principles
and 1400, General Standards of Financial Statement
Presentation. Section 1100 describes what constitutes
Canadian GAAP and its sources, and provides guidance on sources to
consult when selecting accounting policies and appropriate
disclosure when a matter is not dealt with explicitly in the
primary sources of GAAP, thereby recodifying GAAP hierarchy.
Section 1400 clarifies what is fair presentation in accordance
with GAAP and provides general guidance on financial presentation.
The adoption of these standards did not have any material effect on
consolidated financial statements.
Except where
otherwise noted, all amounts in these financial statements are
expressed in Canadian dollars.
USE OF
ESTIMATES
The preparation of financial
statements in conformity with GAAP requires CAE’s management
(“Management”) to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses for the period reported. On a ongoing basis, Management
reviews its estimates, particularly as they relate to accounting on
long-term contracts, useful lives, employee future benefits, income
taxes, impairment of long-lived assets and goodwill, based on
Management’s best knowledge of current events and actions
that the Company may undertake in the future. Actual results could
differ from those estimates, significant changes in estimates
and/or assumptions could result in impairment of certain
assets.
CONSOLIDATION
The consolidated financial
statements include the accounts of CAE Inc. and of all majority
owned subsidiaries. They also include the Company’s
proportionate share of assets, liabilities and earnings of joint
ventures in which the Company has an interest. All significant
intercompany accounts and transactions have been eliminated.
Investments over which CAE exercises significant influence are
accounted for using the equity method and portfolio investments are
accounted for using the cost method.
CONSOLIDATION OF VARIABLE
INTEREST ENTITIES
On January 1st, 2005, the Company
adopted Accounting Guideline “Consolidation of Variable
Interest Entities” (“AcG-15”) on a retroactive
basis without restatement of prior periods. AcG-15 provides a
framework for identifying variable interest entities
(“VIEs”) and determining when an entity should include
the assets, liabilities and results of operations of a VIE in its
consolidated financial statements.
In general, a VIE is a
corporation, partnership, limited-liability corporation, trust, or
any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry
out its principal activities without additional subordinated
financial support, (2) has a group of equity owners that are
unable to make significant decisions about its activities, or
(3) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns
generated by its operations.
47 >
> CAE ANNUAL REPORT 2005
|
|
|
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 01. NATURE OF OPERATIONS
AND SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
AcG-15 requires a VIE to be
consolidated if a party with an ownership, contractual or other
financial interest in the VIE (a variable interest holder) is
exposed to a majority of the risk of loss from the VIE’s
activities, is entitled to receive a majority of the VIE’s
residual returns (if no party is exposed to a majority of the
VIE’s losses), or both (the primary beneficiary). Upon
consolidation, the primary beneficiary generally must initially
record all of the VIE’s assets, liabilities and
non-controlling interests at fair value at the date the enterprise
became the primary beneficiary. However, for variable interest
entities created prior to the initial adoption of AcG-15, the
assets, liabilities and non-controlling interest of these entities
must be initially consolidated as if the entities were always
consolidated based on majority voting interest. AcG-15 also
requires disclosures about VIEs that the variable interest holder
is not required to consolidate, but in which it has a significant
variable interest.
The
adoption of AcG-15 on January 1, 2005 resulted in an increase
in total assets, total liability, and retained earnings of
$46.4 million, $43.2 million, and $3.3 million,
respectively and a decrease in the currency translation adjustment
of $0.1 million.
FOREIGN CURRENCY
TRANSLATION
SELF-SUSTAINING FOREIGN
OPERATIONS
Foreign operations of the Company
classified as self-sustaining operations are translated to Canadian
dollars using the current rate method. Under this method assets and
liabilities are translated at exchange rates in effect at the
balance sheet date and revenues and expenses are translated at the
average exchange rates for the period. Gains or losses on
translation of foreign operations into Canadian dollars are
included in the currency translation adjustment account, a separate
component of shareholders’ equity.
Accumulated
amounts in the currency translation adjustment account are released
to the statement of earnings when the Company reduces its net
investment in foreign operations by way of capital reduction or
through the settlement of long-term inter-company balances which
had been considered part of CAE’s net investment.
FOREIGN CURRENCY
TRANSACTIONS
Monetary assets and liabilities
denominated in currencies other than the functional currency are
translated at the prevailing exchange rate at the balance sheet
date. Non-monetary assets and liabilities denominated in currencies
other than the functional currency and revenue and expense items
are translated into the functional currency using the exchange rate
prevailing at the dates of the respective transactions. Translation
gains or losses are included in the determination of earnings,
except those related to long-term intercompany account balances,
that form part of the net investment in foreign operations, and
those arising from the translation of foreign currency debt that
has been designated as a hedge of the net investment in
subsidiaries, which are included in the currency translation
adjustment account, a separate component of shareholders’
equity.
REVENUE
RECOGNITION
Revenue from long-term contracts
for the design, engineering and manufacturing of flight simulators
is recognized, when persuasive evidence of an arrangement exists,
the fee is fixed or determinable and recovery is reasonably
certain, using the percentage-of-completion method. Under this
method, revenue and earnings are recorded as related costs are
incurred, on the basis of the percentage of actual costs incurred
to date, relative to the estimated total costs to complete the
contract. The cumulative impact of any revisions in cost and
earnings estimates are reflected in the period in which the need
for a revision becomes known. Losses, if any, are recognized fully
when first anticipated. Warranty provisions are recorded at the
time revenue is recognized, based on past experience. No right of
return or complementary upgrades is provided to customers.
Post-delivery customer support is billed separately and revenue is
recognized over the support period.
Long-term
contracts provide for progress billings based on completion of
certain phases of work. Unbilled receivables represent excess of
work performed over customer billings. Deposits on contract
represent customer payments in excess of work performed.
Training services
and other revenue are recognized when persuasive evidence of an
arrangement exists, the fee is fixed or determinable, recovery is
reasonably certain and, when applicable, products have been
delivered, or services have been rendered.
INCOME TAXES AND INVESTMENT
TAX CREDITS
The Company uses the tax
liability method to account for income taxes. Under this method,
future income tax assets and liabilities are determined according
to differences between the carrying value and the tax bases of
assets and liabilities. This method also requires the recognition
of future tax benefits, such as net operating loss carryforwards,
to the extent that realization of such benefits is more likely than
not. Future tax assets and liabilities are measured by applying
enacted or substantively enacted rates and laws at the date of the
financial statements for the year for which the temporary
differences are expected to reverse. CAE does not provide for
income taxes on undistributed earnings of foreign subsidiaries that
are not expected to be repatriated in the foreseeable
future.
A
valuation allowance is recognized to the extent that, in the
opinion of Management, it is more likely than not that the future
income tax assets will not be realized. (Refer to Note
15)
Investment tax credits
(“ITC”) arising from research and development
(“R&D”) activities are deducted from the related
costs and are accordingly included in the determination of earnings
when there is reasonable assurance that the credits will be
realized. ITC arising from the acquisition of property, plant and
equipment and deferred development costs are deducted from the cost
of those assets with amortization calculated on the net
amount.
> 48
> CAE ANNUAL REPORT 2005
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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The Company is subject to
examination by taxation authorities in various jurisdictions. The
determination of tax liabilities and ITC recoverable involve
certain uncertainties in the interpretation of complex tax
regulations. Therefore, the Company provides for potential tax
liabilities and ITC recoverable based on Management’s best
estimates. Differences between the estimates and the ultimate
amounts of taxes and ITC are recorded in earnings at the time they
can be determined. (Refer to Note 23)
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents consist
of highly liquid investments with original terms to maturity of
90 days or less.
RESTRICTED CASH
During fiscal 2004, under the
terms of subsidiaries external bank financing and some
government-related sales contracts, the Company was required to
hold a defined amount of cash as collateral. In fiscal 2005, the
subsidiaries’ external bank financing agreements which
required the holding of cash as collateral as well as the
government-related contracts were settled and effectively released
a large portion of the restricted cash.
ACCOUNTS
RECEIVABLE
Receivables are recorded at cost,
net of a provision for doubtful accounts, based on expected
recoverability. In fiscal 2005, the Company entered into a program
under which it sells certain of its accounts receivable to a third
party for cash consideration without recourse to the Company. These
transactions are accounted for when the Company is considered to
have surrendered control over the transferred accounts receivable.
Losses and gains on these transactions are recognized as other
expense or income. (Refer to Note 5)
INVENTORIES
Raw materials are valued at the
lower of cost and replacement cost. Work in process is stated at
the lower of average cost and net realizable value. The cost of
work in process includes material, labour and an allocation of
manufacturing overhead. (Refer to Note 6)
LONG-LIVED
ASSETS
PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment are
stated at amortized cost, net of any impairment charges. The
declining balance and straight-line methods are used in computing
amortization over the estimated useful lives of the assets. Useful
lives are estimated as follows:
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method
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rates/years
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Building and improvements
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Declining balance
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5% -10
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%
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Simulators
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Straight-line (10%
residual)
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5 to 25 years
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Machinery and equipment
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Declining balance
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20% -35
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%
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LEASES
Leases entered into by the
Company in which substantially all the benefits and risks of
ownership are transferred to the Company are recorded as capital
leases and classified as property, plant and equipment and
long-term borrowings. All other leases are classified as operating
leases under which leasing costs are expensed in the period in
which they are incurred. Gains, net of transaction costs, related
to the sale and leaseback of simulators are deferred and the gains
in excess of the residual value guarantees are amortized over the
term of the lease. The residual value guarantees are to be
ultimately recognized in the Company’s earnings upon expiry
of the related sale and leaseback agreement.
INTEREST
CAPITALIZATION
Interest costs relating to the
construction of simulators and buildings for training centres are
capitalized as part of the cost of property, plant and equipment.
Capitalization of interest ceases when the simulator and training
centre are completed and ready for productive use.
49 >
> CAE ANNUAL REPORT 2005
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 01. NATURE OF OPERATIONS
AND SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
INTANGIBLE ASSETS WITH
DEFINITE USEFUL LIVES
Intangible assets with definite
useful lives are recorded at their fair value at the date of
acquisition of the related acquired enterprise. Amortization is
provided for all intangible assets on a straight-line basis over
their estimated useful lives as follows:
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amortization
period
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weighted
average amortization period
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Trade names
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10 to 25 years
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20
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Backlog and contractual agreements
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1 to 20 years
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15
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Customer relationships
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10 to 25 years
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10
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Other
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12 to 20 years
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12
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IMPAIRMENT OF
LONG-LIVED ASSETS
The Company recognizes impairment
losses for a long-lived asset to be held and used when events or
changes in circumstances cause its carrying value to exceed the
total undiscounted cash flows expected from its use and eventual
disposition. An impairment loss, if any, is determined as the
excess of the carrying value of the asset over its fair
value.
BUSINESS COMBINATIONS AND
GOODWILL
Acquisitions are accounted for
using the purchase method and, accordingly, the results of
operations of the acquired enterprise are included in the
consolidated statement of earnings (losses) from the
respective dates of acquisition.
Goodwill
represents the excess of the cost of acquired enterprises over the
net of the amounts assigned to identifiable assets acquired and
liabilities assumed. Goodwill is tested for impairment, at least
annually or more frequently if events or changes in circumstances
indicate that it might be impaired.
The
impairment test consists of a comparison of the fair value of the
Company’s reporting units with their carrying amount. When
the carrying amount of the reporting unit exceeds the fair value,
the Company compares, in a second step, the fair value of goodwill
related to the reporting unit to its carrying value and recognizes
if required an impairment loss equal to the excess. The fair value
of a reporting unit is calculated based on one or more fair value
measures, including present value techniques of estimated future
cash flows and estimated amounts at which the unit as a whole could
be bought or sold in a current transaction between willing parties.
If the carrying amount of the reporting unit exceeds the fair
value, step two requires the fair value of the reporting unit to be
allocated to the underlying assets and liabilities of that
reporting unit, resulting in an implied fair value of goodwill. If
the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss equal to
the excess is recorded in net earnings (loss). (Refer to Note
9)
OTHER ASSETS
RESEARCH AND DEVELOPMENT
COSTS
Research costs are charged to
earnings in the periods in which they are incurred. Development
costs are also charged to earnings in the period incurred unless
they meet all the criteria for deferral as per the CICA Handbook
Section 3450, Research and Development Costs and their
recovery is reasonably assured. Government assistance arising from
research and development activities is deducted from the related
costs or assets if deferred. Amortization of development costs
deferred to future periods commences with the commercial production
of the product and is charged to earnings based on anticipated
sales of the product, over a period not exceeding five
years.
> 50
> CAE ANNUAL REPORT 2005
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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PRE-OPERATING
COSTS
The Company defers costs incurred
during the pre-operating period for all new training centres.
Pre-operating costs are incremental in nature and are considered by
Management to be recoverable from the future operations of the new
training centre. Capitalization ceases at the opening of the
training centre. Amortization of the deferred pre-operating costs
is taken over five years in respect to civil training
operations.
DEFERRED FINANCING
COSTS
Costs incurred relating to the
issuance of long-term debt are deferred and amortized on a
straight-line basis over the term of the related debt. Costs
related to sale and leaseback agreements are amortized on a
straight-line basis over the term of the lease. (Refer to Note
10)
EMPLOYEE FUTURE
BENEFITS
The Company maintains defined
benefit pension plans that provide benefits based on length of
service and final average earnings. The service costs and the
pension obligations are actuarially determined using the projected
benefit method prorated on employee service and Management’s
best estimate of expected plan investment performance, salary
escalation and retirement ages of employees. For the purpose of
calculating the expected return on plan assets, those assets are
valued at fair value. The excess of the net actuarial gain
(loss) over 10% of the greater of the benefit obligation and
the fair value of plan assets is amortized over the remaining
service period of active employees. Past service costs, arising
from plan amendments, are deferred and amortized on a straight-line
basis over the average remaining service period of active employees
at the date of amendment.
When a curtailment
arises, any unamortized past service cost associated with the
reduction of future services is recognized immediately. Also, the
increase or decrease in benefit obligation is recognized as a loss
or a gain net of unrecognized actuarial gains or losses. Finally,
when the restructuring of a benefit plan gives rise to both a
curtailment and a settlement of obligations, the curtailment is
accounted for prior to the settlement.
On
April 1, 2004, CAE adopted new disclosure requirements for
employee future benefits of CICA Handbook Section 3461,
Employee Future Benefits. Section 3461 requires
additional disclosures about the assets, cash flow and net periodic
benefit costs of defined benefits pension plans and other future
employee benefit plans. (Refer to Note 21)
STOCK-BASED COMPENSATION
PLANS
The Company’s stock-based
compensation plans consist of five plans; an Employee Stock Option
Plan (“ESOP”), an Employee Stock Purchase Plan
(“ESPP”), a Deferred Share Unit (“DSU”)
plan for executives, a Long-Term Incentive Deferred Share Unit
(“LTI-DSU”) Plan and on April 1, 2004, the Company
adopted a Long-Term Incentive Restricted Share Unit
(“LTI-RSU”) Plan. All plans are described in Note
13.
Since fiscal 2004,
net earnings include compensation costs for CAE’s stock
options. Using the fair value method, compensation expense is
measured at the grant date and recognized over the service period
with a corresponding increase to contributed surplus in
shareholders’ equity. The Company estimates the fair value of
options using the Black-Scholes pricing model.
The
Black-Scholes pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, valuation models generally
require the input of highly subjective assumptions including the
expected stock price volatility.
In
Note 13, pro forma net earnings and pro forma basic and diluted net
earnings per share figures are presented as if the fair value based
method of accounting had been used to account for stock options
granted to employees during fiscal 2003.
A
compensation expense is also recognized for the Company’s
portion of the contributions made under the ESPP and for the grant
date amount of vested units under the DSU, LTI-DSU and LTI-RSU
plans. Any subsequent changes in CAE’s stock price affects
the compensation expense. In March 2004, the Company entered into
an equity swap agreement with a major Canadian institution to
reduce its cash and earnings exposure to fluctuation in the
Company’s share price relating to the DSU, LTI-DSU and
LTI-RSU programs.
CAE’s
practice is to issue options in May of each fiscal year or at the
time of hiring of new employees or new appointments. In both
instances these options vest equally over four years. Any
consideration paid by plan participants on the exercise of share
options or the purchase of shares is credited to share capital
together with any related stock-based compensation
expense.
HEDGING RELATIONSHIPS AND
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward,
swap and option contracts to reduce financial risk related to its
exposure to fluctuations in interest rates and foreign exchange
rates. The interest rate risk associated with certain long-term
debt is hedged through interest rate swaps. The foreign currency
risk associated with certain purchase and sale commitments
denominated in a foreign currency is hedged through a combination
of forward contracts and options. The Company does not use any
derivative financial instruments for trading or speculative
purposes.
51 >
> CAE ANNUAL REPORT 2005
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 01. NATURE OF OPERATIONS
AND SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Effective April 1, 2004, the
Company adopted prospectively CICA Accounting Guideline
(“AcG-13”), Hedging Relationships and CICA
Emerging Issues Committee Abstract 128 (“EIC-128”),
Accounting for Trading, Speculative or Non-Hedging Derivative
Financial Instruments. This guideline addresses identification,
designation, documentation and effectiveness of hedging
relationships for the purpose of applying hedge accounting, and the
discontinuance of hedge accounting. Under this guideline, complete
documentation of the information related to hedging relationships
is required and the effectiveness of the hedges must be
demonstrated and documented. The adoption of these guidelines did
not have a material impact on the Company’s financial
statements.
Gains and losses
on foreign currency contracts designated and effective as hedges
are recognized in the consolidated statement of earnings during the
same period as the underlying revenues and expenses. For interest
rate swaps, the difference between the swap rate and the actual
rate is reflected in earnings against the related interest expense.
CAE assesses on an ongoing basis whether the derivatives that are
used in hedging transactions are effective in offsetting changes in
fair values or cash flows of hedged items.
Realized and
unrealized gains or losses associated with derivative instruments,
which have been terminated or cease to be effective prior to
maturity, are deferred under other current, or non-current, assets
or liabilities on the balance sheet and recognized in income in the
period in which the underlying hedged transaction is recognized. In
the event a designated hedged item is sold, extinguished or matured
prior to the termination of the related derivative instrument, any
realized or unrealized gain or loss on such derivative instrument
is recognized in earnings. The interest payments relating to swap
contracts are recorded in net earnings over the life of the
underlying transaction based on the accrual method as an adjustment
to interest income or interest expense. (Refer to Note
14)
DISPOSAL OF LONG-LIVED ASSETS
AND DISCONTINUED OPERATIONS
Long-lived assets to be disposed
of by sale are measured at the lower of their carrying amount or
fair value less cost to sell, and are not depreciated while
classified as held for sale.
Results of
operations of components of the Company that have been disposed of
by sale or are classified as held for sale are reported as
discontinued operations if the operations and cash flows of those
components have been, or will be, eliminated from the ongoing
operations as a result of the disposal transaction and if the
Company will not have any significant continuing involvement in the
operations of the component after the disposal transaction. A
component of an enterprise comprises operations and cash flows that
can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the Company’s operations
and cash flows. (Refer to Note 3)
SEVERANCE, TERMINATION
BENEFITS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL
ACTIVITIES
In accordance with EIC-134,
Accounting for Severance and Termination Benefits and
EIC-135, Accounting for Costs Associated with Exit and Disposal
Activities (Including Costs Incurred in a Restructuring), the
Company recognizes severance benefits that do not vest when the
decision is made to terminate the employee. Special termination
benefits are accounted for when Management commits to a plan that
specifically identifies all significant actions to be taken and
commits the entity to the event that obligates it under the terms
of the contract with its employees to pay such termination
benefits. Such termination benefits and the benefit arrangement is
communicated to the employees in sufficient detail to enable them
to determine the type and amount of benefits they will receive when
their employment is terminated.
All
other costs associated with restructuring, exit and disposal
activities are recognized in the period when they are incurred and
measured at their fair value.
CAE
applied these guidelines for severance termination benefits and
other restructuring costs as described in Note 24.
DISCLOSURE OF
GUARANTEES
The Company discloses all
information concerning certain types of guarantees that may require
payments, contingent on specified types of future events. In the
normal course of business, CAE issues letters of credit and
performance guarantees. (Refer to Note 14)
EARNINGS PER
SHARE
Earnings per share are calculated
by dividing net earnings available for common shareholders by the
weighted average number of common shares outstanding during the
year. The diluted weighted average number of common shares
outstanding is calculated by taking into account the dilution that
would occur if the securities or other agreements for the issuance
of common shares were exercised or converted into common shares at
the later of the beginning of the period or the issuance date. The
treasury stock method is used to determine the dilutive effect of
the stock options. The treasury stock method is a method of
recognizing the use of proceeds that could be obtained upon the
exercise of options and warrants in computing diluted earnings per
share. It assumes that any proceeds would be used to purchase
common shares at the average market price during the
period.
> 52
> CAE ANNUAL REPORT 2005
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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FUTURE CHANGES TO ACCOUNTING
STANDARDS
FINANCIAL INSTRUMENTS –
RECOGNITION AND MEASUREMENT, HEDGES AND COMPREHENSIVE
INCOME
In January 2005, the ASB
issued three new standards dealing with financial instruments; (i)
Financial Instruments-Recognition and Measurement;
(ii) Hedges; and (iii) Comprehensive Income. The new
standards are based on the U.S. FASB Statement 133, Accounting
for Derivative Instruments and Hedging Activities, and on the
International Accounting Standards (“IAS”)
Board’s new standard, IAS 39, Financial
Instruments-Recognition and Measurement. These requirements
will be applicable for CAE in the first quarter of fiscal 2007. The
Company is currently evaluating the impact of these new Handbook
Sections on its financial statements.
The
Handbook Section 3855, Financial instruments-Recognition
And Measurement prescribes when a financial instrument is to be
recognized on the balance sheet and the measurement method, using
fair value or using cost-based measures. It also specifies how
financial instrument gains and losses are to be
presented.
New
Handbook Section 3865, Hedges allows optional treatment
providing that hedges be designated as either fair value hedges,
cash flow hedges or hedges of a net investment in a self-sustaining
foreign operation. For a fair value hedge, the gain or loss
attributable to the hedged risk is recognized in net income in the
period of change together with the offsetting loss or gain on the
hedged item attributable to the hedged risk. The carrying amount of
the hedged item is adjusted for the hedged risk. For a cash flow
hedge or for a hedge of a net investment in a self-sustaining
foreign operation, the effective portion of the hedging
item’s gain or loss is initially reported in other
comprehensive income and subsequently reclassified to net income
when the hedged item affects net income.
The
ASB has issued new Handbook Section 1530, Comprehensive
Income, and amended Surplus, Section 3250 to be
renamed Equity, Section 3251. These standards require
that an enterprise present comprehensive income and its components,
as well as net income in its financial statements; and that an
enterprise present separately changes in equity during the period,
as well as components of equity at the end of the period, including
comprehensive income.
NOTE 02.
BUSINESS ACQUISITIONS AND COMBINATIONS
GREENLEY & ASSOCIATES
INC.
On November 30, 2004, the
Company acquired all the issued and outstanding shares of Greenley
& Associates Inc. (“G&A”), which provides
services in the areas of project management, human factors,
modelling and simulation. Total consideration for this acquisition
amounted to $4.4 million payable in equivalent common shares issued
by CAE in four installments as follows; 424,628 shares
(representing $2.0 million) at the closing date,
$0.8 million on November 30, 2005, $0.8 million on
November 30, 2006, and 169,851 shares (representing
$0.8 million) to be issued on November 30, 2007. The
number of shares issued (to be issued) to satisfy the first and the
fourth payments was calculated based on the average closing share
price ($4.71 per share) of CAE common shares on the Toronto Stock
Exchange (“TSX”) for the 20-day period ending two days
prior November 30, 2004. The number of shares to be issued to
satisfy the second and the third payments will be based on the
average closing share price of CAE common shares on the TSX for the
20-day period ending two days before their respective date of
issuance. The purchase price is subject to an adjustment based on
performance of the business for the twelve-month period following
the ac
