**Exhibit 13.2**

** **

Management’sReport to the Shareholders of Cascades Inc.

 

Financialstatements

 

The consolidated financial statements for the years ended December 31,2007 and 2006, are the responsibility of the management of Cascades Inc., andhave been reviewed by the Audit Committee and approved by the Board ofDirectors.

 

They were prepared in accordance with accounting principles generallyaccepted in Canada and include some amounts, which are based on management’sestimates and judgment.

 

Management is also responsible for all other information included inthis Annual Report and for ensuring that this information is consistent withthe Company’s consolidated financial statements and business activities.

 

External and internal auditors have free and independent access to theAudit Committee, which is comprised of outside independent directors. The AuditCommittee, which meets regularly throughout the year with members of thefinancial management and the external and internal auditors, reviews theconsolidated financial statements and recommends their approval to the Board ofDirectors.

 

The financial statements have been audited by PricewaterhouseCoopersLLP, whose report is provided below.

 

InternalControl over financial reporting

 

Management of the Company is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the *United States SecuritiesExchange Act of 1934*. Internal control over financial reporting is aprocess designed by, or under the supervision of, the President and ChiefExecutive Officer (CEO) and the Vice President and Chief Financial Officer(CFO) to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with Canadian generally accepted accounting principles, including areconciliation to United States generally accepted accounting principles.

 

Due to its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of the effectiveness of internal control over financial reporting tofuture periods are subject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies and procedures may deteriorate.

 

Management conducted an assessment of the effectiveness of the Company’sinternal control over financial reporting, as at December 31, 2007 basedon the framework and criteria established in *InternalControl–Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on that assessment,management has concluded that internal control over financial reporting waseffective as at December 31, 2007.

 

This annual report does not include an attestation report of theCompany’s independent auditors regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Company’s independent auditors pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this annual report.

 

 
| /s/ Alain Lemaire                                                                                  |   | /s/ Christian Dubé                                          |
|----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|
|                                                                                               |   |                                                             |
| Alain Lemaire  President and Chief Executive Officer   Kingsey Falls, Canada   March 14, 2008 |   | Christian Dubé   Vice-President and Chief Financial Officer |

 

42

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Auditors’Report To the Shareholders of Cascades Inc.

 

We have audited the consolidated balance sheets of **CascadesInc.** (the “Company”) as at December 31, 2007 and2006 and the consolidated statements of earnings (loss), shareholders’equity and cash flows for each of the years in the three-year period endedDecember 31, 2007. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with Canadian generally acceptedauditing standards. Those standards require that we plan andperform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financialstatement presentation.

 

In our opinion, these consolidated financial statements present fairly,in all material respects, the financial position of the Company as at December 31, 2007 and2006 and the results of its operations and its cashflows for each of the years in the three-year period ended December 31, 2007 inaccordance with Canadian generally accepted accounting principles.

 

 
| /s/ PricewaterhouseCoopers LLP                           |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Chartered Accountants                                    |   |
| Montréal, Canada                                    |   |
| March 14, 2008 (March 27, 2008 as for note 24) |   |

 

Commentsby Auditors for U.S. Readers on Canada-U.S. Reporting Differences

 

In the United States, reporting standards for auditors require theaddition of an explanatory paragraph (following the opinion paragraph) whenthere is a change in accounting principles that has a material effect on thecomparability of the company’s financial statements, such as the changesdescribed in note 2 to the consolidated financial statements. Our report to theShareholders dated March 14, 2008 (March 27, 2008 as for note 24) is expressed in accordance with Canadianreporting standards which do not require such references in the auditors’report when these items are properly accounted for and adequately disclosed inthe financial statements.

 

As described in note 24(c) to the consolidated financial statements,certain 2005 and 2006 U.S. GAAP balances have been restated to reflect the correctionof errors related to derivative financial statements.

 
| /s/ PricewaterhouseCoopers LLP                           |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Chartered Accountants                                    |   |
| Montréal, Canada                                    |   |
| March 14, 2008 (March 27, 2008 as for note 24) |   |

 

43

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ConsolidatedBalance Sheets

 
| **As at December 31, 2007 and 2006 (in millions of Canadian dollars)** | ** ** | **Note**   | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| **Assets**                                                                                                                    |       |       |       |      |       |     |       |
| **Current assets**                                                                                                            |       |       |       |      |       |     |       |
| Cash  and cash equivalents                                                                                                    | ** ** |       |       | **25**    |       | 34       |       |
| Accounts  receivable                                                                                                          |       | 9 a        | )          | **624**   |       | 650      |       |
| Inventories                                                                                                                   |       | 6, 9 a     | )          | **555**   |       | 548      |       |
| ** **                                                                                                                    |       |       |       | **1,204** |       | 1,232    |       |
| **Property, plant and equipment**                                                                                             |       | 3, 7, 9 a  | )          | **1,886** |       | 2,063    |       |
| **Intangible assets**                                                                                                         |       | 8 a        | )          | **130**   |       | 91       |       |
| **Other assets**                                                                                                              |       | 8 a        | )          | **237**   |       | 212      |       |
| **Goodwill**                                                                                                                  |       | 8 b        | )          | **312**   |       | 313      |       |
| ** **                                                                                                                    |       |       |       | **3,769** |       | 3,911    |       |
| **Liabilities and Shareholders’ Equity**                                                                                 |       |       |       |      |       |     |       |
| **Current liabilities**                                                                                                       |       |       |       |      |       |     |       |
| Bank  loans and advances                                                                                                      | ** ** | ** ** |       | **47**    |       | 42       |       |
| Accounts  payable and accrued liabilities                                                                                     | ** ** | ** ** |       | **572**   |       | 607      |       |
| Current  portion of long-term debt                                                                                            |       | 9          | ** ** | **4**     |       | 9        |       |
| ** **                                                                                                                    |       |       |       | **623**   |       | 658      |       |
| **Long-term debt**                                                                                                            |       | 9          | ** ** | **1,570** |       | 1,657    |       |
| **Other liabilities**                                                                                                         |       | 10         | ** ** | **377**   |       | 439      |       |
| ** **                                                                                                                    |       |       |       | **2,570** |       | 2,754    |       |
| **Shareholders’ equity**                                                                                                 |       |       |       |      |       |     |       |
| Capital  stock                                                                                                                |       | 11         | ** ** | **517**   |       | 517      |       |
| Retained  earnings                                                                                                            | ** ** | ** ** |       | **725**   |       | 649      |       |
| Accumulated  other comprehensive income (loss)                                                                                |       | 20         | ** ** | **(43**   | **)**      | (9       | )          |
| ** **                                                                                                                    |       |       |       | **1,199** |       | 1,157    |       |
| ** **                                                                                                                    |       |       |       | **3,769** |       | 3,911    |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

Approved by the Board of Directors 

 
| /s/ Bernard Lemaire       |   | /s/ Robert Chevrier        |
|---------------------------|--------|----------------------------|
|                      |   |                       |
| Bernard Lemaire  Director |   | Robert Chevrier   Director |

 

44

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ConsolidatedStatements of Shareholders’ Equity

 
| **For each of the years in the three-year period   ended December 31, 2007 (in millions of Canadian dollars)** | ** ** | ** **       | ** ** | ** **             | ** ** | ** **                      | ** ** | ** **                                                           | ** ** | **2007**                       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **Note**         | ** ** | **Capital stock** | ** ** | **Retained   Earnings(3)** | ** ** | **Accumulated  other   comprehensive  income   (loss)(3)** | ** ** | **Shareholders’  equity** | ** ** |
| **Balance – Beginning of year**                                                                                                                                                                | ** ** | ** **       | ** ** | **517**                | ** ** | **649**                         | ** ** | **(9**                                                               | **)**      | **1,157**                      | ** ** |
| Cumulative  impact of accounting changes                                                                                                                                                            |       | 2 c, h | )          | **—**             | ** ** | **—**                      | ** ** | **1**                                                                | ** ** | **1**                          | ** ** |
| Restated  balance – Beginning of year                                                                                                                                                          | ** ** | ** **       |       | **517**                | ** ** | **649**                         | ** ** | **(8**                                                               | **)**      | **1,158**                      | ** ** |
| Comprehensive  income:                                                                                                                                                                              | ** ** | ** **       |       | ** **             | ** ** | ** **                      | ** ** | ** **                                                           | ** ** | ** **                     | ** ** |
| Net  earnings for the year                                                                                                                                                                          | ** ** | ** **       |       | **—**             | ** ** | **95**                          | ** ** | **—**                                                           | ** ** | **95**                         | ** ** |
| Change  in foreign currency translation of self-sustaining foreign subsidiaries, net  of related hedging activities                                                                                 | ** ** | ** **       |       | **—**             | ** ** | **—**                      | ** ** | **(41**                                                              | **)**      | **(41**                        | **)**      |
| Change  in fair value of foreign exchange forward contracts designated as cash flow  hedges (1)                                                                                                     | ** ** | ** **       |       | **—**             | ** ** | **—**                      | ** ** | **4**                                                                | ** ** | **4**                          | ** ** |
| Change  in fair value of commodity derivative financial instruments designated as  cash flow hedges (2)                                                                                             | ** ** | ** **       |       | **—**             | ** ** | **—**                      | ** ** | **2**                                                                | ** ** | **2**                          | ** ** |
| Comprehensive  income for the year                                                                                                                                                                  | ** ** | ** **       |       | ** **             | ** ** | ** **                      | ** ** | ** **                                                           | ** ** | **60**                         | ** ** |
| Dividends                                                                                                                                                                                           | ** ** | ** **       |       | **—**             | ** ** | **(16**                         | **)**      | **—**                                                           | ** ** | **(16**                        | **)**      |
| Adjustment  related to stock options                                                                                                                                                                | ** ** | ** **       |       | **2**                  | ** ** | **—**                      | ** ** | **—**                                                           | ** ** | **2**                          | ** ** |
| Redemption  of common shares                                                                                                                                                                        |       | 11 e        | )          | **(2**                 | **)**      | **(3**                          | **)**      | **—**                                                           | ** ** | **(5**                         | **)**      |
| **Balance – End of year**                                                                                                                                                                      | ** ** | ** **       | ** ** | **517**                | ** ** | **725**                         | ** ** | **(43**                                                              | **)**      | **1,199**                      | ** ** |

 
| ** **                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|
| **Balance – Beginning of year**                                                                                | ** ** | ** ** | ** ** | 264        | ** ** | 669        | ** ** | (36        | )          | 897      | ** ** |
| Comprehensive income:                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |     |       |
| Net  earnings for the year                                                                                          | ** ** | ** ** | ** ** | —     | ** ** | 3          |       | —     | ** ** | 3        |       |
| Change  in foreign currency translation of self-sustaining foreign subsidiaries, net  of related hedging activities | ** ** | ** ** | ** ** | —     | ** ** | —     |       | 27         | ** ** | 27       |       |
| Comprehensive income for the year                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |       |       | ** ** | ** ** | 30       |       |
| Dividends                                                                                                           | ** ** | ** ** | ** ** | —     | ** ** | (13        | )          | —     |       | (13      | )          |
| Net proceeds from issuance of common shares                                                                         | ** ** | 11 c  | )          | 250        | ** ** | (7         | )          | —     |       | 243      |       |
| Adjustment related to stock options                                                                                 | ** ** | ** ** |       | 4          |       | —     |       | —     |       | 4        |       |
| Redemption of common shares                                                                                         | ** ** | ** ** |       | (1         | )          | (3         | )          | —     |       | (4       | )          |
| **Balance – End of year**                                                                                      | ** ** | ** ** | ** ** | 517        | ** ** | 649        |       | (9         | )          | 1,157    |       |

 
| ** **                                                                                                          | ** ** | ** ** | ** ** |   | ** ** |   |   |   |   | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------|------------|--------|--------|--------|--------|----------|--------|
| **Balance – Beginning of year**                                                                                | ** ** | ** ** | ** ** | 265    |       | 783    |   | 11     |   | 1,059    |   |
| Comprehensive loss:                                                                                                 | ** ** | ** ** | ** ** |   |       |   |   |   |   |     |   |
| Net  loss for the year                                                                                              | ** ** | ** ** | ** ** | — |       | (97    | )      | — |   | (97      | )      |
| Change  in foreign currency translation of self-sustaining foreign subsidiaries, net  of related hedging activities | ** ** | ** ** | ** ** | — |       | — |   | (47    | )      | (47      | )      |
| Comprehensive loss for the year                                                                                     | ** ** | ** ** | ** ** |   |       |   |   |   |   | (144     | )      |
| Dividends                                                                                                           | ** ** | ** ** | ** ** | — |       | (13    | )      | — |   | (13      | )      |
| Adjustment related to stock options                                                                                 | ** ** | ** ** | ** ** | 1      |       | — |   | — |   | 1        |   |
| Redemption of common shares                                                                                         | ** ** | ** ** | ** ** | (2     | )          | (4     | )      | — |   | (6       | )      |
| **Balance – End of year**                                                                                      | ** ** | ** ** | ** ** | 264    |       | 669    |   | (36    | )      | 897      |   |

 

----

1.       The change in fair value offoreign exchange forward contracts designated as cash flow hedges is presentednet of income taxes of $2 million and reclassification adjustments to theconsolidated statement of earnings. The portion to be realized within the nexttwelve month is $4 million.

2.       The change in fair value ofcommodity derivative financial instruments designated as cash flow hedges ispresented net of income taxes of $1 million and reclassification adjustments tothe consolidated statement of earnings. The portion to be realized within thenext twelve month is $1 million.

3.       The sum of retained earningsand accumulated other comprehensive income (loss) amounted to $682 millionas of December 31, 2007 (2006–$640 million, 2005–$633 million).

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

45

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ConsolidatedStatements of Earnings (Loss)

 
| **For each of the years in the three-year period ended December 31, 2007   (in millions of Canadian dollars, except per share amounts)** | ** ** | **Note**   | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|
| **Sales**                                                                                                                                                                                                                                         | ** ** | ** ** |       | **3,929**      | ** ** | 3,278      |       | 3,201      |       |
| **Cost of sales and expenses**                                                                                                                                                                                                                    |       |       |       |           | ** ** |       |       |       |       |
| Cost  of sales (exclusive of depreciation and amortization shown below)                                                                                                                                                                           | ** ** | ** ** |       | **3,201**      | ** ** | 2,657      |       | 2,632      |       |
| Depreciation  and amortization                                                                                                                                                                                                                    | ** ** | ** ** |       | **208**        | ** ** | 161        |       | 170        |       |
| Selling  and administrative expenses                                                                                                                                                                                                              | ** ** | ** ** |       | **390**        | ** ** | 304        |       | 305        |       |
| Gains  on disposal and other                                                                                                                                                                                                                      |       | 12         |       | **(17**        | **)**      | (4         | )          | (10        | )          |
| Impairment  and other restructuring costs                                                                                                                                                                                                         |       | 13 a  | )          | **9**          | ** ** | 67         |       | 65         |       |
| Loss  (gain) on financial instruments                                                                                                                                                                                                             |       | 14 a  | )          | **(6**         | **)**      | (3         | )          | 10         |       |
| ** **                                                                                                                                                                                                                                        |       |       |       | **3,785**      | ** ** | 3,182      |       | 3,172      |       |
| **Operating income from continuing operations**                                                                                                                                                                                                   | ** ** | ** ** |       | **144**        | ** ** | 96         |       | 29         |       |
| Interest  expense                                                                                                                                                                                                                                 | ** ** | ** ** |       | **102**        | ** ** | 79         |       | 76         |       |
| Gain  on derivative financial instruments                                                                                                                                                                                                         |       | 14 b  | )          | **—**     | ** ** | —     |       | (2         | )          |
| Foreign  exchange gain on long-term debt                                                                                                                                                                                                          | ** ** | ** ** |       | **(59**        | **)**      | —     |       | (10        | )          |
| ** **                                                                                                                                                                                                                                        |       |       |       | **101**        | ** ** | 17         |       | (35        | )          |
| **Provision for (recovery of) income taxes**                                                                                                                                                                                                      |       | 15         |       | **11**         | ** ** | 6          |       | (8         | )          |
| **Share of results of significantly influenced  companies and dilution gain**                                                                                                                                                                     |       | 8 a   | )          | **(27**        | **)**      | (8         | )          | (7         | )          |
| **Non-controlling interest**                                                                                                                                                                                                                      | ** ** | ** ** |       | **3**          | ** ** | —     |       | —     |       |
| **Net earnings (loss) from continuing operations**                                                                                                                                                                                                | ** ** | ** ** |       | **114**        | ** ** | 19         |       | (20        | )          |
| **Net loss from discontinued operations**                                                                                                                                                                                                         |       | 4          |       | **(19**        | **)**      | (16        | )          | (77        | )          |
| **Net earnings (loss) for the year**                                                                                                                                                                                                              | ** ** | ** ** |       | **95**         | ** ** | 3          |       | (97        | )          |
| **Basic net earnings (loss) from continuing  operations per common share**                                                                                                                                                                        | ** ** | ** ** |       | **1.14**       | ** ** | 0.23       |       | (0.24      | )          |
| **Basic and diluted net earnings (loss) per common  share**                                                                                                                                                                                       |       | 11 f  | )          | **0.95**       | ** ** | 0.04       |       | (1.19      | )          |
| **Weighted average number of common shares  outstanding during the year**                                                                                                                                                                         | ** ** | ** ** |       | **99,329,472** | ** ** | 80,941,603 |       | 81,136,576 |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

46

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ConsolidatedStatements of Cash Flows

 
| **For each of the years in the three-year period ended December 31, 2007   (in millions of Canadian dollars)** | ** ** | **Note**                 |   | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|--------|------------|------------|----------|------------|----------|------------|
| **Operating activities from continuing operations**                                                                                                                                                 |       |                     |   |       | ** ** |     |       |     |       |
| Net  earnings (loss) from continuing operations                                                                                                                                                     | ** ** | ** **               |   | **114**    | ** ** | 19       |       | (20      | )          |
| Adjustments  for                                                                                                                                                                                    |       |                     |   | ** ** | ** ** |     |       |     |       |
| Depreciation  and amortization                                                                                                                                                                      | ** ** | ** **               |   | **208**    | ** ** | 161      |       | 170      |       |
| Gains  on disposal and other                                                                                                                                                                        |       | 12                       |   | **(29**    | **)**      | (4       | )          | (10      | )          |
| Impairment  and other restructuring costs                                                                                                                                                           |       | 13 a                | )      | **3**      | ** ** | 50       |       | 52       |       |
| Unrealized  loss (gain) on financial instruments                                                                                                                                                    |       | 14 a                | )      | **—** | ** ** | (5       | )          | 9        |       |
| Amortization  of transitional deferred unrealized gain                                                                                                                                              |       | 14 a                | )      | **—** | ** ** | —   |       | (1       | )          |
| Foreign  exchange gain on long-term debt                                                                                                                                                            | ** ** | ** **               |   | **(59**    | )          | —   |       | (10      | )          |
| Future  income taxes                                                                                                                                                                                |       | 15 a                | )      | **(22**    | **)**      | (28      | )          | (29      | )          |
| Share  of results of significantly influenced companies and dilution gain                                                                                                                           | ** ** | ** **               |   | **(27**    | **)**      | (8       | )          | (7       | )          |
| Non-controlling  interest                                                                                                                                                                           | ** ** | ** **               |   | **3**      | ** ** | —   |       | —   |       |
| Others                                                                                                                                                                                              | ** ** | ** **               |   | **(13**    | **)**      | (2       | )          | 5        |       |
| ** **                                                                                                                                                                                          |       |                     |   | **178**    | ** ** | 183      |       | 159      |       |
| Changes  in non-cash working capital components                                                                                                                                                     |       | 16 a                | )      | **(89**    | **)**      | 35       |       | (17      | )          |
| ** **                                                                                                                                                                                          |       |                     |   | **89**     | ** ** | 218      |       | 142      |       |
| **Investing activities from continuing operations**                                                                                                                                                 |       |                     |   | ** ** | ** ** |     |       |     |       |
| Purchases  of property, plant and equipment                                                                                                                                                         | ** ** | ** **               |   | **(167**   | **)**      | (110     | )          | (121     | )          |
| Proceeds  from disposal of property, plant and equipment                                                                                                                                            |       | 12 b, f        | )      | **7**      | ** ** | —   |       | 19       |       |
| Increase  in other assets                                                                                                                                                                           | ** ** | ** **               |   | **(3**     | **)**      | (10      | )          | (12      | )          |
| Business  acquisitions, net of cash acquired                                                                                                                                                        |       | 5 a, b, c | )      | **(10**    | **)**      | (572     | )          | (52      | )          |
| Business  disposals, net of cash disposed                                                                                                                                                           |       | 5 d, e         | )      | **37**     | ** ** | 8        |       | —   |       |
| ** **                                                                                                                                                                                          |       |                     |   | **(136**   | **)**      | (684     | )          | (166     | )          |
| **Financing activities from continuing operations**                                                                                                                                                 |       |                     |   | ** ** | ** ** |     |       |     |       |
| Bank  loans and advances                                                                                                                                                                            | ** ** | ** **               |   | **7**      | ** ** | (4       | )          | (1       | )          |
| Change  in revolving credit facilities, net of related expenses                                                                                                                                     | ** ** | ** **               |   | **100**    | ** ** | 186      |       | 159      |       |
| Increase  in other long-term debt                                                                                                                                                                   | ** ** | ** **               |   | **—** | ** ** | 2        |       | 3        |       |
| Payments  of other long-term debt                                                                                                                                                                   | ** ** | ** **               |   | **(8**     | **)**      | (9       | )          | (69      | )          |
| Net  proceeds from issuances of common shares                                                                                                                                                       |       | 11 c                | )      | **1**      | ** ** | 242      |       | —   |       |
| Redemption  of common shares                                                                                                                                                                        |       | 11 e                | )      | **(5**     | **)**      | (4       | )          | (6       | )          |
| Dividends                                                                                                                                                                                           | ** ** |                     |   | **(16**    | **)**      | (13      | )          | (13      | )          |
| ** **                                                                                                                                                                                          |       |                     |   | **79**     | ** ** | 400      |       | 73       |       |
| **Change in cash and cash equivalents during the  year from continuing operations**                                                                                                                 | ** ** |                     |   | **32**     | ** ** | (66      | )          | 49       |       |
| **Change in cash and cash equivalents from  discontinued operations, including proceeds on disposal**                                                                                               |       | 4                        |   | **(40**    | **)**      | 56       |       | (33      | )          |
| **Net change in cash and cash equivalents during  the year**                                                                                                                                        | ** ** |                     |   | **(8**     | **)**      | (10      | )          | 16       |       |
| **Translation adjustments on cash and cash  equivalents**                                                                                                                                           | ** ** |                     |   | **(1**     | **)**      | 1        |       | (3       | )          |
| **Cash and cash equivalents – Beginning of year**                                                                                                                                              | ** ** | ** **               |   | **34**     | ** ** | 43       |       | 30       |       |
| **Cash and cash equivalents – End of year**                                                                                                                                                    | ** ** | ** **               |   | **25**     | ** ** | 34       |       | 43       |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

47

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Segmented information

 

TheCompany’s operations are managed by four segments: boxboard, containerboard,specialty products (which form the packaging products group) and tissuepapers.

 

TheCompany analyzes the performance of its operating segments based on theiroperating income before depreciation and amortization, which is nota measure of performance under Canadian generally accepted accountingprinciples (“Canadian GAAP”); however, the chief operating decision-maker usesthis performance measure for assessing the operating performance of eachreportable segment. Earnings for each segment are prepared on the same basis asthose of the Company. Intersegment operations are recorded on the same basis assales to third parties, which are at fair market value.

 

Salesof the Company presented by reportable segment are as follows:

SALES

 
| **For each of the years in the three-year period ended December 31, 2007  (in millions of Canadian dollars)** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Packaging  products**                                                                                                                                                                       |       | ** ** | ** ** |     |       |     |       |
| Boxboard                                                                                                                                                                                      |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **780**    | ** ** | 727      |       | 684      |       |
| Converting                                                                                                                                                                                    | ** ** | **671**    | ** ** | 748      |       | 717      |       |
| Eliminations  and others                                                                                                                                                                      | ** ** | **(108**   | **)**      | (116     | )          | (102     | )          |
| ** **                                                                                                                                                                                    |       | **1,343**  | ** ** | 1,359    |       | 1,299    |       |
| Containerboard (1)                                                                                                                                                                            |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **599**    | ** ** | 333      |       | 331      |       |
| Converting                                                                                                                                                                                    | ** ** | **984**    | ** ** | 506      |       | 494      |       |
| Eliminations  and others                                                                                                                                                                      | ** ** | **(390**   | **)**      | (239     | )          | (220     | )          |
| ** **                                                                                                                                                                                    |       | **1,193**  | ** ** | 600      |       | 605      |       |
| Specialty  products                                                                                                                                                                           |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **318**    | ** ** | 333      |       | 327      |       |
| Converting                                                                                                                                                                                    | ** ** | **232**    | ** ** | 226      |       | 224      |       |
| Recovery,  deinked pulp and eliminations                                                                                                                                                      | ** ** | **284**    | ** ** | 132      |       | 137      |       |
| ** **                                                                                                                                                                                    |       | **834**    | ** ** | 691      |       | 688      |       |
| Eliminations                                                                                                                                                                                  | ** ** | **(108**   | **)**      | (68      | )          | (68      | )          |
| ** **                                                                                                                                                                                    |       | **3,262**  | ** ** | 2,582    |       | 2,524    |       |
| **Tissue  papers**                                                                                                                                                                            |       | ** ** | ** ** |     |       |     |       |
| Manufacturing  and converting                                                                                                                                                                 | ** ** | **713**    | ** ** | 727      |       | 708      |       |
| **Eliminations**                                                                                                                                                                              | ** ** | **(46**    | **)**      | (31      | )          | (31      | )          |
| **Total**                                                                                                                                                                                     | ** ** | **3,929**  | ** ** | 3,278    |       | 3,201    |       |

 

----

(1)  In 2006 and 2005, the Company’scontainerboard segment consists of 50% of Norampac’s sales.

 

48

----

 

Theoperating income (loss) before depreciation and amortization from continuingoperations of the Company presented by reportable segment are as follows:

 

OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND

AMORTIZATION FROM CONTINUING OPERATIONS

 
| **For each of the years in the three-year period ended December 31, 2007  (in millions of Canadian dollars)** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Packaging products**                                                                                                                                                                        |       | ** ** | ** ** |     |       |     |       |
| Boxboard                                                                                                                                                                                      |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **(3**     | **)**      | 1        |       | (17      | )          |
| Converting                                                                                                                                                                                    | ** ** | **76**     | ** ** | 62       |       | 56       |       |
| Others                                                                                                                                                                                        | ** ** | **(4**     | **)**      | (6       | )          | (11      | )          |
| ** **                                                                                                                                                                                    |       | **69**     | ** ** | 57       |       | 28       |       |
| Containerboard (1)                                                                                                                                                                            |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **59**     | ** ** | (8       | )          | (14      | )          |
| Converting                                                                                                                                                                                    | ** ** | **76**     | ** ** | 45       |       | 46       |       |
| Others                                                                                                                                                                                        | ** ** | **17**     | ** ** | 7        |       | 7        |       |
| ** **                                                                                                                                                                                    |       | **152**    | ** ** | 44       |       | 39       |       |
| Specialty products                                                                                                                                                                            |       | ** ** | ** ** |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **6**      | ** ** | 1        |       | (6       | )          |
| Converting                                                                                                                                                                                    | ** ** | **26**     | ** ** | 30       |       | 24       |       |
| Recovery,  deinked pulp and others                                                                                                                                                            | ** ** | **27**     | ** ** | 14       |       | 10       |       |
| ** **                                                                                                                                                                                    |       | **59**     | ** ** | 45       |       | 28       |       |
| ** **                                                                                                                                                                                    |       | **280**    | ** ** | 146      |       | 95       |       |
| **Tissue papers**                                                                                                                                                                             |       | ** ** | ** ** |     |       |     |       |
| Manufacturing  and converting                                                                                                                                                                 | ** ** | **66**     | ** ** | 116      |       | 100      |       |
| **Corporate**                                                                                                                                                                                 | ** ** | **6**      | ** ** | (5       | )          | 4        |       |
| **Operating income before depreciation and  amortization from continuing operations**                                                                                                         | ** ** | **352**    | ** ** | 257      |       | 199      |       |
| **Depreciation and amortization**                                                                                                                                                             |       | ** ** | ** ** |     |       |     |       |
| Boxboard                                                                                                                                                                                      | ** ** | **(68**    | **)**      | (66      | )          | (73      | )          |
| Containerboard (1)                                                                                                                                                                            | ** ** | **(68**    | **)**      | (38      | )          | (39      | )          |
| Specialty  products                                                                                                                                                                           | ** ** | **(31**    | **)**      | (28      | )          | (29      | )          |
| Tissue  papers                                                                                                                                                                                | ** ** | **(35**    | **)**      | (37      | )          | (37      | )          |
| Corporate  and eliminations                                                                                                                                                                   | ** ** | **(6**     | **)**      | 8        |       | 8        |       |
| ** **                                                                                                                                                                                    |       | **(208**   | **)**      | (161     | )          | (170     | )          |
| **Operating income from continuing operations**                                                                                                                                               | ** ** | **144**    | ** ** | 96       |       | 29       |       |

 

----

| (1) | In 2006 and 2005, the Company’s  containerboard segment consists of 50% of operating income (loss) before  depreciation and amortization from continuing operations of Norampac. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

49

----

 

Purchasesof property, plant and equipment by the Company presented by reportable segmentare as follows:

 

PURCHASES OF PROPERTY, PLANT AND EQUIPMENT

 
| **For each of the years in the three-year period ended December 31, 2007   (in millions of Canadian dollars)** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Packaging products**                                                                                                                                                                              |       |       |       |     |       |     |       |
| Boxboard                                                                                                                                                                                            |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                       | ** ** | **23**     |       | 10       |       | 9        |       |
| Converting                                                                                                                                                                                          | ** ** | **36**     |       | 24       |       | 28       |       |
| Others                                                                                                                                                                                              | ** ** | **—** |       | —   |       | —   |       |
| ** **                                                                                                                                                                                          |       | **59**     |       | 34       |       | 37       |       |
| Containerboard (1)                                                                                                                                                                                  |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                       | ** ** | **16**     |       | 13       |       | 12       |       |
| Converting                                                                                                                                                                                          | ** ** | **14**     |       | 10       |       | 10       |       |
| Others                                                                                                                                                                                              | ** ** | **—** |       | —   |       | 3        |       |
| ** **                                                                                                                                                                                          |       | **30**     |       | 23       |       | 25       |       |
| Specialty  products                                                                                                                                                                                 |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                       | ** ** | **9**      |       | 10       |       | 9        |       |
| Converting                                                                                                                                                                                          | ** ** | **10**     |       | 6        |       | 5        |       |
| Recovery,  deinked pulp and others                                                                                                                                                                  | ** ** | **7**      |       | 5        |       | 6        |       |
| ** **                                                                                                                                                                                          |       | **26**     |       | 21       |       | 20       |       |
| ** **                                                                                                                                                                                          |       | **115**    |       | 78       |       | 82       |       |
| **Tissue papers**                                                                                                                                                                                   |       |       |       |     |       |     |       |
| Manufacturing  and converting                                                                                                                                                                       | ** ** | **52**     |       | 27       |       | 33       |       |
| **Corporate**                                                                                                                                                                                       | ** ** | **7**      |       | 3        |       | 4        |       |
| **Total**                                                                                                                                                                                           | ** ** | **174**    |       | 108      |       | 119      |       |
| Purchases  of property, plant and equipment included in accounts payable                                                                                                                            |       |       |       |     |       |     |       |
| Beginning  of year                                                                                                                                                                                  | ** ** | **10**     |       | 12       |       | 14       |       |
| End  of year                                                                                                                                                                                        | ** ** | **(17**    | **)**      | (10      | )          | (12      | )          |
| **Total investing activities**                                                                                                                                                                      | ** ** | **167**    |       | 110      |       | 121      |       |

 

----

| (1) | In 2006 and 2005, the Company’s  containerboard segment consists of 50% of purchase of property, plant and  equipment of Norampac. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

50

----

 

Identifiableassets of the Company presented by reportable segment are as follows:

** **

IDENTIFIABLE ASSETS

 
| **As at December 31, 2007 and 2006  (in millions of Canadian dollars)** | ** ** | **2007**  | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **Packaging products**                                                                                                    |       |      |       |     |       |
| Boxboard                                                                                                                  | ** ** | **977**   |       | 1,079    |       |
| Containerboard                                                                                                            | ** ** | **1,443** |       | 1,554    |       |
| Specialty  products                                                                                                       | ** ** | **588**   |       | 570      |       |
| ** **                                                                                                                |       | **3,008** |       | 3,203    |       |
| **Tissue papers**                                                                                                         | ** ** | **491**   |       | 537      |       |
| **Corporate**                                                                                                             | ** ** | **199**   |       | 206      |       |
| **Intersegment eliminations**                                                                                             | ** ** | **(66**   | **)**      | (154     | )          |
| ** **                                                                                                                |       | **3,632** |       | 3,792    |       |
| **Investments (****1)**                                                                                                   | ** ** | **137**   |       | 119      |       |
| **Total**                                                                                                                 | ** ** | **3,769** |       | 3,911    |       |

 

----

| (1) | Investments included investments in significantly influenced  companies, notes receivable, other investments, held for trading investment  in shares less current portion of these items. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

51

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Informationby geographic segment is presented as follows:

 

GEOGRAPHIC INFORMATION

 
| **For each of the years in the three-year period ended December 31, 2007  (in millions of Canadian dollars)** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Sales**                                                                                                                                                                                     |       |       |       |     |       |     |       |
| Operations  located in Canada                                                                                                                                                                 |       |       |       |     |       |     |       |
| Within  Canada                                                                                                                                                                                | ** ** | **1,476**  |       | 1,149    |       | 1,171    |       |
| To  the United States                                                                                                                                                                         | ** ** | **559**    |       | 462      |       | 419      |       |
| Offshore                                                                                                                                                                                      | ** ** | **38**     |       | 17       |       | 33       |       |
| ** **                                                                                                                                                                                    |       | **2,073**  |       | 1,628    |       | 1,623    |       |
| Operations  located in the United States                                                                                                                                                      |       |       |       |     |       |     |       |
| Within  the United States                                                                                                                                                                     | ** ** | **1,229**  |       | 1,128    |       | 1,018    |       |
| To  Canada                                                                                                                                                                                    | ** ** | **53**     |       | 39       |       | 51       |       |
| Offshore                                                                                                                                                                                      | ** ** | **1**      |       | 2        |       | 2        |       |
| ** **                                                                                                                                                                                    |       | **1,283**  |       | 1,169    |       | 1,071    |       |
| Operations  located in Europe                                                                                                                                                                 |       |       |       |     |       |     |       |
| Within  Europe                                                                                                                                                                                | ** ** | **536**    |       | 447      |       | 468      |       |
| To  the United States                                                                                                                                                                         | ** ** | **—** |       | 3        |       | 5        |       |
| To  other countries                                                                                                                                                                           | ** ** | **37**     |       | 31       |       | 34       |       |
| ** **                                                                                                                                                                                    |       | **573**    |       | 481      |       | 507      |       |
| **Total**                                                                                                                                                                                     | ** ** | **3,929**  |       | 3,278    |       | 3,201    |       |

 
| ** **                        | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|
| **Property, plant and equipment** |       |      |       |     |       |
| Canada                            | ** ** | **1,247** |       | 1,358    |       |
| United  States                    | ** ** | **472**   |       | 527      |       |
| Europe                            | ** ** | **167**   |       | 178      |       |
| **Total**                         | ** ** | **1,886** |       | 2,063    |       |

 
| ** **                                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Goodwill, customer relationships and client  lists and other finite-life intangible assets** |       |     |       |     |       |
| Canada                                                                                         | ** ** | **342**  |       | 285      |       |
| United  States                                                                                 | ** ** | **99**   |       | 118      |       |
| Europe                                                                                         | ** ** | **1**    |       | 1        |       |
| **Total**                                                                                      | ** ** | **442**  |       | 404      |       |

 

52

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Notesto Consolidated Financial Statements

 

For each of the years in the three-yearperiod ended December 31, 2007 (tabular amounts in millionsof Canadian dollars, except per share amounts)

 

1.Significant accounting policies

 

Basisof presentation

 

The consolidated financial statements have been prepared in accordancewith Canadian GAAP and include the following significant accounting policies.

 

Basisof consolidation

 

The consolidated financial statements include the accounts of theCompany and its subsidiaries. They also include the portion of the accounts ofthe joint ventures accounted for using the proportionate consolidation method.Investments in significantly influenced companies are accounted for using theequity method. The Company also identifies variable interest entities in whichit has an interest and determines whether it is the primary beneficiary of suchentities. If the Company is the primary beneficiary of the variable interestentities identified, those entities are consolidated. A variable interestentity is defined as an entity in which the equity is not sufficient to permitthe entity to finance its activities without external financial support, or theequity investors lack either voting control and obligation to absorb futurelosses or the right to receive future returns.

 

Useof estimates

 

The preparation of financial statements in conformity with CanadianGAAP requires the use of estimates and assumptions that affect the reportedamounts of assets and liabilities in the financial statements and disclosure ofcontingencies at the balance sheet date, and the reported amounts of revenuesand expenses during the reporting period. On a regular basis and with theinformation available, management reviews its estimates, including those relatedto environmental costs, employee future benefits, financial instruments,contingencies, income taxes and related valuation allowance, useful lifeof property, plant and equipment and impairment of long-lived assets andgoodwill. Actual results could differ from those estimates. When adjustmentsbecome necessary, they are reported in earnings in the period in which they areknown.

 

Revenuerecognition

 

The Company recognizes its sales, which consist of product sales, whenpersuasive evidence of an arrangement exists, goods are shipped, significantrisks and benefits of ownership are transferred, the price is fixed anddeterminable, and collection of the resulting receivable is reasonably assured.

 

Financialinstruments and hedging relationships

 

Financial assets and financial liabilities are initially recognized atfair value and their subsequent measurement is dependent on theirclassification as described below. The classification depends on the purposefor which the financial instruments were acquired or issued, theircharacteristics and the Company’s designation of such instruments. Thestandards require that all financial assets be classified as held for trading (“HFT”),available for sale (“AFS”), held to maturity (“HTM”) or loans and receivables.Financial liabilities should be classified as HFT or other liabilities.Derivatives are classified as HFT unless they are designated within aneffective hedging relationship. The standards require that all financial assetsand liabilities, including all derivatives, be measured at fair value oninitial recognition, with the exception of certain related party transactions,and subsequently accounted for based on their classification. Settlementdate accounting continues to be used by the Company for all financial assets.Changes in fair value of the acquired asset between the trade date and thesettlement date are reflected in earnings, other than gains and losses on AFSfinancial assets, which are reflected in other comprehensive income.

 

**Classification of financialinstruments**

** **

The following is a summary of the accounting model the Company electedto apply to each of its significant categories of financial instruments:

 
| Cash and cash equivalents                 |   | Designated as held for  trading   |
|-------------------------------------------|--------|-----------------------------------|
| Accounts receivable                       |   | Loans and receivables             |
| Notes receivable                          |   | Loans and receivables             |
| Other investments                         |   | Designated as available  for sale |
| Held for trading  investment in shares    |   | Designated as held for  trading   |
| Bank loans and advances                   |   | Other liabilities                 |
| Accounts payable and  accrued liabilities |   | Other liabilities                 |
| Long-term debt                            |   | Other liabilities                 |
| Derivative instruments                    |   | Held for trading                  |

 

**Held for trading**

 

HFT financial instruments are financial assets and liabilitiestypically acquired with the objective to generate revenues from short-termfluctuations in price. They are measured at fair value at the balance sheetdate. Interest earned, gains and losses realized on disposal and unrealizedgains and losses from change in fair value are recorded in the statement ofearnings.

 

53

----

** **

**Held to maturity**

** **

HTM financial assets are non-derivative financial assets with fixed ordeterminable payments and a fixed maturity, other than loans and receivables,that an entity has the positive intention and ability to hold to maturity.These financial assets are measured at amortized cost. The Company did not holdany HTM assets as at December 31, 2007.

 

**Available for sale**

** **

AFS financial assets are those non-derivative financial assets that aredesignated as AFS or that are not classified as loans and receivables, HTM orHFT. AFS financial assets are carried at fair value with unrealized gains andlosses included in other comprehensive income until realized, when thecumulative gain or loss is transferred to the consolidated statement ofearnings and presented within loss or gain on financial instruments. Whenunrealized losses on AFS securities are determined to be other than temporary,the cost of the financial asset is written down to fair value with the changerecorded in net gains on investments in the consolidated statement of earnings.Securities that are classified as AFS and that do not have a readily availablemarket value are recorded at cost. Dividends and interest income from AFSinstruments are recorded in the consolidated statement of earnings.

 

**Loans and receivables**

** **

Loans and receivables are accounted for at amortized cost.

 

**Other liabilities**

** **

Other liabilities are recorded at amortized cost and include allliabilities other than derivatives or liabilities which have been identified asHFT.

 

**Derivatives**

** **

The Company uses derivative financial instruments in the management ofits foreign currency, commodity and interest rate exposures. The Company’spolicy is not to use derivative financial instruments for trading orspeculative purposes.

 

Derivatives are carried at fair value and are reported as assets wherethey have a positive fair value and as liabilities where they have a negativefair value. The change in fair value during the year is recorded in earningsunless the instruments are part of a hedging relationship.

 

**Embedded derivatives**

** **

Derivatives embedded in other financial instruments or contracts areseparated from their host contracts and accounted for as derivatives when theireconomic characteristics and risks are not closely related to those of the hostcontract. Embedded derivatives are measured at fair value with changesin fair value recognized in earnings. The Company has elected January 1,2003 as its transition date for identification of its embeddedderivatives.

 

**Transaction costs**

** **

Transaction costs related to HFT financial assets and liabilities areexpensed as incurred. Transaction costs related to HTM financial assets, loansand receivables and other liabilities are considered into the carrying value ofthe asset or liability and are then amortized over the expected life of theinstrument using the effective interest rate method. Transaction costs relatedto AFS assets are capitalized on initial recognition and written off to other comprehensiveincome on the next financial reporting date.

 

**Determination of fair value**

** **

The fair value of a financial instrument is the amount of considerationthat would be agreed upon in an arm’s-length transaction betweenknowledgeable willing parties who are under no compulsion to act. The fairvalue of a financial instrument on initial recognition is the transactionprice, which is the fair value of the consideration given or received.Subsequent to initial recognition, the fair values of financial instrumentsthat are quoted in active markets are based on bid prices for financialassets held and offer prices for financial liabilities. When independent pricesare not available, fair values are determined by using valuation techniqueswhich refer to observable market data. These include comparisons with similarinstruments where observable market prices exist, discounted cash flowanalyses, option pricing models and other valuation techniques commonly used bymarket participants. For certain derivatives, fair values may be determined inwhole or in part from valuation techniques using non-observable market data ortransaction prices. A number of factors such as bid-offer spread, creditprofile and model uncertainty are taken into account, as appropriate, when values arecalculated using valuation techniques.

 

**Hedge**

** **

When the Company uses derivatives in hedge accounting relationships,the Company formally documents all relationships between hedging instrumentsand hedged items, as well as its risk management objective and strategy forundertaking various hedge transactions. This process includes linkingderivatives to specific assets and liabilities on the balance sheet or tospecific firm commitments or forecasted transactions. The Company also assesseswhether the derivatives that are used in hedging transactions are effective inoffsetting changes in fair values or cash flows of hedged items. When hedginginstruments become ineffective before their maturity or the hedgingrelationship is terminated, deferred gains or losses on such instrumentscontinue to be deferred and charged to earnings in the same period as thecorresponding gains or losses for the hedged items; gains and losses realizedsubsequently as a result of marking to market are charged directly to earnings.If the hedged item ceases to exist due to its maturity, expiry, cancellation orexercise before the hedging instrument expires, deferred gains or losses arecharged to earnings.

 

As at December 31, 2007, certain outstanding foreign exchange forwardcontracts and commodity derivatives were reported on a marked-to-market basis,and the gains or losses were included in earnings. The Company elected not toapply hedge accounting for these derivatives.

 

54

----

 

Cashand cash equivalents

 

Cash and cash equivalents include cash on hand, bank balances andshort-term liquid investments with original maturities of three months or less.The short-term liquid investments are accounted for at their estimatedfair value which approximates costs.

 

Accountsreceivable

 

Trade receivables are recognized initially at fair value andsubsequently measured at amortized cost using the effective interest method,less provision for doubtful accounts. An allowance for doubtful accounts oftrade receivables is established when there is objective evidence that theCompany will not be able to collect all amounts due according to the originalterms of the receivables. Significant financial difficulties of the debtor,probability that the debtor will enter into bankruptcy or financialreorganization, and default or delinquency in payments are consideredindicators that the trade receivable is impaired. Each trade account receivablebalance is evaluated separately to identify impairment. The amount of theallowance for doubtful accounts is the difference between the asset’s carryingamount and the present value of estimated cash flows. The carrying amount ofthe asset is reduced through the use of an allowance account, and the amount ofthe loss is recorded in the consolidated statement of earnings within “sellingand administrative expenses”. When a trade receivable is uncollectible, it iswritten off against the allowance for doubtful account. Subsequent recoveriesof amounts previously written off are credited against “selling andadministrative expenses” in the consolidated statement of earnings.

 

Inventories

 

Inventories of finished goods are valued at the lower of averageproduction cost and net realizable value. Inventories of raw materials andsupplies are valued at the lower of cost and replacement value. Cost of rawmaterials and supplies is determined using the average cost and the first-in,first-out methods respectively.

 

Property,plant and equipment and depreciation

 

Property, plant and equipment are recorded at cost, including interestincurred during the construction period of certain property, plant andequipment. Depreciation is calculated on a straight-line basis at annual ratesvarying from 3% to 5% for buildings, 5% to 10% for machinery and equipment, and15% to 20% for automotive equipment, determined according to the estimateduseful life of each class of property, plant and equipment.

 

Grantsand investment tax credits

 

Grants and investment tax credits are accounted for using the costreduction method and are amortized to earnings as a reduction of depreciation,using the same rates as those used to amortize the related property, plantand equipment.

 

Goodwill

 

Goodwill is tested for impairment annually on December 31 orwhen an event or circumstance occurs that could potentially result in apermanent decline in value. This is accomplished mainly by determining whetherprojected discounted future cash flows exceed the net book value of goodwill ofthe respective business unit.

 

Impairmentof long-lived assets

 

Long-lived assets are reviewed for impairment upon the occurrence ofevents or changes in circumstances indicating that the carrying value of theasset may not be recoverable, as measured by comparing their net book value tothe estimated undiscounted future cash flows generated by their use. Impairedassets are recorded at fair value, determined principally using discountedfuture cash flows expected from their use and eventual disposition.

 

Intangibleassets

 

Customer relationships and client lists are recorded at cost and areamortized on a straight-line basis over a period not exceeding 20 years.

 

Otherassets

 

Deferred charges are recorded at cost and include, in particular, theissuance costs of the revolving credit facility, which are amortized on astraight-line basis over the anticipated period of repayment of the respectivecredit facility, and start-up costs which are amortized on a straight-linebasis over a period of three to five years from the end of the start-up period.

 

Environmentalcosts

 

Environmental expenditures are expensed or capitalized depending upontheir future economic benefit. Expenditures incurred to prevent futureenvironmental contamination are capitalized and amortized on a straight-linebasis at annual rates varying from 5% to 10%. Expenditures that relate to anexisting condition caused by past operations, and which do not contribute tocurrent or future revenue generation, are expensed. A provision forenvironmental costs is recorded when it is probable that a liability has beenincurred and the costs can be reasonably estimated.

 

Assetretirement obligations

 

Asset retirement obligations are recognized at fair value in the periodin which the Company incurred such obligation and if a reasonable estimate ofthe fair value can be made. The associated costs are capitalized as part of thecarrying value of the related asset and are depreciated over its remaininguseful life. The liability is accreted using a credit-adjusted risk-free interestrate of the Company.

 

Employeefuture benefits

 

The Company offers funded and unfunded defined benefit pension plans,defined contribution pension plans, and group registered retirement savingsplans that provide retirement benefit payments for most of its employees. Thedefined benefit pension plans are usually contributory and are based onthe number of years of service and, in most cases, based on the averagesalaries or compensation at the end of a career. Retirement benefits are, insome cases, partially adjusted based on inflation. The Company also contributesto its employees’ complementary retirement benefit plans and otherpost-employment benefit plans, such as group life insurance, medical and dentalplans. However, these benefits, other than pension plans, are not funded.Furthermore, the medical and dental plans are being phased out and are nolonger offered to new employees and those who do not meet certain criteria.

 

55

----

 

The cost of pensions and other retirement benefits earned by employeesis actuarially determined using the projected benefit method pro-rated on yearsof service and management’s best estimate of expected plan investmentperformance, salary escalations, retirement ages of employees and expectedhealth care costs. The accrued benefit obligation is evaluated using the marketinterest rate at the evaluation date.

 

For the purpose of calculating the expected return on plan assets,those assets are valued at fair value. Past service costs arising from a planamendment are amortized on a straight-line basis over the average remainingservice period of the group of employees active at the date of the amendment.The excess of the net actuarial gain or loss over the greater of (a) 10% ofthe accrued benefit obligation at the beginning of the year and (b) 10% ofthe fair value of plan assets at the beginning of the year is amortized overthe average remaining service period of active employees, which may vary from6 to 18 years (weighted average of 12 years) in2007 depending on the plan (2006 – 5 to 19 years (weightedaverage of 12 years)).

 

When restructuring a plan, results in a curtailment and a settlement atthe same time, the curtailment is accounted for before the settlement.

 

The measurement date of the retirement benefit plans is December 31 ofeach year. An actuarial evaluation is performed at least every three years. Thelast evaluation took place on December 31, 2005 for approximately 50%of the plans, on December 31, 2006 for approximately 25% of the plansand on December 31, 2007 for the other plans.

 

Income taxes

 

The Company uses the liability method in accounting for income taxes.According to this method, future income taxes are determined using thedifference between the accounting and tax bases of assets and liabilities.Future income tax assets and liabilities are measured using substantivelyenacted tax rates in effect in the year in which these temporary differencesare expected to be recovered or settled. Future income tax assets arerecognized when it is more likely than not that the assets will be realized.

 

Foreigncurrency translation

 

**Foreign currencytransactions**

** **

Transactions denominated in currencies other than the business unit’smeasurement currency are recorded at the rate of exchange prevailing at thetransaction date. Monetary assets and liabilities denominated in foreigncurrencies are translated at the rate of exchange prevailing at the balancesheet date. Unrealized gains and losses on translation of other monetary assetsand liabilities are reflected in the determination of net earnings for theyear.

 

**Foreign operations**

** **

The Company’s foreign operations are defined as self-sustaining. Theassets and liabilities of these operations are translated into Canadian dollarsat the rate of exchange prevailing at the balance sheet date. Revenues andexpenses are translated at the average exchange rate for the year. Translationgains and losses are recorded as a component of equity in accumulated othercomprehensive income.

 

Stock-basedcompensation

 

The Company uses the fair value method of accounting for stock-basedcompensation awards granted to officers and key employees. This method consistsof recording expenses to earnings based on the vesting period of the optionsgranted. The fair value is calculated based on the Black-Scholes option pricingmodel. This model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Whenstock options are exercised, any consideration paid by employees, as well asthe related stock-based compensation are credited to capital stock.

 

Earningsper common share

 

Earnings per common share is determined using the weighted averagenumber of common shares outstanding during the year. Diluted earnings percommon share is determined using the treasury stock method to evaluate thedilutive effect of stock options, convertible instruments and equivalents, whenapplicable. Under this method, instruments with a dilutive effect, basicallywhen the average market price of a share for the period exceeds the exerciseprice, are considered to have been exercised at the beginning of the period andthe proceeds received are considered to have been used to redeem common shares ofthe Company at the average market price for the period.

 

Comparativefigures

 

Certain prior years’ figures have been reclassified as described innotes 2 b), c), h) and 4.

 

56

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2.Changes in accounting policies

 

Newaccounting standards adopted

 

**a)**     Comprehensive income

** **

On January 1, 2007, the Company adopted the Canadian Institute ofChartered Accountants (“CICA”) Handbook Section 1530, “ComprehensiveIncome”. It describes reporting and disclosure recommendations with respect tocomprehensive income and its components. Comprehensive income representschanges in net assets arising from transactions, events and circumstances notrelated to shareholders.

 

**b)**     Equity

** **

On January 1, 2007, the Company adopted CICA Handbook Section 3251,“Equity”, which describes standards for presentation of changes in equity. As aresult of the adoption of sections 3251 and 1530, the Company is nowpresenting a consolidated statement of shareholders’ equity which includesinformation about comprehensive income and accumulated other comprehensiveincome. The comparative consolidated financial statements were restated toreclassify the cumulative translation adjustments, which amounted to$9 million as at December 31, 2006 (2005 – $36 million) toaccumulated other comprehensive income.

 

**c)**     Financial Instruments –Recognition and Measurement

** **

On January 1, 2007, the Company adopted CICA Handbook Section 3855,“Financial Instruments – Recognition and Measurement”. It describes the standardsfor recognizing and measuring financial instruments in the financialstatements. Under this Section, financial assets available for sale, assets andliabilities held for trading and derivative financial instruments, when part ofa hedging relationship or not, are measured and accounted for at fair value.Certain derivatives embedded in other contracts are also measured and accountedfor at fair value. The Company selected January 1, 2003 as its transitiondate for embedded derivatives.

 

Upon the adoption of this Section, the Company made the followingclassifications:

 
| Cash  and cash equivalents                |   | Designated  as held for trading   |
|-------------------------------------------|--------|-----------------------------------|
| Accounts  receivable                      |   | Loans  and receivables            |
| Notes  receivable                         |   | Loans  and receivables            |
| Other  investments                        |   | Designated  as available for sale |
| Held  for trading investment in shares    |   | Designated  as held for trading   |
| Bank  loans and advances                  |   | Other  liabilities                |
| Accounts  payable and accrued liabilities |   | Other  liabilities                |
| Long-term  debt                           |   | Other  liabilities                |
| Derivative  instruments                   |   | Held  for trading                 |

 

 

This Section was applied retroactively without restating thecomparative figures and resulted in the following adjustments as of January 1,2007:

 
| Other  assets                                     |   | (12 | )      |
|---------------------------------------------------|--------|-----|--------|
| Long-term  debt                                   |   | (17 | )      |
| Other  liabilities                                |   | 3   |   |
|                                              |   | (14 | )      |
| Net  change                                       |   | 2   |   |
| Impact  on accumulated other comprehensive income |   | 1   |   |
| Impact  on retained earnings                      |   | 1   |   |
|                                              |   | 2   |   |

 

57

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** **

**d)**     Hedges

** **

On January 1, 2007, the Company adopted CICA Handbook Section 3865,“Hedges”. It expands the guidelines required by Accounting Guideline 13 (“AcG-13”),“Hedging Relationships”. This Section describes when and how hedgeaccounting can be applied as well as the disclosure requirements. Hedgeaccounting enables the recording of gains, losses, revenues and expenses fromthe derivative financial instruments in the same period as for those related tothe hedged item. However, any ineffective portion of a hedging relationship isrecorded directly to earnings. The Company elected to apply hedge accountingfor the following items as of January 1, 2007:

 
| **Item**                                                                                                                           | ** ** | **Nature of hedging relationship**                                                                               | ** ** | **Implication**                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Foreign exchange forward contracts and currency  option instruments related to anticipated sales, purchases and interest  expense. |       | Cash flow hedge of future anticipated sales,  purchases and interest expenses denominated in foreign currencies. |       | Gains or losses from these derivative financial  instruments are recorded in accumulated other comprehensive income net of  related income taxes and are reclassified to earnings as adjustments to  sales, cost of sales or interest expense in the same period as the respective  hedged item affects earnings. |
|                                                                                                                               |       |                                                                                                             |       |                                                                                                                                                                                                                                                                                                              |
| Interest rate swap agreement of a notional amount  of US$50 million, maturing in 2013.                                        |       | Fair value hedge on a portion of the Company’s  6.75% Unsecured senior notes.                               |       | Gains or losses from these derivative financial  instruments are recorded to earnings as interest expense. However, a  corresponding amount is recorded as an adjustment to the carrying value of  the 6.75% Unsecured senior notes and interest expense. This amount is  presented in other debts.               |
|                                                                                                                               |       |                                                                                                             |       |                                                                                                                                                                                                                                                                                                              |
| Commodity swap agreements on natural gas and  electricity.                                                                         |       | Cash flow hedges of anticipated purchases of  natural gas and electricity.                                       |       | Gains or losses from these derivative financial  instruments are recorded in accumulated other comprehensive income net of  related income taxes and are reclassified to earnings as adjustments to cost  of sales in the same period as the respective hedged item affects earnings.                             |
|                                                                                                                               |       |                                                                                                             |       |                                                                                                                                                                                                                                                                                                              |
| Long-term debt denominated in foreign currencies.                                                                                  |       | Hedge of the net investment of the Company in  self-sustaining foreign subsidiaries.                             |       | Gains or losses resulting from the translation to  Canadian dollars of long-term debt denominated in foreign currencies and  designated as net investment hedges are recorded in accumulated other  comprehensive income net of related income taxes. This hedging strategy was  discontinued during the year.    |

 

As in previous years, the Company continued not applying hedgeaccounting to certain derivative financial instruments, including interest rateswap agreements of notional amounts totalling US$5.2 million maturingbetween 2008 and 2012 and commodity swap agreements on old corrugatedcontainers. Accordingly, gains and losses from these derivative financialinstruments are recorded directly to earnings.

 

**e)**     Accounting changes

** **

As at January 1, 2007, the Company adopted CICA Handbook Section 1506,“Accounting Changes”. This Section establishes criteria to be met,together with the accounting treatment and disclosure required when there is achange in accounting policies, estimates and correction of errors. The adoptionof this Section had no impact on its consolidated financial position orresults of operations.

 

**f)**     Capital disclosures

** **

In December 2006, the CICA published Section 1535, “CapitalDisclosures”. This new standard established disclosure requirements concerningcapital such as: qualitative information about its objectives, policies andprocesses for managing capital; quantitative data about what it regards ascapital; whether it has complied with any externally imposed capitalrequirements and, if not, the consequences of such non-compliance. This Section iseffective for interim and annual financial statements relating to fiscal yearsbeginning on or after October 1, 2007. Earlier adoption is encouraged andthus the Company elected to early adopt this new standard in its consolidatedfinancial statements for the year ended December 31, 2007. Disclosurerequirements pertaining to this Section are contained in note 11.

 

58

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** **

**g)**    Financial Instruments –Disclosure and Presentation

** **

In December 2006, the CICA published two new sections: Section 3862,“Financial Instruments – Disclosures”, and Section 3863, “FinancialInstruments – Presentation”. These new standards replace Section 3861, “FinancialInstruments – Disclosure and Presentation”, revising and enhancing itsdisclosure requirements, and carrying forward unchanged its presentationrequirements. These Sections are effective for interim and annual financialstatements relating to fiscal years beginning on or after October 1, 2007.On December 31, 2007, the Company elected to early adopt these newstandards which had no impact on the classification and valuation of itsfinancial instruments. Disclosure requirements pertaining to these Sections arecontained in notes 14 and 19.

 

**h)**    Others

** **

As at January 1, 2007, Boralex Inc. “Boralex”, a significantlyinfluenced company, changed its depreciation method with respect to certainoperating units. This change resulted in a decrease in retained earningsof $1 million (the Company’s share). As at January 1, 2007, Boralexalso adopted Sections 1530, 3251, 3855 and 3865 of the CICAHandbook. The impact on the Company following its adoption of these Sections isreflected in notes a), b), c) and d) above.

 

Newaccounting standards not yet adopted

 

**i)**     Inventories

** **

In June 2007, the CICA published Section 3031, “Inventories”.This new standard establishes measurement and disclosure requirementsconcerning inventories. The new requirements will be effective January 1,2008. The application of this new standard by the Company will decreaseinventories by approximately $1 million, increase property, plant andequipment by $7 million, increase future income taxes by $2 millionand increase retained earnings by $4 million.

 

**j)**     Goodwill and intangibleassets

** **

In February 2008, the CICA published Section 3064, “Goodwilland Intangible Assets”. This new standard establishes standards for therecognition, measurement, presentation and disclosure of goodwill andintangible assets. The requirements will be effective for interim period andannual financial statements starting October 1, 2008. The Company ispresently evaluating the impact of this new standard.

 

3.     Measurement uncertainty

 

The Company evaluates the net book value of its long-lived assets whenevents or changes in circumstances indicate that the net book value of theassets may not be recoverable. To evaluate long-lived assets, the Companydetermines if the undiscounted future cash flows of operating activitiesexceed the net book value of the assets at the valuation date. Estimatesof future cash flows and fair value are based on judgment and could change.Given the sensitivity of certain key assumptions used, such as exchange rates,selling prices and costs of raw materials and energy, there is a measurementuncertainty regarding certain operating units because it is possible thatvariations in future conditions could require a modification of the statedamount of long-lived assets when new impairment tests are conducted.

 

In 2007, impairment tests on long-lived assets were performed on fiveoperating units (2006 – seven) which resulted in no impairment charge in2007 (2006 – $40 million; 2005 – $28 million). The combined netbook value of the property, plant and equipment tested for impairment, net ofrelated impairment charges described in note 13, is $173 million as at December 31,2007 (as at December 31, 2006 – $273 million). One unit that waspart of these tests is the Fjordcell pulp mill which the Company announced, in2006, that it has ceased operations for an indefinite period. The Companycontinues to monitor the situation closely and is committed to re-evaluatingthe situation should conditions affecting operating costs and the exchange rateimprove. Given this indefinite period of closure, the uncertainty of theoperating costs and the impairment test performed, no impairment chargewas recorded on the net book value of the property, plant and equipment,which stood at $42 million as at December 31,2007 ($45 million as at December 31, 2006).

 

The Company is required to estimate the income taxes in each ofjurisdictions in which it operates. This includes estimating a value forexisting net operating losses based on the Company’s assessment of its abilityto utilize them against future taxable income before they expire. If theCompany’s assessment of its ability to use the net operating losses provesinaccurate in the future, more or less of the net operating losses might berecognized as assets, which would increase or decrease the income tax expense,and consequently affect the Company’s net earnings in the relevant year.

 

59

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4.     Discontinued operations

 

During the fourth quarter of 2004, the Company decided to initiate adivestiture plan for its Fine papers and Tissue distribution activities. Thesedivestitures were realized in February 2006 and March 2005 respectively.In addition, the Company ceased its operations at its Fine papers Thunder Bay,Ontario, mill on January 21, 2006. In 2007, the Company decided to disposeof its Greenfield SAS pulp mill located in France (see note 23 b)) and itsScierie Lemay sawmill located in Québec. Consequently, the assets, liabilities,earnings and cash flows from these activities for the current period and forall comparative periods are classified as discontinued operations. Thecomparative financial information of 2006 and 2005 has been restatedto reflect this change.

 

Financial information relating to these discontinued operations is asfollows:

 
| ** **                                       | ** ** | **Note**          | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------|------------|----------|------------|----------|------------|
| Condensed balance sheet                          |       |              |       |       |       |     |       |     |       |
| Current  assets                                  | ** ** | ** **        |       | **37**     | ** ** | 44       |       |     |       |
| Long-term  assets                                | ** ** | ** **        |       | **14**     | ** ** | 18       |       |     |       |
| Current  liabilities                             | ** ** | ** **        |       | **19**     | ** ** | 22       |       |     |       |
| Condensed statement of earnings                  |       |              |       | ** ** | ** ** |     |       |     |       |
| Sales                                            | ** ** | ** **        |       | **104**    | ** ** | 200      |       | 661      |       |
| Depreciation  and amortization                   | ** ** | ** **        |       | **1**      | ** ** | 2        |       | 4        |       |
| Operating  loss (1)                              | ** ** | ** **        |       | **(20**    | **)**      | (21      | )          | (100     | )          |
| Interest  expense                                | ** ** | ** **        |       | **4**      | ** ** | 4        |       | 9        |       |
| Recovery  of income taxes                        | ** ** | ** **        |       | **(5**     | **)**      | (9       | )          | (32      | )          |
| Net  loss from discontinued operations           | ** ** | ** **        |       | **(19**    | **)**      | (16      | )          | (77      | )          |
| Net  loss per share from discontinued operations | ** ** | ** **        |       | **(0.19**  | **)**      | (0.19    | )          | (0.95    | )          |
| Condensed  statement of cash flows               |       |              |       | ** ** | ** ** |     |       |     |       |
| Operating  activities                            | ** ** |              | ** ** | **(36**    | **)**      | (27      | )          | (40      | )          |
| Investing  activities                            |       | 5 e), f | )          | **(2**     | **)**      | 84       |       | 10       |       |
| Financing  activities                            | ** ** |              | ** ** | **(2**     | **)**      | (1       | )          | (3       | )          |
| ** **                                       |       | ** **        |       | **(40**    | **)**      | 56       |       | (33      | )          |

----

(1) Operating loss includes the following items:

 
| ** **                                                            | ** ** | **Note**          | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|------------|------------|----------|------------|----------|------------|
| Gain  on disposal of distribution activities of Tissue papers segment |       | 5 f          | )          | **—** | ** ** | —   |       | 1        |       |
| Closure  and restructuring costs                                      |       | 4 a          | )          | **1**      | ** ** | (2       | )          | (58      | )          |
| Impairment  of property, plant and equipment                          |       | 4 a          | )          | **(4**     | **)**      | (14      | )          | (20      | )          |
| Provision  on disposal of distribution activities of Fine papers      |       | 4 b          | )          | **—** | ** ** | (1       | )          | (9       | )          |
| Legal  settlement                                                     |       | 4 c), d | )          | **(1**     | **)**      | (1       | )          | (10      | )          |
| Loss  on disposal of Thunder Bay assets                               |       | 4 e          | )          | **(5**     | **)**      | —   |       | —   |       |
| ** **                                                            |       |              |       | **(9**     | **)**      | (18      | )          | (96      | )          |

 

a)     In 2007, theCompany recorded a gain of $6 million ($4 million after tax) relatedto the settlement of the pension plan of the Thunder Baycoated Fine paper mill, closed in January 2006.

The Company also recorded an impairment charge of $4 million (2006– $14 million) on property, plant and equipment and other assets, andseverance and inventory writedown provisions of $5 million related to itsScierie Lemay sawmill temporarily closed in 2006.

b)    On November 17,2005, the Company announced that it had reached an agreement for the sale ofits paper merchant division known as Cascades Resources, the Fine papersdistribution activities, to Coast Paper Limited, a subsidiary of PaperlinXLimited. In 2005, the Company recorded a loss of $9 million($7 million after tax) to bring the book value of the net assets to besold to their net estimated realizable value. On February 28, 2006,the Company completed the transaction for a total consideration of$86 million subject to final closing adjustments. An additional loss of$1 million was recorded in 2006 based on the consideration mentionedabove.

c)     In 2003, theCompany was informed that Cascades Resources was the subject of an enquiry bythe Canadian Commissioner of Competition as to whether this division and itscompetitors had colluded to unduly reduce market competition among papermerchants in Canada. On January 9, 2006, the Company entered a guilty pleain Ontario Superior Court relating to sales of carbonless sheet paper inOntario and Québec. Pursuant to the plea, the Company has agreed to pay a totalof $12.5 million in equal installments over a period of six and a halfyears. The first payment is due in January 2008. In 2005, a loss of$10 million was recorded in earnings representing the discounted amount ofthe liability which is presented as “Other liabilities”in the balance sheet.

d)    In 2007, theCompany recorded a provision of $1 million related to the settlement ofthe class actions filed following the infractiondescribed in c) above.

 

e)     In 2007, theCompany sold its coated Fine paper mill located in Thunder Bay, Ontario, whichresulted in a disbursement of $5 million.

 

60

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5.     Business acquisitions anddisposals

 

a)     2007 Acquisitions

 

On August 1, 2007, the Company acquired certain assets ofHoneycomb Products of Michigan Inc. (“HPM”), a honeycomb board mill located inGrand Rapids, Michigan, for a purchase price of $11 million(US$10.4 million).

 

In 2007, the Company finalized the allocation of the purchase pricerelating to the acquisition of Norampac Inc. completed in December 2006.Accordingly, the amounts disclosed in the table below represent the adjustmentsrequired to the allocation prepared in 2006.

 

b)    2006 Acquisitions

 

On April 25, 2006, the Company’s Boxboard group announced that ithad acquired certain assets from the paperboard division of Simkins Industrieslocated in Ridgefield, New Jersey, and New Haven, Connecticut, for$14 million (US$12.5 million). On July 19 and August 7,2006, the Company completed the acquisition of the assets of CaraustarIndustries, Inc.’s coated recycled boxboard mills located in Sprague,Connecticut, and certain of the assets of Caraustar Industries coated recycledboxboard mill located in Rittman, Ohio, for a total purchase price of$18 million (US$15 million). The Sprague mill will now operateunder the name of Versailles.

 

In 2006, the Company finalized the allocation of the purchase pricerelating to the acquisition of three corrugated plants from SPB Canada Inc.completed in 2005. The purchase price was reduced by $3 million.Accordingly, the amounts disclosed in the table below represent the adjustmentsrequired to the allocation prepared in 2005.

 

On December 29, 2006, the Company acquired the remainingoutstanding common shares (50%) of Norampac Inc. from Domtar Inc. for a totalpurchase price of $561 million (including $1 million in transactioncosts). Norampac is a manufacturer of containerboard and corrugated productsprincipally in North America. The balance sheet and results of Norampac arefully consolidated since that date as they were proportionally consolidatedprior to the acquisition.

 

c)     2005 Acquisitions

 

On January 14, 2005, the Company acquired certain assets of DoverIndustries Limited, located in Burlington, Ontario, for a cash consideration of$8 million. On October 14, 2005, the Company paid $6 million toacquire certain assets of the paperboard division of Fraser Papers Inc. locatedin Edmundston, New Brunswick. Both units are part of the converting sector ofthe Boxboard group.

 

On October 11, 2005, the Company acquired the assets of threecorrugated products converting plants from SPB Canada Inc. located in Montréaland Le Gardeur, Québec, and Belleville, Ontario, for an approximateconsideration of $38 million.

 

During the second quarter of 2005, the Company made its final paymentamounting to $57 million (US$46 million) with respect to theacquisition of Dopaco, Inc. announced in August 2004, whichresulted in an adjustment to goodwill of $3 million (US$2 million).

 

These acquisitions have been accounted for using the purchase methodand the accounts and results of operations of these entities have been includedin the consolidated financial statements since their respective acquisitiondates. The following allocations of the purchase prices to the identifiableassets acquired and liabilities assumed resulted in goodwill of$16 million as at December 31, 2007 (2006 – $194 million;2005 – $10 million) and a reduction of goodwill of $7 million in2006 following an adjustment to the 2005 acquisition of SPB. None ofthis goodwill is expected to be deductible for tax purposes with the exceptionof an amount of $2 million as at December 31, 2007 (2006 –$7 million; 2005 – $10 million).

 

**2007**

 
| **Acquired company**                 | ** ** | **HPM**                 | ** ** | **Norampac**       | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|--------------------|------------|------------|------------|
| **Business segment**                      | ** ** | **Speciality products** | ** ** | **Containerboard** | ** ** | **Total**  | ** ** |
| Accounts  receivable                      | ** ** | **1**                   | ** ** | **—**         | ** ** | **1**      | ** ** |
| Inventories                               | ** ** | **1**                   | ** ** | **—**         | ** ** | **1**      | ** ** |
| Property,  plant and equipment            | ** ** | **2**                   | ** ** | **(57**            | **)**      | **(55**    | **)**      |
| Customer  relationships and client lists  | ** ** | **5**                   | ** ** | **45**             | ** ** | **50**     | ** ** |
| Goodwill                                  | ** ** | **2**                   | ** ** | **14**             | ** ** | **16**     | ** ** |
| ** **                                | ** ** | **11**                  | ** ** | **2**              | ** ** | **13**     | ** ** |
| Accounts  payable and accrued liabilities | ** ** | **—**              | ** ** | **(1**             | **)**      | **(1**     | **)**      |
| Other  liabilities                        | ** ** | **—**              | ** ** | **2**              | ** ** | **2**      | ** ** |
| Non-controlling  interest                 | ** ** | **—**              | ** ** | **(3**             | **)**      | **(3**     | **)**      |
| ** **                                | ** ** | **11**                  | ** ** | **—**         | ** ** | **11**     | ** ** |
| Less:  Balance of purchase price          | ** ** | **(1**                  | **)**      | **—**         | ** ** | **(1**     | **)**      |
| **Total consideration paid**              | ** ** | **10**                  | ** ** | **—**         | ** ** | **10**     | ** ** |

 

61

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2006

 
| ** **                                | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------|------------|---------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| **Acquired company**                 | ** ** | **Simkins**  | ** ** | **Caraustar** | ** ** | **SPB**            | ** ** | **Norampac**       | ** ** | ** ** | ** ** |
| **Business segment**                      | ** ** | **Boxboard** | ** ** | **Boxboard**  | ** ** | **Containerboard** | ** ** | **Containerboard** | ** ** | **Total**  | ** ** |
| Cash  and cash equivalents                |       | —       |       | —        |       | —             |       | 18                 |       | 18         |       |
| Accounts  receivable                      |       | —       |       | 7             |       | (2                 | )          | 111                |       | 116        |       |
| Inventories                               |       | —       |       | 4             |       | —             |       | 75                 |       | 79         |       |
| Property,  plant and equipment            |       | —       |       | 18            |       | —             |       | 583                |       | 601        |       |
| Other  assets                             |       | —       |       | —        |       | —             |       | 13                 |       | 13         |       |
| Customer  relationships and client lists  |       | 11           |       | —        |       | 4                  |       | 24                 |       | 39         |       |
| Goodwill                                  |       | 7            |       | —        |       | (7                 | )          | 187                |       | 187        |       |
|                                      |       | 18           |       | 29            |       | (5                 | )          | 1,011              |       | 1,053      |       |
| Bank  loans and advances                  |       | —       |       | —        |       | —             |       | (2                 | )          | (2         | )          |
| Accounts  payable and accrued liabilities |       | —       |       | (6            | )          | —             |       | (92                | )          | (98        | )          |
| Long-term  debt                           |       | —       |       | —        |       | —             |       | (182               | )          | (182       | )          |
| Other  liabilities                        |       | (4           | )          | (5            | )          | 2                  |       | (155               | )          | (162       | )          |
| Non-controlling  interest                 |       | —       |       | —        |       | —             |       | (19                | )          | (19        | )          |
| **Total consideration paid**              |       | 14           |       | 18            |       | (3                 | )          | 561                |       | 590        |       |

 

2005

 
| **Acquired company**                 | ** ** | **Dover**    | ** ** | **Fraser**   | ** ** | **SPB**            | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------|------------|--------------|------------|--------------------|------------|------------|------------|
| **Business segment**                      | ** ** | **Boxboard** | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Total**  | ** ** |
| Accounts  receivable                      |       | —       |       | —       |       | 8                  |       | 8          |       |
| Inventories                               |       | —       |       | —       |       | 5                  |       | 5          |       |
| Property,  plant and equipment            |       | 3            |       | 1            |       | 22                 |       | 26         |       |
| Customer  relationships and client lists  |       | 5            |       | 5            |       | —             |       | 10         |       |
| Goodwill                                  |       | —       |       | —       |       | 10                 |       | 10         |       |
|                                      |       | 8            |       | 6            |       | 45                 |       | 59         |       |
| Accounts  payable and accrued liabilities |       | —       |       | —       |       | (4                 | )          | (4         | )          |
| Other  liabilities                        |       | —       |       | —       |       | (3                 | )          | (3         | )          |
| **Total consideration paid**              |       | 8            |       | 6            |       | 38                 |       | 52         |       |

 

62

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d)    2007 Disposals

 

On January 25, 2007, the Company sold its 40% interest in GSDPackaging, LLC, a U.S. food pail manufacturing company of the Boxboard group,to Rock-Tenn Company for a cash consideration of $38 million(US$32 million). The Company realized a gain of $25 million beforeincome taxes of $11 million.

 
| **Business segment**                               | ** ** | **Boxboard** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|
| Accounts  receivable                                    |       | **2**        |       |
| Inventories                                             |       | **4**        |       |
| Property,  plant and equipment                          |       | **2**        |       |
| Goodwill                                                |       | **6**        |       |
|                                                    |       | **14**       |       |
| Accounts  payable and accrued liabilities               |       | **(2**       | )          |
|                                                    |       | **12**       |       |
| Gain  on disposal                                       |       | **25**       |       |
| **Total consideration received, net of cash  disposed** |       | **37**       |       |

 

e)     2006 Disposals

 

On February 28, 2006, the Company sold its Fine papersdistribution activities for a total consideration of $86 million.

 

On September 7, 2006, the Company disposed of its investment in ajoint venture of its Boxboard group for a consideration of $11 million(US$10 million), of which $9 million (US$8 million) was receivedat closing and $2 million (US$2 million) will be received over thenext two years. The Company realized a gain of $4 million beforeincome taxes of $2 million.

 

Assets and liabilities at the time of disposal where as follows:

 
| **Business segment**                                 | ** ** | **Speciality products  (Discontinued operations)** | ** ** | **Boxboard** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------|------------|
| Accounts receivable                                  |       | 56                                                           |       | 4            |       |
| Inventories                                               |       | 49                                                           |       | 3            |       |
| Property, plant and equipment                             |       | 5                                                            |       | 4            |       |
|                                                      |       | 110                                                          |       | 11           |       |
| Accounts payable and accrued liabilities                  |       | (23                                                          | )          | (3           | )          |
| Long-term debt                                            |       | —                                                       |       | (2           | )          |
|                                                      |       | 87                                                           |       | 6            |       |
| Purchase price adjustment and gain on disposal            |       | (1                                                           | )          | 4            |       |
| Balance of sale price – receivables and other assets |       | —                                                       |       | (2           | )          |
| **Total consideration received, net of cash  disposed**   |       | 86                                                           |       | 8            |       |

 

63

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f)     2005 Disposals

 

On March 31, 2005, the Company sold the distribution activities ofits Tissue papers segment for a net consideration of $16 million. Of thetotal selling price, $14 million was received at closing; $1 millionwill be received on the first anniversary date and $1 million in fourinstallments due March 31, 2006 to March 31, 2009. The disposalof the net assets resulted in a gain of $1 million before related incometaxes of $0.5 million.

 
| **Business segment**                 | ** ** | **Tissue papers  (Discontinued operations)** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|
| Accounts receivable                       |       | 11                                                     |       |
| Inventories                               |       | 7                                                      |       |
| Property, plant and equipment             |       | 4                                                      |       |
| Other assets                              |       | 1                                                      |       |
|                                      |       | 23                                                     |       |
| Accounts payable and accrued liabilities  |       | (8                                                     | )          |
|                                      |       | 15                                                     |       |
| Gain on disposal                          |       | 1                                                      |       |
| Balance of sale price – other assets |       | (2                                                     | )          |
| **Total consideration received**          |       | 14                                                     |       |

 

**6.****    ****Inventories**

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Finished  goods | ** ** | **257**  |       | 247      |       |
| Raw  materials  | ** ** | **125**  |       | 126      |       |
| Supplies        | ** ** | **173**  |       | 175      |       |
| ** **      |       | **555**  |       | 548      |       |

 

64

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7.     Property, plant andequipment

 

**2007**

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Cost**   | ** ** | **depreciation** | ** ** | **Net**    | ** ** |
| Lands                    | ** ** | **81**     | ** ** | **—**       | ** ** | **81**     | ** ** |
| Buildings                | ** ** | **517**    | ** ** | **176**          | ** ** | **341**    | ** ** |
| Machinery  and equipment | ** ** | **2,708**  | ** ** | **1,412**        | ** ** | **1,296**  | ** ** |
| Automotive  equipment    | ** ** | **65**     | ** ** | **48**           | ** ** | **17**     | ** ** |
| Others                   | ** ** | **300**    | ** ** | **149**          | ** ** | **151**    | ** ** |
| ** **               | ** ** | **3,671**  | ** ** | **1,785**        | ** ** | **1,886**  | ** ** |

 

2006

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Cost**   | ** ** | **depreciation** | ** ** | **Net**    | ** ** |
| Lands                    |       | 83         |       | —           |       | 83         |       |
| Buildings                |       | 498        |       | 163              |       | 335        |       |
| Machinery  and equipment |       | 2,855      |       | 1,349            |       | 1,506      |       |
| Automotive  equipment    |       | 57         |       | 41               |       | 16         |       |
| Others                   |       | 280        |       | 157              |       | 123        |       |
|                     |       | 3,773      |       | 1,710            |       | 2,063      |       |

 

Property, plant and equipment include assets under capital leases witha cost of $7 million and accumulated depreciation of $2 million as atDecember 31, 2007 (2006 – $15 million and $4 millionrespectively). Other property, plant and equipment include items that are notdepreciated, such as machinery and equipment in the process of installationwith a book value of $39 million (2006 – $8 million), deposits on purchasesof equipment amounting to $12 million (2006 – $15 million) and unusedproperties, machinery and equipment with a net book value of $89 million(2006 – $93 million) of which $42 million continues to bedepreciated.

 

Depreciation of property, plant and equipment amounted to$197 million for the year ended December 31, 2007 (2006–$156 million;2005 – $169 million).

 

65

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8.     Intangible assets, otherassets and goodwill

 

a)     Intangibleassets and other assets are detailed as follows:

 
| ** **                              | ** ** | **Note**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Customer  relationship and client lists |       | 8 c) |       | **116**  |       | 77       |       |
| Other  finite-life intangible assets    |       | 8 c) |       | **14**   |       | 14       |       |
| Total  intangible assets                | ** ** |      | ** ** | **130**  |       | 91       |       |

 
| ** **                                                                     | ** ** | **Note**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Investments in significantly influenced companies (1) |       |       |       | **119**  |       | 109      |       |
| Notes  receivable                                                              | ** ** | ** ** |       | **7**    |       | 7        |       |
| Other  investments                                                             | ** ** | ** ** |       | **11**   |       | 3        |       |
| Held  for trading investment in shares (2)                                     | ** ** |       |       | **1**    |       | 1        |       |
| Deferred  charges                                                              |       | 8 c)  |       | **14**   |       | 34       |       |
| Employee  future benefits                                                      |       | 17 b) |       | **68**   |       | 52       |       |
| Fair  value of derivative financial assets                                     | ** ** | ** ** |       | **28**   |       | 7        |       |
| ** **                                                                     |       | ** ** |       | **248**  |       | 213      |       |
| Less:  Current portion, included in accounts receivable                        | ** ** | ** ** |       | **11**   |       | 1        |       |
| Total  other assets                                                            | ** ** | ** ** |       | **237**  |       | 212      |       |

 

----

(1)          Investments insignificantly influenced companies include a 34% interest in Boralex Inc. for anet book value of $96 million and a market value of $222 million(2006 – $88 million and $134 million respectively). In 2007, theCompany recorded a dilution gain of $15 million resulting from thedecrease of its participation from 43% to 34% as a result of a public equityoffering of 7.3 million common shares by Boralex at a price of$15.00 each. This gain is presented in the share of results ofsignificantly influenced companies. 

 

(2)          The following are thedetails of net changes in held for trading investments in shares:

 
| ** **                                                                 | ** ** | **2007**   | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Investments at cost – Beginning of year |       | 1          |       | 1        |       |
| Transition  adjustment to opening balance – Financial instruments     | ** ** | **—** |       | —   |       |
| Adjustment  to fair value                                                  | ** ** | **—** |       | —   |       |
| ** **                                                                 |       | **1**      |       | 1        |       |

 

66

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b)    Goodwill fluctuatedas follows:

 

**2007**

 
| ** **                                                   | ** ** | **Packaging products** | ** ** | ** **         | ** ** | ** **             | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **Boxboard**                | ** ** | **Containerboard** | ** ** | **Specialty products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying  value of goodwill – Beginning of year         | ** ** | **36**                      | ** ** | **257**            | ** ** | **10**                 | ** ** | **303** | ** ** | **10** | ** ** | **313** | ** ** |
| Goodwill  resulting from business acquisitions and disposals | ** ** | **(6**                      | **)**      | **11**             | ** ** | **5**                  | ** ** | **10** | ** ** | **—** | ** ** | **10** | ** ** |
| Foreign  currency translation and others                     | ** ** | **(3**                      | **)**      | **(8**             | **)**      | **—**             | ** ** | **(11** | **)** | **—** | ** ** | **(11** | **)** |
| Carrying  value of goodwill – End of year               | ** ** | **27**                      | ** ** | **260**            | ** ** | **15**                 | ** ** | **302** | ** ** | **10** | ** ** | **312** | ** ** |

 

2006

 
| ** **                                           | ** ** | **Packaging products** | ** ** | ** **         | ** ** | ** **             | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **Boxboard**                | ** ** | **Containerboard** | ** ** | **Specialty products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying  value of goodwill – Beginning of year |       | 30                          |       | 80                 |       | 6                      |       | 116 |   | 10 |   | 126 |   |
| Goodwill  resulting from business acquisitions       |       | 7                           |       | 180                |       | —                 |       | 187 |   | — |   | 187 |   |
| Foreign  currency translation and others             |       | (1                          | )          | (3                 | )          | 4                      |       | — |   | — |   | — |   |
| Carrying  value of goodwill – End of year       |       | 36                          |       | 257                |       | 10                     |       | 303 |   | 10 |   | 313 |   |

 

67

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c)     Intangibleassets and deferred charges are detailed as follows:

 
| ** **                              | ** ** | **2007** | ** ** | **2006**                      | ** ** |
|-----------------------------------------|------------|----------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** |
| Intangible assets                       |       |     |       |                          |       |   |   |   |   |   |   |   |   |
| Customer  relationship and client lists | ** ** | **131**  | ** ** | **15**                        | ** ** | **116** |   | 83 |   | 6 |   | 77 |   |
| Other  finite-life intangible assets    | ** ** | **18**   | ** ** | **4**                         | ** ** | **14** |   | 16 |   | 2 |   | 14 |   |
| ** **                              | ** ** | **149**  | ** ** | **19**                        | ** ** | **130** |   | 99 |   | 8 |   | 91 |   |
| Deferred  charges                       |       |     |       |                          |       |   |   |   |   |   |   |   |   |
| Start-up  cost                          | ** ** | **8**    | ** ** | **7**                         | ** ** | **1** |   | 11 |   | 7 |   | 4 |   |
| Financing  costs                        | ** ** | **13**   | ** ** | **7**                         | ** ** | **6** |   | 37 |   | 15 |   | 22 |   |
| Other                                   | ** ** | **8**    | ** ** | **1**                         | ** ** | **7** |   | 9 |   | 1 |   | 8 |   |
| ** **                              | ** ** | **29**   | ** ** | **15**                        | ** ** | **14** |   | 57 |   | 23 |   | 34 |   |

 

d)    Amortization ofdeferred charges, customer relationships and client lists, and otherfinite-life intangible assets amounted to $15 million for the year ended December 31,2007 (2006 – $9 million; 2005 – $10 million). Amortization offinancing costs is presented in interest expense.

 

The weighted average amortization period is as follows (in number ofyears):

 
| **Intangible assets**                    | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| Customer  relationships and client lists |       | 16         |       |
| Other  finite-life intangible assets     |       | 5          |       |
| Start-up  cost                           |       | 5          |       |
| Financing  costs                         |       | 6          |       |
| Other                                    |       | 3          |       |
| Deferred  charges                        |       | 5          |       |

 

The estimated aggregate amount of amortization expense for otherintangible assets and other assets in each of the next five years is asfollows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2008                               |       | 13         |       |
| 2009                               |       | 12         |       |
| 2010                               |       | 12         |       |
| 2011                               |       | 11         |       |
| 2012                               |       | 10         |       |

 

68

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9.  Long-termdebt

 
| ** **                                                                                                 | ** ** | **Note**    | ** ** | **2007**  | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-----------|------------|----------|------------|
| Revolving  credit facility, weighted average rate of 5.52% as at December 31, 2007,  maturing in 2011 |       | a)          |       | **553**   |       | 457      |       |
| Term  credit facility, bearing interest at 5.52% as at December 31, 2007,  maturing in 2012           |       | a)          |       | **100**   |       | 100      |       |
| 7.25%  Unsecured senior notes of US$675 million, maturing in 2013                                     |       | b)          |       | **667**   |       | 787      |       |
| 6.75%  Unsecured senior notes of US$250 million, maturing in 2013                                     |       | b)          |       | **247**   |       | 291      |       |
| Capital  lease obligations                                                                                 |       | b), e) |       | **2**     |       | 7        |       |
| Other  debts                                                                                               |       |        | ** ** | **17**    |       | 24       |       |
|                                                                                                       |       |        | ** ** | **1,586** |       | 1,666    |       |
| Less:  Unamortized financing costs                                                                         |       |        | ** ** | **12**    |       | —   |       |
| Total  long-term debt                                                                                      |       |        | ** ** | **1,574** |       | 1,666    |       |
| Less:  Current portion                                                                                     |       |        | ** ** | **4**     |       | 9        |       |
|                                                                                                       |       |        | ** ** | **1,570** |       | 1,657    |       |

 

----

a)  On December 29,2006, in connection with the acquisition of the remaining outstanding commonshares of Norampac, the Company completed the refinancing of its$875 million (including $325 million of Norampac) credit facility toprovide for new $850 million credit facilities consisting of a$750 million secured revolving credit facility maturing in December 2011 anda $100 million secured term facility maturing in October 2012. Theterm facility can be reimbursed without penalty at the Company’s option anytime prior to maturity. The Company’s obligations under the revolving creditfacility and the term facility are secured by all inventory and receivables ofthe Company and its subsidiaries located in North America and by the property,plant and equipment of five of its mills.

 

On June 27, 2007, the Company amended itscredit facility to add a new 12-month unsecured revolving credit facility inthe amount of $100 million to provide additional availability of fundsmaturing in June 2008.

 

As at December 31, 2007, accounts receivableand inventories totaling approximately $749 million (2006 – $786 million)as well as property, plant and equipment totaling approximately$220 million (2006 – $150 million) were pledged as collateral for theCompany’s long-term debt.

 

b)  As at December 31,2007, the fair value of the unsecured senior notes and the capital leaseobligations of the Company was estimated at $856 million (December 31,2006 – $1,064 million) based on the market value of the unsecured seniornotes and on discounted future cash flows using interest rates available forissues with similar terms and average maturities.

 

c)  As at December 31,2007, the long-term debt included amounts denominated in foreign currencies ofUS$1,002 million and €58 million (December 31, 2006 –US$947 million and €25 million).

 

d)  Theestimated aggregate amounts of repayments on long-term debt, excluding capitallease obligations and financing costs, in each of the next five years are as follows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008                                         |       | 2          |       |
| 2009                                         |       | 3          |       |
| 2010                                         |       | 1          |       |
| 2011                                         |       | 553        |       |
| 2012                                         |       | 101        |       |
| Thereafter                                   |       | 918        |       |

 

e)  As at December 31,2007, future minimum payments under capital lease obligations are as follows:

 
| Year ending December 31, 2008              |   | 2      |   |
|-------------------------------------------------|--------|--------|--------|
| Less: Interest (weighted average rate of 6.72%) |   | — |   |
|                                            |   | 2      |   |
| Less: Current portion                           |   | 2      |   |
|                                            |   | — |   |

 

69

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10.   Otherliabilities

 
| ** **                                                                   | ** ** | **Note**           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| Employee future benefits                                                     |       | 17 b)         |       | **110**  |       | 107      |       |
| Future income taxes                                                          |       | 15 c)         |       | **228**  |       | 286      |       |
| Fair value of derivative financial liabilities                               |       |               |       | **1**    |       | 2        |       |
| Legal settlement                                                             |       | 4 c), d) |       | **11**   |       | 11       |       |
| Non-controlling interest                                                     |       |               | ** ** | **25**   |       | 19       |       |
| Other                                                                        |       |               | ** ** | **9**    |       | 14       |       |
|                                                                         |       |               | ** ** | **384**  |       | 439      |       |
| Less: Current portion, included in accounts payable and accrued  liabilities |       |               | ** ** | **7**    |       | —   |       |
| Total other liabilities                                                      |       |               | ** ** | **377**  |       | 439      |       |

 

11.   Capitalstock

 
| ** **                                      | ** ** | **Note**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Common shares                                   |       | b), c) |       | **509**  |       | 510      |       |
| Adjustment relating to stock options and others |       | d)          |       | **8**    |       | 7        |       |
|                                            |       |        | ** ** | **517**  |       | 517      |       |

 

a)  CAPITALRISK MANAGEMENT

 

Capital is defined as long-term debt, bank loans andadvances net of cash and cash equivalents and shareholders’ equity whichincludes capital stock.

 
| ** **                                | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|
| Cash and cash equivalent                  | ** ** | **(25**   | **)**      | (34      | )          |
| Bank loan and advances                    | ** ** | **47**    |       | 42       |       |
| Long-term debt, including current portion | ** ** | **1,574** |       | 1,666    |       |
|                                      | ** ** | **1,596** |       | 1,674    |       |
| Shareholders’ equity                 | ** ** | **1,199** |       | 1,157    |       |
| Total capital                             | ** ** | **2,795** |       | 2,831    |       |

 

The Company’s objectives when managing capital are:

 

·  to safeguard the Company’sability to continue as a going concern in order to provide returns toshareholders;

·  to maintain an optimalcapital structure and reduce the cost of capital;

·  to make proper capitalinvestments that are significant to ensure the Company remains competitive;

·  to redeem common sharesbased on an annual redemption program.

 

The Company sets the amount of capital in proportionto risk. The Company manages its capital structure and makes adjustments to itin the light of changes in economic conditions and the risk characteristics ofthe underlying assets. In order to maintain or adjust the capital structure,the Company may adjust the amount of dividends paid to shareholders, returncapital to shareholders, issue new shares and acquire or sell assets to improveits financial performance and flexibility.

 

The Company monitors capital on a monthly andquarterly basis based on different financial ratios and non-financialperformance indicators. Also, the Company must conform to certain financialratios under its various credit agreements. These ratios are funded debt tocapitalization and interest coverage. The Company must also comply with aconsolidated interest coverage ratio to incur additional debt. Funded debt isdefined as liabilities as per the consolidated balance sheet, includingguarantees and liens granted in respect of funded debt of another person butexcluding other long-term liabilities, trade accounts payable, obligationsunder operating leases and other accrued obligations (2007 – $1,619 million). The capitalization ratio is calculated as “shareholders’equity” as shown in consolidated balance sheet plus the funded debt. Theinterest coverage ratio is defined as EBITDA to interest expenses. The EBITDAis defined as net income of the last four quarters plus interest expense,income taxes, amortization and depreciation, expense for stock options anddividends received from a person who is not a credit party (2007 –$310 million). Excluded from net income are share of results of equityinvestments and gains or losses from non-recurring items. Interest expense iscalculated as interest and financial charges determined in accordance withCanadian GAAP plus any capitalized interest but excluding the amortization ofdeferred financing costs, upfront and financing costs and also unrealized gainsor losses arising from hedging agreements. It also excludes any gains or losseson the translation of any long-term debt in a foreign currency. Theconsolidated interest coverage ratio to incur additional debt is calculated asdefined in the senior notes indenture dated February 5, 2003.

 

70

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The Company is in compliance with the ratiorequirements of its lenders. If cash is available, the Company used it toreduce its revolving facility utilization.

 

On a regular basis, the Company meets with therating agencies. In 2007, the credit rating related to its secured andunsecured debt and overall corporate rating by Moody’s Investor Service Inc. andby Standard & Poor’s Corporation remained stable.

 

The Company normally invests between $125 and$200 million yearly in purchases of property, plant and equipment. Theseamounts are carefully reviewed during the course of the year in relation tooperating results and strategic actions approved by the Board. Theseinvestments, combined with annual maintenance, enhance the stability of theCompany’s business units and improve cost competitiveness through newtechnology and improved process procedures.

 

The Company has an annual share redemption programin place to redeem its outstanding common shares when the market price isjudged appropriate by management. In addition to limitations to the normalcourse issuer bid, the Company’s ability to redeem common shares is limited byits senior notes indenture.

 

b)  Theauthorized capital stock of the Company consists of an unlimited number ofcommon shares, without nominal value, and an unlimited number of Class Aand B shares issuable in series without nominal value. Over the past two years,the common shares have fluctuated as follows:

 
| ** **                                 | ** ** | **Note**   | ** ** | **2007**                       | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **Number of shares** | ** ** | **$**      | ** ** | **Number of shares** | ** ** | **$** | ** ** |
| Balance – Beginning of year           |       |       |       | **99,533,654**                 | ** ** | **510**    |       | 80,818,540 |   | 259 |   |
| Shares issued                              |       | c)         |       | **—**                     | ** ** | **—** |       | 18,868,585 |   | 250 |   |
| Shares issued on exercise of stock options |       | d)         |       | **103,397**                    | ** ** | **1**      |       | 131,229 |   | 2 |   |
| Redemption of common shares                |       | e)         |       | **(492,700**                   | **)**      | **(2**     | **)**      | (284,700 | ) | (1 | ) |
| Balance – End of year                 |       |       | ** ** | **99,144,351**                 | ** ** | **509**    |       | 99,533,654 |   | 510 |   |

 

c)  On December 20,2006, the Company closed a public offering of 15,095,000 SubscriptionReceipts at a unit price of $13.25, for a total consideration of$200 million. Concurrently, the Company also closed a $50 millionprivate placement of 3,773,585 Subscription Receipts at a price of$13.25 each. Each Subscription Receipt was converted into an equal numberof common shares of the Company, concurrently with the closing of theacquisition of the remaining 50% interest in Norampac, on December 29,2006.

 

d)  Under theterms of a share option plan adopted on December 15, 1998 forofficers and key employees of the Company, 6,300,075 common shares havebeen specifically reserved for issuance. Each option will expire at a date notto exceed 10 years following the grant date of the option. The exerciseprice of an option shall not be lower than the market value of the share at thedate of grant, determined as the average of the closing price of the share onthe Toronto Stock Exchange on the five trading days preceding the date ofgrant. The terms for exercising the options granted before December 31,2003 are 25% of the number of shares under option within 12 monthsafter the date of grant, and up to an additional 25% every 12 months afterthe first, second and third anniversary dates of grant. The terms forexercising the options granted in 2004 and thereafter are 25% of thenumber of shares under option within the first anniversary date of grant, andup to an additional 25% every 12 months after the second, third and fourthanniversary dates of grant. Options cannot be exercised if the market value ofthe share is lower than its book value at the date of grant. The stock-basedcompensation cost related to these options amounted to $1.4 million (2006–$1.4 million;2005–$1.3 million).

 

Changes in the number of options outstanding as at December 31 areas follows:

 
| ** **                             | ** ** | **2007**                        | ** ** | **2006**                                                | ** ** | **2005**                              | ** ** |
|----------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **Number of options** | ** ** | **Weighted average  exercise price   $** | ** ** | ** Number of options** | ** ** | **Weighted average  exercise price   $ ** | ** ** | **Number of options** | ** ** | **Weighted average  exercise price   $** | ** ** |
| Beginning of year                      | ** ** | **2,315,391**                   | ** ** | **11.14**                                               |       | 2,115,167                             |       | 11.03 |   | 1,756,986 |   | 10.67 |   |
| Granted                                | ** ** | **422,068**                     | ** ** | **11.83**                                               |       | 417,416                               |       | 11.49 |   | 390,181 |   | 12.73 |   |
| Exercised                              | ** ** | **(103,397**                    | **)**      | **7.76**                                                |       | (131,229                              | )          | 9.35 |   | (12,560 | ) | 9.47 |   |
| Forfeited                              | ** ** | **(175,006**                    | **)**      | **12.78**                                               |       | (85,963                               | )          | 13.03 |   | (19,440 | ) | 13.10 |   |
| End of year                            | ** ** | **2,459,056**                   | ** ** | **11.28**                                               |       | 2,315,391                             |       | 11.14 |   | 2,115,167 |   | 11.03 |   |
| Options exercisable – End of year | ** ** | **31,496**                      | ** ** | **8.29**                                                |       | 1,426,071                             |       | 10.47 |   | 766,001 |   | 7.60 |   |

 

71

----

 

The following options were outstanding as at December 31,2007:

 
| ** **            | ** ** | **Options outstanding** | ** ** | **Options exercisable**                                  | ** ** | ** **                        | ** ** |
|-----------------------|------------|------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------|------------|
| **Year granted** | ** ** | **Number  of options**  | ** ** | **Weighted average  exercise price   $ ** | ** ** | **Number   of options** | ** ** | **Weighted average   exercise price   $ ** | ** ** | **Expiration   date** | ** ** |
| 1999                  |       | 284,415                      |       | 8.49                                                          |       | 1,770                             |       | 12.29 |   | 2009 |   |
| 2000                  |       | 29,726                       |       | 8.05                                                          |       | 29,726                            |       | 8.05 |   | 2010 |   |
| 2001                  |       | 272,011                      |       | 6.82                                                          |       | —                            |       | — |   | 2011 |   |
| 2002                  |       | 187,919                      |       | 13.24                                                         |       | —                            |       | — |   | 2012 |   |
| 2003                  |       | 218,952                      |       | 13.04                                                         |       | —                            |       | — |   | 2013 |   |
| 2004                  |       | 326,905                      |       | 13.01                                                         |       | —                            |       | — |   | 2014 |   |
| 2005                  |       | 322,923                      |       | 12.73                                                         |       | —                            |       | — |   | 2015 |   |
| 2006                  |       | 394,137                      |       | 11.49                                                         |       | —                            |       | — |   | 2016 |   |
| 2007                  |       | 422,068                      |       | 11.83                                                         |       | —                            |       | — |   | 2017 |   |
|                  |       | 2,459,056                    |       |                                                          |       | 31,496                            |       |   |   |   |   |

 

The following assumptions were used to estimate thefair value, at the date of grant, of each option issued to employees:

 
| ** **                                    | ** ** | **2007**         | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|-----------------------------------------------|------------|------------------|------------|--------------|------------|--------------|------------|
| Risk-free interest rate                       | ** ** | **4.2**          | **%**      | 4.5          | %          | 3.9          | %          |
| Expected dividend yield                       | ** ** | **1.37**         | **%**      | 1.46         | %          | 1.26         | %          |
| Expected life of options                      | ** ** | **6 years** | ** ** | 6 years |       | 6 years |       |
| Expected volatility                           | ** ** | **24**           | **%**      | 33           | %          | 26           | %          |
| Weighted average fair value of issued options | ** ** | **$**            | **3.22**   | ** **   | $          | 3.65         |       | $ | 3.69 |   |
|                                               |            |                  |            |              |            |              |            |  |  |  |

 

e)  In 2007, inthe normal course of business, the Company renewed its redemption program of amaximum of 4,970,094 common shares with the Toronto Stock Exchange, whichshares represent approximately 5% of issued and outstanding common shares. Theredemption authorization is valid from March 13, 2007 to March 12,2008. In 2007, the Company redeemed 492,700 common shares under thisprogram for a consideration of approximately $5 million (2006 –$4 million; 2005 – $6 million).

 

f)   The basicand diluted net earnings (loss) per common share are calculated as follows:

 
| ** **                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net earnings (loss) available to common shareholders   | ** ** | **94.8**   |       | 3.3      |       | (97.5    | )          |
| Weighted average common shares                         | ** ** | **99.3**   |       | 80.9     |       | 81.1     |       |
| Dilution effect of stock options                       | ** ** | **—** |       | 0.1      |       | —   |       |
| Adjusted weighted average common shares                | ** ** | **99.3**   |       | 81.0     |       | 81.1     |       |
| Basic and diluted net earnings (loss) per common share | ** ** | **0.95**   |       | 0.04     |       | (1.19    | )          |

 

In 2005, because of the net loss, stock options werenot considered in the computation of the diluted per share amount.

 

In calculating diluted earnings per share for2007 and 2006, 2,429,330 and 1,636,110 stock options wereexcluded due to their antidilutive effect.

 

g)  The Companyoffers to its Canadian employees a share purchase plan of its common stock.Employees can contribute voluntarily up to a maximum of 5% of their salaryand, if certain conditions are met, the Company will contribute to the plan 25%of the employee’s contribution.

 

The shares are purchased on the market on apredetermined date each month. For the year ended December 31, 2007, theCompany’s contribution to the plan amounted to $0.7 million (2006 and2005 – $0.6 million).

 

h)  The Companyhas a Deferred Share Unit Plan for the benefit of its external directorsallowing them to receive all or a portion of their annual compensation in theform of Deferred Share Units (DSUs). A DSU is a notional unit equivalent invalue to the Company’s common share. Upon resignation from the Board ofDirectors, participants are entitled to receive the payment of their cumulatedDSUs in the form of cash based on the average price of the Company’s commonshares as traded on the open market during the five days before the date of theparticipant’s resignation.

 

The DSU expense and the related liability arerecorded at the grant date. The liability is adjusted periodically to reflectany variation in the market value of the common shares. As at December 31,2007, the Company had a total of 63,200 DSUs outstanding (2006 — 38,888),representing a long-term liability of $0.5 million (2006 –$0.5 million).

 

72

----

 

12.   Gains ondisposal and other

 

a)  Other gainsand losses are detailed as follows:

 
| ** **                                                                    | ** ** | **Note**                     | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Losses (gains) on disposal of property, plant and equipment and other  assets |       | 12 b), c), d) |       | **6**      |       | —   |       | (11      | )          |
| Legal settlement                                                              |       | 12 e)                   |       | **2**      |       | —   |       | —   |       |
| Impairment charge of investment in a significantly influenced company         |       |                         |       | **—** |       | —   |       | 1        |       |
| Gain on business disposal                                                     |       | 5 d)                    |       | **(25**    | **)**      | (4       | )          | —   |       |
|                                                                          |       |                         | ** ** | **(17**    | **)**      | (4       | )          | (10      | )          |

 

b)  In May 1,2007, the Company sold the building of its Toronto (Pickering) tissueconverting facility, closed in 2005, for an amount of $7 million.The Company realized a gain of $1 million.

 

c)  In 2007,the Company completed the sale of its Red Rock linerboard mill located inOntario which was indefinitely shut down. The agreement resulted in theCompany paying the purchaser $10 million. An amount of $5 million hasbeen paid in 2007 and the remaining $5 million is expected to be paidin 2008.

 

d)  In 2007,the Company sold an investment in a privately-held company controlled by arelated director for a cash consideration and a gain of $3 million.

 

e)  In 2007,the Company recorded a provision of $2 million as a settlement related tothe action filed by ServiceCore, Inc.

 

f)   In 2005,the Company realized a gain of $4 million ($3 million after tax) onthe disposal of a building of one of its corrugated products plants.In addition, the Company sold a warehouse of the Corporate segment,resulting in a gain of $11 million. Of that amount, $7 million hasbeen recorded in earnings ($6 million after tax) and the remaining portionhas been deferred and will be recognized in earnings over the two-year termlease agreement entered into with the buyer. Proceeds from these twotransactions amounted to $19 million.

 

13.   Impairmentand other restructuring costs

 

In 2007, the Company recorded additional closure andrestructuring provisions relating to the permanent closure of its Red Rockcontainerboard mill. The Company also recorded an impairment charge onproperty, plant and equipment not in service in the ContainerboardGroup. The Company also recorded severance provisions following a restructuringprogram announced at its St-Jérôme, Québec, fine paper mill.

 

In 2006, the Company announced the permanent shutdown of its specialty products board mill in France and of its convertingboxboard plant in Montréal, Québec. The Company also ceased for an indefiniteperiod the operation of the Red Rock, Ontario, containerboard mill, theFjordcell pulp mill and Scierie Lemay sawmill in Québec, both of the Boxboardgroup.

 

In 2005, the Company permanently shut down its finepapers Thunder Bay, Ontario, mill and a machine at its Red Rock mill, Ontario.The Company has also shut down three corrugated products converting units inMontréal (Québec), Concord (Ontario) and Buffalo (New York). The Company alsodecided to close some equipment at its St-Jerôme, Québec, Fine papers mill, atits Montréal, Québec boxboard converting plant and at its Toronto, Ontario,tissue converting unit. The Company also reduced the value of certain property,plant and equipment that are not in use to their net realizable value.

 

a)  Theimpairment charges and closure and restructuring costs are detailed as follows:

 
| ** **                                    | ** ** | **2007**       | ** ** | **2006**                                         | ** ** | **2005**       | ** ** |
|-----------------------------------------------|------------|----------------|------------|--------------------------------------------------|------------|----------------|------------|
| ** **                                    | ** ** | **Impairment** | ** ** | **Closure and   restructuring  costs** | ** ** | **Impairment** | ** ** | **Closure and   restructuring   costs** | ** ** | **Impairment** | ** ** | **Closure and   restructuring   costs** | ** ** |
| Boxboard – Montréal                 | ** ** | **—**     | ** ** | **—**                                       |       | —         |       | 1 |   | — |   | 2 |   |
| Boxboard – Blendecques                   | ** ** | **—**     | ** ** | **—**                                       |       | —         |       | — |   | 28 |   | — |   |
| Boxboard – Fjordcell                     | ** ** | **—**     | ** ** | **—**                                       |       | —         |       | 1 |   | — |   | — |   |
| Containerboard – Red Rock                | ** ** | **—**     | ** ** | **5**                                            |       | 40             |       | 12 |   | 7 |   | 4 |   |
| Containerboard – others                  | ** ** | **3**          | ** ** | **—**                                       |       | —         |       | — |   | 2 |   | 4 |   |
| Specialty products – St-Jérôme | ** ** | **—**     | ** ** | **1**                                            |       | —         |       | 3 |   | 2 |   | 6 |   |
| Specialty products – board mill          | ** ** | **—**     | ** ** | **—**                                       |       | 7              |       | 3 |   | — |   | — |   |
| Tissue – Toronto                         | ** ** | **—**     | ** ** | **—**                                       |       | —         |       | — |   | — |   | 2 |   |
| Others                                        | ** ** | **—**     | ** ** | **—**                                       |       | —         |       | — |   | 8 |   | — |   |
|                                          | ** ** | **3**          | ** ** | **6**                                            |       | 47             |       | 20 |   | 47 |   | 18 |   |

 

73

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b)  Thefollowing table shows the reconciliation of all closure and restructuring costprovisions. The balance as at December 31, 2007 should be paid in 2008. Itincludes the provisions presented in discontinued operations:

 
| ** **                                   | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Balance – Beginning of  year            | ** ** | **47**     |       | 55       |       | —   |       |
| Additional provisions                        | ** ** | ** ** |       |     |       |     |       |
| Severance and pension liability              | ** ** | **7**      |       | 26       |       | 57       |       |
| Writedown of inventories                     | ** ** | **4**      |       | (2       | )          | 13       |       |
| Others                                       | ** ** | **16**     |       | —   |       | 6        |       |
| Non-monetary items                           | ** ** | ** ** |       |     |       |     |       |
| Writedown of inventories                     | ** ** | **(4**     | **)**      | 2        |       | (13      | )          |
| Pension liability adjustments and others     | ** ** | **(7**     | **)**      | (7       | )          | (3       | )          |
| Liability assumed from  Norampac acquisition | ** ** | **—** |       | 8        |       | —   |       |
| Closure and restructuring  cost payments     | ** ** | **(44**    | **)**      | (35      | )          | (5       | )          |
| Balance – End of year                   | ** ** | **19**     |       | 47       |       | 55       |       |

 

14.   Loss(gain) on financial instruments

 

a)  The loss(gain) on commodity derivatives financial instruments is as follows:

 
| ** **                                                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Unrealized loss (gain) on commodity derivative financial instruments | ** ** | **—** |       | (5       | )          | 9        |       |
| Realized loss (gain) on commodity derivative financial instruments   | ** ** | **(6**     | **)**      | 2        |       | 2        |       |
| Amortization of transitional deferred unrealized gain under AcG-13   | ** ** | **—** |       | —   |       | (1       | )          |
|                                                                 | ** ** | **(6**     | **)**      | (3       | )          | 10       |       |

 

b)  During thefirst quarter of 2005, the Company entered into an interest rate swap agreementfor a notional amount of US$125 million, maturing in 2013, relating to its7.25% unsecured senior notes. During the second quarter of 2005, the Companycancelled this swap agreement and as this instrument was not designated as ahedge, a gain of $2 million was recorded.

 

74

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15.   Incometaxes

 

a)  Theprovision for (recovery of) income taxes is as follows:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    | ** ** | **33**   |       | 34       |       | 21       |       |
| Future     | ** ** | **(22**  | **)**      | (28      | )          | (29      | )          |
|       | ** ** | **11**   |       | 6        |       | (8       | )          |

 

b)  Theprovision for income taxes based on the effective income tax rate differs fromthe provision for income taxes based on the combined basic rate for the following reasons:

 
| ** **                                                                                                         | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Provision for (recovery of) income taxes based on the combined basic  Canadian and provincial income tax rate | ** ** | **34**     |       | 6        |       | (11      | )          |
| Adjustment for income taxes arising from the following:                                                            | ** ** | ** ** |       |     |       |     |       |
| Difference in statutory income tax rate of foreign operations                                                      | ** ** | **(9**     | **)**      | (4       | )          | —   |       |
| Unrecognized tax benefit arising from current losses                                                               | ** ** | **9**      | ** ** | 8        |       | 1        |       |
| Non-taxable portion of foreign exchange gain on long-term debt                                                     | ** ** | **(10**    | **)**      | —   |       | (2       | )          |
| Recognized tax benefit arising from previously incurred losses                                                     | ** ** | **—** | ** ** | —   |       | (9       | )          |
| Permanent differences                                                                                              | ** ** | **(1**     | **)**      | —   |       | 4        |       |
| Large corporations tax                                                                                             | ** ** | **—** | ** ** | —   |       | 2        |       |
| Increase (decrease) in future income taxes resulting from a  substantively enacted change in tax rates             | ** ** | **(16**    | **)**      | (3       | )          | 4        |       |
| Charges for calculation of temporary differences                                                                   | ** ** | **2**      | ** ** | —   |       | —   |       |
| Others                                                                                                             | ** ** | **2**      | ** ** | (1       | )          | 3        |       |
|                                                                                                               | ** ** | **(23**    | **)**      | —   |       | 3        |       |
| Provision for (recovery of) income taxes                                                                           | ** ** | **11**     |       | 6        |       | (8       | )          |

 

c)  Futureincome taxes include the following items:

 
| ** **                                          | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------|------------|
| **Future income tax assets**                        | ** ** | ** ** |       |     |       |
| Tax benefit arising from income tax losses          | ** ** | **163**    | ** ** | 145      |       |
| Employee future benefits                            | ** ** | **26**     | ** ** | 26       |       |
| Unused tax credits                                  | ** ** | **18**     | ** ** | 12       |       |
| Others                                              | ** ** | **20**     | ** ** | 18       |       |
| Valuation allowance                                 | ** ** | **(44**    | **)**      | (21      | )          |
|                                                | ** ** | **183**    | ** ** | 180      |       |
| **Future income tax liabilities**                   | ** ** | ** ** | ** ** |     |       |
| Property, plant and equipment                       | ** ** | **265**    | ** ** | 335      |       |
| Foreign exchange gain on long-term debt             | ** ** | **68**     | ** ** | 43       |       |
| Employee future benefits                            | ** ** | **12**     | ** ** | 8        |       |
| Other assets                                        | ** ** | **45**     | ** ** | 32       |       |
| Others                                              | ** ** | **17**     | ** ** | 8        |       |
|                                                | ** ** | **407**    | ** ** | 426      |       |
| **Future income taxes**                             | ** ** | **(224**   | **)**      | (246     | )          |
| Future income taxes included in Accounts receivable | ** ** | **4**      | ** ** | 40       |       |
| Future income taxes included in Other liabilities   | ** ** | **(228**   | **)**      | (286     | )          |
|                                                | ** ** | **(224**   | **)**      | (246     | )          |

 

75

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d)  TheCompany has accumulated losses for income tax purposes amounting toapproximately $494 million which may be carried forward to reduce taxableincome in future years. The future tax benefit resulting from the deferral of$404 million of these losses has been recognized in the accountsas a future income tax asset. Income tax losses as at December 31,2007 are detailed as follows:

 
| ** **    | ** ** | **Unrecognized   tax losses** | ** ** | **Recognized   tax losses** | ** ** | **Total   tax losses** | ** ** | **Maturity** | ** ** |
|---------------|------------|-----------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|--------------|------------|
| Canada        |       | —                                  |       | 50                                    |       | 50                               |       | 2010         |       |
|          |       | —                                  |       | 18                                    |       | 18                               |       | 2014         |       |
|          |       | —                                  |       | 42                                    |       | 42                               |       | 2015         |       |
|          |       | —                                  |       | 26                                    |       | 26                               |       | 2026         |       |
|          |       | —                                  |       | 102                                   |       | 102                              |       | 2027         |       |
| United States |       | 2                                       |       | —                                |       | 2                                |       | 2012         |       |
|          |       | 2                                       |       | 4                                     |       | 6                                |       | 2018         |       |
|          |       | 1                                       |       | 13                                    |       | 14                               |       | 2019         |       |
|          |       | 2                                       |       | 6                                     |       | 8                                |       | 2020         |       |
|          |       | —                                  |       | 6                                     |       | 6                                |       | 2021         |       |
|          |       | —                                  |       | 4                                     |       | 4                                |       | 2022         |       |
|          |       | —                                  |       | 6                                     |       | 6                                |       | 2023         |       |
| Europe        |       | 83                                      |       | 127                                   |       | 210                              |       | Indefinitely |       |
|          |       | 90                                      |       | 404                                   |       | 494                              |       |         |       |

 

16.   Additional information

 

a)  Changesin non-cash working capital components are detailed as follows:

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accounts receivable                      | ** ** | **(47**  | **)**      | (13      | )          | (38      | )          |
| Inventories                              | ** ** | **(47**  | **)**      | 10       |       | (23      | )          |
| Accounts payable and accrued liabilities | ** ** | **5**    | ** ** | 38       |       | 44       |       |
|                                     | ** ** | **(89**  | **)**      | 35       |       | (17      | )          |

 

b)  Additionalinformation

 
| ** **        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest paid     | ** ** | **108**  |       | 80       |       | 83       |       |
| Income taxes paid | ** ** | **21**   |       | 10       |       | 26       |       |

 

76

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17.   Employee future benefits

 

a)  Theexpense for employee future benefits as at December 31 is as follows:

 
| ** **                                                                                                    | ** ** | **2007**               | ** ** | **2006**             | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                    | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| Current service costs                                                                                         | ** ** | **13**                 | ** ** | **3**                | ** ** | 13 |   | 4 |   |
| Interest cost                                                                                                 | ** ** | **37**                 | ** ** | **6**                | ** ** | 29 |   | 4 |   |
| Past service costs                                                                                            | ** ** | **2**                  | ** ** | **1**                | ** ** | — |   | — |   |
| Actual return on plan assets                                                                                  | ** ** | **(19**                | **)**      | **—**           | ** ** | (61 | ) | — |   |
| Actuarial losses on accrued benefit obligation                                                                | ** ** | **(16**                | **)**      | **(6**               | **)**      | (15 | ) | (8 | ) |
| Curtailment and settlement                                                                                    | ** ** | **(5**                 | **)**      | **—**           | ** ** | 6 |   | 1 |   |
| Others                                                                                                        | ** ** | **(2**                 | **)**      | **(1**               | **)**      | — |   | — |   |
| Benefit costs before adjustments to recognize long-term nature of  employee future benefit costs              | ** ** | **10**                 | ** ** | **3**                | ** ** | (28 | ) | 1 |   |
| Difference between expected return and actual return on plan assets  for the year                             | ** ** | **(26**                | **)**      | **—**           | ** ** | 28 |   | — |   |
| Difference between actuarial loss for the year and actuarial loss on  accrued benefit obligation for the year | ** ** | **17**                 | ** ** | **6**                | ** ** | 19 |   | 8 |   |
| Difference between amortization of past service costs and actual plan  amendments for the year                | ** ** | **(1**                 | **)**      | **(1**               | **)**      | 1 |   | — |   |
| Others                                                                                                        | ** ** | **3**                  | ** ** | **1**                | ** ** | (1 | ) | (4 | ) |
| Adjustments to recognize long-term nature of employee future benefit  costs                                   | ** ** | **(7**                 | **)**      | **6**                | ** ** | 47 |   | 4 |   |
| Recognized costs for defined benefit pension plans                                                            | ** ** | **3**                  | ** ** | **9**                | ** ** | 19 |   | 5 |   |
| Recognized costs for defined contribution pension plans                                                       | ** ** | **21**                 | ** ** | **—**           | ** ** | 15 |   | — |   |
| Total expense for employee future benefits                                                                    | ** ** | **24**                 | ** ** | **9**                | ** ** | 34 |   | 5 |   |

 

Total cash payments for employee futurebenefits for 2007, consisting of cash contributed by the Company to its fundedpension plans, including its defined contribution plans, and cash payments madedirectly to beneficiaries for its unfunded other benefit plans, including itscollective RRSPs, amount to $67 million (2006 – $43 million). Totalestimated cash payments for employee future benefits are $56 million for2008, including specific payment related to the settlement of one pension planpartial wind-up following the closing of the Red Rock division.

 

77

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b)  The funded status of the defined benefit plansand the other complementary retirement benefit plans and post-employmentbenefit plans as at December 31 are as follows:

 
| ** **                                           | ** ** | **2007**               | ** ** | **2006**             | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other Plans** | ** ** |
| **Accrued benefit obligation**                       |       |                   |       |                 | ** ** |   |   |   |   |
| Beginning of year                                    | ** ** | **780**                | ** ** | **112**              | ** ** | 659 |   | 96 |   |
| Current service costs                                | ** ** | **13**                 | ** ** | **3**                | ** ** | 13 |   | 4 |   |
| Interest cost                                        | ** ** | **37**                 | ** ** | **6**                | ** ** | 29 |   | 4 |   |
| Employees’ contributions                        | ** ** | **4**                  | ** ** | **—**           | ** ** | 3 |   | — |   |
| Actuarial losses                                     | ** ** | **(16**                | **)**      | **(6**               | **)**      | (15 | ) | (8 | ) |
| Benefits paid                                        | ** ** | **(33**                | **)**      | **(5**               | **)**      | (35 | ) | (4 | ) |
| Business acquisitions, disposals and closures        | ** ** | **(154**               | **)**      | **—**           | ** ** | 125 |   | 17 |   |
| Past service costs                                   | ** ** | **2**                  | ** ** | **1**                | ** ** | — |   | — |   |
| Others                                               | ** ** | **(4**                 | **)**      | **(1**               | **)**      | 1 |   | 3 |   |
| End of year                                          | ** ** | **629**                | ** ** | **110**              | ** ** | 780 |   | 112 |   |
| **Plan assets**                                      | ** ** | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Beginning of year                                    | ** ** | **753**                | ** ** | **—**           | ** ** | 573 |   | — |   |
| Actual return on plan assets                         | ** ** | **19**                 | ** ** | **—**           | ** ** | 61 |   | — |   |
| Employer’s contributions                        | ** ** | **41**                 | ** ** | **5**                | ** ** | 24 |   | 4 |   |
| Employees’ contributions                        | ** ** | **4**                  | ** ** | **—**           | ** ** | 3 |   | — |   |
| Benefits paid                                        | ** ** | **(33**                | **)**      | **(5**               | **)**      | (35 | ) | (4 | ) |
| Business acquisitions, disposals and closures        | ** ** | **(155**               | **)**      | **—**           | ** ** | 127 |   | — |   |
| Others                                               | ** ** | **(3**                 | **)**      | **—**           | ** ** | — |   | — |   |
| End of year                                          | ** ** | **626**                | ** ** | **—**           | ** ** | 753 |   | — |   |
| **Reconciliation of funded status**                  | ** ** | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Fair value of plan assets                            | ** ** | **626**                | ** ** | **—**           | ** ** | 753 |   | — |   |
| Accrued benefit obligation                           | ** ** | **629**                | ** ** | **110**              | ** ** | 780 |   | 112 |   |
| Funded status of plan – deficit                 | ** ** | **(3**                 | **)**      | **(110**             | **)**      | (27 | ) | (112 | ) |
| Unrecognized net actuarial loss                      | ** ** | **49**                 | ** ** | **1**                | ** ** | 30 |   | 7 |   |
| Unamortized transitional balance                     | ** ** | **(2**                 | **)**      | **(1**               | **)**      | (2 | ) | (1 | ) |
| Unamortized past service costs                       | ** ** | **19**                 | ** ** | **3**                | ** ** | 19 |   | 3 |   |
| Others                                               | ** ** | **(3**                 | **)**      | **1**                | ** ** | 2 |   | — |   |
| Accrued benefit asset (liability) – End of year | ** ** | **60**                 | ** ** | **(106**             | **)**      | 22 |   | (103 | ) |

 

78

----

 

The net amount recognized on the balancesheet as at December 31 is detailed as follows:

 
| ** **                                                                               | ** ** | **2007**               | ** ** | **2006**             | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** |
| Employee future benefit asset, included in Other assets                             | ** ** | **68**                 | ** ** | **—**           | ** ** | **68** | ** ** | 52 |   | — |   | 52 |   |
|                                                                                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Employee future benefit liability, included in Other liabilities                         | ** ** | **(4**                 | **)**      | **(106**             | **)**      | **(110** | **)** | (4 | ) | (103 | ) | (107 | ) |
|                                                                                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Employee future benefit liability, included in Accounts payable and  accrued liabilities | ** ** | **(4**                 | **)**      | **—**           | ** ** | **(4** | **)** | (26 | ) | — |   | (26 | ) |
|                                                                                     | ** ** | **60**                 | ** ** | **(106**             | **)**      | **(46** | **)** | 22 |   | (103 | ) | (81 | ) |

 

c)  Thefollowing amounts relate to plans that are not fully funded as at December 31:

 
| ** **                 | ** ** | **2007**               | ** ** | **2006**             | ** ** |
|----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| Fair value of plan assets  | ** ** | **117**                | ** ** | **—**           | ** ** | 287 |   | — |   |
| Accrued benefit obligation | ** ** | **(160**               | **)**      | **(110**             | **)**      | (348 | ) | (112 | ) |
| Funded deficit             | ** ** | **(43**                | **)**      | **(110**             | **)**      | (61 | ) | (112 | ) |

 

d)  Themain actuarial assumptions adopted in measuring the accrued benefit obligationand expenses as at December 31 are as follows:

 
| ** **                                                   | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **Pension plans** | ** ** | **Other plans**  | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| **Accrued benefit obligation as at December 31**        |       |                   |       |                  | ** ** |   |   |   |   |
| Discount rate                                                | ** ** | **5.50**               | **%**      | **5.50**              | **%**      | 5.25 | % | 5.25 | % |
| Rate of compensation increase                                | ** ** | **2.00 to 3.75**  | **%**      | **2.00 to 5.00**      | **%**      | 2.00 to  5.00 | % | 2.25 to  3.50 | % |
| **Benefit costs for years ended December 31**           | ** ** | ** **             | ** ** | ** **            | ** ** |   |   |   |   |
| Discount rate                                                | ** ** | **5.25**               | **%**      | **5.25**              | **%**      | 5.00 | % | 5.00 | % |
| Expected long-term return on assets                          | ** ** | **7.00**               | **%**      | **—**            | ** ** | 7.00 | % | — |   |
| Rate of compensation increase                                | ** ** | **2.00 to 5.00**  | **%**      | **2.25 to 3.50** | **%**      | 2.00 to  4.25 | % | 2.25 to  4.25 | % |
| **Assumed health care cost trend rates at December 31** | ** ** | ** **             | ** ** | ** **            | ** ** |   |   |   |   |
| Rate increase in health care costs                           | ** ** | ** **             | ** ** | **5.60 to 9.50** | **%**      |   |   | 6.25 to  10.00 | % |
| Cost trend rates decline to                                  | ** ** | ** **             | ** ** | **4.30 to 5.00** | **%**      |   |   | 4.30 to  5.00 | % |
| Year the rate should stabilize                               | ** ** | ** **             |       | **2015**              | ** ** |   |   | 2012 |   |

 

e)  Assumedrate increases in health care costs have a significant effect on the amountsreported for the health care plans. A 1% change in assumed health care costtrend rates would have the following effects for 2007:

 
| ** **                                    | ** ** | **Increase of 1%** | ** ** | **Decrease of 1%** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Current service costs and interest cost       |       | 1.0                          |       | (0.4                         | )          |
| Accrued benefit obligation – End of year |       | 4.9                          |       | (4.0                         | )          |

 

f)   Theplan assets allocation and investment target allocation as at December 31 aredetailed as follows:

 
| ** **                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| **Plan assets allocation** |       |     |       |     |       |
| Money market               |       | 3        | %          | 11       | %          |
| Debt securities            |       | 43       | %          | 32       | %          |
| Equity securities          |       | 54       | %          | 57       | %          |
| Total                      |       | 100      | %          | 100      | %          |

 

79

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The plan assets do not include shares or debtsecurities of the Company. Annual benefit annuities, of an approximate value of$3 million, are pledged by insurance contracts established by the Company.

 
| ** **                       | ** ** | **2007**   | ** ** | **2006** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|
| **Investment target allocation** | ** ** | ** ** |       |     |       |
| Money market                     | ** ** | **4**      | **%**      | 11       | %          |
| Debt securities                  | ** ** | **42**     | **%**      | 37       | %          |
| Equity securities                | ** ** | **54**     | **%**      | 52       | %          |
| Total                            | ** ** | **100**    | **%**      | 100      | %          |

 

Target allocation is established so as tomaximize return while considering an acceptable level of risk in order to meetthe plan obligations on a long-term basis.

 

Investment objectives for the plan assets arethe following: optimizing return while considering an acceptable level of risk,maintaining an adequate diversification, controlling the risk according todifferent asset categories, and maintaining a long-term objective of return oninvestments.

 

Investment guidance is established for eachinvestment manager. It includes parameters that must be followed by managersand presents criteria for diversification, non-eligible assets and minimumquality of investments as well as for return objectives. Unless indicatedotherwise, the managers cannot use any derivative product or invest more than10% of their assets in one particular security.

 

g)  ESTIMATEDFUTURE BENEFIT PAYMENTS

 

Future benefit payments for defined benefitpension plans and other post-employment benefits, taking into considerationfuture participation, are estimated as follows:

 
| ** ** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
|------------|------------|------------------------|------------|----------------------|------------|
| 2008       |       | 96                     |       | 5                    |       |
| 2009       |       | 34                     |       | 5                    |       |
| 2010       |       | 34                     |       | 5                    |       |
| 2011       |       | 35                     |       | 5                    |       |
| 2012       |       | 36                     |       | 6                    |       |
| 2013-2017  |       | 197                    |       | 31                   |       |

 

18.   Commitments and contingencies

 

a)  Futureminimum payments under operating leases and other commercial commitments(mainly composed of raw materials, natural gas, steam and electricity) for thenext years are as follows:

 
| ** **                     | ** ** | **Operating leases** | ** ** | **Other commercial   commitments** | ** ** |
|--------------------------------|------------|---------------------------|------------|----------------------------------------------|------------|
| Years ending December 31, |       |                      |       |                                         |       |
| 2008                           |       | 42                        |       | 154                                          |       |
| 2009                           |       | 35                        |       | 76                                           |       |
| 2010                           |       | 30                        |       | 51                                           |       |
| 2011                           |       | 23                        |       | 36                                           |       |
| 2012                           |       | 20                        |       | 31                                           |       |
| Thereafter                     |       | 42                        |       | 49                                           |       |

 

b)  TheCompany has guaranteed the payment of approximately $2 million underoperating leases held by third parties. The Company has also guaranteedresidual values at the expiration of lease contracts of certain equipment foran amount of $1 million. These guarantees are not likely to be calledand, therefore, no liability has been recognized in the consolidated financialstatements.

 

In addition, the Company has guaranteed thedebt of one of its joint ventures. The maximum amount guaranteed isUS$1.5 million (2006 – US$3 million). As at December 31, 2007,the debt of this joint venture, guaranteed by the Company, amounts toUS$0.9 million (2006 – US$2.1 million). This guarantee is not likelyto be called and, as a result, no liability has been recognized in theconsolidated financial statements.

 

c)  Inthe normal course of operations, the Company is party to various legal actionsand contingencies, mostly related to contract disputes, environmental andproduct warranty claims, and labour issues. While the final outcome withrespect to legal actions outstanding or pending as at December 31, 2007cannot be predicted with certainty, it is management’s opinion that the outcomewill not have material adverse impacts on the Company’s consolidated financialposition, results of its operations or its cash flows.

 

80

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d)  TheCompany is currently working with representatives of the Ontario Ministry ofthe Environment (MOE)–Northern Region regarding its potential responsibilityfor an environmental impact identified at its former Thunder Bay facility (the “Mill”).The MOE has requested that the Company look into a management site planrelating to the sediment quality adjacent to the Mill’s lagoon. Severalmeetings have been held during the year with the MOE and the other potentiallyresponsible party (“PRP”), and a study on the sediment quality and potentialremediation options has commenced. Although a loss is probable, it is notpossible at this time to estimate the Company’s obligation because of theuncertainty surrounding the extent of the environmental impact, the portion tobe shared with the PRP, the potential remediation alternatives and theconcurrence of the MOE.

 

19.   Financial instruments

 

Financial risk factors

 

The Company’s activities expose it to avariety of financial risks: market risk (including currency risk, fair valueinterest rate risk, cash flow interest rate risk and price risk), credit riskand liquidity risk. The Company’s overall risk management program focuses on theunpredictability of the financial market and seeks to minimize potentialadverse effects on the Company’s financial performance. The Company usesderivative financial instruments to hedge certain risk exposures.

 

Risk management is carried out by a centraltreasury department under policies approved by the Board of Directors. Thisdepartment identifies, evaluates and hedges financial risks in closecooperation with the business units. The board provides guidance for overallrisk management, covering specific areas, such as foreign exchange risk,interest rate risk, credit risk, use of derivative financial instruments andnon-derivative financial instruments, and investment of excess liquidity.

 

**a)     Market risk**

** **

**(i) Currency risk**

** **

The Company operates internationally and isexposed to foreign exchange risks arising from various currencies as a resultof its export of goods produced in Canada, the United States, France, Germany,Sweden and England. These risks are partially covered by purchases, debt and forwardexchange contracts. Foreign exchange risk arises from future commercialtransactions, recognized assets and liabilities, and net investments in foreignoperations.

 

Management has implemented a policy to manageforeign exchange risk against its functional currency. The Company manages theforeign exchange exposure by entering into various foreign exchange forwardcontracts.

 

The Company’s risk management policy is tohedge up to 50% of anticipated cash flows (mainly export sales and purchases ofraw materials) in each major foreign currency for the subsequent 12 to18 months. In 2007, approximately 27% of sales from our Canadianoperations were made to the United States and 27% of sales from Europeanoperations (excluding Sweden) were made in countries in a currency other thanthe euro. Our operation in Sweden is also exposed to currency risk, mainly theeuro and the British pound (GBP). The total sales of 2007 from thisoperation impacted by euro or GBP were approximately $47 million Canadiandollars.

 

The following table summarizes the Company’scommitments to buy and sell foreign currencies as at December 31,2007 and 2006:

 
| **2007**                                            | ** ** | **Exchange rate** | ** ** | **Maturity**               | ** ** | **Notional amount   (in millions)** | ** ** | **Fair value   (in millions)** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|
| Buy  contracts (1):                                 |       |                   |       |                       |       |                                               |       |                                          |       |
| Foreign exchange forward contracts (US$for CAN$)    |       | 0.9918                 |       | February 15,  2013    |       | US$                                                | 650        |                                          | 4.0        |   |
| Foreign exchange forward contracts (US$for CAN$)    |       | 0.9539                 |       | May 31,  2013         |       | US$                                                | 250        |                                          | 9.1        |   |
| Sell  contracts:                                    |       |                   |       |                       |       |                                               |       |                                          |       |   |
| Foreign exchange forward contracts (US$for CAN$)    |       | 1.0616                 |       | 0 to  12 months  |       | US$                                                | 29.5       |                                          | 2.1        |   |
| Foreign exchange forward contracts (US$for €)  |       | 0.6808                 |       | 0 to  12 months  |       | US$                                                | 14.8       |                                          | —     |   |
| Foreign exchange forward contracts (GBP for SEK)    |       | 13.632                 |       | 0 to  12 months  |       | GBP                                                | 1.8        |                                          | 0.2        |   |
| Foreign exchange forward contracts (€ for SEK) |       | 9.33                   |       | 0 to  12 months  |       | €                                             | 5          |                                          | (0.1       | ) |
| Foreign exchange forward contracts (GBP for €) |       | 2.7335                 |       | 0 to  12 months  |       | GBP                                                | 0.012      |                                          | —     |   |
| Buy options (2):                                    |       | Strike rate            |       |                       |       |                                               |       |                                          |       |
| Currency option instruments (US$for CAN$)           |       | 1.00 to  1.1830   |       | 0 to  12 months  |       | US$                                                | 33.5       |                                          | 3.0        |   |
| Currency option instruments (US$for CAN$)           |       | 1.00                   |       | 13 to  24 months |       | US$                                                | 3.0        |                                          | —     |   |
| Currency option instruments (US$for €)         |       | 0.7179                 |       | 0 to12 months    |       | US$                                                | 2.2        |                                          | (0.1       | ) |
| Sell  options:                                      |       |                   |       |                       |       |                                               |       |                                          |       |   |
| Currency option instruments (US$for CAN$)           |       | 1.08 to  1.10     |       | 0 to  12 months  |       | US$                                                | 15         |                                          | (0.2       | ) |
|                                                     |            |                        |            |                            |            |                                                    |            |                                               |            |  |  |

 

----

(1)         In 2007, the Company entered into foreign exchangeforward contracts and option agreements not designated as hedges. Thesecontracts and agreements, maturing in 2013, have been contracted to fixthe currency rate at a weighted average rate of US$0.9813/CAN$ on a notionalamount of US$900 million. As December 31, 2007, these contracts andagreements are recorded as assets at their fair value of $13 million.In 2007, a gain of $13 million was recorded in the statement of earningsagainst the foreign exchange gain on long-term debt.

 

(2  )    Currency options are contracts whereby the Companyhas the right, but not the obligation, to sell U.S. dollars at the strike rateif the U.S. dollar trades below that rate. In accordance with the contracts,the Company has the obligation to sell U.S. dollars at the strike rate if theU.S. dollar trades above a specific rate.

 

81

----

 

The Company has certain investments inforeign operations, whose net assets are exposed to foreign currencytranslation risk.

 

In 2007, if the Canadian dollar hadstrengthened by $0.01 against the U.S. dollar on average for the year withall other variables held constant, the operating income before depreciation forthe year would have been approximately $4 million lower, based on thenet exposure of the total U.S. sales less U.S. purchases of the Company’sCanadian operations and the operating income of the Company’s U.S.operations but excluding the effect of this change on the denominated workingcapital components. The interest expense would have been approximately$0.7 million lower arising mainly from the Company’s U.S. dollardenominated unsecured senior notes.

 

In 2007, if the Canadian dollar hadstrengthened by $0.01 against the euro with all other variables heldconstant, the operating income before depreciation for the year would not havechanged following the translation of the Company’s European operationsoperating income.

 
| **2006**                                             | ** ** | **Exchange rate** | ** ** | **Maturity**             | ** ** | **Notional amount   (in millions)** | ** ** | **Unrealized   gain (loss)   (in millions)** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Sell  contracts:                                     |       |                   |       |                     |       |                                               |       |                                                             |       |
| Foreign exchange forward contracts (US$for  CAN$)    |       | 1.1496                 |       | 0 to 12 months |       | US$                                                | 44         |                                                             | (0.4       | ) |
| Foreign exchange forward contracts (US$for  €)  |       | 0.7874                 |       | 0 to 12 months |       | US$                                                | 1          |                                                             | —     |   |
| Foreign exchange forward contracts (GBP for  SEK)    |       | 13.5991                |       | 0 to 12 months |       | GBP                                                | 2          |                                                             | 0.1        |   |
| Foreign exchange forward contracts (€ for  SEK) |       | 9.2443                 |       | 0 to 12 months |       | €                                             | 2          |                                                             | 0.1        |   |
| Foreign exchange forward contracts (GBP for  €) |       | 1.4606                 |       | 0 to 12 months |       | GBP                                                | 5          |                                                             | (0.1       | ) |
| Buy options:                                         |       | Strike rate            |       |                     |       |                                               |       |                                                             |       |   |
| Currency option instruments (US$for CAN$)            |       | 1.10 to 1.27      |       | 0 to 12 months |       | US$                                                | 29         |                                                             | (0.3       | ) |
|                                                      |            |                        |            |                          |            |                                                    |            |                                                                  |            |  |  |

 

**(ii) Price risk**

** **

The Company is exposed to commodity pricerisk and has entered into various derivative financial instruments whereby itsets the price for notional quantities of old corrugated containers,electricity and natural gas.

 

The Company uses these commodity contracts tohelp manage its production costs.

 

The fair value of these contracts is asfollows:

 
| ** **                | ** ** | **2007**                 | ** ** |
|---------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **Quantity**             | ** ** | **Maturity** | ** ** | **Fair value** | ** ** |
| Old corrugated containers | ** ** | **83,500 s.t.**     | ** ** | **2008** | ** ** | **2.3** | ** ** |
| Electricity               | ** ** | **79,344 MWh**      | ** ** | **2008** | ** ** | **0.2** | ** ** |
| Natural gas:              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canadian portfolio        | ** ** | **5,115,000 GJ**    | ** ** | **2008 to 2012** | ** ** | **4.6** | ** ** |
| U.S. porfolio             | ** ** | **3,951,700 mmBtu** | ** ** | **2008 to 2011** | ** ** | **2.0** | ** ** |

 
| ** **                | ** ** | **2006**        | ** ** |
|---------------------------|------------|-----------------|------------|
| ** **                | ** ** | **Quantity**    | ** ** | **Maturity** | ** ** | **Unrealized gain (loss)** | ** ** |
| Old corrugated containers |       | 307,500 s.t.    |       | 2007 to 2008 |   | 0.8 |   |
| Electricity               |       | 16,529 MWh      |       | 2007 |   | 0.5 |   |
| Natural gas:              |       |            |       |   |   |   |   |
| Canadian portfolio        |       | 1,095,000 GJ    |       | 2007 to 2010 |   | 1.8 |   |
| U.S. porfolio             |       | 5,153,900 mmBtu |       | 2007 to 2011 |   | (2.4 | ) |

 

**(iii) Cash flow and fair value interest rate risk**

** **

As the Company has no significantinterest-bearing assets, its earnings and operating cash flows aresubstantially independent of change in market interest rates.

 

The Company’s interest rate risk arises fromlong-term borrowings. Borrowings issued at variable rates expose the Company tocash flow interest rate risk. Borrowings issued at fixed rate expose theCompany to fair value interest rate risk.

 

When appropriate, the Company analyzes itsinterest rate risk exposure. Various scenarios are simulated taking intoconsideration refinancing, renewal of existing positions, alternative financingand hedging. Based on these scenarios, the Company calculates the impact onearnings of a defined interest rate shift. For each simulation, the sameinterest rate shift is used for all currencies. The scenarios are run only forliabilities that represent the major interest-bearing positions. Based on thelong-term debt as at December 31, 2007, the impact on interest expense ofa 1% change in rate would be approximately $6.5 million (impact on netearnings is approximately $4.6 million).

 

As at December 31, 2007, approximately42% (2006 – 34%) of the Company’s long-term debt was at variable rates.

 

82

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In addition, the Company holds certaininterest rate swap agreements not designated as hedges. These agreements,maturing from 2008 to 2012, have been contracted to fix interest at aweighted average rate of 8.23% on a notional amount of US$5.2 million. Asat December 31, 2007, these agreements are recorded as liabilities attheir fair value of $0.4 million (2006 – $0.4 million).

 

The Company enters into fixed-to-floatinginterest rate swaps to hedge the fair value interest rate risk arising from theunsecured senior notes. In April 2004, the Company entered into interestrate swap agreements maturing in 2013. These agreements are designated ashedges of the change in fair value of a portion of the Company’s long-termdebt. Accordingly, the interest rate changed from a fixed rate of 6.75% to anaverage floating rate paid in 2007 of 6.89% (2006 – 7.50%) on a notionalamount of US$50 million. As at December 31, 2007, the fair value ofthese instruments represented an unrealized loss of $0.3 million (2006 –unrealized loss of $2.4 million).

 

**b)     Credit risk**

** **

Credit risk arises from cash and cashequivalents, derivative financial instruments and deposits with banks andfinancial institutions. The Company reduces this risk by dealing withcreditworthy financial institutions.

 

The Company is exposed to credit risk on theaccounts receivable from its customers. In order to reduce this risk, theCompany’s credit policies include the analysis of the financial position of itscustomers and the regular review of their credit limits. In addition, theCompany believes there is no particular concentration of credit risks due tothe geographic diversity of customers and the procedures for the management ofcommercial risks. Derivative financial instruments include an element of creditrisk should the counterparty be unable to meet its obligations.

 

As at December 31, 2007, approximately8% of trade receivable is outstanding for more than 90 days from the dateof invoice, while approximately 48% is current (less than 30 days).

 

**c)     Liquidity risk**

** **

Liquidity risk is the risk that the Companywill not be able to meet its obligations as they fall due. The following arethe contractual maturities of financial liabilities as at December 31,2007:

 
| ** **                               | ** ** | **Carrying   amount** | ** ** | **Contractual   cash flows** | ** ** | **Less than   one year** | ** ** | **Between one   and two years** | ** ** | **Between two   and five years** | ** ** | **More than   five years** | ** ** |
|------------------------------------------|------------|-----------------------|------------|------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **$**                 | ** ** | **$**                        | ** ** | **$**                    | ** ** | **$**                           | ** ** | **$**                            | ** ** | **$**                      | ** ** |
| Non-derivative financial  liabilities:   |       |                  |       |                         |       |                     |       |                            |       |                             |       |                       |       |
| Bank loans and advances                  |       | 47                    |       | 47                           |       | 47                       |       | —                          |       | —                           |       | —                     |       |
| Accounts payable and accrued liabilities |       | 572                   |       | 572                          |       | 572                      |       | —                          |       | —                           |       | —                     |       |
| Revolving credit facility                |       | 553                   |       | 553                          |       | —                   |       | —                          |       | 553                              |       | —                     |       |
| Term credit facility                     |       | 100                   |       | 100                          |       | —                   |       | —                          |       | 100                              |       | —                     |       |
| Unsecured senior notes                   |       | 914                   |       | 914                          |       | —                   |       | —                          |       | —                           |       | 914                        |       |
| Capital lease obligations                |       | 2                     |       | 2                            |       | 2                        |       | —                          |       | —                           |       | —                     |       |
| Other debts                              |       | 17                    |       | 11                           |       | 2                        |       | 3                               |       | 2                                |       | 4                          |       |
| Legal settlement                         |       | 11                    |       | 12                           |       | 3                        |       | 3                               |       | 6                                |       | —                     |       |
|                                     |       | 2,216                 |       | 2,211                        |       | 626                      |       | 6                               |       | 661                              |       | 918                        |       |

 

As at December 31, 2007, the Company hadunused credit facilities of $293 million, net of outstanding letters ofcredit of $34 million (December 31, 2006-$295 million). The2007 unused amount includes the unsecured revolving credit facility of$100 million maturing in June 2008.

 

83

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**20.  Accumulated othercomprehensive income (loss)**

 

a)

 
| ** **                                                                                                                            | ** ** | **2007** | ** ** | **2006** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Foreign currency translation of self-sustaining foreign subsidiaries,  net of hedging activities                                      | ** ** | **(49**  | **)**      | (9       | )          |       |       |
| Unrealized gains arising from foreign exchange forward contracts  designated as cash flow hedges, net of related income taxes         | ** ** | **4**    |       | —   |       |       |       |
| Unrealized gains arising from commodity derivative financial  instruments designated as cash flow hedges, net of related income taxes | ** ** | **2**    |       | —   |       |       |       |
|                                                                                                                                  | ** ** | **(43**  | **)**      | (9       | )          |       |       |

 

b)  Changein foreign currency translation of self-sustaining foreign subsidiaries is asfollows:

** **
| ** **                                                                                                                                     | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Balance – Beginning of year**                                                                                                           | ** ** | **(9**     | **)**      | (36      | )          | 11       |       |
| Effect of changes in exchange rates during the year:                                                                                           |       |       |       |     |       |     |       |
| On net investment in self-sustaining foreign subsidiaries                                                                                      | ** ** | **(136**   | **)**      | 23       |       | (63      | )          |
| On certain long-term debt denominated in foreign currencies  designated as a hedge of net investments in self-sustaining foreign  subsidiaries | ** ** | **116**    |       | 1        |       | 21       |       |
| Future income taxes on designated long-term debt                                                                                               | ** ** | **(20**    | **)**      | —   |       | (4       | )          |
| Others                                                                                                                                         | ** ** | **—** |       | 3        |       | (1       | )          |
| **Balance – End of year**                                                                                                                 | ** ** | **(49**    | **)**      | (9       | )          | (36      | )          |

 

**21.  Related party transactions**

 

The Company entered into the followingtransactions with related parties:

 
| ** **                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Joint ventures (1)                                                   |       |     |       |     |       |     |       |
| Sales                                                                | ** ** | **21**   |       | 33       |       | 33       |       |
| Revenue from services                                                | ** ** | **4**    |       | 12       |       | 13       |       |
| Purchases                                                            | ** ** | **2**    |       | 29       |       | 23       |       |
| Significantly influenced companies                                   |       |     |       |     |       |     |       |
| Sales                                                                | ** ** | **18**   |       | 17       |       | 16       |       |
| Purchases                                                            | ** ** | **7**    |       | 2        |       | 7        |       |
| Entity controlled by a related director of the Company (2) Purchases |       | **5**    |       | 7        |       | 7        |       |

 

----

| (1) | Represent the portion of transactions or  balances not eliminated upon proportionate consolidation of the joint  ventures. |
|-----|----------------------------------------------------------------------------------------------------------------------------|
| (2) | Since November 2007, this entity is no  longer controlled by a related director of the Company.                       |

 

84

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These transactions occurred in the normalcourse of operations and are measured at the exchange amount, which is theamount of consideration established and agreed to by the related parties.

 

The balance sheets as at December 31 includedthe following balances with related parties:

 
| ** **                                              | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|
| Joint ventures (1)                                      |       |       |       |     |       |
| Accounts receivable                                     | ** ** | **3**      |       | 2        |       |
| Accounts payable                                        | ** ** | **2**      |       | 2        |       |
| Significantly influenced companies                      |       |       |       |     |       |
| Accounts receivable                                     | ** ** | **3**      |       | 4        |       |
| Entity controlled by a related director of  the Company |       |       |       |     |       |
| Accounts payable                                        | ** ** | **—** |       | 1        |       |

 

----

| (1) | Represent the portion of transactions or  balances not eliminated upon proportionate consolidation of the joint ventures. |
|-----|---------------------------------------------------------------------------------------------------------------------------|

 

**22.  Interests in joint ventures**

** **

The major components of the interests injoint ventures in the consolidated financial statements are as follows:

 
|                                                   | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Consolidated balance sheets                            | ** ** | ** ** |       |     |       |     |       |
| Current assets                                         | ** ** | **25**     |       | 33       |       |     |       |
| Long-term assets                                       | ** ** | **27**     |       | 33       |       |     |       |
| Current liabilities                                    | ** ** | **10**     |       | 9        |       |     |       |
| Long-term debt, net                                    | ** ** | **1**      |       | 2        |       |     |       |
| Cash and cash equivalents at end of year               | ** ** | **3**      |       | 5        |       |     |       |
| Total assets                                           | ** ** | **52**     |       | 66       |       |     |       |
| Total debt (1)                                         | ** ** | **4**      |       | 4        |       |     |       |
| Consolidated statements of earnings                    |       |       |       |     |       |     |       |
| Sales                                                  | ** ** | **86**     |       | 757      |       | 758      |       |
| Depreciation and amortization                          | ** ** | **3**      |       | 33       |       | 35       |       |
| Operating income                                       | ** ** | **11**     |       | 89       |       | 57       |       |
| Financial expenses                                     | ** ** | **—** |       | 14       |       | 13       |       |
| Net earnings                                           | ** ** | **9**      |       | 25       |       | 14       |       |
| Consolidated statements of cash flows                  |       |       |       |     |       |     |       |
| Operating activities                                   | ** ** | **4**      |       | 60       |       | 44       |       |
| Investing activities                                   | ** ** | **(6**     | **)**      | (26      | )          | (68      | )          |
| Financing activities                                   | ** ** | **—** |       | (30      | )          | 35       |       |
| Additional information                                 |       |       |       |     |       |     |       |
| Dividends received by the Company from  joint ventures | ** ** | **5**      |       | 22       |       | 33       |       |

 

----

| (1) | Includes bank loans and advances, current  portion of long-term debt, and long-term debt. |
|-----|-------------------------------------------------------------------------------------------|

 

85

----

 

**23.  Subsequent events**

 

a)  On June 20,2007, Reno De Medici S.p.A. (“RdM”), a public company based in Milan, Italy,and the Company announced the signing of a Letter of Intent for the negotiationof the terms and conditions of a possible combination of RdM and the Europeanrecycled cartonboard business of Cascades S.A. Concurrently with the proposedmerger, Cascades S.A. and a group of current shareholders of RdM were expectedto enter into a three-year shareholders agreement covering matters relating tocorporate governance (where Cascades S.A., on the one hand, and a group ofcurrent shareholders of RdM, on the other hand, would be equally represented onthe board of directors of RdM). The agreement also provides for an 18-monthlock-up and thereafter reciprocal first refusal and tag-along rights.

 

On September 14, 2007, the Companyannounced the signing of the definitive combination agreement and shareholdersagreement. The combination was subject to certain conditions, includingapproval of the appropriate regulatory authorities as well as approval by theshareholders of RdM at a special meeting. On October 29, 2007, thecombination was approved by the shareholders of RdM. The transaction waseffective March 1, 2008, and all conditions pertaining to the merger havebeen met.

 

The transaction resulted in the Companycontributing its manufacturing assets of recycled boxboard located inBlendecques, France, and Arnsberg, Germany, and its sheeting center inWednesbury, U.K., in exchange for 115.6 million or 30.6% of theoutstanding shares of RdM. The Company’s investment in RdM will beproportionally consolidated in 2008 since the Company and a group ofcurrent shareholders have joint control of RdM.

 

b)  Asdescribed in note 4, the Company decided to dispose of its Greenfield SAS pulpmill located in France. The transaction was completed on January 7,2008 for an amount of $40 million (€28 million). Thistransaction resulted in a gain of $23 million before related income taxesof $3 million.

 

**24. Summary of differences between Canadian and United States generallyaccepted accounting principles**

 

The consolidated financial statements havebeen prepared in accordance with Canadian GAAP which differs in certainrespects from United States generally accepted accounting principles (“U.S.GAAP”). Such differences, as they relate to the Company, are summarized below.

 

**Accounting policies under U.S. GAAP**

 

a)  EffectiveJanuary 1, 2007, the Company has adopted FASB Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109”. This standard prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementmodel for tax position taken or expected to be taken in a tax return. FIN48 defines the recognition threshold as more likely than not, meaninggreater than 50 percent, to be sustained upon audit by the taxingauthorities based solely on the technical merits of the position. If therecognition threshold is met, the tax benefit is measured and recognized as thelargest amount of benefit that is in management’s judgment more likely than notto be realized. If the recognition threshold is not met, no benefit can berecognized in the financial statements. The provisions of FIN 48 alsoprovide guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. In accordance withthe transitional provisions of the standard, prior periods are not restated forthe adoption of this new accounting standard. The application of this standardhad no impact on the Company’s financial position or results of operations.

 

b)  EffectiveDecember 31, 2006, the Company adopted SFAS 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans – an amendment ofFASB Statements No. 87, 88, 106, and 132(R)” . This standard requiresan employer to (i) recognize the overfunded or underfunded status of adefined benefit plan as an asset or liability with changes in that fundedstatus recognized through comprehensive income; and (ii) measure thefunded status of a plan as of the year-end date. The impact of adopting SFAS158 effective December 31, 2006 is summarized in the tablebelow. In accordance with the transition provision of the standard, priorperiod financial statements were not restated.

 
| ** **                                    | ** ** | **Before   applying  SFAS 158** | ** ** | **Incremental   effect of applying SFAS 158** | ** ** | **After   applying  SFAS 158** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|
| Other assets, intangible assets and  goodwill |       | 632                             |       | (13                                           | )          | 619                            |       |
| Other liabilities                             |       | 165                             |       | 21                                            |       | 186                            |       |
| Future income taxes                           |       | 295                             |       | (12                                           | )          | 283                            |       |
| Accumulated other comprehensive income        |       | (18                             | )          | (22                                           | )          | (40                            | )          |

 

86

----

 

**Restatement of comparative U.S. GAAP balances**

 

c)  In2007, the Company concluded that certain derivative financial instrumentsdesignated as hedges as defined in SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities” in 2006 and 2005, were not appropriately reflectedin the 2006 and 2005 U.S. GAAP reconciliation note to the Company’sconsolidated financial statements.  Consequently, the Company has restated its2006 and 2005 U.S. GAAP reconciliation as follows:

 
| ** **                                    | ** ** | **2006**                            | ** ** | **2005**                    | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **U.S. GAAP   previously reported** | ** ** | **U.S. GAAP   as restated** | ** ** | **U.S. GAAP   previously reported** | ** ** | **U.S. GAAP   as restated** | ** ** |
| Other assets, intangible assets and  goodwill |       | 617                                 |       | 619                         |       | 376 |   | 385 |   |
| Other liabilities                             |       | 466                                 |       | 469                         |       | 297 |   | 300 |   |
| Accumulated other comprehensive income        |       | (40                                 | )          | (40                         | )          | (57 | ) | (51 | ) |
| Shareholders’ equity                     |       | 1,166                               |       | 1,166                       |       | 921 |   | 927 |   |
| Comprehensive income (loss)                   |       | 35                                  |       | 29                          |       | (161 | ) | (156 | ) |

 

The restatement also resulted in anadjustment of $1 million to accumulated other comprehensive income as at January 1,2005. The restatement had no impact on net earnings (loss), net earnings (loss)per share and cash flows.

 

**Reconciliation of net earnings (loss), shareholders’ equity and balancesheet**

 

d)  Thefollowing summary sets out the material adjustments to the Company’s reportednet earnings (loss), shareholders’ equity and balance sheet which would be madein order to reconcile to U.S. GAAP. It also sets out a statement of changes inshareholders’ equity under U.S. GAAP.

 

**Reconciliationof net earnings (loss)**

 
|                                                                                   |       | **Note**   | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| Net earnings (loss) under Canadian GAAP                                                | ** ** | ** ** |       | **95**     |       | 3        |       | (97      | )          |
| U.S. GAAP adjustments:                                                                 |       |       |       |       |       |     |       |     |       |
| Start-up costs                                                                         |       | e)         | ** ** | **—** |       | 1        |       | —   |       |
| Gain realized on formation of Norampac                                                 |       | f)         | ** ** | **(4**     | **)**      | (5       | )          | (4       | )          |
| Change in fair value arising from foreign exchange forward contracts                   |       | g)         | ** ** | **—** |       | (2       | )          | (4       | )          |
| Change in fair value arising from commodity derivative financial  instruments          |       | g)         | ** ** | **—** |       | (3       | )          | —   |       |
| Inventory costs                                                                        |       | h)         | ** ** | **6**      |       | —   |       | —   |       |
| Employee future benefits                                                               |       | i)         | ** ** | **(2**     | **)**      | (1       | )          | —   |       |
| Excess of redemption price of Class B preferred shares on their  paid-up capital  |       | j)         | ** ** | **(1**     | **)**      | (1       | )          | —   |       |
| Tax effect on above adjustments                                                        | ** ** | ** ** |       | **(4**     | **)**      | 4        |       | 3        |       |
| Net earnings (loss) under U.S. GAAP                                                    | ** ** | ** ** |       | **90**     |       | (4       | )          | (102     | )          |
| Net earnings (loss) under U.S. GAAP from continuing operations                         | ** ** | ** ** |       | **109**    |       | 12       |       | (25      | )          |
| Net loss under U.S. GAAP from discontinued operations                                  | ** ** | ** ** |       | **(19**    | **)**      | (16      | )          | (77      | )          |
|                                                                                   | ** ** | ** ** |       | **90**     |       | (4       | )          | (102     | )          |
| Basic net earnings (loss) under U.S. GAAP from continuing operations  per common share | ** ** | ** ** |       | **1.10**   |       | 0.15     |       | (0.31    | )          |
| Basic and diluted net earnings (loss) under U.S. GAAP per common  share                | ** ** | ** ** |       | **0.91**   |       | (0.05    | )          | (1.26    | )          |

 

87

----

** **

**Statement ofchanges in shareholders’ equity under U.S. GAAP**

 
| ** **                                                                                                          | ** ** | **2007**             | ** ** | **2006**     | ** ** | **2005**             | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------|------------|----------------------|------------|
| ** **                                                                                                          | ** ** | **Number of shares** | ** ** | **Amount $** | ** ** | **Number of shares** | ** ** | **Amount $  (restated – (c))** | ** ** | **Number of shares** | ** ** | **Amount $  (restated —(c))** | ** ** |
| Common stock                                                                                                        |       |                 |       |         |       |                 |       |   |   |   |   |   |   |
| Balance – Beginning of  year                                                                                   | ** ** | **99,533,654**       | ** ** | **503**      |       | 80,818,540           |       | 259 |   | 81,361,580 |   | 261 |   |
| Shares issued                                                                                                       | ** ** | **—**           | ** ** | **—**   |       | 18,868,585           |       | 250 |   | — |   | — |   |
| Shares issued on exercise  of stock options                                                                         | ** ** | **103,397**          | ** ** | **1**        |       | 131,229              |       | 2 |   | 12,560 |   | — |   |
| Redemption of common  shares                                                                                        | ** ** | **(492,700**         | **)**      | **(2**       | **)**      | (284,700             | )          | (1 | ) | (555,600 | ) | (2 | ) |
| Share issue costs, net  of related income taxes                                                                     | ** ** | **—**           | ** ** | **—**   |       | —               |       | (7 | ) | — |   | — |   |
| Balance – End of year                                                                                          | ** ** | **99,144,351**       | ** ** | **502**      |       | 99,533,654           |       | 503 |   | 80,818,540 |   | 259 |   |
| Adjustment relating to  stock options                                                                               |       |                 |       |         |       |                 |       |   |   |   |   |   |   |
| Balance – Beginning of  year                                                                                   | ** ** | ** **           |       | **10**       |       |                 |       | 8 |   |   |   | 7 |   |
| Adjustment for the year                                                                                             | ** ** | ** **           |       | **1**        |       |                 |       | 2 |   |   |   | 1 |   |
| Balance – End of year                                                                                          | ** ** | ** **           |       | **11**       |       |                 |       | 10 |   |   |   | 8 |   |
| Retained earnings                                                                                                   |       |                 |       |         |       |                 |       |   |   |   |   |   |   |
| Balance – Beginning of  year                                                                                   | ** ** | ** **           |       | **691**      |       |                 |       | 711 |   |   |   | 830 |   |
| Net earnings (loss) for  the year                                                                                   | ** ** | ** **           |       | **90**       |       |                 |       | (4 | ) |   |   | (102 | ) |
| Dividend on common  shares                                                                                          | ** ** | ** **           |       | **(16**      | **)**      |                 |       | (13 | ) |   |   | (13 | ) |
| Excess of common share  redemption price over its paid-up capital                                                   | ** ** | ** **           |       | **(3**       | **)**      |                 |       | (3 | ) |   |   | (4 | ) |
| Balance – End of year                                                                                          | ** ** | ** **           |       | **762**      |       |                 |       | 691 |   |   |   | 711 |   |
| Accumulated other  comprehensive income                                                                             |       |                 |       |         |       |                 |       |   |   |   |   |   |   |
| Balance – Beginning of  year                                                                                   | ** ** | ** **           |       | **(40**      | **)**      |                 |       | (51 | ) |   |   | 2 |   |
| Restatement (see (c))                                                                                               | ** ** | ** **           |       | **—**   |       |                 |       | — |   |   |   | 1 |   |
| Restated balance –  Beginning of year                                                                          | ** ** | ** **           |       | **(40**      | **)**      |                 |       | (51 | ) |   |   | 3 |   |
| Annual changes – net of  tax                                                                                   |       |                 |       |         |       |                 |       |   |   |   |   |   |   |
| Foreign currency  translation                                                                                       | ** ** | ** **           |       | **(41**      | **)**      |                 |       | 27 |   |   |   | (48 | ) |
| Change in fair value of  foreign exchange forward contracts designated as cash flow hedges                          | ** ** | ** **           |       | **4**        |       |                 |       | — |   |   |   | (4 | ) |
| Change in fair value of  commodity derivative financial instruments designated as cash flow hedges                  | ** ** | ** **           |       | **2**        |       |                 |       | (7 | ) |   |   | 6 |   |
| Minimum pension liability                                                                                           | ** ** | ** **           |       | **—**   |       |                 |       | 13 |   |   |   | (8 | ) |
| Unrecognized actuarial  gains and losses and past service costs on defined benefit pension and other  benefit plans | ** ** | ** **           |       | **(5**       | **)**      |                 |       | (22 | ) |   |   | — |   |
| Rounding                                                                                                            | ** ** | ** **           |       | **1**        |       |                 |       | — |   |   |   | — |   |
| Balance – End of year                                                                                          | ** ** | ** **           |       | **(79**      | **)**      |                 |       | (40 | ) |   |   | (51 | ) |
| Rounding                                                                                                            | ** ** | ** **           |       | **(2**       | **)**      |                 |       | 2 |   |   |   | — |   |
| Shareholders’ equity –  End of year                                                                       | ** ** | ** **           |       | **1,194**    |       |                 |       | 1,166 |   |   |   | 927 |   |

 

88

----

 

**Reconciliationof shareholders’ equity**

 
| ** **                                                                                                         | ** ** | **Note**   | ** ** | **2007**   | ** ** | **2006**                  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------|------------|
|                                                                                                               |       |       |       |       |       | **(restated — (c))** |       |
| Shareholders’ equity under Canadian GAAP                                                                      | ** ** | ** ** |       | **1,199**  |       | 1,157                     |       |
| U.S. GAAP adjustments:                                                                                             |       |       |       |       |       |                      |       |
| Start-up costs                                                                                                     |       | e          | )          | **(6**     | **)**      | (6                        | )          |
| Gain realized on formation of Norampac                                                                             |       | f          | )          | **44**     |       | 48                        |       |
| Unrealized gains arising from foreign exchange forward contracts                                                   |       | g          | )          | **—** |       | —                    |       |
| Unrealized gains arising from commodity derivative financial  instruments                                          |       | g          | )          | **(1)**    |       | 1                         |       |
| Inventory costs                                                                                                    |       | h          | )          | **6**      |       | —                    |       |
| Employee future benefits                                                                                           |       | i          | )          | **(13**    | **)**      | (11                       | )          |
| Unrecognized actuarial gains and losses and past service costs on  defined benefit pension and other benefit plans |       | i          | )          | **(55**    | **)**      | (48                       | )          |
| Tax effect on above adjustments                                                                                    | ** ** | ** ** |       | **13**     |       | 17                        |       |
| Excess of redemption price of Class B preferred shares on their  paid-up capital                              |       | j          | )          | **7**      |       | 8                         |       |
| Shareholders’ equity under U.S. GAAP                                                                          | ** ** | ** ** |       | **1,194**  |       | 1,166                     |       |

** **

**Reconciliationof balance sheet**

 
| ** **

** **                       | ** ** | ** **            |   | **2007**          | ** ** | **2006**      | ** ** |
|----------------------------------------------|------------|-----------------------|--------|-------------------|------------|---------------|------------|
|                                         |       | **Note**              |   | **Canadian GAAP** | ** ** | **U.S. GAAP** | ** ** | **Canadian GAAP** |   | **U.S. GAAP  (restated -(c))** |   |
| Current assets                               |       | g) h)                 |   | **1,204**         | ** ** | **1,203**     |       | 1,232 |   | 1,232 |   |
| Property, plant and equipment                |       | f) h) and j)          |   | **1,886**         | ** ** | **1,925**     |       | 2,063 |   | 2,098 |   |
| Intangible assets, other assets and goodwill |       | b) e) f) g) i) and n) |   | **679**           | ** ** | **679**       |       | 616 |   | 619 |   |
| Long-term debt                               |       | g)                    |   | **1,570**         | ** ** | **1,582**     |       | 1,657 |   | 1,656 |   |
| Other liabilities                            |       | b) and e) to j)       |   | **377**           | ** ** | **408**       |       | 439 |   | 469 |   |
| Shareholders’ equity                    |       | b) and e) to j)       |   | **1,199**         | ** ** | **1,194**     |       | 1,157 |   | 1,166 |   |

 

The amounts shown in the above table includejoint ventures accounted for by the proportionate consolidation method, asindicated under (t), in accordance with both Canadian and U.S. GAAP.

 

e)  UnderCanadian GAAP, start-up costs are deferred and amortized over a period not exceedingfive years. Under U.S. GAAP, start-up costs are accounted for under Statementof Position (“SOP”) No. 98-5, “Reporting on the Costs of Start-UpActivities”, and are included in the statement of earnings in the period theyare incurred.

 

f)   On December 30,1997, the Company and Domtar Inc. merged their respective containerboard andcorrugated packaging operations to form Norampac Inc., a 50-50 jointventure. Under Canadian GAAP, a portion of the gain realized on the transactionof an original amount of approximately $58 million, net of related taxes,was recorded against property, plant and equipment and goodwill. Under U.S.GAAP, this gain would have been recognized in earnings on December 30,1997. Therefore, an adjustment is required to adjust amortization expensesrecorded under Canadian GAAP. As disclosed in note 5(b), the Company acquiredthe remaining outstanding common shares of Norampac on December 29, 2006.

 

In addition, under U.S. GAAP, additionalliabilities have been included in the allocation of the purchase price at thedate of the transaction with respect to employee future benefits with a correspondingadjustment to goodwill.

 

g)  Asdisclosed under note 2, the Company adopted sections 1530, 3251, 3855 and3865 (referred to as the “Sections”) of the CICA Handbook with respect tomeasurement and recognition of financial instruments, hedges, equity andcomprehensive income. These Sections essentially harmonized Canadian GAAP andU.S. GAAP. Upon adoption of these Sections under Canadian GAAP, deferred financingcosts amounting to $12 million were added to the carrying value of therelated long-term debt. Under U.S. GAAP, deferred financing costs areclassified in other assets. With the exception of the latter, the adjustmentresulting from the adoption of these Sections effective January 1,2007 under Canadian GAAP had no impact on U.S. GAAP. Under Canadian GAAP,prior to January 1, 2007, gains and losses arising from foreign exchangeforward contracts and options and commodity swap contracts used to hedgeanticipated sales, purchases or interest were charged to earnings as anadjustment to sales, cost of sales or interest expense in the same period asthe respective hedged item affects earnings.

 

Under U.S. GAAP, derivative financialinstruments concluded before January 1, 2004 are not designated ashedges as defined in SFAS 133, “Accounting for Derivative Instruments and HedgingActivities”; therefore these instruments are marked to market on the balancesheet with fluctuations recorded in earnings.

 

89

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Under U.S. GAAP, derivative financialinstruments designated as cash flow hedges as defined in SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities” are marked to market on thebalance sheet with a corresponding adjustment to other comprehensive income.Amounts recorded in accumulated other comprehensive income are reclassified toearnings as adjustments to sales, cost of sales or interest expense in the sameperiod as the respective hedged item affects earnings.

 

h)  UnderU.S. GAAP, inventory costs represent the sum of the applicable expenditures andcharges directly or indirectly incurred in bringing a product to its existingcondition. Accordingly, unlike Canadian GAAP, inventory costs should include,among other things, an allocation of amortization and depreciation expenserecorded on production equipment. As a result, an amount of $4 million(net of income taxes of $2 million) was recognized in earnings under U.S.GAAP to reflect the cumulative adjustments required in order to account for theallocation of such cost as a component of inventory costs.

 

i)   UnderU.S. GAAP in accordance with SFAS 158, the Company recognizes the overfunded orunderfunded status of its defined benefits plans as an asset or liability withchanges in that funded status recognized through comprehensive income. Prior tothe adoption of SFAS 158 effective December 31, 2006 asdescribed in note 24(b), a minimum pension liability adjustment was recordedfor plans whose accumulated benefit obligation exceeded the fair value of planassets. The excess of its liability over the intangible assets, which can alsobe recorded for the plan, was recorded in comprehensive income. Theseadjustments are not required under Canadian GAAP. Other than what is disclosedabove, since the adoption of CICA 3461, “Employee Future Benefits”, on January 1,2000, the treatment of pension costs is not materially different from U.S.GAAP. The remaining adjustments result mainly from actuarial gains and losseswhich arose prior to January 1, 2000.

 

j)   In2003, the Company redeemed all of the outstanding Class B preferred sharesof a subsidiary for a consideration of $16 million. Under Canadian GAAP,the excess of the redemption price of $10 million over the recordedcapital was included in retained earnings. Under U.S. GAAP, as these preferredshares represent a non-controlling interest, the excess of $10 millionwould have been recorded as an increase of $15 million in property, plantand equipment and an increase of $5 million in future income taxliabilities. The adjustment of $15 million in property, plant andequipment is amortized on a straight-line basis over a period of 20 years.In addition, under U.S. GAAP, the premium paid on redemption would beclassified under investing activities rather than financing activities.

 

k)  UnderU.S. GAAP, the amounts for each category of cash flows from discontinued operationspresented in note 4 would be presented directly on the statement of cashflows.

 

l)   UnderU.S. GAAP, financing charges incurred in 2006 and 2005 amounting to$3 million and $2 million respectively would be classified underoperating activities rather than financing activities.

 

m) UnderCanadian GAAP, costs related to share issuance are presented in retainedearnings, net of related income taxes. Under U.S. GAAP, share issue costs (2007- nil; 2006 - $7 million; 2005 - nil) are recorded as a reduction ofcapital stock.

 

n)  UnderCanadian GAAP, prior to January 1, 2007 (refer to note 2), theCompany’s deferred financing costs were amortized on a straight-line basis overthe anticipated period of repayment of the underlying debt. Under U.S. GAAP,such costs are amortized using the interest method. Amortization under bothmethods is not materially different for each of the periods presented.

 

o)  UnderCanadian GAAP, the Company accounts for its deferred share unit plan using theintrinsic value model. Under U.S. GAAP, the deferred share unit plan isaccounted for at fair value using a Black-Scholes pricing model. Both methodsdo no result in materially different results for each of the periods presented.

 

p)  UnderU.S. GAAP, income tax expense would be reduced by $13 million in2007 (2006 - $9 million; 2005 - $10 million) for tax creditsrelating to research and development expenses, which are recognized as areduction of cost of sales under Canadian GAAP.

 

q)  Certainprior years’ figures have been reclassified to conform to the presentationadopted in 2007, mainly the present certain U.S. GAAP reconciling items on apre-tax basis and to consider the impact of reclassifications described in note4. The reclassification performed had no impact on net earnings (loss), balancesheet items, shareholders’ equity and cash flows under U.S. GAAP.

 

r)   Comprehensiveincome (loss)

 
| ** **                                                                                                             | ** ** | **2007**   | ** ** | **2006**             | ** ** | **2005**             | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|
|                                                                                                                   |       |       |       | **(restated - (c))** | ** ** | **(restated - (c))** |       |
| Net earnings (loss) under U.S. GAAP                                                                                    | ** ** | **90**     |       | (4                   | )          | (102                 | )          |
| Other comprehensive income                                                                                             |       |       |       |                 |       |                 |       |
| Change in foreign currency translation of self-sustaining foreign  subsidiaries                                        | ** ** | **(41**    | **)**      | 27                   |       | (48                  | )          |
| Minimum pension liability adjustment (1)                                                                               | ** ** | **—** |       | 13                   |       | (8                   | )          |
| Change in fair value of foreign exchange forward contracts designated  as cash flow hedges (2)                         | ** ** | **4**      |       | —               |       | (4                   | )          |
| Change in fair value of commodity derivative financial instruments  designated as cash flow hedges (3)                 | ** ** | **2**      |       | (7                   | )          | 6                    |       |
| Unrecognized actuarial gains and losses and past service costs on  defined benefit pension and other benefit plans (4) | ** ** | **(5**     | **)**      | —               |       | —               |       |
| Comprehensive income (loss) under U.S. GAAP                                                                            | ** ** | **50**     |       | 29                   |       | (156                 | )          |

 

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| (1) |   | The minimum pension liability adjustments  are presented net of related income taxes of $7 million and  $4 million for the years ended December 31, 2006 and  2005 respectively. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The change in fair value of foreign  exchange forward contracts is presented net of related income taxes of  $2 million (2006 - nil; 2005 - $2 million).                                        |
| (3) |   | The change in fair value of commodity  derivative financial instruments is presented net of related income taxes of  $1 million (2006 - $3 million; 2005 - $3 million).                    |
| (4) |   | The unrecognized actuarial gains and losses  and past service costs on defined benefit pension and other benefit plans  adjustment is presented net of related income taxes of $2 million.           |

 

90

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s)  Accumulated other comprehensive income (loss)

 
| ** **                                                                                                                                        | ** ** | **2007**   | ** ** | **2006**                  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                                                                                                                                        | ** ** | ** ** | ** ** | **(restated - (c))** | ** ** |
| Cumulative foreign currency translation  adjustments                                                                                              | ** ** | **(49**    | **)**      | (10                       | )          |
| Cumulative unrealized gains arising from  foreign exchange forward contracts designated as cash flow hedges, net of  related income taxes         | ** ** | **4**      |       | —                    |       |
| Cumulative unrealized gains arising from  commodity derivative financial instruments designated as cash flow hedges,  net of related income taxes | ** ** | **2**      |       | 1                         |       |
| Unrecognized actuarial gains and losses and  past service costs on defined benefit pension and other benefit plans, net of  related income taxes  | ** ** | **(36**    | **)**      | (31                       | )          |
| ** **                                                                                                                                        |       | **(79**    | **)**      | (40                       | )          |

 

t)   UnderCanadian GAAP, investments in joint ventures are accounted for using the proportionateconsolidation method. Under U.S. GAAP, they are accounted for using the equitymethod. The different accounting treatments affect only the presentation andclassification of financial statement items and not net earnings orshareholders’ equity. Rules prescribed by the U.S. Securities and ExchangeCommission (“SEC”) permit the use of the proportionate consolidation method inthe reconciliation to U.S. GAAP provided the joint venture is an operating entityand the significant financial operating policies are, by contractualarrangement, jointly controlled by all parties having an equity interest in thejoint venture. As required, the Company discloses in note 22 the majorcomponents of its financial statements resulting from the use of theproportionate consolidation method to account for its interests in jointventures.

 

**Accounting pronouncements not yet adopted under U.S. GAAP**

 

u)  In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (GAAP), andexpands disclosures about fair value measurements. SFAS No. 157 appliesunder other accounting pronouncements that require or permit fair valuemeasurements, and therefore does not require any new fair value measurements.SFAS No. 157 is effective for fiscal years beginning after November 15,2007 (January 1, 2008 for the Company). In February 2008,the FASB amended SFAS No. 157 to exclude leasing transactions and todelay the effective date by one year for nonfinancial assets and liabilitiesthat are recognized or disclosed at fair value in the financial statements on anonrecurring basis. The Company is in the process of determining the effect, ifany, the adoption of SFAS No. 157 will have on its financialstatements.

 

v)  In February 2007,the FASB published SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - including an amendment of FASB Statement No. 115”.This standard permits entities to choose to measure many financial instrumentsand certain other assets and liabilities at fair value on an instrument-by-instrumentbasis under a fair value option. This new standard will be effective for fiscalyears beginning after November 15, 2007. The Company is presentlyevaluating the impact of this new standard.

 

w) In December 2007,the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated FinancialStatements - an amendment of ARB No. 51”, and SFAS 141(R), “Business Combinations”.SFAS 160 and SFAS 141(R) introduce significant changes in theaccounting and reporting for business acquisitions and non-controlling interestin a subsidiary. SFAS 160 also changes the accounting for and reporting ofthe deconsolidation of a subsidiary. SFAS 141(R) continues the movementtoward the greater use of fair values in financial reporting and increasedtransparency through expanded disclosures. These new standards will beeffective for fiscal years beginning after December 15, 2008. The Companyis presently evaluating their impact.

 

91

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