Exhibit 2 FINANCIAL STATEMENTS CP SHIPS LIMITED FINANCIAL STATEMENTS 31ST DECEMBER 2003 RESTATED contents 2 Management's Responsibility for Financial Reporting 3 Auditors' Report 4 Consolidated Statements of Income 4 Consolidated Statements of Retained Earnings 5 Consolidated Balance Sheets 6 Consolidated Statements of Cash Flow 7 Notes to the Consolidated Financial Statements MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The information in these consolidated financial statements is the responsibility of management and has been reviewed and approved by the Board of Directors. The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles and include amounts based on management's best estimates and careful judgment. Management maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are authorized, recorded and reported properly. The internal audit department reviews these accounting controls on an ongoing basis and reports its findings and recommendations to management and to the Audit Committee of the Board of Directors. As disclosed in note 2 to the consolidated financial statements, a restatement has been necessary as a result of control related issues. A number of corrective measures have been taken and management will continue to monitor the quality of controls. The Board of Directors carries out its responsibility for the consolidated financial statements principally through its Audit Committee, consisting of all of the non-executive directors. This Committee reviews the consolidated financial statements with management and the independent auditors prior to submission to the Board for approval. It also reviews the recommendations of both the independent and internal auditors for improvements to internal controls as well as the actions of management to implement such recommendations. /s/ Frank J. Halliwell /s/ Ian J. Webber Frank J. Halliwell Ian J. Webber Chief Executive Officer Chief Financial Officer 16th August 2004 -2- To the shareholders of CP Ships Limited We have audited the consolidated balance sheets of CP Ships Limited as at 31st December 2003 and 2002, and the consolidated statements of income, retained earnings and cash flow for each of the years ended 31st December 2003, 2002 and 2001. These consolidated 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 31st December 2003 and 2002, the results of its operations and its cash flow for each of the years ended 31st December 2003, 2002 and 2001 in accordance with Canadian generally accepted accounting principles. As described in note 2 to the consolidated financial statements, the accompanying consolidated financial statements of CP Ships Limited as at 31st December 2003 and 2002 and for each of the two years ended 31st December 2003 and 2002 have been restated. Our previously issued auditors' report dated 12th March 2004 has been withdrawn. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario, Canada 12th March 2004, except as to notes 2, 7, 23(b) and 24(k) which are as of 16th August 2004 [TRIPLE DATE] -3- CONSOLIDATED STATEMENTS OF INCOME (US$ millions except per share amounts) Year ended 31st December 2003 2002 2001 ---- ---- ---- Restated (note 2) Restated (note 2) Revenue Container shipping operations 3,130 2,687 2,646 Expenses Container shipping operations 2,487 2,155 2,068 General and administrative 424 367 363 Depreciation and amortization of intangible assets 119 93 74 Currency exchange (gain)/loss (2) (4) 2 Diminution in value of property, plant and equipment 2 - - Gain on disposal of property, plant and equipment (2) - - --------------------------------------------------- 3,028 2,611 2,507 --------------------------------------------------- Operating income before exceptional items 102 76 139 Exceptional items (note 3) (10)` 2 (19) Spin-off related items (note 3) - - (24) --------------------------------------------------- Operating income 92 78 96 Interest expense, net (note 4) (36) (23) - --------------------------------------------------- Income before income tax 56 55 96 Income tax expense (note 5) (3) (10) (12) --------------------------------------------------- Income before goodwill charges and minority interest 53 45 84 Minority interest - - 1 --------------------------------------------------- Income before goodwill charges 53 45 85 Goodwill charges, net of tax ($nil) - - (16) --------------------------------------------------- Net income 53 45 69 Dividends on preference shares - - (3) --------------------------------------------------- Net income available to common shareholders $ 53 $ 45 $ 66 --------------------------------------------------- Average number of common shares outstanding (millions) 89.8 84.8 79.3 (note 17) Earnings per common share basic (note 17) $ 0.59 $ 0.53 $ 0.83 Earnings per common share diluted (note 17) $ 0.57 $ 0.52 $ 0.83 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Balance, 1st January (Restated - note 2) 540 509 443 Net income 53 45 69 Dividends on preference shares - - (3) Dividends on common shares (14) (14) - --------------------------------------------------- Balance, 31st December (Restated - note 2) $ 579 $ 540 $ 509 --------------------------------------------------- See accompanying notes to the consolidated financial statements -4- CONSOLIDATED BALANCE SHEETS (US$ millions) As at 31st December 2003 2002 ---- ---- ASSETS Restated (note 2) Restated (note 2) Current assets Cash and cash equivalents 75 110 Accounts receivable 463 526 Prepaid expenses 44 46 Inventory 24 21 --------------------------------------- 606 703 Property, plant and equipment (note 7) 1,235 1,134 Deferred charges (note 8) 32 38 Goodwill and other intangible assets (note 9) 607 608 Future income tax assets (note 5) 4 - Other assets (note 10) 16 4 --------------------------------------- $ 2,500 $ 2,487 --------------------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities 564 665 Long-term debt due within one year (note 11) 19 15 --------------------------------------- 583 680 Long-term liabilities Long-term debt due after one year (note 11) 632 582 Future income tax liabilities (note 5) 7 7 --------------------------------------- 639 589 Shareholders' equity Common share capital (note 14) 686 685 Contributed surplus (note 15) 7 1 Retained earnings 579 540 Cumulative foreign currency translation adjustments 6 (8) --------------------------------------- 1,278 1,218 --------------------------------------- $ 2,500 $ 2,487 --------------------------------------- Contingent Liabilities and Commitments - notes 19, 20 and 23(b) See accompanying notes to the consolidated financial statements On behalf of the Board: /s/ Frank J. Halliwell /s/ Ian J. Webber Frank J. Halliwell Ian J. Webber Chief Executive Officer Chief Financial Officer -5- CONSOLIDATED STATEMENTS OF CASH FLOW (US$ millions) Year ended 31st December 2003 2002 2001 ---- ---- ---- Operating activities Restated (note 2) Restated (note 2) Net income 53 45 69 Depreciation and amortization of intangible assets 119 93 90 Exceptional items 10 (2) 43 Future income tax benefit (4) (1) - Amortization of deferred charges 13 9 5 Diminution in value of property, plant and equipment 2 - - Gain on disposal of property, plant and equipment (2) - - Restricted share awards 6 1 - Other - - 1 --------------------------------------------------- 197 145 208 (Increase)/decrease in non-cash working capital (note 16) (37) (49) 7 --------------------------------------------------- Cash from operations before exceptional and spin-off 160 96 215 related payments Exceptional and spin-off related payments (10) (12) (25) --------------------------------------------------- Cash from operations 150 84 190 Financing activities Increase in share capital 1 88 - Contributed surplus - - 2 Return of share capital - - (14) Redemption of preferred shares - - (116) Increase in long-term debt 104 557 160 Repayment of long-term debt (172) (212) (14) Repayment of Italia short-term debt - (11) - Increase in deferred financing costs (1) (11) (7) Increase in loans from former affiliated companies - - 88 Repayment of loans from former affiliated companies - - (138) Preference dividends paid - - (3) Common share dividends paid (14) (14) - --------------------------------------------------- Cash (outflow)/inflow from financing activities (82) 397 (42) Investing activities Additions to property, plant and equipment (158) (439) (288) Increase in deferred dry-dock costs (4) (9) (9) Reimbursement of ship stage payments 43 - - Acquisition of businesses (note 6) - (40) - Proceeds from disposal of property, plant and equipment 18 5 15 Proceeds from disposal of investments - - 12 Increase in other assets (2) (4) - Repayment of loans to former affiliated companies - - 116 --------------------------------------------------- Cash outflow from investing activities (103) (487) (154) Decrease in cash and cash equivalents /(1)/ (35) (6) (6) Cash and cash equivalents at beginning of year 110 116 122 --------------------------------------------------- Cash and cash equivalents at end of year $ 75 $ 110 $ 116 --------------------------------------------------- Additional information Taxes paid $ 6 $ 12 $ 12 Interest paid $ 32 $ 12 $ 7 --------------------------------------------------- (1) Cash and cash equivalents comprise cash and temporary investments with a maximum maturity of three months See accompanying notes to the consolidated financial statements -6- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unless otherwise indicated, all amounts are shown in US$ millions) 1. Significant accounting policies These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). (a) Basis of consolidation - The consolidated financial statements include CP Ships Limited ("CP Ships") and all of its subsidiary companies from the date of acquisition until the date of disposal, if relevant. (b) Revenue & cost recognition - Revenue and costs directly attributable to loaded container movements are recognized when delivery of the loaded container to its final destination is completed. Other revenue is accounted for on completed service delivery and other costs are accounted for when incurred. (c) Use of estimates - The preparation of financial statements requires that management make estimates in reporting the amounts of certain revenues and expenses for each financial year and certain assets and liabilities at the end of each financial year. Actual results may differ from these estimates. (d) Income taxes - CP Ships accounts for income taxes using the liability method. Under this method, future income tax assets and liabilities are recognized based on differences between the basis of assets and liabilities used for financial statement and for income tax purposes, using substantively enacted tax rates. Future tax assets are not recognized if they are not expected to be utilized. (e) Earnings per common share - Basic earnings per common share is calculated using the weighted average number of common shares outstanding in the year. The dilutive effect of outstanding stock options and unvested restricted shares is reflected in diluted earnings per share by application of the treasury stock method. (f) Property, plant & equipment - Property, plant and equipment is stated at cost less depreciation, which is determined on a straight-line basis over the estimated remaining useful life of each asset. Depreciation on ships is calculated on a straight-line basis at rates to reduce the book value of each ship to its estimated residual value by the end of its estimated useful life which is considered to be 25 years. Major additions, replacements and capital improvements to ships are depreciated over the estimated remaining useful life of the ship. Containers are depreciated on a straight-line basis over their estimated useful life of 12 years to their estimated residual values. Furniture and equipment is fully depreciated on a straight-line basis over the estimated useful lives of the assets, a maximum of ten years. Computer hardware and software is fully depreciated on a straight-line basis over its estimated useful life, which varies between two and eight years, from the date that it is brought into use. Relevant costs directly associated with developing or obtaining internal-use computer software are capitalized. Trucking equipment is fully depreciated on a straight-line basis over the estimated service lives of the assets, a maximum of ten years. Owned automobiles are depreciated on a straight-line basis over four years. Owned buildings are fully depreciated on a straight-line basis over the estimated useful lives, a maximum of 50 years. Land is not depreciated. Leasehold improvements are amortized over the lesser of the remaining lease term or ten years. -7- Terminal equipment is depreciated on a straight-line basis over its estimated useful life which varies between three and 30 years. When depreciable assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and the remaining balance, net of any proceeds from sale or salvage value, is reflected in the result from operations. In accordance with CICA 3063, "Impairment of Long-lived Assets," the company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such property, plant and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying amount of the assets exceeds their fair market value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (g) Leases - Leases are classified as either capital or operating. Those leases which transfer substantially all the benefits and risks of ownership of property to CP Ships are accounted for as capital leases. Capital leases are accounted for as assets and are fully amortized on a straight-line basis over the lesser of the period of expected use of the assets or the lease term. Commitments to repay the principal amounts arising under capital lease obligations are included in current liabilities to the extent that the amount is repayable within one year, otherwise the principal is included in amounts due after one year. The capitalized lease obligation reflects the present value of future lease payments. The finance element of the lease payments is charged to income over the term of the lease. Operating lease costs are charged to income on a straight-line basis. (h) Deferred charges - Deferred charges include deferred financing costs and deferred dry-docking costs. Deferred financing costs represent expenses incurred to obtain financing which have been deferred and are amortized over the periods to maturity of the underlying arrangements. Any unamortized cost is written off on the early termination of the underlying arrangement. Dry-docking and special survey costs are deferred and amortized over the dry-docking cycle, typically between two to five years. Any unamortized cost is written off on the disposal of the relevant ship. (i) Goodwill & other intangible assets - Goodwill represents the excess of the fair value of consideration paid over the fair value of net tangible and other identifiable intangible assets acquired. Separately identifiable intangible assets are recorded at fair value. CP Ships evaluates the carrying value of goodwill for possible impairment of each reporting unit on an annual basis. Prior to 2002, goodwill was amortized to income over a period of 35 years. The impact of not amortizing goodwill in 2001 would have been to increase net income by $16 million to $85 million from an income of $69 million and would have increased basic and diluted earnings per share by $0.20. Identifiable intangible assets with indefinite lives are not amortized but are subject to impairment review at least annually. All other intangible assets are amortized on a straight-line basis over their estimated economic useful lives ranging from 10 to 20 years, and are subject to impairment review at least annually. (j) Foreign currency translation - Revenue and expense items and other transactions denominated in foreign currencies are recorded in US$, which is the functional currency of CP Ships, at the exchange rates in effect on the dates of the related transactions. Monetary assets and liabilities denominated in foreign currencies are translated into US$ at the year-end rates of exchange. Foreign currency gains and losses arising from realization or remeasurement of foreign currency denominated monetary assets and liabilities are recognized in income as incurred. The financial statements of subsidiary companies denominated in currencies other than US$ which are considered to be self-sustaining are translated into US$ using year-end rates of exchange for assets and liabilities and average rates in effect during the year for revenues and expenses. Exchange gains or losses arising from such translation are deferred and included under shareholders' equity as foreign currency translation adjustments. The financial statements of subsidiary companies denominated in currencies other than US$ which are considered to be integrated operations are translated into US$ using year-end rates of exchange for monetary assets and liabilities, historical exchange rates for non-monetary assets and liabilities and average rates in effect during the year for revenues and expenses. Exchange gains or losses arising from such translation are recognized in income. -8- (k) Employee future benefits - The costs of defined benefit pensions are actuarially determined using the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation and retirement ages of employees. Market related values are used for calculating the expected return on plan assets. The projected benefit obligation is discounted using a market interest rate at the beginning of the year on high quality corporate debt instruments. Pension expense includes the cost of pension benefits earned during the year, the interest cost on pension obligations, the expected return on pension plan assets, settlement gains, the amortization of any net transitional asset, the amortization of adjustments arising from any pension plan amendments and the amortization of the excess of any net actuarial gain or loss of over 10% of the greater of the benefit obligation and the market related value of plan assets. The amortization period covers the expected average remaining service lives of employees covered by the various plans. For defined contribution plans, pension costs generally equal plan contributions due during the year. (l) Derivative financial instruments - Derivative financial instruments are utilized to manage exposure to foreign currency exchange rates, interest rates and fuel prices. Derivative financial instruments are not fair valued unless used for speculative or trading purposes. However, CP Ships does not use derivative financial instruments for speculative or trading purposes. All relationships between hedging instruments and hedged items are documented, as well as risk management objectives and the strategy for undertaking hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecast transactions. Assessments are made, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Payments or receipts under derivative financial instruments used to manage exposure to foreign currencies and bunker fuel are recognized in the income statement concurrently with the hedged transaction and are netted against the hedged item, providing the effectiveness of the hedge is reasonably assured. The fair values of the outstanding contracts are not reflected in the financial statements. Net payments or receipts under derivative instruments used to manage exposure to interest rates are accrued as adjustments to interest expense and the fair values of the outstanding contracts are not reflected in the financial statements. (m) Stock-based compensation - Under stock-based compensation plans described in note 15, stock options and restricted stock have been granted to directors and certain key employees or were granted to former Canadian Pacific Limited ("CPL") employees as part of the Plan of Arrangement under which CP Ships was demerged from CPL on 1st October 2001 (note 14). CICA 3870, "Stock-based Compensation and Other Stock-based Payments," was adopted effective 1st January 2002. Any consideration paid by employees on the exercise of stock options is credited to share capital. In the event options are canceled, no adjustment is made to share capital and no expense is recognized. Compensation expense is not recognized for stock options. Compensation expense is recognized for direct awards of stock at market value when granted or if non-vested, such expense is spread over the vesting period. Prior to 2002, all stock-based compensation was treated as an equity transaction and no expense was recognized. (n) Restructuring costs - Prior to 31st March 2003 restructuring costs were recorded in the period detailed exit and restructuring plans were approved. Subsequent to 31st March 2003, CICA Emerging Issue Committee Abstract ("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)," were adopted. They require that all costs associated with an exit activity should be recognized when liabilities are actually incurred. Provisions for restructuring costs are recorded in liabilities. (o) Acquisitions - All acquisitions are accounted for using the purchase method. Under this method, all assets and liabilities are recorded at their fair value at the acquisition date. -9- (p) Comparative figures - Certain comparatives have been reclassified to conform to the financial statement presentation adopted in the current year. (q) New Canadian accounting pronouncements - CICA Accounting Guideline AcG-13, "Hedging Relationships," is effective for fiscal years beginning on or after 1st July 2003 and specifies new criteria for applying hedge accounting. If hedge accounting criteria are not met, derivative instruments currently accounted for as hedges will no longer continue to be accounted for as hedges, and their recorded amounts will be adjusted from their carrying value to their fair value. If this standard had been applied at 31st December 2003, the fair value adjustment would have increased net income by $1 million. CICA Accounting Guideline AcG-15, "Consolidation of Variable Interest Entities," requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. AcG-15's consolidation requirement is effective for all annual and interim periods beginning on or after 1st November 2004. The impact of AcG-15 on the results of operations and financial position is not expected to be significant. CICA 1100, "Generally Accepted Accounting Principles," establishes standards for financial reporting in accordance with generally accepted accounting principles, and defines primary sources of GAAP and requires that an entity apply every relevant primary source. This guidance is effective for fiscal years beginning on or after 1st October 2003. The impact of CICA 1100 on the results of operations and financial position is being assessed. CICA 3870, "Stock-based Compensation and Other Stock-based Payments," was amended in 2003 to require expensing of all stock-based compensation from the grant date, effective 1st January 2004. In accordance with the transitional provisions of CICA 3870, all stock-based compensation will be expensed in 2004, and 2004 opening retained earnings will be retroactively restated with a cumulative charge of $1 million. 2. Restatements In August 2004, the company restated the previously reported results for 2003 to reflect an increase in container shipping costs of $23 million and a reduction in revenue of $6 million, resulting in a reduction in net income of $29 million. At the same time, 2002 results were also restated to reflect an increase in container shipping costs and a reduction in net income of $7 million. The balance sheet as at 31st December 2003 has been restated to increase accounts payable and accrued liabilities by $30 million and to reduce accounts receivable by $6 million, with a corresponding reduction of $36 million in retained earnings. The balance sheet as at 31st December 2002 has been restated to increase accounts payable and accrued liabilities by $7 million with a corresponding $7 million reduction in retained earnings. (a) Impact of restatement on consolidated statements of income The impact of the restatements on net income for the years ended 31st December 2003 and 2002 are as follows: US$ millions 31st December 2003 31st December 2002 - ------------------------------------------------------------------------------ Net income - as previously reported 82 52 Adjustments: - ------------ Revenue Container shipping operations (i) (6) - Expenses Container shipping operations (ii), (23) (7) (iii) ------------------------------------------ Total adjustments (29) (7) ------------------------------------------ Net income - as restated 53 45 ------------------------------------------ -10- (i) Adjustment required to eliminate revenue-related balances that should not have been included on the balance sheet. Of this amount $3 million is to eliminate intercompany items previously not eliminated on consolidation and included within accounts receivable. A further $3 million relates to the elimination of other miscellaneous revenue-related balances which should not have been recognized as revenues and accounts receivable. (ii) The 2003 adjustment includes $20 million to correct the level of accruals established for container shipping costs. These underaccruals resulted from issues that affected certain of the processes and controls required to make and maintain reasonable estimates of accruals. A further $2 million relates to an incorrect reversal of cost accruals. An additional $1 million relates to the elimination of certain other cost-related balances. (iii) The 2002 adjustment of $7 million is to charge additional costs for container shipping operations, required as a result of the unintentional recording of an intercompany liability within accruals and the subsequent charging of third party costs against this balance. None of the adjustments reflected above are affected by income taxes and therefore no restatement of the company's previously reported provisions for income taxes is required. (b) Impact of restatement on consolidated statements of retained earnings 31st December 31st December 31st December US$ millions 2003 2002 2001 - ------------------------------------------------------------------------------ Retained earnings - as previously reported 615 547 509 Adjustments (36) (7) - -------------------------------------------------- Retained earnings - as restated 579 540 509 -------------------------------------------------- As at 31st December 2003, accounts receivable has decreased by $6 million and accounts payable and accrued liabilities have increased by $30 million. As at 31st December 2002, accounts payable and accrued liabilities have increased by $7 million. (c) Impact of restatement on segmented reporting The impact of the restatement on operating income by segment for the years ended 31st December 2003 and 2002 is as follows: 2003 - ---- Trans Latin US$ millions Atlantic Australasia America Asia Other Total - ----------------------------------------------------------------------------------------------------- Operating income / (loss) before exceptional items as previously reported 82 27 15 (8) 15 131 Restatement (17) (3) (4) (4) (1) (29) ------------------------------------------------------------------------------- Restated operating income / (loss) before exceptional items 65 24 11 (12) 14 102 ------------------------------------------------------------------------------- -11- 2002 Trans Latin US$ millions Atlantic Australasia America Asia Other Total - ----------------------------------------------------------------------------------------------------- Operating income / (loss) before exceptional items as previously reported 60 27 21 (38) 13 83 Restatement (4) - - (3) - (7) ------------------------------------------------------------------------------- Restated operating income / (loss) before exceptional items 56 27 21 (41) 13 76 ------------------------------------------------------------------------------- 3. Exceptional items In 2003, the exceptional charge of $10 million arises from organizational restructuring in Europe and mainly comprises consolidation of the UK management activities of Canada Maritime, Cast and Contship Containerlines resulting in the closure of certain UK offices. The charges include staff related costs of $7 million and expenses relating to redundant office leases of $3 million. At 31st December 2003, this restructuring was substantially complete with $3 million remaining to be spent for redundant office leases to 2008. In 2002 the exceptional credit of $2 million arose from the write back of unutilized provisions for unusual charges established in 2001 as an exceptional charge. The exceptional charges in 2001 comprised: (a) Spin-off related items of $24 million for professional fees and other expenses associated with the company's demerger from CPL under the Plan of Arrangement described in note 14, including $7 million for consent payments to parties to the Montrose and Montclare ship leases and $10 million for the cost of terminating a cash-based long-term incentive plan ("LTIP") by converting it into restricted stock awards. The total value of shares required to terminate LTIP was $22 million. The amount of $10 million included in the exceptional charge, together with an $8 million provision charged for the year ended 31st December 2000 for LTIP earned to that date allowed for the purchase on the market of CP Ships' shares at a value of $18 million. Shares valued at $4 million were issued from treasury. The shares were placed in an irrevocable trust which was established to settle the company's obligations under the LTIP termination arrangements. (b) Unusual charges of $19 million for the restructuring of organization and offices, mainly in Europe and North America, during 2001 and 2002. The charges include the cost of employee severance and redundant office leases, and as at 31st December 2003, $18 million has been utilized. 4. Interest expense (net) 2003 2002 2001 ---- ---- ---- Long-term debt (38) (24) (6) Short-term debt (1) (1) (1) ---------------------------- Total interest expense (39) (25) (7) Interest income 3 2 7 ---------------------------- Interest expense (net) $ (36) $ (23) $ - ---------------------------- 5. Income tax expense The principal operating subsidiaries have operations taxable mainly in jurisdictions or under programs with relatively low rates of tax including under UK Tonnage Tax where taxation is based on the tonnage of ships used by the subsidiary, rather than profits earned. -12- 2003 2002 2001 ---- ---- ---- Income tax expense Current 7 11 12 Future (4) (1) - ---------------------------- $ 3 $ 10 $ 12 ---------------------------- The difference between the income tax expense and the theoretical expense obtained by applying the Canadian statutory tax rate is as follows: 2003 2002 2001 ---- ---- ---- Restated Restated Provision at Canadian 20 17 38 statutory rates Foreign tax rate differentials (2) (7) (30) Tonnage tax rate differentials (15) (5) - Prior year items (2) (1) 1 Tax losses now recognized (3) - - Other 5 6 3 ---------------------------- Income tax expense $ 3 $ 10 $ 12 ---------------------------- The provision for future income taxes arises from differences in the recognition of revenues and expenses for income tax and accounting purposes. The temporary differences comprising the net future income tax liabilities are: 2003 2002 ---- ---- Future income tax assets Non-capital loss carryforwards 4 - ------------------- $ 4 $ - Future income tax liabilities Capital assets carrying value in excess of tax basis (7) (6) Other items - (1) ------------------- $ (7) $ (7) ------------------- Net future tax liabilities $ (3) $ (7) ------------------- In assessing the realizability of future tax assets, CP Ships considers whether it is more likely than not that some or all of the future tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. CP Ships considers the scheduled reversal of historical taxable income, projected future taxable income and tax planning strategies in making this assessment. At 31st December 2003, the amount of unused tax losses was $62 million (2002: $56 million, and 2001: $17 million), for which no future tax asset has been recognized because it is considered unlikely the losses will be utilized in the foreseeable future, if at all. The tax losses will begin to expire in 2007, although subsequent to 31st December 2003, $24 million of the unused tax losses were lost as a result of an internal reorganization. 6. Business acquisitions There were no business acquisitions in 2003. In 2002, CP Ships acquired all the outstanding shares of Italia di Navigazione S.p.A. ("Italia Line") and its sales agencies in Italy and Spain together with certain assets of its Canadian and Venezuelan agencies. This acquisition gave rise to goodwill and other intangible assets of $106 million. No deferred tax asset was created for tax losses or tax-deductible goodwill since they were not expected to be utilized. The estimated fair values of the net assets acquired and consideration, which was paid in cash, are summarized as follows: Accounts receivable and inventory 36 -13- All other tangible assets 16 Goodwill and other intangible assets 106 Bank borrowings (11) Accounts payable and accrued liabilities (85) Long-term debt (22) --------- Consideration and costs $ 40 --------- Included above is a $9 million provision to terminate contracts and restructure the organization. These costs related to closing certain offices and terminating contracts with third party suppliers that were not needed. At 31st December 2003, $6 million had been utilized (2002: $1 million). The remaining balance of $3 million, mainly for redundant contracts with third party suppliers, is expected to be utilized in 2004. 7. Property, plant & equipment 2003 2002 ---- ---- Ships Restated Restated Cost 1,188 1,014 Accumulated depreciation (201) (146) -------------------------- 987 868 Containers Cost 140 150 Accumulated depreciation (67) (61) -------------------------- 73 89 Terminal equipment & other Cost 151 135 Accumulated depreciation (82) (67) -------------------------- 69 68 Computer hardware & software Cost 227 199 Accumulated depreciation (121) (90) -------------------------- 106 109 Total cost 1,706 1,498 Total accumulated depreciation (471) (364) -------------------------- Net book value $ 1,235 $ 1,134 -------------------------- Certain adjustments to properly reflect the gross cost and accumulated depreciation of group assets have been made. This restatement has no effect on net book value of property, plant and equipment in total or of any asset category. These adjustments were required to reverse consolidation entries which had not been updated to reflect changes in and disposals of certain assets. Assets under construction, which are not being depreciated, included above in computer hardware and software amount to $5 million at 31st December 2003. As of 31st December 2002, assets under construction not being depreciated amounted to $46 million, of which $44 million is included above in ships. At 31st December 2003 assets held under capital leases, with a cost of $215 million (2002: $115 million) and accumulated depreciation of $67 million (2002: $64 million), are included above and mainly comprise ship leases with a net book value of $105 million (2002: $nil), and container leases of $39 million (2002: $47 million). Ships with a net book value of $754 million at 31st December 2003 (2002: $533 million) were pledged as security against bank and other loans. In 2002, buildings with a net book value of $3 million were mortgaged as security against long-term loans. They were sold in 2003. 8. Deferred charges Deferred charges of $32 million (2002: $38 million) comprise: -14- (a) Unamortized deferred financing costs of $15 million (2002: $16 million) related to the arrangement of financings including $200 million unsecured principal amount ten-year senior notes in 2002 and certain capital lease obligations. These costs are amortized evenly over the periods of the underlying arrangements, which end between 2005 and 2012. The amortization in 2003 was $4 million (2002: $2 million, and 2001: $nil). (b) Unamortized deferred dry-dock costs of $17 million (2002: $22 million) related to dry-docking and special survey costs. These costs are amortized evenly over the dry-docking cycle, typically between two and five years. The amortization in 2003 was $9 million (2002: $7 million, and 2001: $6 million). 9. Goodwill & other intangible assets Goodwill and other intangible assets of $607 million (2002: $608 million) comprise: (a) Goodwill Balance, 1st January 2003 598 Additions - ---------- Balance, 31st December 2003 $ 598 ---------- (b) Other intangible assets 2003 2002 ---- ---- Cost 10 10 Accumulated depreciation (1) - ------------------- $ 9 $ 10 ------------------- Other intangible assets comprise trade names and customer service contracts acquired in the Italia Line acquisition in 2002 and have an estimated useful life of between 10 and 20 years. Amortization expense for these items in 2003 was $1 million (2002 and 2001: $nil). No intangible assets were acquired in 2003. 10. Other assets Other assets comprise cash on deposit of $6 million (2002: $4 million) primarily in respect to operational guarantees (note 19) and $10 million (2002: $nil) for an accrued swap receivable relating to the hedge of certain GBP denominated capital lease obligations (notes 11 and 13). 11. Long-term debt 2003 2002 ---- ---- Bank loans 275 326 Ten-year senior notes 196 196 Long-term loans 37 45 ------------------- 508 567 Capital leases 143 30 ------------------- 651 597 Amounts due within one year (19) (15) ------------------- Amounts due after one year $ 632 $ 582 ------------------- The bank loans represent two long-term revolving credit facilities secured by certain owned ships and providing for borrowings of up to $525 million, of which $514 million was available at 31st December 2003. The first facility of $175 million was fully drawn at 31st December 2003 and is committed to August 2005 with a $50 million step down in August 2004. This facility bears interest at a margin, linked to its credit rating, over US$ LIBOR. As at 31st December 2003, the margin was 1.05%. -15- The second facility of $350 million, of which $100 million was drawn at 31st December 2003, is committed to December 2006, with a 25% step down in December 2005. This facility bears interest at a margin, which depends on the corporate credit rating, over US$ LIBOR. As at 31st December 2003, the margin was 1.75%. During 2003, $90 million of unsecured revolving facilities with a 364-day maturity expired undrawn. Ten-year senior notes comprise $200 million unsecured principal amount notes at 10.375% issued in July 2002 at a price of 97.722% for an effective rate of 10.75% which mature in July 2012. The issue discount is being accreted over the life of the bonds. CP Ships may redeem the senior notes at any time according to a predetermined pricing formula. Long-term loans comprise a $37 million term loan repayable up to 2008 bearing interest at 6.71% secured by four ships. The bank loans, senior notes and long-term loans are subject to covenants, which are customary for these types of facility. CP Ships is in compliance with these covenants at 31st December 2003. Aggregate maturities of the bank loans, long-term loans and senior notes over the next five years and thereafter are as follows: 2004 7 2005 20 2006 271 2007 10 2008 4 2009 and thereafter 196 --------- Total payments $ 508 --------- Capital leases - Capital leases consist of ship leases of $118 million (2002: $nil) and container and other leases of $25 million (2002: $30 million). During 2003, two 4100 teu ships, Canmar Venture and Spirit, were financed under separate 25-year GBP denominated capital leases. These ship lease obligations bear interest at 3-month GBP LIBOR+0.2% and expire in 2028 and are repayable in quarterly installments. CP Ships has the sole option to terminate these leases at any time, or to extend them beyond 2028 for further one-year periods. The GBP denominated lease obligations have been swapped for US$ to remove foreign currency exchange risk (note 13), and as a consequence the effective interest rate is 3-month US$ LIBOR+0.45%. The container and other leases are repayable in monthly instalments ending between 2004 and 2007. Obligations under container and other leases bear interest primarily at fixed rates, which range from 3% to 18%. Interest expense on capital leases amounted to $5 million (2002: $2 million, and 2001: $3 million). Capital lease commitments over the next five years and thereafter are as follows: 2004 20 2005 18 2006 16 2007 12 2008 9 2009 and thereafter 175 --------- Total minimum lease payments 250 Less imputed interest (107) --------- Present value of minimum lease payments 143 Less current portion (12) --------- Long-term portion of capital lease commitments $ 131 --------- -16- 12. Fair value of financial instruments Short-term financial assets and liabilities are valued at their carrying values as presented in the consolidated balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of these instruments. The estimated fair value of financial instruments at 31st December 2003 and 2002 is as follows: Asset / (Liability) Asset / Carrying (Liability) Amount Fair Value -------------------------- 2003 -------------------------- Long-term debt (651) (686) Derivative instruments (note 13): Interest rate swaps - (1) Foreign currency contracts 10 10 Bunker fuel price contracts - 1 2002 -------------------------- Long-term debt (597) (611) Derivative instruments (note 13): Interest rate swaps - 4 Long-term debt - The fair value of third-party long-term debt has been estimated based on current market prices and rates currently available to CP Ships for long-term borrowing with similar terms and conditions to those borrowings in place at the balance sheet date, or estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities. Apart from the ten-year senior notes, there is no material difference between the carrying value and the fair value of the third-party long-term debt. Interest rate, foreign currency & bunker fuel derivatives - The fair value of the interest rate swaps, foreign currency exchange contracts and bunker fuel price contracts, used for hedging purposes, is the estimated amount that CP Ships would have to pay or receive to terminate the agreements at the reporting date, taking into account interest rates, foreign exchange rates and bunker fuel prices. 13. Derivative instruments & hedging activity Derivatives are used only for hedging purposes. The following summarizes the company's risk management of market risk from foreign exchange fluctuations, changes in interest rates and bunker fuel prices. (a) Foreign exchange risk management As a result of net exposures denominated in currencies other than the US$, the company is exposed to changes in exchange rates. To manage this risk derivatives are used to cover certain forecast currency exposures. During 2003, all forecasted Euro and Canadian $ exposure was hedged resulting in a gain of $21 million (2002: $18 million, and a loss in 2001: $4 million). At 31st December 2003, 50% of anticipated 2004 Canadian $ exposure was hedged using a combination of put and call options such that the net exposure is limited to between $1.30 and $1.39. During January 2004, forward contracts were concluded at a weighted average rate of $1.25 to hedge 50% of forecast net Euro exposure for the first half of 2004 and 25% for the second half. During the year, two GBP denominated capital leases were entered into to finance the purchase of the Canmar Venture and Spirit (note 11). These lease obligations have been swapped for US$ to remove foreign currency exchange risk over the same term as the leases, and as a consequence the effective interest rate is 3-month US$ LIBOR+0.45%. -17- (b) Interest rate risk management For most of 2003, the interest rate on the $200 million senior notes due 2012 was swapped from 10.375% fixed to an interest rate based on 3-month US$ LIBOR+5.77% giving rise to a reduction in interest expense of $6 million (2002: $1 million). This 10-year hedging instrument was closed out in December 2003 and replaced with a new 5 1/2-year $100 million fixed to floating interest rate swap at 6-month US$ LIBOR+6.12%. Subsequent to the year end, the remaining $100 million was swapped from fixed to floating rates for 4 1/2 years at 6-month US$ LIBOR+6.26%. Other floating rate 3-month US$ LIBOR obligations of $190 million were swapped to 1.49% fixed to 30th June 2004 resulting in $nil impact in 2003. (c) Bunker fuel price risk management CP Ships purchases approximately 1.6 million tonnes of bunker fuel annually and is exposed to movements in bunker fuel prices. To manage this exposure, financial instruments including swaps and put and call options are used to hedge up to 50% of the forecast demand. As at 31st December 2003, there were outstanding bunker fuel swap contracts for 160,000 tonnes of fuel with a weighted average price of $137 per tonne, which expire between January 2004 and December 2004. The company is exposed to credit loss in the event of non-performance by counterparties to financial instruments including the interest rate, foreign exchange and bunker hedge contracts. This risk is mitigated by contracting with counterparties of high credit quality and by using an appropriate number of counterparties, thereby reducing the risks that would result from concentration. 14. Shareholders' equity (a) Plan of arrangement Prior to 1st October 2001, CP Ships Holdings Inc ("CPSHI") was the wholly owned holding company of Canadian Pacific Limited's ("CPL") container shipping interests. On 1st October 2001, as part of a Plan of Arrangement, CPL distributed its interests in CPSHI to a newly created subsidiary company, CP Ships. CPL then distributed its investment in CP Ships to CPL's common shareholders on the basis of one new common share in CP Ships for four old CPL common shares. As both CPSHI and CP Ships were under the control of CPL at the time, the transactions were accounted for in a manner similar to a pooling-of-interests and the historical financial information of CPSHI became the historical financial information of the now publicly held CP Ships. On 1st January 2002, CPSHI amalgamated with CP Ships. (b) Common shares The authorized share capital of CP Ships is an unlimited number of common shares and an unlimited number of preference shares. An analysis of common shares issued and outstanding is as follows: Number $ Millions ------ ---------- Balance at 31st December 2001 79,969,095 597 New issue 9,646,500 88 Issued under stock-based compensation plans 121,326 - ----------------------------- Balance at 31st December 2002 89,736,921 $ 685 Issued under stock-based compensation plans 153,598 1 ----------------------------- Balance at 31st December 2003 89,890,519 $ 686 ----------------------------- On 3rd July 2002, the issue of 8.5 million new common shares at C$ 15.00 (US$ 9.93) for approximate net proceeds, after deduction of offering expenses, of $77 million was completed. -18- On 9th July 2002, the issue of a further 1.1 million new common shares at C$ 15.00 (US$ 9.93) under an over-allotment option for additional net proceeds of approximately $11 million was completed. Shareholder rights plan - On 30th July 2001, CP Ships adopted a Shareholder Rights Plan (the "Rights Plan") which became effective 1st October 2001. The Rights Plan is designed to provide CP Ships with sufficient time to explore and develop alternatives for maximizing shareholder value in the event of a takeover bid and to provide all shareholders with an equal opportunity to participate in the bid. 15. Stock plans (a) Stock-based compensation Under the Employee Stock Option Plan ("ESOP") and Directors Stock Option Plan ("DSOP") options may be granted with or without vesting criteria to employees and directors to purchase common shares at a price normally based on the market value of the shares on or immediately prior to the grant date. Each option may be exercised on a date or dates set by the Board of Directors and generally expires ten years after the grant date. Restricted shares, direct awards of stock, may also be granted with or without vesting criteria and would normally vest on a specific date. At 31st December 2003, 1,360,630 shares (2002: 3,763,573 shares, and 2001: 2,453,429) were available for the granting of future options and restricted shares under the stock option plans out of the 6,158,000 currently authorized. The company has elected to not recognize stock option compensation as an expense but to disclose the effect based on fair value spread over the period to vesting. ESOP awards generally vest three years from grant. DSOP awards vest immediately upon grant. The company has used the Black-Scholes option-pricing model to assess the fair value of the options granted to employees and directors in 2003 and 2002 with the following assumptions: 2003 2002 ---- ---- Dividend yield 1.4% 1.4% Volatility 30.0% 30.0% Risk-free interest rate 4.5% 4.5% Expected life (years) 5 5 Had compensation expense for awards under the plans been determined based on the fair value at the grant dates, the company's net income available to common shareholders and earnings per common share would have been as follows: ($ millions except per share amounts) 2003 2002 2001 ---- ---- ---- Restated Restated Net income available to common shareholders As reported $ 53 $ 45 $ 66 Pro forma $ 52 $ 45 $ 66 Earnings per common share basic As reported $ 0.59 $ 0.53 $ 0.83 Pro forma $ 0.58 $ 0.53 $ 0.83 Earnings per common share diluted As reported $ 0.57 $ 0.52 $ 0.83 Pro forma $ 0.56 $ 0.52 $ 0.83 Stock options granted prior to 1st January 2002 are excluded for the fair value assessment, as permitted under Canadian GAAP. -19- Transition of CPL option plan - On the effective date of the Plan of Arrangement described in note 14, outstanding options under the CPL Key Employee Stock Option Plan ("KESOP") were replaced pro-rata with new options under the new option plans of the five separately-listed companies, including CP Ships, which were created by the spin-off. Former CPL employees' options over CP Ships shares may be exercised after two years from the original grant date under KESOP in respect to one-half of the number of shares and after three years in respect to the balance and expire ten years after the original grant date. For the 2003 stock compensation grants, vesting of all of the stock options and one-third of the restricted shares is contingent on the achievement by the company of certain financial performance. Details of the stock options activity for 2003, 2002 and 2001 are as follows: Weighted Average Number of Exercise Price Options ($ per share) ------- ------------- Balance as at 31st December 2000 - - Granted to former CPL employees under the Plan of Agreement 548,983 4.05 Granted under: ESOP 3,136,000 7.84 DSOP 48,000 7.84 Exercised (51,051) 4.21 Forfeited (8,412) 4.14 ------------------------------------ Balance as at 31st December 2001 (489,520 exercisable) 3,673,520 7.33 ------------------------------------ Granted under: ESOP 155,500 9.66 DSOP 24,000 10.39 Exercised (107,733) 3.90 Forfeited (2,213,785) 4.15 Expired (25) 3.90 ------------------------------------ Balance as at 31st December 2002 (413,989 exercisable) 1,530,977 7.11 ------------------------------------ Granted under: ESOP 1,589,333 12.64 DSOP 24,000 13.76 Exercised (127,790) 6.17 Forfeited (140,287) 8.92 Expired (1,204) 4.63 ------------------------------------ Balance as at 31st December 2003 (303,707 exercisable) 2,875,029 10.36 ------------------------------------ Details of the stock options outstanding as at 31st December 2003 are as follows: Weighted Range of Average Weighted Weighted Exercise Remaining Average Average Prices Options Contractual Exercise Price Options Exercise Price ($ per share) Outstanding Life (years) ($ per share) Exercisable ($ per share) - ---------------------------------------------------------------------------------------------------- 3.44 13,515 0.5 3.44 13,515 3.44 3.89-3.92 18,971 1.5 3.89 18,971 3.89 4.92 62,018 5.1 4.92 62,018 4.92 5.11-6.63 113,203 4.8 5.54 113,203 5.54 7.84 1,013,323 7.8 7.84 48,000 7.84 9.66-10.39 60,666 8.5 9.95 24,000 10.39 12.57-17.58 1,593,333 9.2 12.66 24,000 13.76 ------------------------------------------------------------------------------------- 2,875,029 8.3 10.36 303,707 6.61 ------------------------------------------------------------------------------------- Details of the restricted shares outstanding for 2003 and 2002 (nil outstanding in 2001) are as follows: Number of Restricted Shares ----------------- -20- Balance as at 31st December 2001 - Granted 704,666 --------------------- Balance as at 31st December 2002 704,666 Granted 1,059,579 Forfeited (90,006) --------------------- Balance as at 31st December 2003 1,674,239 --------------------- During 2002, 2,114,012 stock options were replaced with 704,666 restricted shares. Details of the restricted shares outstanding as at 31st December 2003 by year of vesting are as follows: Number of Year of Vesting Restricted Shares - --------------- ----------------- 2004 637,994 2005 1,036,245 --------------------- 1,674,239 --------------------- Of the total restricted shares outstanding at 31st December 2003, it is estimated that 1,295,985 will be exercisable upon vesting based on their vesting criteria. The related compensation expense recognized in 2003 for granting these restricted shares was $6 million (2002: $1 million, and 2001: $nil) and contributed surplus was increased accordingly. In the event of a change in control of CP Ships, all outstanding options and unvested restricted shares under all plans become immediately exercisable. (b) Employee share purchase plan The employee share purchase plan permits full-time employees of the company and its subsidiaries to purchase common shares through payroll deductions. The company contributes approximately $1 for every $6 contributed by an employee. To 31st December 2003, a total of 25,808 (2002: 13,568) common shares have been issued from treasury under this plan. A further 460,624 common shares have been authorized and reserved for issuance under this plan. 16. Supplemental cash flow information (a) Changes in non-cash working capital 2003 2002 2001 ---- ---- ---- Decrease/(increase) in current assets Restated Restated Accounts receivable 63 (73) (61) Prepaid expenses 2 (8) (6) Inventory (3) (9) 2 --------------------------------------- 62 (90) (65) (Decrease)/increase in current liabilities Accounts payable and accrued liabilities (101) 90 62 Increase in non-cash working capital from acquisition of businesses (note 6) - (49) - Decrease in non-cash working capital transferred in from shipping-related affiliates prior to spin-off (note 14) - - 9 Other changes in non-cash working capital 2 - 1 --------------------------------------- $ (37) $ (49) $ 7 --------------------------------------- (b) Non-cash transactions excluded from the consolidated statements of cash flow -21- 2003 2002 2001 ---- ---- ---- Capital lease obligations included in long-term debt 122 22 52 17. Earnings per share Basic and diluted earnings per share have been calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if dilutive stock options and non-vested restricted shares were exercised using the treasury stock method. A reconciliation of the weighted average number of common shares used to calculate basic and diluted earnings per share is as follows: (millions of shares) 2003 2002 2001 ---- ---- ---- Weighted average number of common 89.8 84.8 79.3 shares outstanding for basic earnings per share Effect of dilutive securities - stock options 1.1 0.6 0.6 - unvested restricted shares 1.7 0.7 - ---------------------------------------- Weighted average number of common shares outstanding for diluted earnings per share 92.6 86.1 79.9 ---------------------------------------- The basic and diluted earnings per share figures for 2001 have been determined as if the shares and options outstanding at the spin-off date (note 14) had been in place for all of 2001. 18. Related party transactions Container shipping operations expense for the year ended 31st December 2001 includes $90 million in relation to services provided by parties who were related at the times of the transactions, mainly for inland transportation costs paid to Canadian Pacific Railway, which charges were established on normal commercial terms. There were dividends on preference shares paid to a former affiliated company amounting to $3 million in 2001. 19. Contingent liabilities In 2003, CICA Accounting Guideline AcG-14, "Disclosure of Guarantees," was adopted. At 31st December 2003, there were bank and other guarantees, certain of which are collateralized by cash of $5 million, given in the normal course of business of $16 million. The guarantees include $3 million given by financial institutions on behalf of CP Ships to guarantee the payment by third parties for certain operational charges. As at 31st December 2003, there were no outstanding liabilities. During the normal course of business activity, CP Ships and its subsidiaries are occasionally involved in litigation proceedings. The company is currently defending an action in Belgium that was initiated in 1999 totalling approximately Euro 89 million ($112 million) against it and certain of its subsidiaries relating to termination of contracts for stevedoring and related services. CP Ships intends to defend vigorously this action and does not believe any liability will be incurred and accordingly, no provision has been made in the financial statements with respect to this matter other than for legal costs. 20. Commitments (a) Capital expenditures - Capital commitments at 31st December 2003 amounted to $2 million. (b) Operating leases - CP Ships utilizes ships, containers and other equipment and occupies premises under non-cancellable operating leases. Rent expense under operating leases: -22- 2003 2002 2001 ---- ---- ---- Ships 177 207 308 Containers 153 131 132 Other 32 27 18 ---------------------------- $ 362 $ 365 $ 458 ---------------------------- There are commitments under operating leases, including obligations under time charters which include certain ship operating expenses, and under long-term bareboat charters. The commitments in each of the next five years and thereafter are: Current Future Operating Commit- Leases ments Total ------ ----- ----- 2004 204 - 204 2005 127 1 128 2006 105 25 130 2007 94 53 147 2008 63 59 122 2009 and thereafter 137 454 591 ------------------------------------- Total payments $ 730 $ 592 $ 1,322 ------------------------------------- Future commitments comprise operating leases and associated management services agreements with a term of up to 10 years for nine new 4250 teu ships which are expected to be delivered between late 2005 and early 2007. The lease terms allow for termination at CP Ships' option on an annual basis from the end of the third year of each lease by giving two years notice and paying a termination fee. The associated management services agreements would terminate at the same time. Under the early termination option, the minimum future lease commitments at 31st December 2003 would be $249 million. 21. Pensions CP Ships operates a number of defined contribution and defined benefit pension plans throughout the world. Defined benefit plans are based principally on years of service and compensation levels near retirement. Annual contributions to these plans, which are based on various actuarial cost methods, are made on the basis of not less than the minimum amounts required by national, federal or provincial pension supervisory authorities. Net benefit plan (credit)/expense for each year for defined benefit plans includes the following components: 2003 2002 2001 ---- ---- ---- Service cost - benefits earned during the year 1 1 1 Interest cost on projected benefit obligation 2 2 4 Expected return on pension fund assets (2) (2) (4) Recognized net actuarial loss 1 - 4 Amount (released)/provided due to limitation (4) 2 (3) Curtailment gain - (2) - ------------------------------------ Net benefit plan (credit)/expense $ (2) $ 1 $ 2 ------------------------------------ Information about changes in the defined benefit plans is as follows: 2003 2002 ---- ---- Change in benefit obligation Benefit obligation at beginning of year 35 32 Service cost 1 1 Interest cost 2 2 -23- Actuarial loss 4 2 Curtailment gain (2) - Benefits paid (3) (3) Exchange rate fluctuation 5 1 -------------------------- Benefit obligation at end of year $ 42 $ 35 -------------------------- Change in plan assets Fair value of assets at beginning of year 23 25 Actual return on plan assets 3 (2) Employer contributions 2 2 Benefits paid (3) (3) Exchange rate fluctuation 4 1 -------------------------- Fair value of plan assets at end of year $ 29 $ 23 -------------------------- Included in the above accrued benefit obligation and fair value of plan assets are the following amounts in respect to plans that are not fully funded: 2003 2002 ---- ---- Funded status (13) (12) Unrecognized net actuarial loss 16 13 Amount not recognized due to limitation - (4) -------------------------- Accrued benefit asset/(liability) $ 3 $ (3) -------------------------- Weighted-average assumptions as of 31st December: 2003 2002 ---- ---- Discount rate 6.0% 6.1% Expected return on plan assets 6.8% 7.0% Rate of compensation increase 4.4% 4.2% There are also a number of defined contribution plans. The net expense in 2003 for such plans was $7 million (2002: $6 million, and 2001: $4 million). 22. Segment information CP Ships provides regional containerized ocean and related inland transportation services across the world in various trade lanes. It manages its business by aggregating container shipping services into the four major markets that it serves, namely TransAtlantic, Australasia, Latin America and Asia. Container shipping services in other regions and services ancillary to container shipping are separately aggregated. Accordingly, there are five reportable segments. Revenue and operating expenses are either directly related to the activity in a segment or are centrally managed and, together with general and administrative costs, are allocated across the segments. Assets are not managed or analyzed by segment and consequently no such segmented analysis is presented. It is impractical to obtain an analysis of revenue by customers' countries of domicile. CP Ships does not rely on any single major customer or group of major customers. No customer accounts for more than 10% of revenue. 2003 2002 2001 ---- ---- ---- Revenue Restated Restated TransAtlantic 1,573 1,328 1,323 Australasia 515 531 549 Latin America 297 238 244 Asia 635 508 435 Other 110 82 95 ----------------------------------- $ 3,130 $ 2,687 $ 2,646 ----------------------------------- -24- ----------------------------------- Expenses TransAtlantic 1,508 1,272 1,244 Australasia 491 504 520 Latin America 286 217 216 Asia 647 549 448 Other 96 69 79 ----------------------------------- $ 3,028 $ 2,611 $ 2,507 ----------------------------------- Operating income/(loss) before exceptional items TransAtlantic 65 56 79 Australasia 24 27 29 Latin America 11 21 28 Asia (12) (41) (13) Other 14 13 16 ----------------------------------- $ 102 $ 76 $ 139 ----------------------------------- Depreciation and amortization included in expenses: 2003 2002 2001 ---- ---- ---- TransAtlantic 69 50 44 Australasia 16 10 6 Latin America 11 9 5 Asia 17 18 8 Other 6 6 11 ----------------------------------- $ 119 $ 93 $ 74 ----------------------------------- Geographical analysis of property, plant and equipment and goodwill and other intangible assets: 2003 2002 ---- ---- Canada 39 33 United States 92 88 Other countries 44 56 Ships (1) 987 868 Containers (1) 73 89 Goodwill and other intangible assets (1) 607 608 -------------------------- $ 1,842 $ 1,742 -------------------------- (1) No ships, containers or goodwill and other intangible assets are located in a particular country. 23. Subsequent events (a) Issuance of convertible senior subordinated notes Subsequent to 31st December 2003, CP Ships completed the issue of 4% convertible senior subordinated notes due 2024 in an aggregate principal amount of $200 million. The notes are convertible into common shares under certain specified conditions at an initial conversion price of approximately US$ 25.22 per share. CP Ships may call the notes for cash at any time after 3rd July 2009. Holders of notes may put the notes to CP Ships in exchange for cash on 30th June 2009, 30th June 2014, and 30th June 2019. Proceeds of the offering have been used to reduce borrowings under the secured revolving credit facilities. (b) Litigation CP Ships is aware that certain security holder class action lawsuits have been filed against the company and certain directors in New York, California and Florida. Press releases issued by the plaintiffs in those lawsuits make reference to the company's press release of 9th August 2004 that it intends to restate previously reported financial results. CP Ships and the named directors intend to vigorously defend such lawsuits. The outcome and the amount -25- of these claims are not yet determinable and accordingly, no provision has been made in these financial statements with respect to these matters. 24. Differences between accounting principles generally accepted in Canada & in the United States Summary of differences - The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") which differ in certain respects from accounting principles generally accepted in the United States ("US GAAP"). The material differences are described below along with their effect on the Consolidated Statements of Income, Retained Earnings, Consolidated Balance Sheets and Consolidated Statements of Cash Flow. Certain additional disclosures as required under US GAAP have not been provided as permitted by the Securities and Exchange Commission. (a) Derivative financial instruments - FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137 and 138, is applied for the purpose of presenting US GAAP financial information. The cumulative effect of the adoption of FAS 133 at 1st January 2001 was to reduce net income before taxes under US GAAP by approximately $4 million. FAS 133 requires that all derivative instruments be recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Embedded derivatives Certain customers are offered the option to pay invoices in either US$ or the local currency of the customer using exchange rates fixed at the date of invoicing. These terms constitute an embedded derivative and for US GAAP are accounted for under FAS 133 which requires revaluing these derivatives to fair value and recording a liability with the offset to net income. There is no such requirement under Canadian GAAP. Interest rate swaps Interest rate swap agreements are used to manage interest rate risk. These swaps are accounted for as hedges under Canadian GAAP. Under US GAAP, not all of the criteria for hedge accounting are met and therefore outstanding interest rate swap agreements have been marked-to-market through earnings. Foreign currency contracts Derivatives, which are designated as cash flow hedges for Canadian GAAP, are used to hedge certain anticipated foreign currency expenditures. Under Canadian GAAP, gains and losses on foreign exchange hedge contracts are recognized in income in the period that the hedged exposure is recognized in income, which is the same period in which the instrument is settled. Except for cross-currency swaps relating to the Canmar Venture and Spirit lease obligations (note 13), not all of the criteria for hedge accounting under US GAAP are met and therefore outstanding hedges have been marked-to-market through earnings. Bunker fuel price contracts Bunker fuel price contracts are used to hedge fuel prices. Under Canadian GAAP, payments or receipts on bunker fuel price hedge contracts are recognized in the income statement concurrently with the hedged transaction and netted against the hedged item. Under US GAAP, not all of the criteria for hedge accounting are met and therefore outstanding contracts are marked-to-market through earnings. (b) Acquisition-related costs - Prior to 1st January 2001, there were differences between Canadian and US GAAP as to the timing of the recognition of certain liabilities associated with acquisition-related integration and reorganization costs. Further, in the past under US GAAP certain of these costs were charged to the income statement rather than being allocated to the cost of the acquisition, with a consequent effect on the amount of goodwill and the subsequent annual amortization charge. Differences in the balance of goodwill will remain because from 1st January 2002 goodwill has not been amortized under either Canadian or US GAAP. Prior to 2002, under Canadian GAAP, goodwill charges net of any tax effects were reported separately as a deduction from income after tax, whereas US GAAP required goodwill charges to be reported within operating expenses and consequently they were included in the determination of operating income. Amortization expense for the year ended 31st December 2001 was $14 million. -26- (c) Pension costs - The treatment of pension costs is similar under both Canadian and US GAAP with certain exceptions. The differences affecting CP Ships are the additional minimum liability required under US GAAP and the recoverable surplus limitation required under Canadian GAAP. These items account for the US GAAP reconciliation items. (d) Stock-based compensation - Under Canadian GAAP, compensation expense is not recognized for stock options. Any consideration paid by employees on the exercise of stock options is credited to share capital. For US GAAP under APB 25, the difference between the market value at the date of grant and the grant price of the stock option or issuance of shares to employees would be recognized as compensation expense. Under both Canadian and US GAAP the issuance of shares to employees is recognized as compensation expense based on market value at the date of grant. Prior to 1st January 2002, however, the issuance of shares to employees was not recognized as compensation expense under Canadian GAAP. (e) Ships - During August 2002, four ships were purchased that were previously bareboat chartered. Under Canadian GAAP, these charters were accounted for as operating leases. However, the ships were owned by special purpose entities that were consolidated under US GAAP. Consequently, for US GAAP a loss on extinguishment of debt was recorded at purchase while this amount was capitalized as part of the cost of the ships for Canadian GAAP. At 31st December 2003, the difference in equity of $22 million represents the difference in capitalized ship costs between US and Canadian GAAP and will be reduced as the assets are depreciated. (f) Capitalized interest - Under Canadian GAAP, CP Ships does not capitalize interest on construction of assets. US GAAP requires interest incurred as part of the costs of constructing assets to be capitalized and amortized over their estimated useful lives. (g) Restructuring costs - Prior to 31st March 2003, there were differences between Canadian GAAP and US GAAP as to the timing and recognition of certain liabilities associated with the accounting for costs associated with an exit activity. US GAAP requires that all costs associated with an exit activity should be recognized when liabilities are actually incurred, whereas under Canadian GAAP, certain costs could be recognized when it was decided to execute an exit plan resulting in the incurrence of costs that have no future economic benefit. (h) Compensation expense & treasury stock - Rabbi Trust - The US employee deferred compensation plan assets held in a Rabbi Trust are not consolidated under Canadian GAAP. However, in accordance with US GAAP, assets held in a Rabbi Trust are included in the financial statements of the employer, with a corresponding amount recorded as a deferred compensation obligation. CP Ships stock held by the Rabbi Trust is classified as treasury stock and is excluded from the average number of common shares outstanding. The deferred compensation obligation is adjusted each period with a corresponding charge (or credit) to compensation expense to reflect the fair value of the amount owed to the employees. (i) Other comprehensive income - US GAAP requires the disclosure, as other comprehensive income, of changes in equity during the period from transactions and other events from non-owner sources. Canadian GAAP does not require similar disclosure. Other comprehensive income under US GAAP in these financial statements arises from foreign currency translation adjustments and additional minimum pension liability. (j) Recent US GAAP pronouncements - In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 is effective for variable interest entities created or modified after 31st January 2003 and to any variable interest entities in which the company obtains an interest after that date. A FASB Staff Position issued in October 2003 deferred the effective date of FIN 46 to the first interim or annual period ending after 15th December 2003 for entities created before 1st February 2003 if certain criteria are met. The requirements of FIN 46 did not have a material impact on the results of operations or financial position of CP Ships in 2003. In April 2003, the FASB issued Statement No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and requires that contracts with comparable characteristics be accounted for similarly. The provisions of SFAS 149 are effective for -27- contracts entered into or modified after 30th June 2003 and for hedging relationships designated after 30th June 2003. The requirements of SFAS 149 did not have a material impact on the results of operations or financial position of CP Ships in 2003. In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for the classification and measurement of financial instruments with characteristics of both liabilities and equity. SFAS 150 was originally to be effective for all financial instruments entered into or modified after 31st May 2003 or otherwise at the beginning of the first interim period beginning after 15th June 2003 and was to be applied prospectively. However, on 29th October 2003, the FASB decided to defer the provisions of paragraphs 9 and 10 of SFAS 150 as they apply to manditorily redeemable non-controlling interests. These provisions require that mandatorily redeemable minority interests within the scope of SFAS 150 be classified as a liability on the parent company's financial statements in certain situations, including when a finite-life entity is consolidated. The deferral of those provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB's Liabilities and Equity Project or Phase II of the FASB's Business Combinations Project. The Board also decided to (i) preclude any "early" adoption of the provisions of paragraph 9 and 10 for these non-controlling interests during the deferral period, and (ii) require the restatement of any financial statements that have been issued where these provisions were applied to mandatorily redeemable noncontrolling interests. SFAS 150 is not expected to have any impact on CP Ships' financial position or results of operations. (k) As described in note 2, the company has restated its financial statements for certain items described herein. The adjustments described in that note also the impact the US GAAP financial information for the two years ended 31st December 2003 as set out below. 31st 31st December December US$ millions 2003 2002 - ----------------------------------------------------------------------- Net income - US GAAP - as previously reported 71 40 Adjustments (29) (7) -------------------------- Net income - US GAAP - as restated 42 33 -------------------------- 31st 31st December December US$ millions 2003 2002 - ----------------------------------------------------------------------- Equity - US GAAP - as previously reported 1,233 1,164 Adjustments (36) (7) -------------------------- Equity - US GAAP - as restated 1,197 1,157 -------------------------- -28- (l) Statements of consolidated income & shareholders' equity Reconciliation of net income under Canadian GAAP to net income under US GAAP: (US$ millions except per share amounts) Year ended 31st December 2003 2002 2001 ---- ---- ---- Restated Restated Net income - Canadian GAAP 53 45 69 US GAAP adjustments: Embedded derivatives (7) - 2 Interest rate swaps (1) 4 - Foreign currency contracts 1 - - Bunker fuel price contracts 1 - - Acquisition-related costs - (3) (3) Pension costs (4) 2 (3) Stock-based compensation (3) - (8) Ships 1 (20) - Capitalized interest (1) 5 - Restructuring costs 3 - - Compensation expense - Rabbi Trust (1) - - Tax effect of US GAAP adjustments - - - -------------------------------------------- Income - US GAAP before cumulative effect of accounting change 42 33 57 Cumulative effect of adoption of FAS 133 - - (4) -------------------------------------------- Net income - US GAAP 42 33 53 Other comprehensive income: Foreign currency translation adjustments 14 2 (2) Additional minimum pension liability (7) (6) - -------------------------------------------- Comprehensive income - US GAAP $ 49 $ 29 $ 51 -------------------------------------------- Earnings per common share basic ($ per share) /(1)/ Canadian GAAP $ 0.59 $ 0.53 $ 0.83 US GAAP Income before cumulative effect of accounting change $ 0.47 $ 0.39 $ 0.68 Cumulative effect of accounting change - - $ (0.05) -------------------------------------------- Basic earnings per common share after cumulative effect of accounting change $ 0.47 $ 0.39 $ 0.63 -------------------------------------------- Earnings per common share diluted ($ per share) /(1)/ Canadian GAAP $ 0.57 $ 0.52 $ 0.83 US GAAP Income before cumulative effect of accounting change $ 0.45 $ 0.38 $ 0.68 Cumulative effect of accounting change - - $ (0.05) -------------------------------------------- Diluted earnings per common share after cumulative effect of accounting change $ 0.45 $ 0.38 $ 0.63 -------------------------------------------- Average number of common shares outstanding basic (millions) Canadian GAAP 89.8 84.8 79.3 US GAAP 89.6 84.8 79.3 Average number of common shares outstanding diluted (millions) Canadian GAAP 92.6 86.1 79.9 US GAAP 92.6 86.1 79.9 /(1)/ 2001 earnings per share is calculated after deduction of preference share dividends -29- Reconciliation of equity under Canadian GAAP to equity under US GAAP: As at 31st December 2003 2002 2001 ---- ---- ---- Restated Restated Equity - Canadian GAAP 1,278 1,218 1,096 US GAAP adjustments: Embedded derivatives (9) (2) (2) Interest rate swaps 3 4 - Foreign currency contracts 1 - - Bunker fuel price contracts 1 - - Acquisition-related costs (44) (44) (41) Pension costs (12) (1) 3 Stock-based compensation (3) - - Ships (22) (23) (3) Capitalized interest 4 5 - Restructuring costs 3 - - Compensation expense - Rabbi Trust (1) - - Treasury stock - Rabbi Trust (2) - - Tax effect of US GAAP adjustments - - - --------------------------------------------- Equity - US GAAP $ 1,197 $ 1,157 1,053 --------------------------------------------- 25. Additional US GAAP disclosures Additional US GAAP disclosures are set out below. (a) Financial statement presentation In accordance with FASB Statement 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", the loss of $25 million on extinguishment of debt was reclassified into net income as it is no longer eligible to be classified as extraordinary. (b) Accounts receivable As at 31st December ($ millions) 2003 2002 ---- ---- Restated Trade receivables 335 375 Third-party agents 16 17 Other receivables 112 134 ------------------------- Total accounts receivable $ 463 $ 526 ------------------------- (c) Allowance for bad debts The allowance for bad debts as at 31st December 2003 and 2002 was $25 million and $18 million, respectively. (d) Trade and other payables As at 31st December ($ millions) 2003 2002 ---- ---- Restated Restated Trade payables 104 132 Accrued operating expenses 254 336 Third-party agents - 6 Other payables and accrued 206 191 liabilities ----------------------------- Total accounts payable and accrued liabilities $ 564 $ 665 ----------------------------- -30- (d) Restructuring In 2001, a $19 million restructuring charge was recorded related to rationalizing organization and offices, mostly in North America and Europe to improve efficiency, reduce costs and strengthen competitive positioning. The charge is comprised of $10 million in employee related charges, and $9 million in office lease related charges and is shown as a separate operating expense line within the statements of income. The employee related charges represent severance and related benefits such as outplacement counseling, certain legal costs, vacation and medical coverage for terminated employees. The restructuring plan identified a number of offices to be closed in various cities. The office lease related charges include the cost of leased office space that will no longer be occupied as well as costs required to terminate existing lease obligations. The following table presents a roll forward of activity related to these restructuring charges. ($ millions) Employee Office Lease Related Related Charges Charges Total ------- ------- ----- Balance at 31st December 2000 - - - Pre-tax charge 10 9 19 Payments (3) (2) (5) ---------------------------------------- Balance at 31st December 2001 7 7 14 Pre-tax charge - - - Payments (4) (5) (9) Adjustment (2) - (2) ---------------------------------------- Balance at 31st December 2002 1 2 3 Pre-tax charge - - - Payments (1) (1) (2) ---------------------------------------- Balance at 31st December 2003 $ - $ 1 $ 1 ---------------------------------------- The adjustment made to the restructuring provision in 2002 is further described in note 3. In 2003, a restructuring charge was recorded (as described in note 3) and is shown as a separate operating expense line within the statements of income. The following table presents a roll forward of the 2003 activity related to this restructuring charge: Employee Office Lease Related Related ($ millions) Charges Charges Total ------- ------- ----- Balance at 31st December 2002 - - - Pre-tax charge 3 2 5 Payments (3) (2) (5) ---------------------------------------- Balance at 31st December 2003 $ - $ - $ - ---------------------------------------- (e) Stock-based compensation Under the CP Ships Employee Stock Option Plan ("ESOP") and the Directors Stock Option Plan ("DSOP") options may be granted to key employees and directors to purchase CP Ships common shares at a price normally based on the market value of the shares on or immediately prior to the grant date. Each option may be exercised after three years and no later than ten years after the grant date. CP Ships applies the intrinsic value method of accounting for its options granted to employees. If CP Ships had determined compensation cost based on the fair value at the grant date for employee share options in accordance with FASB Statement No. 123, "Accounting for Stock-Based Compensation", net income and net income per share would have changed to the pro forma amounts indicated below. -31- Year ended 31st December ($ million except per share amounts) 2003 2002 2001 ---- ---- ---- Restated Restated Net income - US GAAP, as reported $ 42 $ 33 $ 53 Pro-forma net income - US GAAP $ 46 $ 32 $ 53 Pro-forma earnings per share basic /(1)/ $ 0.51 $ 0.38 $ 0.63 Pro-forma earnings per share diluted /(1)/ $ 0.50 $ 0.37 $ 0.63 /(1)/ 2001 earnings per share is calculated after deduction of preference share dividends The weighted average number of shares in issue used in the above table is given in note 24(l). The fair value of each grant is estimated on the date of the grant using the Black-Scholes option pricing method with the following weighted-average assumptions used for grants made during the years ended 31st December 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Dividend yield 1.4% 1.4% 2.0% Expected volatility 30.0% 30.0% 30.0% Risk-free interest rate 4.5% 4.5% 3.8% Expected option term (years) 5 5 5 (f) Goodwill and other intangible assets Amortization of goodwill ceased on 31st December 2001 on the implementation of SFAS 142. Goodwill is now carried at amortized cost. The impact on net income is as follows: Year ended 31st December ($ million except per share amounts) 2003 2002 2001 ---- ---- ---- Restated Restated Net income - US GAAP 42 33 53 Add back: goodwill amortization - - 14 ----------------------------------- Adjusted net income - US GAAP $ 42 $ 33 $ 67 Earnings per share basic, as reported /(1)/ $ 0.47 $ 0.39 $ 0.63 Pro-forma earnings per share basic /(1)/ $ 0.47 $ 0.39 $ 0.81 Earnings per share diluted, as reported /(1)/ $ 0.45 $ 0.38 $ 0.63 Pro-forma earnings per share diluted /(1)/ $ 0.45 $ 0.38 $ 0.80 /(1)/ 2001 earnings per share is calculated after deduction of preference share dividends Aggregate anticipated amortization expense for intangible assets over the next five years is as follows ($ millions) 2004 1 2005 1 2006 1 2007 1 2008 1 2009 and thereafter 4 --------- Total $ 9 --------- -32- (g) Pensions Information about CP Ships' defined benefit pension plans required in accordance with FASB Statement No. 132 "Employers' Disclosures about Pension and Other Post Retirement Benefits" is as follows: ($ millions) 2003 2002 ---- ---- Change in benefit obligation Benefit obligation at beginning of year 35 32 Service cost 1 1 Interest cost 2 2 Plan participants' contributions - - Actuarial (gain)/loss 4 2 Acquisitions - - Amendment - - Disposals - - Settlements (2) - Benefits paid (3) (3) Exchange rate fluctuation 5 1 --------------------- Benefit obligation at end of year 42 35 --------------------- Change in plan assets Fair value of plan assets at beginning of year 23 25 Actual return on plan assets 3 (2) Employer contributions 2 2 Plan participants' contributions - - Settlements - - Acquisitions - - Disposals - - Benefits paid (3) (3) Exchange rate fluctuations 4 1 --------------------- Fair value of plan assets at end of period $ 29 $ 23 --------------------- Funded status (13) (12) Unrecognized transition (asset)/obligation - - Unrecognized net actuarial (gain)/loss 16 13 Unrecognized prior service cost - - --------------------- (Accrued)/prepaid benefit cost $ 3 $ 1 --------------------- ($ millions) 2003 2002 2001 ---- ---- ---- Components of net periodic benefit cost Service cost 1 1 1 Interest cost 2 2 4 Expected return on assets (2) (2) (4) Recognized net actuarial loss 1 - - Curtailment gain - (2) - Settlement cost on disposal - - 3 ---------------------------- Net periodic benefit cost $ 2 $ (1) $ 4 ---------------------------- -33- Weighted average assumptions used to determine 2003 2002 ---- ---- benefit obligations as of 31st December Discount rate 6.0% 6.1% Rate of compensation increase 4.4% 4.2% Weighted average assumptions used to determine net 2003 2002 2001 ---- ---- ---- periodic benefit cost for years ended 31st December Discount rate 6.1% 6.5% 6.7% Expected return on plan assets 7.0% 7.2% 6.9% Rate of compensation increase 4.2% 4.9% 4.6% Additional disclosures required in accordance with FASB Statement No. 132 regarding the Canadian pension arrangements are as follows: The accumulated benefit obligation at 31st December 2003 is $12 million (2002: $9 million). The measurement date used is 31st December 2003. Prior to 1st October 2001, CP Ships participated in the Canadian Pacific Express Transport Pension Plan ("CPET Plan"). The CPET Plan is a registered pension plan with defined benefit and defined contribution components. Assets are set aside to satisfy the pension obligations of the registered plan. Effective 1st October 2001, CP Ships is withdrawing from participation in the CPET Plan and establishing its own registered pension plan. At 31st December 2003, the basis upon which the transfer of assets to the new CP Ships plan will be determined had not been finalized nor had regulatory approval been provided. (h) Software development costs Software development costs are capitalized in accordance with SOP 98-1, "Accounting for the costs of computer software developed or obtained for internal use". At 31st December 2003 and 2002, the net book value of software development costs included within computer hardware and software was $72 million and $76 million, respectively. Amortization expense for the year ended 31st December 2003 was $16 million (2002: $9 million, and 2001: $1 million). (i) Shareholders equity The following table presents the activity for contributed surplus and accumulated other comprehensive income for 2003, 2002 and 2001: ($ millions) Accumulated Other Contributed Comprehensive Surplus Income ------- ------ Balance at 31st December 2000 - (8) Translation adjustment - (2) ---------------------------- Balance at 31st December 2001 - (10) Translation adjustment - 2 Additional minimum pension liability - (6) Stock-based compensation - restricted 1 - shares ---------------------------- Balance at 31st December 2002 1 (14) Translation adjustment - 14 Additional minimum pension liability - (7) Stock-based compensation - restricted 6 - shares Treasury stock - Rabbi Trust (2) - ---------------------------- Balance at 31st December 2003 $ 5 $ (7) ---------------------------- -34- Treasury stock is carried at cost, and results from the consolidation of certain employee deferred compensation plans including Rabbi Trusts in accordance with FIN 46, "Variable Interest Entities". At 31st December 2003, there were 493,578 shares classified as treasury stock. (j) Income tax expense Sources of income/(loss) before income taxes are presented as follows: Year ended 31st December ($ millions) 2003 2002 2001 ---- ---- ---- Restated Restated Income/(loss) before income tax from continuing operations: Canada (1) (10) 3 Foreign 57 65 93 -------------------------------------- Income before income tax $ 56 $ 55 $ 96 -------------------------------------- The income tax expense from continuing operations consisted of the following: Year ended 31st December ($ millions) 2003 2002 2001 ---- ---- ---- Current tax (benefit)/expense: Canada (1) 3 2 Foreign 8 8 10 -------------------------------------- Total current $ 7 $ 11 $ 12 Future tax benefit Canada (2) (1) - Foreign (2) - - -------------------------------------- Total future $ (4) $ (1) $ - -------------------------------------- Total tax expense $ 3 $ 10 $ 12 -------------------------------------- The effect of temporary differences and carryforwards that give rise to future income tax assets and liabilities from continuing operations are as follows: As at 31st December ($ millions) 2003 2002 ---- ---- Future income tax assets: Non-capital loss carryforwards 26 20 --------------------- Gross future income tax assets 26 20 Valuation allowance (22) (20) --------------------- Net future income tax assets $ 4 $ - Future income tax liabilities: Capital assets carrying value in excess of tax basis (7) (6) basis Other items - (1) --------------------- Total future income tax liabilities $ (7) $ (7) --------------------- Net future income tax liabilities $ (3) $ (7) --------------------- The valuation allowance for future tax assets as at 31st December 2003, 2002 and 2001 was $22 million, $20 million, and $6 million, respectively. The net change in the valuation allowance for the year ended 31st December 2003 was an increase of $2 million. For the years ended 31st December 2002 and 2001, the net change in the valuation allowance was an increase of $14 million and an increase of $5 million, respectively. -35- 26. Supplemental Information on the Subsidiary Guarantors The obligations of CP Ships under the ten-year senior notes have been jointly and severally, fully and unconditionally guaranteed by wholly owned subsidiaries, CP Ships (UK) Limited ("CP Ships (UK)"), Lykes Lines Limited, LLC ("Lykes LLC"), and TMM Lines Limited, LLC ("TMM LLC") (the "Subsidiary Guarantors"). The following tables set out condensed consolidating balance sheets of CP Ships as at 31st December 2003 and 2002 and condensed consolidating statements of income and cash flow for the years ended 31st December 2003, 2002 and 2001which contain separate financial information relating to the Subsidiary Guarantors. Supplementary consolidating statements of income - 2003 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Restated Restated Restated Restated Restated Canadian GAAP Revenues Container shipping operations - 3,001 627 (498) 3,130 Expenses Container shipping operations - 2,451 357 (321) 2,487 General and administrative 20 418 163 (177) 424 Depreciation and amortization of intangible assets - 38 81 - 119 Currency exchange loss/(gain) - 4 (6) - (2) Diminution in value of property, plant and equipment - 2 - - 2 Gain on disposal of property, plant and equipment - (2) - - (2) ------------------------------------------------------------------------ 20 2,911 595 (498) 3,028 Operating (loss)/income before exceptional items (20) 90 32 - 102 Exceptional items - (7) (3) - (10) ------------------------------------------------------------------------ Operating (loss)/income (20) 83 29 - 92 Interest expense, net (1) 5 (40) - (36) ------------------------------------------------------------------------ (Loss)/income before income tax (21) 88 (11) - 56 Income tax expense - (4) 1 - (3) ------------------------------------------------------------------------ (Loss)/income before income from subsidiaries (21) 84 (10) - 53 Income/(loss) of subsidiaries 74 9 84 (167) - ------------------------------------------------------------------------ Net income available to common shareholders $ 53 $ 93 $ 74 $ (167) $ 53 ------------------------------------------------------------------------ Net income - Canadian GAAP 53 93 74 (167) 53 US GAAP adjustments/(1)/ Embedded derivatives - (7) - - (7) Interest rate swaps (1) - - - (1) Foreign currency contracts - - 1 - 1 Bunker fuel price contracts - - 1 - 1 Pension costs - - (4) - (4) Stock-based compensation (3) - - - (3) Ships - 1 - - 1 Capitalized interest - - (1) - (1) Restructuring costs - 2 1 - 3 Compensation expense - Rabbi Trust - (1) - - (1) Tax effect of US GAAP adjustments - - - - - ------------------------------------------------------------------------ Net income - US GAAP 49 88 72 (167) 42 Foreign currency translation adjustments - 4 10 - 14 Additional minimum pension liability - (7) - - (7) ------------------------------------------------------------------------ Comprehensive income - US GAAP $ 49 $ 85 $ 82 $ (167) $ 49 ------------------------------------------------------------------------ /(1)/The US GAAP differences as they apply to CP Ships are discussed in note 24. -36- Supplementary consolidating statements of income - 2002 YEAR ENDED 31ST DECEMBER 2002 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Restated Restated Restated Restated Restated Canadian GAAP Revenues Container shipping operations - 2,609 460 (382) 2,687 Expenses Container shipping operations - 2,157 252 (254) 2,155 General and administrative 8 382 105 (128) 367 Depreciation and amortization of intangible assets - 41 52 - 93 Currency exchange gain - (3) (1) - (4) ------------------------------------------------------------------------ 8 2,577 408 (382) 2,611 Operating (loss)/income before exceptional items (8) 32 52 - 76 Unusual items - 3 (1) - 2 ------------------------------------------------------------------------ Operating (loss)/income (8) 35 51 - 78 Interest expense, net (8) - (15) - (23) ------------------------------------------------------------------------ (Loss)/income before income tax (16) 35 36 - 55 Income tax expense - (2) (8) - (10) ------------------------------------------------------------------------ (Loss)/income before income from subsidiaries (16) 33 28 - 45 Income/(loss) of subsidiaries 61 (2) 33 (92) - ------------------------------------------------------------------------ Net income available to common shareholders $ 45 $ 31 $ 61 $ (92) $ 45 ------------------------------------------------------------------------ Net income - Canadian GAAP 45 31 61 (92) 45 US GAAP adjustments/(1)/ Interest rate swaps 4 - - - 4 Acquisition-related costs - (3) - - (3) Pension costs - - 2 - 2 Ships - (20) - - (20) Capitalized interest - - 5 - 5 Tax effect of US GAAP adjustments - - - - - ------------------------------------------------------------------------ Net income - US GAAP 49 8 68 (92) 33 Foreign currency translation adjustments - (3) 5 - 2 Additional minimum pension liability - (6) - - (6) ------------------------------------------------------------------------ Comprehensive income/(loss) - US GAAP $ 49 $ (1) $ 73 $ (92) $ 29 ------------------------------------------------------------------------ /(1)/The US GAAP differences as they apply to CP Ships are discussed in note 24. -37- Supplemental consolidating statements of income - 2001 YEAR ENDED 31ST DECEMBER 2001 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Canadian GAAP Revenues Container shipping operations - 2,655 287 (296) 2,646 Expenses Container shipping operations - 2,165 199 (296) 2,068 General and administrative - 324 35 4 363 Depreciation and amortization of intangible assets - 44 37 (7) 74 Currency exchange loss - 1 1 - 2 Gain on disposal of property, plant and equipment (7) - - 7 - ------------------------------------------------------------------------ (7) 2,534 272 (292) 2,507 Operating income before exceptional items 7 121 15 (4) 139 Unusual items - (8) (11) - (19) Spin-off related items - (7) (17) - (24) ------------------------------------------------------------------------ Operating income/(loss) 7 106 (13) (4) 96 Interest income/(expense), net 3 6 (9) - - ------------------------------------------------------------------------ Income/(loss) before income tax 10 112 (22) (4) 96 Income tax expense - (6) (6) - (12) ------------------------------------------------------------------------ Income/(loss) before goodwill charges and minority interest 10 106 (28) (4) 84 Minority interest - - 1 - 1 ------------------------------------------------------------------------ Income/(loss) before goodwill charges 10 106 (27) (4) 85 Goodwill charges, net of tax - (16) - - (16) ------------------------------------------------------------------------ Income/(loss) before income from subsidiaries 10 90 (27) (4) 69 Income/(loss) of subsidiaries 60 (13) 90 (137) - ------------------------------------------------------------------------ Net income 70 77 63 (141) 69 Dividends on preference shares (3) - - - (3) ------------------------------------------------------------------------ Net income available to common shareholders $ 67 $ 77 $ 63 $ (141) $ 66 ------------------------------------------------------------------------ Net income - Canadian GAAP 70 77 63 (141) 69 US GAAP adjustments/(1)/ Derivative financial instruments - 2 - - 2 Acquisition-related costs - (3) - - (3) Pension costs - - (3) - (3) Stock-based compensation - (7) (1) - (8) Tax effect of US GAAP adjustments - - - - - ------------------------------------------------------------------------ Income - US GAAP before cumulative effect of accounting changes 70 69 59 (141) 57 Cumulative effect of adoption of FAS 133 - (4) - - (4) ------------------------------------------------------------------------ Net income - US GAAP 70 65 59 (141) 53 Foreign currency translation adjustments - 1 (3) - (2) ------------------------------------------------------------------------ Comprehensive income - US GAAP $ 70 $ 66 $ 56 $ (141) $ 51 ------------------------------------------------------------------------ /(1)/The US GAAP differences as they apply to CP Ships are discussed in note 24. -38- Supplemental consolidating balance sheets and reconciliation of equity under Canadian GAAP to equity under US GAAP - 2003 AS AT 31ST DECEMBER 2003 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals Canadian GAAP ------- ---------- ------------ ------------ ------ ASSETS Restated Restated Restated Restated Restated Current assets Cash and cash equivalents 2 30 43 - 75 Accounts receivable Intercompany 2 1,325 1,464 (2,791) - Trade and other receivables - 382 125 - 507 Loans to affiliated companies due within one year 338 237 305 (880) - Inventory - 21 3 - 24 ------------------------------------------------------------------------ 342 1,995 1,940 (3,671) 606 ------------------------------------------------------------------------ Investments in subsidiaries 1,449 58 1,192 (2,699) - Property, plant and equipment - 166 1,069 - 1,235 Deferred charges 7 7 18 - 32 Goodwill and other intangible assets - 488 119 - 607 Future income tax assets - - 4 - 4 Other assets - 15 1 - 16 ------------------------------------------------------------------------ $ 1,798 $ 2,729 $ 4,343 $ (6,370) $ 2,500 ------------------------------------------------------------------------ LIABILITIES Current liabilities Accounts payable and accrued liabilities Intercompany 29 1,434 1,328 (2,791) - Accounts payable and accrued liabilities 11 331 222 - 564 Loans from affiliated companies due within one year 290 15 575 (880) - Long-term debt due within one year - 2 17 - 19 ------------------------------------------------------------------------ 330 1,782 2,142 (3,671) 583 Long-term liabilities Long-term debt due after one year 196 115 321 - 632 Future income tax liabilities - - 7 - 7 ------------------------------------------------------------------------ 196 115 328 - 639 Shareholders' equity Common share capital 686 20 848 (868) 686 Share premium - 297 - (297) - Contributed surplus 7 444 - (444) 7 Retained earnings 579 69 1,021 (1,090) 579 Cumulative foreign currency translation adjustments - 2 4 - 6 ------------------------------------------------------------------------ 1,272 832 1,873 (2,699) 1,278 ------------------------------------------------------------------------ $ 1,798 $ 2,729 $ 4,343 $ (6,370) $ 2,500 ------------------------------------------------------------------------ Equity - Canadian GAAP 1,272 832 1,873 (2,699) 1,278 US GAAP adjustments/(1)/ Embedded derivatives - (9) - - (9) Interest rate swaps 3 - - - 3 Foreign currency contracts - - 1 - 1 Bunker fuel price contracts - - 1 - 1 Acquisition-related costs - (44) - - (44) Pension costs - (13) 1 - (12) Stock-based compensation (3) - - - (3) Ships - (22) - - (22) Capitalized interest - - 4 - 4 Restructuring costs - 2 1 - 3 Compensation expense - Rabbi Trust - (1) - - (1) Treasury stock - Rabbi Trust - (2) - - (2) Tax effect of US GAAP adjustments - - - - - ------------------------------------------------------------------------ Equity - US GAAP $ 1,272 $ 743 $ 1,881 $ (2,699) $ 1,197 ------------------------------------------------------------------------ /(1)/The US GAAP differences as they apply to CP Ships are discussed in note 24. -39- Supplemental consolidating balance sheets and reconciliation of equity under Canadian GAAP to equity under US GAAP - 2002 AS AT 31ST DECEMBER 2002 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Restated Restated Restated Restated Restated Canadian GAAP ASSETS Current assets Cash and cash equivalents 1 58 51 - 110 Accounts receivable Intercompany 2 1,039 883 (1,924) - Trade and other receivables 2 463 107 - 572 Loans to affiliated companies due within one year 66 134 177 (377) - Inventory - 18 3 - 21 ------------------------------------------------------------------------ 71 1,712 1,221 (2,301) 703 ------------------------------------------------------------------------ Investments in subsidiaries 1,361 43 1,104 (2,508) - Property, plant and equipment - 106 1,028 - 1,134 Deferred charges 8 7 23 - 38 Goodwill and other intangibles - 483 125 - 608 Other assets - 4 - - 4 ------------------------------------------------------------------------ $ 1,440 $ 2,355 $ 3,501 $ (4,809) $ 2,487 ------------------------------------------------------------------------ LIABILITIES Current liabilities Accounts payable and accrued liabilities Intercompany 7 876 1,041 (1,924) - Accounts payable and accrued liabilities 11 565 89 - 665 Loans from affiliated companies due within one year - 177 200 (377) - Long-term debt due within one year - - 15 - 15 ------------------------------------------------------------------------ 18 1,618 1,345 (2,301) 680 Long-term liabilities Long-term debt due after one year 196 1 385 - 582 Future income taxes - 1 6 - 7 ------------------------------------------------------------------------ 196 2 391 - 589 Shareholders' equity Common share capital 685 20 824 (844) 685 Share premium - 297 - (297) - Contributed surplus 1 444 - (444) 1 Retained earnings 540 (24) 947 (923) 540 Cumulative foreign currency translation adjustments - (2) (6) - (8) ------------------------------------------------------------------------ 1,226 735 1,765 (2,508) 1,218 ------------------------------------------------------------------------ $ 1,440 $ 2,355 $ 3,501 $ (4,809) $ 2,487 ------------------------------------------------------------------------ Equity - Canadian GAAP 1,226 735 1,765 (2,508) 1,218 US GAAP adjustments/1)/ Derivative financial instruments - (2) - - (2) Interest rate swaps 4 - - - 4 Acquisition-related costs - (44) - - (44) Pension costs - (6) 5 - (1) Ship leases - (23) - - (23) Capitalized interest - - 5 - 5 Tax effect of US GAAP adjustments - - - - - ------------------------------------------------------------------------ Equity - US GAAP $ 1,230 $ 660 $ 1,775 $ (2,508) $ 1,157 ------------------------------------------------------------------------ /(1)/The US GAAP differences as they apply to CP Ships are discussed in note 24. -40- Supplemental consolidating statements of cash flow - 2003 YEAR ENDED 31ST DECEMBER 2003 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Restated Restated Restated Restated Restated Operating Activities Net income 53 93 74 (167) 53 Depreciation and amortization of intangible assets - 38 81 - 119 Exceptional items - 7 3 - 10 Income from subsidiaries (74) (9) (84) 167 - Future income tax benefit - (1) (3) - (4) Amortization of deferred charges 1 3 9 - 13 Diminution in value of property, plant and equipment - 2 - - 2 Gain on disposal of property, plant and equipment - (2) - - (2) Restricted share awards 6 - - - 6 ---------------------------------------------------------------------------- (14) 131 80 - 197 Decrease/(increase) in non-cash working capital 24 (79) 18 - (37) ---------------------------------------------------------------------------- Cash from operations before exceptional item related payments 10 52 98 - 160 Exceptional item related payments - (6) (4) - (10) ---------------------------------------------------------------------------- Cash from operations 10 46 94 - 150 Financing activities Increase in share capital 1 - 24 (24) 1 Increase in long-term debt - - 104 - 104 Repayment of long-term debt - (3) (169) - (172) Increase in deferred financing costs - - (1) - (1) (Decrease)/increase in loans from affiliated companies 18 (72) 54 - - Common share dividends paid (14) - - - (14) ---------------------------------------------------------------------------- Cash inflow/(outflow) from financing activities 5 (75) 12 (24) (82) Investing activities Additions to property, plant and equipment - (5) (153) - (158) Increase in deferred dry-dock costs - (1) (3) - (4) Reimbursement of ship stage payments - - 43 - 43 Proceeds from disposal of property, plant and equipment - 18 - - 18 Increase in investments in affiliated companies (14) (10) - 24 - Increase in other assets - (1) (1) - (2) ---------------------------------------------------------------------------- Cash (outflow)/inflow from investing activities (14) 1 (114) 24 (103) ---------------------------------------------------------------------------- Increase/(decrease) in cash and cash equivalents 1 (28) (8) - (35) Cash and cash equivalents at beginning of year 1 58 51 - 110 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2 $ 30 $ 43 $ - $ 75 ---------------------------------------------------------------------------- Supplemental consolidating statements of cash flow - 2002 -41- YEAR ENDED 31ST DECEMBER 2002 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Restated Restated Restated Restated Restated Operating Activities Net income 45 31 61 (92) 45 Depreciation and amortization of intangible assets - 41 52 - 93 Exceptional items - (3) 1 - (2) Income from subsidiaries (61) 2 (33) 92 - Future income tax benefit - (1) - - (1) Amortization of deferred charges - 3 6 - 9 Other 1 (3) 5 (2) 1 ---------------------------------------------------------------------------- (15) 70 92 (2) 145 Decrease/(increase) in non-cash working capital 9 (72) 12 2 (49) ---------------------------------------------------------------------------- Cash from operations before exceptional item related payments (6) (2) 104 - 96 Exceptional item related payments - - (12) - (12) ---------------------------------------------------------------------------- Cash from operations (6) (2) 92 - 84 Financing activities Increase in share capital 88 - 229 (229) 88 Increase in long-term debt 196 - 361 - 557 Repayment of long-term debt - - (212) - (212) Repayment of Italia short-term debt - - (11) - (11) Increase in deferred financing costs (8) - (3) - (11) (Decrease)/increase in loans from affiliated companies (55) 32 23 - - Common share dividends paid (14) - - - (14) ---------------------------------------------------------------------------- Cash inflow/(outflow) from financing activities 207 32 387 (229) 397 Investing activities Additions to property, plant and equipment - (14) (425) - (439) Increase in deferred dry-dock costs - (2) (7) - (9) Acquisition of businesses - - (40) - (40) Proceeds from disposal of property, plant and equipment - 3 2 - 5 Increase in investments in affiliated companies (200) (29) - 229 - Increase in other assets - (4) - - (4) ---------------------------------------------------------------------------- Cash (outflow)/inflow from investing activities (200) (46) (470) 229 (487) ---------------------------------------------------------------------------- Increase/(decrease) in cash and cash equivalents 1 (16) 9 - (6) Cash and cash equivalents at beginning of year - 74 42 - 116 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1 $ 58 $ 51 $ - $ 110 ---------------------------------------------------------------------------- -42- Supplemental consolidating statements of cash flow - 2001 YEAR ENDED 31ST DECEMBER 2001 CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Operating Activities Net income 70 77 63 (141) 69 Depreciation and amortization of intangible assets - 60 37 (7) 90 Unusual and spin-off related items - 15 28 - 43 Income from subsidiaries (60) 13 (90) 137 - Gain on disposal of property, plant and equipment (7) - - 7 - Amortization of deferred charges - 2 3 - 5 Other - - 3 (2) 1 ---------------------------------------------------------------------------- 3 167 44 (6) 208 Decrease/(increase) in non-cash working capital 17 (70) 45 15 7 ---------------------------------------------------------------------------- Cash from operations before exceptional and spin-off related payments 20 97 89 9 215 Exceptional and spin-off related payments - (8) (17) - (25) ---------------------------------------------------------------------------- Cash from operations 20 89 72 9 190 Financing activities Contributed surplus 2 - - - 2 Return of share capital (14) - - - (14) Redemption of preferred shares (116) - - - (116) Increase in long-term debt - - 160 - 160 Repayment of long-term debt - (2) (12) - (14) Increase in deferred financing costs - - (7) - (7) Repayment of loans from former affiliated companies (5) (8) (37) - (50) Preference dividends paid (3) (1) - 1 (3) ---------------------------------------------------------------------------- Cash (outflow)/inflow from financing activities (136) (11) 104 1 (42) Investing activities Additions to property, plant and equipment - (82) (196) (10) (288) Increase in deferred dry-dock costs - (6) (3) - (9) Proceeds from disposal of property, plant and equipment - 3 12 - 15 Proceeds from disposal of investments - (1) 13 - 12 Repayment of loans to former affiliated companies 116 - - - 116 ---------------------------------------------------------------------------- Cash inflow/(outflow) from investing activities 116 (86) (174) (10) (154) ---------------------------------------------------------------------------- (Decrease)/increase in cash and cash equivalents - (8) 2 - (6) Cash and cash equivalents at beginning of year - 82 40 - 122 ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ - $ 74 $ 42 $ - $ 116 ---------------------------------------------------------------------------- -43- As described in note 2, the company has restated its financial statements for certain items described therein. In addition, associated investigation of the supplemental information on the subsidiary guarantors has resulted in adjustments to this supplemental information for 2003 and 2002. These adjustments, which do not affect the consolidated totals, are required to correct the reporting of transactions between the subsidiary guarantors and other subsidiaries. (a) Impact of restatement on consolidated statements of income The impact of the restatements on net income for the years ended 31st December 2003 and 2002 are as follows: 2003 - ---- CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Net income - as previously reported 82 127 103 (230) 82 Adjustments: ------------ Related to restatement (see note 2) (29) (29) (29) 58 (29) Other (i) - (5) - 5 - ------------------------------------------------------------------------ Total adjustments (29) (34) (29) 63 (29) ------------------------------------------------------------------------ Net income - as restated $ 53 $ 93 $ 74 $ (167) $ 53 ------------------------------------------------------------------------ (i) 2003 container shipping operations expenses have been reduced by $6 million due to the late recognition of recharges by the subsidiary guarantors to the other subsidiaries. These recharges consequently reduce the income of subsidiaries of the subsidiary guarantors and therefore there is a nil effect on net income. An additional $5 million adjustment on the subsidiary guarantor's income of subsidiaries is for corrections to commission recharges by other subsidiaries and results in a reduction of net income of the subsidiary guarantors. These adjustments do not have an affect the consolidated totals. 2002 - ---- CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Net income - as previously reported 52 40 68 (108) 52 Adjustments: ------------ Related to restatement (see note 2) (7) (7) (7) 14 (7) Other (i) - (2) - 2 - ------------------------------------------------------------------------ (7) (9) (7) 16 (7) Total adjustments ------------------------------------------------------------------------ Net income - as restated $ 45 $ 31 $ 61 $ (92) $ 45 ------------------------------------------------------------------------ (i) The 2002 adjustment of $2 million results from the outcome of investigations into inter-company balances within the subsidiary guarantors. These adjustments do not have an affect on the consolidated totals. -44- (b) Impact of restatements on consolidated statements of retained earnings The impact of the restatements on retained earnings as at 31st December 2003 and 2002 are as follows: 2003 - ---- CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Retained earnings - as previously reported 615 112 1,057 (1,169) 615 Adjustments: ------------ Related to restatement (see note 2) (36) (36) (36) 72 (36) Other - (7) - 7 - ---------------------------------------------------------------------------- Total adjustments (36) (43) (36) 79 (36) ---------------------------------------------------------------------------- Retained earnings - as restated $ 579 $ 69 $ 1,021 $ (1,090) $ 579 ---------------------------------------------------------------------------- 2002 - ---- CP Ships Subsidiary Other Consolidated Limited Guarantors Subsidiaries Eliminations Totals ------- ---------- ------------ ------------ ------ Retained earnings - as previously reported 547 (15) 954 (939) 547 Adjustments: ------------ Related to restatement (see note 2) (7) (7) (7) 14 (7) Other - (2) - 2 - ---------------------------------------------------------------------------- Total adjustments (7) (9) (7) 16 (7) ---------------------------------------------------------------------------- Retained earnings - as restated $ 540 $ (24) $ 947 $ (923) $ 540 ---------------------------------------------------------------------------- -45-