##### 



EXHIBIT 2 > CAE ANNUAL REPORT
2005 
 SELECTED FINANCIAL INFORMATION SELECTED ANNUAL INFORMATION FOR THE PAST FIVE YEARS (Unaudited amounts in millions except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Revenue
    
    $
    986.2
    
    
    
    $
    938.4
    
    
    $
    976.8
    
    
    $
    1,010.7
    
    
    $
    820.3(Loss) earnings from continuing operations
    
    
    (304.7
    )
    
    
    
    47.4
    
    
    
    113.9
    
    
    
    133.0
    
    
    
    99.3Net (loss) earnings
    
    
    (199.9
    )
    
    
    
    64.0
    
    
    
    117.2
    
    
    
    149.5
    
    
    
    106.1Financial position:Total assets
    
    $
    1,699.7
    
    
    
    $
    2,308.7
    
    
    $
    2,356.5
    
    
    $
    2,378.4
    
    
    $
    1,366.8Total net debt
    
    
    285.8
    
    
    
    
    529.6
    
    
    
    757.1
    
    
    
    822.2
    
    
    
    108.7Per share:(Loss) earnings from continuing operations
    
    $
    (1.23
    )
    
    
    $
    0.20
    
    
    $
    0.52
    
    
    $
    0.61
    
    
    $
    0.46Net (loss) earnings
    
    
    (0.81
    )
    
    
    
    0.27
    
    
    
    0.53
    
    
    
    0.69
    
    
    
    0.49Dividends
    
    
    0.10
    
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.10Shareholders equity
    
    
    2.64
    
    
    
    
    3.94
    
    
    
    3.42
    
    
    
    2.81
    
    
    
    2.13
 SELECTED
QUARTERLY FINANCIAL INFORMATION (Unaudited amounts in millions, except share amounts and per share amounts)
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Fiscal
2003Revenue
    
    $
    244.7
    
    
    
    214.7
    
    
    
    246.9
    
    
    
    270.5Earnings from continuing operations
    
    $
    33.2
    
    
    
    18.2
    
    
    
    27.9
    
    
    
    34.6Basic earnings per share from continuing operations
    
    $
    0.15
    
    
    
    0.08
    
    
    
    0.13
    
    
    
    0.16Diluted earnings per share from continuing operations
    
    $
    0.15
    
    
    
    0.08
    
    
    
    0.13
    
    
    
    0.16Net earnings
    
    $
    37.4
    
    
    
    23.3
    
    
    
    31.5
    
    
    
    25.0Basic earnings per share
    
    $
    0.17
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    0.11Diluted earnings per share
    
    $
    0.17
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    0.11Average number of shares outstanding, in millions
    
    
    219.3
    
    
    
    219.4
    
    
    
    219.4
    
    
    
    219.4Average exchange rate, 1 US dollar to Canadian dollar
    
    $
    1.56
    
    
    
    1.56
    
    
    
    1.57
    
    
    
    1.51Fiscal
2004Revenue
    
    $
    208.9
    
    
    
    213.2
    
    
    
    255.2
    
    
    
    261.1Earnings from continuing operations
    
    $
    12.2
    
    
    
    11.0
    
    
    
    14.5
    
    
    
    9.7Basic earnings per share from continuing operations
    
    $
    0.06
    
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.04Diluted earnings per share from continuing operations
    
    $
    0.06
    
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.04Net earnings
    
    $
    13.2
    
    
    
    15.1
    
    
    
    21.4
    
    
    
    14.3Basic earnings per share
    
    $
    0.06
    
    
    
    0.07
    
    
    
    0.09
    
    
    
    0.05Diluted earnings per share
    
    $
    0.06
    
    
    
    0.07
    
    
    
    0.09
    
    
    
    0.05Average number of shares outstanding, in millions
    
    
    219.7
    
    
    
    220.0
    
    
    
    246.5
    
    
    
    246.6Average exchange rate, 1 US dollar to Canadian dollar
    
    $
    1.40
    
    
    
    1.38
    
    
    
    1.32
    
    
    
    1.32Fiscal
2005Revenue
    
    $
    230.9
    
    
    
    235.1
    
    
    
    257.5
    
    
    
    262.7Earnings (loss) from continuing operations
    
    $
    18.9
    
    
    
    12.8
    
    
    
    (345.7
    )
    
    
    9.3Basic earnings (loss) per share from continuing operations
    
    $
    0.08
    
    
    
    0.05
    
    
    
    (1.40
    )
    
    
    0.04Diluted earnings (loss) per share from continuing operations
    
    $
    0.08
    
    
    
    0.05
    
    
    
    (1.40
    )
    
    
    0.04Net earnings (loss)
    
    $
    24.3
    
    
    
    14.0
    
    
    
    (347.0
    )
    
    
    108.8Basic earnings (loss) per share
    
    $
    0.10
    
    
    
    0.06
    
    
    
    (1.40
    )
    
    
    0.44Diluted earnings (loss) per share
    
    $
    0.10
    
    
    
    0.05
    
    
    
    (1.40
    )
    
    
    0.44Average number of shares outstanding, in millions
    
    
    246.7
    
    
    
    246.8
    
    
    
    247.0
    
    
    
    247.8Average exchange rate, 1 US dollar to Canadian dollar
    
    $
    1.36
    
    
    
    1.31
    
    
    
    1.22
    
    
    
    1.23
 > 42




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##### 



> CAE ANNUAL REPORT
2005 
 MANAGEMENT AND
AUDITORS REPORTS MANAGEMENTS STATEMENT OF RESPONSIBILITY The consolidated financial statements contained in this Annual Report are the responsibility
of management, and have been prepared in accordance with Canadian generally accepted accounting
principles and include when necessary some estimates based on management best judgment. Financial
information presented elsewhere in the Annual Report is under management responsibilities and
consistent with that contained in the accompanying financial statements. CAEs policy is to maintain internal accounting and administrative systems, combined with
disclosure control of high quality consistent with reasonable cost. Such systems are designed to
provide reasonable assurance as to the reliability of financial information and the safeguarding
of assets. The Board of Directors is responsible for ensuring that Management fulfils its
responsibilities for financial reporting and is ultimately responsible for reviewing and approving
the consolidated financial statements through its Audit Committee, consisting solely of outside
directors, which reviews the consolidated financial statements and reports thereon to the Board.
The Committee meets periodically with the external auditors, internal auditors and management to
review their respective activities and to satisfy itself that each party is properly discharging
its responsibilities. Both external auditors and internal auditors have free access to the
Committee, with or without management, to discuss the scope of their audits, the adequacy of the
system of internal controls and financial reporting. The financial statements have been reviewed by the Audit Committee and, together with the
other required information in the Annual Report, approved by the Board of Directors. In addition,
the consolidated financial statements have been audited by PricewaterhouseCooper LLP, whose report
is provided below. (Signed)
    
    
    
    (Signed)R.E. Brown
    
    
    
    A. RaquepasPresident and Chief Executive Officer
    
    
    
    Vice President, Finance and Chief Financial OfficerMontreal, CanadaMay 10, 2005
 AUDITORS REPORT To the Shareholders of CAE Inc.
We have audited the consolidated balance sheets of CAE Inc. as at March 31, 2005 and 2004, and the
consolidated statements of earnings, retained earnings and cash flows for each of the years in the
three-year period ended March 31,2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at March 31, 2005 and 2004, and the results of
its operations and cash flows for each of the years in the three-year period ended March 31, 2005
in accordance with Canadian generally accepted accounting principles. (Signed)
Chartered Accountants, Montreal, Canada
May 10, 2005 Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the companys financial statements, such as the
changes described in Note 1 to the consolidated financial statements. Our report to the
shareholders dated May 10, 2005 is expressed in accordance with Canadian reporting standards which
do not require a reference to such a change in accounting principles in the auditors report when
the change is properly accounted for and adequately disclosed in the financial statements. (Signed)
Chartered Accountants, Montreal, Canada
May 10, 2005 43 >




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##### 



> CAE ANNUAL REPORT
2005  CONSOLIDATED FINANCIAL STATEMENTS
 CONSOLIDATED BALANCE SHEETS As at March 31 (amounts in millions of Canadian dollars)
    
    2005
    
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    57.1
    
    
    
    $
    54.7Accounts receivable (Note 5)
    
    
    255.7
    
    
    
    
    316.5Inventories (Note 6)
    
    
    101.0
    
    
    
    
    147.7Prepaid expenses
    
    
    17.8
    
    
    
    
    19.6Income taxes recoverable
    
    
    58.5
    
    
    
    
    52.0Future income taxes (Note 15)
    
    
    2.5
    
    
    
    
    1.8Current assets held for sale (Note 3)
    
    
    5.8
    
    
    
    
    89.8498.4
    
    
    
    
    682.1Restricted cash
    
    
    0.9
    

    
    
    
    7.0Property, plant and equipment, net (Note 7)
    
    
    792.2
    
    
    
    
    780.0Future income taxes (Note 15)
    
    
    101.0
    
    
    
    
    89.0Intangible assets (Note 8)
    
    
    20.2
    
    
    
    
    129.2Goodwill (Note 9)
    
    
    92.1
    
    
    
    
    300.7Other assets (Note 10)
    
    
    137.4
    
    
    
    
    180.8Long-term assets held for sale (Note 3)
    
    
    57.5
    
    
    
    
    139.9$
    1,699.7
    
    
    
    $
    2,308.7Liabilities
and Shareholders EquityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    312.8
    
    
    
    $
    322.0Deposits on contracts
    
    
    93.5
    
    
    
    
    69.3Long-term debt due within one year (Note 11)
    
    
    35.3
    
    
    
    
    8.8Future income taxes (Note 15)
    
    
    19.6
    
    
    
    
    51.1Current liabilities related to assets held for sale (Note 3)
    
    
    7.8
    
    
    
    
    54.5469.0
    
    
    
    
    505.7Long-term debt (Note 11)
    
    
    307.6
    
    
    
    
    575.5Deferred gains and other long-term liabilities (Note 16)
    
    
    179.8
    
    
    
    
    171.0Future income taxes (Note 15)
    
    
    38.3
    
    
    
    
    77.5Long-term liabilities related to assets held for sale (Note 3)
    
    
    53.4
    
    
    
    
    60.21,048.1
    
    
    
    
    1,389.9Shareholders
EquityCapital stock (Note 12)
    
    
    373.8
    
    
    
    
    367.5Contributed surplus (Note 13)
    
    
    3.3
    
    
    
    
    1.3Retained earnings
    
    
    340.8
    
    
    
    
    562.1Currency translation adjustment (Note 22)
    
    
    (66.3
    )
    
    
    
    (12.1
    )651.6
    
    
    
    
    918.8$
    1,699.7
    
    
    
    $
    2,308.7
 Contingencies and commitments (Notes 18 and 20) The accompanying notes form an integral part of these consolidated financial statements. Approved by the Board:
    
    (Signed)
    
    (Signed)R.E. Brown
    
    L.R. WilsonDirector
    
    Director
 > 44




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##### 



> CAE ANNUAL REPORT 2005 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS Years ended March 31 (amounts in millions of Canadian dollars, except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003RevenueCivil Simulation and Training
    
    $
    520.2
    

    
    
    $
    461.8
    
    
    $
    517.2Military Simulation and Training
    
    
    466.0
    
    
    
    
    476.6
    
    
    
    459.6$
    986.2
    
    
    
    $
    938.4
    
    
    $
    976.8Earnings from continuing operations before interest and income taxesCivil Simulation and Training (Note 23)
    
    $
    47.6
    
    
    
    $
    39.0
    
    
    $
    115.6Military Simulation and Training (Note 23)
    
    
    47.2
    
    
    
    
    51.6
    
    
    
    78.8Impairment of goodwill, tangible and intangible assets (Note 4)
    
    
    (443.3
    )
    
    
    
    
    
    
    
    Restructuring Costs (Note 24)
    
    
    (24.5
    )
    
    
    
    (9.3
    )
    
    
    (Loss) earnings from continuing operations before interest and income taxes
    
    $
    (373.0
    )
    
    
    $
    81.3
    
    
    $
    194.4Interest on
long-term debt (Note 11A(ix))
    
    
    37.8
    
    
    
    
    28.0
    
    
    
    31.6Other interest expense (income), net (Note 11A(ix))
    
    
    (5.7
    )
    
    
    
    (5.6
    )
    
    
    (3.5
    )(Loss) earnings from continuing operations before income taxes
    
    $
    (405.1
    )
    
    
    $
    58.9
    
    
    $
    166.3Income tax (recovery) expense (Note 15)
    
    
    (100.4
    )
    
    
    
    11.5
    
    
    
    52.4(Loss) earnings from continuing operations
    
    $
    (304.7
    )
    
    
    $
    47.4
    
    
    $
    113.9Results of discontinued operations (Note 3)
    
    
    104.8
    
    
    
    
    16.6
    
    
    
    3.3Net (loss) earnings
    
    $
    (199.9
    )
    
    
    $
    64.0
    
    
    $
    117.2Basic (loss) earnings per share from continuing operations
    
    $
    (1.23
    )
    
    
    $
    0.20
    
    
    $
    0.52Diluted (loss) earnings per share from continuing operations
    
    $
    (1.23
    )
    
    
    $
    0.20
    
    
    $
    0.52Basic (loss) earnings per share
    
    $
    (0.81
    )
    
    
    $
    0.27
    
    
    $
    0.53Diluted (loss) earnings per share
    
    $
    (0.81
    )
    
    
    $
    0.27
    
    
    $
    0.53Weighted average number of common shares outstanding
    
    
    247.1
    
    
    
    
    233.2
    
    
    
    219.4
 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Years ended March 31 (amounts in millions of Canadian dollars)
    
    2005
    
    
    
    2004
    
    
    2003Retained earnings at beginning of year as previously reported
    
    $
    562.1
    
    
    
    $
    531.2
    
    
    $
    440.4Change in accounting policy (Note 1)
    
    
    3.3
    
    
    
    
    
    
    
    
    Retained earnings at beginning of year
    
    
    565.4
    
    
    
    
    531.2
    
    
    
    440.4Share issue costs (2004-net of taxes of $2.4 million)
    
    
    
    
    
    
    
    (5.1
    )
    
    
    Net (loss) earnings
    
    
    (199.9
    )
    
    
    
    64.0
    
    
    
    117.2Dividends
    
    
    (24.7
    )
    
    
    
    (28.0
    )
    
    
    (26.4
    )Retained earnings at end of year
    
    $
    340.8
    
    
    
    $
    562.1
    
    
    $
    531.2
 The accompanying notes form an integral part of these consolidated financial
statements. 45 >




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##### 



> CAE ANNUAL REPORT 2005 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOW Years ended March 31 (amounts in millions of Canadian dollars)
    
    2005
    
    
    
    2004
    
    
    2003Operating activitiesNet (loss) earnings
    
    $
    (199.9
    )
    
    
    $
    64.0
    
    
    $
    117.2Results of discontinued operations
    
    
    (104.8
    )
    
    
    
    (16.6
    )
    
    
    (3.3
    )(Loss) earnings from continuing operations
    
    
    (304.7
    )
    
    
    
    47.4
    
    
    
    113.9Adjustments to reconcile earnings to cash flows from operating activities:Impairment of goodwill, tangible and intangible assets (Note 4)
    
    
    443.3
    
    
    
    
    
    
    
    
    Amortization
    
    
    82.0
    
    
    
    
    71.4
    
    
    
    65.1Future income taxes
    
    
    (113.9
    )
    
    
    
    (2.9
    )
    
    
    16.2Investment tax credits
    
    
    (29.2
    )
    
    
    
    (9.2
    )
    
    
    28.2Stock based compensation (Note 13)
    
    
    2.0
    
    
    
    
    1.3
    
    
    
    Other
    
    
    20.9
    
    
    
    
    (6.3
    )
    
    
    (18.4
    )Decrease (increase) in non-cash working capital (Note 17)
    
    
    85.6
    
    
    
    
    (100.2
    )
    
    
    (64.7
    )Net cash provided by continuing operating activities
    
    
    186.0
    
    
    
    
    1.5
    
    
    
    140.3Net cash provided by discontinued operating activities
    
    
    21.6
    
    
    
    
    4.2
    
    
    
    14.6Net cash provided by operating activities
    
    
    207.6
    
    
    
    
    5.7
    
    
    
    154.9Investing activitiesPurchase of businesses (Note 2)
    
    
    (13.8
    )
    
    
    
    
    
    
    
    Proceeds from disposal of discontinued operations (Note 3)
    
    
    239.4
    
    
    
    
    22.3
    
    
    
    25.0Short-term investments, net
    
    
    
    
    
    
    
    2.6
    
    
    
    18.8Capital expenditures
    
    
    (118.0
    )
    
    
    
    (86.8
    )
    
    
    (224.2
    )Proceeds from sale and leaseback of assets
    
    
    43.8
    
    
    
    
    122.5
    
    
    
    127.0Deferred development costs
    
    
    (9.9
    )
    
    
    
    (12.7
    )
    
    
    (13.3
    )Deferred pre-operating costs
    
    
    (1.7
    )
    
    
    
    (6.6
    )
    
    
    (7.6
    )Other assets
    
    
    (2.4
    )
    
    
    
    (4.8
    )
    
    
    (27.5
    )Net cash provided by (used in) continuing investing activities
    
    
    137.4
    
    
    
    
    36.5
    
    
    
    (101.8
    )Net cash used in discontinued investing activities
    
    
    (5.8
    )
    
    
    
    (12.0
    )
    
    
    (32.6
    )Net cash provided by (used in) investing activities
    
    
    131.6
    
    
    
    
    24.5
    
    
    
    (134.4
    )Financing
activitiesProceeds of long-term debt
    
    
    267.7
    
    
    
    
    514.9
    
    
    
    250.0Repayments of long-term debt
    
    
    (588.5
    )
    
    
    
    (650.4
    )
    
    
    (326.3
    )Dividends paid
    
    
    (24.0
    )
    
    
    
    (27.4
    )
    
    
    (26.2
    )Capital stock issuances (Note 12)
    
    
    3.6
    
    
    
    
    176.4
    
    
    
    3.5Share issue costs
    
    
    
    
    
    
    
    (7.5
    )
    
    
    Other
    
    
    0.7
    
    
    
    
    1.4
    
    
    
    (14.1
    )Net cash (used in) provided by continuing financing activities
    
    
    (340.5
    )
    
    
    
    7.4
    
    
    
    (113.1
    )Net cash provided by discontinued financing activities
    
    
    3.2
    
    
    
    
    10.4
    
    
    
    18.7Net cash (used in) provided by financing activities
    
    
    (337.3
    )
    
    
    
    17.8
    
    
    
    (94.4
    )Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (2.3
    )
    
    
    
    (3.2
    )
    
    
    2.2Net (decrease) increase in cash and cash equivalents
    
    
    (0.4
    )
    
    
    
    44.8
    
    
    
    (71.7
    )Cash and cash equivalents at beginning of year
    
    
    61.9
    
    
    
    
    17.1
    
    
    
    88.8Cash and cash equivalents at end of year
    
    $
    61.5
    
    
    
    $
    61.9
    
    
    $
    17.1Cash and cash equivalents related to:Continuing operations
    
    $
    57.1
    
    
    
    $
    54.7
    
    
    $
    13.5Discontinued operations
    
    
    4.4
    
    
    
    
    7.2
    
    
    
    3.6$
    61.5
    
    
    
    $
    61.9
    
    
    $
    17.1
 Supplementary Cash Flow Information (Note 17) The accompanying notes form an integral part of these consolidated financial statements. > 46




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##### 



> CAE ANNUAL REPORT
2005 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 2005, 2004 and 2003 (amounts in millions of Canadian dollars) NOTE 01.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS CAE Inc designs and provides simulation equipment and services and develops integrated
training solutions for the military, commercial airlines, business aircraft operators and aircraft
manufacturers. CAEs flight simulators replicate aircraft performance in normal and abnormal operations and
a comprehensive set of environmental conditions, utilizing visual systems with an extensive
database of airports, other landing areas and flying environments and motion and sound cues to
create a fully immersive training environment. The Company offers a full range of flight training
devices based on the same software used in its simulators. CAE also operates a global network of
training centres in locations around the world. CAEs operations are broken down into two operating segments; Military Simulation and
Training (Military) and Civil Simulation and Training (Civil). Prior to the sale of its Marine Controls division in the fourth quarter of fiscal 2005 the
Company also provided simulators and training services for sea and land-based activities and
supplied marine automation systems for military and civil applications. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENT PRESENTATION The accounting policies of CAE Inc. and its subsidiaries (CAE or the Company) conform, in
all material respect, to Canadian generally accepted accounting principles (GAAP) as defined by
the Canadian Institute of Chartered Accountants (CICA). These accounting principles are different
in some respects from United States generally accepted accounting principles (U.S. GAAP). The
significant differences are described in Note 27. On April 1, 2004, the Company adopted CICA Handbook Sections 1100, Generally Accepted
Accounting Principles and1400, General Standards of Financial Statement Presentation.Section 1100
describes what constitutes Canadian GAAP and its sources, and provides guidance on sources to
consult when selecting accounting policies and appropriate disclosure when a matter is not dealt
with explicitly in the primary sources of GAAP, thereby recodifying GAAP hierarchy. Section 1400
clarifies what is fair presentation in accordance with GAAP and provides general guidance on
financial presentation. The adoption of these standards did not have any material effect on
consolidated financial statements. Except where otherwise noted, all amounts in these financial statements are expressed in Canadian
dollars. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires CAEs management
(Management) to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the period reported. On a ongoing
basis, Management reviews its estimates, particularly as they relate to accounting on long-term
contracts, useful lives, employee future benefits, income taxes, impairment of long-lived assets
and goodwill, based on Managements best knowledge of current events and actions that the Company
may undertake in the future. Actual results could differ from those estimates, significant changes
in estimates and/or assumptions could result in impairment of certain assets. CONSOLIDATION The consolidated financial statements include the accounts of CAE Inc. and of all majority
owned subsidiaries. They also include the Companys proportionate share of assets, liabilities and
earnings of joint ventures in which the Company has an interest. All significant intercompany
accounts and transactions have been eliminated. Investments over which CAE exercises significant
influence are accounted for using the equity method and portfolio investments are accounted for

using the cost method. CONSOLIDATION OF VARIABLE INTEREST ENTITIES On January 1st, 2005, the Company adopted Accounting Guideline Consolidation of Variable
Interest Entities (AcG-15) on a retroactive basis without restatement of prior periods. AcG-15
provides a framework for identifying variable interest entities (VIEs) and determining when an
entity should include the assets, liabilities and results of operations of a VIE in its
consolidated financial statements. In general, a VIE is a corporation, partnership,
limited-liability corporation, trust, or any other legal structure used to conduct activities or
hold assets that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of equity owners that
are unable to make significant decisions about its activities, or (3) has a group of equity owners
that do not have the obligation to absorb losses or the right to receive returns generated by its
operations. 47 >




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##### 



> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 NOTE 01. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD) AcG-15 requires a VIE to be consolidated if a party with an ownership, contractual or other
financial interest in the VIE (a variable interest holder) is exposed to a majority of the risk of
loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns
(if no party is exposed to a majority of the VIEs losses), or both (the primary beneficiary).
Upon consolidation, the primary beneficiary generally must initially record all of the VIEs
assets, liabilities and non-controlling interests at fair value at the date the enterprise became
the primary beneficiary. However, for variable interest entities created prior to the initial
adoption of AcG-15, the assets, liabilities and non-controlling interest of these entities must be
initially consolidated as if the entities were always consolidated based on majority voting
interest. AcG-15 also requires disclosures about VIEs that the variable interest holder is not
required to consolidate, but in which it has a significant variable interest. The adoption of AcG-15 on January 1, 2005 resulted in an increase in total assets, total
liability, and retained earnings of $46.4 million, $43.2 million, and $3.3 million, respectively
and a decrease in the currency translation adjustment of $0.1 million. FOREIGN CURRENCY TRANSLATION SELF-SUSTAINING FOREIGN OPERATIONS Foreign operations of the Company classified as self-sustaining operations are translated to
Canadian dollars using the current rate method. Under this method assets and liabilities are
translated at exchange rates in effect at the balance sheet date and revenues and expenses are
translated at the average exchange rates for the period. Gains or losses on translation of foreign
operations into Canadian dollars are included in the currency translation adjustment account, a
separate component of shareholders equity. Accumulated amounts in the currency translation adjustment account are released to the
statement of earnings when the Company reduces its net investment in foreign operations by way of
capital reduction or through the settlement of long-term inter-company balances which had been
considered part of CAEs net investment. FOREIGN CURRENCY TRANSACTIONS Monetary assets and liabilities denominated in currencies other than the functional currency
are translated at the prevailing exchange rate at the balance sheet date. Non-monetary assets and
liabilities denominated in currencies other than the functional currency and revenue and expense
items are translated into the functional currency using the exchange rate prevailing at the dates
of the respective transactions. Translation gains or losses are included in the determination of
earnings, except those related to long-term intercompany account balances, that form part of the
net investment in foreign operations, and those arising from the translation of foreign currency
debt that has been designated as a hedge of the net investment in subsidiaries, which are included
in the currency translation adjustment account, a separate component of shareholders equity. REVENUE RECOGNITION Revenue from long-term contracts for the design, engineering and manufacturing of flight
simulators is recognized, when persuasive evidence of an arrangement exists, the fee is fixed or
determinable and recovery is reasonably certain, using the percentage-of-completion method. Under
this method, revenue and earnings are recorded as related costs are incurred, on the basis of the
percentage of actual costs incurred to date, relative to the estimated total costs to complete the
contract. The cumulative impact of any revisions in cost and earnings estimates are reflected in
the period in which the need for a revision becomes known. Losses, if any, are recognized fully
when first anticipated. Warranty provisions are recorded at the time revenue is recognized, based
on past experience. No right of return or complementary upgrades is provided to customers.
Post-delivery customer support is billed separately and revenue is recognized over the support
period. Long-term contracts provide for progress billings based on completion of certain phases of
work. Unbilled receivables represent excess of work performed over customer billings. Deposits on
contract represent customer payments in excess of work performed. Training services and other revenue are recognized when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, recovery is reasonably certain and, when applicable,
products have been delivered, or services have been rendered. INCOME TAXES AND INVESTMENT TAX CREDITS The Company uses the tax liability method to account for income taxes. Under this method,
future income tax assets and liabilities are determined according to differences between the
carrying value and the tax bases of assets and liabilities. This method also requires the
recognition of future tax benefits, such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not. Future tax assets and liabilities are
measured by applying enacted or substantively enacted rates and laws at the date of the financial
statements for the year for which the temporary differences are expected to reverse. CAE does not
provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected
to be repatriated in the foreseeable future. A valuation allowance is recognized to the extent that, in the opinion of Management, it is
more likely than not that the future income tax assets will not be realized. (Refer to Note 15) Investment tax credits (ITC) arising from research and development (R&D) activities are
deducted from the related costs and are accordingly included in the determination of earnings when
there is reasonable assurance that the credits will be realized. ITC arising from the acquisition
of property, plant and equipment and deferred development costs are deducted from the cost of
those assets with amortization calculated on the net amount. > 48




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##### 



> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 The Company is subject to examination by taxation authorities in various jurisdictions. The
determination of tax liabilities and ITC recoverable involve certain uncertainties in the
interpretation of complex tax regulations. Therefore, the Company provides for potential tax
liabilities and ITC recoverable based on Managements best estimates. Differences between the
estimates and the ultimate amounts of taxes and ITC are recorded in earnings at the time they can
be determined. (Refer to Note 23) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments with original terms to maturity
of 90 days or less. RESTRICTED CASH During fiscal 2004, under the terms of subsidiaries external bank financing and some
government-related sales contracts, the Company was required to hold a defined amount of cash as
collateral. In fiscal 2005, the subsidiaries external bank financing agreements which required
the holding of cash as collateral as well as the government-related contracts were settled and
effectively released a large portion of the restricted cash. ACCOUNTS RECEIVABLE Receivables are recorded at cost, net of a provision for doubtful accounts, based on expected
recoverability. In fiscal 2005, the Company entered into a program under which it sells certain of
its accounts receivable to a third party for cash consideration without recourse to the Company.
These transactions are accounted for when the Company is considered to have surrendered control
over the transferred accounts receivable. Losses and gains on these transactions are recognized as
other expense or income. (Refer to Note 5) INVENTORIES Raw materials are valued at the lower of cost and replacement cost. Work in process is stated
at the lower of average cost and net realizable value. The cost of work in process includes
material, labour and an allocation of manufacturing overhead. (Refer to Note 6) LONG-LIVED ASSETS PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at amortized cost, net of any impairment charges. The
declining balance and straight-line methods are used in computing amortization over the estimated
useful lives of the assets. Useful lives are estimated as follows: method
    

rates/yearsBuilding and improvements
    
    Declining balance
    
    
    5% -10
    %Simulators
    
    Straight-line (10% residual)
    
    
    5 to 25 yearsMachinery and equipment
    
    Declining balance
    
    
    20% -35
    %
 LEASES Leases entered into by the Company in which substantially all the benefits and risks of
ownership are transferred to the Company are recorded as capital leases and classified as
property, plant and equipment and long-term borrowings. All other leases are classified as
operating leases under which leasing costs are expensed in the period in which they are incurred.
Gains, net of transaction costs, related to the sale and leaseback of simulators are deferred and
the gains in excess of the residual value guarantees are amortized over the term of the lease. The
residual value guarantees are to be ultimately recognized in the Companys earnings upon expiry of
the related sale and leaseback agreement. INTEREST CAPITALIZATION Interest costs relating to the construction of simulators and buildings for training centres
are capitalized as part of the cost of property, plant and equipment. Capitalization of interest
ceases when the simulator and training centre are completed and ready for productive use. 49 >




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> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 NOTE 01. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD) INTANGIBLE ASSETS WITH DEFINITE USEFUL LIVES Intangible assets with definite useful lives are recorded at their fair value at the date of
acquisition of the related acquired enterprise. Amortization is provided for all intangible assets
on a straight-line basis over their estimated useful lives as follows: amortization
period
    
    

weighted
average amortization periodTrade names
    
    
    10 to 25 years
    
    
    
    20Backlog and contractual agreements
    
    
    1 to 20 years
    
    
    
    15Customer relationships
    
    
    10 to 25 years
    
    
    
    10Other
    
    
    12 to 20 years
    
    
    
    12
 IMPAIRMENT OF LONG-LIVEDASSETS The Company recognizes impairment losses for a long-lived asset to be held and used when
events or changes in circumstances cause its carrying value to exceed the total undiscounted cash
flows expected from its use and eventual disposition. An impairment loss, if any, is determined as
the excess of the carrying value of the asset over its fair value. BUSINESS COMBINATIONS AND GOODWILL Acquisitions are accounted for using the purchase method and, accordingly, the results of
operations of the acquired enterprise are included in the consolidated statement of earnings
(losses) from the respective dates of acquisition. Goodwill represents the excess of the cost of acquired enterprises over the net of the
amounts assigned to identifiable assets acquired and liabilities assumed. Goodwill is tested for
impairment, at least annually or more frequently if events or changes in circumstances indicate
that it might be impaired. The impairment test consists of a comparison of the fair value of the Companys reporting
units with their carrying amount. When the carrying amount of the reporting unit exceeds the fair
value, the Company compares, in a second step, the fair value of goodwill related to the reporting
unit to its carrying value and recognizes if required an impairment loss equal to the excess. The
fair value of a reporting unit is calculated based on one or more fair value measures, including
present value techniques of estimated future cash flows and estimated amounts at which the unit as
a whole could be bought or sold in a current transaction between willing parties. If the carrying
amount of the reporting unit exceeds the fair value, step two requires the fair value of the
reporting unit to be allocated to the underlying assets and liabilities of that reporting unit,
resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess
is recorded in net earnings (loss). (Refer to Note 9) OTHER ASSETS RESEARCH AND DEVELOPMENT COSTS Research costs are charged to earnings in the periods in which they are incurred. Development
costs are also charged to earnings in the period incurred unless they meet all the criteria for
deferral as per the CICA Handbook Section 3450, Research and Development Costs and their recovery
is reasonably assured. Government assistance arising from research and development activities is
deducted from the related costs or assets if deferred. Amortization of development costs deferred
to future periods commences with the commercial production of the product and is charged to
earnings based on anticipated sales of the product, over a period not exceeding five years. > 50




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> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 PRE-OPERATING COSTS The Company defers costs incurred during the pre-operating period for all new training
centres. Pre-operating costs are incremental in nature and are considered by Management to be
recoverable from the future operations of the new training centre. Capitalization ceases at the
opening of the training centre. Amortization of the deferred pre-operating costs is taken over
five years in respect to civil training operations. DEFERRED FINANCING COSTS Costs incurred relating to the issuance of long-term debt are deferred and amortized on a
straight-line basis over the term of the related debt. Costs related to sale and leaseback
agreements are amortized on a straight-line basis over the term of the lease. (Refer to Note 10) EMPLOYEE FUTURE BENEFITS The Company maintains defined benefit pension plans that provide benefits based on length of
service and final average earnings. The service costs and the pension obligations are actuarially
determined using the projected benefit method prorated on employee service and Managements best
estimate of expected plan investment performance, salary escalation and retirement ages of
employees. For the purpose of calculating the expected return on plan assets, those assets are
valued at fair value. The excess of the net actuarial gain (loss) over 10% of the greater of the
benefit obligation and the fair value of plan assets is amortized over the remaining service
period of active employees. Past service costs, arising from plan amendments, are deferred and
amortized on a straight-line basis over the average remaining service period of active employees
at the date of amendment. When a curtailment arises, any unamortized past service cost associated with the reduction of
future services is recognized immediately. Also, the increase or decrease in benefit obligation is
recognized as a loss or a gain net of unrecognized actuarial gains or losses. Finally, when the
restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations,
the curtailment is accounted for prior to the settlement. On April 1, 2004, CAE adopted new disclosure requirements for employee future benefits of CICA
Handbook Section 3461, Employee Future Benefits.Section 3461 requires additional disclosures about
the assets, cash flow and net periodic benefit costs of defined benefits pension plans and other
future employee benefit plans. (Refer to Note 21) STOCK-BASED COMPENSATION PLANS The Companys stock-based compensation plans consist of five plans; an Employee Stock Option
Plan (ESOP), an Employee Stock Purchase Plan (ESPP), a Deferred Share Unit (DSU) plan for
executives, a Long-Term Incentive Deferred Share Unit (LTI-DSU) Plan and on April 1, 2004, the
Company adopted a Long-Term Incentive Restricted Share Unit (LTI-RSU) Plan. All plans are
described in Note 13. Since fiscal 2004, net earnings include compensation costs for CAEs stock options. Using the
fair value method, compensation expense is measured at the grant date and recognized over the
service period with a corresponding increase to contributed surplus in shareholders equity. The
Company estimates the fair value of options using the Black-Scholes pricing model. The Black-Scholes pricing model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In addition, valuation
models generally require the input of highly subjective assumptions including the expected stock
price volatility. In Note 13, pro forma net earnings and pro forma basic and diluted net earnings per share
figures are presented as if the fair value based method of accounting had been used to account for
stock options granted to employees during fiscal 2003. A compensation expense is also recognized for the Companys portion of the contributions made
under the ESPP and for the grant date amount of vested units under the DSU, LTI-DSU and LTI-RSU
plans. Any subsequent changes in CAEs stock price affects the compensation expense. In March
2004, the Company entered into an equity swap agreement with a major Canadian institution to
reduce its cash and earnings exposure to fluctuation in the Companys share price relating to the
DSU, LTI-DSU and LTI-RSU programs. CAEs practice is to issue options in May of each fiscal year or at the time of hiring of new
employees or new appointments. In both instances these options vest equally over four years. Any
consideration paid by plan participants on the exercise of share options or the purchase of shares
is credited to share capital together with any related stock-based compensation expense. HEDGING RELATIONSHIPS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into forward, swap and option contracts to reduce financial risk related to
its exposure to fluctuations in interest rates and foreign exchange rates. The interest rate risk
associated with certain long-term debt is hedged through interest rate swaps. The foreign currency
risk associated with certain purchase and sale commitments denominated in a foreign currency is
hedged through a combination of forward contracts and options. The Company does not use any
derivative financial instruments for trading or speculative purposes. 51 >




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##### 



> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 01. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD) Effective
April 1, 2004, the Company adopted prospectively CICA Accounting Guideline
(AcG-13), Hedging Relationshipsand CICA Emerging Issues Committee Abstract 128 (EIC-128),
Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments.This
guideline addresses identification, designation, documentation and effectiveness of hedging
relationships for the purpose of applying hedge accounting, and the discontinuance of hedge
accounting. Under this guideline, complete documentation of the information related to hedging
relationships is required and the effectiveness of the hedges must be demonstrated and documented.
The adoption of these guidelines did not have a material impact on the Companys financial
statements. Gains and losses on foreign currency contracts designated and effective as hedges are
recognized in the consolidated statement of earnings during the same period as the underlying
revenues and expenses. For interest rate swaps, the difference between the swap rate and the
actual rate is reflected in earnings against the related interest expense. CAE assesses on an
ongoing basis whether the derivatives that are used in hedging transactions are effective in
offsetting changes in fair values or cash flows of hedged items. Realized and unrealized gains or losses associated with derivative instruments, which have
been terminated or cease to be effective prior to maturity, are deferred under other current, or
non-current, assets or liabilities on the balance sheet and recognized in income in the period in
which the underlying hedged transaction is recognized. In the event a designated hedged item is
sold, extinguished or matured prior to the termination of the related derivative instrument, any
realized or unrealized gain or loss on such derivative instrument is recognized in earnings. The
interest payments relating to swap contracts are recorded in net earnings over the life of the
underlying transaction based on the accrual method as an adjustment to interest income or interest
expense. (Refer to Note 14) DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS Long-lived assets to be disposed of by sale are measured at the lower of their carrying amount
or fair value less cost to sell, and are not depreciated while classified as held for sale. Results of operations of components of the Company that have been disposed of by sale or are
classified as held for sale are reported as discontinued operations if the operations and cash
flows of those components have been, or will be, eliminated from the ongoing operations as a
result of the disposal transaction and if the Company will not have any significant continuing
involvement in the operations of the component after the disposal transaction. A component of an
enterprise comprises operations and cash flows that can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the Companys operations and cash flows.
(Refer to Note 3) SEVERANCE, TERMINATION BENEFITS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES In accordance with EIC-134, Accounting for Severance and Termination Benefitsand EIC-135,
Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a
Restructuring),the Company recognizes severance benefits that do not vest when the decision is
made to terminate the employee. Special termination benefits are accounted for when Management
commits to a plan that specifically identifies all significant actions to be taken and commits the
entity to the event that obligates it under the terms of the contract with its employees to pay
such termination benefits. Such termination benefits and the benefit arrangement is communicated
to the employees in sufficient detail to enable them to determine the type and amount of benefits
they will receive when their employment is terminated. All other costs associated with restructuring, exit and disposal activities are recognized in
the period when they are incurred and measured at their fair value. CAE applied these guidelines for severance termination benefits and other restructuring costs as
described in Note 24. DISCLOSURE OF GUARANTEES The Company discloses all information concerning certain types of guarantees that may require
payments, contingent on specified types of future events. In the normal course of business, CAE
issues letters of credit and performance guarantees. (Refer to Note 14) EARNINGS PER SHARE Earnings per share are calculated by dividing net earnings available for common shareholders
by the weighted average number of common shares outstanding during the year. The diluted weighted
average number of common shares outstanding is calculated by taking into account the dilution that
would occur if the securities or other agreements for the issuance of common shares were exercised
or converted into common shares at the later of the beginning of the period or the issuance date.
The treasury stock method is used to determine the dilutive effect of the stock options. The
treasury stock method is a method of recognizing the use of proceeds that could be obtained upon
the exercise of options and warrants in computing diluted earnings per share. It assumes that any
proceeds would be used to purchase common shares at the average market price during the period. > 52




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> CAE ANNUAL REPORT
2005  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FUTURE CHANGES TO ACCOUNTING STANDARDS FINANCIAL INSTRUMENTS  RECOGNITION AND MEASUREMENT, HEDGES AND COMPREHENSIVE INCOME In January 2005, the ASB issued three new standards dealing with financial instruments; (i)
Financial Instruments-Recognition and Measurement; (ii) Hedges; and (iii) Comprehensive Income.
The new standards are based on the U.S. FASB Statement 133, Accounting for Derivative Instruments
and Hedging Activities,and on the International Accounting Standards (IAS) Boards new
standard, IAS 39, Financial Instruments-Recognition and Measurement.These requirements will be
applicable for CAE in the first quarter of fiscal 2007. The Company is currently evaluating the
impact of these new Handbook Sections on its financial statements. The
Handbook Section 3855, Financial instruments-Recognition And Measurement prescribeswhen a
financial instrument is to be recognized on the balance sheet and the measurement method, using
fair value or using cost-based measures. It also specifies how financial instrument gains and
losses are to be presented. New Handbook Section 3865, Hedgesallows optional treatment providing that hedges be
designated as either fair value hedges, cash flow hedges or hedges of a net investment in a
self-sustaining foreign operation. For a fair value hedge, the gain or loss attributable to the
hedged risk is recognized in net income in the period of change together with the offsetting loss
or gain on the hedged item attributable to the hedged risk. The carrying amount of the hedged item
is adjusted for the hedged risk. For a cash flow hedge or for a hedge of a net investment in a
self-sustaining foreign operation, the effective portion of the hedging items gain or loss is
initially reported in other comprehensive income and subsequently reclassified to net income when
the hedged item affects net income. The ASB has issued new Handbook Section 1530, Comprehensive Income,and amended Surplus,
Section 3250 to be renamed Equity,Section 3251. These standards require that an enterprise
present comprehensive income and its components, as well as net income in its financial
statements; and that an enterprise present separately changes in equity during the period, as well
as components of equity at the end of the period, including comprehensive income. NOTE 02.
BUSINESS ACQUISITIONS AND COMBINATIONS GREENLEY & ASSOCIATES INC. On November 30, 2004, the Company acquired all the issued and outstanding shares of Greenley &
Associates Inc. (G&A), which provides services in the areas of project management, human
factors, modelling and simulation. Total consideration for this acquisition amounted to $4.4
million payable in equivalent common shares issued by CAE in four installments as follows; 424,628
shares (representing $2.0 million) at the closing date, $0.8 million on November 30, 2005, $0.8
million on November 30, 2006, and 169,851 shares (representing $0.8 million) to be issued on
November 30, 2007. The number of shares issued (to be issued) to satisfy the first and the fourth
payments was calculated based on the average closing share price ($4.71 per share) of CAE common
shares on the Toronto Stock Exchange (TSX) for the 20-day period ending two days prior November
30, 2004. The number of shares to be issued to satisfy the second and the third payments will be
based on the average closing share price of CAE common shares on the TSX for the 20-day period
ending two days before their respective date of issuance. The purchase price is subject to an
adjustment based on performance of the business for the twelve-month period following the
acquisition. Any changes in the total consideration will be accounted for as a change in goodwill. SERVICIOS DE INSTRUCCION DE VUELO, S.L. In February 2004, CAE and Iberia Lineas Aereas de Espana, SA (Iberia) agreed to combine
their aviation training operations in Spain after receiving regulatory clearance from the Spanish
authorities to commence operations, under an agreement entered into in October 2003. On May 27, 2004, in connection with the financing of the combined operation, CAE Servicios
Globales de Instruccion de Vuelo (Espana), S.L. (SGIV), a wholly-owned subsidiary of CAE, and
Iberia contributed the net assets of their respective training centre facilities to Servicios de
Instruccion de Vuelo, S.L. (SIV), with SGIV obtaining ownership of 80% of SIV. SIV financed the
acquisition of the assets from SGIV and Iberia through an asset-backed financing transaction.
(Refer to Note 11) As part of this transaction, should the October 2003 agreement be terminated, SGIV and Iberia
will be obliged to repurchase the assets they contributed, in proportion to the fair market value
of the assets, for a total amount equal to the outstanding balance under the financing
transaction. FLIGHT TRAINING CENTRE CHILE S.A. On
April 22, 2004, the Company acquired from LAN Chile S.A. all the issued and outstanding
shares of Flight Training Centre Chile S.A. (FTC Chile) located in Santiago, Chile, for a total
cash consideration of $0.9 million (US$ 0.7 million). This acquisition expands the Companys
pilot-training operations into the South American market. 53 >




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> CAE ANNUAL REPORT
2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 02. BUSINESS ACQUISITIONS AND COMBINATIONS (CONTD) For the years ended March 31, 2004 and 2003, there were no acquisitions for the continuing
operations. The net assets contributed by Iberia to SIV and net assets acquired from FTC Chile and
G&A are summarized as follows: (amounts in millions)
    
    SIV
    
    
    FTC CHILE
    
    
    G&A
    
    
    TOTALCurrent assets
    
    $
    4.6
    
    
    $
    0.2
    
    
    $
    2.1
    
    
    $
    6.9Current liabilities
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.2
    )
    
    
    (1.4
    )Property, plant and equipment
    
    
    73.1
    
    
    
    2.2
    
    
    
    0.3
    
    
    
    75.6Other assets
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5Intangible assetsTrade names
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3Customer relations
    
    
    7.2
    
    
    
    
    
    
    
    0.5
    
    
    
    7.7Other intangibles
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Goodwill
    
    
    6.9
    
    
    
    
    
    
    
    2.5
    
    
    
    9.4Future income taxes
    
    
    
    
    
    
    0.4
    
    
    
    (0.5
    )
    
    
    (0.1
    )Long-term debt
    
    
    (61.8
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    (62.0
    )Long-term liabilities
    
    
    (2.4
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (2.7
    )Total cost of the purchase:
    
    
    27.5
    
    
    
    2.4
    
    
    
    4.4
    
    
    
    34.3Less: Balance of purchase price
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    (1.5
    )Issuance of 424,628 shares (Note 12)
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    (2.0
    )Common shares to be issued
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    (2.4
    )Minority interest
    
    
    (14.6
    )
    
    
    
    
    
    
    
    
    
    
    (14.6
    )Total cash consideration
    
    $
    12.9
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    13.8
 The net assets of SIV and FTC are included in the Civil Simulation and Training segment. The
net assets of G&A are included in the Military Simulation and Training segment. As part of the May 27, 2004 agreement (the Agreement), Iberia was to subsequently transfer
a simulator that it was leasing from a third party, to SIV in exchange for a cash consideration of
$5.7 million (3.5 million). This transaction was accounted for as an increased contribution of
property, plant and equipment and in long-term debt with a cash consideration equivalent to the
net asset value. During the year the Company reviewed its initial purchase price allocation of SIV, whereby
property, plant and equipment were reduced by $4.5 million, customer relationship was increased by
$7.2 million, goodwill increased by $4.5 million and cash consideration increased by $7.2 million. In addition, as part of the Agreement, SIV has agreed to fund an amount up to a maximum of
$2.4 million (1.5 million) to cover any payments made by Iberia to former employees in order to
indemnify Iberia for potential costs to be incurred due to certain employment matters. Based on
Managements best estimate of SIVs potential liability, an amount of $2.4 million (1.5 million)
has been accrued as part of the purchase price and accounted for as goodwill. NOTE 03.
DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
DISCONTINUED OPERATIONS
CLEANING TECHNOLOGIES On April 30, 2003, the Company completed the sale of certain assets of its German Cleaning
Technologies operations to Bavaria AG for a nominal cash consideration approximating book value.
Subsequent to completing the sale, CAE incurred post disposition costs with respect to the transfer
of employees, resulting in a net charge of $2.6 million recorded in its results of discontinued
operations. At the time of the sale, CAE and the buyer also entered into agreements by which CAE
was to finance pension costs which would be compensated by the buyer. During fiscal 2005, CAE
recorded in its results from discontinued operations a charge of $4.4 million (2.8 million)
relating to cover potential bad debts. On
July 31, 2003, CAE completed the sale of substantially all the assets of its last
remaining Cleaning Technology business, Alpheus Inc. to Cold Jet Inc. of Cincinnati, Ohio. The
total consideration, received was $2.8 million (US$2.1 million) of which $2.0 million (US$1.5
million) was received in fiscal 2004 and $0.8 million (US$0.6 million) received during the current
fiscal year. In addition, the Company is entitled to receive further consideration of US$1.0
million based on the future performance of the combined businesses over the 53-month period from
closing. No value has been ascribed in these financial statements to this additional
consideration. > 54




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FORESTRY SYSTEMS On August 16, 2002, CAE sold substantially all the assets of the sawmill division of its
Forestry Systems segment for cash consideration of $25.0 million and a further estimated payment at
$10.0 million, included in other assets, based on the operating performance of the disposed
business in the three-year period following the closing date. On May 2, 2003, CAE completed the sale of its remaining Forestry Systems business to Carmanah
Design and Manufacturing Inc. for a total cash consideration of $20.3 million ($19.8 million
received on closing, $0.5 million received during the second quarter of fiscal 2004). The Company
is entitled to receive further consideration based on the performance of the business over the
30-month period following the closing. No value has been ascribed to this additional consideration
in these financial statements. MARINE CONTROLS In the second quarter of fiscal 2005, the Board of Directors approved a plan to divest its
Marine Controls business. The plan was consistent with the Companys strategic process of focusing
on its core competencythe development and use of simulation and modelling technology to provide
training solutions. On February 3, 2005, CAE completed with L-3 Communications Corporation (L-3)
the sale of the substantial components of its Marine Controls segment for cash consideration of
$238.6 million. This amount is subject to completion of a net working capital audit of the Marine
Controls segment. CAE does not believe this provision will result in a material adjustment to the
cash consideration received. In accordance with the purchase agreement, L-3 will also acquire two
other components of the Marine Controls segment, including the assumption of the CAEs guarantee
of $53.0 million (£23 million) of project financed related debt for the U.K. Astute Class
submarine training program. The sale of these components is subject to regulatory approvals and
expected to be completed by the end of fiscal 2006. The expected proceeds on the sale of these
components are nominal. The results of Marine Controls have been reported as discontinued
operations and previously reported statements have been reclassified. Interest expense relating to
debt not directly attributable to the continuing operations and expected to be paid with the
proceeds of the sale of the Marine Controls business has been allocated to the discontinued
operations based on their share of net assets (refer to Note 11A (ix)). This transaction resulted
in a gain of $103.9 million, net of taxes of $25.1 million. The gain takes into account $43.7
million of goodwill and $7.0 million relating to the release of currency translation adjustment on
CAEs Marine entities. ASSETS HELD FOR SALECIVIL SIMULATION AND TRAINING In the third quarter of fiscal 2005, CAE as part of is global expansion, announced that it
will be opening a new business aviation-training centre in Morris County, New Jersey. The new
training centre is expected to be operational in fiscal 2006. As a result, two redundant training
centre buildings, one located in Dallas, Texas and a second located in Marietta, Georgia were
adjusted to their fair value in fiscal 2005 and reclassified to assets held for sale in December
2004 and previously reported statements have been restated. Summarized financial information for the discontinued operations is as follows: OPERATION SUMMARY OF DISCONTINUED OPERATIONS (amounts in millions, except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003RevenueCleaning Technologies
    
    $
    
    
    
    
    $
    1.7
    
    
    $
    72.0Forestry Systems
    
    
    
    
    
    
    
    3.1
    
    
    
    20.8Marine Controls
    
    
    109.6
    
    
    
    
    154.8
    
    
    
    153.8$
    109.6
    
    
    
    $
    159.6
    
    
    $
    246.6Net loss
from Cleaning Technologies
net of tax recovery (2005 Nil; 2004$1.7; 2003$7.7)
    
    $
    (4.4
    )
    
    
    $
    (2.6
    )
    
    $
    (6.6
    )Net loss
from Forestry Systems
net of tax recovery (2005 Nil; 2004$0.2; 2003$3.0)
    
    
    
    
    
    
    
    (0.5
    )
    
    
    (7.2
    )Net loss
from Civil Simulation and Training
net of tax recovery (2005$0.1; 2004$0.2; 2003$0.2)
    
    
    (0.2
    )
    
    
    
    (0.3
    )
    
    
    (0.4
    )Net earnings
from Marine Controls

net of tax expense (2005 $3.8; 2004 $9.2; 2003 $8.0)
    
    
    5.5
    
    
    
    
    20.0
    
    
    
    17.5Gain on sale
of Marine Controls
net of $25.1 million tax expense
    
    
    103.9
    
    
    
    
    
    
    
    
    Net earnings from discontinued operations
    
    $
    104.8
    
    
    
    $
    16.6
    
    
    $
    3.3Basic net earnings per share
    
    $
    0.42
    
    
    
    $
    0.07
    
    
    $
    0.01Diluted net earnings per share
    
    $
    0.42
    
    
    
    $
    0.07
    
    
    $
    0.01
 55 >




---



##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 03. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (CONTD) NET ASSETS OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (amounts in millions)
    

as at march 31, 2005
    
    
    

as at march 31, 2004marine
    
    
    
    
    
    
    
    marinecontrols
    
    
    civil
    
    
    
    controls
    
    
    civilCurrent assets held for saleCash and cash equivalents
    
    $
    4.4
    
    
    $
    
    
    
    
    $
    7.2
    
    
    $
    Accounts receivable
    
    
    1.2
    
    
    
    
    
    
    
    
    74.4
    
    
    
    Inventories
    
    
    
    
    
    
    
    
    
    
    
    7.1
    
    
    
    Prepaid expenses
    
    
    0.2
    
    
    
    
    
    
    
    
    1.1
    
    
    
    $
    5.8
    
    
    $
    
    
    
    
    $
    89.8
    
    
    $
    Long-term assets held for saleProperty, plant and equipment, net
    
    $
    50.8
    
    
    $
    4.2
    
    
    
    $
    51.3
    
    
    $
    11.7Future income taxes
    
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    Intangible assets
    
    
    
    
    
    
    
    
    
    
    
    26.0
    
    
    
    Goodwill
    
    
    
    
    
    
    
    
    
    
    
    43.1
    
    
    
    Other assets
    
    
    2.5
    
    
    
    
    
    
    
    
    3.0
    
    
    
    $
    53.3
    
    
    $
    4.2
    
    
    
    $
    128.2
    
    
    $
    11.7Current liabilities related to assets held for saleAccounts payable and accrued liabilities
    
    $
    7.8
    
    
    $
    
    
    
    
    $
    28.0
    
    
    $
    Deposits on contracts
    
    
    
    
    
    
    
    
    
    
    
    21.8
    
    
    
    Long-term debt due within one year
    
    
    
    
    
    
    
    
    
    
    
    4.7
    
    
    
    $
    7.8
    
    
    $
    
    
    
    
    $
    54.5
    
    
    $
    Long-term liabilities related to assets held for saleLong-term debt
    
    $
    53.0
    
    
    $
    
    
    
    
    $
    47.9
    
    
    $
    Future income taxes
    
    
    0.4
    
    
    
    
    
    
    
    
    12.3
    
    
    
    $
    53.4
    
    
    $
    
    
    
    
    $
    60.2
    
    
    $
    
 NOTE 04.IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS During the third quarter of fiscal 2005, Management performed a comprehensive review of current
performance and strategic orientation of its reporting units. This strategic review revealed that,
several factors have severely affected mainly the Civil business, including; the enduring adverse
economic environment of the airline industry creating a new market reality, slower than anticipated
training outsourcing opportunities (due to pilot-related restructuring efforts at some major
airlines), the escalating cost of manufacturing full-flight simulators, the erosion of the less
than 50-seat regional jet market and the recent and rapid appreciation of the Canadian dollar
versus its US counterpart. These elements have caused the recalibration of some key assumptions in
Civils strategic planning, which led to the review of the carrying amount of certain assets
including; goodwill, intangible assets acquired in previous acquisitions, inventory levels,
non-performing training equipment and certain other assets. In testing for impairment of long-lived assets, the Company assessed recoverability of the
carrying amounts by reference to expected undiscounted cash flows. An impairment charge is
recognized when the carrying amount is not fully recoverable and when it exceeds the fair values
determined by reference to recognized valuation methods, including discounted cash flows and
independent appraisals. > 56




---



##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Therefore, based on this review, the Company recorded a $443.3 million impairment
charge, virtually all related to its Civil business, detailed as follows: (amounts in millions)
    
    2005Goodwill
    
    $
    205.2Customer relations
    
    
    86.7Trades names
    
    
    20.4Property, plant and equipment (simulators)
    
    
    78.4Inventories
    
    
    33.3Other assets
    
    
    19.3$
    443.3
 NOTE 05.
ACCOUNTS RECEIVABLE (amounts in millions)
    
    2005
    
    
    
    2004Trade
    
    $
    99.9
    
    
    
    $
    130.0Allowance for doubtful accounts
    
    
    (3.5
    )
    
    
    
    (7.9
    )Unbilled receivables
    
    
    122.0
    
    
    
    
    148.7Other receivables
    
    
    37.3
    
    
    
    
    45.7$
    255.7
    
    
    
    $
    316.5
 Approximately $10.4 million of the March 2005 unbilled receivables are not expected to be
recovered within one year (2004$5.9 million). Under
an agreement dated March 24, 2005, on an ongoing basis, the Company will sell third party
receivables to a financial institution for an amount of up to $25.0 million. Under the terms of the
agreement, the Company will continue to act as collection agent. The selected accounts receivable
will be sold to a third party for cash consideration on a non-recourse basis to the Company. As at
March 31, 2005, $16.5 million of specific accounts receivable were sold to the financial
institution pursuant to this agreement. Net proceeds of the sale were used to repay borrowings
under the Companys committed credit facilities. NOTE 06.
INVENTORIES (amounts in millions)
    
    2005
    
    
    
    2004Work-in-progress
    
    $
    61.6
    
    
    
    $
    110.8Raw materials, supplies and manufactured products
    
    
    39.4
    
    
    
    
    36.9$
    101.0
    
    
    
    $
    147.7
 As indicated in Note 4, the Company recognized an impairment charge of $33.3 million related to
certain inventory, during the third quarter of fiscal 2005. 57 >




---



##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 07.
PROPERTY, PLANT AND EQUIPMENT (amounts in millions)
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    2004accumulated
    
    
    net book
    
    
    
    
    
    
    
    accumulated
    
    
    net bookcost
    
    
    depreciation
    
    
    value
    
    
    
    cost
    
    
    depreciation
    
    
    valueLand
    
    $
    18.8
    
    
    $
    
    
    
    $
    18.8
    
    
    
    $
    19.7
    
    
    $
    
    
    
    $
    19.7Buildings and improvements
    
    
    233.9
    
    
    
    66.9
    
    
    
    167.0
    
    
    
    
    240.4
    
    
    
    58.3
    
    
    
    182.1Simulators
    
    
    396.3
    
    
    
    43.0
    
    
    
    353.3
    
    
    
    
    403.2
    
    
    
    36.1
    
    
    
    367.1Machinery and equipment
    
    
    185.3
    
    
    
    100.3
    
    
    
    85.0
    
    
    
    
    214.4
    
    
    
    102.6
    
    
    
    111.8Assets under capital lease
    
    
    137.0
    
    
    
    27.8
    
    
    
    109.2
    
    
    
    
    38.2
    
    
    
    24.3
    
    
    
    13.9Assets under constructionSimulators
    
    
    58.9
    
    
    
    
    
    
    
    58.9
    
    
    
    
    85.4
    
    
    
    
    
    
    
    85.4$
    1,030.2
    
    
    $
    238.0
    
    
    $
    792.2
    
    
    
    $
    1,001.3
    
    
    $
    221.3
    
    
    $
    780.0
 As indicated in Note 4, during the third quarter of fiscal 2005, the Company recognized an
impairment charge of $78.4 million related to non performing simulators. Depreciation
of property, plant and equipment was $55.1 million in 2005 (2004$51.3 million,
2003$48.5 million). NOTE 08. INTANGIBLE
ASSETS (amounts in millions)
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    2004accumulated
    
    
    net book
    
    
    
    
    
    
    
    accumulated
    
    
    net bookcost
    
    
    depreciation
    
    
    value
    
    
    
    cost
    
    
    depreciation
    
    
    valueTrade names
    
    $
    12.3
    
    
    $
    0.2
    
    
    $
    12.1
    
    
    
    $
    30.5
    
    
    $
    3.3
    
    
    $
    27.2Customer relations
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    
    101.7
    
    
    
    10.6
    
    
    
    91.1Customer contractual agreements
    
    
    8.5
    
    
    
    2.5
    
    
    
    6.0
    
    
    
    
    11.5
    
    
    
    2.3
    
    
    
    9.2Other intangible assets
    
    
    2.1
    
    
    
    0.5
    
    
    
    1.6
    
    
    
    
    2.4
    
    
    
    0.7
    
    
    
    1.7$
    23.4
    
    
    $
    3.2
    
    
    $
    20.2
    
    
    
    $
    146.1
    
    
    $
    16.9
    
    
    $
    129.2
 As indicated in Note 4, during the third quarter of fiscal 2005, the Company recognized an
impairment charge of $86.7 million and $20.4 million related to customer relations and trade names,
respectively, originating from Civils acquisitions in fiscal 2002. The continuity of intangible assets is as follows: (amounts in millions)
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    2004civil
    
    
    military
    
    
    total
    
    
    
    civil
    
    
    military
    
    
    totalBeginning balance
    
    $
    127.4
    
    
    $
    1.8
    
    
    $
    129.2
    
    
    
    $
    140.1
    
    
    $
    2.1
    
    
    $
    142.2Additions (Note 2)
    
    
    7.2
    
    
    
    0.9
    
    
    
    8.1
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6Amortization
    
    
    (6.3
    )
    
    
    (0.1
    )
    
    
    (6.4
    )
    
    
    
    (6.8
    )
    
    
    (0.1
    )
    
    
    (6.9
    )Impairment
    
    
    (107.1
    )
    
    
    
    
    
    
    (107.1
    )
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange
    
    
    (3.5
    )
    
    
    (0.1
    )
    
    
    (3.6
    )
    
    
    
    (6.5
    )
    
    
    (0.2
    )
    
    
    (6.7
    )Ending balance
    
    $
    17.7
    
    
    $
    2.5
    
    
    $
    20.2
    
    
    
    $
    127.4
    
    
    $
    1.8
    
    
    $
    129.2
 The yearly amortization expense for the five following years will be approximately $1.8
million. > 58




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 09.
GOODWILL The continuity of goodwill by reportable segment is as follows: (amounts in millions)
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004civil
    
    
    military
    
    
    total
    
    
    
    civil
    
    
    military
    
    
    totalBeginning balance
    
    $
    204.1
    
    
    $
    96.6
    
    
    $
    300.7
    
    
    
    $
    216.5
    
    
    $
    104.0
    
    
    $
    320.5Additions (Note 2)
    
    
    6.9
    
    
    
    2.5
    
    
    
    9.4
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment
    
    
    (205.2
    )
    
    
    
    
    
    
    (205.2
    )
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange
    

    
    (5.8
    )
    
    
    (7.0
    )
    
    
    (12.8
    )
    
    
    
    (12.4
    )
    
    
    (7.4
    )
    
    
    (19.8
    )Ending balance
    
    $
    
    
    
    $
    92.1
    
    
    $
    92.1
    
    
    
    $
    204.1
    
    
    $
    96.6
    
    
    $
    300.7
 As indicated in Note 4, a goodwill impairment charge of $205.2 million was recorded in the
third quarter of fiscal 2005, which represented all the goodwill related to the Civil segment. NOTE 10.
OTHER ASSETS (amounts in millions)
    
    2005
    
    
    
    2004Investment in and advances to CVS Leasing Ltd. (1)
    
    $
    41.2
    
    
    
    $
    49.1Deferred
development costs net of $10.7 million accumulated amortization
(2004
$5.6 million)(ii) (iv)
    
    
    33.7
    
    
    
    
    41.3Deferred
pre-operating costs net of $14.6 million accumulated amortization (2004 $8.5 million)
    
    
    13.5
    
    
    
    
    25.2Long-term receivables (iii)
    
    
    10.6
    
    
    
    
    18.4Deferred financing costs net of $14.7 million accumulated amortization (2004 $5.7 million)
    
    
    5.6
    
    
    
    
    11.5Other net of $0.3 million accumulated amortization (2004 Nil) (Note 21)
    
    
    32.8
    
    
    
    
    35.3$
    137.4
    
    
    
    $
    180.8
   (i)
    
    The Company led a consortium which was contracted by the U.K. Ministry of Defence (MoD)
to design, construct, manage, finance and operate an integrated simulator-based aircrew
training facility for the Medium Support Helicopter (MSH) fleet of the Royal Air Force. The
contract covers a 40-year period, which can be terminated by the MoD after 20 years, in 2018.In connection with the contract, the Company has established a subsidiary, CAE Aircrew
Training Pic (Aircrew), of which it owns 78% with the balance held by the other consortium
partners. This subsidiary has leased the land from the MoD, built the facility and operates the
training centre. Aircrew has been consolidated with the accounts of the Company.In addition, the Company has a minority shareholding of 14% in, and has advanced funds to,
CVS Leasing Ltd. (CVS), an entity established to acquire the simulators and other equipment
that are leased to Aircrew. CVS obtained project financing which amounts to £70.6 million at
March 31, 2005 and expires in October 2016. This financing is secured solely by the assets of
CVS with no recourse to CAE.(ii)
    
    R&D expenditures aggregated $93.5 million during the year (2004$81.0 million, 2003$102.0
million), of which $9.9 million representing qualifying development costs pursuant to CICA
requirements (2004$12.7 million, 2003$13.7 million) was deferred. The Company has received
government assistance of $10.8 million related to R&D expenditures during the year (2004$13.9
million, 2003$32.5 million), of which $0.9 million (2004$2.3 million, 2003$2.3 million) was
recorded against deferred costs incurred to develop new products and none was recorded against
machinery and equipment (2004$1.8 million, 2003-nil), with the balance being accounted for as
a reduction of research and development expenses. (Refer to Note 19)(iii)
    
    The Company has established secured subordinated promissory notes in connection with the
sale of its various Cleaning Technologies businesses totaling $7.6 million. The notes bear
interest at rates ranging from 3% to 7%.(iv)
    
    As indicated in Note 4, during the third quarter of fiscal 2005, the Company recognized an
impairment charge of $19.3 million related to deferred development charges. 59 >




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11.
DEBT FACILITIES
A. LONG-TERM DEBT (amounts in millions)
    
    2005
    
    
    
    2004(i) Senior notes
    
    $
    150.6
    
    
    
    $
    161.5(ii) Revolving unsecured term credit facilities,5 years maturing April 2006, US$350.0 (outstanding March 31, 2005$30.4 and US$Nil,
March 31, 2004$18 1.4 and US$70.0)
    
    
    30.4
    
    
    
    
    273.15 years, maturing April 2006, 100.0 (outstanding March 31, 2005Nil, March 31, 200420.0)
    
    
    
    
    
    
    
    32.2(iii) Term loan, maturing in April 2009 (outstanding March 31, 2005US$Nil, March 31, 2004US$28.2)
    
    
    
    
    
    
    
    37.0(iv) Term loans, maturing in May and June 2011(outstanding March 31, 200530.5 and 6.0, March 31, 2004Nil)
    
    
    57.3
    
    
    
    
    (v) Term loan of £12.7, secured, maturing in October 2016(outstanding March 31, 2005£6.0, March 31, 2004£8.9)
    
    
    13.7
    
    
    
    
    21.4(vi) Grapevine Industrial Development Corporation bonds, secured (US$27.0)
    
    
    32.7
    
    
    
    
    35.4(vii) Amsterdam asset-backed financing maturing in December 2007 and August 2008(outstanding March 31, 200524.7, March 31, 2004Nil)
    
    
    38.8
    
    
    
    
    (viii) Obligations under capital lease commitments
    
    
    19.4
    
    
    
    
    23.7342.9
    
    
    
    
    584.3Less: Long-term debt due within one year
    
    
    35.3
    
    
    
    
    8.8$
    307.6
    
    
    
    $
    575.5
   (i)
    
    Pursuant to a private placement, the Company borrowed US$108.0 million and $20.0
million. These unsecured senior notes rank equally with term bank financings with fixed
repayment amounts of $20.0 million in 2005, US$15.0 million in 2007, US$60.0 million in 2009
and US$33.0 million in 2012. Fixed interest is payable semi-annually in June and December at
an average rate of 7.6% on the US amounts and 7.2% on the Canadian amount. The Company has
entered into interest rate swap agreements converting the initial fixed interest rate into
the equivalent of a three-month LIBOR borrowing plus 3.6% on US$33.0 million of the senior
notes.(ii)
    
    These revolving term credit facilities (US$350.0 million and 100.0 million) are unsecured
and the interest rate payable is based on LIBOR, BAs or EURIBOR plus 0.6%. As at the end of
March 31, 2004, an amount of $35.0 million had been fixed through a swap agreement until
April 2006 at a rate of 5.0%. This swap was unwound in February 2005 as the Company repaid
substantially all of the outstanding borrowings under the facilities. The average interest
rate at March 31, 2005 is 3.1% (20043.4%).(iii)
    
    The Company had arranged project financing for its training centre in São Paulo, Brazil.
This term loan was carrying an interest rate of 7.7% and was supported by a letter of credit
for an amount equal to the outstanding obligations. The loan was repaid prior to March 31, 2005
with the proceeds from the sale of the Marine division.(iv)
    
    The Company, in association with Iberia Lineas de España, combined their aviation training
operations in Spain. The operators financed the acquisition of the simulators from CAE and
Iberia through asset-backed financing maturing in May and June 2011. As part of the lease
agreements, should the October 2003 agreement be terminated, CAE and Iberia will be obliged
to repurchase the simulators they contributed, in proportion to the fair value of the
simulators, for a total amount equal to the outstanding balance under the financing
agreement. Quarterly capital repayments are to be made for the term of the financing. The
implicit interest rate is 4.60%. The net book value of the simulators being financed, as at
March 31, 2005 is equal to approximately $90.2 million (57.5 million).(v)
    
    The Company arranged project financing for one of its subsidiaries to finance the Companys
MSH program for the MoD in the United Kingdom. The credit facility includes a term loan that
is secured by the project assets of the subsidiary and a bi-annual repayment is required
until 2016. Interest on the loans is charged at a rate approximating LIBOR plus 0.85%. The
Company has entered into an interest rate swap totaling £5.5 million fixing the interest rate
at 6.31%. The value of the assets pledged as collateral for the credit facility as at March
31, 2005, is £26.1 million (200427.5 million). > 60




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (vi)
    Airport Improvement Revenue Bonds were issued by the Grapevine Industrial
Development Corporation, Grapevine, Texas for amounts of US$8.0 million and US$19.0 million
and maturing respectively in 2010 and 2013. Real property, improvements, fixtures and
specified simulation equipment secure the bonds. The rates are set periodically by the
remarketing agent based on market conditions. For the bonds maturing in 2010, the rate is set
weekly. For the bonds maturing in 2013, the rate is set yearly and is subject to a maximum
rate of 10% permissible under current applicable laws. As at March 31, 2005, the combined rate
for both series was approximately 2.6%. The security is limited to an amount not exceeding the
outstanding balance of the loans which represents US$27.0 million as at March 31, 2005. Also,
a letter of credit has been issued to support the bonds for the outstanding amount of the
loans.(vii)
    Asset backed financing in the Companys Amsterdam Training centre represents financing for
three different simulators expiring in December 2007 and August 2008. The average cost of the
financing is equal to approximately 8.0%. The net book value of the simulators under the
financing, as at March 31, 2005 is equal to approximately $44.7 million (28.5 million).(viii)
    These capital leases are related to the leasing of various simulators in CAEs
subsidiaries. The effective interest rate on obligations under capital leases which mature
have staggered maturities until March 2024 was approximately 5.0% (20045.0%).(ix)
    Payments required in each of the next five fiscal years to meet the retirement provisions
of the long-term debt are as follows: (amounts in millions)2006
    
    $
    35.32007
    
    
    45.72008
    
    
    47.82009
    
    
    21.92010
    
    
    84.3Thereafter
    
    
    107.9$
    342.9
 Details of net interest expense (income) are as follows: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Long-term debt interest expense
    
    $
    35.3
    
    
    
    $
    30.2
    
    
    $
    33.5Amortization of deferred financing costs and other
    
    
    9.7
    
    
    
    
    5.7
    
    
    
    6.7Allocation of interest expense to discontinued operations
    
    
    (1.4
    )
    
    
    
    (1.5
    )
    
    
    (2.4
    )Interest capitalized
    
    
    (5.8
    )
    
    
    
    (6.4
    )
    
    
    (6.2
    )Interest on long-term debt
    
    $
    37.8
    
    
    
    $
    28.0
    
    
    $
    31.6
 (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Interest income
    
    $
    (5.7
    )
    
    
    $
    (6.1
    )
    
    $
    (3.7
    )Other interest expense
    
    
    
    
    
    
    
    0.5
    
    
    
    0.2Other interest income, net
    
    $
    (5.7
    )
    
    
    $
    (5.6
    )
    
    $
    (3.5
    )
 Certain of the Companys debt instruments include customary positive and negative covenants,
including interest coverage, leverage ratios, and restrictions on the sale of assets. In
connection with the impairment charge taken during the third quarter of fiscal 2005, CAE obtained
an amendment to certain definitions related to financial covenants from both its banking
syndicate, with respect to the unsecured revolving credit facilities, and its senior note holders.
CAE was able to obtain approval from both groups of senior lenders to amend the definitions, thus
allowing the Company to be compliant with the financial covenants associated with each agreement.
As at March 31, 2005, CAE is in full compliance with its financial covenants. B. SHORT-TERM DEBT The Company has unsecured bank lines of credit available in various currencies totaling $31.0
million (2004$28.2 million, 2003$89.0 million), of which $11.2 million was used as at March 31,
2005 (2004$6.4 million, 2003$41.3 million). The effective rate on the short-term borrowings was
4.25% (20044.0%, 20034.8%). 61 >




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12.
CAPITAL STOCK  (i)
    The Companys articles of incorporation authorize the issuance of an unlimited number of
preferred shares, issuable in series, and an unlimited number of common shares. To date, the Company has not
issued any preferred shares.(ii)
    A reconciliation of the issued and
outstanding common shares of the Company is as follows: (amounts in milions, except number of shares)
    
    
    
    
    
    2005
    
    
    
    2004
    
    
    
    
    
    
    2003number
    
    
    stated
    
    
    
    number
    
    
    stated
    
    
    number
    
    
    statedof shares
    
    
    value
    
    
    
    of shares
    
    
    value
    
    
    of shares
    
    
    valueBalance at beginning of year
    
    
    246,649,180
    
    
    $
    367.5
    
    
    
    
    219,661,178
    
    
    $
    190.5
    
    
    
    218,955,780
    
    
    $
    186.8Shares issued (Note 2, (a) (b))
    
    
    424,628
    
    
    
    2.0
    
    
    
    
    26,600,000
    
    
    
    175.0
    
    
    
    
    
    
    
    Stock options exercised
    
    
    869,620
    
    
    
    3.6
    
    
    
    
    282,000
    
    
    
    1.4
    
    
    
    650,776
    
    
    
    3.5Stock dividends (c)
    
    
    126,901
    
    
    
    0.7
    
    
    
    
    106,002
    
    
    
    0.6
    
    
    
    54,622
    
    
    
    0.2Balance at end of year
    
    
    248,070,329
    
    
    $
    373.8
    
    
    
    
    246,649,180
    
    
    $
    367.5
    
    
    
    219,661,178
    
    
    $
    190.5
   (a)
    
    On November 30, 2004, the Company issued 424,628 common shares at a price of $4.71 per
share, for the acquisition of Greenley &Associates Inc.(b)
    
    On September 30, 2003, the Company issued 26,600,000 common shares at a price of $6.58 per
share, for a cash proceeds of $175.0 million.(c)
    
    Until February 29th, 2004, the Companys Dividend Reinvestment Plan (DRIP)
provided that eligible shareholders (which coveredall shareholders living wherever the shares were distributed) could elect to receive common
stock dividends in lieu of cash dividends.
As of March 1, 2004, eligibility has been limited to Canadian resident shareholders only.  (iii)
    The following is a reconciliation of the denominators for the basic and diluted earnings per
share computations: 2005
    
    
    
    2004
    
    
    2003Weighted average number of common shares outstanding Basic
    
    
    247,060,580
    
    
    
    
    233,167,858
    
    
    
    219,427,513Effect of dilutive stock options
    
    
    812,273
    
    
    
    
    849,912
    
    
    
    897,806Weighted average number of common shares outstanding Diluted
    
    
    247,872,853
    
    
    
    
    234,017,770
    
    
    
    220,325,319
 Options to acquire 4,635,100 common shares (20044,195,400, 20033,198,000) have been
excluded from the above calculation since their inclusion would have an anti-dilutive effect. NOTE 13.
STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN Under the long-term incentive program of the Company, options may be granted to officers and
other key employees of the Company and its subsidiaries to purchase common shares of the Company
at a subscription price of 100% of the market value at the date of the grant. Market value is
determined as the closing price of the common shares on the Toronto Stock Exchange on the last day
of trading prior to the effective date of the grant. At March 31, 2005, a total of 10,660,426 common shares remained authorized for issuance under
the Employee Stock Option Plan (ESOP). The options are exercisable during a period not to exceed
six years and are not exercisable during the first 12 months after the date of the grant. The right
to exercise all of the options accrues over a period of four years of continuous employment.
However, if there is a change of control of the Company, the options become immediately
exercisable. Options are adjusted proportionately for any stock dividends or stock splits
attributed to the common shares of the Company. > 62




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##### 



> CAE ANNUAL REPORT 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 A reconciliation of the outstanding options is as follows: For the years ended March 31
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003weighted
    
    
    
    
    
    
    
    weighted
    
    
    
    
    
    

weightedaverage
    
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averagenumber
    
    
    exercise
    
    
    
    number
    
    
    exercise
    
    
    number
    
    
    exerciseof options
    
    
    price
    
    
    
    of options
    
    
    price
    
    
    of options
    
    
    priceOptions outstanding at beginning of year
    
    
    8,128,370
    
    
    $
    7.51
    
    
    
    
    5,692,750
    
    
    $
    9.37
    
    
    
    4,999,078
    
    
    $
    7.70Granted
    
    
    2,046,650
    
    
    $
    5.68
    
    
    
    
    3,536,320
    
    
    $
    4.14
    
    
    
    1,767,000
    
    
    $
    12.71Exercised
    
    
    (869,620
    )
    
    $
    4.15
    
    
    
    

    (282,000
    )
    
    $
    4.88
    
    
    
    (650,776
    )
    
    $
    5.62Forfeited
    
    
    (809,725
    )
    
    $
    6.77
    
    
    
    
    (718,400
    )
    
    $
    6.98
    
    
    
    (325,400
    )
    
    $
    9.38Expired
    
    
    (287,000
    )
    
    $
    6.43
    
    
    
    
    (100,300
    )
    
    $
    5.70
    
    
    
    (97,152
    )
    
    $
    9.10Options outstanding at end of year
    
    
    8,208,675
    
    
    $
    7.52
    
    
    
    
    8,128,370
    
    
    $
    7.51
    
    
    
    5,692,750
    
    
    $
    9.37Options exercisable at end of year
    
    
    3,731,085
    
    
    $
    8.76
    
    
    
    
    2,887,000
    
    
    $
    8.07
    
    
    
    2,000,975
    
    
    $
    6.78
 The following table summarizes information about the Companys ESOP as at March 31, 2005: options outstanding
    
    
    
    options exercisableaverageremaining
    
    
    weighted
    
    
    
    
    
    
    
    weightednumber
    
    
    contractual life
    
    
    average exercise
    
    
    
    number
    
    
    average exerciserange of exercise prices
    
    outstanding
    
    
    (years)
    
    
    price
    
    
    
    exercisable
    
    
    price$4.08 to $5.20
    
    
    2,876,875
    
    
    
    4.07
    
    
    $
    4.21
    
    
    
    
    916,185
    
    
    $
    4.15$5.28 to $5.89
    
    
    1,206,700
    
    
    
    5.15
    
    
    $
    5.63
    
    
    
    
    91,800
    
    
    $
    5.45$6.03 to $9.20
    
    
    1,527,850
    
    
    
    2.52
    
    
    $
    6.72
    
    
    
    
    1,021,225
    
    
    $
    6.98$12.225 to $14.60
    
    
    2,597,250
    
    
    
    3.65
    
    
    $
    12.53
    
    
    
    
    1,701,875
    
    
    $
    12.48Total
    
    
    8,208,675
    
    
    
    3.33
    
    
    $
    7.52
    
    
    
    
    3,731,085
    
    
    $
    8.76
 For the year ended March 31, 2005, compensation cost for CAEs stock options was recognized
in net earnings with a corresponding credit of $2.0 million (fiscal 2004-$1.3 million) to
contributed surplus using the fair value method of accounting for awards that were granted in
fiscal 2004 and 2005. The assumptions used for purposes of the option calculations outlined in this note are presented
below: 2005
    
    
    
    2004
    
    
    2003Assumptions used in Black-Scholes options pricing model:Dividend yield
    
    
    1.26
    %
    
    
    
    1.29
    %
    
    
    1.06
    %Expected volatility
    
    
    40.0
    %
    
    
    
    41.5
    %
    
    
    46.5
    %Risk-free interest rate
    
    
    5.75
    %
    
    
    
    5.75
    %
    
    
    5.26
    %Expected life (years)
    
    
    6
    
    
    
    
    6
    
    
    
    6Weighted
average fair value of options granted
    
    $
    2.27
    
    
    
    $
    1.65
    
    
    $
    5.84
 63 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. STOCK-BASED COMPENSATION PLANS (CONTD) DISCLOSURE OF PRO FORMA INFORMATION REQUIRED UNDER CICA HANDBOOK SECTION 3870 During the year ended March 31, 2003, the Company granted 1,767,000 options to purchase common
shares. The weighted average grant date fair value of options granted during this period amounted
to $5.84 per option. To compute the pro forma compensation cost, the Black-Scholes valuation model
was used to determine the fair value of the options granted. Pro forma net earnings and pro forma
basic and diluted net earnings per share are presented below: (amounts in millions, except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003Net (loss) earnings, as reported
    
    $
    (199.9
    )
    
    
    $
    64.0
    
    
    $
    117.2Pro forma impact
    
    
    (2.1
    )
    
    
    
    (2.5
    )
    
    
    (2.5
    )Pro forma net (loss) earnings
    
    $
    (202.0
    )
    
    
    $
    61.5
    
    
    $
    114.7Pro forma basic and diluted net earnings per share1
    
    $
    (0.82
    )
    
    
    $
    0.26
    
    
    $
    0.52
   1
    
    For fiscal 2005, the effect of stock options potentially exercisable on pro
forma net loss per share was anti-dilutive; therefore, basic and diluted pro forma net
loss per share are the same. EMPLOYEE STOCK PURCHASE PLAN The Company maintains an Employee Stock Purchase Plan (ESPP) to enable employees of the
Company and its participating subsidiaries to acquire CAE common shares through regular payroll
deductions plus employer contributions. The Plan allows employees to contribute up to 10% of their
annual base salary. The Company and its participating subsidiaries match the first $500 employee
contribution and contribute $1 for every $3 on additional employee contributions, to a maximum of
2% of the employees base salary. Matching contributions vest at the beginning of the third year
following the year during which the employee contributions were made, provided employment has been
continuous during that period. Common shares of the Company are purchased by the ESPP trustee on
behalf of the participants on the open market, through the facilities of the Toronto Stock
Exchange. The Company recorded compensation expense in the amount of
$1.4 million (2004$1.6
million, 2003$1.9 million) in respect of employer contributions under the Plan. DEFERRED SHARE UNIT PLAN The Company maintains a Deferred Share Unit (DSU) Plan for executives whereby an executive
may elect to receive any cash incentive compensation in the form of deferred share units. The Plan
is intended to enhance the Companys ability to promote a greater alignment of interests between
executives and the shareholders of the Company. A deferred share unit is equal in value to one
common share of the Company. The units are issued on the basis of the average closing board lot
sale price per share of CAE common shares on the Toronto Stock Exchange during the last 10 days on
which such shares traded prior to the date of issue. The units also accrue dividend equivalents
payable in additional units in an amount equal to dividends paid on CAE common shares. Deferred
share units mature upon termination of employment, whereupon an executive is entitled to receive
the fair market value of the equivalent number of common shares, net of withholdings, in cash. In fiscal 2000, the Company adopted a DSU Plan for Non-Employee Directors. A non-employee
director holding less than 5,000 common shares of the Company receives the Board retainer and
attendance fees in the form of deferred share units. A non-employee director holding at least 5,000
common shares may elect to participate in the Plan in respect of part or all of his or her retainer
and attendance fees. The terms of the Plan are essentially identical to the key executive DSU Plan. The Company records the cost of the DSU Plan as compensation expense. As at March 31, 2005,
343,116 units were outstanding at a value of $1.9 million
(2004403,071 units at a value of $2.3
million; 2003362,498 units at a value of $1.0 million). A total number of 114,969 units were
redeemed during the fiscal year ended March 31, 2005 under both DSU Plans in accordance with their
respective plan text, for a total of $0.6 million. As at March 31, 2005 and March 31, 2004 no DSU
were cancelled. > 64




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM INCENTIVE-DEFERRED SHARE UNIT PLAN (MAY 2003 AND MAY 2004) During the year ended March 31, 2005, the Company adopted, as an element of its long-term
incentive compensation plan, a new long-term deferred share units (LTI-DSU). This new LTI-DSU
does not replace the existing 2003 LTI-DSU Plan. Both plans are intended to enhance the Companys
ability to promote a greater alignment of interests between executives and the shareholders of the
Company. LTI-DSUs have been granted to executives and managers of the Company. A LTI-DSU is equal
in value to one common share of the Company determined based on the closing quoted market value of
the Company shares net of withholdings at a specific date, and subject to the Company plan. The
LTI-DSU also accrued dividend equivalents payable in additional units in an amount equal to
dividends paid on CAE common shares. The April 2003 LTI-DSU vest equally over four years and can
be redeemed for cash upon retirement, death, disability or involuntary termination. In May 2003,
the Company issued 1,441,011 LTI-DSU units. The expense recorded in fiscal 2005 with respect to
these units was $1.2 million (2004$1.4 million). The May 2004 LTI-DSU vest equally over five
years and can be redeemed for value upon retirement, death, disability or involuntary termination.
The vested shares in the account of the participant upon voluntary termination may be redeemed.
The value is equal to the fair market value of the equivalent number of common shares of the
Company, net of withholdings, in cash. In fiscal 2005, the Company issued 582,431 LTI-DSU units.
The expense recorded in fiscal 2005 with respect to these units was $0.6 million. On March
15, 2004, the Company entered into a contract to reduce its earnings exposure to the fluctuations
in the Companys share price (refer to Note 14). LONG-TERM INCENTIVE-RESTRICTED SHARE UNIT PLAN The long-term incentiverestricted share unit (LTI-RSU) is intended to enhance CAE Inc.s
ability to attract and retain talented individuals to serve as officers and executive of CAE and to
promote a greater alignment of interests between such officers, executives and the shareholders of
CAE. The LTI-RSU is set up as a stock based performance plan. Vesting of granted restricted shares
is based on the performance of the stock on the third anniversary of the grant date. Vesting is
conditional to the targets set out in the LTI-RSU plan and described hereafter:  (i)
    100% of the units, if CAE shares have appreciated at least 33% (10% annual compounded growth)
during that timeframe; or(ii)
    50% of the units, if CAE shares have appreciated at least 24% (7.5% annual compounded growth)
but not as much as 33% during that
timeframe. No LTI-RSU vest if the market value of the Common Shares has appreciated less than 24% during
the specified timeframe. No pro-ration in the vesting percentage of LTI-RSU occurs for any appreciation of the market
value of CAE shares of between 24% and
33% during the specified timeframe. In order to determine if the maximum or minimum return has been reached, the plan uses the
weighted value of the Common Share, based on the Fair Market value during the twenty trading days
immediately preceding the date. If a participant is subjected to employment loss or other form of
dismissal other than for cause subjected to conditional pro-rata. If a participant leaves
voluntarily or is terminated for cause, both the vested and unvested portion of the Restricted
Share Units are cancelled. If the above-mentioned criteria are satisfied, the amount of money to
be paid to each participant is determined by the number of Restricted Share Units in the
participants account multiplied by the closing price of CAEs stock on the TSX. Therefore, the
closing price on the particular date is used for the vesting determination date (i.e. third
anniversary vesting date). The participants are paid within ten days of the vesting determination
date. In fiscal 2005, the Company issued 788,167-RSU units. The expense recorded in fiscal 2005
with respect to these units was $1.0 million. 65 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14.
FINANCIAL INSTRUMENTS FOREIGN CURRENCY RISK The Company entered into forward foreign exchange contracts totaling $305.0 million (buy
contracts $42.4 million and sell contracts $262.6 million). The total net unrealized gain as of
March 31, 2005, is $9.1 million (unrealized loss on buy contracts of $0.1 million and unrealized
gain on sell contracts of $9.2 million). CONSOLIDATED FOREIGN EXCHANGE TRANSACTIONS OUTSTANDING (amounts in millions)
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004notional
    
    
    average
    
    
    
    notional
    
    
    averageCURRENCIES (SOLD/BOUGHT)
    

amount1
    
    
    rate
    
    
    

amount1
    
    
    rateUS/CALess than 1 year
    
    $
    169.3
    
    
    
    0.7964
    
    
    
    $
    96.4
    
    
    
    0.7492Between 1 and 3 years
    
    
    48.6
    
    
    
    0.7989
    
    
    
    
    15.4
    
    
    
    0.7410Between 3 and 5 years
    
    
    0.4
    
    
    
    0.8263
    
    
    
    
    
    
    
    
    CA/USLess than 1 year
    
    
    34.4
    
    
    
    1.2125
    
    
    
    
    11.8
    
    
    
    1.3141US/EURLess than 1 year
    
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    1.1383CA/EURLess than 1 year
    
    
    7.9
    
    
    
    1.5796
    
    
    
    
    
    
    
    
    EUR/CALess than 1 year
    
    
    22.2
    
    
    
    0.6268
    
    
    
    
    
    
    
    
    Between 1 and 3 years
    
    
    8.9
    
    
    
    0.6271
    
    
    
    
    
    
    
    
    Between 3 and 5 years
    
    
    7.8
    
    
    
    0.6147
    
    
    
    
    
    
    
    
    GBP/CALess than 1 year
    
    
    5.0
    
    
    
    0.4251
    
    
    
    
    3.3
    
    
    
    0.4122Between 1 and 3 years
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    0.4135CA/GBPLess than 1 year
    
    
    0.5
    
    
    
    2.2126
    
    
    
    
    
    
    
    
    GBP/USLess than 1 year
    
    
    
    
    
    
    
    
    
    
    
    51.7
    
    
    
    0.5561$
    305.0
    
    
    
    
    
    
    
    $
    181.4
   1
    
    Exchange rates as at the end of the respective
fiscal years were used to translate amounts in foreign
currencies. CREDIT RISK The Company is exposed to credit risk on billed and unbilled accounts receivable. However, its
customers are primarily established companies with publicly available credit ratings or government
agencies, factors that facilitate monitoring the risk. In addition, the Company typically receives
substantial non-refundable deposits on contracts. The Company closely monitors its exposure to
major airlines in order to curtail it to the extent possible. The Company is exposed to credit risk in the event of non-performance by counterparties to
its derivative financial instruments. The Company minimizes this exposure by entering into
contracts with counterparties that are of high credit quality. Collateral or other security to
support financial instruments subject to credit risk is usually not obtained. The credit standing
of counterparties is regularly monitored. > 66




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTEREST RATE EXPOSURE The Company bears some interest rates fluctuation risk on its variable long-term debt and some
fair value risk on its fixed interest long-term debt. As at March 31, 2005, the Company has
entered into three interest rate swap agreements with three different financial institutions to
mitigate these risks for a total notional value of $65.8 million. One agreement, with a notional
value of $39.9 million (US$33.0 million), has converted fixed interest rate debt into floating
whereby the Company pays the equivalent of a 3-month LIBOR borrowing rate plus 3.6% and receives a
fixed interest rate of 7.8% up to June 2012. The remaining two contracts are converting floating
interest rate debt into fixed for a notional value of $25.9 million whereby the Company will
receive quarterly LIBOR and a weekly tax-exempt based floating rate and pay fixed interest
payments as follows:  
    until September 2005 on $13.3 million (US$11.0 million), the Company will pay monthly a fixed annual interest rate of 5.0%;  
    until October 2016 on $12.6 million (£5.5 million), the Company will pay quarterly fixed annual interest rate of 6.3%. After considering these swap agreements, as at March 31, 2005, 70% of the long-term debt bears
fixed interest rates. STOCK BASED COMPENSATION COST In March 2004, the Company entered into an equity swap agreement with a major Canadian
institution to reduce its cash and earnings exposure to fluctuation in the Companys share price
relating to the DSU and LTI-DSU programs. Pursuant to the agreement, the Company receives the
economic benefit of dividends and share price appreciation while providing payments to the
financial institution for the institutions cost of funds and any share price depreciation. The net
effect of the equity swap partly offsets movements in the Companys share price impacting the cost
of the DSU and LTI-DSU programs. As at March 31, 2005, the equity swap agreement covered 600,000
shares of the Company. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions have been used to estimate the fair value of the
financial instruments:  
    cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are
valued at their carrying amounts on the balance sheet, which represent an appropriate estimate of their fair values due to their near-term maturities;  
    capital leases are valued using the discounted cash flow method;  
    long-term debt value is estimated based on discounted cash flows using current interest rates for debt with similar terms and remaining
maturities;  
    interest rate and currency swap contracts reflect the present value of the potential gain or
loss if settlement were to take place at the balance
sheet date;  
    the forward foreign exchange contracts are represented by the estimated amounts that the Company would receive or pay to settle the con-
tracts at the balance sheet date. The fair value and the carrying amount of the financial instruments as at March 31 is as follows: (amounts
in millions)
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004fair
    
    
    carrying
    
    
    
    fair
    
    
    carryingvalue
    
    
    amount
    
    
    
    value
    
    
    amountLong-term debt
    
    $
    354.2
    
    
    $
    342.9
    
    
    
    $
    612.0
    
    
    $
    584.3Net forward foreign exchange contracts
    
    
    9.1
    
    
    
    
    
    
    
    
    1.2
    
    
    
    Interest rate swap contracts
    
    
    (1.8
    )
    
    
    
    
    
    
    
    (2.6
    )
    
    
    
 LETTERS OF CREDIT AND GUARANTEES As at March 31, 2005, CAE had outstanding letters of credit and performance guarantees in the
amount of $73.3 million (2004$168.6 million) issued in the normal course of business. These
guarantees are issued under standby facilities available to the Company through various financial
institutions. 67 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. FINANCIAL INSTRUMENTS (CONTD) The advance payment guarantees are related to progress/milestone payments made by our
customers and are reduced or eliminated upon delivery of the product. The contract performance
guarantees are linked to the completion of the intended product or service rendered by CAE and at
the satisfaction of the customer. It represents 10% to 20% of the overall contract amount. The
customer releases the Company from these guarantees at the signature of a certificate of
completion. The letters of credit for the operating lease obligations provide credit support for
the benefit of the owner participant in the September 30, 2003 sale and leaseback transaction and
an operating lease for a simulator in another subsidiary. (amounts in millions)
    
    2005
    
    
    
    2004Advance payment
    
    $
    25.3
    
    
    
    $
    119.2Contract performance
    
    
    7.8
    
    
    
    
    10.6Operating lease obligations
    
    
    37.6
    
    
    
    
    31.1Others
    
    
    2.6
    
    
    
    
    7.7Total
    
    $
    73.3
    
    
    
    $
    168.6
 RESIDUAL VALUE GUARANTEES-SALE AND LEASEBACK TRANSACTIONS Following certain sale and leaseback transactions, the Company has agreed to guarantee the
residual value of the underlying equipment in the event that the equipment is returned to the
lessor and the net proceeds of any eventual sale do not cover the guaranteed amount. The maximum
amount of exposure is $52.3 million of which $22.6 million matures in 2007, $12.3 million matures
in 2008, $8.2 million in 2020 and $9.2 million in 2023. Of this amount, as at March 31, 2005,
$33.1 million is recorded as deferred gain (2004$33.1 million). INDEMNIFICATIONS In certain instances when CAE sells businesses, the Company may retain certain liabilities for
known exposures and provide indemnification to the buyer with respect to future claims for certain
unknown liabilities existing, or arising from events occurring, prior to the sale date, including
liabilities for taxes, legal matters, environmental exposures, product liability, and other
obligations. The terms of the indemnifications vary in duration, from one to two years for certain
types of indemnities, terms for tax indemnifications that are generally aligned to the applicable
statute of limitations for the jurisdiction in which the divestiture occurred, and terms for
environmental liabilities that typically do not expire. The maximum potential future payments that
the Company could be required to make under these indemnifications are either contractually
limited to a specified amount or unlimited. The Company believes that other than the liabilities
already accrued, the maximum potential future payments that the Company could be required to make
under these indemnifications are not determinable at this time, as any future payments would be
dependent on the type and extent of the related claims, and all available defenses, which are not
estimable. However, costs incurred to settle claims related to these indemnifications have not
been material to the Companys financial position, results of operations or cash flows. > 68




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15.
INCOME TAXES A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as
follows: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Earnings before income taxes and discontinued operations
    
    $
    (405.1
    )
    
    
    $
    58.9
    
    
    $
    166.3Statutory income tax rates in Canada
    
    
    31.27
    %
    
    
    
    32.78
    %
    
    
    34.70
    %Income taxes at Canadian statutory rates
    
    $
    (126.7
    )
    
    
    $
    19.3
    
    
    $
    57.7Difference between Canadian statutory rates and those applicable to foreign subsidiaries
    
    
    (12.2
    )
    
    
    
    (2.9
    )
    
    
    1.4Manufacturing and processing allowance
    
    
    
    
    
    
    
    (0.5
    )
    
    
    (3.5
    )Goodwill impairment
    
    
    61.7
    
    
    
    
    
    
    
    
    Losses not tax effected
    
    
    2.7
    
    
    
    
    0.2

    
    
    
    1.0Tax benefit of operating losses not previously recognized
    
    
    (12.2
    )
    
    
    
    (5.2
    )
    
    
    (1.1
    )Tax benefit of capital losses not previously recognized
    
    
    (11.3
    )
    
    
    
    
    
    
    
    Non taxable capital gain
    
    
    (0.1
    )
    
    
    
    (0.2
    )
    
    
    (0.7
    )Non deductible items
    
    
    4.5
    
    
    
    
    3.3
    
    
    
    (0.4
    )Prior years tax adjustments and assessments
    
    
    (3.6
    )
    
    
    
    (3.6
    )
    
    
    (0.9
    )Impact of change in income tax rates on future income taxes
    
    
    (1.0
    )
    
    
    
    0.7
    
    
    
    (1.7
    )Non taxable research and development tax credits
    
    
    (1.5
    )
    
    
    
    (0.5
    )
    
    
    (0.4
    )Other
    
    
    (0.7
    )
    
    
    
    0.9
    
    
    
    1.0Total income tax (recovery) expense
    
    $
    (100.4
    )
    
    
    $
    11.5
    
    
    $
    52.4
 Significant components of the provision for income tax expense attributable to continuing operations are as follows: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Current income tax expense
    
    $
    13.5
    
    
    
    $
    14.4
    
    
    $
    36.2Future income tax (recovery) expense
    
    
    (113.9
    )
    
    
    
    (2.9
    )
    
    
    16.2Total income tax (recovery) expense
    
    $
    (100.4
    )
    
    
    $
    11.5
    
    
    $
    52.4
 The tax effects of temporary differences that gave rise to future tax liabilities and assets are as follows: (amounts in millions)
    
    2005
    
    
    
    2004Non-capital loss carryforwards
    
    $
    71.4
    
    
    
    $
    73.6Capital loss carryforwards
    
    
    4.6
    
    
    
    
    17.5Investment tax credits
    
    
    (20.9
    )
    
    
    
    (14.3
    )Property, plant and equipment
    
    
    (8.7
    )
    
    
    
    (32.7
    )Intangibles
    
    
    (0.5
    )
    
    
    
    (22.3
    )Amounts not currently deductible
    
    
    19.1
    
    

    
    
    13.7Deferred revenues
    
    
    12.4
    
    
    
    
    4.7Percentage of completion versus completed contract
    
    
    (6.9
    )
    
    
    
    (45.3
    )Other
    
    
    6.2
    
    
    
    
    10.576.7
    
    
    
    
    5.4Valuation allowance
    
    
    (31.1
    )
    
    
    
    (43.2
    )Net future income tax assets (liabilities)
    
    $
    45.6
    
    
    
    $
    (37.8
    )
 As of March 31, 2005, the Company has accumulated non-capital losses carried forward relating
to operations in the United States for approximately $122.6 million (US$101.3 million). For
financial reporting purposes, a net future tax income asset of $33.6 million (US$27.8 million) has
been recognized in respect of these loss carry forwards. The Company has accumulated non-capital tax losses carried forward relating to its operations
in other countries of approximately $66.8 million. For financial reporting purposes, a net future
income tax asset of $10.6 million has been recognized. 69 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. INCOME TAXES (CONTD) The Company has also accumulated capital losses carried forward relating to operations in the
United States for approximately $11.5 million (US$9.5 million). For financial reporting purposes,
no future tax income asset was recognized, as a full valuation allowance was taken. The non-capital losses for income tax purposes expire as follows: (amounts in millions)
    
    UNITED STATES (US$)
    
    
    OTHER COUNTRIES (CA$)Year of expiration:2006
    
    $
    
    
    
    $
    2007
    
    
    31.5
    
    
    
    2008
    
    
    27.2
    
    
    
    0.42009
    
    
    6.0
    
    
    
    0.82010
    
    
    
    
    
    
    0.12011-2023
    
    
    36.6
    
    
    
    0.6No expiration
    
    
    
    
    
    
    64.9$
    101.3
    
    
    $
    66.8
 The valuation allowance relates principally to loss carryforward benefits where realization is
not likely due to a history of loss carryforwards and to the uncertainty of sufficient taxable
earnings in the future, together with time limitations in the tax legislation giving rise to the
potential benefit. In 2005, $22.3 million (2004$5.7 million) of the valuation allowance balance
was reversed when it became more likely than not that benefits would be realized. NOTE 16.
DEFERRED GAINS AND OTHER LONG-TERM LIABILITIES (amounts in millions)
    
    2005
    
    
    
    2004Deferred gains on sale and leasebacks (i)
    
    $
    90.7
    
    
    
    $
    90.5Deferred revenue and gains
    
    
    21.1
    
    
    
    
    33.9Long-term portion of employee benefits obligation (Note 21)
    
    
    24.9
    
    
    
    
    26.3Government cost sharing (Note 19)
    
    
    7.6
    
    
    
    
    7.2Minority
interest
(ii)
    
    
    16.9
    
    
    
    
    1.6Other
    
    
    18.6
    
    
    
    
    11.5$
    179.8
    
    
    
    $
    171.0
   (i)
    
    The related amortization for the year
amounts to $3.5 million (2004$3.2 million,
2003$2.1 million).(ii)
    
    In fiscal 2005 CAE
acquired 80% of the training centre Servicios de
Instruccion de Vuelo, S.L. in Spain. NOTE 17.
SUPPLEMENTARY CASH FLOW INFORMATION Cash provided (used in) by non-cash working capital is as follows: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Accounts receivable
    
    $
    53.9
    
    
    
    $
    (16.1
    )
    
    $
    28.7Inventories
    
    
    18.7
    
    
    
    
    (21.6
    )
    
    
    0.6Prepaid expenses
    
    
    0.5
    
    
    
    
    (6.3
    )
    
    
    (6.3
    )Income taxes recoverable
    
    
    28.5
    
    
    
    
    (8.8
    )
    
    
    (23.7
    )Accounts payable and accrued liabilities
    
    
    (42.3
    )
    
    
    
    (49.7
    )
    
    
    17.9Deposits on contracts
    
    
    26.3
    
    
    
    
    2.3
    
    
    
    (81.9
    )Decrease (increase) in non-cash working capital
    
    $
    85.6
    
    
    
    $
    (100.2
    )
    
    $
    (64.7
    )Interest paid
    
    $
    38.2
    
    
    
    $
    41.1
    
    
    $
    38.1Income taxes paid
    
    $
    
    
    
    
    $
    8.2
    
    
    $
    3.4
 > 70




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings from continuing operations include a net foreign exchange gain of $5.2 million
in 2005 or $0.02 per share (2004net foreign exchange gain of $10.2 million or $0.04 per share,
2003net foreign exchange gain of $7.6 million or $0.03 per share). NOTE 18.
CONTINGENCIES Through the normal course of operations, the Company is party to a number of lawsuits, claims and
contingencies. Accruals are made in instances where it is probable that liabilities will be
incurred and where such liabilities can be reasonably estimated. Although it is possible that
liabilities may be incurred in instances for which no accruals have been made, the Company has no
reason to believe that the ultimate outcome of these matters will have a material impact on its
financial position. NOTE 19.
GOVERNMENT COST SHARING The Company has signed agreements with the Government of Canada whereby the latter shares in the
cost, based on expenditures incurred by the Company, of certain R&D programs for visual systems and
advanced flight simulation technology for civil applications and networked simulation for military
applications. Funding in the amount of $31.2 million related to the visual R&D programs was
completed in 2001. There were no royalty payments for this program in fiscal 2005 (2004-$0.4
million). Funding in the amount of $41.4 million related to the civil flight simulation program
was completed in 2004. Royalty payments for this program are estimated at $3.5 million in fiscal
2005 (2004-$3.2 million). In fiscal 2003, funding of $39.0 million was approved to develop a
military network simulation. Royalty payments for this program are estimated at $2.4 million in
fiscal 2005 (2004nil). The amount of funding received in fiscal 2005
was $10.8 million (2004$8.5 million, 2003-$12.3 million). The Company provided for $12.9 million of future repayments on the
civil flight simulation program and the military network simulation program in fiscal 2005. These
programs are repayable in the form of royalties to March 2013 based on future sales. The maximum
amount of royalties payable under the visual program is $41.4 million. The maximum payment under
the civil or military simulation programs, based on future sales, is $66.0 million and $53.6
million respectively. NOTE 20.
OPERATING LEASE COMMITMENTS Future minimum lease payments under operating leases are as follows: (amounts in millions)
    
    civil
    
    
    military
    
    
    totalYears ending March 31,2006
    
    $
    46. 1
    
    
    $
    34.7
    
    
    $
    80.82007
    
    
    58.5
    
    
    
    26.3
    
    
    
    84.82008
    
    
    48.4
    
    
    
    24.3
    
    
    
    72.72009
    
    
    36.0
    
    
    
    23.4
    
    
    
    59.42010
    
    
    33.6
    
    
    
    21.8
    
    
    
    55.4Thereafter
    
    
    284.9
    
    
    
    76.6
    
    
    
    361.5$
    507.5
    
    
    $
    207.1
    
    
    $
    714.6
 71 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21.
EMPLOYEE FUTURE BENEFITS The Company has two Registered funded defined benefit pension plans in Canada (one for employees
and one for designated executives) that provide benefits based on length of service and final
average earnings. In addition, the Company maintains a Supplemental arrangement to provide defined
benefits for designated executives. This Supplemental arrangement is solely the obligation of the
Company and there is no requirement to fund it. The Company, however, is obligated to pay the
benefits when they become due. Once the designated executive retires from the Company, the Company
is required to secure the obligation for that executive. As at March 31, 2005, the Company has
issued letters of credit totaling $19.2 million to secure the obligations under this Supplemental
arrangement. Contributions reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets are represented primarily by Canadian and
foreign equities and government and corporate bonds. On February 3, 2005 the Company sold the Marine Controls division, resulting in a curtailment
loss of $0.2 million which has been included in discontinued operations. On
January 1, 2005, the Company approved some pension plan improvements to the Registered
pension plans resulting in increased pension obligations of $0.9 million. The changes in the pension obligations and in the fair value of assets and the funded status of the
Registered pension plans were as follows: (amounts in millions)
    
    2005
    
    
    
    2004Change in pension obligationsPension obligation, beginning of year
    
    $
    139.5
    
    
    
    $
    133.5Current service cost
    
    
    3.6
    
    
    
    
    3.4Interest cost
    
    
    9.0
    
    
    
    
    8.6Curtailment of discontinued operations
    
    
    (4.2
    )
    
    
    
    (1.5
    )Employee contributions
    
    
    2.6
    
    
    
    
    2.7Plan amendments
    
    
    0.9
    
    
    
    
    1.2Pension benefits paid
    
    
    (8.1
    )
    
    
    
    (8.4
    )Actuarial loss
    
    
    15.4
    
    
    
    
    Pension obligation, end of year
    
    
    158.7
    
    
    
    
    139.5Change in fair value of plan assetsFair value of plan assets, beginning of year
    
    $
    118.9
    
    
    
    $
    105.6Actual return on plan assets
    
    
    12.6
    
    
    
    
    14.4Pension benefits paid
    
    
    (8.1
    )
    
    
    
    (8.4
    )Settlement of discontinued operations
    
    
    (4.2
    )
    
    
    
    (1.3
    )Plan expenses
    
    
    (0.3
    )
    
    
    
    (0.3
    )Employee contributions
    
    
    2.6
    
    
    
    
    2.7Employer contributions
    
    
    6.7
    
    
    
    
    6.2Fair value of plan assets, end of year
    
    
    128.2
    
    
    
    
    118.9Funded status-plan deficit
    
    
    (30.5
    )
    
    
    
    (20.6
    )Unrecognized net actuarial loss
    
    
    42.4
    
    
    
    
    34.4Unamortized past service cost
    
    
    6.1
    
    
    
    
    5.8Amount recognized as an asset, end of year
    
    $
    18.0
    
    
    
    $
    19.6
 As at March 31, 2004 and March 31, 2005, all plans had pension obligations in excess of plan
assets. > 72




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAE pension plan weighted-average asset allocations by asset category are as follows: allocation of plan assets at measurement datesasset category
    

december
31, 2004
    
    

december
31, 2003Equity securities
    
    
    63
    %
    
    
    64
    %Fixed income securities
    
    
    37
    %
    
    
    36
    %Total
    
    
    100
    %
    
    
    100
    %
 There is a target allocation percentage for equity securities of 63%, which includes a
mix of Canadian, U.S. and international equities, and for the fixed income securities of 37%,
which must be rated BBB or higher. Individual asset classes are allowed to fluctuate slightly, and
are rebalanced regularly to the target mix. Fund managers are responsible for investing the assets
so as to achieve return in line with underlying market indices. The net pension cost for Registered pension plans for the years ended March 31 included the
following components: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Current service cost
    
    $
    3.6
    
    
    
    $
    3.4
    
    
    $
    3.8Plan expenses
    
    
    0.3
    
    
    
    
    0.3
    
    
    
    0.3Interest cost on pension obligations
    
    
    9.0
    
    
    
    
    8.5
    
    
    
    7.6Actual return on plan assets
    
    
    (12.6
    )
    
    
    
    (14.4
    )
    
    
    7.3Net actuarial loss on benefit obligation
    
    
    15.4
    
    
    
    
    
    
    
    
    7.3Past service cost arising from plan amendments in the period
    
    
    0.9
    
    
    
    
    1.2
    
    
    
    2.8Pension cost before adjustments to recognize the long-term nature of plans
    
    
    16.6
    
    
    
    
    (1.0
    )
    
    
    29.1Adjustments to recognize long-term nature of plans:Difference between expected return and actual return on plan assets
    
    
    4.8
    
    
    
    
    7.7
    
    
    
    (14.5
    )Difference between actuarial loss recognized for the year and actual
actuarial loss on benefit obligation for the year
    
    
    (14.0
    )
    
    
    
    2.2
    
    
    
    (6.5
    )Difference between amortization of past service cost for the year
and actual plan amendments for the year
    
    
    (0.4
    )
    
    
    
    (0.8
    )
    
    
    (2.6
    )Total adjustment
    
    
    (9.6
    )
    
    
    
    9.1
    
    
    
    (23.6
    )Net pension cost
    
    
    7.0
    
    
    
    
    8.1
    
    
    
    5.5Curtailment/settlement of discontinued operations
    
    
    1.3
    
    
    
    
    0.8
    
    
    
    Net pension cost including curtailment/settlement of discontinued operations
    
    $
    8.3
    
    
    
    $
    8.9
    
    
    $
    5.5
 The following components must be disclosed under US GAAP and are combinations of elements
presented above: (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Expected return on plan assets
    
    $
    (7.8
    )
    
    
    $
    (6.7
    )
    
    $
    (7.2
    )Amortization of net actuarial loss
    
    
    1.4
    
    
    
    
    2.2
    
    
    
    0.8Amortization of past service costs
    
    
    0.5
    
    
    
    
    0.4
    
    
    
    0.2
 With respect to the Supplemental arrangement, the net pension cost for 2005 was $1.4 million
(2004$1.7 million; 2003$1.7 million). The net pension cost for 2005 is made up of $0.8 million of
current service cost (2004$0.8 million; 2003$0.8 million), $1.0 million of interest cost on
obligations (2004$0.9 million; 2003$0.9 million),
$1.0 million of actuarial loss (2004$0.1
million; 2003$1.7 million), an adjustment to actuarial loss of
($1.0) million (2004($0.1)
million; 2003($1.7 million) and ($0.4) million
(2004nil; 2003nil) of settlement and other loss. The pension obligations relative to the Supplemental arrangement was $16.1 million as at March
31,2005 (2004$14.6 million; 2003  $13.7 million). In fiscal year ending March 2005, the current
service cost was $0.8 million, the interest cost on pension obligations was $0.9 million, the
benefits paid were $0.8 million, the actuarial loss was $1.0 million, the special/contractual
termination benefits was $0.2 million and the settlement of discontinued operations was $0.6
million. In fiscal year ending March 2004, the current service cost was $0.8 million, the interest
cost on pension obligations was $0.9 million, the benefits paid were $0.9 million and the actuarial
loss was $0.1 million. The total amount recognized as a liability, as at March 31, 2005, was $16.0
million (2004$15.4 million). The difference between this obligation recognized by the Company and
the pension obligation is the amount of unamortized actuarial (loss) gains of $(0.1) million
(2004-$0.8 million). 73 >




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21. EMPLOYEE FUTURE BENEFITS (CONTD) Expected contributions and benefit payments: In
the fiscal year ending March 2005, CAE contributed
$6.7 million (2004$6.2 million) to its
Registered pension plans and an additional
$0.8 million (2004-0.9$ million) to the Supplemental arrangement. In the next fiscal year, CAE expects to contribute $7.4 million to its Registered pension plans and
an additional $0.8 million to the Supplemental arrangement. The benefit payments expected to be paid in future years are as follows: registered
    
    
    supplemental(amounts in millions)
    
    plans
    
    
    arrangementYear:2006
    
    $
    8.3
    
    
    $
    0.92007
    
    
    8.9
    
    
    
    0.92008
    
    
    9.5
    
    
    
    0.92009
    
    
    10.3
    
    
    
    0.92010
    
    
    11.1
    
    
    
    1.02011-2015
    
    
    70.0
    
    
    
    6.5
 Significant assumptions (weighted average): 2005
    
    
    
    2004Pension obligations as of March 31:Discount rate
    
    
    6.0
    %
    
    
    
    6.5
    %Compensation rate increases (i)
    
    
    4.5
    %
    
    
    
    4.25
    %Net pension cost:Expected return on plan assets
    
    
    6.5
    %
    
    
    
    6.5
    %Discount rate
    
    
    6.5
    %
    
    
    
    6.5
    %Compensation
rate increases
(i)
    
    
    4.5
    %
    
    
    
    4.25
    %
   (i)
    
    For the executive plans, the compensation rate increase is 3.25%. For the purpose of calculating the expected return on plan assets, historical and expected
future returns were considered separately for each class of asset based on the asset allocation. The Company measures its benefit obligations and fair value of plan assets for accounting purposes
as at December 31 of each year. The most recent actuarial valuation of the pension plans for
funding purposes was as of March 28, 2002 for the employee Registered plan, and December 31, 2001
for the designated executive Registered plan. The next required valuation will be as of December
31, 2004 for both Registered plans. The total net amount recognized for the Registered plans and the Supplemental arrangement is an
asset of $2.0 million (2004asset of $4.2 million) and is included in the Companys Consolidated
Balance Sheet in other assets for $18.0 million (2004  $19.6 million) and in deferred gains and
other long-term liabilities for $16.0 million
(2004$15.4 million). NOTE 22.
CURRENCY TRANSLATION ADJUSTMENT The net change in the currency translation adjustment account is as follows: (amounts in millions)
    
    2005
    
    
    
    2004Balance at beginning of year
    
    $
    (12.1
    )
    
    
    $
    28.5Effect of changes in exchange rates during the year:On net investment in self-sustaining subsidiaries (net of taxes)
    
    
    (59.4
    )
    
    
    
    (62.2
    )On certain long-term debt denominated in foreign currencies designated
as a hedge of net investments in self-sustaining foreign subsidiaries
    
    
    12.2
    
    
    
    
    21.6Portion included in income as a result of reductions in net investments
in self-sustaining foreign operations
    
    
    (7.0
    )
    
    
    
    Balance at end of year
    
    $
    (66.3
    )
    
    
    $
    (12.1
    )
 > 74




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23.
INVESTMENT TAX CREDITS In the first quarter of fiscal 2005, an amount of $11.4 million, net of tax of $4.7 million of ITC
was recognized in net earnings and $0.4 million was recorded against deferred development costs for
expenses. These amounts related to the results of examinations by the taxation authorities for
fiscal years 2000 to 2002, and to Managements reassessment of its best estimate of potential tax
liabilities for the subsequent fiscal years. On a per segment and discontinued operations basis
gross ITC were recognized as follows: Civil $9.8 million, Military $4.4 million and discontinued
operations $1.9 million. The following table provides the earnings from operations before interest and income taxes amounts
by segment and discontinued operations, including and excluding ITC provisions reversed based on
recent tax examinations: including
    
    
    excludingitc provisions
    
    
    itc provisions(amounts in millions)
    
    reversed
    
    
    reversedCivil
    
    $
    47.6
    
    
    $
    37.8Military
    
    
    47.2
    
    
    
    42.8Discontinued operations
    
    
    135.0
    
    
    
    133.1$
    229.8
    
    
    $
    213.7
 NOTE 24.
RESTRUCTURING COSTS In fiscal 2004 and fiscal 2005, the Company proceeded with three measures intended to restore the
Companys profitability, cash flow and return on investment. The first two initiatives were announced at the end of the fourth quarter of fiscal 2004 and
carried-out during the first and second quarters of fiscal 2005. The first initiative resulted in a restructuring charge of $8.2 million that was recorded in the
results of the fourth quarter of fiscal 2004. An amount of $0.7 million related to the sale of its
Marine Controls segment has been allocated to discontinued operations. The charge included
severance and other involuntary termination costs that related mainly to the workforce reduction of
approximately 250 employees in the Montreal plant, following the loss of a major simulation
equipment contract to a competitor. The complete amount was disbursed during the first and second
quarters of fiscal 2005. The second initiative was designed to integrate a number of functions in some European training
centres. A restructuring charge of $1.8 million, mainly for severances and other costs, was also
recorded in the results of the fourth quarter of fiscal 2004. During fiscal 2005, an amount of $1.2
million was disbursed, leaving a provision of $0.6 million, expected to be paid by the end of the
first quarter of fiscal 2006. During the fourth quarter of 2005, following a comprehensive review of current performance and the
strategic orientation of its operations, the Company announced a broad restructuring plan aimed at
the elimination of existing duplications between the Civil and Military segments and the
achievement of a more competitive cost structure. The plan, that includes a workforce reduction of
approximately 450 employees and the closing of redundant facilities, has an important effect on the
Companys operations in Montreal but
also around the world, including some European and American training centres. Total amount to be
incurred as a result of this measure is in the range of $55 to $65 million. A restructuring charge
of $24.5 million, consisting mainly of severance and other related costs, was recorded in the
results of the fourth quarter of fiscal year 2005 on a separate line of the statement of earnings.
During the quarter, $13.9 million was paid, resulting in a balance of $10.6 million as at March 31,
2005, which is expected to be paid in fiscal year 2006. RESTRUCTURING COSTS SUMMARY employeetermination(amounts in millions)
    
    costs
    
    
    other costs
    
    
    totalCosts charged to expense
    
    $
    8.7
    
    
    $
    0.6
    
    
    $
    9.3Payments made
    
    
    (8.2
    )
    
    
    (0.5
    )
    
    
    (8.7
    )Balance of provision as at March 31, 2004
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.6Costs charged to expense
    
    
    20.8
    
    
    
    3.7
    
    
    
    24.5Payments made
    
    
    (12.1
    )
    
    
    (1.8
    )
    
    
    (13.9
    )Balance of provision as at March 31, 2005
    
    $
    9.2
    
    
    $
    2.0
    
    
    $
    11.2
 75 >




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 25.
VARIABLE INTEREST ENTITIES The Company has entered into sale and leaseback arrangements with special purpose entities
(SPEs). These arrangements relate to simulators used in the Companys training centres for the
military and civil aviation. These leases expire in different periods up to 2023, with the
exception of one in 2037. Typically, the Company has the option to purchase the equipment at a
specific time during the lease terms at a specific purchase price. Some leases include renewal
options at the end of the term. In some cases, the Company has provided guarantees for the residual
value of the equipment at the expiry date of the leases or at the date the Company exercises its
purchase option. These SPEs are financed by secured long-term debt and third-party equity investors
who in certain cases benefit from tax incentives. The equipment serves as collateral for the SPEs
long-term debt. The Companys variable interests in these SPEs are solely through residual value guarantees and
fixed purchase price options, except for one case where it is in the form of equity and
subordinated loan. In one case, the Company also provides administrative services to the SPE in
return for a market fee. Some of these SPEs are variable interest entities (VIEs) and the Company is the primary beneficiary
for only one of them with assets and liabilities amounting to $44.1 million and $38.9 million
respectively as at March 31, 2005. Accordingly, this entity was consolidated effective January 1,
2005 and the retroactive application, without restatement, of AcG-15 resulted in a $3.3 million
increase in retained earnings as at March 31, 2005. For all of the other SPEs that are VIEs, the
Company is not the primary beneficiary and consolidation is not appropriate under AcG-15. As at
March 31, 2005, the Companys maximum potential exposure relating to these non-consolidated SPEs
was $49.4 million. The non-consolidated SPEs assets amounted to $183.8 million as at March 31,
2005. The liabilities recognized as a result of consolidating this VIE do not represent additional claims
on the Companys general assets; rather, they represent claims against the specific assets of the
consolidated VIE. Conversely, assets recognized as a result of consolidating this VIE do not
represent additional assets that could be used to satisfy claims against the Companys general
assets. Additionally, the consolidation of this VIE did not result in any change in the underlying
tax, legal or credit exposure of the Company. NOTE 26.
OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION The Companys significant operating segments include:  (i)
    Civil Simulation and Training (Civil) a world-leading supplier of civil flight simulators
and visual systems, and a provider of business
and civil aviation training.(ii)
    Military Simulation and Training (Military) a premier supplier of military flight
and land-based simulators, visual and training systems. Each operating segment is led by a senior executive and offers different products and uses
different technology and marketing strategies. The Company evaluates performance based on earnings
before interest, income taxes and discontinued operations and uses capital employed to assess
resources allocated to each segment. Capital employed includes accounts receivable, inventories,
prepaid expenses, property, plant and equipment, goodwill, intangible assets and other assets less
accounts payable and accrued liabilities, deposits on contracts and deferred gains and other
long-term liabilities. > 76




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial information on the Companys operating segments is shown in the following table: OPERATING SEGMENTS (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Capital employedCivil
    
    $
    621.5
    
    
    
    $
    1,030.1
    
    
    $
    1,143.2Military
    
    
    193.5
    
    
    
    
    303.6
    
    
    
    251.9Other
    
    
    15.3
    
    
    
    
    (21.5
    )
    
    
    (35.9
    )Total capital employed
    
    $
    830.3
    
    
    
    $
    1,312.2
    
    
    $
    1,359.2Cash and cash equivalents
    
    
    57.1
    
    
    
    
    54.7
    
    
    
    13.5Restricted cash
    
    
    0.9
    
    
    
    
    7.0
    
    
    
    14.4Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    2.5Income taxes recoverable
    
    
    58.5
    
    
    
    
    52.0
    
    
    
    25.7Accounts payable and accrued liabilities
    
    

    312.8
    
    
    
    
    322.0
    
    
    
    376.5Deposits on contracts
    
    
    93.5
    
    
    
    
    69.3
    
    
    
    68.5Future income taxes short-term
    
    
    2.5
    
    
    
    
    1.8
    
    
    
    (13
    )Future income taxes long-term
    
    
    101.0
    
    
    
    
    89.0
    
    
    
    85.7Deferred gains and other long-term liabilities
    
    
    179.8
    
    
    
    
    171.0
    
    
    
    139.6Assets held for sale
    
    
    63.3
    
    
    
    
    229.7
    
    
    
    272.2Total assets
    
    $
    1,699.7
    
    
    
    $
    2,308.7
    
    
    $
    2,356.5Total assets by segmentCivil
    
    $
    929.7
    
    
    
    $
    1,315.6
    
    
    $
    1,460.6Military
    
    
    418.5
    
    
    
    
    509.6
    
    
    
    449.1Assets held for sale
    
    
    63.3
    
    
    
    
    229.7
    
    
    
    272.2Other
    
    
    288.2
    
    
    
    
    253.8
    
    
    
    174.6$
    1,699.7
    
    
    
    $
    2,308.7
    
    
    $
    2,356.5Segmented revenuesCivil
    
    $
    523.0
    
    
    
    $
    465.0
    
    
    $
    518.1Military
    
    
    467.6
    
    
    
    
    477.5
    
    
    
    463.7$
    990.6
    
    
    
    $
    942.5
    
    
    $
    981.8Intersegment revenuesCivil
    
    $
    2.8
    
    
    
    $
    3.2
    
    
    $
    0.9Military
    
    
    1.6
    
    
    
    
    0.9
    
    
    
    4.1$
    4.4
    
    
    
    $
    4.1
    
    
    $
    5.0External revenuesCivil
    
    $
    520.2
    
    
    
    $
    461.8
    
    
    $
    517.2Military
    
    
    466.0
    
    
    
    
    476.6
    
    
    
    459.6$
    986.2
    
    
    
    $
    938.4
    
    
    $
    976.8Amortization of property, plant and equipmentCivil
    
    $
    41.8
    
    
    
    $
    37.7
    
    
    $
    37.2Military
    
    
    12.1
    
    
    
    
    12.7
    
    
    
    11.0Other
    
    
    1.2
    
    
    
    
    0.9
    
    
    
    0.3$
    55.1
    
    
    
    $
    51.3
    
    
    $
    48.5Amortization of intangible assetsCivil
    
    $
    6.3
    
    
    
    $
    6.8
    
    
    $
    7.5Military
    
    
    0.1
    
    
    
    
    0.1
    
    
    
    0.2$
    6.4
    
    
    
    $
    6.9
    
    
    $
    7.7Amortization of other assetsCivil
    
    $
    14.4
    
    
    
    $
    10.1
    
    
    $
    5.3Military
    
    
    4.5
    
    
    
    
    1.4
    
    
    
    1.6Other
    
    
    1.6
    
    
    
    
    1.7
    
    
    
    2.0$
    20.5
    
    
    
    $
    13.2
    
    
    $
    8.9
 77 >




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 26. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION (CONTD) OPERATING SEGMENTS (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Capital expendituresCivil
    
    $
    111.5
    
    
    
    $
    81.7
    
    
    $
    212.1Military
    
    
    6.5
    
    
    
    
    5.1
    
    
    
    12.1$
    118.0
    
    
    
    $
    86.8
    
    
    $
    224.2Additions and adjustments to goodwillCivil
    
    $
    1.1
    
    
    
    $
    (12.5
    )
    
    $
    (4.8
    )Military
    
    
    (4.5
    )
    
    
    
    (7.4
    )
    
    
    (7.1
    )Impairment
    
    
    (205.2
    )
    
    
    
    
    
    
    
    $
    (208.6
    )
    
    
    $
    (19.9
    )
    
    $
    (11.9
    )Additions and adjustments to intangible assetsCivil
    
    $
    3.8
    
    
    
    $
    (5.9
    )
    
    $
    6.2Military
    
    
    0.7
    
    
    
    
    (0.2
    )
    
    
    (0.2
    )Impairment
    
    
    (107.1
    )
    
    
    
    
    
    
    
    $
    (102.6
    )
    
    
    $
    (6.1
    )
    
    $
    6.0
 GEOGRAPHIC INFORMATION (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Revenue from external customers based on their locationCanada
    
    $
    81.4
    
    
    
    $
    109.8
    
    
    $
    75.3United States
    
    
    413.5
    
    
    
    
    302.2
    
    
    
    292.0United Kingdom
    
    
    85.3
    
    
    
    
    86.5
    
    
    
    109.6Germany
    
    
    110.2
    
    
    
    
    129.8
    
    
    
    113.7Other European countries
    
    
    137.9
    
    
    
    
    153.2
    
    
    
    128.0Other countries
    
    
    157.9
    
    
    
    
    156.9
    
    
    
    258.2$
    986.2
    
    
    
    $
    938.4
    
    
    $
    976.8Property, plant and equipment, goodwill and intangible assetsCanada
    
    $
    195.7
    
    
    
    $
    224.1
    
    
    $
    226.6United States
    
    
    277.4
    
    
    
    
    430.6
    
    
    
    563.1European
    
    
    405.1
    
    
    
    
    500.9
    
    
    
    466.4Other countries
    
    
    26.3
    
    
    
    
    54.3
    
    
    
    83.1$
    904.5
    
    
    
    $
    1,209.9
    
    
    $
    1,339.2
 > 78




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27.
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP), which differ in certain respects from those
principles that the Company would have followed had its financial statements been prepared in
accordance with accounting principles generally accepted in the United States (US GAAP). Additional disclosures required under US GAAP have been provided in the accompanying financial
statements and notes. The reconciliation of net earnings in accordance with Canadian GAAP to conform to US GAAP is as
follows: Years ended March 31 (amounts in millions, except per share amounts)
    
    note
    
    
    2005
    
    
    2004
    
    
    2003Net (loss) earnings in accordance with Canadian GAAP
    
    
    
    
    
    $
    (199.9
    )
    
    $
    64.0
    
    
    $
    117.2Discontinued operations in accordance with Canadian GAAP
    
    
    
    
    
    
    104.8
    
    
    
    16.6
    
    
    
    3.3(Loss) Earnings from continuing operations for the year in accordance with
Canadian GAAP
    
    
    
    
    
    $
    (304.7
    )
    
    $
    47.4
    
    
    $
    113.9Deferred development costs, net of tax recovery of $2.2
(2004 - recovery-$1.2), (2003 - recovery  $2.7)
    
    
    A
    
    
    
    9.5
    
    
    
    (2.5
    )
    
    
    (5.8
    )Deferred pre-operating costs, net of tax expense of $3.6
(2004 - $0.4), (2003 - recovery-$1.2)
    
    
    B
    
    
    
    8.1
    
    
    
    (0.1
    )
    
    
    (2.6
    )Derivative instruments, net of tax recovery of $0.8
(2004 -$4.0) (2003 -$7.2)
    
    
    C
    
    
    
    (4.0
    )
    
    
    (8.5
    )
    
    
    (15.5
    )Variable interest entities net of tax expense of $0.5
(2004 - $2.5) , (2003 - $0.9)
    
    
    G
    
    
    
    0.6
    
    
    
    5.3
    
    
    
    2.0Foreign exchange gain on purchase of subsidiary in 2002, net of tax recovery
of $3.7 million
    
    
    E
    
    
    
    (7.9
    )
    
    
    
    
    
    
    (Loss)
Earnings from continuing operations before cumulative effect of accounting
change  US GAAP
    
    
    
    
    
    $
    (298.4
    )
    
    $
    41.6
    
    
    $
    92.0Discontinued operations in accordance to US GAAP
    
    
    A,B,C,H
    
    
    
    98.9
    
    
    
    15.9
    
    
    
    3.9Net
(loss) earnings before cumulative effect of accounting change  US GAAP
    
    
    

    
    
    $
    (199.5
    )
    
    $
    57.5
    
    
    $
    95.9Cumulative
effect on prior years of accounting change
    
    
    D,G
    
    
    
    (0.6
    )
    
    
    
    
    
    
    Net (loss) earnings for the year in accordance with US GAAP
    
    
    
    
    
    $
    (200.1
    )
    
    $
    57.5
    
    
    $
    95.9Basic and diluted (loss) earnings per share from continuing operations in accordance
with US GAAP
    
    
    
    
    
    $
    (1.21
    )
    
    $
    0.18
    
    
    $
    0.42Basic and diluted results per share from discontinued operations in accordance
with US GAAP
    
    
    
    
    
    $
    0.40
    
    
    $
    0.07
    
    
    $
    0.02Basic and diluted net (loss) earnings per share before cumulative effect of accounting
change in accordance with US GAAP
    
    
    
    
    
    $
    (0.81
    )
    
    $
    0.25
    
    
    $
    0.44Basic and diluted net (loss) earnings per share in accordance with US GAAP
    
    
    
    
    
    $
    (0.81
    )
    
    $
    0.25
    
    
    $
    0.44Dividends per common share
    
    
    
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.12Weighted average number of common shares outstanding
    
    
    
    
    
    
    247.1
    
    
    
    233.2
    
    
    
    219 .4
 (amounts in millions)
    
    
    
    
    
    
    2005
    
    
    2004
    
    
    2003Comprehensive incomeNet (loss) earnings in accordance with US GAAP
    
    
    
    
    
    
    $
    (200.1
    )
    
    $
    57.5
    
    
    $
    95.9Accumulated
minimum pension liability, net of taxes of $1.7 (2004- $4.2)
(2003 - $10.8)
    
    
    J
    
    
    
    
    (4.2
    )
    
    
    9.1
    
    
    
    (23.5
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    (41.3
    )
    
    
    (40.1
    )
    
    
    36.8Comprehensive income
    
    
    
    
    
    
    $
    (245.6
    )
    
    $
    26.5
    
    
    $
    109.2
 79 >




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD) ACCUMULATED OTHER COMPREHENSIVE LOSS IN ACCORDANCE WITH US GAAP foreign
    
    
    changecurrency
    
    
    in minimumtranslation
    
    
    pension(amounts in millions)
    
    adjustments
    
    
    liability
    
    
    totalOpening balance  2003
    
    $
    (15.1
    )
    
    $
    
    
    
    $
    (15.1
    )Changes for the year  2003
    
    
    36.8
    
    
    
    (23.5
    )
    
    
    13.3Closing balance  2003
    
    
    21.7
    
    
    
    (23.5
    )
    
    
    (1.8
    )Changes for the year  2004
    
    
    (40.1
    )
    
    
    9.1
    
    
    
    (31.0
    )Closing balance  2004
    
    
    (18.4
    )
    
    
    (14.4
    )

    
    
    (32.8
    )Changes for the year  2004
    
    
    (41.3
    )
    
    
    (4.2
    )
    
    
    (45.5
    )Ending balance  2005
    
    $
    (59.7
    )
    
    $
    (18.6
    )
    
    $
    (78.3
    )
 The cumulative effect of these adjustments on the shareholders equity of the Company is as
follows: (amounts in millions)
    
    note
    
    
    2005
    
    
    
    2004Shareholders equity in accordance with Canadian GAAP
    
    
    
    
    
    $
    651.6
    
    
    
    $
    918.8Deferred development costs, net of tax expense of $15.6 (2004  $13.4)
    
    
    A
    
    
    
    (18.4
    )
    
    
    
    (27.9
    )Deferred pre-operating costs, net of tax expense of $5.2 (2004  $8.8)
    
    
    B
    
    
    
    (10.8
    )
    
    
    
    (18.9
    )Derivative instruments, net of tax expense of $10.3 (2004  $9.8)
    
    
    C
    
    
    
    (22.5
    )
    
    
    
    (21.0
    )Foreign currency translation adjustments
    
    
    H
    
    
    
    
    
    
    
    
    (6.6
    )Variable interest entities net of tax recovery of nil (2004  $3.0)
    
    
    I
    
    
    
    
    
    
    
    
    6.0Foreign exchange gain on purchase of subsidiary, net of tax recovery of
nil (2004 - $3.7)
    
    
    E
    
    
    
    
    
    
    
    
    7.9Minimum pension liability, net of tax expense of $8.3 (2004 - $6.6)
    
    
    J
    
    
    
    (18.6
    )
    
    
    
    (14.4
    )Shareholders equity in accordance with US GAAP
    
    
    
    
    
    $
    581.3
    
    
    
    $
    843.9
 > 80




---



##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The balance sheets in accordance with US GAAP as at March 31, 2005 and March 31, 2004 are as
follows: march 31, 2005
    
    
    
    
    
    
    
    march 31,2005canadian
    
    
    us
    
    
    
    canadian
    
    
    us(amounts in millions)
    
    notes
    
    
    gaap
    
    
    gaap
    
    
    
    gaap
    
    
    gaapAssetsCash and cash equivalents
    
    
    
    
    
    $
    57.1
    
    
    $
    57.1
    
    
    
    $
    54.7
    
    
    $
    54.7Accounts receivable
    
    
    
    
    
    
    255.7
    
    
    
    255.7
    
    
    
    
    316.5
    
    
    
    316.5Derivative instruments
    
    
    C
    
    
    
    
    
    
    
    9.1
    
    
    
    
    
    
    
    
    1.4Inventories
    
    
    
    
    
    
    101.0
    
    
    
    101.0

    
    
    
    
    147.7
    
    
    
    147.7Prepaid expenses
    
    
    
    
    
    
    17.8
    
    
    
    17.8
    
    
    
    
    19.6
    
    
    
    16.2Income taxes recoverable
    
    
    
    
    
    
    58.5
    
    
    
    58.5
    
    
    
    
    52.0
    
    
    
    52.0Future income taxes
    
    
    
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    
    1.8
    
    
    
    1.8Current assets held for sale
    
    
    
    
    
    
    5.8
    
    
    
    3.4
    
    
    
    
    89.8
    
    
    
    87.7$
    498.4
    
    
    $
    505.1
    
    
    
    $
    682.1
    
    
    $
    678.0Restricted cash
    
    
    
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    
    7.0
    
    
    
    7.0Property, plant and equipment, net
    
    
    
    
    
    
    792.2
    
    
    
    792.2
    
    
    
    
    780.0
    
    
    
    858.9Future income taxes
    
    
    A,B,C,E,G,J
    
    
    
    101.0
    
    
    
    140.9
    
    
    
    
    89.0
    
    
    
    120.7Intangible assets
    
    
    J
    
    
    
    20.2
    
    
    
    26.3
    
    
    
    
    129.2
    
    
    
    135.0Goodwill
    
    
    
    
    
    
    92.1
    
    
    
    92.1
    
    
    
    
    300.7
    
    
    
    312.3Other assets
    
    
    A,B
    
    
    
    137.4
    
    
    
    90.5
    
    
    
    
    180.8
    
    
    
    114.2Long-term assets held for sale
    
    
    
    
    
    
    57.5
    
    
    
    56.9
    
    
    
    
    139.9
    
    
    
    140.0$
    1,699.7
    
    
    $
    1,704.9
    
    
    
    $
    2,308.7
    
    
    $
    2,366.1Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    
    
    
    
    $
    312.8
    
    
    $
    312.8
    
    
    
    $
    322.0
    
    
    $
    321.3Deposits on contracts
    
    
    
    
    
    
    93.5
    
    
    
    93.5
    
    
    
    
    69.3
    
    
    
    69.3Derivative instruments
    
    
    C
    
    
    
    
    
    
    
    42.3
    
    
    
    
    
    
    
    
    31.3Long-term debt due within one year
    
    
    
    
    
    
    35.3
    
    
    
    35.3
    
    
    
    
    8.8
    
    
    
    21.1Future income taxes
    
    
    
    
    
    
    19.6
    
    
    
    19.6
    
    
    
    
    51.1
    
    
    
    51.1Current liabilities related to assets held for sale
    
    
    J
    
    
    
    7.8
    
    
    
    8.0
    
    
    
    
    54.5
    
    
    
    55.8$
    469.0
    
    
    $
    511.5
    
    
    
    $
    505.7
    
    
    $
    549.9Long-term debt
    
    
    
    
    
    
    307.6
    
    
    
    307.6
    
    
    
    
    575.5
    
    
    
    669.1Deferred gains and other long-term liabilities
    
    
    J
    
    
    
    179.8
    
    
    
    212.8
    
    
    
    
    171.0
    
    
    
    165.5Future income taxes
    
    
    
    
    
    
    38.3
    
    
    
    38.3
    
    
    
    
    77.5
    
    
    
    77.5Long-term liabilities related to assets held for sale
    
    
    
    
    
    
    53.4
    
    
    
    53.4
    
    
    
    
    60.2
    
    
    
    60.2$
    1,048.1
    
    
    $
    1,123.6
    
    
    
    $
    1,389.9
    
    
    $
    1,522.2Shareholders equityCapital stock
    
    
    F,K
    
    
    $
    373.8
    
    
    $
    618.0
    
    
    
    $
    367.5
    
    
    $
    611.7Contributed surplus
    
    
    
    
    
    
    3.3
    
    
    
    3.3
    
    
    
    
    1.3
    
    
    
    1.3Retained earnings
    
    
    A,B,C,D,E,F,G,H,K
    
    
    
    340.8
    
    
    
    38.3
    
    
    
    
    562.1
    
    
    
    263.7Currency translation adjustment
    
    
    H,I
    
    
    
    (66.3
    )
    
    
    
    
    
    
    
    (12.1
    )
    
    
    Accumulated other comprehensive loss
    
    
    H,J
    
    
    
    
    
    
    
    (78.3
    )
    
    
    
    
    
    
    
    (32.8
    )$
    651.6
    
    
    $
    581.3
    
    
    
    $
    918.8
    
    
    $
    843.9$
    1,699.7
    
    
    $
    1,704.9
    
    
    
    $
    2,308.7
    
    
    $
    2,366.1
 81 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD) CONSOLIDATED STATEMENT OF CASH FLOWS Under US GAAP reporting, separate subtotals within operating, financing and investment
activities would not be presented. The reconciliation of cash flows under Canadian
GAAP to conform to US GAAP is as follows: Years ended March 31 (amounts in millions)
    
    note
    
    
    2005
    
    
    
    2004
    
    
    2003Cash flows from operating activities in accordance with Canadian GAAP
    
    
    
    
    
    $
    207.6
    
    
    
    $
    5.7
    
    
    $
    154.9Deferred development costs
    
    
    A
    
    
    
    (9.9
    )
    
    
    
    (12.7
    )
    
    
    (13.3
    )Deferred pre-operating costs
    
    
    B
    
    
    
    (1.7
    )
    
    
    
    (6.6
    )
    
    
    (10.3
    )Variable interest entities
    
    
    G
    
    
    
    5.6
    
    
    
    
    13.7
    
    
    
    10.9Deferred pre-operating costs related to discontinued operations
    
    
    
    
    
    
    (0.4
    )
    
    
    
    (3.8
    )
    
    
    2.7Cash flows from operating activities in accordance with US GAAP
    
    
    
    
    
    $
    201.2
    
    
    
    $
    (3.7
    )
    
    $
    144.9Cash flows from investing activities in accordance with Canadian GAAP
    
    
    
    
    
    $
    131.6
    
    
    
    $
    24.5
    
    
    $
    (134.4
    )Deferred development costs
    
    
    A
    
    
    
    9.9
    
    
    
    
    12.7
    
    
    
    13.3Deferred pre-operating costs
    
    
    B
    
    
    
    1.7
    
    
    
    
    6.6
    
    
    
    10.3Deferred pre-operating costs related to discontinued operations
    
    
    
    
    
    
    0.4
    
    
    
    
    3.8
    
    
    
    (2.7
    )Cash flows from investing activities in accordance with US GAAP
    
    
    
    
    
    $
    143.6
    
    
    
    $
    47.6
    
    
    $
    (113.5
    )Cash flows from financing activities in accordance with Canadian GAAP
    
    
    
    
    
    $
    (337.3
    )
    
    
    $
    17.8
    
    
    $
    (94.4
    )Variable interest entities
    
    
    G
    
    
    
    (5.6
    )
    
    
    
    (13.7
    )
    
    
    (10.9
    )Cash flows from financing activities in accordance with US GAAP
    
    
    
    
    
    $
    (342.9
    )
    
    
    $
    4.1
    
    
    $
    (105.3
    )
 RECONCILIATION ITEMS A) DEFERRED DEVELOPMENT COSTS Under US GAAP, development costs are charged to expense in the period incurred. Under Canadian
GAAP, certain development costs are capitalized and amortized over their estimated useful lives if
they meet the criteria for deferral. The difference between US GAAP and Canadian GAAP represents
the gross development costs capitalized in the respective year, net of the reversal of amortization
expense recorded for Canadian GAAP relating to amounts previously capitalized. B) DEFERRED PRE-OPERATING COSTS Under US GAAP, pre-operating costs are charged to expense in the period incurred. Under
Canadian GAAP, the amounts are deferred and amortized over 5 years based on the expected period and
pattern of benefit of the deferred expenditures. The difference between US GAAP and Canadian GAAP
represents the gross pre-operating costs capitalized in the respective year, net of the reversal of
amortization expense recorded for Canadian GAAP relating to amounts previously capitalized. C)DERIVATIVE FINANCIAL INSTRUMENTS Under Canadian GAAP, the Company recognizes the gains and losses on forward contracts entered
into for hedging purposes in income concurrently with the recognition of the transactions being
hedged. The interest payments relating to swap contracts are recorded in net earnings over the life
of the underlying transaction on an accrual basis as an adjustment to interest income or interest
expense. Under US GAAP, all derivatives (including embedded derivatives in purchase and sale
contracts) are recorded on the balance sheet at fair value. Realized and unrealized gains and
losses resulting from the valuation of derivatives at market value are recognized in net earnings
as the gains and losses arise and not concurrently with the recognition of the transactions being
hedged, as the Company does not apply the optional hedge accounting provisions of SFAS 133, 138 and
149. D) ADJUSTMENTS FOR CHANGES IN ACCOUNTING POLICIES Under US GAAP, the cumulative effect of certain accounting changes must be included in earnings
in the year of the change. Under Canadian GAAP, the impact is reflected through retained earnings. > 82




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS E) FOREIGN EXCHANGE GAIN ON PURCHASE OF SUBSIDIARY Under Canadian GAAP, upon the purchase of Schreiner, a foreign exchange gain was recorded in
fiscal 2002 as a reduction of goodwill on the forward contract hedge of the foreign currency
denominated purchase price. Under US GAAP, this gain was recorded in earnings. In fiscal 2005,
Management performed a comprehensive review of current performance and strategic orientation of its
business units, which led to the review of the carrying amount of certain assets such as the
goodwill of Schreiner (Note 4). Accordingly, an additional impairment charge of $7.9 million (net
of tax of $3.7 million) was recorded in earnings as per US GAAP. F) REDUCTION IN STATED CAPITAL On July 7, 1994, the Company applied a portion of its deficit as a reduction of its stated
capital in the amount of $249.3 million. Under US GAAP, the reduction of stated capital would not
be permitted. G) VARIABLE INTEREST ENTITIES The Company enters into sale and leaseback arrangements with special purposes entities (SPEs)
relating to simulation equipment used in the Companys training center. Prior to the adoption of
FASB Interpretation (FIN) No. 46 Consolidation of Variable Interest Entities, the Company was
consolidating SPEs for which legal stated capital represented less than 3% of their assets. Under
those rules, three SPEs were consolidated. In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46, Consolidation of
Variable Interest Entities. This interpretation clarifies how to apply Accounting Research Bulletin
(ARB No. 51) Consolidated Financial Statements to those entities defined as Variable interest
entities, when equity investors are not considered to have a controlling financial interest or they
have not invested enough equity to allow the entity to finance its activities without additional
subordinated financial support from other parties. This interpretation requires that existing
unconsolidated variable interest entities be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. An entity that holds a
significant variable interest but is not the primary beneficiary is subject to specific disclosure
requirements. In December 2003, the FASB revised FIN No.46 to make certain technical corrections and address
certain implementation issues that had arisen. FIN No.46R provides a new framework for identifying
variable interest entities (VIEs) and determining when a company should include the assets,
liabilities, non-controlling interests and results of activities of a VIE in its consolidated
financial statements. The Company was required to replace FIN No. 46 provisions with FIN No. 46R
provisions to all newly created post-January 31, 2003 entities as of the end of the first period
ending after March 15, 2005. As a foreign private issuer, the company will apply the provisions of
FIN 46R to entities created before February 1, 2003, starting April 1, 2004. The Company adopted
FIN No. 46R on April 1, 2004. Upon adoption by the Company of FIN No. 46R, the Company concluded that two out of the three SPEs
that were consolidated under the old rules did not require to be consolidated anymore. The impact
on CAEs net earnings of the deconsolidation is $0.6 million. A
similar accounting standard under Canadian GAAP, AcG 15Consolidation of Variable Interest
Entities, has been adopted by the Company on January 1, 2005 (Note 1). Due to a different
application date between Canadian and US GAAP, the Company had to record in fiscal 2005 a decrease
of $0.6 million (net of taxes of $0.5 million) in its net earnings as per US GAAP. H) FOREIGN CURRENCY TRANSLATION ADJUSTMENT Under US GAAP, foreign currency translation adjustment is included as a component of
Comprehensive income. Under Canadian GAAP, the concept of comprehensive income is not yet
applicable for the Company, and the currency translation adjustment is included as a component of
Shareholders equity. In fiscal 2005, the Company transferred to earnings an amount of $6.6
million, as a results of reductions in net investments in self-sustaining foreign operations. Under
US GAAP the reduction in currency translation adjustment account would not be permitted. I)COMPREHENSIVE INCOME US GAAP requires disclosure of comprehensive income, which comprises income and other
components of comprehensive income. Other comprehensive income includes items that cause changes in
shareholders equity but are not related to share capital or net earnings, which, for the Company,
comprises currency translation adjustments and change in minimum pension liability. Under Canadian
GAAP, the requirement to report comprehensive income will be applicable for the Company only in
fiscal 2007 with the adoption of section 1530 Comprehensive Income. J) MINIMUM PENSION LIABILITY Under US GAAP, if the accumulated benefit obligation exceeds the market value of plan assets, a
minimum pension liability for the excess is recognized to the extent that the liability recorded in
the balance sheet is less than the minimum liability. Any portion of the additional liability that
relates to unrecognized past service costs is recognized as an intangible asset while the remainder
is charged to comprehensive income. The concept of additional minimum liability does not currently
exist under Canadian GAAP. 83 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD) K) SHARE ISSUE COSTS Under Canadian GAAP, costs related to share issuance can be presented in retained earnings,
net of taxes. Under US GAAP, these costs were recorded as a reduction of capital stock. ACCOUNTING CHANGES ACCOUNTING FOR STOCK-BASED COMPENSATION Prior to April 1, 2003, CAE had elected to measure stock-based compensation using the
intrinsic value base method of accounting. In that instance, however, under SFAS 123, the Company
is required to make pro forma disclosures of net earnings, basic earnings per share and diluted
earnings per share using the fair value method of accounting for stock-based compensation granted
prior to April 1, 2003. Pro forma net earnings and pro forma basic and diluted net earnings per share are presented below: (amounts in millions of Canadian dollars, except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003Net (loss) earnings, as reported per US GAAP
    
    $
    (200.1
    )
    
    
    $
    57.5
    
    
    $
    95.9Compensation expense recorded
    
    
    2.0
    
    
    
    
    1.3
    
    
    
    Net (loss) earnings before the effect of Stock-based compensation
    
    
    (198.1
    )
    
    
    
    58.8
    
    
    
    95.9Pro forma impact
    
    
    (6.4
    )
    
    
    
    (6.0
    )
    
    
    (5.6
    )Pro forma net (loss) earnings
    
    
    (204.5
    )
    
    
    
    52.8
    
    
    
    90.3Pro forma basic and diluted net (loss) earnings per share
    
    
    (0.83
    )
    
    
    
    0.23
    
    
    
    0.41
 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In fiscal 2004, the Company adopted SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.SFAS 149 amends and clarifies the financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133. SFAS 149 had no impact on CAEs financial
position. PENSION AND OTHER RETIREMENT BENEFITS During 2003, the Financial Accounting Standards Board revised SFAS 132, Employers Disclosures
about Pensions and Other Postretirement Benefits.The revised SFAS 132 retains and revises the
disclosure requirements contained in the original SFAS 132. It also requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension
plans and other postretirement benefit plans. CAE adopted revised SFAS 132, in fiscal 2004. RECENT ACCOUNTING DEVELOPMENTS EXCHANGES FOR NON-MONETARY ASSETS During 2004, the Financial Accounting Standards Board issued SFAS 153, Exchanges for
Non-Monetary Assets.SFAS 153 amends APB Opinion No.29, Accounting for Non-Monetary Transactions,
and requires that all non-monetary exchanges be accounted for at fair value except for the
exchanges of non-monetary assets that do not have commercial substance. The Company still
evaluating the impact of this new standard on its financial statements, and is required to apply
it to all non-monetary asset exchanges occurring in periods beginning after July 1, 2005. STOCK-BASED COMPENSATION In December 2004, the FASB has issued SFAS 123 (revised). This standard amends SFAS 123
Accounting for Stock-Based Compensation.The principal amendments require companies to recognize
the costs of providing stock options to employees based on the fair value of the options at the
grant date. The obligations to pay cash to employees based on the companys share price must be
recorded at fair value using an option pricing model. The Company still evaluating the impact of
this new standard on its financial statements, and is required to apply this standard for periods
beginning after June 15, 2005. > 84




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL DISCLOSURES Additional disclosures required under US GAAP are as follows: I) STATEMENTS OF EARNINGS For the years ended March 31 (amounts in millions)
    
    
    
    
    

2005
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003CANADIAN
    
    

US
    
    
    
    CANADIAN
    
    
    US
    
    
    CANADIAN
    
    
    USGAAP
    
    

GAAP
    
    
    
    GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPRevenues from sales of simulators
    
    $
    456.4
    
    
    $
    453.5
    
    
    
    $
    456.1
    
    
    $
    434.3
    
    
    $
    530.6
    
    
    $
    516.0Revenues from sales of services
    
    $
    529.8
    
    
    $
    529.9
    
    
    
    $
    482.3
    
    
    $
    482.3
    
    
    $
    446.2
    
    
    $
    446.2Cost of sales from simulators
    
    $
    280.9
    
    
    $
    281.7
    
    
    
    $
    282.6
    
    
    $
    281.6
    
    
    $
    231.4
    
    
    $
    231.4Cost of sales from services
    
    $
    317.8
    
    
    $
    302.6
    
    
    
    $
    277.0
    
    
    $
    274.0
    
    
    $
    239.5
    
    
    $
    246.5Research and development expenses
    
    $
    93.5
    
    
    $
    100.8
    
    
    
    $
    81.0
    
    
    $
    84.6
    
    
    $
    108.3
    
    
    $
    116.8Rental expenses
    
    $
    94.0
    
    
    $
    94.0
    
    
    
    $
    91.9
    
    
    $
    79.0
    
    
    $
    87.5
    
    
    $
    73.2Selling, general and administrative expenses
    
    $
    105.2
    
    
    $
    105.2
    
    
    
    $
    115.3
    
    
    $
    115.3
    
    
    $
    115.7
    
    
    $
    115.7Impairment charges
    
    $
    443.3
    
    
    $
    440.4
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest expense
    
    $
    32.1
    
    
    $
    33.9
    
    
    
    $
    22.4
    
    
    $
    22.2
    
    
    $
    28.1
    
    
    $
    44.6
 II) BALANCE SHEET Accounts payable and accrued liabilities on a Canadian GAAP basis are presented below: As at March 31 (amounts in millions)
    
    2005
    
    
    
    2004Accounts payable trade
    
    $
    93.0
    
    
    
    $
    91.0Contract liabilities
    
    
    90.1
    
    
    
    
    101.9Income tax payable
    
    
    7.7
    
    
    
    
    23.8Other accrued liabilities
    
    
    122.0
    
    
    
    
    105.3Accounts payable and accrued liabilities
    
    $
    312.8
    
    
    
    $
    322.0
 Accounts receivable from government amounted to $52.4 million as of March 31, 2005
(2004$33.9 million). III) INCOME TAXES The components of earnings from continuing operations and income taxes on a Canadian GAAP
basis are as follows: For the years ended March 31 (amounts
in millions)
    
    2005
    
    
    
    2004
    
    
    2003Earnings before income taxes and other itemsCanada
    
    $
    (87.0
    )
    
    
    $
    (13.8
    )
    
    $
    96.4Other countries
    
    
    (318.1
    )
    
    
    
    72.7
    
    
    
    69.9$
    (405.1
    )
    
    
    $
    58.9
    
    
    $
    166.3Current
income taxesCanada
    
    $
    (1.8
    )
    
    
    $
    1.8
    
    
    $
    37.8Other countries
    
    
    15.3
    
    
    
    
    12.6
    
    
    
    (1.6
    )$
    13.5
    
    
    
    $
    14.4
    
    
    $
    36.2Future
income taxesCanada
    
    $
    (25.8
    )
    
    
    $
    (6.9
    )
    
    $
    (1.4
    )Other countries
    
    
    (88.1
    )
    
    
    
    4.0
    
    
    
    17.6$
    (113.9
    )
    
    
    $
    (2.9
    )
    
    $
    16.2Income tax provision
    
    $
    (100.4
    )
    
    
    $
    11.5
    
    
    $
    52.4
 85 >




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##### 



> CAE ANNUAL REPORT 2005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD) VI) PRODUCT WARRANTY COSTS The Company has warranty obligations in connection to the sale of its civil and military
simulators. The original warranty period is usually for a two-year period. The cost incurred
to provide for these warranty obligations are estimated and recorded as an accrued liability
at the time revenue is recognized. The Company estimates its warranty cost for a given product
based on past experience. The change in the Companys accrued warranty liability as at March
31, are as follows: (amounts in millions)
    
    2005
    
    
    
    2004Accrued warranty liability at beginning of year
    
    $
    6.6
    
    
    
    $
    10.7Warranty settlements during the year
    
    
    (5.5
    )
    
    
    
    (7.5
    )Warranty provisions
    
    
    3.9
    
    
    
    
    3.0Adjustments for changes in estimates
    
    
    0.3
    
    
    
    
    0.4Accrued warranty obligations at the end of the year
    
    $
    5.3
    
    
    
    $
    6.6
 V) PENSION Obligations and funded status: The accumulated benefit obligation (ABO) for all defined benefit pension plans was $158.5
million for March 31, 2005 and $139.8 million for March 31, 2004. At these dates, all plans had
accumulated benefit obligation in excess of plan assets. As at March 31 Before taxes (amounts in millions)
    
    2005
    
    
    
    2004
    
    
    2003Minimum Liability
    
    $
    30.4
    
    
    
    $
    20.9
    
    
    $
    30.1Balance  fiscal year end:Additional liability
    
    $
    33.2
    
    
    
    $
    26.8
    
    
    $
    39.5Intangible Assets
    
    
    (6.1
    )
    
    
    
    (5.8
    )
    
    
    (5.2
    )Accumulated Net Additional Liability
    
    $
    27.1
    
    
    
    $
    21.0
    
    
    $
    34.3Change in Accumulated Net Additional Liability
    
    $
    6.1
    
    
    
    $
    (13.3
    )
    
    $
    34.3
 VI) IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS During the third quarter of fiscal 2005, the Company recorded an impairment charge of
$443.3 million. For US GAAP purposes the impairment will be different has the company expenses
development and pre-operating costs when incurred and because the carrying amount of goodwill
is different for Canadian and US GAAP (Refer to E). Accordingly, the Company recorded a $440.4 million impairment charge for US GAAP purposes,
virtually all related to its Civil business, detailed as follows: (amounts in millions)
    
    2005Goodwill
    
    $
    216.8Customer relations
    
    
    86.7Trades names
    
    
    20.4Property, plant and equipment (simulators)
    
    
    78.4Inventories
    
    
    33.3Other assets
    
    
    4.8$
    440.4
 NOTE 28. COMPARATIVE FINANCIAL
STATEMENTS
 The comparative consolidated
financial statements have been reclassifïed from statements
previously presented to conform to the presentation adopted in the current year. > 86