Filed pursuant to General Instruction II.L. of Form F-10
File No. 333-114811
PROSPECTUS SUPPLEMENT NO. 1
TO THE SHORT FORM BASE SHELF PROSPECTUS DATED APRIL 21, 2004
No securities regulatory authority has expressed an opinion about these
securities and it is an offence to claim otherwise.
This amended and restated short form prospectus is referred to as a base shelf
prospectus and has been filed under legislation in the Province of Alberta
that permits certain information about these securities to be determined after
this prospectus has become final and that permits the omission from this
prospectus of that information. The legislation requires the delivery to
purchasers of a prospectus supplement containing the omitted information
within a specified period of time after agreeing to purchase any of these
securities.
This short form base shelf prospectus constitutes a public offering of these
securities only in those jurisdictions where they may be lawfully offered for
sale and then only by persons permitted to sell such securities. The
securities offered hereunder have not been and will not be qualified for sale
under the securities laws of the Province of Alberta or any other jurisdiction
in Canada and may not be offered or sold in the Province of Alberta or in any
other jurisdiction in Canada except pursuant to exemptions from the applicable
prospectus requirements.
Amended and Restated Short Form Base Shelf Prospectus
CP SHIPS
REGIONAL FOCUS o GLOBAL SCALE
Secondary Offering 22nd November 2004
- ------------------
US$200,000,000 4% Convertible Senior Subordinated Notes due 2024
On 24th February 2004, CP Ships Limited ("CP Ships" or the "Company") issued
and sold US$200.0 million aggregate principal amount of 4% convertible senior
subordinated notes due 2024 (the "Notes"), on a private placement basis, at an
issue price of $1,000 per Note. Under limited circumstances, the Notes may be
converted into common shares of CP Ships. This prospectus may be used by
selling security holders in connection with resales of Notes and the common
shares issuable upon conversion of the Notes (collectively, the "Securities")
during the period that this prospectus, including any amendments thereto,
remains valid. For a description of the Notes see "Description of Notes". For
a description of CP Ships' common shares see "Articles of Amalgamation and
Description of Share Capital - Common Shares".
The Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automatic Linkages system of the National Association of
Securities Dealers, Inc. (the "PORTAL Market"). CP Ships' common shares are
listed on The New York Stock Exchange (the "NYSE") and the Toronto Stock
Exchange (the "TSX") under the symbol "TEU".
INVESTING IN THE NOTES OR CP SHIPS' COMMON SHARES INVOLVES RISKS. PLEASE
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 18 OF THIS PROSPECTUS.
The Securities may be offered by holders in negotiated transactions or
otherwise, to or through underwriters or dealers purchasing as principals or
directly to purchasers at varying prices determined at the time of the sale or
at negotiated prices. In addition, the common shares may be offered from time
to time through ordinary brokerage transactions on the NYSE and the TSX. See
"Plan of Distribution". This prospectus is filed in the Province of Alberta,
Canada and as part of a registration statement in the United States pursuant
to a multijurisdictional disclosure system adopted by the United States.
Holders may be deemed to be "underwriters" as defined in the United States
Securities Act of 1933, as amended (the "Securities Act"). Any profits
realized by holders may be
deemed to be underwriting compensation. If the holders use any broker-dealers,
any commissions paid to underwriters or dealers and, if underwriters or
dealers purchase any Securities as principals, any profits received by such
underwriters or dealers on the resale of the Securities may be deemed to be
underwriting compensation under the Securities Act.
CP Ships will not receive any of the proceeds from the resale of the
Securities by any of the holders.
CP SHIPS IS PERMITTED, UNDER A MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED
BY THE UNITED STATES, TO PREPARE THIS PROSPECTUS IN ACCORDANCE WITH APPLICABLE
CANADIAN DISCLOSURE REQUIREMENTS. PROSPECTIVE UNITED STATES INVESTORS SHOULD
BE AWARE THAT SUCH REQUIREMENTS ARE DIFFERENT FROM THOSE OF THE UNITED STATES.
FINANCIAL STATEMENTS INCLUDED OR INCORPORATED HEREIN HAVE BEEN PREPARED IN
ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND ARE
SUBJECT TO CANADIAN AUDITING AND STANDARDS, AND THUS MAY NOT BE COMPARABLE TO
FINANCIAL STATEMENTS OF UNITED STATES COMPANIES.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THE ACQUISITION OF THE SECURITIES
DESCRIBED HEREIN MAY HAVE TAX CONSEQUENCES BOTH IN THE UNITED STATES AND IN
CANADA (SEE "CERTAIN INCOME TAX CONSIDERATIONS" ON PAGE 57 HEREIN). SUCH
CONSEQUENCES FOR INVESTORS WHO ARE RESIDENT IN, OR CITIZENS OF, THE UNITED
STATES MAY NOT BE DESCRIBED FULLY HEREIN.
THE ABILITY OF AN INVESTOR TO ENFORCE CIVIL LIABILITIES UNDER THE UNITED
STATES' FEDERAL SECURITIES LAWS MAY BE AFFECTED ADVERSELY BECAUSE CP SHIPS IS
INCORPORATED UNDER THE LAWS OF THE PROVINCE OF NEW BRUNSWICK, CANADA, A
MAJORITY OF CP SHIPS' OFFICERS AND DIRECTORS AND SOME OF THE EXPERTS NAMED IN
THIS PROSPECTUS ARE RESIDENT OUTSIDE OF THE UNITED STATES, AND MOST OF CP
SHIPS' ASSETS AND THE ASSETS OF THOSE OFFICERS, DIRECTORS AND EXPERTS ARE
LOCATED OUTSIDE OF THE UNITED STATES.
THE SPECIFIC TERMS OF AN OFFERING OF SECURITIES WILL BE SET FORTH IN A
PROSPECTUS SUPPLEMENT TO THIS PROSPECTUS.
THERE IS NO MARKET THROUGH WHICH THE NOTES MAY BE SOLD AND PURCHASERS OF NOTES
MAY NOT BE ABLE TO RESELL THE NOTES PURCHASED UNDER THIS PROSPECTUS.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY
INDIVIDUAL STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ii
TABLE OF CONTENTS
Page
----
DOCUMENTS INCORPORATED BY REFERENCE...........................................5
FORWARD-LOOKING STATEMENTS....................................................6
SUMMARY.......................................................................7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION...................................13
RISK FACTORS.................................................................19
USE OF PROCEEDS..............................................................29
CAPITALIZATION...............................................................30
PRICE RANGE OF COMMON SHARES OF CP SHIPS.....................................31
DIVIDEND POLICY..............................................................31
EARNINGS COVERAGE............................................................32
DESCRIPTION OF NOTES.........................................................33
ARTICLES OF AMALGAMATION AND DESCRIPTION OF SHARE CAPITAL....................56
CERTAIN INCOME TAX CONSIDERATIONS............................................58
PLAN OF DISTRIBUTION.........................................................67
LEGAL MATTERS................................................................69
SCHEDULE A..................................................................A-1
---------------
CP Ships' consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Canada, or
"Canadian GAAP". For a discussion of the material differences affecting CP
Ships between Canadian GAAP and generally accepted accounting principles in
the United States, or "U.S. GAAP", see Note 23 to CP Ships' restated audited
consolidated financial statements for the year ended 31st December 2003
incorporated by reference in this prospectus. "EBITDA", as used in the
prospectus, is defined as earnings before interest, tax, depreciation,
amortization, exceptional items, goodwill charges and minority interest.
EBITDA is not a substitute for operating income, net income or cash flow from
operating activities as determined in accordance with generally accepted
accounting principles. EBITDA is presented as additional information because
CP Ships believes that it is widely used in the container shipping industry as
a measure to evaluate a company's operating performance and is a useful
indicator of CP Ships' ability to meet its working capital, capital
expenditures and debt service requirements. Because EBITDA is not calculated
identically by all companies, the presentation may not be comparable to other
similarly titled measures of other companies. CP Ships' discretionary use of
funds depicted by EBITDA may be limited by working capital, capital
expenditure and debt service requirements and by restrictions related to legal
requirements, commitments and uncertainties. CP Ships states its financial
statements in U.S. dollars. In this prospectus, references to Canadian dollars
or Cdn$ are to the currency of Canada, references to dollars and U.S. dollars,
U.S.$ or $ are to the currency of the United States and references to GB
Pounds or Sterling are to the currency of the United Kingdom.
In making an investment decision, prospective investors must rely on their
own examination of the Company, including the merits and risks involved.
Prospective investors should not construe anything in this prospectus as
investment, legal, business or tax advice. Each prospective investor should
consult its own advisors as needed to make its investment decision and to
determine whether it is legally permitted to purchase the Securities under
applicable legal investment or similar laws or regulations.
iii
Information and statistics regarding the industry in which CP Ships
operates is referred to and relied upon in this prospectus. This market data
was obtained from independent industry publications or other publicly
available information. Although CP Ships believes that these sources are
reliable, it has not independently verified the information and does not
guarantee the accuracy and completeness of this information.
This prospectus contains summaries CP Ships believes to be accurate with
respect to certain documents, but reference is made to the actual documents
for complete information. All such summaries are qualified in their entirety
by such reference. Copies of documents referred to herein will be made
available to prospective investors upon request to CP Ships or the selling
security holders.
This prospectus includes references to certain Internet websites. None of
these websites, or their content, are incorporated by reference into this
prospectus.
iv
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this prospectus from
documents filed with securities commissions or similar regulatory authorities
in Canada and with the Securities and Exchange Commission (the "SEC") in the
United States. Copies of the documents incorporated herein by reference may be
obtained on request without charge from the Vice President -- General Counsel
and Secretary of CP Ships at 2 City Place, Beehive Ring Road, Gatwick Airport,
West Sussex RH6 0PA, United Kingdom (telephone number +44 (0)1293 866200) or
by accessing the disclosure documents available through the Internet on the
Canadian Securities Administrators' System for Electronic Document Analysis
and Retrieval (SEDAR) at www.sedar.com, which is the Canadian equivalent of
the SEC's Electronic Data Gathering, Analysis and Retrieval System (EDGAR).
Disclosure documents filed with the SEC are available through EDGAR at
www.sec.gov.
The following documents, filed with the securities regulatory authorities
in each of the provinces and territories of Canada and with the SEC, are
specifically incorporated by reference and form an integral part of this
prospectus:
(a) CP Ships' audited consolidated financial statements as at 31st
December 2003 and 2002 and for each of the years in the
three-year period ended 31st December 2003, as restated, as well
as the auditor's report thereon as filed on 15th November 2004;
(b) CP Ships' management's discussion and analysis of operating
results and financial position for the year ended 31st December
2003 as amended;
(c) CP Ships' material change report dated 12th May 2004 regarding a
restatement of CP Ships' financial results for fiscal year 2003
and of its balance sheet as at 31st December 2003;
(d) CP Ships' material change report dated 11th August 2004 regarding
the restatement of CP Ships financial results for fiscal years
2003 and 2002 and first quarter 2004;
(e) The revised Annual Information Form of CP Ships dated as of 3rd
September 2004 for the fiscal year ended 31st December 2003;
(f) CP Ships' management proxy circular dated 12th March 2004 for the
annual and special meeting of shareholders held on 4th May 2004,
with the exception of the information under the headings "Report
on Executive Compensation" and "Corporate Governance" and the
graph on page 14 showing cumulative shareholder return;
(g) CP Ships' unaudited interim consolidated financial statements as
at and for the nine months ended 30th September 2004; and
(h) CP Ships' management's discussion and analysis of operating
results and financial position for the period ended 30th
September 2004.
Any document of the type referred to above (excluding confidential
material change reports), and any updated earnings coverage ratios filed by CP
Ships with the securities regulatory authorities in Canada after the date of
this prospectus and prior to the termination of the offering of Securities
under any prospectus supplement will be deemed to be incorporated by reference
in this prospectus.
A prospectus supplement containing the specific terms of an offering of
Securities will be delivered to purchasers of such Securities together with
this prospectus and will be deemed to be incorporated into this prospectus as
of the date of such prospectus supplement solely for the purposes of the
offering of the Securities covered by that prospectus supplement, unless
otherwise expressly provided therein.
Upon a new annual information form and the related annual financial
statements being filed by CP Ships with the Alberta Securities Commission
during the currency of this prospectus, CP Ships' previous annual information
form, previous
5
annual financial statements and all interim financial statements, management's
discussion and analysis of operating results and financial position, material
change reports, annual filings and information circulars filed prior to the
commencement of the then current financial year shall be deemed no longer to
be incorporated into this prospectus for the purposes of future offers and
sales of Securities hereunder.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE IN THIS PROSPECTUS WILL BE DEEMED TO BE MODIFIED OR
SUPERSEDED, FOR THE PURPOSES OF THIS PROSPECTUS, TO THE EXTENT THAT A
STATEMENT CONTAINED HEREIN OR IN ANY SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS
OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR SUPERSEDES
THAT STATEMENT. THE MODIFYING OR SUPERSEDING STATEMENT NEED NOT STATE THAT IT
HAS MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR INCLUDE ANY INFORMATION SET
FORTH IN THE DOCUMENT THAT IT MODIFIES OR SUPERSEDES. THE MAKING OF A
MODIFYING OR SUPERSEDING STATEMENT WILL NOT BE DEEMED AN ADMISSION FOR ANY
PURPOSES THAT THE MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE, CONSTITUTED A
MISREPRESENTATION, AN UNTRUE STATEMENT OF A MATERIAL FACT OR AN OMISSION TO
STATE A MATERIAL FACT THAT IS REQUIRED TO BE STATED OR THAT IS NECESSARY TO
MAKE A STATEMENT NOT MISLEADING IN LIGHT OF THE CIRCUMSTANCES IN WHICH IT IS
MADE. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT BE DEEMED IN ITS
UNMODIFIED OR SUPERSEDED FORM TO CONSTITUTE PART OF THIS PROSPECTUS.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this
prospectus contain certain forward-looking statements within the meaning of
the United States Private Securities Litigation Reform Act of 1995 relating,
but not limited, to the operations, anticipated financial performance,
business prospects and strategies of CP Ships. These statements can be found
in the management's discussion and analysis of financial condition and results
of operations incorporated by reference herein and elsewhere in this
prospectus and in other documents incorporated by reference into this
prospectus. Forward-looking information typically contains statements with
words such as "consider", "anticipate", "believe", "expect", "plan", "intend",
"likely" or similar words suggesting future outcomes or statements regarding
an outlook on future changes in volumes, freight rates, costs, achievable cost
savings, the estimated amounts and timing of capital expenditures, anticipated
future debt levels and incentive fees or revenue, or other expectations,
beliefs, plans, objectives, assumptions, intentions or statements about future
events or performance. Investors should be aware that these statements are
subject to known and unknown risks, uncertainties and other factors,
including, but not limited to, those discussed under "Risk Factors", that
could cause actual results to differ materially from those suggested by the
forward-looking statements.
Investors are cautioned not to place undue reliance on forward-looking
information. By its nature, the forward-looking information of CP Ships
involves numerous assumptions, inherent risks and uncertainties, both general
and specific, that contribute to the possibility that the predictions,
forecasts and other forward-looking statements will not occur. These factors
include, but are not limited to, changes in business strategies; general
global, political and economic and business conditions, including the length
and severity of any economic slowdown in the countries and regions where CP
Ships operates, including seasonality, particularly in the United States,
Canada, Latin America, Australasia, Asia and Europe; the effects of
competition and pricing pressures; industry over-capacity; changes in demand
for container shipping; availability and cost of chartered ships; changes in
laws and regulations, including tax, environmental, employment, competition,
anti-terrorism and trade laws; difficulties in implementing a cost savings
program; currency exposures and exchange rate fluctuations; fuel price and
interest rate fluctuations; changes in access to capital markets and other
sources of financing; various events which could disrupt operations, including
war, acts of terrorism, severe weather conditions and external labour unrest,
all of which may be beyond CP Ships' insurance coverage; compliance with
security measures introduced by governmental and industry trade practice
groups; and CP Ships' anticipation of and success in managing the risks
arising from the foregoing.
The above list of important factors affecting forward-looking information
is not exhaustive. CP Ships undertakes no obligation, except as required by
law, to update publicly or otherwise revise any forward-looking information,
whether as a result of new information, future events or otherwise, or the
above list of factors affecting this information.
6
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus and in the documents incorporated by reference in this prospectus.
It is not complete and is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including "Risk Factors" and
"Description of Notes") appearing elsewhere in this prospectus, as well as in
the documents incorporated by reference, including CP Ships' consolidated
financial statements and their related notes.
CP SHIPS
Overview
CP Ships is one of the world's leading container shipping companies,
offering its customers door-to-door as well as port-to-port containerized
services for the international transportation of a broad range of industrial
and consumer goods, including raw materials, semi-manufactured and finished
goods. It operates a fleet of 80 ships in 23 trade lanes focusing on four
principal markets. In 2003, the Company transported 2.2 million twenty foot
equivalent units ("teu"), the standard measure of volume in the industry, on
behalf of approximately 23,700 customers. Based on standing capacity, CP Ships
ranks as the fourteenth largest carrier in the world, giving it the economies
of scale available to global carriers.
In 2003, the Company had restated revenue of $3.13 billion and EBITDA as
restated of $221 million before an exceptional charge of $10 million related
to its organizational restructuring in Europe.
CP Ships is a regional specialist that offers direct services to a wider
range of ports within a particular market than is generally offered by global
carriers. This approach, together with its global scale, allows it to provide
customers with the local expertise and market presence of a regional
specialist combined with many of the operating advantages of a global carrier.
CP Ships provides scheduled services in its four principal markets:
TransAtlantic, Australasia, Latin America and Asia, which it serves through
seven well-recognized brands: Canada Maritime, Cast, Contship Containerlines,
ANZDL, Lykes Lines, TMM Lines and Italia Line.
CP Ships operates in an industry whose annual volume growth has on average
exceeded global gross domestic product growth by two to three times over the
last 20 years. Since its introduction in the 1950s, the container shipping
industry has facilitated world trade because of its simplicity, efficiency and
low cost, becoming an integral part of the global sourcing strategies for many
of the world's major manufacturers and retailers.
Over the last seven years, CP Ships considers it has outperformed, on the
basis of return on capital employed ("ROCE"), in both weak as well as strong
market conditions, the average ROCE of those carriers in the top 20 for which
data is publicly available due to its business model based on its competitive
strengths and strategy which are discussed below.
Competitive Strengths
CP Ships considers it has the following strengths which allow it to compete
successfully:
Leading market position. CP Ships believes it is the largest carrier based
on market share in a majority of its 14 core trade lanes. This leading market
position has been achieved by focusing on customers and customer service
through its well-recognized and highly-regarded brands.
Regional focus. The Company's regional focus provides more reliable and
frequent service schedules, flexible and timely responses to changes in local
market conditions, the ability to offer customized services, greater trade
lane economies of scale and premium pricing for its services. These
attributes, along with its strong market position, provide it with a measure
of protection from new competitors on its core trade lanes.
Low cost operator. A combination of global scale economies and trade lane
scale economies based on strong market position has allowed CP Ships to reduce
its costs significantly. Savings in costs associated with ship networks,
terminals and stevedoring, the container fleet, inland transport and
administration have contributed to a 19% reduction in cost per teu from 1996
to 2002. Cost per teu as restated increased in 2003 compared to 2002 by 7%,
mainly due to increased fuel and charter
7
costs and the depreciation of the U.S. dollar, which increased the reported
amount of the substantial portion of CP Ships' costs incurred in other
currencies, such as the euro, Canadian dollar, Mexican Peso and GB Pound
Sterling. However, CP Ships remains committed to its cost savings programs.
Diversified customer base. CP Ships has approximately 23,700 customers
which are diversified both by geography and by industry. Its largest customer
represented 2.1% of its revenue in 2003, and its top ten customers accounted
for only 8.5%. This diversity protects CP Ships against the adverse effect of
relying on a single customer or industry.
Successful track record of acquisitions. CP Ships has successfully
completed nine acquisitions since 1993 often involving the turn-around of
under-performing businesses. It has successfully integrated those businesses,
improving both services and profitability. Acquisitions have contributed to a
compound annual growth of revenue of 25% since 1994.
Experienced management team. CP Ships' senior management team average over
20 years experience in the container shipping industry. The large majority of
the management team has worked for CP Ships for many years or with its
acquired businesses. Incentives are provided to senior management through
share-based compensation and to all staff (including senior management)
through cash incentives based on operating income.
Strategy
Six principal strategies underpin CP Ships' business model, which has
delivered average ROCE above the industry average over many years.
Concentration on container shipping. CP Ships concentrates on container
shipping services which allows management to focus on one business and to plan
for and quickly respond to often rapidly changing economic, political and
trade conditions in what is a truly international business.
Focus on regional markets. CP Ships has built strong positions in a number
of regional markets. It is the leading carrier in the majority of its core
trade lanes, which allows it to offer the best schedules and services to its
customers and to maximize trade lane economies of scale.
Pursue selective acquisitions. Since 1993, nine acquisitions have been
executed and integrated successfully, often involving the turnaround of
under-performing businesses. CP Ships' revenue is now seven times larger than
in 1994. In a relatively fragmented industry under economic pressure, there
will likely be further acquisition opportunities. CP Ships expects to continue
to pursue a disciplined acquisition strategy that enables it either to grow in
its existing markets or to carefully expand into new markets, thereby helping
it to achieve further economies of scale that improve operating performance.
Furthermore, as a way of leveraging strong regional positions and adding
value to our core container services, CP Ships intends to selectively and
modestly develop logistics services. In April 2004, CP Ships closed the
acquisition of Montreal based ROE Logistics, a family owned business
specializing in providing a range of freight forwarding, customs brokerage,
logistics, warehousing and distribution services.
Enhance strong brands. CP Ships offers two or more of its well-recognized
brands in all of its trade lanes. It intends to strengthen its brands by
continuing to respond to the evolving needs of its customers by selectively
expanding its services, improving service frequencies and transit times,
improving the efficiency of its inland transportation networks and
implementing effective training and staff retention programs. CP Ships
considers that its multiple branding approach results in higher levels of
service and customer loyalty and is one of the best ways to build and retain
market share.
Provide supply chain solutions. Integrated door-to-door or intermodal
container transportation is the largest component in the logistics supply
chains of international trade. CP Ships continues to emphasize consistently
reliable, tailor-made intermodal supply chain solutions for its customers to
strengthen customer relationships and protect operating margins.
Reduce costs. Delivering low-cost, high-quality service is a key to success
in the highly competitive container shipping industry. CP Ships reduced its
cost per teu as restated by 14% from 1996 to 2003, and remains committed to
its cost savings programs.
8
The Notes
Issuer....................... CP Ships Limited, a corporation subsisting under the Business Corporations Act
(New Brunswick) Canada
Notes........................ $200,000,000 aggregate principal amount of 4% convertible senior subordinated
notes due 2024
Maturity..................... 30th June 2024
Interest..................... CP Ships will pay 4% interest per annum on the principal amount of the Notes,
payable semi-annually in arrears on 30th June and 30th December of each year,
starting on 30th June 2004.
Conversion rights............ The Notes may be converted into common shares only under the following
circumstances:
o During any fiscal quarter commencing after 30th June 2004 and only during
such fiscal quarter, if the closing sale price of one of CP Ships' common
shares exceeds 120% of the conversion price for at least 20 trading days in
the 30 trading day period ending on the last trading day of the preceding
fiscal quarter;
o During the five business day period after any five consecutive trading day
period, referred to as a measurement period, in which the trading price per
Note for each day of such measurement period was less than 98% of the
product of the closing sale price of one of CP Ships' common shares and the
conversion rate for such date; provided, however, in certain circumstances
described under "Description of Notes -- Conversion Rights -- Conversion
Upon Satisfaction of Trading Price Condition", investors will receive
common shares or cash, or a combination of common shares and cash, with a
value equal to the principal amount of the Notes, plus accrued and unpaid
interest and accrued and unpaid additional interest (as described below
under "Description of Notes -- Registration Rights"), if any
o If the Notes have been called for redemption; or
o If CP Ships engages in specified corporate transactions described below
under "Description of Notes -- Conversion Rights -- Conversion Upon
Specified Corporate Transactions".
The Notes are initially convertible into 39.6542 common shares per $1,000
principal amount of Notes. This rate results in an initial conversion price
of approximately $25.22 per share. See "Description of Notes -- Conversion
Rights." CP Ships may, in lieu of delivering its common shares upon
conversion of all or a portion of the Notes, elect to pay cash or a
combination of cash and common shares. The conversion rate may be adjusted
for certain reasons, including for any cash dividend or distribution
payable to all holders of CP Ships' common shares to the extent such cash
dividend or distribution, together with any other cash dividend or
distributions paid on CP Ships' common shares during the preceding 12
months, exceeds $0.16 per share (subject to adjustment). The conversion
rate will not be adjusted for accrued and unpaid interest. Except as
otherwise described in this prospectus, investors will not receive any
payment representing accrued and unpaid interest upon conversion of a Note.
For a description of CP Ships' common shares, see "Articles of Amalgamation
and
9
Description of Share Capital - Common Shares".
Ranking...................... The Notes will be CP Ships' general unsecured senior subordinated obligations
and will be subordinated in right of payment to all of CP Ships' existing and
future senior indebtedness (including indebtedness to CP Ships' subsidiaries);
structurally subordinated in right of payment to all existing and future
indebtedness and other liabilities of CP Ships' existing and future
subsidiaries (other than indebtedness and other liabilities owed to CP Ships);
equal in right of payment to any future senior subordinated indebtedness; and
senior in right of payment to any future indebtedness that expressly provides
that it is subordinated in right of payment to the Notes.
In addition, the Notes will be effectively subordinated in right of payment to
CP Ships' secured indebtedness to the extent of the security.
As of 31st December 2003, CP Ships had approximately $507 million of balance
sheet debt, including $291 million of subordinated loans from its subsidiaries
and had guaranteed a further $451 million of its subsidiaries' balance sheet
debt obligations, and CP Ships' subsidiaries had balance sheet debt of
approximately $797 million, including $342 million of loans from CP Ships. On
a consolidated basis, substantially all of CP Ships' operating liabilities are
incurred by its subsidiaries and therefore structurally senior to the Notes.
Certain subsidiaries also provide guarantees in respect of the 10 3/8% Senior
Notes (as defined below). The indenture for the Notes does not restrict CP
Ships or its subsidiaries from incurring additional debt or other liabilities.
Purchase of Notes at the An investor may require CP Ships to purchase all or a portion of the Notes it
option of holder............. holds on 30th June 2009, 30th June 2014 and 30th June 2019, at a purchase
price equal to 100% of the principal amount of the Notes plus accrued and
unpaid interest to, but excluding, the date of purchase. For more information
about the purchase of the Notes by CP Ships at the option of the holder, see
"Description of Notes -- Purchase at Option of the Holder".
Purchase of Notes at the Upon a "fundamental change" or "termination of trading" (as defined under
option of holder upon certain "Description of Notes -- Offer to Purchase at Option of the Holder Upon a
designated events............ Designated Event") CP Ships may be required to offer to purchase all
outstanding Notes at a purchase price equal to 100% of their principal amount
plus accrued and unpaid interest to, but excluding, the date of purchase.
CP Ships' optional CP Ships may redeem any of the Notes beginning 3rd July 2009 by giving
redemption................... investors at least 30 days' notice. CP Ships may redeem the Notes either in
whole or in part at a redemption price of 100% of principal amount of the
Notes plus accrued and unpaid interest to, but excluding, the redemption date.
Use of proceeds.............. CP Ships will not receive any of the proceeds of the sale hereunder by selling
security holders of the Notes or common shares. CP Ships received net proceeds
of approximately $194 million from the sale of the Notes to the initial
purchasers on 24th February 2004, $190 million of which net proceeds were
applied to reduce borrowings under revolving credit facilities and the balance
of which were used for general corporate purposes.
Sinking fund................. None
Additional amounts........... All payments CP Ships makes with respect to the Notes will be made without
withholding or deduction for taxes unless CP Ships is legally required to do
so, in which case CP Ships will pay such additional amounts as may be
necessary so that the net amount received by holders of the Notes (other than
certain excluded holders) after
10
such withholding or deduction will not be less than the amount that would have
been received in the absence of such withholding or deduction. See
"Description of Notes -- Additional Amounts".
Tax redemption............... In the event that CP Ships has become or will become obligated to pay
Additional Amounts, CP Ships may redeem, in whole but not in part, the
Notes for a purchase price equal to 100% of the principal amount of
the Notes plus accrued and unpaid interest to, but excluding, the
redemption date. Upon CP Ships giving notice of redemption, a holder
may elect not to have its Notes redeemed in which case such holder
would not be entitled to receive the Additional Amounts. See
"Description of Notes -- Redemption for Tax Reasons".
Governing law................ The indenture under which the Notes were issued and the Notes are governed by
the laws of the State of New York.
Registration rights.......... At the time of the initial sale of the Notes, CP Ships entered into a
registration rights agreement with the initial purchasers of the Notes
pursuant to which CP Ships agreed to:
o file a shelf registration statement with the SEC covering resales of the
Notes in the United States and the common shares issuable upon conversion
of the Notes within 120 days after the closing date of the initial sale;
o use reasonable best efforts to have the shelf registration statement
declared effective within 180 days of the closing date of the initial sale;
and
o use reasonable best efforts to keep the shelf registration statement
effective until the date there are no longer any outstanding registrable
securities, as defined in "Description of Notes -- Registration Rights".
If CP Ships does not comply with these requirements or certain other covenants
set forth in the registration rights agreement, CP Ships will be required to
pay additional interest or liquidated damages, as the case may be, to holders
of the Notes or common shares issued on the conversion of Notes. See
"Description of Notes -- Registration Rights."
Transfer restrictions........ Neither the Notes nor the common shares issuable upon conversion of the Notes
have been qualified for distribution to the public in Canada and are therefore
subject to restrictions on transfer. Additionally, the certificates evidencing
the Notes and the common shares issued upon conversion of the Notes will bear
a legend to the effect that, unless permitted under Canadian securities
legislation, an investor may not trade, resell or otherwise transfer the Notes
or the common shares issued upon conversion of the Notes in any province or
territory of Canada or to any Canadian Person prior to 25th June 2004.
Following such date, the Notes and common shares issued upon conversion of the
Notes will not generally be subject to any restriction on transfer under
applicable Canadian provincial securities legislation.
Listing and trading.......... The Notes are eligible for trading on the PORTAL Market. CP Ships' common
shares are listed on the NYSE and the TSX under the symbol "TEU".
Risk Factors................. In analyzing an investment in the Securities offered hereby, prospective
investors should carefully consider, along with other matters referred to and
incorporated by reference in this prospectus, the information set forth under
"Risk Factors".
11
For a more complete description of the terms of the Notes, see "Description of
Notes". For a description of CP Ships' common shares, see "Articles of
Amalgamation and Description of Share Capital - Common Shares".
12
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set out certain consolidated financial and operating
information for CP Ships as at the dates and for the periods indicated.
The information shown below should be read in conjunction with CP Ships'
restated audited consolidated financial statements as at 31st December 2003
and 2002 and for each of the years in the three-year period ended 31st
December 2003 as well as the auditor's reports thereon contained therein and
CP Ships' management's discussion and analysis of operating results and
financial position for the year ended 31st December 2003, as amended, all of
which are incorporated by reference herein. CP Ships' consolidated financial
statements have been prepared in accordance with Canadian GAAP, which differ
in certain respects from U.S. GAAP. For a discussion of the material
differences between Canadian GAAP and U.S. GAAP as they affect CP Ships, see
the notes to the consolidated financial statements incorporated by reference
herein.
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 (the
"Plan of Arrangement") under the Canada Business Corporations Act, CPL
distributed its interests in CPSHI to CP Ships, a newly created subsidiary
company of CPL. CPL then distributed its investment in CP Ships to its common
shareholders on the basis of one new common share in CP Ships for four old CPL
common shares (the "Spin-off"). Where appropriate, share numbers in the
financial statements and other financial information reflect the effect of
this share consolidation applied retroactively. As both CPSHI and CP Ships
were under the control of CPL at the time, the transactions have been
accounted for in a manner similar to a pooling-of-interests and the historical
financial information of CPSHI has become the historical financial information
of CP Ships.
Consolidated Statements of Income Data (Canadian GAAP)
Year ended 31st December
--------------------------------
2001(1) 2002 (10) 2003 (10)
-------- --------- ---------
($ millions, except amounts per share,
presented in $)
(restated) (restated)
Revenue...................................... 2,646 2,687 3,130
Expenses..................................... (2,507) (2,611) (3,028)
-------- --------- ---------
Operating income before exceptional items.... 139 76 102
Exceptional items............................ (43) 2 (10)
-------- --------- ---------
Operating income............................. 96 78 92
Interest income (expense), net............... -- (23) (36)
Income tax expense........................... (12) (10) (3)
Minority interest............................ 1 -- --
Goodwill charges(2).......................... (16) -- --
-------- --------- ---------
Net income................................... 69 45 53
======== ======== ========
Earnings per common share basic(3)........... $ 0.83 $ 0.53 $ 0.59
Earnings per common share diluted(3)......... $ 0.83 $ 0.52 $ 0.57
Cash dividend declared per common share...... -- $ 0.16 $ 0.16
Cash dividend declared per preference share.. $ 17.69 -- --
13
Other Consolidated Data (Canadian GAAP)
Year ended 31st December
--------------------------------
2001(1) 2002 (10) 2003 (10)
-------- --------- ---------
($ millions, unless otherwise stated)
(restated) (restated)
Other financial information
EBITDA (unaudited)(4):........................... 213 169 221
Rent expense under operating leases(5)........... 458 365 362
Capital expenditures(6).......................... 288 439 158
Cash inflow (outflow) from
Operations..................................... 190 84 150
Financing activities........................... (42) 397 (82)
Investing activities........................... (154) (487) (103)
Ratio of earnings to fixed charges
(unaudited)(7)................................... 1.60 1.44 1.40
Year ended 31st December
--------------------------------
2001 2002 2003
-------- --------- ---------
Other unaudited operational data
Volume (teu millions)............................. 1.84 2.01 2.20
Container fleet at the period end (teu 000s)...... 345 413 443
Number of ships employed at period end(8):
Owned(9)........................................ 31 36 46
Chartered....................................... 47 53 34
Total........................................... 78 89 80
Consolidated Balance Sheet Data (Canadian GAAP)
As at 31st December
--------------------------------
2001(1) 2002 (10) 2003 (10)
-------- --------- ---------
($ millions)
(restated) (restated)
Cash and cash equivalents ..................... 116 110 75
Accounts receivable (1)........................... 453 526 463
Total assets (1).................................. 1,923 2,487 2,500
Total debt........................................ 230 597 651
Common share capital.............................. 597 685 686
Shareholders' equity (1), (10).................... 1,096 1,218 1,278
- ----------
(1) The 2001 financial statements have been revised. This follows a
re-examination and correction of the accounting treatment for consent
payments made in August 2001 to parties to the Montrose and Montclare ship
leases to allow an efficient spin-off from CPL under the Plan of
Arrangement. The costs were originally deferred and were being amortized
over the expected lives of the ship leases. However, it has been
determined that the consent payments should have been written off in 2001.
The effect is to add $7 million to the 2001 exceptional charge for costs
related to the spin-off which was part of a total $36 million exceptional
charge. Previously reported 2001 net income has been reduced by $7 million
and earnings per share by $0.09 per share.
(2) The impact of not amortizing goodwill for the year ended 31st December
2001 would have been to increase net income by $16 million and increase
basic and diluted earnings per share by $0.20.
(3) Earnings per common share is calculated after deduction of preference
dividends in the years ended 31st December 2003, 2002 and 2001 of $0, $0
and $3 million, respectively. Basic and diluted earnings per common share
have been calculated using net income after deducting the preference
shares dividend divided, by 89.8 million and 92.6 million shares,
respectively, for the year ended 31st December 2003 and 84.8 million and
86.1 million shares, respectively, for the year
14
ended 31st December 2002 and 79.3 million and 79.9 million shares,
respectively, for the year ended 31st December 2001.
(4) EBITDA, as used in this prospectus, is defined as earnings before
interest, tax, depreciation, amortization, exceptional items, goodwill
charges and minority interest. EBITDA is not a substitute for operating
income, net income or cash flow from operating activities as determined in
accordance with generally accepted accounting principles. EBITDA is
presented as additional information because CP Ships believes that it is
widely used in the container shipping industry as a measure to evaluate a
company's operating performance and is a useful indicator of CP Ships'
ability to meet its working capital, capital expenditures and debt service
requirements. Because EBITDA is not calculated identically by all
companies, the presentation may not be comparable to other similarly
titled measures of other companies. CP Ships' discretionary use of funds
depicted by EBITDA may be limited by working capital, capital expenditure
and debt service requirements and by restrictions related to legal
requirements, commitments and uncertainties. Exceptional items were: (i)
charges of $43 million relating to the spin-off and restructuring in 2001,
(ii) a credit of $2 million relating to the restructuring of the Company's
organization and offices in 2002, and (iii) a charge of $10 million
relating to organizational restructuring in Europe in the year ended 2003.
The table below shows a reconciliation of restated net income to EBITDA.
Year ended
31st December,
-------------------------------
2001 (1) 2002 (10) 2003 (10)
-------- --------- ---------
($ millions)
Net income..................... 69 45 53
Goodwill charges............... 16 -- --
Income tax expense............. 12 10 3
Interest expense, net.......... -- 23 36
Depreciation and amortization.. 74 93 119
Minority interest.............. (1) -- --
Exceptional items.............. 43 (2) 10
--- --- ---
EBITDA......................... 213 169 221
=== === ===
(5) The following table sets out rent expenses for operating leases for the
periods indicated:
Year ended 31st December
-------------------------------
2001 2002 2003
---------- ---------- -------
($ millions)
Ships..... 308 207 177
Containers 132 131 153
Others.... 18 27 32
---- ---- ----
Total..... 458 365 362
==== ==== ====
(6) Capital expenditures comprises cash paid in the period for additions to
capital assets and deposits on ships, excluding capital leases. In the
year ended 31st December 2003, CP Ships received a refund of $43 million
for stage payments made from 2001 through 2003 as a result of the Spirit
and Venture Leases.
(7) Ratio of earnings to fixed charges comprises earnings (including charges
for goodwill and preference share dividends but excluding charges for
minority interest) before income tax expense plus fixed charges as a
multiple of the fixed charges. Fixed charges comprise interest expense on
balance sheet debt and an estimate of interest included in operating lease
rentals, being one-third of such rental expense net of estimated operating
costs, such as for crew and certain repair and maintenance costs included
in rentals under ship time charter agreements. They also include the
preference stock dividend payments.
(8) The number of ships employed at the period end includes sub-charters to
third parties and ships being repositioned.
(9) Owned ships includes indirectly owned ships, bare-boat charters and
long-term time charters some of which may contain a purchase option.
15
(10) On 16th 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 $7 million reduction in retained earnings.
a) Impact of restatement of consolidated statements of income
-------------------------------------------------------------
The impact of the restatements on net income for the years ended 31st
December 2003 and 2002 are as follows:
US$ millions 31st December 2003 31st December 2003
-------------------------------------------------------------------------------------------
Net income - as previously reported 82 52
Adjustments:
Revenue
Container shipping operations (i) (6) -
Expenses
Container shipping operations (ii),
(iii) (23) (7)
-------------------------------------------------
Total adjustments (29) (7)
-------------------------------------------------
Net income - as restated 53 45
-------------------------------------------------
(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 inter-company 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 $7 million is to charge additional costs for
container shipping operations, required as a result of the
unintentional recording of an inter-company liability within
accruals and the subsequent charging of third party costs against
this balance.
None of the adjustments reflected above are affected by income taxes and
therefore no restatement of the company's previously reported provisions
for income taxes is required.
16
b) Impact of restatement on consolidated statements of retained earnings
31st December 2003 31st December 2002 31st December 2001
US$ millions
--------------------------------------------------------------------------------------------------------
Retained earnings - as
previously reported
615 547 509
Adjustments (36) (7) -
-------------------------------------------------------------------------
Retained earnings - as 579 540 509
restated
-------------------------------------------------------------------------
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 $7 million.
c) Impact of restatement on segmented reporting
The impact of the restatement on operating income by segment for the years
ended 31st December 2003 and 2002 is as follows:
2003
----
Trans Atlantic Latin America
US$ millions Australasia Asia Other Total
---------------------------------------------------------------------------------------------------
Operating 82 27 15 (8) 15 131
income before
exceptional
items as
reported in 2003
Restatement (17) (3) (4) (4) (1) (29)
----------------------------------------------------------------------------------
Restated
operating
income before
exceptional
items
65 24 11 (12) 14 102
-----------------------------------------------------------------------------------
17
2002
Trans Atlantic Latin America
US$ millions Australasia Asia Other Total
---------------------------------------------------------------------------------------------------
Operating 60 27 21 (38) 13 83
income before
exceptional
items as
reported in 2002
Restatement (4) - - (3) - (7)
-----------------------------------------------------------------------------------
Restated 56 27 21 (41) 13 76
operating income
-----------------------------------------------------------------------------------
18
RISK FACTORS
This section describes some, but not all, of the risks associated with an
investment in CP Ships' securities. The order in which these risks are listed
does not necessarily indicate their relative importance. Investors should
carefully consider these risks in addition to the other information contained
or incorporated by reference in this prospectus.
If any event arising from these risks occurs, or an event occurs as a
result of a risk that CP Ships has not yet identified or that CP Ships
currently believes is immaterial, CP Ships' business, prospects, financial
condition and results of operations could be materially adversely affected,
and therefore the market price of CP Ships' securities, including the Notes
and common shares, could decline.
Risks Relating to the Container Shipping Industry
The cyclical nature of the container shipping industry could have an adverse
effect on business, and the duration and extent of the current upturn remain
uncertain.
Historically, the financial performance of the container shipping industry
has been cyclical, experiencing volatility in profitability and asset values
resulting from changes in the supply of, and demand for, container shipping
services. The level of shipping capacity is a function of:
o the number of ships in the world fleet;
o their deployment;
o the delivery of new ships; and
o scrapping of older ships.
The demand for container shipping services is influenced by, among other
factors:
o global and regional economic conditions;
o currency exchange rates;
o the globalization of manufacturing;
o fluctuations in the levels of global and regional international trade;
o regulatory developments; and
o changes in sea-borne and other transportation patterns.
Changes in the demand for container shipping services are difficult to
predict and are a function of global economic activity. Increases in container
shipping capacity result from new ships being built and delivered, to the
extent that this is not offset by decommissioning of older ships. As at 31st
December 2003, CP Ships believes that a record amount of new capacity from
ship building is on order for delivery over the next three to four years. This
new capacity represents approximately 40% of existing industry capacity.
Decreases in demand or increases in container shipping capacity could lead
to significantly lower freight rates, reduced volume or a combination of the
two, which could have a material adverse effect on CP Ships' business,
financial condition and results of operations.
19
CP Ships operates in a highly competitive industry and this competition may
result in downward pressure on freight rates.
The container shipping business is highly competitive and barriers to entry
are relatively low, especially for existing container shipping companies
("carriers") wishing to enter, or expand their presence in, a market or trade
lane. Carriers compete on many factors, including:
o price;
o frequency of service;
o transit time;
o port coverage;
o service reliability;
o container availability;
o inland operations;
o quality of customer service; and
o value added services and other customer requirements.
Competition may result in downward pressure on freight rates and could have
a material adverse effect on CP Ships' business, financial condition and
results of operations. CP Ships experiences strong competition in its markets
and trade lanes.
Fluctuations in ship charter rates may increase CP Ships' costs or reduce its
competitiveness.
A ship charter is the lease of a ship, usually for a specified period of
time. In the ship charter market, charter rates often fluctuate sharply due to
changes in the supply of, and demand for, container shipping services and
container ships. Recently, charter rates have been increasing significantly.
Carriers with a relatively high proportion of ships under short-term charters
will experience significantly higher costs when they renew existing ship
charter agreements. In addition, ship owners may seek to extend the term of
ship charters on renewal in a market where higher charter rates prevail, and
shorter duration charters may become less available. Conversely when charter
rates are falling, carriers with a relatively large proportion of owned ships
or ships under long-term charters can be placed at a competitive disadvantage
to carriers who are able to renew existing ship charter agreements at
significantly lower prices.
A number of chartered ships in CP Ships' fleet are due for renewal in 2005,
and these charters if renewed at higher rates would increase costs. Such
increases, unless they are able to be offset by higher freight rates, may have
a material adverse effect on its business, financial condition and results of
operations.
Increases in marine fuel prices may adversely affect results.
In 2003, marine fuel accounted for approximately 10% of CP Ships' total
expenses, net of adjustments for slot revenues and excluding depreciation. The
cost of marine fuel is subject to many economic and political factors which
are beyond CP Ships' control. An increase in the cost of marine fuel could
adversely affect its results of operations and financial condition in the
event that CP Ships is not able to increase freight rates or otherwise recover
fuel cost increases from customers.
20
Changes in anti-trust immunities could adversely affect CP Ships.
Certain types of agreements among carriers are exempted from anti-trust
legislation in many countries. These exemptions are important to those
carriers who have formed strategic global alliances as well as to other
carriers, including CP Ships, primarily in respect of joint service,
conference and rate discussion agreements. Recent legislative and case law
developments in the United States, Canada, Europe and Australia have gradually
eroded and narrowed such exemptions. In February 2002, the European Commission
announced that it would study, and re-assess the justifications for the
existing anti-trust exemptions. In April 2002, the Organisation for Economic
Co-operation and Development published a report suggesting that member
countries should seriously consider removing anti-trust exemptions for common
pricing and rate discussion. The European Commission has initiated a
consultation process involving public hearings. Additionally, three decisions
issued by the European Court of First Instance on 28th February 2002 held that
the immunities contained in the EC Reg. 4056/86 relating to certain rate
fixing agreements apply only to port-to-port services, and do not permit
fixing of tariffs for the inland leg of intermodal services. If any of such
anti-trust exemptions were to be eliminated or significantly narrowed, it
could materially adversely affect the container shipping industry and CP
Ships' business, financial condition and results of operations.
Changes in environmental and other regulations could adversely affect CP Ships.
CP Ships' operations are subject to a wide variety of international,
national and local laws and regulations and international agreements,
governing maritime operations, environmental protection, the management,
transportation, discharge and release of hazardous substances and human health
and safety, all of which may change at any time. CP Ships is required to
satisfy insurance and financial responsibility requirements for potential oil
(including marine fuel) spills and other pollution incidents. Although CP
Ships has arranged insurance to cover certain environmental risks, there can
be no assurance that such insurance will be sufficient to cover all such risks
or that any claims will not have a material adverse effect on its business,
financial condition and results of operations.
In addition, CP Ships may incur additional costs in order to comply with
existing and future environmental and other regulatory obligations, including
costs relating to air emissions, maintenance and inspection, elimination of
tin-based paint, development and implementation of emergency procedures and
insurance coverage or other financial assurance of its ability to address
pollution incidents. Such costs could have a material adverse effect on its
business, financial condition and results of operations.
Labour interruptions could disrupt business.
CP Ships' operations are reliant upon stevedores and other outside labour
employed by third parties at all ports at which its ships call. Industrial
action or other labour unrest could prevent or hinder CP Ships' operations
from being carried out normally and could have a material adverse effect on
its business, financial condition and results of operations if not resolved in
a timely and cost effective manner.
Risk of loss and liability may be beyond insurance coverage.
Maritime property and casualty losses may arise from a variety of causes,
including adverse weather, collision, stranding, fire, mechanical failure,
human error and spills or leaks resulting in pollution. Such cases may result
in third party claims. In addition to such risks, the operation of ships may
be affected by terrorist activity and political developments, as well as
labour disputes, strikes, war and other causes. Any such event could result in
direct losses and liabilities, loss of income or increased costs which could
have a material adverse effect on CP Ships' business, financial condition and
results of operations.
In the event that claims or liabilities are assessed against CP Ships, its
assets could be subject to attachment, seizure or other judicial processes.
Although CP Ships carries insurance policies in an aggregate amount that it
considers adequate, and also maintains arrangements to provide security and
release from attachments, there can be no assurance that such insurance or
arrangements would be sufficient to cover the cost of damages suffered from
all such events or that it will be able to renew such insurance on
commercially reasonable terms.
As a result of the significant insurance losses incurred in the 11th
September 2001 attacks and related concern regarding
21
terrorist attacks, insurers have increased premiums and reduced or restricted
coverage for terrorist losses generally. Accordingly, premiums payable by CP
Ships for terrorist coverage have increased substantially and the level of
terrorist coverage has been significantly reduced.
Increased inspection procedures, tighter import and export controls and new
security regulations could increase costs and cause disruption of the
business.
International container shipping is subject to security and customs
inspection and related procedures ("Inspection Procedures") in countries of
origin, destination, and trans-shipment points. These Inspection Procedures
can result in cargo seizure, delays in the loading, offloading,
trans-shipment, or delivery of containers and the levying of customs duties,
fines or other penalties against exporters or importers and, in some cases,
carriers such as CP Ships.
Since the events of 11th September 2001, U.S. and Canadian authorities have
more than doubled container inspection rates to approximately 5% of all
imported containers. Government investment in non-intrusive container scanning
technology has grown and there is interest in electronic monitoring
technology, including so-called "e-seals" and "smart" containers, that would
enable remote, centralized monitoring of containers during shipment to
identify tampering with or opening of the containers, along with potentially
measuring other characteristics such as temperature, air pressure, motion,
chemicals, biological agents and radiation.
It is unclear what changes, if any, to the existing Inspection Procedures
will ultimately be proposed or implemented, or how any such changes will
affect the industry and CP Ships. It is possible that such changes could
impose additional financial and legal obligations on CP Ships, including
additional responsibility for inspecting and recording the contents of
containers. Changes to the Inspection Procedures and container security could
result in additional costs and obligations on carriers and may, in certain
cases, render the shipment of certain types of goods by container uneconomical
or impractical. Additional costs arising from current Inspection Procedures or
future proposals may not be fully recoverable from customers through higher
rates or security surcharges. Any such changes or developments may have a
material adverse effect on CP Ships' business, financial condition and results
of operations.
Risks Relating to CP Ships
CP Ships' future success depends on its ability to achieve and manage growth.
A significant component of CP Ships' strategy is to expand its business
both in the geographic areas and markets where it is currently focused and
into new geographic areas and markets. CP Ships also intends to pursue
selective acquisitions. CP Ships' future growth will depend upon a number of
factors, both within and outside of its control, including its ability to do
the following:
o enhance service offerings in the regional markets that CP Ships already
serves;
o develop further services (by itself or in connection with other
carriers) in markets where CP Ships' strengths will enhance its ability
to succeed;
o establish a viable presence in strategic geographic areas;
o identify potential acquisition candidates and secure acquisitions on
favourable terms;
o integrate successfully any acquired business; and
o manage the expansion and obtain required financing.
CP Ships may not be successful in any of the above and any expansion or
acquisition may not be profitable. This could ultimately have a material
adverse effect on its business, financial condition and results of operations.
To the extent its operations continue to expand, CP Ships may need to
increase the number of ships and containers in its fleet, the number of its
employees and the scope of its operational and financial systems to handle
increased volume,
22
complexity and expanded geographic area of its operations. There can be no
assurance that CP Ships will be able to obtain further ships and containers on
a cost efficient basis or to retain and attract qualified management and
employees or that its current operational and financial systems and controls
will be adequate as it grows. This could ultimately have a material adverse
effect on its business, financial condition and results of operations.
Sources of CP Ships' future financing are uncertain.
CP Ships operates in a capital intensive industry that requires a
substantial amount of capital and other long-term expenditures, including
those relating to the purchase and construction of new ships by
owner-operators like itself and by lessors. CP Ships expects to fund its
commitments, other capital and operating expenses from a combination of the
following:
o cash on hand;
o cash generated from operations;
o revolving credit facilities; and
o the capital markets, including proceeds from this offering.
CP Ships is, and after the issuance of the Notes will remain, leveraged,
which may require CP Ships to use a significant amount of cash to service its
debt. This could impair the ability of CP Ships to make necessary capital
expenditures, develop business opportunities or make acquisitions.
CP Ships expects to have sufficient cash and/or committed financing to meet
its obligations as they fall due. However, no assurance can be given that it
will be able to generate sufficient cash from operations or obtain the
necessary financing or that such financing will be at interest rates and on
other terms that are favourable to it or consistent with its expectations. The
inability to secure necessary financing may adversely affect its business,
financial condition and results of operations.
Financing terms may restrict CP Ships' strategies and activities.
In addition to the indenture under which the Notes were issued, CP Ships is
party to a $525 million revolving credit facility, a container lease relating
to temperature controlled container equipment, a $200 million 10 3/8% senior
note indenture, capital leases for the two container ships Canmar Venture and
Canmar Spirit, a container sale and leaseback transaction, a loan secured on
four Pacific Class Vessels, and certain other financing transactions.
The terms of these financings include covenants that require CP Ships to
meet certain financial tests and that restrict CP Ships' ability to:
o incur additional debt;
o create liens or other encumbrances;
o commit to additional lease obligations;
o acquire other businesses;
o sell or otherwise dispose of assets;
o lend surplus funds between group companies;
o make certain payments and investments;
o pay dividends; and
23
o merge or consolidate with other entities in certain circumstances.
These restrictions may affect CP Ships' growth, expansion into target
markets, pursuit of selective acquisitions and ability to plan for and react
to changes in its business. These restrictions could have a material adverse
effect on CP Ships' business, financial condition and results of operations.
Change of control restrictions and other agreements may put CP Ships in
default under existing arrangements and force it to repurchase the 10 3/8%
Senior Notes.
Under the revolving credit facility, the container lease relating to
temperature controlled container equipment and the Spirit and Venture Leases,
if CP Ships ceases to be listed on the TSX or the NYSE (or any other approved
stock exchange) or any person or group acquires more than 25% of the
outstanding common shares of CP Ships, this will constitute an event of
default under such facilities which, unless waived by the lenders, will
require the repayment of all principal and interest owing under such
facilities. The Company's revolving credit facility, the container lease
relating to temperature controlled container equipment, the Spirit and Venture
Leases, the 10 3/8% Senior Notes (as described below), and certain other
indebtedness or other obligations contain cross-default provisions that would
be triggered by a default under indebtedness for money borrowed having an
aggregate principal amount of $15 million ($20 million in the case of the 10
3/8% Senior Notes).
Under the terms of CP Ships' 10 3/8% Senior Notes, if any person or group
acquires 50% or more of the common shares of CP Ships or any other voting
shares that may be issued by CP Ships, or if CP Ships consummates certain
specific merger or consolidation transactions or sells substantially all of
its assets, or the majority of the Board of CP Ships is replaced during any
consecutive two-year period and, within 90 days of such event, the credit
rating of the 10 3/8% Senior Notes is downgraded by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc.("S&P") and Moody's Investors
Service, Inc. ("Moody's"), CP Ships will be required to make an offer to
purchase all of the outstanding 10 3/8% Senior Notes at a price equal to 101%
of the principal amount thereof plus accrued and unpaid interest to the date
of purchase.
In connection with the Spin-off of CP Ships from CPL, CP Ships and other
parties entered into the Plan of Arrangement under which CP Ships agreed not
to take any action or enter into any transaction (which could include certain
transactions involving a change of control of CP Ships) that could cause the
Spin-off to be taxed in a manner inconsistent with the tax rulings obtained
from the Canadian and U.S. revenue authorities in connection with the
Spin-off. In the event that CP Ships intends to take any action or enter into
any such transaction that could have such effect, it will, as required under
the arrangement agreement, first obtain a supplemental tax ruling or an
opinion from an accounting or law firm confirming that such transaction will
not cause the Spin-off to be taxed in such different manner .
The terms of the revolving credit facility, the container lease relating to
temperature controlled container equipment, the Spirit and Venture Leases, the
10 3/8% Senior Notes and the Plan of Arrangement which are, or may be,
affected by a transaction involving a change of control, could delay an
acquisition of control or make any such transaction more difficult or costly.
In addition, if a change of control occurs, there can be no assurance that CP
Ships will have sufficient funds or that it will be able to obtain enough
funds on reasonable terms to repay its existing or future financing or that it
will be able to obtain consents to such change of control from the lenders or
other holders of such financing on terms which CP Ships would find acceptable.
Increases in interest rates may materially impact results.
A majority of CP Ships' debt is at floating rates of interest. Borrowings
under the revolving credit facility, the container lease relating to
temperature controlled container equipment and the Spirit and Venture Leases
are floating rate obligations. To reduce its exposure to interest rate
fluctuations, CP Ships may decide to swap these floating rate obligations into
fixed rates or otherwise undertake hedges. Unless it fully hedges its interest
rate exposure, it will be exposed to interest rate risk resulting from
fluctuations in the relevant reference rates. Any such increase in interest
expense may have a material adverse effect on CP Ships' business, financial
condition and results of operations. Furthermore, if CP Ships decides to enter
into agreements to hedge its interest rate risk, there can be no assurance
that it will be able to do so on commercially reasonable terms or that these
agreements, if entered into, will protect it fully against its interest rate
risk.
24
Fluctuations in currency exchange rates could adversely affect results.
CP Ships' revenue is denominated primarily in U.S. dollars, but it is
exposed to currency exchange risk through local operating costs denominated in
other currencies. The most significant exposures are in euros, Canadian
dollars, Mexican Peso and GB Pounds Sterling. CP Ships may continue to expand
its operations internationally and its exposure to fluctuations in the
exchange rate between the U.S. dollar and other currencies may increase.
Depreciation of the U.S. dollar generally, and in particular in relation to
the euro, Canadian dollar, Mexican Peso and GB pound sterling, could affect
trade flows and increase, in U.S. dollar terms, CP Ships' costs and expenses
denominated in other currencies. Further fluctuations could adversely affect
CP Ships' business, financial condition and results of operations. Although
certain agreements to hedge some of its exchange rate exposure have been
entered into, there can be no assurance that CP Ships will continue to be able
to enter into such agreements on commercially reasonable terms or that these
agreements will protect it fully against its exchange rate risk. Accordingly,
there can be no assurance that future exchange rate fluctuations between
certain other currencies and the U.S. dollar will not have a material adverse
effect on CP Ships' business, financial condition and results of operations.
Failure to achieve operating efficiencies could adversely affect growth and
competitiveness.
CP Ships continually reviews the structure and organization of its
operations. It implements annual cost savings programs under which it seeks to
improve efficiency and reduce costs. CP Ships plans to achieve additional cost
savings through the continued rationalization of ship schedules, ship charter
renewals, renegotiation of terms with suppliers, organizational changes and
other operational actions.
CP Ships' ability to achieve cost reductions depends in part on factors
beyond its control, and no assurance can be given that it will be able to
achieve the expected synergies and cost savings. If it fails to achieve cost
savings, this could have a material adverse effect on its business, financial
condition and results of operations.
The Company's business is subject to global political and economic risks.
CP Ships operates in various countries around the world and is exposed to
the risks of political unrest, war, acts of terrorism and other instability
which can result in disruption to its business or the business of its
customers, seizure of or damage to its assets and delays in loading or
unloading. Any of the foregoing could have a material adverse effect on its
business, financial condition and results of operations.
An increase in tax rates or change in tax residency or tax status could
adversely affect CP Ships.
CP Ships is subject to a low effective rate of tax on its income as many of
its operating companies reside in low tax jurisdictions or are subject to
special tax regimes. In the United States, its activities are substantially
exempt from federal income tax although the precise scope of this exemption is
uncertain under recently finalized tax regulations.
In the United Kingdom, CP Ships' principal tax-paying subsidiary is taxed
under a tonnage tax regime based on the tonnage of ships in its fleet rather
than income earned by the company.
There can be no assurance that the tax laws and the tax authorities'
practices will not change or that future income tax rates and payments will
not increase significantly and reduce profits. Such changes or increases could
materially adversely affect CP Ships' business, financial condition and
results of operations.
CP Ships believes that it is resident solely in Canada for income tax
purposes and intends to take all necessary steps to remain so. CP Ships' tax
residency is, however, affected by a number of factors, some of which are
outside its control, including the application and interpretation of relevant
tax laws and treaties. If CP Ships were to cease to be tax resident in Canada,
it would be liable to pay additional Canadian taxes, including but not limited
to capital gains tax based on the difference between the fair market value and
tax cost of its assets at the relevant time. If CP Ships were to pay such
taxes this would have a material adverse effect on CP Ships' business,
financial condition and results of operations. In addition, CP Ships may be
obliged to make indemnification payments under the Plan of Arrangement if its
ceasing to be Canadian tax resident caused the spin-off to be taxed in a
manner inconsistent with the tax rulings obtained from the Canadian and United
States revenue authorities in connection with the spin-off. If such
indemnification payments were to become due, this may
25
have an adverse effect on CP Ships. Further, the tax consequences to holders
of the Notes would generally be different if CP Ships were not resident in
Canada.
CP Ships owns 100% of the voting shares of Linea Maritima Mexicana, S.A. de
C.V., a Mexican company ("Mexicana Lines Limited"), which acts as a commercial
agent for a number of other companies not resident in Mexico. Because Mexicana
Lines Limited exports commission-related services, CP Ships believes that
Mexicana Lines Limited is entitled to pay value added tax ("VAT") at a 0% rate
to the Administracion Central Juridico Internacional y de Normatividad de
Grandes Contribuyentes (the "Mexican Administrative Tax Service"). Consistent
with this view, Mexicana Lines Limited has claimed back, and historically the
Mexican Administrative Tax Service has refunded, all VAT paid by Mexicana
Lines Limited. During 2003, the Mexican Administrative Tax Service stopped
refunding VAT paid by Mexicana Lines Limited. Mexicana Lines Limited has
submitted a request to the Mexican Administrative Tax Service that the VAT
withheld to date be refunded, and that it confirm that the Mexican
Administrative Tax Service will resume VAT refunds for future periods.
The Mexican Administrative Tax Service has notified Mexicana Lines Limited
that it is reviewing its status as a commercial agent exporting
commission-related services. In addition to withholding the VAT refund, the
Mexican Administrative Tax Service may seek to require Mexicana Lines Limited
to repay the VAT refunds it has already received. Although CP Ships believes
that Mexicana Lines Limited is entitled to these refunds and that the risk of
either having to pay these refunds or losing the 0% VAT rating is remote,
there can be no assurance that Mexicana Lines Limited will be successful in
causing the Mexican Administrative Tax Service to resume the payment of these
VAT refunds. If Mexicana Lines Limited is either not able to continue to
receive VAT refunds, or required to repay VAT refunds already received, this
may adversely affect CP Ships' business, financial condition and results of
operations.
Seasonality may impact business and financial condition.
CP Ships' business is seasonal due to the effects of holidays (such as for
consumer goods), crop cycles (for agricultural products) and other factors.
Some of its costs are fixed and cannot be readily adjusted for such changes in
seasonality. Although peak shipping periods differ in some of the markets in
which it operates, revenue and operating income have historically been lower
during its first quarter. There can be no assurance that future seasonality in
revenue, operating income and working capital requirements will not have a
material adverse effect on CP Ships' business, financial condition and results
of operations.
Investors may have difficulty bringing actions or enforcing judgments for
United States and Canadian securities law liabilities.
CP Ships is a Canadian company and a number of its directors and officers
are not resident in the United States or Canada. In addition, a majority of
its assets are located outside of the United States and Canada. As a result,
it may be difficult for holders of Notes to rely upon United States federal or
state or Canadian provincial securities laws to effect service of process
within the United States or Canada on CP Ships or its directors and officers.
Holders may also find it difficult to enforce, both in and outside the United
States and Canada, judgments obtained in United States or Canadian courts'
against CP Ships or its directors and officers based upon the civil liability
provisions of U.S. or Canadian securities laws. In addition, it may be
difficult for holders to bring an original action outside of the United States
or Canada against CP Ships or its directors or officers to enforce liabilities
based upon U.S. or Canadian securities laws.
CP Ships' has been sued in class action lawsuits arising out of its
restatement of financial results.
Six class action lawsuits in the US and two in Canada have been filed
against CP Ships. These proceedings are at preliminary stage, and to date no
class has been certified and no consolidated claim has been filed. The
proceedings allege claims against CP Ships, certain directors and its officers
arising from the restatement of financial results. CP Ships has retained
counsel and intends to defend the allegations vigorously.
26
Risks Relating to the Notes
The Notes are unsecured and are contractually subordinated to CP Ships'
existing and future senior indebtedness, and CP Ships' corporate structure
results in the structural subordination of the Notes to all indebtedness and
other liabilities of CP Ships' subsidiaries. CP Ships depends upon cash from
its subsidiaries to service its debt.
The Notes are unsecured subordinated obligations of CP Ships. Payments to
holders under the Notes will be made after payment of all existing and future
senior debt of CP Ships and senior and secured debt of its subsidiaries. As a
result, in a winding up, all payments on the Notes will be subordinate to, and
subject in right of payment to the prior payment in full of, all claims of all
of CP Ships' creditors other than claims in respect of any liability that is,
or is expressed to be, subordinated, whether only in the event of a winding up
or otherwise, to the claims of all or any of CP Ships' creditors, in the
manner provided in the subordinated debt indenture.
CP Ships is a holding company that conducts all of its business activities
through its subsidiaries. As a result, CP Ships is dependent on the cash flow
of its subsidiaries to meet its obligations, including the payment of interest
and principal on the Notes. CP Ships' subsidiaries are separate and distinct
legal entities and have no obligation to pay any amounts due under the Notes
or to make any funds available for such payment. If CP Ships does not receive
cash distributions, dividends or other payments from its subsidiaries, CP
Ships may not be able to pay the principal or interest on the Notes or
dividends on the common shares issuable upon conversion of the Notes. In
addition, the payment of dividends, the making of loans, advances or other
payments to CP Ships by its subsidiaries may be limited, among other things,
by statutory or contractual restrictions, including those under current or
future indebtedness.
Because of CP Ships' corporate structure, payment of the Notes will be
structurally subordinated to all existing and future liabilities, including
trade payables, of CP Ships' subsidiaries. None of CP Ships' subsidiaries will
be direct obligors on or guarantors of the Notes. Any right of CP Ships to
receive assets of any of its subsidiaries upon liquidation or reorganization
of any such subsidiary (and the consequent right of holders of the Notes to
participate in the distribution or realize proceeds from those assets) will
come after the claims of the creditors of any such subsidiary (including trade
creditors and holders of any indebtedness of such subsidiary) except if and to
the extent CP Ships is itself a creditor of such subsidiary.
Canadian bankruptcy and insolvency laws may impair the enforcement of remedies
under the Notes.
The rights of the holders of Notes and of the trustee who represents the
holders of the Notes to enforce remedies are likely to be significantly
impaired by the restructuring provisions of applicable Canadian federal
bankruptcy, insolvency and other restructuring legislation if the benefit of
such legislation is sought with respect to CP Ships. For example, both the
Bankruptcy and Insolvency Act (Canada) and the Companies' Creditors
Arrangement Act (Canada) contain provisions enabling an insolvent person to
obtain a stay of proceedings against its creditors and others and to prepare
and file a proposal or plan of arrangement for consideration by all or some of
its creditors to be voted on by the various classes of its creditors affected
thereby. Such a restructuring proposal, if accepted by the requisite
majorities of each affected class of creditors and if approved by the relevant
Canadian court, would affect creditors within any such class who may not
otherwise be willing to accept it. Moreover, this legislation permits the
insolvent debtor to retain possession and administration of its property,
subject to court oversight, even though it may be in default under the
applicable debt instrument.
It is possible that CP Ships could be subject to insolvency proceedings in
other jurisdictions in which it operates. The insolvency laws of these
jurisdictions may differ from Canadian insolvency laws.
The Company's ability to purchase the Notes with cash at the option of an
investor or upon a designated event may be limited.
On 30th June 2009, 30th June 2014 and 30th June 2019 or in the event of a
"designated event" under the indenture governing the Notes, holders may
require CP Ships to repurchase their Notes at 100% of the principal amount of
the Notes, plus accrued unpaid interest. CP Ships cannot assure investors
that, if required, it would have sufficient cash or other financial resources
at that time or would be able to arrange financing to pay the purchase price
of the Notes in cash. CP Ships' ability to purchase the Notes in that event
may be limited by law, by the indenture governing the Notes, by the terms of
other agreements relating to its debt and by indebtedness and agreements that
CP Ships may enter into in the future which may replace, supplement or amend
its existing or future debt. In addition, certain of CP Ships' debt
obligations contain
27
provisions that would prohibit CP Ships' purchase of the Notes pursuant to
this provision without consent of the lenders under such debt obligations. If
a holder elects to require CP Ships to purchase the Notes at a time when CP
Ships is prohibited from purchasing Notes, CP Ships could seek consent to
purchase the Notes under the relevant debt obligations, or attempt to
refinance this debt. If CP Ships does not obtain such consent, CP Ships would
not be permitted to purchase the notes. CP Ships' failure to purchase tendered
Notes would constitute an event of default under the indenture, which might
constitute a default under the terms of its other indebtedness.
The conversion feature of the Notes could result in investors receiving less
than the value of the common shares into which a Note is convertible.
The Notes are convertible into common shares of CP Ships only if specified
conditions are met. If the specified conditions for conversion are not met,
investors will not be able to convert the Notes, and investors may not be able
to receive the value of the common shares into which the Notes would otherwise
be convertible.
There are regulatory restrictions on an investor's ability to resell the Notes
and the common shares issuable upon conversion of the Notes.
Unless the Notes and the common shares issued upon conversion of the Notes
are sold pursuant to the shelf registration statement of which this prospectus
is a part, holders may transfer or resell the Notes or the common shares only
in a transaction exempt from registration under the Securities Act and
applicable U.S. state securities laws; in any event, a sale of Notes or common
shares must be exempt from the prospectus requirements of applicable Canadian
securities laws. Although CP Ships is obligated to register resales of the
Notes and the common shares issuable upon the conversion of the Notes under
the Securities Act for a limited period, no assurance can be given as to the
ability of holders to sell their Notes or the common shares issuable upon
conversion of the Notes. Although CP Ships is required to register resales of
the Notes and the common shares issuable upon conversion of the Notes, the
registration statement may not be available to holders at all times. In
addition, selling security holders may be subject to certain restrictions and
potential liability under the Securities Act.
In addition, the Notes and the common shares issuable upon conversion of
the Notes are subject to resale restrictions in Canada and may not be
transferred or resold to Canadian residents or traded in any province or
territory of Canada except in compliance with applicable exemptions from the
requirement to prepare a prospectus.
Absence of a public market for the Notes could cause investors in the Notes to
be unable to resell them for an extended period of time.
The initial issuance of Notes constituted a new issue of securities for
which there was not an established trading market. CP Ships was informed by
Morgan Stanley & Co. Incorporated, RBC Capital Markets Corporation, Citigroup
Global Markets Inc., DnB NOR Markets, Inc. and Scotia Capital (USA) Inc. (the
"initial purchasers") that they intended to make a market in the Notes after
the offering was completed. The initial purchasers may not have commenced
market-making and/or may cease their market-making at any time without notice.
Although the Notes are designated for trading on the PORTAL Market, CP Ships
cannot provide any assurance that an active trading market for the Notes has
developed or will develop or, if such market develops, how liquid it will be.
If a trading market does not develop or is not maintained, holders of the
Notes may experience difficulty in reselling, or an inability to sell, the
Notes. If a market for the Notes develops, any such market may be discontinued
at any time. If a public trading market develops for the Notes, future trading
prices of the Notes will depend on many factors, including, among other
things, the price of CP Ships' common shares into which the Notes are
convertible, prevailing interest rates, CP Ships' operating results and the
market for similar securities. Depending on the price of CP Ships' common
shares into which the Notes are convertible, prevailing interest rates, the
market for similar securities and other factors, including CP Ships' financial
condition, the Notes may trade at a discount from their principal amount.
CP Ships' common share price may experience substantial volatility, which may
affect an investor's ability to sell common shares of CP Ships at an
advantageous price and could impact the market value of the Notes.
The market price of common shares of CP Ships has been and may continue to
be volatile. For example, the closing price of common shares of CP Ships on
the NYSE has fluctuated during the past twelve months between $11.53 per share
(during
28
the third quarter 2004) and $21.58 per share (during the first quarter 2004)
and may continue to fluctuate. The volatility may affect an investor's ability
to sell common shares of CP Ships at an advantageous price. Additionally,
there may be greater volatility in the market price of the Notes than would be
expected for nonconvertible debt securities. Market price fluctuations in
common shares of CP Ships may be due to acquisitions, dispositions or other
material public announcements, along with a variety of additional factors
including, without limitation, those set forth under "Forward-Looking
Statements". In addition, stock markets in general, including the NYSE and the
TSX, recently have experienced extreme price and trading fluctuations. These
fluctuations have resulted in volatility in the market prices of securities
that often has been unrelated or disproportionate to changes in companies'
operating performance. These broad market fluctuations may adversely affect
the market prices of the Notes and common shares.
CP Ships has a shareholder rights plan containing provisions that may delay or
prevent a change in control.
The existence of CP Ships' shareholder rights plan, which contains
provisions allowing shareholders to acquire additional common shares at
one-half of their then-market price in the event of a person becoming the
beneficial owner of 20% or more of CP Ships' shares other than through a
permitted bid, could have the effect of delaying or preventing a change in
control of CP Ships, even if the change in control would be beneficial to CP
Ships' shareholders. In addition, the shareholder rights plan could dissuade a
potential bidder from making a bid.
USE OF PROCEEDS
CP Ships will not receive any of the proceeds of the sale hereunder by
selling security holders of the Notes or common shares issued upon conversion
of the Notes. CP Ships received net proceeds of approximately $194 million
from the sale of the Notes to the initial purchasers on 24th February 2004,
$190 million of which net proceeds were applied to reduce borrowings under
revolving credit facilities and the balance of which were used for general
corporate purposes.
The estimated net proceeds of the sale of Securities to be received by
selling security holders, and their use, will be specified in the prospectus
supplement relating to the offering of such Securities.
29
CAPITALIZATION
The following table shows the consolidated capitalization of CP Ships as at
31st December 2003 and on an as adjusted basis to give effect as at 31st
December 2003 to the offering of the Notes and the application of the net
proceeds of the offering of Notes to reduce CP Ships' borrowings under its
revolving credit facilities. Since 31st December 2003, there has been no
material change in the consolidated capitalization of CP Ships other than as
described in this prospectus.
As at 31st December 2003
------------------------
Actual (8) As Adjusted (8)
------------ ------------------
(unaudited)
(restated) (restated)
($ millions)
Cash and cash equivalents.................... 75 79
---- ----
Debt due within one year
Debt due within one year................... 19 19
---- ----
Debt due after one year
Revolving credit facilities(1)............. 275 85(2)
Pacific Class Vessel loan(3)............... 30 30
Convertible notes offered hereby(4)(5)..... -- 170
10 3/8% Senior Notes due 2012(6)........... 196 196
Capital leases(7).......................... 131 131
---- ----
Sub-total............................... 632 612
---- ----
Total debt............................ 651 631
---- ----
Shareholders' equity
Common share capital....................... 686 686
Equity component of convertible notes(5)... -- 29
Contributed surplus........................ 7 7
Cumulative foreign currency translation
adjustments................................ 6 6
Retained earnings.......................... 579 579
---- ----
Total shareholders' equity.............. 1,278 1,307
----- -----
Total Capitalization.................. 1,929 1,938
===== =====
- --------
(1) Consists of borrowings under the $175 million revolving credit facility
and the $350 million revolving credit facility, which facilities were
cancelled on 31st March 2004 and 25th March 2004, respectively, and
replaced by the $525 million revolving credit facility (the "$525 Million
Facility"). On 30th September 2004, there were no funds drawn under the
$525 Million Facility. Borrowings under the $525 Million Facility are
secured on ships and guaranteed by CP Ships and certain of its direct and
indirect wholly-owned subsidiaries.
(2) CP Ships used $190 million of the net proceeds of the offering of Notes
of approximately $194 million to reduce borrowings under CP Ships'
revolving credit facilities. See "Use of Proceeds".
(3) The Pacific Class Vessel loan consists of $37 million repayable up to
2008, of which $7 million is due within one year. On 30th September 2004,
the balance outstanding under the Pacific Class Vessel loan was $31
million and the make-whole premium payable for the prepayment of the loan
at such date was approximately $2 million.
(4) The Notes will be subordinated in right of payment to all of CP Ships'
existing and future senior indebtedness, structurally subordinated in
right of payment to all existing and future indebtedness and other
liabilities of CP Ships' existing and future subsidiaries, equal in right
of payment to any future senior subordinated indebtedness, and senior in
right of payment to any future indebtedness that expressly provides that
it is subordinated in right of payment to the Notes.
(5) Under U.S. GAAP, the Notes would be classified entirely within long-term
liabilities. Under Canadian GAAP, the debt component of the Notes was
determined by discounting the face value of the debt for a five year
period at an estimated market rate of interest for a nonconvertible
subordinated obligation having comparable terms and the amount was
determined to be $170 million, The difference between the principal
amount of the Notes of $200 million and the $170
30
million has been classified as the equity component of the Notes net of
costs. The principal amount of the Notes will accrete to $200 million over
a five year period.
(6) The 10 3/8% Senior Notes are senior unsecured obligations of CP Ships,
guaranteed by certain indirect wholly-owned subsidiaries, and rank pari
passu with all other senior unsecured indebtedness of CP Ships and such
subsidiaries.
(7) Capital leases consist of (i) the Spirit and Venture Leases of $118
million, of which $2 million is due within one year, and (ii) other
capital lease obligations of $25 million, of which $10 million is due
within one year.
(8) See note (10) to the Summary Financial Consolidated Information for
details of the restatement.
PRICE RANGE OF COMMON SHARES OF CP SHIPS
Common shares of CP Ships are listed on the NYSE and the TSX under the
symbol "TEU". The following table sets forth, for the periods indicated, the
high and low closing prices of common shares of CP Ships as reported on the
NYSE and the TSX.
NYSE ($) TSX (Cdn$)
--------------- ----------------
High Low High Low
------ ------- ------ -------
2001
Fourth quarter (from 3rd October)........... 11.22 7.15 17.70 11.15
2002
First quarter............................... 12.16 10.27 19.28 16.50
Second quarter.............................. 12.09 9.68 19.35 15.20
Third quarter............................... 12.05 9.01 19.15 14.10
Fourth quarter.............................. 13.94 10.32 21.63 16.46
2003
First quarter............................... 15.04 11.71 23.00 17.32
Second quarter.............................. 16.84 13.04 22.95 19.18
Third quarter............................... 22.29 16.17 30.35 22.21
Fourth quarter.............................. 22.28 18.87 29.58 24.37
2004
First quarter .............................. 21.58 16.05 27.80 21.48
Second quarter.............................. 18.63 15.55 25.15 21.27
Third quarter............................... 18.14 11.53 23.46 15.00
Fourth quarter (through 12th November
2004)....................................... 13.27 11.75 15.81 14.75
On 12th November 2004, the closing price of common shares of CP Ships was
$13.27 per share on the NYSE and Cdn$15.75 per share on the TSX.
DIVIDEND POLICY
On 15th November 2004, CP Ships' Board of Directors declared a dividend for
the second quarter of 2004 of $0.04 per common share (approximately $3.6
million in aggregate), which will be paid on 10th December 2004.
The Board of Directors determines the amount of the quarterly dividends
based on its view of anticipated net income and in accordance with CP Ships'
capital expenditure and working capital needs as well as its strategic
spending plans. Should the Board's view change, the amount of the dividend
could be increased, decreased or eliminated entirely.
The Board of Directors is under no obligation to declare dividends and the
declaration of dividends is wholly within its discretion. Restrictions under
CP Ships' existing or future financing agreements and the provisions of
applicable law preclude, or may preclude, the payment of dividends in certain
circumstances.
31
EARNINGS COVERAGE
The earnings coverages set out below have been prepared and included in
this prospectus in accordance with Canadian disclosure requirements and are
based on CP Ships' restated audited consolidated financial statements as at
31st December 2003 and its unaudited interim consolidated financial statements
as at 30th September 2004, respectively, each incorporated by reference in
this prospectus.
The annual interest requirements on CP Ships' long-term debt, using
applicable interest rates, after giving effect to the issuance of the Notes
amounts to $38.5 million and $37.7 million for the twelve months ended 31st
December 2003 and 30th September 2004, respectively. CP Ships' net income
before interest expense and income taxes for the twelve months ended 31st
December 2003 as restated was $92 million and for the twelve months ended 30th
September 2004 was $114 million which is 2.39 and 3.03 times CP Ships'
interest requirement for each respective period.
32
DESCRIPTION OF NOTES
The Notes were issued on 24th February 2004 under an indenture entered into
between CP Ships and The Bank of New York, as trustee. The following
statements are subject to the detailed provisions of the indenture and are
qualified in their entirety by reference to the indenture. CP Ships will
provide copies of the indenture to prospective investors upon request, and it
is also available for inspection at the office of the trustee.
General
The Notes are limited to $200 million aggregate principal amount. Under the
indenture, CP Ships may, without the consent of the holders of the Notes,
issue additional notes from time to time in the future with the same terms and
the same CUSIP numbers as the Notes ("Additional Notes") in an unlimited
principal amount, provided that such Additional Notes must be part of the same
issue as the Notes for United States federal income tax purposes. The Notes
and any Additional Notes CP Ships may issue in the future will constitute a
single series of debt securities under the indenture. This means that, in
circumstances where the indenture provides for the holders of the Notes to
vote or take any action, the Notes and any Additional Notes that CP Ships may
issue will vote or take that action as a single class.
Interest on the Notes is payable semi-annually on 30th June and 30th
December of each year at the rate of 4% per annum, to the persons who are
registered holders of the Notes at the close of business on the preceding 15th
June and 15th December, respectively, with the first interest payment made on
30th June 2004,. The Notes are convertible into CP Ships' common shares as
described under "-- Conversion Rights". Unless previously redeemed, converted
or purchased by CP Ships, the Notes will mature on 30th June 2024. The Notes
are payable at the office of the paying agent, which initially will be an
office or agency of the trustee, or an office or agency maintained by CP Ships
for such purpose, in the Borough of Manhattan, The City of New York.
Interest on the Notes will be computed using a 360-day year comprising
twelve 30-day months. If any date for the payment of interest or additional
interest, if any, is not a business day, then the applicable payment will be
postponed to the next succeeding business day. If the stated maturity date,
redemption date or purchase date of a Note is not a business day, the required
payment of interest, if any, and principal will be made on the next succeeding
business day, and no interest will accrue for the period from and after the
stated maturity date, redemption date or purchase date to such next succeeding
business day.
The Notes were issued without coupons in denominations of $1,000 and
integral multiples thereof.
Holders may present for conversion any Notes that have become eligible for
conversion at the office of the conversion agent, and may present Notes for
registration of transfer at the office of the trustee.
The indenture will not restrict CP Ships or CP Ships' subsidiaries from
incurring additional debt or other liabilities. In addition, neither CP Ships
nor any of CP Ships' subsidiaries are restricted under the indenture from
paying dividends or issuing or repurchasing CP Ships' securities. The
indenture does not require CP Ships to maintain any sinking fund or other
reserves for repayment of the Notes.
The Notes are not subject to defeasance or covenant defeasance.
Subordination
The Notes are CP Ships' unsecured senior subordinated obligations and are
subordinated in right of payment to all of CP Ships' existing and future
senior indebtedness (as defined below); structurally subordinated in right of
payment to all existing and future indebtedness and other liabilities of CP
Ships' existing and future subsidiaries (other than indebtedness and other
liabilities owed to CP Ships); equal in right of payment to any future senior
subordinated indebtedness; and senior in right of payment to any future
indebtedness that expressly provides that it is subordinated in right of
payment to the Notes. In addition, the Notes are effectively subordinated in
right of payment to CP Ships' secured indebtedness, to the extent of the
security.
33
If payment of the Notes is accelerated because of an event of default, CP
Ships will be required to promptly notify the holders of senior indebtedness.
Upon any distribution to its creditors in a liquidation or dissolution of
CP Ships or in a bankruptcy, liquidation, insolvency, receivership or similar
proceeding relating to CP Ships, any assignment for the benefit of creditors
or any marshalling of CP Ships' assets and liabilities, the holders of senior
indebtedness would be entitled to receive payment in full in cash of all
obligations due in respect of such senior indebtedness (including interest
accruing after, or which would accrue but for, the commencement of any
proceeding at the rate specified in the applicable senior indebtedness,
whether or not a claim for such interest would be allowed) before the holders
of the Notes will be entitled to receive any payment with respect to the
Notes.
As a result of these subordination provisions, in the event of CP Ships'
bankruptcy, dissolution, liquidation, insolvency, reorganization, receivership
or assignment for the benefit of creditors, holders of senior indebtedness may
recover more, ratably, and holders of the Notes may recover less, ratably,
than CP Ships' other creditors.
CP Ships also may not make any payment with respect to the Notes if:
o a default in the payment of senior indebtedness occurs and continues
beyond any grace period;
o any other default occurs and continues with respect to designated senior
indebtedness that permits holders of designated senior indebtedness or
their representatives to accelerate its maturity, and the trustee
receives a payment blockage notice from the holders of designated senior
indebtedness or their representatives; or
o any judicial proceeding shall be pending with respect to any default of
senior indebtedness.
CP Ships may and shall resume payments with respect to the Notes on:
o in the case of a payment default, the date on which such default is
cured or waived; and
o in the case of a non-payment default, the earlier of the date on which
such non-payment default is cured or waived or 179 calendar days after
the receipt of the payment blockage notice.
No new period of payment blockage pursuant to a payment blockage notice may
start unless 360 calendar days have elapsed since the effectiveness of the
prior payment blockage notice.
No non-payment default that existed or was continuing on the date of
delivery of any payment blockage notice to the trustee shall be, or be made,
the basis for a subsequent payment blockage notice.
The subordination provisions will not prevent the occurrence of any event
of default under the indenture or the acceleration of the maturity of the
Notes following any event of default in accordance with the procedures set out
in the indenture.
If the trustee, the payment agent or any holder receives any payment or
distribution of assets in contravention of these subordination provisions
before all senior indebtedness is paid in full in cash, then such payment or
distribution will be held in trust for the holders of senior indebtedness to
the extent necessary to make payment in full in cash of all unpaid senior
indebtedness. Upon the proper written request of the holders of senior
indebtedness, the trustee shall deliver the amounts in trust to the holders of
senior indebtedness.
The Notes are obligations exclusively of CP Ships. Since substantially all
of CP Ships' operations are conducted through subsidiaries, CP Ships' cash
flow and CP Ships' ability to service debt, including the Notes, are dependent
in part upon the earnings of CP Ships' subsidiaries and distribution of those
earnings to CP Ships, or upon loans or other payments of funds by those
subsidiaries to CP Ships. The payment of dividends and the making of loans by
CP Ships' subsidiaries may be subject to statutory or contractual restrictions
and are dependent upon the earnings of those subsidiaries. Consequently, the
right of the holders of the Notes to participate in those assets will be
effectively subordinated in right of payment to all existing and future
indebtedness and other liabilities of CP Ships' subsidiaries (other than
indebtedness and other liabilities
34
owed to CP Ships).
As of 31st December 2003, CP Ships had approximately $507 million of
balance sheet debt, including $291 million of subordinated loans from its
subsidiaries and had guaranteed a further $451 million of its subsidiaries'
balance sheet debt obligations, and CP Ships' subsidiaries had balance sheet
debt of approximately $797 million, including $342 million of loans from CP
Ships. On a consolidated basis, substantially all of CP Ships' operating
liabilities are incurred at its subsidiaries and are therefore structurally
senior to the Notes. Certain subsidiaries also provide guarantees in respect
of the 10 3/8% Senior Notes. The indenture for the Notes does not restrict CP
Ships or its current or future subsidiaries from incurring additional debt or
other liabilities. Such indebtedness or liabilities may be substantial.
"designated senior indebtedness" means the Container Sale and Leaseback and
the Venture and Spirit Leases (in each case, as defined below under
"Description of Indebtedness and Other Obligations") and any other senior
indebtedness that expressly provides that it is "designated senior
indebtedness", including the $525 Million Facility and the container lease
relating to temperature controlled container equipment dated 25th October
2004.
"senior indebtedness" means the principal of, and premium, if any, and
interest (including interest accruing after, or which would accrue but for,
the commencement of any proceeding at the rate specified in the applicable
senior indebtedness, whether or not a claim for such interest would be
allowed), on all of CP Ships' indebtedness, whether outstanding on the
issuance date or thereafter incurred; provided, however, that senior
indebtedness will not include:
(1) indebtedness evidenced by the Notes;
(2) indebtedness to any of CP Ships' subsidiaries, except (a) indebtedness
existing at the date of the indenture, (b) additional indebtedness in
an aggregate amount of $50 million, (c) indebtedness incurred for the
purpose of cash management of CP Ships in the ordinary course of
business, and (d) indebtedness pledged as security for any senior
indebtedness of CP Ships' subsidiaries;
(3) any liability for federal, state, foreign, local or other taxes owed or
owing by CP Ships;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business; and
(5) any indebtedness that expressly provides that it is ranked in right of
payment equally with or subordinated to the Notes.
"senior subordinated indebtedness" means the Notes, subordinated
inter-company loans outstanding at the date of the Indenture and any other
indebtedness of CP Ships that specifically provides that such indebtedness is
to rank equally with the Notes in right of payment and is not subordinated by
its terms in right of payment to any indebtedness or other obligation of CP
Ships which is not senior indebtedness.
"indebtedness", with respect to any person, means:
(1) all obligations of such person:
o for borrowed money;
o evidenced by a note, debenture, bond or similar written instrument;
o in respect of leases required, in conformity with Canadian GAAP, to be
accounted for as capitalized lease obligations on the balance sheet; or
o in respect to letters of credit, guarantees or bankers' acceptances;
(2) all obligations secured by a mortgage, pledge or similar arrangement
encumbering property or assets as reflected as debt on the balance sheet
of such person;
35
(3) all obligations of such person under interest rate, fuel and currency
swap arrangements, cap, floor and collar agreements, spot and forward
contracts, and similar agreements and arrangements; or
(4) all obligations of others (a) of the type described in clause (1), (2)
or (3) above or (b) under any operating lease, in each case assumed by
or guaranteed or in effect guaranteed by such person.
Conversion Rights
Holders may convert any outstanding Notes (or portions of outstanding
Notes) under the circumstances summarized below into 39.6542 common shares per
$1,000 principal amount of Notes, subject to adjustment in certain
circumstances as described below. This rate is referred to herein as the
"conversion rate". This rate results in an initial conversion price (that is,
$1,000 principal amount divided by the conversion rate) of approximately
$25.22 per share. CP Ships will not issue fractional common shares upon
conversion of Notes. Instead, CP Ships will pay a cash adjustment based upon
the closing sale price of CP Ships' common shares on the business day
immediately preceding the conversion date. Upon conversion, CP Ships will have
the option to deliver cash or a combination of cash and common shares as
described below. Holders may convert Notes only in denominations of $1,000 and
whole multiples of $1,000.
Holders may surrender notes for conversion into CP Ships' common shares
only under the following circumstances:
o during any fiscal quarter commencing after 30th June 2004 and only
during such fiscal quarter, if the closing sale price of one of CP
Ships' common shares exceeds 120% of the conversion price for at least
20 trading days in the 30 trading day period ending on the last trading
day of the preceding fiscal quarter;
o during the five business day period after any five consecutive trading
day period, referred to as a measurement period, in which the trading
price per Note for each day of such measurement period was less than 98%
of the product of the closing sale price of one of CP Ships' common
shares and the conversion rate for such date subject to certain
limitations;
o if CP Ships has called the notes for redemption; or
o upon the occurrence of the corporate transactions summarized below.
Conversion Upon Satisfaction of Market Price Condition. A holder may
convert its Notes into CP Ships' common shares prior to the close of business
on the maturity date during any fiscal quarter commencing after 30th June 2004
and only during such fiscal quarter, if the closing sale price of one of CP
Ships' common shares exceeds 120% of the conversion price for at least 20
trading days in the 30 trading day period ending on the last trading day of
the preceding fiscal quarter.
The "closing sale price" of the common shares on any date means the closing
sale price per common share (or if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and the average ask prices) on such date as
reported in composite transactions for the principal U.S. securities exchange
on which the common shares are traded (currently being the NYSE) or, if the
common shares are not listed on a U.S. national or regional securities
exchange, as reported by the Nasdaq System or, if no such price is reported,
as reported by the principal non-United States market on which the common
shares are traded (currently being the TSX), such price to be converted into
U.S. dollars based on the Bank of Canada noon exchange rate as reported for
conversion into U.S. dollars on such date. In the absence of such quotation,
CP Ships' Board will determine in good faith the closing sale price.
Conversion Upon Satisfaction of Trading Price Condition. A holder also may
convert its Notes into CP Ships' common shares prior to the close of business
on the maturity date during the five business day period after any five
consecutive trading day period, referred to as a measurement period, in which
the trading price per Note for each day of such measurement period was less
than 98% of the product of the closing sale price of one of CP Ships' common
shares and the conversion rate for such date; provided, however, that after
30th June 2019, if on the date of any conversion pursuant to this condition,
the closing sale price of CP Ships' common shares is between the conversion
price and 120% of the conversion price per share, then holders may receive, in
lieu of common shares, based on the conversion rate, common shares, or at CP
Ships' election, cash or a combination of common shares and cash, having a
value equal to the principal amount of such notes, plus accrued and unpaid
interest, if any ("Principal Value Conversion"). If a holder surrenders its
Notes for conversion and it is a Principal Value Conversion, CP Ships will
notify the holder by the second trading day following the date of such
surrender whether CP Ships will pay the holder all or a portion of the
principal amount plus accrued and unpaid interest,
36
including additional interest, if any, in cash, common shares or a combination
of cash and common shares, and in what percentage. Any common shares delivered
upon a Principal Value Conversion will be valued at the greater of the
conversion price on the conversion date and the applicable stock price (as
defined below) as of the conversion date. CP Ships will pay the holder any
portion of the principal amount plus accrued and unpaid interest, including
additional interest, if any, to be paid in cash and deliver common shares with
respect to any portion of the principal amount plus accrued and unpaid
interest, including additional interest, if any, to be paid in common shares,
no later than the third business day following the determination of the
applicable stock price.
The "conversion value" is equal to the product of the closing sale price
for CP Ships' common shares on a given day multiplied by the then-current
conversion rate, which is the number of common shares into which each $1,000
principal amount Note is then convertible.
The "trading price" of the Notes on any date of determination means the
average of the secondary market bid quotations per note obtained by CP Ships
or a calculation agent for $1,000,000 principal amount of Notes at
approximately 3:30 p.m., New York City time, on such determination date from
three independent nationally recognized securities dealers CP Ships selects,
provided that if at least three such bids cannot reasonably be obtained by CP
Ships or the calculation agent, but two such bids are obtained, then the
average of the two bids shall be used, and if only one such bid can reasonably
be obtained by CP Ships or the calculation agent, this one bid shall be used.
If either CP Ships or the calculation agent cannot reasonably obtain at least
one bid for $1,000,000 principal amount of Notes from a nationally recognized
securities dealer, then the trading price of the Notes will be deemed to be
less than 98% of the average conversion value of the Notes.
The "applicable stock price" shall mean the average of the closing sale
prices of one common share of CP Ships over the five trading day period
starting the third trading day following the applicable date such Notes are
surrendered for conversion.
In connection with any conversion upon satisfaction of the above trading
pricing condition, the calculation agent shall have no obligation to determine
the trading price of the Notes unless CP Ships has requested such
determination; and CP Ships shall have no obligation to make such request
unless a holder of Notes provides CP Ships with reasonable evidence that the
trading price per $1,000 principal amount of Notes would be less than 98% of
the conversion value. At such time, CP Ships shall instruct the calculation
agent to determine the trading price of the Notes beginning on the next
trading day and on each successive trading day until the trading price per
$1,000 principal amount of Notes is greater than or equal to 98% of the
conversion value.
Conversion Upon Notice of Redemption. A holder may surrender for conversion
any Notes CP Ships calls for redemption at any time prior to the close of
business on the day that is one business day prior to the redemption date,
even if the Notes are not otherwise convertible at that time. If a holder
already has delivered an acceptance notice with respect to CP Ships' offer to
purchase a Note, however, the holder may not surrender that Note for
conversion until the holder has withdrawn the notice in accordance with the
indenture.
Conversion Upon Specified Corporate Transactions. If:
o CP Ships distributes, to all holders of CP Ships' common shares, certain
rights entitling them to purchase common shares, for a period expiring
within 45 days of the record date for such issuance, at less than the
average of the last closing sale price for CP Ships' common shares for
the ten consecutive trading days immediately preceding the record date;
or
o CP Ships elects to distribute, to all holders of CP Ships' common
shares, cash or other assets, debt securities or certain rights to
purchase CP Ships' securities, which distribution has a per share value
exceeding 5% of the closing sale price of the common shares on the
trading day preceding the declaration date for the distribution;
then CP Ships must notify the holders of Notes at least 20 days prior to the
ex-dividend date for the distribution. Once CP Ships has given that notice,
holders may convert their Notes at any time until the earlier of the close of
business on the business day immediately prior to the ex-dividend date and CP
Ships' announcement that the distribution will not take place.
In addition, if CP Ships is party to a consolidation, amalgamation,
statutory arrangement, merger, binding share exchange or other combination or
a transfer of all or substantially all CP Ships' consolidated property and
assets, as determined under
37
applicable law, pursuant to which CP Ships' common shares are converted into,
or become the right to receive, cash, securities or other property, a holder
may convert Notes at any time from and after the date which is 15 days prior
to the anticipated effective date of the transaction, as determined by CP
Ships, until 15 days after the effective date of the transaction.
The phrase "all or substantially all" of CP Ships' assets will likely be
interpreted under applicable law and will be dependent upon particular facts
and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale, lease or transfer of "all or substantially all"
of CP Ships' assets has occurred.
In the case of a distribution, no adjustment to the ability of holders of
Notes to convert will be made if the holders participate, as holders of Notes,
or will participate in the distribution without conversion.
Conversion Procedures. To convert its Notes into common shares, a holder
must do the following (or comply with DTC procedures for doing so in respect
of its beneficial interest in Notes evidenced by a global note):
o complete and manually sign the conversion notice on the back of the
Notes or facsimile of the conversion notice and deliver this notice to
the conversion agent;
o surrender the Note to the conversion agent;
o if required, furnish appropriate endorsements and transfer documents;
o if required, pay all transfer or similar taxes directly to CP Ships; and
o if required, pay funds equal to interest payable on the next interest
payment date.
The date a holder complies with these requirements is the conversion date
under the indenture.
CP Ships will have the option to deliver cash in lieu of some or all of the
common shares to be delivered upon conversion of the Notes. CP Ships will give
notice of its election to deliver part or all of the conversion consideration
in cash to the holder converting the Notes within two business days of CP
Ships' receipt of the holder's notice of conversion unless CP Ships has
already informed holders of CP Ships' election in connection with CP Ships'
optional redemption of the Notes. The amount of cash to be delivered per Note
will be equal to the number of common shares in respect of which the cash
payment is being made multiplied by the average of the closing sale prices of
one common share of CP Ships on the ten trading days commencing one day after
(a) the date of CP Ships' notice of election to deliver all or part of the
conversion consideration in cash if CP Ships has not given notice of
redemption or (b) the conversion date, in the case of conversion following
notice of redemption specifying CP Ships' intention to deliver cash upon
conversion.
If CP Ships elects to deliver cash in lieu of some or all of the common
shares issuable upon conversion, CP Ships will make the payment, including
delivery of the common shares, if any, through the transfer agent for the
common shares, to holders surrendering Notes no later than the fifteenth
business day following the conversion date. Otherwise, CP Ships will deliver
the common shares, together with any cash payment for fractional shares,
through the transfer agent for the common shares no later than the fifth
business day following the conversion date. CP Ships may not deliver cash in
lieu of any common shares issuable upon a conversion (other than in lieu of
fractional shares) if an Event of Default with respect to the Notes has
occurred and is continuing, other than a default in payment of the conversion
consideration.
CP Ships' delivery to the holder of the full number of common shares into
which the Note is convertible (or cash in lieu thereof, as described above),
together with any cash payment for such holder's fractional shares, will be
deemed to satisfy CP Ships' obligation to pay:
o the principal amount of the Note; and
o accrued but unpaid interest, if any, attributable to the period from the
most recent interest payment date to the conversion date.
38
As a result, accrued but unpaid interest to the conversion date is deemed
to be paid in full rather than cancelled, extinguished or forfeited. CP Ships
will continue to be required to pay liquidated damages, if any, on the common
shares issued upon conversion of the Notes under the circumstances provided in
the registration rights agreement.
Notwithstanding the preceding paragraph, if Notes are converted after a
record date but prior to the corresponding interest payment date, holders of
such Notes at the close of business on the record date will receive the
interest payable on such Notes on the corresponding interest payment date
notwithstanding the conversion. Such Notes, upon surrender for conversion,
must be accompanied by funds equal to the amount of interest payable on that
interest payment date with respect to the Notes so converted; provided that no
such payment need be made (1) if CP Ships has specified a redemption date that
is after a record date but on or prior to the next interest payment date, (2)
if CP Ships' has specified a repurchase date in connection with a designated
event that is after a record date but on or prior to the next interest payment
date or (3) to the extent of any overdue interest at the time of conversion
with respect to such Note.
Conversion Rate Adjustments. CP Ships will adjust the conversion rate if
any of the following events occurs:
o dividends or distributions on CP Ships' common shares payable in common
shares;
o subdivisions, combinations or certain reclassifications of CP Ships'
common shares;
o distributions to all holders of CP Ships' common shares of certain
rights or warrants entitling them to purchase common shares, for a
period expiring within 45 days of the record date for such issuance, at
a price per share that is less than the average of the closing sale
prices for CP Ships' common shares for the ten trading days preceding
the time of announcement of such issuance;
o distributions to all holders of CP Ships' common shares of shares of CP
Ships' capital stock, CP Ships' assets or debt securities or certain
rights to purchase CP Ships' securities, but excluding cash dividends or
other cash distributions referred to in the next bullet and the rights
and warrants referred to in the bullet above; provided, however, that if
CP Ships distributes capital stock of, or similar equity interests in, a
subsidiary or other business unit, the conversion rate will be adjusted
based on the market value of the securities so distributed relative to
the market value of CP Ships' common shares, in each case based on the
average closing sales prices of those securities (where such closing
sales prices are available) for the ten trading days commencing on and
including the fifth trading day after the date on which "ex-dividend
trading" commences for such distribution on the NYSE or such other
exchange or market on which the securities are then listed or quoted;
o CP Ships distributes cash payable to all holders of CP Ships' common
shares to the extent such cash distribution, together with any other
cash distributions paid during the preceding twelve months, exceeds
$0.16 per share (the "dividend threshold amount") (the dividend
threshold amount is subject to proportionate adjustment to reflect
subdivisions or combinations of CP Ships' common shares), in which case
the conversion rate shall be increased so that it equals the rate
determined by multiplying the conversion rate in effect on the record
date with respect to the cash distribution by a fraction, (1) the
numerator of which shall be the current market price per common share on
the record date, and (2) the denominator of which shall be such price
less the amount of the distribution in excess of the dividend threshold
amount. The "current market price" shall mean the average of the closing
sale prices per common share for the ten consecutive trading days ending
on the earlier of the date of determination and the day before the "ex"
date with respect to the distribution requiring such computation. For
purposes of this paragraph, the term "ex" date, when used with respect
to any distribution, means the first date on which CP Ships' common
shares trade, regular way, on the relevant exchange or in the relevant
market from which the closing sale price was obtained without the right
to receive such distribution;
o payments by CP Ships or one of CP Ships' subsidiaries in respect of an
issuer bid, a tender offer or exchange offer for CP Ships' common shares
to the extent that cash and the value of any other consideration per
common share exceeds the closing sale price of CP Ships' common shares
on the trading day next succeeding the last date on which tenders or
exchanges may be made pursuant to such issuer bid or tender or exchange
offer; or
o someone other than CP Ships or one of CP Ships' subsidiaries makes a
payment of cash or other consideration in respect of a tender offer or
exchange offer in which, as of the closing date of the offer, CP Ships'
Board is not
39
recommending rejection of the offer and:
(1) after the tender offer or exchange offer, the offeror's ownership of
CP Ships' common shares exceeds 25% of the total common shares
outstanding; and
(2) the cash and value of any other consideration paid per share exceeds
the closing sale price on the trading day next succeeding the last
date on which tenders or exchanges may be made pursuant to the tender
or exchange offer.
However, the adjustment referred to in this bullet will generally not be
made if, as of the closing of the offer, the offering documents disclose
a plan or intention to cause CP Ships to engage in a consolidation or
merger or sale of all or substantially all of its assets.
Each adjustment referred to above will be made only upon conclusion of the
applicable event. CP Ships will not adjust the conversion rate, however, if
holders of Notes are able to participate in the transaction or distribution
without conversion, or in certain other cases set forth in the indenture.
CP Ships' shareholder rights plan provides that each of CP Ships' common
shares, including those issued pursuant to the terms of the Notes, issued at
any time prior to the distribution of separate certificates representing CP
Ships' share purchase rights, will be entitled to receive such rights.
However, there shall not be any adjustment to the conversion rate as a result
of:
o the issuance of the rights to purchase common shares pursuant to CP
Ships' shareholder rights plan or any successor agreement;
o the distribution of any entitlement to receive the share purchase rights;
o the exercise or redemption of such rights in accordance with CP Ships'
shareholder rights plan; or
o the termination or invalidation of the share purchase rights or similar
rights.
No adjustment in the conversion rate will be required unless the adjustment
would require a change of at least 1% in the conversion rate then in effect;
provided that any adjustment that would otherwise be required to be made will
be carried forward and taken into account in any subsequent adjustment.
CP Ships may at any time increase the conversion rate by any amount for any
period of time if CP Ships' Board has made a determination that such increase
would be in CP Ships' best interests.
If CP Ships is party to a consolidation, amalgamation, statutory
arrangement, merger, binding share exchange or other combination pursuant to
which its common shares are converted into cash, securities or other property,
at the effective time of the transaction, the right to convert a Note into
common shares will be changed into the right to convert it into the kind and
amount of cash, securities or other property which the holder would have
received if the holder had converted its note immediately prior to the
transaction; provided, however, that if, prior to 25th February 2009, holders
of Notes would otherwise be entitled to receive, upon conversion of the Notes,
any property (including cash) or securities that would not constitute
"prescribed securities" for the purposes of clause 212(1)(b)(vii)(E) of the
Income Tax Act (Canada) (which is referred to as `ineligible consideration"),
such holders shall not be entitled to receive such ineligible consideration
but CP Ships or the successor or acquiror, as the case may be, shall have the
right (at the sole option of CP Ships or the successor or acquiror, as the
case may be) to deliver either such ineligible consideration or "prescribed
securities" for the purposes of clause 212(1)(b)(vii)(E) of the Income Tax Act
(Canada) with a market value equal to the market value of such ineligible
consideration. In general, prescribed securities would include CP Ships'
common shares and other shares which are not redeemable by the holder within
five years of the date of issuance. Because of this, certain transactions may
result in the Notes being convertible into prescribed securities that are
highly illiquid. This could have a material adverse effect on the value of the
Notes. CP Ships agrees to give holders of Notes notice (to the extent
permitted by applicable law or regulation) at least 30 days prior to the
effective date of such transaction in writing and by release to a business
newswire stating the consideration into which the Notes will be convertible
after the effective date of such transaction. After such notice, CP Ships or
the successor or acquiror, as the case may be, may not change the
consideration to be delivered upon conversion of the Note except in accordance
with any other provision of the indenture.
40
If the transaction also constitutes a "designated event", as defined below,
CP Ships will be required to make an offer to the holder to purchase all or a
portion of its Notes as described below under "Offer to Purchase at Option of
the Holder Upon a Designated Event".
U.S. holders of the notes may be deemed to have received a distribution
subject to U.S. federal income tax as a dividend as a result of certain
adjustments of the conversion rate. See "Certain Income Tax Considerations --
United States Federal Income Tax Considerations -- Adjustment of Conversion
Rate".
Redemption of Notes at CP Ships' Option
No sinking fund is provided for the Notes. Prior to 3rd July 2009, CP Ships
cannot redeem the Notes except pursuant to the provisions described below
under "Redemption for Tax Reasons". The Notes will be redeemable at CP Ships'
option, in whole or in part, at any time on or after 3rd July 2009 at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed plus accrued and unpaid interest to, but excluding, the redemption
date. CP Ships will give at least 30 but not more than 60 days' notice of
redemption by mail to each holder of Notes to be redeemed at the address of
the holder appearing in the security register.
If CP Ships redeems less than all of the outstanding Notes, the trustee
will select the Notes to be redeemed on a pro rata basis in principal amounts
of $1,000 or integral multiples of $1,000. If a portion of a holder's Notes is
selected for partial redemption and the holder converts a portion of the
Notes, the converted portion shall be deemed to be the portion selected for
redemption.
Redemption for Tax Reasons
CP Ships may also redeem all but not part of the Notes for cash if CP Ships
has or would become obligated to pay to the holder of any Note "Additional
Amounts" as a result of any change from the date of this prospectus in the
laws or any regulations of a Relevant Taxing Jurisdiction (as defined below
under "-- Additional Amounts"), or any change from the date of this prospectus
in an interpretation or application of such laws or regulations by any
legislative body, court, governmental agency, taxing authority or regulatory
authority (including the enactment of any legislation and the publication of
any judicial decision or regulatory or administrative determination); provided
CP Ships cannot avoid these obligations by taking reasonable measures
available to CP Ships and that CP Ships delivers to the trustee an opinion of
legal counsel specializing in taxation and an officers' certificate attesting
to such change and obligation to pay Additional Amounts. The term "Additional
Amounts" is defined under "-- Additional Amounts" below. This redemption price
would be 100% of the principal amount plus accrued and unpaid interest to, but
excluding, the redemption date but without reduction for applicable Taxes
(except in respect of certain excluded holders). CP Ships will give investors
not less than 30 days' nor more than 60 days' notice of this redemption,
except that (i) CP Ships will not give notice of redemption earlier than 60
days prior to the earliest date on or from which CP Ships would be obligated
to pay any such Additional Amounts, and (ii) at the time CP Ships gives the
notice, the circumstances creating CP Ships' obligation to pay such Additional
Amounts remain in effect.
Upon receiving such notice of redemption, each holder who does not wish to
have CP Ships redeem its Notes will have the right to elect to:
o convert its Notes; or
o not have its notes redeemed, provided that no Additional Amounts will be
payable on any payment of interest or principal with respect to the
Notes after such redemption date. All future payments will be subject to
the deduction or withholding of any Taxes required by law to be deducted
or withheld.
Where no election is made, the holder will have its Notes redeemed without
any further action. The holder must deliver to the paying agent a written
notice of election so as to be received by the paying agent (which will
initially be the trustee) no later than the close of business on a business
day at least five business days prior to the redemption date.
A holder may withdraw any notice of election by delivering to the paying
agent a written notice of withdrawal prior to the close of business on the
business day prior to the redemption date.
41
For purposes of this section, references herein to "CP Ships" refer also to
any successor entity that assumes the obligations of the Notes under the
indenture.
Purchase at Option of the Holder
A holder will have the right to require CP Ships to purchase its Notes on
30th June 2009, 30th June 2014 and 30th June 2019. CP Ships will purchase for
cash any outstanding Note for which a holder delivers a written purchase
notice to the paying agent. This notice must be delivered during the period
from the opening of business on the date that is not more than 25 business
days prior to the purchase date until the close of business on the fifth
business day immediately preceding the purchase date. A holder may withdraw
its purchase notice at any time prior to the close of business on the last
business day prior to the purchase date. If a purchase notice is given and
withdrawn during that period, CP Ships will not be obligated to purchase the
Notes listed in the notice. CP Ships' purchase obligation will be subject to
certain additional conditions.
The purchase price payable for a Note will be equal to 100% of the
principal amount to be purchased plus accrued and unpaid interest to, but
excluding, the purchase date. Payment of the purchase price will be made on
the applicable purchase date to holders of record on the close of business on
the day immediately preceding the purchase date.
The purchase notice must state:
o if certificated Notes have been issued, the Note certificate numbers
(or, if a holder's Notes are not certificated, its purchase notice must
comply with appropriate DTC procedures);
o the portion of the principal amount of Notes to be purchased, which must
be in integral multiples of $1,000; and
o that the Notes are to be purchased by CP Ships pursuant to the
applicable provisions of the Notes and the indenture.
A holder may withdraw any written purchase notice by delivering a written
notice of withdrawal to the paying agent prior to the close of business on the
business day immediately preceding the purchase date. The withdrawal notice
must state:
o the principal amount of the Notes being withdrawn;
o if certificated Notes have been issued, the certificate numbers of the
Notes being withdrawn (or, if the Notes are not certificated, the notice
of withdrawal must comply with appropriate DTC procedures); and
o the principal amount of Notes, if any, which remains subject to the
purchase notice.
CP Ships must give notice of an upcoming purchase date to all Note holders
not less than 25 business days prior to the purchase date at their addresses
shown in the register of the registrar. CP Ships will also give notice to
beneficial owners as required by applicable law. This notice will state, among
other things, the procedures that holders must follow to require CP Ships to
purchase their Notes.
Payment of the purchase price for a Note for which a purchase notice has
been delivered and not withdrawn is conditioned upon book-entry transfer or
delivery of the Note, together with necessary endorsements, to the paying
agent at its office in the Borough of Manhattan, The City of New York, or any
other office of the paying agent, at any time after delivery of the purchase
notice. Payment of the purchase price for the Note will be made promptly
following the later of the purchase date and the time of book-entry transfer
or delivery of the Note. If the paying agent holds money sufficient to pay the
purchase price of a Note on the purchase date, then, on and after the business
day following the purchase date:
o that Note will cease to be outstanding; and
o all rights of the holder will terminate, other than the right to receive
the purchase price upon delivery of that Note.
This will be the case whether or not book-entry transfer of the Note has
been made or the Note has been delivered to the paying agent.
42
CP Ships may not purchase Notes at the option of holders if there has
occurred and is continuing an Event of Default with respect to the Notes,
other than a default in the payment of the purchase price with respect to the
Notes.
CP Ships may be unable to purchase the Notes if a holder elects to require
CP Ships to purchase the Notes pursuant to this provision. If a holder elects
to require CP Ships to purchase the Notes, CP Ships may not have enough funds
to pay the purchase price for all tendered Notes. In addition, certain of CP
Ships' debt obligations contain provisions that would prohibit CP Ships'
purchase of the Notes pursuant to this provision without consent of the
lenders under such debt obligations. If a holder elects to require CP Ships to
purchase the Notes at a time when CP Ships is prohibited from purchasing
Notes, CP Ships could seek consent to purchase the Notes under the relevant
debt obligations, or attempt to refinance this debt. If CP Ships does not
obtain such consent, CP Ships would not be permitted to purchase the Notes. CP
Ships' failure to purchase tendered Notes would constitute an event of default
under the indenture and would also constitute a default under the terms of its
other indebtedness.
In connection with any purchase offer, CP Ships will, to the extent
applicable:
o comply with the provisions of Rule 13e-4, Rule l4e-1 and any other
tender offer rules under the Exchange Act and any Canadian laws; and
o file Schedule TO or any other required schedule under the Exchange Act
rules or Canadian law which may then be applicable.
Offer to Purchase at Option of the Holder Upon a Designated Event
In the event of a designated event (as defined below) with respect to CP
Ships, CP Ships will be required to make an offer to each holder, subject to
the terms and conditions of the indenture, to purchase for cash all
outstanding Notes in integral multiples of $1,000 principal amount, at a price
equal to 100% of the principal amount, plus any accrued and unpaid interest
to, but excluding, the purchase date. CP Ships will be required to purchase
Notes in respect of which such offer is accepted by a holder no later than 30
business days after notice of a designated event has been mailed as described
below. This date is referred to in this offering memorandum as the "designated
event purchase date".
A "designated event" will be deemed to have occurred upon a "fundamental
change" or a "termination of trading"; provided that a fundamental change or
termination of trading occurring on or prior to 25th February 2009 shall not
be deemed a designated event unless the transaction or event resulting in such
fundamental change or termination of trading also constitutes a "change in
control".
A "change in control" will be deemed to have occurred at such time as:
o any person, including its affiliates and associates, other than CP
Ships, CP Ships' subsidiaries or their employee benefit plans, becomes
the beneficial owner of more than 50% or more of the total number of
votes attached to CP Ships' share capital entitled to general voting
rights (collectively, "Voting Securities") or other securities into
which the Voting Securities are reclassified or changed; or
o there shall be consummated any consolidation, merger, amalgamation,
binding share exchange, statutory arrangement (involving a business
combination) or similar transaction involving CP Ships in which CP Ships
is not the continuing or surviving corporation or pursuant to which the
common shares would be converted into cash, securities or other
property, in each case, other than a consolidation, amalgamation,
merger, binding share exchange, statutory arrangement (involving a
business combination) or similar transaction in which the holders of the
Voting Securities immediately prior to such transaction have, directly
or indirectly, at least a majority of the voting shares of the
continuing or surviving corporation immediately after such transaction.
A "fundamental change" is any transaction or event (whether by means of an
exchange offer, liquidation, tender offer, consolidation, merger,
amalgamation, statutory arrangement, combination, reclassification,
recapitalization or otherwise) in connection with which all or substantially
all of CP Ships' common shares are exchanged for, converted into, acquired for
or constitute solely the right to receive, consideration which is not all or
substantially all common shares that:
43
o are listed on, or immediately after the transaction or event will be
listed on, the TSX or a United States national securities exchange, or
o are approved, or immediately after the transaction or event will be
approved, for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
A "termination of trading" will be deemed to have occurred if CP Ships'
common shares (or other securities or property into which the Notes are then
convertible, including, without limitation, "prescribed securities" as
described above under "-- Conversion Rate Adjustments") are neither listed for
trading on the TSX or a United States national securities exchange nor
approved for trading on the Nasdaq National Market.
Within 30 business days after the occurrence of a designated event, CP
Ships must mail to the trustee, to all holders of Notes at their addresses
shown in the register maintained by the registrar and to beneficial owners as
required by applicable law a notice regarding the designated event and an
offer to purchase the Notes. The notice will include:
o the events deemed a designated event;
o the date of such designated event;
o the last date on which a holder may accept CP Ships' offer to purchase
the Notes;
o the price of the designated event purchase offer;
o the day on which CP Ships will purchase Notes for which a holder has
accepted CP Ships' offer;
o the name and address of the paying agent and the conversion agent;
o the conversion rate and any adjustments to the conversion rate;
o that Notes with respect to which a designated event purchase offer has
been accepted by the holder may be converted, if otherwise convertible,
only if the acceptance of the designated event purchase offer has been
withdrawn in accordance with the terms of the indenture; and
o the procedures that holders must follow to accept CP Ships' offer to
purchase the Notes.
To accept the designated event purchase offer, the holder must deliver a
written notice so as to be received by the paying agent no later than the
close of business on the fifth business day prior to the designated event
purchase date. The required acceptance notice must state:
o if certificated Notes have been issued, the certificate numbers of the
Notes to be delivered by the holder (or if a holder's Notes are not
certificated, its acceptance notice must comply with appropriate DTC
procedures);
o the portion of the principal amount of Notes to be purchased, which
portion must be an integral multiple of $1,000; and
o that the holder accepts CP Ships' offer to purchase such Notes pursuant
to the applicable provisions of the Notes.
A holder may withdraw any acceptance of the designated event purchase offer
by delivering to the paying agent a written notice of withdrawal prior to the
close of business on the business day prior to the designated event purchase
date. The notice of withdrawal must state:
o the principal amount of the notes being withdrawn;
o if certificated Notes have been issued, the certificate numbers of the
Notes being withdrawn (or if the Notes are not certificated, the notice
of withdrawal must comply with appropriate DTC procedures); and
44
o the principal amount of the Notes, if any, which remains subject to an
acceptance of the designated event purchase offer.
CP Ships will cause the designated event purchase price for such Note to be
paid promptly following the later of the designated event purchase date or the
time of delivery of such note. Payment of the purchase price for a Note for
which an acceptance notice has been delivered and not withdrawn is conditioned
upon book-entry transfer or delivery of the Note, together with necessary
endorsements, to the paying agent at its office in the Borough of Manhattan,
The City of New York, or any other office of the paying agent, at any time
after delivery of the acceptance notice. If the paying agent holds money
sufficient to pay the purchase price of a Note on the purchase date, then, on
and after the business day following the purchase date:
o that Note will cease to be outstanding; and
o all rights of the holder will terminate, other than the right to receive
the purchase price upon delivery of that Note.
This will be the case whether or not book-entry transfer of the Note has
been made or the Note has been delivered to the paying agent.
In connection with any purchase offer in the event of a designated event,
CP Ships will to the extent applicable:
o comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act") and any Canadian laws; and
o file Schedule TO or any other required schedule under the Exchange Act
rules and Canadian law which may then be applicable.
CP Ships may be unable to purchase the Notes if a holder accepts CP Ships'
offer to purchase the Notes pursuant to this provision. If a holder accepts CP
Ships' offer to purchase the Notes, CP Ships may not have enough funds to pay
the designated event purchase price. A designated event may constitute an
event of default under existing or future credit agreements. In addition,
certain of CP Ships' debt obligations contain provisions that would prohibit
CP Ships' purchase of the Notes pursuant to this provision without consent
under such debt obligations. If a holder elects to require CP Ships to
purchase the Notes at a time when CP Ships is prohibited from purchasing
Notes, CP Ships could seek consent to purchase the Notes under the relevant
debt obligations, or attempt to refinance this debt. If CP Ships does not
obtain such consent, CP Ships would not be permitted to purchase the Notes. CP
Ships' failure to purchase Notes pursuant to this provision would constitute
an event of default under the terms of its other indebtedness.
The designated event purchase feature of the Notes may in certain
circumstances make more difficult or discourage a take-over of CP Ships.
CP Ships could, in the future, enter into certain transactions, including
certain recapitalizations, that would not constitute a designated event with
respect to the designated event purchase feature of the Notes but that would
increase the amount of CP Ships', or CP Ships' subsidiaries', indebtedness.
CP Ships may not purchase Notes upon a designated event if there has
occurred and is continuing an event of default with respect to the Notes,
other than a default in making a designated event purchase offer or in the
payment of the designated event purchase price with respect to the Notes.
Merger or Consolidation, or Conveyance, Transfer or Lease of Properties and
Assets
The indenture provides that CP Ships may not consolidate, amalgamate or
merge with or into any other person, enter into a binding share exchange or
sell, convey, transfer or lease all or substantially all of CP Ships'
properties and assets to another person (including in any such case under a
statutory arrangement) unless, among other things:
o the resulting, surviving or transferee person is a corporation organized
and valid existing under the laws of Australia,
45
the United States, any state thereof, the District of Columbia, the laws
of Canada or any province or territory thereof, the United Kingdom, any
member state of the European Union as of the date of the indenture or
Switzerland or, in the event that the common shares of such entity are
and remain listed and readily tradeable on an established securities
market in the United States (within the meaning of Section 1(h)(11)(C)(ii)
of the Internal Revenue Code of 1986, as amended) and such listing is
required in order to secure a beneficial U.S. Federal Income tax rate on
dividends paid by CP Ships on the common shares, Bermuda or Hong Kong;
o such person assumes all CP Ships' obligations under the Notes and the
indenture; and
o CP Ships or such successor person shall not immediately thereafter be in
default under the indenture;
provided, however, for purposes of the foregoing, the sale, conveyance,
transfer or lease (in a single transaction or a series of transactions) of the
properties or assets of one or more subsidiaries (other than to CP Ships or
another wholly-owned subsidiary) which, if such properties or assets were
directly owned by CP Ships, would constitute all or substantially all of CP
Ships' properties and assets on a consolidated basis, shall be deemed to be a
sale, conveyance, transfer or lease of all or substantially all of CP Ships'
properties and assets.
Upon the assumption of CP Ships' obligations by such a person in such
circumstances, subject to certain exceptions, CP Ships shall be discharged
from all obligations under the Notes and the indenture.
Although such transactions are permitted under the indenture, certain of
the foregoing transactions could constitute a designated event requiring CP
Ships to make an offer to purchase the Notes of the holders as described in
"Offer to Purchase at Option of the Holder Upon a Designated Event".
The phrase "all or substantially all" of CP Ships' assets will likely be
interpreted under applicable law and will be dependent upon particular facts
and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale, lease or transfer of "all or substantially all"
of CP Ships' assets has occurred.
Limitation on Layering
CP Ships will not incur any indebtedness that is contractually subordinate
in right of payment to any senior indebtedness unless such indebtedness is
senior subordinated indebtedness or is contractually subordinated in right of
payment to senior subordinated indebtedness; provided, however, that unsecured
debt will not be deemed to be subordinate in right of payment to secured debt
merely by virtue of its nature as unsecured debt.
Events of Default
The following will be events of default for the Notes:
o default in the payment of the principal amount, redemption price,
purchase price payable to a holder upon delivery of a purchase notice as
described above under "Purchase at Option of Holder", or designated
event purchase price with respect to any Note when, such amount becomes
due and payable, or the failure to make a designated event offer;
o default in the payment of accrued and unpaid interest, if any (including
Additional Amounts and additional interest in the event of a
"registration default"), on the Notes and such default continues for 30
days;
o failure by CP Ships to comply with any of CP Ships' other covenants in
the Notes or the indenture upon receipt by CP Ships of notice of such
default by the trustee or by holders of not less than 25% in aggregate
principal amount of the Notes then outstanding and CP Ships' failure to
cure (or obtain a waiver of) such default within 60 days after receipt
of such notice;
o the acceleration of the maturity of any of CP Ships' indebtedness (other
than "non-recourse indebtedness" (as defined below)), at any one time,
in an amount in excess of the greater of (i) $25 million and (ii) 5% of
"consolidated net tangible assets" (as defined below), unless such
acceleration is rescinded or annulled within a period of 30 days after
written notice to CP Ships by the trustee or to CP Ships and the trustee
by the holders of at least 25% in aggregate
46
principal amount of the notes; or
o certain events of bankruptcy, insolvency or reorganization affecting CP
Ships or any of CP Ships' "significant subsidiaries".
As used herein,
o "non-recourse indebtedness" means indebtedness the terms of which
provide that the lender's claim for repayment of such indebtedness is
limited solely to a claim against the property which secures such
indebtedness;
o "consolidated net tangible assets" means the total amount of CP Ships'
assets (including investments in "joint ventures" (as defined below))
and CP Ships' subsidiaries' assets (less, in each case, applicable
depreciation, amortization and other valuation reserves) after deducting
therefrom (a) all of CP Ships' and CP Ships' subsidiaries' current
liabilities (excluding (i) the current portion of long-term
indebtedness, (ii) intercompany liabilities and (iii) any liabilities
which are by their terms renewable or extendible at the option of the
obligor thereon to a time more than 12 months from the time as which the
amount thereof is being computed) and (b) all goodwill, tradenames,
trademarks, patents, unamortized debt discount and other like
intangibles, all as set forth on CP Ships' most recent consolidated
balance sheet and computed in accordance with Canadian GAAP (or U.S.
GAAP if adopted by CP Ships for use in preparation of CP Ships'
financial statements);
o "joint venture" means any partnership, corporation or other entity, in
which CP Ships and/or one or more "Subsidiaries" (as defined below) own,
directly or indirectly, up to and including 50% of the partnership
interests, outstanding voting stock or other equity interest;
o "Subsidiary" means any corporation of which at least a majority of the
outstanding stock having by the terms thereof ordinary voting power to
elect a majority of the directors of such corporation is, at the time,
directly or indirectly, owned by CP Ships or by one or more of CP Ships'
Subsidiaries, or by CP Ships and one or more Subsidiaries; and
o "significant subsidiary" shall have the meaning set forth in Rule
1-02(w) of Regulation S-X.
If an event of default shall have occurred and be continuing, either the
trustee or the holders of not less than 25% in aggregate principal amount of
Notes then outstanding may declare the principal amount of the Notes plus
accrued and unpaid interest, if any, on the Notes accrued through the date of
such declaration to be immediately due and payable. In the case of certain
events of CP Ships' bankruptcy, insolvency or reorganization, the principal
amount of the Notes plus accrued and unpaid interest, if any, accrued thereon
through the occurrence of such event shall automatically become and be
immediately due and payable.
Additional Amounts
All payments that CP Ships makes under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account
of any present or future tax, duty, levy, impost, assessment or other
governmental charge (including, without limitation, penalties, interest and
other similar liabilities related thereto) of whatever nature (collectively,
"Taxes") imposed or levied by or on behalf of the federal government of Canada
or by or within any province or political subdivision or within any other
jurisdiction in which CP Ships or any successor entity is organized,
incorporated or otherwise resident for tax purposes or from or through which
payment is made or by or within any political subdivision thereof (each, a
"Relevant Taxing Jurisdiction"), unless CP Ships is required to withhold or
deduct Taxes by law or by the interpretation or administration of law. If CP
Ships is required to withhold or deduct any amount for or on account of Taxes
from any payment made under or with respect to the Notes, CP Ships will pay
additional amounts ("Additional Amounts"), to the extent they may lawfully do
so, so that the net amount received by each holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the holder would have received if such Taxes had not been withheld or
deducted. CP Ships will make a similar payment of Additional Amounts to
holders of Notes (other than excluded holders) that are exempt from
withholding but are required to pay tax directly on amounts otherwise subject
to withholding.
CP Ships will not, however, pay Additional Amounts to a holder or
beneficial owner of Notes ("excluded holder") to the
47
extent that the Taxes are imposed or levied:
(a) due to the fact that CP Ships does not deal at arm's length (within the
meaning of the Income Tax Act (Canada)) with such holder or beneficial
owner at the time of making such payment;
(b) by a Relevant Taxing Jurisdiction by reason of the holder's or
beneficial owner's present or former connection with such Relevant
Taxing Jurisdiction (other than the mere receipt or holding of Notes or
by reason of the receipt of payments thereunder or the exercise or
enforcement of rights under any Notes or the indenture); or
(c) by reason of the failure of the holder or beneficial owner of Notes,
prior to the relevant date on which a payment under and with respect to
the Notes is due and payable (the "Relevant Payment Date") to comply
with CP Ships' written request addressed to the holder at least 30
calendar days prior to the Relevant Payment Date to provide accurate
information with respect to any certification, identification,
information or other reporting requirements which the holder or such
beneficial owner is legally required to satisfy, whether imposed by
statute, treaty, regulation or administrative practice, in each such
case by the Relevant Taxing Jurisdiction, as a precondition to exemption
from, or reduction in the rate of deduction or withholding of, Taxes
imposed by the Relevant Taxing Jurisdiction (including, without
limitation, a certification that the holder or beneficial owner is not
resident in the Relevant Taxing Jurisdiction).
In addition, CP Ships' obligation to pay Additional Amounts or to reimburse
a holder for Taxes paid by such holder in respect of Taxes will not apply with
respect to:
(d) any estate, inheritance, gift, sales, transfer, personal property or
similar Taxes;
(e) (except as otherwise provided in the first paragraph of this section)
any Tax which is payable otherwise than by deduction or withholding from
payments made under or with respect to the Notes;
(f) Taxes imposed on or with respect to any payment by CP Ships to the
holder if such holder is a fiduciary or partnership or person other than
the sole beneficial owner of such payment to the extent that Taxes would
not have been imposed on such holder had such holder been the sole
beneficial owner of such Note; or
(g) any combination of the above.
CP Ships will make such withholding or deduction as is required by
applicable law and remit the amount withheld or deducted to the relevant
taxing authority. Additional Amounts will be paid in cash semi-annually, at
maturity, on any redemption date, on a conversion date or on any purchase
date.
At least 30 calendar days prior to each date on which any payment under or
with respect to the Notes is due and payable, if CP Ships will be obligated to
pay Additional Amounts with respect to such payment (unless such obligation to
pay Additional Amounts arises after the 30th day prior to the date on which
payment under or with respect to the Notes is due and payable, in which case
it will be promptly thereafter), CP Ships will deliver to the trustee an
Officers' Certificate stating that such Additional Amounts will be payable and
the amounts so payable and will set forth such other information necessary to
enable the trustee to pay such Additional Amounts to holders on the payment
date.
Upon request, CP Ships will furnish to a holder of Notes copies of tax
receipts evidencing the payment of any Taxes by CP Ships in such form as
provided in the normal course by the taxing authority imposing such Taxes and
as is reasonably available to CP Ships. If notwithstanding the efforts of CP
Ships to obtain such receipts, the same are not obtainable, CP Ships will
provide such holder with other evidence reasonably satisfactory to the holder
of such payments by CP Ships.
Whenever in the indenture or in this "Description of the Notes" CP Ships
refers to, in any context, the payment of principal, interest, if any, or any
other amount payable under or with respect to any note, CP Ships is including
in that reference the payment of Additional Amounts, if applicable.
For purposes of this section, references herein to "CP Ships" refer also to
any successor entity that assumes the obligations of these notes under the
indenture.
48
Modifications of the Indenture
CP Ships and the trustee may enter into supplemental indentures that add,
change or eliminate provisions of the indenture or modify the rights of the
holders of the Notes with the consent of the holders of at least a majority in
principal amount of the Notes then outstanding. However, without the consent
of each holder, no supplemental indenture may:
o reduce the rate or change the time of payment of interest (including
additional amounts and additional interest in the event of a
"registration default") on any Note;
o make any Note payable in money or securities other than that stated in
the Note;
o change the stated maturity of any Note;
o reduce the principal amount, redemption price, termination of trading
purchase price or change in control purchase price with respect to any
Note;
o make any change that adversely affects the right of a holder to require
CP Ships to purchase a Note;
o waive a default in the payment of any amount due with respect to any Note;
o impair the right to convert, or receive payment with respect to, a Note,
or the right to institute suit for the enforcement of any payment with
respect to, or conversion of, the Notes; or
o change the provisions in the indenture that relate to modifying or
amending the indenture.
Without the consent of any holder of Notes, CP Ships and the trustee may
enter into supplemental indentures for any of the following purposes:
o to evidence a successor to CP Ships and the assumption by that successor
of CP Ships' obligations under the indenture and the Notes;
o to add to CP Ships' covenants for the benefit of the holders of the
Notes or to surrender any right or power conferred upon CP Ships;
o to secure CP Ships' obligations in respect of the Notes;
o to make any changes or modifications to the indenture necessary in
connection with the registration of the Notes under the Securities Act
and the qualification of the indenture under the Trust Indenture Act; or
o to cure any ambiguity or inconsistency in the indenture.
No supplemental indenture entered into pursuant to the second, third,
fourth or fifth bullets of the preceding paragraph may be entered into without
the consent of the holders of a majority in principal amount of the Notes,
however, if such supplemental indenture would materially and adversely affect
the interests of the holders of the Notes.
The holders of a majority in principal amount of the outstanding Notes may,
on behalf of the holders of all Notes:
o waive compliance by CP Ships with restrictive provisions of the
indenture, as detailed in the indenture; and
o waive any existing or past default under the indenture and its
consequences, except a default in the payment of the principal amount,
accrued and unpaid interest, if any (including Additional Amounts and
additional interest in the event of a "registration default"),
redemption price, termination of trading purchase price or change in
control purchase price or obligation to deliver common shares upon
conversion with respect to any Note or in respect of any
49
provision which under the indenture cannot be modified or amended without
the consent of the holder of each outstanding Note affected.
No Personal Liability of Directors, Officers, Employees, Incorporators and
Shareholders
No director, officer, employee, incorporator or shareholder of CP Ships, as
such, shall have any liability for any of CP Ships' obligations under the
Notes or the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. The waiver may not be
effective to waive liabilities under the U.S. federal securities laws, and it
is the view of the SEC that a waiver of such liabilities is against public
policy in the United States.
Unclaimed Money; Prescription
If money deposited with the trustee or paying agent for the payment of
principal or interest remains unclaimed for two years, the trustee and paying
agent shall notify CP Ships and shall pay the money back to CP Ships at CP
Ships' written request. Thereafter, holders of Notes entitled to the money
must look to CP Ships for payment, subject to applicable law, and all
liability of the trustee and the paying agent shall cease. Other than as
described in this paragraph, the indenture does not provide for any
prescription period for the payment of interest and principal on the Notes.
Reports To Trustee
CP Ships will regularly furnish to the trustee copies of CP Ships' annual
report to shareholders, containing audited financial statements, and any other
financial reports which CP Ships furnishes to its shareholders.
Rule 144A Information Requirements
CP Ships agreed in the indenture to furnish to the holders or beneficial
holders of the Notes and prospective purchasers of the Notes designated by the
holders of the Notes, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time
as CP Ships registers the Notes and the underlying common shares for resale
under the Securities Act; provided, however, that CP Ships will not be
required to provide such information so long as it furnishes information to
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Exchange Act.
Trustee and Transfer Agent
The trustee for the Notes is The Bank of New York. The Canadian transfer
agent and registrar of CP Ships' common shares is Computershare Trust Company
of Canada at its principal office in Toronto, Canada. The United States
transfer agent and registrar for CP Ships' common shares is Computershare
Trust Company of New York at its principal office in New York, New York.
Listing and Trading
The Notes are eligible for trading on the PORTAL Market. CP Ships' common
shares are listed under the symbol "TEU" on the NYSE and TSX.
Enforceability of Judgments
Given that most of CP Ships' assets, as well as the assets of most of CP
Ships' directors and officers, are outside the United States, any judgment
obtained in the United States against CP Ships or certain of CP Ships'
directors or officers, including judgments with respect to the payment of
principal on any debt securities, may not be collectible within the United
States.
CP Ships has been informed by McCarthy Tetrault LLP, CP Ships' Canadian
counsel, that the laws of the Province of New Brunswick and the federal laws
of Canada applicable therein permit an action to be brought in a court of
competent jurisdiction in the Province of New Brunswick on any final and
conclusive judgment in personam of any federal or state court located in the
State of New York (hereinafter referred to as a "New York Court") against CP
Ships, which judgment is
50
subsisting and unsatisfied for a sum certain with respect to the
enforceability of the indenture and the Notes that is not impeachable as void
or voidable under the internal laws of the State of New York if:
o the New York Court rendering such judgment had jurisdiction over CP
Ships, as recognized by the courts of the Province of New Brunswick or
the federal courts of Canada (and submission by CP Ships in the indenture
to the jurisdiction of the New York Court will be sufficient for that
purpose with respect to the Notes);
o such judgment was not obtained by fraud or in a manner contrary to
natural justice and the enforcement thereof would not be inconsistent
with public policy, as such terms are understood under the laws of the
Province of New Brunswick, the federal laws of Canada or contrary to any
order made by the Attorney General of Canada under the Foreign
Extraterritorial Measures Act (Canada) or by the Competition Tribunal
under the Competition Act (Canada);
o the enforcement of such judgment would not be contrary to the laws of
general application limiting the enforcement of creditors' rights
including bankruptcy, reorganization, winding up, moratorium and similar
laws and does not constitute, directly or indirectly, the enforcement of
foreign revenue, expropriatory or penal laws in the Province of New
Brunswick or any applicable federal laws in Canada;
o no new admissible evidence relevant to the action is discovered prior to
the rendering of judgment by the court in the Province of New Brunswick
or a federal court of Canada; and
o the action to enforce such judgment is commenced within the appropriate
limitation period except that any court in the Province of New Brunswick
or federal court of Canada may only give judgment in Canadian dollars.
CP Ships has been advised by such counsel that there is doubt as to the
enforceability in Canada in original actions, or in motions to enforce
judgments of U.S. courts, of civil liabilities predicated solely upon U.S.
federal securities laws.
Form, Denomination and Registration of Notes
The Notes were issued in registered form, without interest coupons, in
minimum denominations of $1,000 and integral multiples thereof, in the form of
global securities and may be issued in the form of certificated securities, as
further provided below. See "Global Securities" for more information.
The trustee is not required:
o to issue, register the transfer of or exchange any note for a period of
15 days before a selection of Notes to be redeemed or purchased by CP
Ships; or
o to register the transfer of or exchange any Note so selected for
redemption or repurchase in whole or in part, except, in the case of a
partial redemption or repurchase, that portion of any of the Notes not
being redeemed or purchased by CP Ships.
See "Global Securities" and "Certificated Securities" for a description of
additional transfer restrictions applicable to the Notes.
No service charge will be imposed in connection with any transfer or
exchange of any Note, but CP Ships may in general require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith.
Global Securities
One or more global securities were deposited with a custodian for The
Depository Trust Company ("DTC"), and registered in the name of DTC or a
nominee for DTC.
Investors hold their interests in a global security directly through DTC if
they are DTC participants, or indirectly through organizations that are DTC
participants.
51
Except in the limited circumstances described below and in "Certificated
Securities", holders of Notes represented by interests in a global security
will not be entitled to receive Notes in certificated form. Unless and until
it is exchanged in whole or in part for certificated securities, each global
security may not be transferred except as a whole by DTC to a nominee of DTC;
or by a nominee of DTC to DTC or another nominee of DTC.
The global securities have been entered by DTC in its book-entry settlement
system. The custodian and DTC have electronically record the principal amount
of Notes represented by global securities held within DTC. Beneficial
interests in the global securities are shown on records maintained by DTC and
its direct and indirect participants. So long as DTC or its nominee is the
registered owner or holder of a global security, DTC or such nominee are
considered to be the sole owner or holder of the Notes represented by such
global security for all purposes under the indenture and the Notes. No owner
of a beneficial interest in a global security may transfer such interest
except in accordance with DTC's applicable procedures and the applicable
procedures of its direct and indirect participants.
Payments of principal and interest under a global security will be made to
DTC's nominee as the registered owner of such global security. CP Ships
expects that the nominee, upon receipt of any such payment, will immediately
credit DTC participants' accounts with payments proportional to their
respective beneficial interests in the principal amount of the relevant global
security as shown on the records of DTC. CP Ships also expects that payments
by DTC participants to owners of beneficial interests will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants, and none of CP Ships, the trustee, the conversion agent, the
custodian or any paying agent or registrar will have any responsibility or
liability for any aspect of the records relating to or payments made an
account of beneficial interests in any global security or for maintaining or
reviewing any records relating to such beneficial interests.
DTC has advised CP Ships that it is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own the
depository. Access to DTC's book-entry system is also available to others,
such as banks, brokers, dealers and trust companies, that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the participants and indirect participants.
Canadian Legends on the Notes and Common Shares
The certificates evidencing the Notes and the common shares issuable upon
conversion of the Notes will bear a legend to the effect that, unless
permitted under Canadian securities legislation, the Notes and common shares
issuable upon conversion of the Notes may not be resold or otherwise
transferred to Canadian Persons or traded in any province or territory of
Canada prior to 25th June 2004.
The term "Canadian Persons" means any person in Canada or resident in
Canada, including any natural person resident in Canada, any partnership or
corporation organized or incorporated under the federal laws of Canada or the
laws of any province or territory of Canada, any estate of which any executor
or administrator is a Canadian person, any trust of which the trustee making
the investment decision is a Canadian person, any agency or branch of a
foreign entity located in Canada and any discretionary account or similar
account (other than an estate or trust) held by a dealer or other fiduciary
organized, incorporated or (if an individual) resident in Canada.
By its purchase of Notes, each purchaser of Notes will be deemed to
acknowledge that the Notes and common shares issuable upon exercise of the
Notes may not be offered or sold to any Canadian Person by any non-Canadian
Person prior to 25th June 2004 and that each Note and each common share
issuable upon conversion of a Note, will also contain a legend substantially
to the following effect:
52
BY ITS ACQUISITION HEREOF, THE HOLDER OF THIS SECURITY AGREES THAT UNLESS
IT IS A CANADIAN PERSON (AS DEFINED IN THE INDENTURE (THE "INDENTURE") OF CP
SHIPS LIMITED DATED 24th FEBRUARY 2004) IT WILL NOT TRADE, RESELL OR OTHERWISE
TRANSFER THIS SECURITY IN ANY PROVINCE OR TERRITORY OF CANADA OR TO ANY
CANADIAN PERSON (AS DEFINED IN THE INDENTURE) BEFORE 25th JUNE 2004.
Certificated Securities
If DTC notifies CP Ships that it is unwilling or unable to continue as
depositary for a global security or if DTC ceases to be a clearing agency
registered under the Exchange Act and a successor depositary is not appointed
by CP Ships within 90 days of such notice, or an event of default has occurred
and the trustee has received a request from a beneficial owner of a Note, the
trustee will exchange each beneficial interest in that global security for one
or more certificated securities registered in the name of the owner of such
beneficial interest. Any such certificated security issued in exchange for a
beneficial interest in a global security will bear the restricted legend set
forth in the indenture and accordingly will be subject to the restrictions on
transfer applicable to certificated securities bearing such restricted legend.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the Notes represented by
the global securities be made by wire transfer of immediately available funds
to the accounts specified by holders of the global securities. With respect to
Notes in certificated form, CP Ships will make all payments by wire transfer
of immediately available funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each
holder's registered address.
The Notes represented by the global securities are eligible to trade in the
PORTAL Market and to trade in DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such Notes will, therefore, be
required by DTC to be settled in immediately available funds. CP Ships expects
that secondary trading in any certificated securities will also be settled in
immediately available funds.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The information described above concerning DTC and its book-entry system
has been obtained from sources that CP Ships believes to be reliable, but CP
Ships takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the global securities among participants in DTC, it is under
no obligation to perform or to continue those procedures, and those procedures
may be discontinued at any time. None of CP Ships, the initial purchasers or
the trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Registration Rights
CP Ships and the initial purchasers entered into a registration rights
agreement on 24th February 2004. Pursuant to the registration rights
agreement, CP Ships agreed to file with the SEC within 120 days of 24th
February 2004 a shelf registration statement at CP Ships' expense to cover
resales of registrable securities by the holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
shelf registration statement. CP Ships agreed to use its reasonable best
efforts to cause the shelf registration statement to be declared effective by
the SEC within 180 days of 24th February 2004. Notwithstanding the foregoing,
CP Ships is permitted to prohibit offers and sales of registrable securities
pursuant to the shelf registration statement under certain circumstances and
subject to certain conditions (any period during which offers and sales are
prohibited being referred to as a "suspension period").
When CP Ships uses the term "registrable securities" in this section, CP
Ships is referring to the Notes and the common shares issuable upon conversion
of the notes until the earliest of:
53
o the effective registration under the Securities Act and the resale of the
registrable securities in accordance with the registration statement; and
o the expiration of the holding period with respect to the registrable
securities under Rule 144(k) under the Securities Act.
CP Ships agreed in the registration rights agreement to give notice to all
holders of the filing and effectiveness of a shelf registration statement by
release made to Canada NewsWire, Reuters Economic Services and Bloomberg
Business News. A holder who sells registrable securities pursuant to the shelf
registration statement generally will be required to deliver a prospectus to
purchasers and be bound by certain provisions of the registration rights
agreement that are applicable to such holder (including certain
indemnification provisions). CP Ships will provide to each holder copies of
such prospectus, notify each holder when a shelf registration statement has
become effective and take certain other actions as are required to permit,
subject to the foregoing, unrestricted resales of the registrable securities.
Holders of the registrable securities will be required to deliver
prescribed information to be used in connection with, and to be named as
selling security holders in, the shelf registration statement within the
periods set forth in the registration rights agreement in order to have their
registrable securities included in the shelf registration statement. Upon
receipt of such information and any other information CP Ships may reasonably
request following the effectiveness of the shelf registration statement, CP
Ships will, within ten business days of receipt or, if later, within ten
business days of the end of any period during which CP Ships has suspended use
of the prospectus, file any amendments to the shelf registration statement or
supplements to the related prospectus as are necessary to permit holders to
deliver a prospectus to purchasers of registrable securities, subject to CP
Ships' right to suspend the use of the prospectus; except that CP Ships is not
required to file more than one amendment to the shelf registration statement
or supplement to the related prospectus in each calendar quarter to name
additional holders as selling security holders under the shelf registration
statement. CP Ships will pay the predetermined additional interest or
liquidated damages, each as described in the following paragraph, to the
holder if CP Ships fails to make the filing in the time required or, if such
filing is a post-effective amendment to the shelf registration statement
required to be declared effective under the Securities Act, if such amendment
is not declared effective within 45 days of the filing. There can be no
assurance that CP Ships will be able to maintain an effective and current
registration statement as required. The absence of such a registration
statement may limit the holder's ability to sell such registrable securities
or adversely affect the price at which such registrable securities can be
sold.
If:
o the shelf registration statement is not filed with the SEC within 120
days of 24th February 2004,
o the shelf registration statement has not been declared effective by the
SEC within 180 days of 24th February 2004, or
o the shelf registration statement is filed and declared effective but
shall thereafter cease to be effective (without being succeeded
immediately by an additional registration statement filed and declared
effective) or usable for the offer and sale of registrable securities for
a period of time (including any suspension period) which shall exceed 45
days in the aggregate in any 3-month period or 90 days in the aggregate
in any 12-month period,
(each such event referred to in the bullets above being referred to as a
"registration default"), CP Ships will pay certain additional interest in the
case of the Notes and liquidated damages in the case of common shares to each
holder of registrable securities who has timely provided the required selling
security holder information to CP Ships. The additional interest or liquidated
damages, as the case may be, payable during any period during which a
registration default shall have occurred and be continuing is:
o in the case of Notes, at a rate per year equal to 0.25% for the first
90-day period, and at a rate per year equal to 0.50% thereafter of the
aggregate principal amount of such Notes, or
o in the case of common shares issued upon conversion of the Notes, at a
rate per year equal to 0.25% for the first 90-day period, at a rate per
year equal to 0.50% thereafter of the then applicable conversion price
(as defined below).
So long as a registration default continues, CP Ships will pay additional
interest or liquidated damages, as the case may be, in cash on 30th June and
30th December of each year to the holder of record of the Notes or common
shares issued upon
54
conversion of the Notes, as the case may be, on the immediately preceding 15th
June or 15th December. Following the cure of all registration defaults, such
additional interest and liquidated damages will cease to accrue with respect
to such registration default.
The term "applicable conversion price" means, as of any date of
determination, $1,000 divided by the conversion rate then in effect as of the
date of determination or, if no Notes are then outstanding, the conversion
rate that would be in effect were Notes then outstanding.
With respect to references in this document to the payment of interest on
any Note, such reference shall be deemed to include the payment of additional
interest to the extent that, in such context, additional interest is, was or
would be payable.
CP Ships will use its reasonable best efforts to cause the shelf
registration statement to be effective until each of the registrable
securities covered by the shelf registration statement ceases to be a
registrable security.
The foregoing summary of certain provisions of the registration rights
agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the registration rights
agreement. Copies of the registration rights agreement are available from CP
Ships upon request.
Governing Law
The indenture and the Notes are governed by and construed in accordance
with the laws of the State of New York applicable to agreements and
instruments entered into and wholly-performed within the State of New York. CP
Ships has submitted to the non-exclusive jurisdiction of any federal or state
court in the State of New York for purposes of all legal actions and
proceedings instituted in connection with the indenture and the Notes. CP
Ships will have appointed J.P. LaCasse, CP Ships, 401 East Jackson Street,
Suite 3300, Tampa, Florida 33602, as CP Ships' authorized agent upon which
process may be served in any such action in any federal or state court in the
State of New York.
55
ARTICLES OF AMALGAMATION AND DESCRIPTION OF SHARE CAPITAL
CP Ships has been amalgamated and is subsisting under the laws of the
Province of New Brunswick, Canada. The Articles of Amalgamation of CP Ships do
not restrict it from carrying on any particular types of business.
The registered office of CP Ships is located at Brunswick House, 44 Chipman
Hill, Saint John, New Brunswick, Canada E2L 4Z6. The head office of CP Ships
is located at 2 City Place, Beehive Ring Road, Gatwick Airport, West Sussex
RH6 0PA, United Kingdom and its telephone number is +44-20-1293 866200.
The following summary describes those provisions of CP Ships' Articles of
Amalgamation and By-laws, and of applicable laws, that are material to an
understanding of the equity securities of CP Ships. The summary does not
purport to be complete and is subject to, and qualified in its entirety by,
the complete provisions of the Articles of Amalgamation and By-laws of CP
Ships. The authorized share capital of CP Ships consists of an unlimited
number of common shares without par value, 90,050,870 of which were issued and
outstanding as at 12th November 2004, an unlimited number of first preferred
shares without par value and an unlimited number of second preferred shares
without par value. No first preferred shares or second preferred shares have
been issued.
Common Shares
The holders of common shares are entitled to receive notice of and to
attend all meetings of shareholders and have one vote for each common share
held at all such meetings, except for meetings at which only the holders of
another class or series of shares are entitled to vote separately as a class
or series. Holders of common shares are entitled to receive, as and when
declared by the Board, dividends in such amounts and in such form as the Board
may determine from time to time. Subject to the rights of creditors and the
rights, privileges, restrictions and conditions attaching to the preferred
shares (which rank ahead of the common shares), the common shares entitle the
holders thereof to receive the remaining property of CP Ships in the event of
the liquidation, dissolution or winding-up of CP Ships on a pro rata basis.
First Preferred Shares
The Board may issue first preferred shares at any time and from time to
time on one or more series. However, the Board may not issue any first
preferred shares if by doing so, the aggregate amount payable to holders of
such shares as a return of capital in the event of a liquidation, dissolution
or wind-up of CP Ships or any other distribution of its assets among its
shareholders for the purposes of winding-up its affairs (collectively, a
"Wind-up") would exceed Cdn$250 million. Subject to the restrictions described
below, the Board may determine the rights, privileges, conditions and
restrictions attaching to the first preferred shares.
Holders of first preferred shares are not entitled to voting rights except
as required by applicable law. Holders of first preferred shares enjoy
priority over holders of common shares and second preferred shares with
respect to the payment of dividends and the return of capital in the event of
a Wind-up. Dividends may not be declared or paid on common shares or second
preferred shares unless all dividends payable on first preferred shares have
been paid, or set aside for payment.
Second Preferred Shares
The Board may issue second preferred shares at any time and from time to
time in one or more series. However, the Board may not issue any second
preferred shares if by doing so, the aggregate amount payable to holders of
such shares as a return of capital in the event of a Wind-up would exceed
Cdn$250 million. Subject to the restrictions described below, the Board may
determine the rights, privileges, restrictions and conditions attaching to the
second preferred shares. Holders of second preferred shares enjoy priority
over holders of common shares with respect to the payment of dividends and the
return of capital in the event of a Wind-up. Dividends may not be declared or
paid on the common shares unless all dividends payable on second preferred
shares have been paid, or set aside for payment.
Meetings of Shareholders
The last general meeting of holders of common shares was held on 4th May
2004. Future general meetings must be held
56
not later than 15 months after the date of the last general meeting. At each
meeting (i) the audited consolidated financial statements must be put before
the shareholders, (ii) the auditors must be appointed and (iii) the directors
will be elected. Annual or special meetings of shareholders may be held
anywhere in the world as determined by the Board. Voting may be effected in
person or by written proxy and the quorum for any shareholders meeting shall
not be less than two persons present holding or representing not less than 5%
of the total number of votes attaching to the issued and outstanding shares
enjoying voting rights at such meeting.
Pre-emptive Rights
Holders of common shares are not entitled to statutory pre-emptive rights
in connection with any new issue of common shares authorized by the Board.
Modifications, Subdivisions and Consolidations
In accordance with the Business Corporations Act (New Brunswick), Canada,
the amendment of certain rights of holders of a class of shares, including the
common shares, requires the approval of not less than two-thirds of the votes
cast by the holders of such shares voting separately as a class at a special
meeting of such holders. In circumstances where the rights of a class or
series of shares may be amended and the holders of a class or series of shares
are entitled to vote separately, such shareholders have the right under the
Business Corporations Act (New Brunswick), Canada to dissent from such
amendment and require that CP Ships pay them the fair value of their shares.
Limitations on Non-Canadians Shareholders
There are no limitations on the rights of non-resident or foreign
shareholders to own securities of CP Ships or to vote such securities imposed
by Canadian law or by the Articles of Amalgamation and By-laws of CP Ships.
Change of Control Provisions
No provisions of CP Ships' Articles of Amalgamation or By-laws would have
the effect of delaying, deterring or preventing a change of control of CP
Ships. See "-- Shareholder Rights Plan" and "Description of Indebtedness and
Certain Other Obligations".
Common Shares Outstanding and Reserved for Issuance
As at 12th November 2004, (i) 90,050,870 common shares were issued and
outstanding and (ii) approximately 7,449,000 common shares were reserved for
issuance to the directors and employees of CP Ships' under its share
compensation arrangements.
Shareholder Rights Plan
On 30th July 2001, CP Ships adopted a Shareholder Rights Plan (the "Rights
Plan") as set out in Shareholder Rights Plan Agreement dated 30th July 2001
between CP Ships and Computershare Trust Company of Canada as trustee. The
Rights Plan was amended and reconfirmed by CP Ships' shareholders on 17th
April 2002. The Rights Plan is intended to provide CP Ships with sufficient
time to explore and develop alternatives for maximizing shareholder value in
the event of a take-over bid and to provide all shareholders with an equal
opportunity to participate in the bid. The Rights Plan must be reconfirmed by
a majority of shareholders of CP Ships at the annual meeting of shareholders
in 2005. If the Rights Plan is not so confirmed, it will terminate at the
end of such annual meeting.
The following summary of the Rights Plan is qualified in its entirety by
reference to the text of the Rights Plan.
Under the Rights Plan, one right ("Right") is issued and attaches to each
outstanding common share. The Rights will separate from the common shares and
will be exercisable ten trading days after a person has acquired, or commenced
a take-over bid to acquire, beneficial ownership of 20% or more of the common
shares (a "Flip-in Event"), subject to the Board postponing such separation.
Following a Flip-in Event, each Right (other than Rights held by the person
that initiated the Flip-in Event) will permit the holders of Rights to
purchase common shares at a 50% discount to their market price. The Rights are
not exercisable if the take-over bid is made pursuant to an offer which (a)
has been made by way of a take-over bid
57
circular, (b) has been made to all shareholders of CP Ships, (c) is
outstanding for a minimum of sixty days, and (d) provides that, if more than
50% of the common shares held by Independent Shareholders (as defined in the
Rights Plan) are tendered to the bid and not withdrawn within the sixty (60)
day period, the bidder must make a public announcement to that effect and
allow for the tendering of additional common shares for an additional ten (10)
day period.
The Board may waive the application of the Rights Plan if the take-over bid
is made by way of a circular to all holders of common shares. Certain
exemptions are also provided for investment advisors, trust companies and
certain other investment and pension fund managers who acquire 20% or more of
the common shares provided that they are not making a take-over bid. The
Rights Plan does not detract from or lessen the duty of the Board to act
honestly and in good faith in the best interests of CP Ships.
CERTAIN INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material Canadian and U.S.
federal income tax consequences of the acquisition, ownership and disposition
of Notes and common shares issued upon their conversion. This discussion is
not intended to be, nor should it be construed to be, legal or tax advice to
any particular prospective purchaser.
Canadian Federal Income Tax Considerations
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to a holder of Notes who acquires Notes
pursuant to this prospectus and who, at all relevant times, for purposes of
the Income Tax Act (Canada) (the "Canadian Tax Act"), holds the Notes and
common shares acquired under the terms of the Notes as capital property, is
not affiliated with CP Ships and deals with CP Ships at arm's length (a
"Holder"). Generally, Notes and common shares will be considered to be capital
property to a Holder provided that the Holder does not hold the Notes or
common shares in the course of carrying on a business of trading or dealing in
securities and has not acquired them as an adventure in the nature of trade.
This summary is not applicable to any Holder that is a "financial institution"
(as defined in the Canadian Tax Act) for the purposes of the mark-to-market
rules or any Holder an interest in which would be a "tax shelter investment"
(as defined in the Canadian Tax Act). This summary also assumes that CP Ships
is resident in Canada for the purposes of the Canadian Tax Act. See "Risk
Factors -- Risks Relating to CP Ships -- Any increase in tax rates or change
in tax residency could adversely affect CP Ships".
This summary is based on the current provisions of the Canadian Tax Act and
the regulations thereunder, all specific proposals to amend the Canadian Tax
Act and the regulations thereunder publicly announced by the Minister of
Finance (Canada) prior to the date hereof (the "Proposed Amendments"), and
counsel's understanding of the administrative practices and policies published
in writing by the Canada Revenue Agency (the "CRA"). This summary is not
exhaustive of all possible Canadian federal income tax considerations and,
except for the Proposed Amendments, does not anticipate any changes in law
whether by legislative, governmental or judicial decision or action, nor does
it take into account provincial, territorial or foreign tax considerations,
which may differ significantly from those discussed herein. No assurance can
be given that the Proposed Amendments will be enacted in the form proposed or
at all.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER AND
NO REPRESENTATION WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO ANY
PARTICULAR HOLDER IS MADE. CONSEQUENTLY, PROSPECTIVE INVESTORS OF NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF HOLDING AND DISPOSING OF NOTES AND COMMON SHARES ACQUIRED UNDER THE
TERMS OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT OF THE INCOME AND
OTHER TAX LAWS OF ANY COUNTRY, PROVINCE, STATE OR LOCAL TAX AUTHORITY.
Residents of Canada
This section of the summary is generally applicable to a Holder who, at all
relevant times, for purposes of the Canadian Tax Act is or is deemed to be a
resident of Canada (a "Canadian Holder"). Certain Canadian Holders whose Notes
or common shares acquired under the terms of the Notes might not otherwise
qualify as capital property may make an irrevocable election in accordance
with subsection 39(4) of the Canadian Tax Act to have the Notes and common
shares and every "Canadian security" (as defined in the Canadian Tax Act)
owned by such Canadian Holder in the taxation year of the election and in all
subsequent years deemed to be capital property.
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Taxation of Interest on Notes
A Canadian Holder that is a corporation, partnership, unit trust or trust
of which a corporation or partnership is a beneficiary will be required to
include in computing its income for a taxation year all interest on a Note
that accrues to the Canadian Holder to the end of that taxation year or became
receivable or is received by it before the end of that taxation year, except
to the extent that such amount was included in the Canadian Holder's income
for a preceding taxation year.
Any other Canadian Holder, including an individual, will be required to
include in computing for a taxation year any interest on a Note received or
receivable by such Canadian Holder in that taxation year (depending upon the
method regularly followed by the Canadian Holder in computing income) except
to the extent that such amount was included in the Canadian Holder's income
for a preceding taxation year. In addition, although the Note is not an
"investment contract" (as defined in the Canadian Tax Act), if at any time a
Note should become an "investment contract" in relation to a Canadian Holder,
such Canadian Holder will be required to include in computing income for a
taxation year any interest that accrues to the Canadian Holder on the Note to
the end of any "anniversary day" (as defined in the Canadian Tax Act) in that
year to the extent such interest was not otherwise included in the Canadian
Holder's income for that year or a preceding taxation year.
A Canadian Holder that is a "Canadian-controlled private corporation" (as
defined in the Canadian Tax Act) is liable for a refundable tax of 6 2/3% on
certain investment income, including interest.
Any amount paid by CP Ships as a penalty or bonus because of early
repayment of all or part of the principal amount of a Note will be deemed to
be interest received at that time by the Canadian Holder to the extent that
such amount can reasonably be considered to relate to, and does not exceed the
value at the time of the payment of, the interest that would have been paid or
payable by CP Ships on the Note for a period ending after the payment of such
amount.
On a disposition or a deemed disposition of Notes, a Canadian Holder will
generally be required to include in income the amount of interest accrued or
deemed to accrue to the date of disposition, to the extent that such amounts
have not otherwise been included in the Canadian Holder's income for the year
or a preceding taxation year.
Exercise of Conversion Right
A Canadian Holder that converts a Note into common shares only pursuant to
the Canadian Holder's right of conversion will not be considered to realize a
capital gain or capital loss on such conversion. The cost to such Canadian
Holder of the common shares acquired on the conversion generally will be equal
to the Canadian Holder's adjusted cost base of the Note immediately before the
conversion. The adjusted cost base to a Canadian Holder of the common shares
acquired on the conversion will be averaged with the adjusted cost base of all
other common shares held by the Canadian Holder as capital property. Under the
current administrative practice of the CRA, a Canadian Holder who, on
conversion of a Note, receives an amount not in excess of $200 in lieu of a
fraction of a common share may either treat this amount as proceeds of
disposition of a portion of a Note, thereby realizing a capital gain or
capital loss, or alternatively may reduce the adjusted cost base of the common
shares that the Canadian Holder receives on the conversion by the amount of
cash received.
Disposition of Notes
A disposition or deemed disposition of a Note, including a redemption,
purchase for cancellation, payment on maturity or the exercise by a Canadian
Holder of its conversion right where CP Ships elects to deliver cash in lieu
of some or all of the common shares to be delivered on conversion (but not
including a conversion of a Note into common shares pursuant only to a
Canadian Holder's right of conversion as described above under the heading
"Residents of Canada -- Exercise of Conversion Right") will give rise to a
capital gain (or capital loss) to the extent that the Canadian Holder's
proceeds of disposition, net of any accrued interest or other amount included
in computing the Canadian Holder's income as interest and any reasonable costs
of disposition, exceed (or are less than) the adjusted cost base of the Note
to the Canadian Holder immediately before the disposition.
One-half of the amount of any capital gain (a "taxable capital gain")
realized by a Canadian Holder in a taxation year generally must be included in
computing the Canadian Holder's income in that year, and one-half of the
amount of any capital loss (an "allowable capital loss") realized by a
Canadian Holder in a taxation year generally may be deducted from taxable
capital gains realized by the Canadian Holder in that year. Allowable capital
losses in excess of taxable capital gains
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may be carried back and deducted in any of the three preceding taxation years
or carried forward and deducted in any following taxation year against taxable
capital gains realized in such years to the extent and under the circumstances
described in the Canadian Tax Act. A capital gain realized by an individual
may give rise to a liability for alternative minimum tax.
A Canadian Holder that is a "Canadian-controlled private corporation" (as
defined in the Canadian Tax Act) is liable for a refundable tax of 6 2/3% on
certain investment income, including taxable capital gains.
Common Shares
Dividends declared and paid on a Canadian Holder's common shares will be
included in the Canadian Holder's income as taxable dividends received from a
taxable Canadian corporation. The normal gross-up and dividend tax credit
rules will apply to dividends received by a Canadian Holder who is an
individual and dividends received by a Canadian Holder which is a corporation
will normally be deductible in computing its taxable income. Certain
corporations may be liable to pay a refundable tax under Part IV of the
Canadian Tax Act on such dividends.
A disposition or deemed disposition of a common share will generally result
in the Canadian Holder realizing a capital gain (or capital loss) to the
extent that the proceeds of disposition of the common share exceed (or are
less than) the aggregate of the Canadian Holder's adjusted cost base of the
common share and any reasonable costs related to the disposition. The general
tax treatment of capital gains and capital losses is discussed above under the
heading "Residents of Canada -- Disposition of Notes".
In the case of a Canadian Holder that is a corporation, the amount of any
capital loss otherwise determined resulting from the disposition or deemed
disposition of a common share may be reduced by the amount of dividends
previously received or deemed to have been received thereon in accordance with
detailed rules contained in the Canadian Tax Act. Similar rules apply where a
corporation is a member of a partnership or a beneficiary of a trust that owns
common shares or where a partnership or trust, of which a corporation is a
member or beneficiary, itself is a member of a partnership or a beneficiary of
a trust that owns common shares. Canadian Holders to whom these rules may be
relevant should consult their own tax advisors.
Non-Residents of Canada
This section of the summary is generally applicable to a Holder who, at all
relevant times, for purposes of the Canadian Tax Act, is not, has not been and
will not be or be deemed to be, resident in Canada at any time while he or she
holds or held Notes or common shares (or other property for which common
shares were substituted in a tax deferred transaction), does not use or hold
and will not be deemed to use or hold the Notes or common shares in connection
with carrying on a business in Canada, and in respect of whom the Notes or
common shares are not "designated insurance property" (a "Non-Resident
Holder").
Taxation of Interest on Notes
A Non-Resident Holder will not be subject to Canadian withholding tax in
respect of amounts paid or credited by CP Ships as, on account or in lieu of
payment of, or in satisfaction of, the principal of the Notes or interest or
premium thereon.
Exercise of Conversion Right
A Non-Resident Holder that converts a Note into common shares only pursuant
to the Non-Resident Holder's right of conversion will not be considered to
realize a capital gain or capital loss on such conversion.
Disposition of Notes and Common Shares
A Non-Resident Holder will not be subject to tax under the Canadian Tax Act
in respect of any capital gain realized by such Non-Resident Holder on a
disposition of a Note, including on the exercise by a Non-Resident Holder of
its conversion right where CP Ships elects to deliver cash in lieu of some or
all of the common shares to be delivered on conversion (but not including a
conversion of a Note into common shares only pursuant to a Non-Resident
Holder's right of conversion as
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described above under the heading "Non-Residents of Canada -- Exercise of
Conversion Right") or a common share acquired under the terms of the Notes, as
the case may be, unless the Note or common share constitutes "taxable Canadian
property" (as defined in the Canadian Tax Act) of the Non-Resident Holder at
the time of disposition and the Holder is not entitled to relief under an
applicable income tax treaty or convention. As long as the common shares are
then listed on a prescribed stock exchange (which currently includes the TSX
and the NYSE), the Notes and the common shares generally will not constitute
taxable Canadian property of a Non-Resident Holder, unless at any time during
the 60-month period immediately preceding the disposition, the Non-Resident
Holder, persons with whom the Non-Resident Holder did not deal at arm's
length, or the Non-Resident Holder together with all such persons, owned or
was considered to own 25% or more of the issued shares of any class or series
of shares of the capital stock of CP Ships.
Taxation of Dividends on Common Shares
Under the Canadian Tax Act, dividends on common shares paid or credited to
a Non-Resident Holder will be subject to Canadian withholding tax at the rate
of 25% of the gross amount of the dividends. This withholding tax may be
reduced pursuant to the terms of an applicable income tax treaty or convention
between Canada and the country of residence of a Non-Resident Holder. Under
the Canada-United States Income Tax Convention, a Non-Resident Holder resident
in the United States and entitled to the benefits of that convention will
generally be subject to Canadian withholding tax at a rate of 15% of the
amount of such dividends.
United States Federal Income Tax Considerations
The following is a summary of the principal U.S. federal income tax
considerations generally applicable to a U.S. Holder who acquires Notes or
common shares in a secondary market transaction. As used in this summary of
U.S. federal income tax considerations, the term "U.S. Holder" means a
beneficial holder of a Note or common share that for U.S. federal income tax
purposes is (i) a citizen or resident of the United States, (ii) a corporation
or an entity treated as a corporation, formed under the laws of the United
States or any state thereof (including the District of Columbia), (iii) an
estate, the income of which is subject to U.S. federal income taxation
regardless of its source and (iv) in general, a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more "United States persons" have the authority to
control all substantial decisions of the trust. As used in this summary of
U.S. federal income tax considerations, the term "Non-U.S. Holder" means any
beneficial owner of a Note that is not a U.S. Holder.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations, Internal Revenue Service ("IRS") rulings
and judicial decisions now in effect, all of which are subject to change
(possibly, with retroactive effect) or different interpretations. There can be
no assurance that the IRS will not challenge one or more of the tax
consequences described herein, and CP Ships has not obtained, nor does CP
Ships intend to obtain, a ruling from the IRS with respect to the U.S. federal
income tax consequences of acquiring or holding the Notes or common shares.
This summary does not purport to deal with all aspects of U.S. federal income
taxation that may be relevant to a particular U.S. Holder in light of the
holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Code or a holder whose "functional currency" is
not the U.S. dollar). Also, it is not intended to be wholly applicable to all
categories of U.S. Holders, some of which (such as dealers in securities or
currencies, traders in securities that elect to use a mark-to-market method of
accounting, banks, thrifts, regulated investment companies, insurance
companies, tax-exempt organizations, persons that own, or are deemed to own,
10% of more of the voting shares of CP Ships and persons holding Notes or
common shares as part of a hedging or conversion transaction or straddle or
persons deemed to sell Notes or common shares under the constructive sale
provisions of the Code) may be subject to special rules. This summary also
does not discuss any aspect of state, local or foreign law or U.S. federal
estate and gift tax law as applicable to U.S. Holders of the Notes and common
shares. In addition, this discussion is limited to purchasers of Notes or
common shares who will hold the Notes and common shares as "capital assets"
within the meaning of Section 1221 of the Code (generally, for investment).
All prospective investors in the Notes and common shares are advised to
consult their own tax advisors regarding the federal, state, local and foreign
tax consequences of the purchase, ownership and disposition of the Notes and
the common shares, including the possible application of any income tax
treaty.
This summary does not consider the U.S. federal income tax consequences of
the holding or the disposition of the Notes or common shares by a partnership.
If a partnership (including for this purpose any entity treated as a
partnership for U.S. federal income tax purposes) is a beneficial owner of the
Notes or common shares, the U.S. federal income tax treatment of a
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partner in the partnership generally will depend upon the status of the
partner and the activities of the partnership. A holder of the Notes or common
shares that is a partnership, and partners in such partnership, should consult
their individual tax advisors about the U.S. federal income tax consequences
of holding and disposing of the Notes and common shares.
Filing of the Shelf Registration Statement
The filing of the shelf registration statement will not be a taxable event
for United States federal income tax purposes. A holder of Notes or common
shares will not recognize any taxable gain or loss as a result of the filing
of the shelf registration statement, and the holder's tax basis and holding
period in its Notes or common shares will remain the same.
United States Holders
Interest on Notes
A U.S. Holder will be required to recognize as ordinary income any interest
paid or accrued on the Notes, in accordance with the U.S. Holder's regular
method of U.S. federal income tax accounting. Such interest will be treated as
income from outside the United States but generally will be "passive income"
or, in the case of certain types of U.S. Holders, "financial services income"
for U.S. foreign tax credit purposes. See "Credit for Foreign Taxes Withheld",
below.
Market Discount
If a U.S. Holder acquires a Note for an amount that is less than, in
general, the Note's principal amount, the amount of such difference is treated
as "market discount." Market discount is disregarded under a de minimis rule
if such difference is less than 1/4 of one percent of the principal amount of
the Note multiplied by the number of complete years to maturity after the U.S.
Holder acquires the Note. A U.S. Holder is required to treat any principal
payment on, or any gain on the sale, retirement or other disposition of, a
Note as ordinary income to the extent of the accrued market discount that has
not previously been included in income. In general, the amount of market
discount that has accrued is determined on a ratable basis unless the U.S.
Holder elects to determine the amount of accrued market discount on a constant
interest rate basis. A U.S. Holder may elect to include market discount in
income currently as it accrues. Such election will apply to all debt
instruments acquired by the U.S. Holder on or after the first taxable year to
which such election applies and is irrevocable without the consent of the IRS.
Amortizable Bond Premium
"Amortizable bond premium" may arise from the purchase of a Note in a
secondary market transaction. Such premium is equal to the excess of the
purchase price of the Note, reduced by any amount attributable to the
conversion right, over, in general, the Note's principal amount. The amount
attributable to the conversion right may be determined under any reasonable
method, including by reference to the trading prices of comparable, but
nonconvertible, notes issued by CP Ships or other issuers. Generally, a U.S.
Holder may elect to amortize bond premium as an offset to interest income,
using a constant yield method. The premium amortization is calculated assuming
that CP Ships will exercise redemption rights in a manner that maximizes the
U.S. Holder's yield. A U.S. Holder that elects to amortize bond premium must
reduce its tax basis in the Note by the amount of the premium used to offset
interest income. An election to amortize bond premium applies to all taxable
debt obligations held during or after the taxable year for which the election
is made and may be revoked only with the consent of the IRS.
Additional Payments
In certain circumstances, CP Ships may be obligated to pay holders of the
Notes amounts in excess of stated interest or principal. For example, as more
fully described under "Description of Notes -- Registration Rights", in the
event of a "registration default" CP Ships will be required to pay additional
interest to holders of the Notes. Additionally, CP Ships will be required to
pay Additional Amounts if certain withholding taxes are imposed on payments on
the Notes, as more fully described in "Description of Notes -- Additional
Amounts". Although the matter is not free from doubt, CP Ships intends to take
the position that the contingency that CP Ships will make such additional
payments is "remote" within the meaning of the applicable Treasury regulations
and does not intend to treat the possibility of such payments as causing the
Notes to be considered issued with "original issue discount" or as requiring
the Notes to be treated as "contingent payment debt
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instruments" for U.S. federal income tax purposes. On that basis, CP Ships
believes that such additional payments, if any, will be taxable to a U.S.
Holder as ordinary income at the time such payments accrue or are received in
accordance with the holder's method of U.S. federal income tax accounting.
Conversion of Notes into Common Shares
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a Note into common shares except (i) with respect to cash
received in lieu of a fractional common share and (ii) to the extent that any
common shares are considered attributable to accrued but unpaid interest not
previously included in gross income. Cash received in lieu of a fractional
common share should generally be treated as a payment in exchange for the
fractional common share rather than as a dividend. Gain or loss recognized on
the receipt of cash paid in lieu of a fractional common share generally will
equal the difference between the amount of cash received and the amount of
adjusted tax basis allocable to the fractional common share, and will be
long-term capital gain or loss if the U.S. Holder will have held the Note for
more than one year at the time of conversion. See "Sale, Exchange, Redemption
or Other Disposition of Notes or Common Shares", below, for a discussion of
the consequences of capital-gain treatment. The fair market value of common
shares that are attributable to accrued but unpaid interest generally will be
taxable to the U.S. Holder as ordinary interest income to the extent not
previously included in gross income. See "-- Interest on Notes" above.
The initial tax basis of common shares received on conversion (other than
common shares attributable to accrued but unpaid interest not previously
included in gross income) will equal the adjusted tax basis of the Note
converted, reduced by the portion of adjusted tax basis allocated to any
fractional common share exchanged for cash. The initial tax basis of common
shares attributable to such accrued but unpaid interest will be the fair
market value of such common shares. The holding period for the common shares
received on conversion will generally include the period during which the
converted Note was held prior to conversion. The holding period for common
shares attributable to accrued but unpaid interest will, however, commence on
the day following the date of delivery of the common shares.
Conversion of Notes into Cash or Common Shares and Cash
As discussed above under "Description of Notes -- Conversion Rights --
Conversion Procedures", CP Ships will have the option to deliver cash in lieu
of some or all of the common shares to be delivered upon conversion of the
Notes. If a U.S. Holder converts a Note and CP Ships delivers solely cash, the
transaction will be treated for U.S. federal income tax purposes as a
redemption of the Note, having the consequences for the holder described below
under "Sale, Exchange, Redemption or Other Disposition of Notes or Common
Shares".
If a U.S. Holder converts a Note and CP Ships delivers a combination of
common shares and cash, and such cash is not merely received in lieu of a
fractional common share, the U.S. federal income tax treatment to the holder
is uncertain. For U.S. federal income tax purposes, the transaction will be
treated as an exchange of the Note for a combination of cash and common
shares. Assuming the Note is a "security" for U.S. federal income tax
purposes, which is likely, a U.S. Holder will be required to recognize the
gain (but not loss) realized on this exchange in an amount equal to the lesser
of (i) the gain realized (being the excess, if any, of the fair market value
of the common shares received plus the cash received over the adjusted tax
basis in the Note exchanged therefor) and (ii) the cash received. Such gain
generally will be long-term capital gain if the U.S. Holder will have held the
Note for more than one year at the time of the exchange. See "Sale, Exchange,
Redemption or Other Disposition of Notes or Common Shares", below, for a
discussion of the consequences of capital-gain treatment. The U.S. Holder's
adjusted tax basis in the common shares received generally will equal the
adjusted tax basis in the Note exchanged (exclusive of any basis allocable to
a fractional share), decreased (but not below zero) by the cash received
(other than cash in lieu of a fractional share) and increased by the amount of
gain recognized (other than gain with respect to a fractional share). The U.S.
Holder's holding period for the common shares received upon exchange of the
Note will include the holding period for the Note so exchanged.
Alternatively, the cash payment might be treated as the proceeds from the
redemption of a portion of the Note and taxed in the manner described under
"Sale, Exchange, Redemption or Other Disposition of Notes or Common Shares",
below. In such case, the U.S. Holder's adjusted tax basis in the Note
(exclusive of any basis allocable to a fractional share) would be allocated
pro rata between the common shares received and the portion of the Note that
is treated as redeemed for cash. The holding period for the common shares
received in the conversion would include the holding period for the Note.
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In either case, a U.S. Holder should be entitled to treat any cash received
in the exchange as applied first to the satisfaction of any accrued but unpaid
interest on the Note. U.S. Holders should consult their tax advisors regarding
the proper treatment to them of the receipt of a combination of cash and
common shares upon a conversion.
Adjustment of Conversion Rate
The conversion rate of the Notes is subject to adjustment under certain
circumstances, see "Description of Notes -- Conversion Rights -- Conversion
Rate Adjustments". Certain adjustments (or failures to make adjustments) to
the conversion rate of the Notes may result in a taxable constructive dividend
distribution to a U.S. Holder of a Note. This will occur if and to the extent
that certain adjustments in the conversion rate, which may occur in limited
circumstances (particularly an adjustment to reflect a taxable dividend to
holders of common shares of CP Ships), increase the proportionate interest of
a U.S. Holder of a Note in the fully diluted common shares. The amount of any
constructive dividend distribution will be limited to the amount of CP Ships'
current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes. Because a constructive dividend distribution may occur
whether or not a U.S. Holder ever exercises the conversion privilege, such
holder may recognize income even though such holder does not receive any cash
or property as a result of the adjustment (or failure to adjust). Adjustments
to the conversion rate made pursuant to a bona fide, reasonable adjustment
formula that has the effect of preventing dilution in the interest of the
holders of the Notes, however, will generally not be considered to result in a
constructive dividend distribution.
Sale, Exchange, Redemption or Other Disposition of Notes or Common Shares
Subject to the passive foreign investment company ("PFIC") rules discussed
below, gain or loss, if any, realized by a U.S. Holder on the sale, exchange
(other than a conversion), redemption or other disposition of a Note or common
share will generally be subject to U.S. federal income taxation as capital
gain or loss in an amount equal to the difference between the U.S. Holder's
adjusted tax basis in the Note or common share and the amount realized on the
disposition (other than, in the case of a Note, any amount attributable to
accrued but unpaid interest, which will be taxable as ordinary income). Any
amount attributable to accrued market discount that has not previously been
included in income will be taxed in the manner described above, see "--Market
Discount". A U.S. Holder's adjusted tax basis in a Note generally will equal
the cost of the Note to such holder increased by the amount of market discount
previously included in the U.S. Holder's income with respect to the Note and
reduced by any principal payments received by such holder and any bond premium
used to offset interest income, see "--Amortizable Bond Premium" above. A U.S.
Holder's adjusted tax basis in a common share purchased in a secondary market
transaction generally will equal the cost of such common share. A U.S.
Holder's adjusted tax basis in a common share acquired through conversion of a
Note is discussed above.
Gain or loss realized on the sale, exchange, redemption or other
disposition of a Note or common share generally will be capital gain or loss
(subject to the market discount rules described above), and will be long-term
capital gain or loss if at the time of the disposition the Note or common
share has been held for more than one year. For non-corporate taxpayers,
including individuals, the excess of net long-term capital gains over net
short-term capital losses generally is taxed at a lower rate than ordinary
income (generally 15% for most gains recognized in taxable years beginning on
or before 31st December 2008). The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses. Any gain or loss
realized by a U.S. Holder on the sale of a Note or a common share will
generally constitute U.S. source gain or loss for foreign tax credit purposes.
Distributions on Common Shares
Subject to the PFIC rules discussed below, the gross amount of any
distribution by CP Ships (including any Canadian taxes withheld therefrom)
with respect to common shares generally will be included in the gross income
of a U.S. Holder as dividend income to the extent paid out of CP Ships'
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Such dividends will not be eligible for the
dividends-received deduction generally allowed to corporations under the Code.
However, provided that CP Ships is not a PFIC, such dividends should be
"qualified dividend income", which, if received by a U.S. Holder that is a
non-corporate taxpayer, including an individual, in taxable years beginning on
or before 31st December 2008, is subject to tax at the rates applicable to
adjusted capital gain, discussed above. Qualified dividend income does not
include dividends received on common shares with respect to which the U.S.
Holder has not met a minimum holding-period requirement or to the extent the
U.S. Holder is obligated to make related payments with respect to
substantially similar or related property (e.g., in a short sale of such
shares). See "Credit for Foreign Taxes Withheld", below, for a discussion of
the source of dividends on common shares for U.S. foreign tax credit purposes.
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To the extent that the amount of any distribution exceeds CP Ships' current
and accumulated earnings and profits for a taxable year, the distribution will
first be treated as a tax-free return of capital to the extent of the U.S.
Holder's adjusted tax basis in the common shares and, to the extent that such
distribution exceeds the U.S. Holder's adjusted tax basis in the common
shares, will be taxed as a capital gain from the sale or exchange of the
common shares.
If a U.S. Holder receives a dividend in other than U.S. dollars, the amount
of the dividend for U.S. federal income tax purposes will be the U.S. dollar
value of the dividend (including any amount withheld and calculated by
reference to the exchange rate in effect on the day the U.S. Holder receives
the dividend), whether or not the payment is converted into U.S. dollars at
that time. In such case, the U.S. Holder may recognize U.S.-source ordinary
income or loss as a result of currency fluctuations between the date on which
the dividend is paid and the date the dividend amount is converted into U.S.
dollars.
Credit for Foreign Taxes Withheld
Subject to the limitations set forth in Sections 901 and 904 of the Code
(including certain holding-period requirements), the foreign tax withheld or
paid, if any, with respect to interest on the Notes or dividends on the common
shares generally will be eligible for credit against a U.S. Holder's U.S.
federal income tax liability. Alternatively, a U.S. Holder may claim a
deduction for such amount of withheld foreign taxes, but only for a year for
which the U.S. Holder elects to do so with respect to all foreign income
taxes.
The overall limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. If CP Ships is not a
"United States-owned foreign corporation", interest on Notes and dividends on
the common shares will generally be treated for U.S. foreign tax credit
purposes as foreign source "passive income" or, in the case of certain types
of U.S. Holders, "financial services income". If, and for so long as, CP Ships
is a United States-owned foreign corporation, and dividends CP Ships pays on
the common shares may, subject to certain exceptions, instead be treated for
U.S. foreign tax credit purposes as either foreign-source "passive income" (or
"financial services income") or as U.S.-source income, in proportion to CP
Ships' earnings and profits in the year of such distribution allocable to
foreign and U.S. sources, respectively. CP Ships will be treated as a United
States-owned foreign corporation so long as stock representing 50% or more of
the voting power or value of its stock is held, directly or indirectly, by
U.S. Holders. No assurance can be given as to whether CP Ships will be treated
as a United States-owned foreign corporation.
U.S. Holders should consult their own tax advisors with respect to the
availability of a foreign tax credit or deduction for foreign taxes withheld.
Liquidated Damages
In the event of a "registration default", as described in "Description of
Notes -- Registration Rights", CP Ships will be required to pay liquidated
damages to holders of common shares issued upon conversion of Notes. These
amounts will be taxable to a U.S. Holder as ordinary income at the time such
payments accrue or are received in accordance with the holder's method of U.S.
federal income tax accounting.
Passive Foreign Investment Company
If CP Ships were to be treated as a PFIC, U.S. Holders of the Notes or
common shares could be subject to a variety of adverse tax consequences,
including higher U.S. federal income taxes on certain distributions, and on
any gain recognized on the disposition of the Notes (other than by conversion)
or the common shares, than otherwise would apply. In addition, the lower rates
of taxation recently announced for "qualified dividend income" are not
available to dividends paid by PFICs. A non-U.S. corporation is classified as
a PFIC if 75% or more of its gross income for the taxable year is passive
income or if the value of the assets it holds during the taxable year that
produce passive income (or are held for the production of passive income) is
at least 50% of the total value of its assets, taking into account a
proportionate share of the income and assets of corporations at least 25%
owned by such corporation. Based on the nature of CP Ships' income, assets and
activities and the manner in which CP Ships plans to operate its business in
future years, CP Ships does not expect to be classified as a PFIC for any
taxable year. However, because the PFIC determination will be made annually on
the basis of CP Ships' income and assets, and because the principles and
methodology for applying the PFIC tests are not entirely clear, there can be
no assurance that CP Ships will not be a PFIC in the current or subsequent
taxable years. U.S. Holders should consult their own tax advisors regarding
the U.S. federal income tax consequences to them if CP Ships were to be
treated as a PFIC.
65
Information Reporting and Backup Withholding
The Code and the Treasury regulations require those who make specified
payments to report the payments to the IRS. Among the specified payments are
interest, dividends and proceeds paid by brokers to their customers. The
required information returns enable the IRS to determine whether the recipient
properly included the payments in income. This reporting regime is reinforced
by "backup withholding" rules. These rules require the payors to withhold tax
at the rate of 28% from payments subject to information reporting if the
recipient fails to provide his or her taxpayer identification number to the
payor, furnishes an incorrect identification number or repeatedly fails to
report interest or dividends on his or her U.S. federal income tax returns.
The information reporting and backup withholding rules do not apply to
payments to corporations, tax-exempt organizations and other exempt
recipients.
Payments of interest or dividends to a U.S. Holder that is not an exempt
recipient will be subject to information reporting and backup withholding
unless the holder provides CP Ships or CP Ships' paying agent with a correct
taxpayer identification number and complies with certain certification
procedures.
Payments made to U.S. Holders by a broker upon a sale of Notes or common
shares will generally be subject to information reporting and backup
withholding. If, however, the sale is made through a foreign office of a U.S.
broker, the sale will generally be subject to information reporting but not
backup withholding. If the sale is made through a foreign office of a foreign
broker, the sale will generally not be subject to either information reporting
or backup withholding. This exception may not apply, however, if the foreign
broker is owned or controlled by United States persons or is engaged in a U.S.
trade or business.
Any amounts withheld from a payment to a U.S. Holder of Notes or common
shares under the backup withholding rules can be credited against any U.S.
federal income tax liability of the U.S. Holder and may entitle the holder to
a refund, provided that the required information is furnished to the IRS.
Non-U.S. Holders
A Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax on (i) interest paid or accrued on the Notes, (ii) payments of
Additional Amounts on the Notes, (iii) receipt of common shares upon
conversion of the Notes, or (iv) gain realized upon the disposition of the
Notes, whether by redemption or sale. Similarly, distributions by CP Ships
with respect to common shares, and gain realized upon the disposition of
common shares will generally not be subject to U.S. federal income or
withholding tax. However, gain realized on the disposition of Notes or common
shares by an individual Non-U.S. Holder who is present in the United States
for 183 days or more of the taxable year of the sale and meets certain other
conditions will be subject to U.S. federal income tax at a 30% rate. In
addition, if a Non-U.S. Holder recognizes income or gain on the Notes or
common shares and such income or gain is effectively connected with the
conduct of such Non-U.S. Holder's trade or business within the United States,
the income and gain that is effectively connected with the conduct of such
trade or business or, if certain treaty provisions apply, is attributable to a
permanent establishment in the United States will generally be subject to U.S.
federal income tax in the same manner as income or gain realized by a U.S.
Holder. In addition, for a corporate Non-U.S. Holder, the earnings and profits
that are attributable to the effectively connected income, subject to certain
adjustments, may be subject to an additional branch profits tax at a rate of
30%, or such lower rate as may be provided by an applicable income tax treaty.
A Non-U.S. Holder will not be subject to information reporting or backup
withholding (at a current rate of 28%) with respect to interest payments on
the Notes or payments of dividends on common shares if such interest or
dividends are paid by a non-U.S. payor or non-U.S. middleman to a Non-U.S.
Holder through an account maintained outside the United States. However,
unless a Non-U.S. Holder establishes an exemption (as described below),
information reporting and backup withholding will generally apply to all
interest paid on the Notes and dividends paid with respect to common shares if
such amounts (i) are paid by a U.S. payor or U.S. middleman or (ii) are paid
in the United States. For this purpose, a payment will be considered to be
made in the United States if it is paid to an account maintained by the payee
in the United States or is mailed to a U.S. address. Further, if interest
payments on the Notes or dividend payments on common shares are paid to a
Non-U.S. Holder through a foreign office of a broker that is (i) a U.S. person
as defined under the Code, (ii) a foreign person that derived 50% or more of
its gross income for certain periods from the conduct of a trade or business
in the United States, (iii) a controlled foreign corporation within the
meaning of the Code, or a (iv) foreign partnership with certain connections to
66
the United States, such interest and dividends will be subject to information
reporting (but not backup withholding) unless a Non-U.S. Holder establishes an
exemption from such reporting (as described below).
Generally, information reporting and backup withholding will not apply to a
payment by or through a foreign office of a foreign broker of the gross
proceeds of a sale of the Notes or the common shares effected outside the
United States. However, unless a Non-U.S. Holder establishes an exemption (as
described below), the gross proceeds of any sale of the Notes or common shares
made through a U.S. office of any broker, foreign or domestic, will be subject
to information reporting and backup withholding.
To establish an exemption from information reporting and backup
withholding, a Non-U.S. Holder must timely provide an IRS Form W-8BEN (or
other applicable form) certifying under penalties of perjury that such holder
is a non-United States person as defined under the Code. Notwithstanding any
IRS Form W-8BEN or other documentary evidence, a broker or other payor who has
actual knowledge or reason to know that a holder is a U.S. person will be
required to backup withhold and file information returns with the IRS if such
broker or payor is a U.S. person or has certain connections to the United
States.
PLAN OF DISTRIBUTION
The Notes were issued on 24th February 2004 and offered and sold in the
United States to qualified institutional buyers in reliance on Rule 144A under
the Securities Act and in certain Canadian provinces pursuant to exemptions
from the requirement to file a prospectus in the province in which such sales
were made.
Holders are entitled to the benefits of a registration rights agreement
described under "Description of Notes -- Registration Rights", pursuant to
which CP Ships has filed this prospectus as a base shelf prospectus with the
Alberta Securities Commission under the Canadian Securities Administrators,
National Instrument 44-102 and a registration statement including this
prospectus with the SEC under the Securities Act.
All information omitted from this prospectus will be contained in a
prospectus supplement that will be delivered to purchasers together with this
prospectus. Each prospectus supplement will be incorporated by reference into
this prospectus as of the date of the prospectus supplement and only for the
purposes of the distribution to which the prospectus supplement pertains. The
only information that will be contained in any prospectus supplement to this
prospectus is the information required by applicable securities legislation
and a current list of the holders who have delivered a completed selling
security holder's questionnaire to CP Ships (each, an "Electing Holder"); the
aggregate principal amount of the Notes held by each such Electing Holder and
the number of Common Shares into which the Notes are convertible. An initial
list of Electing Holders is set forth in Schedule A hereto, which is
incorporated and forms a part of this prospectus and which may be updated by
way of a prospectus supplement as described above.
An Electing Holder may sell at any time, or from time to time, pursuant to
this prospectus, the aggregate principal amount of the Notes held by such
Electing Holder as set forth in Schedule A to this prospectus and in a
prospectus supplement, as the case may be, or the number of Common Shares into
which such Electing Holder has converted its Notes, and the aggregate
principal amount payable of the Notes, or the number of Common Shares, as the
case may be, held by such Electing Holders shall thereafter be reduced to the
extent of such sales. The Notes held by the Electing Holders were either
acquired by them upon the issuance of the Notes on 24th February 2004 at a
price of $1,000 per Note, or in subsequent transactions thereafter at varying
prices.
CP Ships is registering the Securities covered by this prospectus under
the Securities Act to permit any Electing Holders to conduct public secondary
trading of these Securities from time to time after the date of this
prospectus in accordance with the federal securities laws of the United
States. CP Ships has agreed, among other things, to bear all fees and
expenses, other than any underwriting compensation, in connection with the
registration and sale of the Securities covered by this prospectus.
Additionally, CP Ships has agreed to indemnify the holders against certain
liabilities, including liabilities under the Securities Act, and each Electing
Holder has agreed to indemnify CP Ships and any persons who control CP Ships,
as defined in the federal securities laws of the United States, against any
liability with respect to any information furnished by such holder in writing
to CP Ships expressly for use in the shelf registration statement.
67
CP Ships will not receive any of the proceeds from the sale of the
Securities by Electing Holders. Electing Holders may sell all or any portion
of the Securities beneficially owned by them and offered hereby from time to
time:
o directly; or
o through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, commissions or concessions
from Electing Holders or from the purchasers of the Securities
for whom they may act as agent.
The Securities may be sold from time to time in one or more transactions at:
o fixed prices, which may be changed;
o varying prices determined at the time of sale; or
o negotiated prices.
The prices will be determined by Electing Holders or by agreement between
Electing Holders and underwriters or dealers who may receive fees or
commissions in connection with the sale. The aggregate proceeds to Electing
Holders from the sale of the Securities offered by them will be the purchase
price of the Securities less discounts and commissions, if any.
The sales described in the preceding paragraph may be effected in
transactions:
o on any U.S. or Canadian national securities exchange or quotation
service on which the Securities may be listed or quoted at the
time of the sale, including the NYSE and the TSX in the case of
the underlying common shares;
o in the over-the-counter market;
o in transactions otherwise than on such exchanges or services or
in the over-the-counter market; or
o through the writing of options.
These transactions may include block transactions or "crosses". Crosses
are transactions in which the same broker acts as agent on both sides of the
trade.
Once any security is sold by an Electing Holder pursuant to this
prospectus and a related prospectus supplement, such security is not
thereafter covered by this prospectus even if subsequently reacquired by an
Electing Holder.
CP Ships' outstanding common shares are listed on the NYSE and the TSX,
each of which has approved the listing of the underlying common shares. CP
Ships does not intend to list the Notes for trading on any securities exchange
in the United States or Canada. Accordingly, no assurance an be given as to
the development of an active trading market for the Notes. See "Risk Factors
- -- Absence of a public market for the Notes could cause investors in the Notes
to be unable to resell them for an extended period of time."
In order to comply with the securities laws of certain U.S. states and
Canadian jurisdictions, if applicable, the Notes and underlying common may be
sold in such jurisdictions only through registered or licensed brokers or
dealers.
The holders and any underwriters, dealers or agents that participate in
the distribution of the Securities offered under this prospectus may be deemed
to be "underwriters" within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them might be deemed to be
underwriting compensation under the Securities Act.
68
There is no assurance that any selling holder will sell any or all of the
Notes or underlying common shares described in this prospectus, and any
selling holder may transfer, devise or gift such Securities by other means not
described in this prospectus.
In connection with any offering of Securities, the underwriters, if any,
may offer, allot or effect transactions which stabilize or maintain the market
price of the Securities offered at a level above that which might otherwise
prevail in the open market. Such transactions, if commenced, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
by Sidley Austin Brown & Wood LLP, Chicago, Illinois, United States counsel to
CP Ships, and McCarthy Tetrault, Canadian counsel to CP Ships.
69
SCHEDULE A
The table below sets forth the name each Electing Holder, the principal
amount of Notes beneficially owned by each Electing Holder and the number of
Common Shares into which the Notes are initially convertible that may be
offered under this prospectus. CP Ships has prepared the table below based on
the information given to the Company by the Electing Holders named in the
table on or prior to 12th November 2004.
Unless otherwise disclosed, no Electing Holder has indicated that it has
held any position or office or had any other material relationship with the
Company or its affiliates during the past three years. The Electing Holders
listed in the table may have sold or transferred, in transactions exempt from
the registration requirements of the Securities Act, some or all of their
Notes or Common Shares since the date as of which the information is presented
in the table. Because the Electing Holders may offer all or some of their
Notes or Common Shares from time to time, CP Ships cannot estimate the amount
of the Notes or Common Shares that will be held by the Electing Holders upon
the termination of any particular offering.
Only Electing Holders identified below who beneficially own the Notes or
Common Shares set forth opposite each such holder's name in the table on the
effective date of the registration statement, of which this prospectus forms a
part, may sell such Securities pursuant to the registration statement. Prior
to any use of this prospectus in connection with an offering of the Notes or
Common Shares by any holder not identified below, the registration statement
of which this prospectus forms a part will be amended by a post-effective
amendment to set forth the name and aggregate amount of Notes or Common Shares
beneficially owned by the Electing Holder intending to sell such Notes or
Common Shares and the aggregate amount of Notes or Common Shares to be
offered. The prospectus, which will be a part of such a post-effective
amendment, will also disclose whether any Electing Holder selling in
connection with such prospectus has held any position or office with, has been
employed by or otherwise has had a material relationship with, CP Ships during
the three years prior to the date of the prospectus if such information has
not been disclosed herein.
Electing Holder Principal amount of Number of Common
Notes held Shares
CNH LA Master Account, L.P. $500,000 -
Credit Suisse First Boston Europe Limited $3,500,000
DKR Soundshore Strategic Holding Fund Ltd. $750,000
DKR Soundshore Opportunity Holding Fund Ltd. $1,500,000
Goldman, Sachs & Co. $23,000,000
Grace Convertible Arbitrage Fund, Ltd. $5,500,000
LDG Limited $64,000
Lighthouse Multi-Strategy Master Fund LP $25,000
Lyxor/Qyuest Fund Ltd $125,000
Man Convertible Bond Master Fund, Ltd. $4,591,000
Morgan Stanley Convertible Securities Trust $800,000
Polygon Global Opportunities Master Fund $3,500,000
Quest Global Convertible Fund Ltd $350,000
RBC Alternative Assets, L.P. $100,000
S.A.C. Arbitrage Fund, LLC $5,000,000
Sphinx Fund $42,000
St. Thomas Trading, Ltd. $5,909,000
TQA Master Fund, Ltd. $618,000
TQA Master Plus Fund Ltd. $967,000
Univest Multi Strategy FD $200,000
A-1
Electing Holder Principal amount of Number of Common
Notes held Shares
Allstate Insurance Company $3,000,000
Argent Classic Convertible Arbitrage Fund L.P. $560,000
Argent LowLev Convertible Arbitrage Fund II, LLC $70,000
Arlington County Employees' Retirement System $155,000
CIBC World Markets $5,500,000
CQS Convertible and Quantitative Strategies Master Fund Limited $1,000,000
Defined Benefit Plan of Zeneca AG Products Holdings, Inc. $100,000
Delta Airlines Master Trust $45,000
FrontPoint Convertible Arbitrage Fund, L.P. $3,500,000
HFR CA Select Fund $1,000,000
Institutional Benchmarks Master Fund, LP $2,500,000
Jefferies & Company, Inc $3,500,000
KBC Financial Products USA Inc $2,790,000
Lehman Brothers Inc $10,000,000
Mellon HBV Master Convertible Arbitrage Fund LP $857,000
Mellon HBV Master Leveraged Multi-Strategy Fund LP $46,500
Mellon HBV Master Multi-Strategy Fund LP $418,500
Microsoft Corporation $245,000
Mint Master Fund Ltd. $178,000
Morgan Stanley & Co Inc. $4,925,000
Norbord, Inc. $35,000
OCM Global Convertible Securities Fund $50,000
OCM International Convertible Trust $200,000
OCM Non-U.S. Convertible Securities Fund $115,000
Royal Bank of Canada $3,000,000
Sage Capital Management LLC $2,050,000
San Diego County Employee Retirement Association $2,500,000
Silvercreek II Limited $660,000
State Employees' Retirement Fund of the State of Delaware $1,085,000
TD Securities (USA) LLC $1,099,409
The St. Paul Travelers Companies, Inc. - Commercial Lines $35,000
The St. Paul Travelers Companies, Inc. - Personal Lines $25,000
Tribeca investments limited $10,500,000
Wachovia Capital Markets LLC $2,500,000
Wachovia Securities International Ltd. $9,000,000
WPG Convertible Arbitrage Overseas Master FD $800,000
Xavex - Convertible Arbitrage 7 Fund $178,000
Xavex Convertible Arbitrage 10 Fund $280,000
Zazove Convertible Arbitrage Fund, LP $6,300,000
Zazove Hedged Convertible Fund, LP $4,500,000
Zazove Income Fund, LP $1,500,000
Zeneca Holdings Pension Trust $245,000
Zurich Institutional Benchmarks Master Fund Ltd. $131,000
A-2