Exhibit 13.2  Managements and
Auditors Reports  Managements
Report  The consolidated
financial statements for the years ended December 31, 2004 and 2003, are
the responsibility of the management of Cascades Inc., and have been reviewed
by the Audit Committee and approved by the Board of Directors. They were
prepared in accordance with accounting principles generally accepted in Canada
and include some amounts, which are based on managements estimates and
judgement. Management is also responsible for all other information included in
this Annual Report and for ensuring that this information is consistent with
the Companys consolidated financial statements and business activities.  The Management of
the Company is responsible for the design, establishment and maintenance of
appropriate internal controls and procedures for financial reporting, to ensure
that financial statements for external purposes are fairly presented in
conformity with generally accepted accounting principles. Such internal
controls systems are designed to provide reasonable assurance on the
reliability of the financial information and the safeguarding of assets.  External and
internal auditors have free and independent access to the Audit Committee,
which is comprised of outside independent directors. The Audit Committee, which
meets regularly throughout the year with members of the financial management
and the external and internal auditors, reviews the consolidated financial
statements and recommends their approval to the Board of Directors.  The financial
statements have been audited by PricewaterhouseCoopers LLP, whose report is
provided below.   /s/ Alain Lemaire
  
  /s/ Christian DubéAlain Lemaire
  Christian DubéPresident and Chief
  Executive Officer
  Vice-President and
  Chief Financial OfficerKingsey Falls, Canada
  Kingsey Falls, CanadaFebruary 24, 2005
  February 24, 2005   Auditors Report to the Shareholders of Cascades
Inc.  We have audited the
consolidated balance sheets of Cascades Inc. (the Company) as at December 31,
2004 and 2003 and the consolidated statements of earnings, retained earnings
and cash flows for each of the years in the three-year period ended December 31,
2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.  We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  In our opinion,
these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2004
and 2003 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.   /s/
  PricewaterhouseCoopers LLPChartered AccountantsMontreal, CanadaFebruary 24, 2005  39


Consolidated
Financial Statements  Consolidated
Balance SheetsAs at December 31, 2004 and 2003 (in
millions of Canadian dollars)  Note
  
  2004
  
  2003AssetsCurrent assetsCash
  and cash equivalents
  
  
  
  30
  
  27Accounts
  receivable
  
  
  
  527
  
  494Inventories
  
  6
  
  559
  
  5011,116
  
  1,022Property, plant and equipment
  
  7
  
  1,700
  
  1,636Other assets
  
  8
  
  215
  
  186Goodwill
  
  8
  
  113
  
  833,144
  
  2,927Liabilities and Shareholders EquityCurrent liabilitiesBank
  loans and advances
  
  
  
  47
  
  43Accounts
  payable and accrued liabilities
  
  
  
  509
  
  453Current
  portion of long-term debt
  
  9
  
  58
  
  18614
  
  514Long-term debt
  
  9
  
  1,168
  
  1,092Other liabilities
  
  10
  
  303
  
  2652,085
  
  1,871Shareholders equityCapital
  stock
  
  11
  
  265
  
  264Retained
  earnings
  
  
  
  783
  
  778Cumulative
  translation adjustments
  
  21
  
  11
  
  141,059
  
  1,0563,144
  
  2,927  The accompanying notes
are an integral part of these consolidated financial statements.   Approved by the Board
  of Directors/s/ Bernard Lemaire
  
  /s/ Robert ChevrierBernard Lemaire
  Director
  Robert Chevrier
  Director  40


Consolidated
Statements of Retained Earnings
For the three-year period ended December 31, 2004 (in
millions of Canadian dollars) Note
  
  2004
  
  2003
  
  2002BalanceBeginning of year
  
  
  
  778
  
  749
  
  594Net
  earnings for the year
  
  
  
  23
  
  55
  
  169Dividends
  on common shares
  
  
  
  (13
  )
  (13
  )
  (10
  )Dividends
  on preferred shares
  
  
  
  
  
  (1
  )
  (1
  )Excess
  of common share redemption price over paid-up capital
  
  11 d)
  
  (5
  )
  (2
  )
  (3
  )Excess
  of redemption price of preferred shares of a subsidiary over recorded capital
  
  11 b)
  
  
  
  (10
  )
  BalanceEnd of year
  
  
  
  783
  
  778
  
  749  Consolidated
Statements of Earnings
For the three-year period ended December 31, 2004 (in
millions of Canadian dollars) Note
  
  2004
  
  2003
  
  2002(note 4)
  
  (note 4)Sales
  
  
  
  3,254
  
  2,995
  
  3,118Cost of sales and expensesCost
  of sales (exclusive of depreciation shown below)
  
  17 c)
  
  2,691
  
  2,463
  
  2,414Selling
  and administrative expenses
  
  
  
  313
  
  294
  
  289Impairment
  loss on property, plant and equipment
  
  14
  
  18
  
  
  
  Loss
  (gain) on derivative financial instruments
  
  15
  
  (2
  )
  1
  
  Unusual
  losses (gains)
  
  13
  
  (4
  )
  
  
  4Depreciation
  and amortization
  
  
  
  159
  
  143
  
  1373,175
  
  2,901
  
  2,844Operating income from continuing operations
  
  
  
  79
  
  94
  
  274Interest
  expense
  
  17 b)
  
  76
  
  80
  
  69Foreign
  exchange gain on long-term debt
  
  
  
  (18
  )
  (72
  )
  Loss
  on long-term debt refinancing
  
  
  
  1
  
  22
  
  20
  
  64
  
  205Provision for income taxes
  
  16
  
  2
  
  10
  
  60Share of results of significantly influenced
  companies
  
  12
  
  (2
  )
  3
  
  (22
  )Share of earnings attributed to non-controlling
  interests
  
  
  
  
  
  
  
  1Net earnings from continuing operations
  
  
  
  20
  
  51
  
  166Net earnings from assets held for sale
  
  4
  
  3
  
  4
  
  3Net earnings for the year
  
  
  
  23
  
  55
  
  169Basic net earnings from continuing operations
  per common share
  
  
  
  0.25
  
  0.61
  
  2.04Basic net earnings per common share
  
  11 e)
  
  0.28
  
  0.66
  
  2.07Diluted net earnings per common share
  
  11 e)
  
  0.28
  
  0.66
  
  2.05Weighted average number of common shares
  outstanding during the year
  
  
  
  81,678,884
  
  81,720,379
  
  81,482,507  The accompanying notes
are an integral part of these consolidated financial statements.  41


Consolidated
Statements of Cash Flows
For the three-year period ended December 31, 2004 (in
millions of Canadian dollars) Note
  
  2004
  
  2003
  
  2002(note 4)
  
  (note 4)Operating activities from continuing operationsNet
  earnings from continuing operations
  
  
  
  20
  
  51
  
  166Adjustments
  forImpairment
  loss on property, plant and equipment
  
  
  
  18
  
  
  
  Amortization
  of transitional deferred unrealized gain
  
  
  
  (2
  )
  
  
  Unusual
  losses (gains)
  
  
  
  (4
  )
  
  
  4Depreciation
  and amortization
  
  
  
  159
  
  143
  
  137Foreign
  exchange gain on long-term debt
  
  
  
  (18
  )
  (72
  )
  Loss
  on long-term debt refinancing
  
  
  
  1
  
  22
  
  Future
  income taxes
  
  
  
  (20
  )
  (1
  )
  13Share
  of results of significantly influenced companies
  
  
  
  (2
  )
  3
  
  (22
  )Share
  of earnings attributed to non-controlling interests
  
  
  
  
  
  
  
  1Others
  
  
  
  6
  
  12
  
  8158
  
  158
  
  307Changes
  in non-cash working capital components
  
  17 a)
  
  (2
  )
  (32
  )
  23156
  
  126
  
  330Investing activities from continuing operationsPurchases
  of property, plant and equipment
  
  
  
  (129
  )
  (121
  )
  (128
  )Purchases
  of other assets
  
  
  
  (9
  )
  (13
  )
  (21
  )Business
  acquisitions, net of cash acquired
  
  5 a)
  
  (120
  )
  (31
  )
  (127
  )Business
  disposal, net of cash disposed
  
  5 b)
  
  14
  
  
  
  4(244
  )
  (165
  )
  (272
  )Financing activities from continuing operationsBank
  loans and advances
  
  
  
  3
  
  (50
  )
  Issuance
  of senior notes, net of related expenses
  
  
  
  156
  
  974
  
  Change
  in revolving credit facilities, net of related expenses
  
  
  
  (8
  )
  155
  
  Increase
  in other long-term debt
  
  
  
  10
  
  52
  
  77Payments
  of other long-term debt
  
  
  
  (49
  )
  (1,052
  )
  (113
  )Premium
  paid on redemption of long-term debt
  
  
  
  (1
  )
  (16
  )
  Non-controlling
  interests
  
  
  
  
  
  
  
  (7
  )Net
  proceeds from issuances of shares
  
  
  
  2
  
  2
  
  3Redemption
  of common shares and preferred shares of a subsidiary
  
  11 b) d)
  
  (7
  )
  (20
  )
  (3
  )Dividends
  
  
  
  (13
  )
  (14
  )
  (11
  )93
  
  31
  
  (54
  )Change in cash and cash equivalents during the
  year from continuing operations
  
  
  
  5
  
  (8
  )
  4Change in cash and cash equivalents from assets
  held for sale
  
  4
  
  
  
  
  
  Change in cash and cash equivalents during the
  year
  
  
  
  5
  
  (8
  )
  4Translation adjustments on cash and cash
  equivalents
  
  
  
  (2
  )
  (3
  )
  3Cash and cash equivalentsBeginning of year
  
  
  
  27
  
  38
  
  31Cash and cash equivalentsEnd of year
  
  
  
  30
  
  27
  
  38  The accompanying notes
are an integral part of these consolidated financial statements.  42


Segmented Information For the three-year period
ended December 31, 2004 (in
millions of Canadian dollars)  The Companys
operations are organized into and managed by three segments: packaging
products, tissue papers and fine papers. The classification of these operating
segments is based on the primary operations of the main subsidiaries and joint
ventures of the Company.  The Company
analyzes the performance of its operating segments based on their operating
income before depreciation and amortization, which is not a measure of
performance under Canadian generally accepted accounting principles (Canadian
GAAP); however, chief operating decision-makers use this performance measure
for assessing the operating performance of their reportable segments. Earnings
for each segment are prepared on the same basis as those of the Company.
Intersegment operations are recorded on the same basis as sales to third
parties, which is at fair market value.  Sales of the Company
presented by the reportable segments are as follows:  Sales
  
  Note
  
  2004
  
  2003
  
  2002(note 2 d)
  
  (note 2 d)Packaging productsBoxboardManufacturing
  
  
  
  705
  
  727
  
  760Converting
  
  
  
  513
  
  292
  
  263Eliminations
  and others
  
  
  
  13
  
  7
  
  21,231
  
  1,026
  
  1,025Containerboard(1)Manufacturing
  
  
  
  344
  
  340
  
  374Converting
  
  
  
  489
  
  480
  
  488Eliminations
  and others
  
  
  
  (200
  )
  (191
  )
  (204
  )633
  
  629
  
  658Specialty
  products
  
  
  
  509
  
  484
  
  477Eliminations
  
  
  
  (44
  )
  (38
  )
  (40
  )2,329
  
  2,101
  
  2,120Tissue papersManufacturing
  and converting
  
  
  
  665
  
  620
  
  663Distribution(2)
  
  
  
  87
  
  89
  
  88Eliminations
  
  
  
  (35
  )
  (23
  )
  (24
  )717
  
  686
  
  727Fine papersManufacturing
  
  
  
  373
  
  380
  
  440Distribution(2)
  
  
  
  409
  
  417
  
  427Eliminations
  
  
  
  (68
  )
  (63
  )
  (65
  )714
  
  734
  
  802Eliminations
  
  
  
  (68
  )
  (72
  )
  (58
  )Assets held for sale
  
  4
  
  (438
  )
  (454
  )
  (473
  )Total
  
  
  
  3,254
  
  2,995
  
  3,118  
 (1)The Companys
containerboard sub-segment consists entirely of its interest in Norampac Inc. (Norampac),
a joint venture. (2)Some or all of
these sub-segments represent assets held for sale (see note 4).  43


Segmented Information For
the three-year period ended December 31, 2004 (in millions of Canadian dollars) (Continued)  The operating income
before depreciation and amortization from continuing operation and the
depreciation and amortization from continuing operation of the Company
presented by the reportable segments are as follows:  Operating
  income before depreciation and
  amortization and operating income
  from continuing operation
  
  Note
  
  2004
  
  2003
  
  2002Packaging productsBoxboardManufacturing
  
  
  
  19
  
  37
  
  79Converting
  
  
  
  45
  
  15
  
  7Others
  
  
  
  3
  
  3
  
  367
  
  55
  
  89Containerboard(1)Manufacturing
  
  
  
  25
  
  18
  
  47Converting
  
  
  
  54
  
  52
  
  50Others
  
  
  
  8
  
  11
  
  987
  
  81
  
  106Specialty
  products
  
  
  
  24
  
  38
  
  49178
  
  174
  
  244Tissue papersManufacturing
  and converting
  
  
  
  74
  
  72
  
  130Distribution(2)
  
  
  
  2
  
  1
  
  676
  
  73
  
  136Fine papersManufacturing
  
  
  
  (10
  )
  (5
  )
  27Distribution(2)
  
  
  
  7
  
  11
  
  10(3
  )
  6
  
  37Corporate
  
  
  
  (4
  )
  (3
  )
  3Assets held for sale
  
  4
  
  (9
  )
  (13
  )
  (9
  )Operating income before depreciation and
  amortization from continuing operations
  
  
  
  238
  
  237
  
  411Depreciation and amortizationBoxboard
  
  
  
  (64
  )
  (49
  )
  (49
  )Containerboard
  
  
  
  (38
  )
  (37
  )
  (37
  )Specialty
  products
  
  
  
  (20
  )
  (21
  )
  (19
  )Tissue
  papers
  
  
  
  (36
  )
  (36
  )
  (32
  )Fine
  papers
  
  
  
  (11
  )
  (11
  )
  (11
  )Corporate
  and eliminations
  
  
  
  8
  
  9
  
  9Assets
  held for sale
  
  4
  
  2
  
  2
  
  2(159
  )
  (143
  )
  (137
  )Operating income from continuing operations
  
  
  
  79
  
  94
  
  274  
 (1)  The Companys
containerboard sub-segment consists entirely of its interest in Norampac, a
joint venture. (2)  Some or all
of these sub-segments represent discontinued operations (see note 4).  44


Segmented Information For the three-year period
ended December 31, 2004 (in
millions of Canadian dollars) (Continued)  Purchases of property,
plant and equipment of the Company presented by the reportable segments are as
follows:  Purchases
  of property, plant and equipment
  
  2004
  
  2003
  
  2002Packaging productsBoxboardManufacturing
  
  22
  
  19
  
  18Converting
  
  20
  
  10
  
  7Others
  
  6
  
  5
  
  348
  
  34
  
  28Containerboard(1)Manufacturing
  
  13
  
  14
  
  18Converting
  
  15
  
  13
  
  10Others
  
  2
  
  2
  
  30
  
  29
  
  28Specialty
  products
  
  16
  
  19
  
  2094
  
  82
  
  76Tissue papersManufacturing
  and converting
  
  20
  
  25
  
  31Distribution(2)
  
  1
  
  
  
  21
  
  25
  
  31Fine papersManufacturing
  
  10
  
  7
  
  16Distribution(2)
  
  
  
  1
  
  1Others
  
  
  
  2
  
  10
  
  10
  
  17Corporate
  
  5
  
  5
  
  5Assets held for sale
  
  (1
  )
  (1
  )
  (1
  )Total
  
  129
  
  121
  
  128  
 (1)  The Companys containerboard sub-segment
consists entirely of its interest in Norampac, a joint venture. (2)  Some or all of these sub-segments represent
assets held for sale (see note 4).  45


Segmented Information For the three-year period
ended December 31, 2004 (in
millions of Canadian dollars) (Continued)  Identifiable assets and
goodwill of the Company presented by the reportable segments are as follows:  Identifiable
  assets
  
  2004
  
  2003Packaging productsBoxboard
  
  997
  
  946Containerboard(1)
  
  744
  
  717Specialty
  products
  
  438
  
  3902,179
  
  2,053Tissue papers
  
  552
  
  546Fine papers
  
  369
  
  363Corporate
  
  190
  
  114Consolidation revaluation(2)
  
  (178
  )
  (192
  )Intersegment eliminations
  
  (51
  )
  (51
  )3,061
  
  2,833Investments
  
  83
  
  94Total
  
  3,144
  
  2,927  Goodwill
  
  2004
  
  2003Packaging productsBoxboard
  
  27
  
  5Containerboard(1)
  
  106
  
  99Specialty
  products
  
  7
  
  7140
  
  111Tissue papers
  
  10
  
  10Fine papers
  
  4
  
  4Consolidation revaluation(3)
  
  (41
  )
  (42
  )Total
  
  113
  
  83  
 (1)The
Companys Containerboard sub-segment consists entirely of its interest in
Norampac, a joint venture. (2)Consolidation
revaluation includes adjustments of assets resulting from business acquisitions.  It also includes the required adjustments
resulting from the creation of Norampac, consisting mainly of reduction in
property, plant and equipment and goodwill. The following table details the
components of the consolidation revaluation relating to identifiable assets:  2004
  
  2003Privatization
  of subsidiaries(a)
  
  (44
  )
  (48
  )Creation
  of Norampac(b)
  
  (75
  )
  (80
  )Creation
  of Norampac(c)
  
  (45
  )
  (50
  )Others
  
  (14
  )
  (14
  )(178
  )
  (192
  )  
 (a)Represents the
impact of the privatization of certain subsidiaries of the Company on December 31,2000. The adjustment also reflects the
accounting impact of the privatization of Cascades S.A. in 2002. (b)With respect to
the creation of Norampac, the assets and liabilities that were contributed by
the Company and Domtar Inc., the Companys joint venture partner in Norampac,
were recorded at their fair market value. However, upon proportionate
consolidation of the joint venture, the Company reduced its portion of the
contributed assets and liabilities to their original carrying value. (c)A portion of the
gain realized on the creation of Norampac was recognized against property,
plant and equipment and goodwill. The net book value of the deferred gain
allocated against goodwill was $22 million. For the years ended December 31,
2004 and 2003, the net book value of the deferred gain allocated against
goodwill was $16 million and $17 million, respectively.  (3)The amounts shown
for identifiable assets include a reduction of goodwill for the years ended December 31,
2004 and 2003 amounting to $41 million and $42 million, respectively, which are
shown separately in the table above under goodwill.  46


Segmented Information For the three-year period
ended December 31, 2004 (in
millions of Canadian dollars) (Continued)  Sales, property, plant
and equipment and goodwill of the Company presented by the geographic segments
are as follows:  Note
  
  2004
  
  2003
  
  2002By geographic segmentSalesOperations located in CanadaWithin Canada
  
  
  
  1,571
  
  1,660
  
  1,747To the United States
  
  
  
  555
  
  540
  
  636Offshore
  
  
  
  54
  
  51
  
  472,180
  
  2,251
  
  2,430Operations located in United StatesWithin the United States
  
  
  
  833
  
  614
  
  596To Canada
  
  
  
  94
  
  36
  
  20Offshore
  
  
  
  31
  
  
  
  2958
  
  650
  
  618Operations located in EuropeWithin Europe
  
  
  
  496
  
  461
  
  460To the United States
  
  
  
  5
  
  8
  
  10To other countries
  
  
  
  53
  
  77
  
  71554
  
  546
  
  541Operations located in Mexico
  
  
  
  
  
  2
  
  2Assets held for sale Operations located in Canada
  
  4
  
  (438
  )
  (454
  )
  (473
  )Total
  
  
  
  3,254
  
  2,995
  
  3,118  2004
  
  2003Property, plant and equipmentCanada
  
  993
  
  1013United
  States
  
  476
  
  399Europe
  
  231
  
  224Total
  
  1,700
  
  1,636  2004
  
  2003GoodwillCanada
  
  61
  
  60United
  States
  
  52
  
  23Total
  
  113
  
  83  47


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts)  1
Accounting policies  Basis of
presentation  The consolidated
financial statements have been prepared in accordance with Canadian GAAP and
include the significant accounting policies listed below.  Basis of
consolidation  The consolidated
financial statements include the accounts of the Company and its subsidiaries.
They also include the portion of the accounts of the joint ventures accounted
for through the proportionate consolidation method. Investments in
significantly influenced companies are accounted for using the equity method.  Use of
estimates  The preparation of
financial statements in conformity with Canadian GAAP requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and disclosure of contingencies at the
balance sheet date, as well as the reported amounts of revenues and expenses
during the reporting period. On a regular basis and with the available
information, management reviews its estimates regarding environmental costs,
useful life of property, plant and equipment, impairment of long-term assets,
goodwill and pension plans. Actual results could differ from those estimates.
When adjustments become necessary, they are reported in earnings in the period
in which they are known.  Revenue
recognition  The Company recognizes
its sales when persuasive evidence of an arrangement exits, goods are shipped,
significant risks and benefits of ownership are transferred, price is fixed and
determinable and the collection of the resulting receivable is reasonably
assured.  Fair
market value of financial instruments  The Company estimates the
fair market value of its financial instruments based on current interest rates,
market value and current pricing of financial instruments with similar terms.
Unless otherwise disclosed herein, the carrying value of these financial
instruments, especially those with current maturities such as cash and cash
equivalents, accounts receivable, bank loans and advances, accounts payable and
accrued liabilities, approximates their fair market value.  Derivative
financial instruments  The Company uses
derivative financial instruments in the management of its foreign currency,
commodity and interest rate exposures. Except for certain interest rate swap
agreements, the Companys policy is not to utilize derivative financial
instruments for trading or speculative purposes.  The Company
documents relationships between hedging instruments and hedged items, as well
as its risk management objective and strategy for undertaking various hedge
transactions. This process includes linking derivatives to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also assesses whether the derivatives that are used
in hedging transactions are effective in offsetting changes in fair values or
cash flows of hedged items.  Foreign
exchange forward contracts designated as hedging instruments  In
order to reduce the potential adverse effects of currency fluctuation, the
Company enters into various foreign exchange forward contracts. Gains and
losses on these derivative financial instruments used to hedge anticipated
sales, purchases or interest expenses denominated in foreign currencies are
recognized as an adjustment of sales, cost of sales or interest expenses when
the underlying sale, purchase or interest expense is recorded.  Foreign
exchange forward contracts and currency options not designated as hedging
instruments  Foreign
exchange forward contracts and currency options not designated as hedging
instruments are recorded at fair value. The fair value of these instruments is
reviewed periodically and the resulting gains and losses are reported to
earnings.  48


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Commodity
contracts designated as hedging instruments  The Company uses
certain swaps and forward contracts on commodity in order to fix the price for
nominal quantities of certain raw materials or finished goods to reduce the
adverse effects of changes in raw material costs and sales prices of finished
goods. Realized and unrealized gains and losses arising from these contracts
are recognized in sales or cost of sales when the sale or purchase of the
underlying commodity is recorded.  Commodity
contracts not designated as hedging instruments  The
Company also uses swaps and forward contracts on commodity that are not
designated as hedging instruments. These instruments are recorded at fair
value. The fair value of these contracts is reviewed periodically and the
resulting gains and losses are reported to earnings.  Interest
rate swap agreement designated as an hedging instrument  The
Company enters into interest rate swap agreements in order to hedge the changes
in fair value of a portion of its long-term debt. Interest expense on the debt
is adjusted to include the payments made or received under the interest rate
swaps.  Interest
rate swap agreements not designated as hedging instruments  These
interest rate swap agreements require the exchange of interest payments without
actual exchange of the notional amount on which the payments are based. The
Company adjusts the interest expense on the debt to include payments made or
received under the interest rate swap agreements. These instruments are
accounted for at fair value and resulting gains or losses are included in
earnings under Selling and administrative expenses.  OthersRealized and unrealized gains or losses associated with
derivative financial instruments, which have been terminated or cease to be effective
prior to maturity, are deferred under current or long-term assets or
liabilities and recognized in earnings in the period in which the underlying
original hedged transaction is recognized. In the event a designated hedged
item is sold, extinguished or matures prior to the termination of the related
derivative financial instrument, any realized or unrealized gain or loss on
such derivative financial instrument is recognized in earnings.  Derivative
financial instruments which are not designated as hedges or have ceased to be
effective prior to maturity are recorded at their estimated fair values under
current or long-term assets or liabilities with changes in their estimated fair
values recorded in earnings. Estimated fair value is determined using pricing
models incorporating current market prices and the contractual prices of the
underlying instruments, the time value of money and yield curves.  Cash and
cash equivalents  Cash and cash equivalents
include cash on hand, bank balances and short-term liquid investments with
original maturities of three months or less.  Inventories  Inventories of finished
goods are valued at the lower of average production cost and net realizable
value. Inventories of raw materials and supplies are valued at the lower of
cost and replacement value. Cost of raw materials and supplies is determined
using the average cost and the first-in, first-out methods respectively.  Property,
plant and equipment, depreciation and amortization  Property, plant and
equipment are recorded at cost, including interest incurred during the
construction period of certain property, plant and equipment. Depreciation and
amortization are calculated on a straight-line basis at annual rates varying
from 3% to 5% for buildings, 5% to 10% for machinery and equipment, and 15% to
20% for automotive equipment, determined according to the estimated useful life
of each class of property, plant and equipment.  Grants
and investment tax credits  Grants and investment tax
credits are accounted for using the cost reduction method and are amortized to
earnings as a reduction of depreciation and amortization, using the same rates
as those used to amortize the related property, plant and equipment.  49


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Other
investments  Other investments are
recorded at cost except when there is a decline in value which is other than
temporary, in which case they are reduced to their estimated net realizable
value.  Goodwill  The Company assesses
periodically whether a provision for impairment in the value of goodwill is
required. This is accomplished mainly by determining whether projected
discounted future cash flows exceed the net book value of goodwill of the
respective business units. Goodwill is tested for impairment annually on December 31
or when an event or circumstance occurs that could potentially result in a
permanent decline in value.  Impairment
of long-lived assets  Long-lived assets are
reviewed for impairment upon the concurrence of events or changes in
circumstances indicating that the carrying value of the asset may not be
recoverable, as measured by comparing their net book value to the estimated
undiscounted future cash flows generated by their use. Impaired assets are
recorded at fair value, determined principally using discounted future cash
flows expected from their use and eventual disposition.  Deferred
charges  Deferred charges are
recorded at cost and include, in particular, the issuance costs of long-term
debt, which are amortized on a straight-line basis over the anticipated period
of repayment of the respective debt, and start-up costs which are amortized on
a straight-line basis over a period of three to five years from the end of the
start-up period.  Environmental
costs  Environmental
expenditures are expensed or capitalized depending upon their future economic
benefit. Expenditures incurred to prevent future environmental contamination
are capitalized and amortized on a straight-line basis at annual rates varying
from 5% to 10%. Expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. A provision for environmental costs
is recorded when it is probable that a liability has been incurred and
the costs can be reasonably estimated.  Asset
retirement obligations  Asset retirement obligations
are recognized, at fair value, in the period in which the Company incurred a
legal obligation associated to the retirement of an asset. The associated costs
are capitalized as part of the carrying value of the related asset and
depreciated over its remaining useful life. The liability is accreted using a
credit adjusted risk free interest rate of the Company.  Employee
future benefits  The Company offers funded
and non-funded defined benefit pension plans, some defined contribution pension
plans, and group registered retirement savings plans(RRSPs)
that provide retirement benefit payments for most of its employees. The defined
benefit pension plans are usually contributory and are based on the number of
years of service and, in most cases, based on the average gains at the end of
career. Retirement benefits are in some cases, partially adjusted, based on inflation. The Company also provides to its
employees complementary retirement benefit plans and other post-employment
benefit plan, such as group life insurance and medical and dental care plans.
However, these benefits, other than pension plans, are not funded.  The cost of
pensions and other retirement benefits earned by employees is actuarially
determined using the projected benefit method pro-rated on years of service and
managements best estimate of expected plan investment performance, salary
escalations, retirement ages of employees and expected health care costs. The
accrued benefit obligation is evaluated using the market interest rate at the
evaluation date.  50


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  For the purpose of
calculating the expected return on plan assets, those assets are valued at fair
value. Past service costs arising from a plan amendment are amortized on a
straight-line basis over the average remaining service 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% of the accrued benefit obligation at the
beginning of the year and (b) 10% of the fair value of plan assets at the
beginning of the year, is amortized over the average remaining service period
of active employees, which may vary from 8 to 19 years (weighted average of 13
years) in 2004 depending on the plan (2003  8 to 19 years (weighted average of
13 years)).  When restructuring
a plan causes a curtailment and a settlement at the same time, the curtailment
is accounted for before the settlement.  The measurement
date of most of the retirement benefit plans is December 31 of every year.
An actuarial evaluation is performed at least every three years. The last
evaluation took place on December 31, 2003 for almost half of the plans
and on December 31, 2002 for most of 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 the difference between the accounting
and tax bases of assets and liabilities. Future income tax assets and
liabilities are measured using substantively enacted tax rates in effect in the
year in which these temporary differences are expected to be recovered or
settled. Future income tax assets are recognized when it is more likely than
not that the assets will be realized.  Foreign
currency translation  Foreign
currency transactions  Transactions
denominated in foreign currencies are recorded at the rate of exchange
prevailing at the transaction date. Monetary assets and liabilities denominated
in foreign currencies are translated at the rate of exchange prevailing at the
balance sheet date. Gains and losses related to the portion of the long-term
debt designated as a hedge of the net investment of the Company in
self-sustaining foreign operations are recorded in cumulative translation
adjustments net of related income taxes. Unrealized gains and losses on translation
of other monetary assets and liabilities are reflected in the determination of
the net results for the year.  Foreign
operations  The Companys foreign operations are defined as
self-sustaining. The assets and liabilities of these operations are translated
into Canadian dollars at the rate of exchange prevailing at the balance sheet
date. Revenues and expenses are translated at the average exchange rate for the
year. Translation gains and losses are deferred and shown as a separate
component of shareholders equity as cumulative translation adjustments.  Stock-based
compensation  The Company applies the
fair value method of accounting for stock-based compensation awards granted to
officers and key employees. This method consists of recording expenses to earnings
based on the vesting period of the options granted. The fair value is
calculated based on the Black-Scholes option pricing model. This model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. When stock options are
exercised, any consideration paid by employees is credited to capital stock.  Amounts
per common share  Amounts per common share
are determined using the weighted average number of common shares outstanding
during the year. Diluted amounts per common share are determined using the
treasury stock method to evaluate the dilutive effect of stock options,
convertible instruments and equivalents, when applicable. Under this method,
instruments with a dilutive effect, basically when the average market price of
a share for the period exceeds the exercise price, are considered to have been
exercised at the beginning of the period and the proceeds received are
considered to have been used to redeem common shares of the Company at the
average market price for the period.  51


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  2 Changes
in accounting policies  New
accounting standards adopted  a)
Employee future benefits  On June 30,
2004, the Company adopted prospectively the new recommendations of the Canadian
Institute of Chartered Accountants (CICA) regarding employee future benefits
that require additional disclosure about the assets, cash flows and net
periodic cost of defined benefit pension plans and other employee future
benefit plans. Refer to note 18 regarding the additionnal disclosure
requirements.  b)
Hedging relationships  On January 1,
2004, the Company adopted prospectively Accounting Guideline 13 (AcG-13)
regarding hedge accounting. In compliance with the criteria required by AcG-13,
hedge accounting requires the Company to document the risk management strategy
used. Upon executing a hedging contract, management documents the hedged item,
namely asset, liability or anticipated transaction, the characteristics of the
hedging instrument used and the selected method of assessing effectiveness. The
current accounting policy will be maintained for hedging relationships deemed
to be effective at January 1, 2004. Consequently, realized and unrealized
gains and losses on hedges will continue to be deferred until the hedged item
is realized so as to allow matching of the designations in the statement of
earnings. Hedge accounting was applied as at January 1, 2004 for hedging
relationships existing as at December 31, 2003 that satisfied the
conditions of AcG-13. Hedging relationships existing as at December 31,
2003 that did not satisfy the conditions of AcG-13 were recorded at fair
value as at January 1, 2004, resulting in an increase in assets of $3.7
million and in liabilities of $0.1 million. The related unrealized gain of $3.6
million was deferred and presented under other liabilities on the balance
sheet.  c) Asset
retirement obligations  On January 1,
2004, the Company adopted retroactively, without prior period restatement, the
new recommendations of the CICA relating to asset retirement obligations. This
standard requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made.  The
application of this standard did not have any significant impact on the
financial position or results of operations of the Company.  d)
Generally accepted accounting principles  On
January 1, 2004, the Company adopted retroactively with prior period
restatement CICA Section 1100, Generally
Accepted Accounting Principles,and Section 1400,
General Standards for Financial Statement
Presentation.Section 1100 clarifies the relative authority of
various accounting pronouncements and other sources of guidance within GAAP,
whereas Section 1400 clarifies what constitutes a fair presentation in
accordance with GAAP. In addition, under Section 1100, industry practice
no longer plays a role in establishing GAAP. As a result, the cost of delivery,
which had been subtracted from sales in accordance with industry practice, is
no longer subtracted from sales, but rather is included in cost of goods sold.
The cost of delivery for the year ended December 31,
2004, 2003 and 2002 amounted to $217 million, $208 million and $207 million
respectively and have been included in the cost of good sold resulting,
in the restatement of the comparative figures of 2003 and 2002.  e)
Impairment of long-lived assets  On January 1,
2004, the Company adopted new CICA Handbook Section 3063, Impairment of Long-lived Assets.Section 3063
provides accounting guidance for the recognition, measurement and disclosure of
impairment of long-lived assets, including property, plant and equipment and
intangible assets with finite useful lives. Section 3063 requires the
recognition of an impairment loss for a long-lived asset when events or changes
in circumstances cause its carrying value to exceed the total undiscounted
future cash flows expected from its use and eventual disposition. The
impairment loss is calculated by deducting the fair value of the asset from its
carrying value. This change in accounting policy has been applied prospectively
and had no impact on the Companys financial statements on January 1,
2004.  52


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  f)
Guarantees  On January 1, 2003, the Company adopted
prospectively the new guideline of the CICA regarding the disclosure of
guarantees. Under this new guideline, entities are required to disclose key
information about certain types of guarantee contracts that require payments
contingent on specified types of future events. Disclosures include the nature
of the guarantee, how it arose, the events or circumstances that would trigger
performance under the guarantee, maximum potential future payments under the
guarantee, the carrying amount of the related
liability and information about recourse or collateral. Note 19(b) provides
the required disclosure.  g)
Long-lived assets and discontinued operations  The
Company adopted prospectively the new guideline of the CICA regarding the
disposal of long-lived assets and discontinued operations, which applies to
disposal activities initiated on or after May 1, 2003.  This new section sets standards for
recognition, measurement, presentation and disclosure of the disposal of
long-lived assets.  It also sets
standards for the presentation and disclosure of discontinued operations. The
adoption of this standard did not impact the financial statements.  New
accounting standards not yet adopted  h)
Variable interest entities  In
June 2003, the CICA issued Accounting Guideline 15 (AcG-15), Consolidation of variable interest entities.The
new guideline requires companies to identify variable interest entities in
which they have an interest to determine whether they are the primary
beneficiary of such entities and, if so, to consolidate them. A variable interest
entity is defined as an entity in which the equity is not sufficient to permit
that entity to finance its activities without external support, or the equity
investors lack either voting control and obligation to absorb future losses or
the right to receive future returns. At the end of 2003, the CICA announced the
deferral of the effective date of AcG-15 as it expects to make certain
amendments. Previously, AcG-15 was to be effective for interim and annual
periods starting on or after January 1, 2004. It will be effective for
interim and annual periods beginning on or after November 1, 2004. The
application of this standard will not have any material impact on the financial
position or results of operations of the Company.  i)
Financial instruments, hedging, capital assets and comprehensive income  In January 2005, the CICA published four
new sections: Section 1530, Comprehensive
Income;Section 3251, Equity;Section 3855, Financial
Instruments  Recognition and Measurement,and Section 3865, Hedges.These new standards regarding
recognition and measurement of financial instruments, hedging and comprehensive
income have been created to harmonize with the generally accepted accounting
policies already used in the United States (U.S. GAAP). These new standards
have to be adopted by the Company at the latest for the period beginning January 1,
2007, but early adoption is encouraged. The Company is presently evaluating the
impact of these new standards.  3
Measurement uncertainty  The Company evaluates the
net book value of its long-lived assets when events or changes in circumstances
indicate that the net book value of the assets may not be recoverable. To
evaluate long-lived assets, the Company determines if the undiscounted future
cash flows of operating activities exceed the net book value of the assets at
the valuation date. Estimate of future cash flows and fair value are based on
judgment and could change.  During the fourth
quarter of 2004, the Company performed an impairment test on long-lived assets
of certain operating units due to their operating loss for the current period.  According to the
results of the impairment tests performed, it is not necessary to record an
impairment loss for these operating units with the exception of the impairment
loss on property, plant and equipment disclosed in note 14. However, given the
sensitivity of certain key assumptions used, such as exchange rates, selling
prices and costs of raw materials, there is a measurement uncertainty regarding
of certain operating units because it is reasonably possible that variations of
future conditions could require a change in the stated amount of the long-lived
assets when new impairment tests will be prepared.  53


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  4 Assets
held for sale  During the fourth quarter
of 2004, the Company decided to initiate a divestiture plan for its
distribution activities in the Fine papers and Tissue papers segments.
Consequently, the assets, liabilities, earnings and cash flows from these
activities for the current period and for all comparative periods, are classified
as assets held for sale. The comparative financial information of 2003 and 2002
has been restated to reflect this change. Financial information relating to
these assets held for sale is as follows:  2004
  
  2003
  
  2002Condensed
  balance sheetCurrent
  assets
  
  126
  
  126Long-term
  assets
  
  9
  
  12Current
  liabilities
  
  29
  
  31Condensed
  statement of earningsSales
  
  438
  
  454
  
  473Depreciation
  and amortization
  
  2
  
  2
  
  2Operating
  income
  
  7
  
  11
  
  7Interest
  expenses
  
  3
  
  3
  
  3Income
  taxes
  
  1
  
  4
  
  1Net
  earnings from assets held for sale
  
  3
  
  4
  
  3Net
  earnings per share from assets held for sale
  
  0.03
  
  0.05
  
  0.03Condensed
  statement of cash flowsCash
  flows from operating activities
  
  1
  
  14
  
  (5
  )Cash
  flows from investing activities
  
  (1
  )
  (1
  )
  (5
  )Cash
  flows from financing activities
  
  
  
  (13
  )
  10  54


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  5
Business acquisitions and disposal  a) 2004 acquisitions  On February 18,
2004 and June 3, 2004, the Company acquired the 50% interest held by its partners
in Cascades Sonoco S.A. for a nil amount and in Greenfield SAS for a cash
consideration of $2 million (1.5 million). On March 11, 2004, the Company
acquired the assets of a tissue mill located in Memphis, Tennessee, from
American Tissue or affiliates thereof, for a cash consideration of $15 million
(US$11.4 million). On April 2, 2004, a joint venture of the Company
acquired the shares of Johnson Corrugated Products Corp., a corrugated products
plant in Thompson, Connecticut, for an approximate cash consideration of $15
million (US$11.7 million). The Companys 50% share of the purchase price
amounted to $8 million (US$5.9 million). On June 11, 2004, a joint venture
of the Company acquired the non-controlling interest of its subsidiary for a
cash consideration of $14 million. The Companys 50% share of the purchase
price amounted to $7 million.  On August 24,
2004, the Company acquired the remaining outstanding shares (50%) of Dopaco
Inc., a U.S. producer of packaging products for the quick service restaurant
industry, for an approximate consideration of $139 million (US$106.5 million),
of which $82 million (US$63 million) has been paid in cash at the closing date
and a balance estimated at $57 million (US$43.5 million) will be payable in May 2005
based on a financial formula. The balance sheet and results of Dopaco, Inc.
are fully consolidated since that date. On August 27, 2004, a joint
venture of the Company acquired the assets of AIM Corrugated Container Corp., a
corrugated products plant in Lancaster, New York, for an approximate cash
consideration of $21 million (US$16 million). The Companys 50% share of the
purchase price amounted to $10 million (US$8 million).  2003 acquisitions  On March 6,
2003, the Company acquired 50% of the assets of La Compagnie Greenfield S.A. as
part of its packaging products group for $0.6 million (0.3 million). On April 14,
2003, a joint venture of the Company acquired a corrugated products converting
plant as part of its packaging products group, located in Schenectady, New
York. The aggregate purchase price, subject to certain adjustments, was $32
million (US$22 million) and comprised $20 million (US$14 million) in cash and
all the operating assets of its Dallas-Fort Worth, Texas plant valued at $12
million (US$8 million). The Companys 50% share in the cash portion of the
purchase price amounted to $10 million (US$7 million).  On October 1,
2003, the Company increased its investment in Dopaco, Inc. from 40% to
50%, for a consideration of $17 million (US$12.4 million). The balance sheet
and results of Dopaco, Inc. have been proportionally consolidated since October 1,
2003.  On December 22,
2003, the Company completed the acquisition of all shares in Scierie P. H.
Lemay Itée, a Canadian company operating a sawing and a planing plant, for a
consideration of $3 million. Prior to this transaction, the Company had a 50%
holding in that company.  2002 acquisitions  On January 2,
2002, one of the Companys joint ventures increased its investment in Metro
Waste Paper Recovery Inc. (Metro Waste), another joint venture, in exchange
for assets having a net value of $6 million. On January 21, 2002, one of
the Companys joint ventures acquired Star Leominster as part of the packaging
products segment for $50 million (US$31 million), the Companys share amounting
to $25 million (US$15.5 million). On March 27, 2002, the Company acquired
converting operations from American Tissue as part of the tissue papers segment
for an amount of $30 million (US$19 million). On June 14, 2002, the Company
completed the acquisition of two manufacturing units of American Tissue for a
consideration of $66 million (US$43 million). Other acquisitions and price
adjustments on prior transactions amounted to $10 million including an
acquisition realized by the distribution division of Fine Paper group for an
amount of $4 million, which is classified as an asset held for sale.  These acquisitions
have been accounted for using the purchase method and the accounts and results
of operations of these entities have been included in the consolidated
financial statements since their respective dates of acquisition. The following
allocations of the purchase prices to the identifiable assets acquired and
liabilities assumed resulted in goodwill of $33 million as at December 31,
2004 (2003  $7 million; 2002  $17 million) of which $10 million was already
recorded in Dopacos books at the date of transaction. None of the
above-mentioned goodwill is expected to be deductible for tax purposes with the
exception of an amount of $5 million as at December 31, 2004 (2003  $4
million). The purchase price allocations presented in the table below for the
acquisitions of Dopaco and AIM have not been completed yet mainly with respect
to the identification and valuation of other potential intangible assets.  55


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular amounts in millions of Canadian
dollars, except per share amounts) (Continued)  AIM &Dopaco
  
  Johnson
  
  American
  
  OthersPackaging
  
  Packaging
  
  Tissue
  
  Packaging2004
  
  products
  
  products
  
  Tissue papers
  
  products
  
  TotalCash
  and cash equivalents
  
  2
  
  1
  
  
  
  1
  
  4Accounts
  receivable
  
  26
  
  3
  
  
  
  4
  
  33Inventories
  
  38
  
  
  
  
  
  6
  
  44Property,
  plant and equipment
  
  123
  
  8
  
  15
  
  3
  
  149Customer
  relationship and client lists
  
  26
  
  
  
  
  
  4
  
  30Goodwill
  
  24
  
  9
  
  
  
  
  
  33239
  
  21
  
  15
  
  18
  
  293Accounts
  payable and accrued liabilities
  
  (27
  )
  (2
  )
  
  
  (8
  )
  (37
  )Long-term
  debt
  
  (17
  )
  
  
  
  
  (3
  )
  (20
  )Other
  liabilities
  
  (46
  )
  (1
  )
  
  
  2
  
  (45
  )149
  
  18
  
  15
  
  9
  
  191Less:
  Investments realized in prior years
  
  (10
  )
  
  
  
  
  
  
  (10
  )Less:
  Balance of purchase price
  
  (57
  )
  
  
  
  
  
  
  (57
  )Total consideration
  
  82
  
  18
  
  15
  
  9
  
  124Greenfield
  
  Schenectady
  
  Dopaco
  
  Scierie Lemay2003
  
  Packaging
  products
  
  Packaging
  products
  
  Packaging
  products
  
  Packaging
  products
  
  TotalAccounts
  receivable
  
  
  
  2
  
  19
  
  4
  
  25Inventories
  
  2
  
  2
  
  27
  
  9
  
  40Property,
  plant and equipment
  
  
  
  11
  
  107
  
  16
  
  134Other
  assets
  
  
  
  
  
  10
  
  4
  
  14Goodwill
  
  
  
  2
  
  4
  
  1
  
  72
  
  17
  
  167
  
  34
  
  220Bank
  loans and advances
  
  
  
  
  
  
  
  (5
  )
  (5
  )Accounts
  payable and accrued liabilities
  
  (1
  )
  (1
  )
  (22
  )
  (6
  )
  (30
  )Long-term
  debt
  
  
  
  
  
  (14
  )
  (10
  )
  (24
  )Other
  liabilities
  
  
  
  
  
  (32
  )
  (3
  )
  (35
  )1
  
  16
  
  99
  
  10
  
  126Less:
  Fair market value of assets exchanged
  
  
  
  (6
  )
  
  
  
  
  (6
  )Less:
  Investments realized in prior years
  
  
  
  
  
  (82
  )
  (7
  )
  (89
  )Total consideration
  
  1
  
  10
  
  17
  
  3
  
  31  56


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular amounts in millions of Canadian
dollars, except per share amounts) (Continued)  StarAmerican
  
  Leominster
  
  Metro WasteTissue
  
  Packaging
  
  Packaging2002
  
  Tissue papers
  
  products
  
  products
  
  Others
  
  TotalAccounts
  receivable
  
  
  
  3
  
  2
  
  6
  
  11Inventories
  
  
  
  2
  
  
  
  3
  
  5Property,
  plant and equipment
  
  92
  
  9
  
  4
  
  13
  
  118Other
  assets
  
  4
  
  
  
  
  
  
  
  4Goodwill
  
  
  
  15
  
  2
  
  
  
  1796
  
  29
  
  8
  
  22
  
  155Accounts
  payable and accrued liabilities
  
  
  
  (2
  )
  (2
  )
  (3
  )
  (7
  )Other
  liabilities
  
  
  
  (2
  )
  
  
  
  
  (2
  )96
  
  25
  
  6
  
  19
  
  146Less:  Fair
  market value of assets exchanged
  
  
  
  
  
  (6
  )
  
  
  (6
  )Total
  compensation paid by assets held for sale
  
  
  
  
  
  
  
  (4
  )
  (4
  )Less:  Investments
  realized in prior years
  
  
  
  
  
  
  
  (9
  )
  (9
  )Total consideration
  
  96
  
  25
  
  
  
  6
  
  127  b) Disposals  On May 10,
2004, the Company sold the assets of two of its fiberboard panel businesses
(packaging products segment) located in Canada for a total consideration of $16
million. Of this transaction price, $14 million was received at closing and $2
million will be received at the latest in 2011. The Company realized a gain of
$4 million before related income taxes of $1 million.  In 2002, the
Company sold its retail egg carton operation (packaging products segment)
located in Canada for a cash consideration of $4 million, and realized a $5
million losses.  6
Inventories  2004
  
  2003Finished
  goods
  
  284
  
  260Raw
  materials
  
  130
  
  104Supplies
  
  145
  
  137559
  
  501  57


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  7
Property, plant and equipment  2004
  
  Cost
  
  Accumulated
  depreciation and
  amortization
  
  NetLands
  
  52
  
  
  
  52Buildings
  
  436
  
  140
  
  296Machinery
  and equipment
  
  2,491
  
  1,207
  
  1,284Automotive
  equipment
  
  52
  
  41
  
  11Others
  
  72
  
  15
  
  573,103
  
  1,403
  
  1,7002003
  
  Cost
  
  Accumulated
  depreciation and
  amortization
  
  NetLands
  
  53
  
  
  
  53Buildings
  
  431
  
  129
  
  302Machinery
  and equipment
  
  2,271
  
  1,047
  
  1,224Automotive
  equipment
  
  53
  
  40
  
  13Others
  
  51
  
  7
  
  442,859
  
  1,223
  
  1,636  Property, plant
and equipment include assets under capital leases with a cost of $9 million and
accumulated amortization of $3 million as at December 31, 2004 (2003  $13
million and $4 million respectively). Other property, plant and equipment include
items that are not amortized, such as machinery and equipment in the process of
installation with a book value of $28 million (2003  $23 million), deposits on
purchases of property, plant and equipment amounting to $12 million (2003  $2
million) and unused properties, machinery and equipment with a net book value
of $10 million (2003  $15 million) which do not exceed their estimated net
realizable value.  Depreciation and
amortization of property, plant and equipment amounted to $157 million for the year
ended December 31, 2004 (2003  $141 million; 2002  $131 million).  58


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  8 Other
assets and goodwill  a) Other assets are
detailed as follows:  Note
  
  2004
  
  2003Investments
  in significantly influenced companies
  
  
  
  74
  
  85Other
  investments
  
  
  
  9
  
  9Deferred
  charges
  
  8 c)
  
  38
  
  36Employee
  future benefits
  
  18 b)
  
  52
  
  50Fair
  value of derivative financial instruments
  
  
  
  8
  
  Other
  definite-life intangible assets
  
  8 c)
  
  34
  
  6215
  
  186  b) Goodwill fluctuated as
follows:  Packaging productsContainer-
  
  Specialty2004
  
  Boxboard
  
  board
  
  products
  
  Sub-total
  
  Tissue papers
  
  TotalCarrying
  value of goodwill  Beginning of year
  
  5
  
  66
  
  2
  
  73
  
  10
  
  83Goodwill
  resulting from business acquisitions
  
  24
  
  9
  
  
  
  33
  
  
  
  33Amortization
  of a deferred gain(1)
  
  
  
  1
  
  
  
  1
  
  
  
  1Foreign
  currency translation
  
  (2
  )
  (2
  )
  
  
  (4
  )
  
  
  (4
  )Carrying
  value of goodwill  End of year
  
  27
  
  74
  
  2
  
  103
  
  10
  
  113Packaging productsContainer-
  
  Specialty2003
  
  Boxboard
  
  board
  
  products
  
  Sub-total
  
  Tissue papers
  
  TotalCarrying
  value of goodwill  Beginning of year
  
  
  
  67
  
  2
  
  69
  
  10
  
  79Goodwill
  resulting from acquisitions
  
  5
  
  2
  
  
  
  7
  
  
  
  7Amortization
  of a deferred gain(1)
  
  
  
  1
  
  
  
  1
  
  
  
  1Foreign
  currency translation
  
  
  
  (4
  )
  
  
  (4
  )
  
  
  (4
  )Carrying
  value of goodwill  End of year
  
  5
  
  66
  
  2
  
  73
  
  10
  
  83  
 (1)On December 30,1997, the Company and Domtar Inc. merged
their respective containerboard and corrugated packaging operations to form
Norampac, a 50-50 joint venture. A portion of the gain realized on the
transaction was recorded against property, plant and equipment and goodwill.
Under current accounting standards, the portion of the deferred gain allocated
to goodwill is amortized on a straight-line basis over a period of 25 years.  59


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  c) Deferred charges and
other definite-life intangible assets are detailed as follows:  2004
  
  2003Cost
  
  Accumulated
  depreciation
  and
  amortization
  
  Net
  
  Cost
  
  Accumulated
  depreciation
  and
  amortization
  
  NetDeferred
  chargesStart-up
  cost
  
  34
  
  24
  
  10
  
  31
  
  26
  
  5Financing
  costs
  
  33
  
  9
  
  24
  
  36
  
  10
  
  26Other
  
  10
  
  6
  
  4
  
  9
  
  4
  
  577
  
  39
  
  38
  
  76
  
  40
  
  36Other
  definite-life intangible assetsCustomer
  relationship and client lists
  
  32
  
  2
  
  30
  
  3
  
  1
  
  2Others
  
  7
  
  3
  
  4
  
  8
  
  4
  
  439
  
  5
  
  34
  
  11
  
  5
  
  6  Depreciation and
amortization of deferred charges and other definite-life intangible assets,
calculated on a straight-line basis, amounted to $8 million for the year ended December 31,
2004 (2003  $5 million; 2002  $9 million).  The weighted average
amortization period is as follows (in number of years):  Start-up
  cost
  
  4Financing
  costs
  
  9Other
  
  4Deferred
  charges
  
  7Customer
  relationship and client list
  
  26Others
  
  24Other
  definite-life intangible assets
  
  26  The estimated aggregate
amount of depreciation and amortization expense in each of the next five years
is as follows:  Years
  ending December 31,2005
  
  82006
  
  72007
  
  52008
  
  42009
  
  3  60


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  9
Long-term debt  Cascades
  Inc. and its subsidiaries
  
  Note
  
  2004
  
  2003Revolving
  credit facility, weighted average rate of 3.90% as at
  December 31, 2004, maturing in February 2007
  
  9 a)
  
  159
  
  1687.25%
  Unsecured senior notes of US$675 million
  (2003US$550 million), maturing in 2013
  
  9 a) c)
  
  813
  
  711Balance
  on purchase price
  
  5 a)
  
  52
  
  Capital
  lease obligations
  
  9 c) g)
  
  5
  
  13Other
  debts
  
  
  
  19
  
  231,048
  
  915Less:
  Current portion
  
  
  
  56
  
  10992
  
  905  The Companys
proportionate share of the following debts of joint ventures
do not give to their holders any recourse against the assets or general
credit of Cascades Inc. and its subsidiaries.  Joint
  ventures
  
  Note
  
  2004
  
  2003Revolving
  credit facility, weighted average rate of 3.63% as at
  December 31, 2004, maturing in May 2008
  
  9 b)
  
  10
  
  116.75%
  Unsecured senior notes of US$250 million
  (Cascades portion US$125 million), maturing in 2013
  
  9 b) c)
  
  151
  
  161Other
  debts
  
  
  
  17
  
  23178
  
  195Less:
  Current portion
  
  
  
  2
  
  8176
  
  187Total
  
  
  
  2004
  
  2003Long-term
  debt
  
  
  
  1,226
  
  1,110Less:
  Current portion
  
  
  
  58
  
  181,168
  
  1,092  a) On February 5,
2003, the Company completed a series of transactions to refinance substantially
all of its existing credit facilities, except those of its joint ventures. It
secured a new four-year revolving credit facility of CA$500 million. Its
obligations under this new revolving credit facility are secured by all
inventory and receivables of Cascades and its North American subsidiaries and
by the property, plant and equipment of three of its mills. In addition, it
issued new unsecured senior notes for an aggregate amount of US$450 million
which were subsequently registered with the Securities and Exchange Commission
of the United States. These notes, bearing a 7.25% coupon, will mature in 2013
and are redeemable all or in part at the option of the Company under certain
conditions and subject to payment of a redemption premium. The aggregate
proceeds of these two transactions, combined with its available cash on hand,
were used by the Company to repay substantially all of the existing credit
facilities. On March 12, 2003, the Company also redeemed the US$125
million 8.375% senior notes originally due in 2007 issued by its subsidiary,
Cascades Boxboard Group Inc.  61


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  On July 8,
2003, the Company completed a private placement of US$100 million of 7.25%
senior notes due in 2013, which are treated as part of the same series of 7.25%
senior notes due in 2013 issued in February, as described above. These senior
notes were subsequently registered with the Securities and Exchange Commission
of the United States. The issuance of these senior notes was completed at a
price of 104.50% or an effective interest rate of 6.61%. The proceeds of this
financing were used to reduce indebtedness under the revolving credit facility
of the Company.  On December 2,
2004, the Company completed a private placement of US$125 million of 7.25% senior
notes due in 2013, which are treated as part of the same series of 7.25% senior
notes due in 2013 issued in February 2003. The issuance of these senior
notes was completed at a price of 105.50% or an effective interest rate of
6.376%. The proceeds of this financing were used to reduce indebtedness under
the revolving credit facility of the Company.  b) On May 28, 2003,
a joint venture of the Company, Norampac Inc., completed a series of
transactions to substantially refinance all of its existing credit facilities.
Norampac secured a new five-year revolving credit facility of CA$350 million.
Its obligations under this new revolving credit facility are secured by all
inventory and receivables of Norampac and its North American subsidiaries, and
by the property, plant and equipment of two of its mills and three of its
converting facilities. In addition, Norampac issued new unsecured senior notes
for an aggregate amount of US$250 million which were subsequently registered
with the Securities and Exchange Commission of the United States. These notes,
bearing a 6.75% coupon, will mature in 2013 and are redeemable in all or in
part at the option of the Company under certain conditions and subject to
payment of a redemption premium. The aggregate proceeds of these two
transactions were used by the joint venture to repay substantially all of the
existing credit facilities and to redeem both its US$150 million 9.50% and
CA$100 million 9.375% senior notes originally due in 2008.  c) As at December 31,
2004, the fair value of the senior notes and the capital lease obligations of
Cascades Inc. and its subsidiaries and joint ventures was estimated at $865
million and $158 million respectively (December 31, 2003  $759 million
and $167 million respectively) based on the market value of the senior notes
and on discounted future cash flows using interest rates available for issues
with similar terms and average maturities.  d) As at December 31,
2004, the long-term debt included amounts denominated in foreign currencies of US$933
million and 31 million (December 31, 2003  US$691 million and 22
million).  e) As at December 31,
2004, accounts receivable and inventories totalling approximately $589 million
(2003  $512 million) as well as property,
plant and equipment totalling approximately $156 million (2003  $160
million) were pledged as collateral for the long-term debt of Cascades Inc. and
its subsidiaries.  Accounts
receivable and inventory totalling approximately $149 million (2003  $136
million) as well as property, plant and equipment totalling approximately $75
million (2003  $74 million) were pledged as collateral for the long-term debt
of a joint venture.  f) The estimated
aggregate amount of repayments on long-term debt, excluding capital lease
obligations, in each of the next five years is as follows:  Years
  ending December 31,
  
  Cascades Inc.
  and its subsidiaries
  
  Joint ventures2005
  
  54
  
  22006
  
  1
  
  32007
  
  160
  
  22008
  
  
  
  122009
  
  
  
  5Thereafter
  
  828
  
  154  62


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  g) As at December 31,
2004, future minimum payments under capital lease obligations are as follows:  Years
  ending December 31,
  
  Cascades Inc.
  and its subsidiaries
  
  Joint ventures2005
  
  2
  
  2006
  
  2
  
  2007
  
  1
  
  2008
  
  1
  
  6
  
  Less:
  Interest (weighted average rate of 6.22%)
  
  1
  
  5
  
  Less:
  Current portion
  
  2
  
  3
  
    h) As at December 31,
2004, the Company and joint ventures had unused credit facilities of $334
million and $168 million respectively (December 31, 2003  $330 million
and $181 million respectively).  10 Other
liabilities  Note
  
  2004
  
  2003Employee
  future benefits
  
  18 b)
  
  84
  
  80Future
  income taxes
  
  16 c)
  
  214
  
  182Unrealized
  gain on derivative financial instruments
  
  
  
  5
  
  Non-controlling
  interests
  
  
  
  
  
  3303
  
  265  11 Capital stock  Note
  
  2004
  
  2003Common
  shares
  
  11 a)
  
  261
  
  262Adjustment
  relating to stock options and others
  
  11 c)
  
  4
  
  2265
  
  264  a) The authorized capital
stock of the Company consists of an unlimited number of common shares, without
nominal value, and an unlimited number of Class A and B shares issuable in
series without nominal value. Over the past two years, the common shares have
fluctuated as follows:  2004
  
  2003Note
  
  Number of shares
  
  $
  
  Number of shares
  
  $BalanceBeginning
  of year
  
  
  
  81,731,387
  
  262
  
  81,826,272
  
  261Shares
  issued on exercise of stock options
  
  11 c)
  
  133,893
  
  1
  
  180,115
  
  2Redemption
  of common shares
  
  11 d)
  
  (503,700
  )
  (2
  )
  (275,000
  )
  (1
  )BalanceEnd
  of year
  
  
  
  81,361,580
  
  261
  
  81,731,387
  
  262  63


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  b) In 2003, the Company
purchased the totality of 4,300,000 Class B preferred shares of a
subsidiary for a consideration of $16 million. The excess of the redemption
price of $10 million over the recorded capital is included in retained
earnings.  c) Under the terms of a
share option plan adopted on December 15, 1998 for officers and key
employees of the Company and its joint ventures, 6,547,261 common shares have
been specifically reserved for issuance. Each option will expire at a date not
to exceed ten years following the date the option was granted. The exercise
price of an option shall not be lower than the market value of the share at the
date of grant, determined as the average of the closing price of the share on
the Toronto Stock Exchange on the five trading days preceding the date of
grant. The terms for exercising the options granted before December 31,
2003 are 25% of the number of shares under option within twelve months after
the date of grant, and up to an additional 25% each twelve months after the
first, second and third anniversary dates of grant. The terms for exercising
the option granted in 2004 and thereafter are 25% of the number of shares
within the first anniversary date of grant, and up to an additional 25% each
twelve months after the second, third and fourth anniversary date of grant. The
options cannot be exercised if the market value of the share is lower than its
book value at the date of grant.  Changes in the number of
options outstanding as at December 31 are as follows:  2004
  
  2003
  
  2002Number
  of options
  
  Weighted average
  exercise price ($)
  
  Number
  of options
  
  Weighted average
  exercise price ($)
  
  Number
  of options
  
  Weighted average
  exercise price ($)Beginning
  of year
  
  1,494,942
  
  9.83
  
  1,378,610
  
  8.82
  
  1,492,652
  
  7.44Granted
  
  407,723
  
  13.02
  
  321,596
  
  13.04
  
  324,113
  
  13.24Exercised
  
  (133,893
  )
  8.27
  
  (180,115
  )
  7.92
  
  (407,062
  )
  7.13Forfeited
  
  (11,786
  )
  13.10
  
  (25,149
  )
  8.99
  
  (31,093
  )
  10.79End
  of year
  
  1,756,986
  
  10.67
  
  1,494,942
  
  9.83
  
  1,378,610
  
  8.82Options
  exercisableEnd of year
  
  1,131,655
  
  9.35
  
  935,011
  
  8.55
  
  886,413
  
  8.19  The following options
were outstanding as at December 31, 2004:  Options outstanding
  
  Options exercisableYear granted
  
  Number of options
  
  Weighted average exercise price ($)
  
  Number of options
  
  Weighted average exercise price ($)
  
  Expiration1996
  
  39,320
  
  6.68
  
  39,320
  
  6.68
  
  20061999
  
  327,369
  
  8.54
  
  327,369
  
  8.54
  
  20092000
  
  73,976
  
  7.78
  
  73,976
  
  7.78
  
  20102001
  
  337,896
  
  6.82
  
  337,896
  
  6.82
  
  20112002
  
  270,810
  
  13.24
  
  203,108
  
  13.24
  
  20122003
  
  299,972
  
  13.04
  
  149,986
  
  13.04
  
  20132004
  
  407,643
  
  13.02
  
  
  
  
  
  20141,756,986
  
  
  
  1,131,655  The following assumptions
were used to estimate the fair value, at the date of grant, of each option
issued to employees:  2004
  
  2003Risk-free
  interest rate
  
  4.3
  %
  4.8
  %Expected
  dividend yield
  
  1.24
  %
  1.21
  %Expected
  life of the options
  
  6 years
  
  6 yearsExpected
  volatility
  
  29
  %
  28
  %Weighted
  average fair value of issued option
  
  
  $4.07
  
  
  $4.36  64


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  d) In 2004, in the normal
course of business, the Company renewed its redemption program of a maximum of
4,086,964 common shares with the Toronto Stock Exchange which represent
approximately 5% of issued and outstanding common shares. The redemption
authorization is valid from March 11, 2004 to March 10, 2005. In
2004, the Company redeemed 503,700 common shares under this program for a
consideration of approximately $7 million.  e) The basic and diluted
net earnings per common share for the years ended December 31, 2004, 2003
and 2002 are calculated as follows:  2004
  
  2003
  
  2002Net
  earnings
  
  22.6
  
  54.7
  
  169.5DividendsPreferred
  shares
  
  
  
  (0.5
  )
  (1.1
  )Net
  earnings available to common shareholders
  
  22.6
  
  54.2
  
  168.4Weighted
  average common shares
  
  81.7
  
  81.7
  
  81.5Dilution
  effect of stock options
  
  0.3
  
  0.4
  
  0.8Adjusted
  weighted average common shares
  
  82.0
  
  82.1
  
  82.3Basic
  net earnings per common share
  
  0.28
  
  0.66
  
  2.07Diluted
  net earnings per common share
  
  0.28
  
  0.66
  
  2.05  f) The Company offered to
its Canadian employees a share purchase plan of its common stock. Employees can
contribute, on a voluntary basis, up to a maximum of 5% of their salary and, 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 a predetermined date each month. For the years ended
December 31, 2004, 2003 and 2002, the Companys contribution to the plan
amounted to $0.6 million annually.  12 Share
of earnings of significantly influenced companies  On February 20,
2002, a significantly influenced company, Boralex Inc., sold seven power
stations to an income fund. The Company thus realized a gain of $18 million net
of related future income taxes of $5 million, representing its share of the net
gain realized by this significantly influenced company.  In 2003, this gain
was subsequently adjusted by Boralex Inc. The Company thus recorded its share
of that adjustment representing a loss of $3 million net of related future
income taxes.  13
Unusual losses (gains)  Note
  
  2004
  
  2003
  
  2002Loss
  (gain) on business disposal
  
  5 b)
  
  (4
  )
  
  
  5Gain
  on dilution and disposal of an investment
  
  13 a)
  
  
  
  
  
  (1
  )Expenses
  related to business closures
  
  13 b)
  
  
  
  
  
  6Other
  income
  
  13 c)
  
  
  
  
  
  (6
  )(4
  )
  
  
  4  a) In 2002, the Company
realized a gain of $1 million resulting from the dilution of its investments in
a significantly influenced company.  b) In 2002, the Company
closed one of its converting folding boxboard units located in Ontario,
incurring closing costs of $6 million.  c) In 2002, the Court of
First Instance of the European Community reduced the amount of the fine imposed
in 1994. The reduction in the fine and the related interest
thereon have been recorded as a gain amounting to $6 million.  65


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  14
Impairment of property, plant and equipment  In 2004, the Company
recorded an impairment loss of $18 million ($12 million after-tax) related to
the property, plant and equipment of its de-inked pulp mill located in
Cap-de-la-Madeleine, Quebec, which was temporarily closed in March 2003.
The Company decided to permanently shutdown this facility. The book value of
those assets has been written down to its fair value representing the present
value of the estimated net proceeds from dismantling, redeployment or disposal.
Those assets are part of the Specialty products group in the Packaging products
segment.  15 Loss
(gain) on derivative financial instruments  2004
  
  2003
  
  2002Realized
  loss on derivative financial instruments
  
  
  
  1
  
  Amortization
  of transitional deferred unrealized gain under AcG-13
  
  (2
  )
  
  
  (2
  )
  1
  
    16 Income
taxes  a) The provision for
income taxes is as follows:  2004
  
  2003
  
  2002Current
  
  22
  
  11
  
  47Future
  
  (20
  )
  (1
  )
  132
  
  10
  
  60  b) The provision for
income taxes based on the effective income tax rate differs from the provision
for income tax expense based on the combined basic rate for the following
reasons:  2004
  
  2003
  
  2002Provision
  for income taxes based on the combined basic Canadian and provincial income
  tax rate
  
  9
  
  26
  
  88Provision
  for income taxes (recovery) arising from the following:Adjustment
  related to deduction for manufacturing and processing and income from active
  businesses carried on in Quebec
  
  2
  
  (4
  )
  (18
  )Difference
  in foreign operations statutory income tax rate
  
  (5
  )
  
  
  (3
  )Unrecognized
  tax benefit arising from current losses of subsidiaries
  
  1
  
  2
  
  2Non-taxable
  portion of foreign exchange gain on long-term debt
  
  (3
  )
  (18
  )
  Recognized
  tax benefit arising from previously incurred losses of subsidiaries
  
  (5
  )
  (9
  )
  (10
  )Permanent
  differences
  
  1
  
  1
  
  2Large
  corporations tax
  
  4
  
  4
  
  2Increase
  (decrease) in future income taxes resulting from a substantively enacted
  change in tax rates
  
  
  
  5
  
  (1
  )Others
  
  (2
  )
  3
  
  (2
  )(7
  )
  (16
  )
  (28
  )Provision
  for income taxes
  
  2
  
  10
  
  60  66


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  c) Future income taxes
include the following items:  2004
  
  2003Future income tax assetsTax
  benefit arising from income tax losses
  
  113
  
  108Employee
  future benefits
  
  21
  
  19Unused
  tax credits
  
  6
  
  9Others
  
  13
  
  10Valuation
  allowance
  
  (25
  )
  (28
  )128
  
  118Future income tax liabilitiesProperty, plant and equipment
  
  262
  
  247Exchange
  gain on long-term debt
  
  36
  
  23Employee
  future benefits
  
  15
  
  12Other
  assets
  
  26
  
  14Others
  
  3
  
  4342
  
  300Future income taxes
  
  214
  
  182  d) Certain subsidiaries
have accumulated losses for income tax purposes amounting to approximately $319
million which may be carried forward to reduce taxable income in future years.
The future tax benefit resulting from the deferral of $264 million of these
losses has been recognized in the accounts as a future income tax asset. These
unused losses for income tax purposes may be claimed in years ending no later
than 2024 for an amount of $184 million and indefinitely for an amount of $135
million.  17 Additional information  a) Changes in non-cash
working capital components are detailed as follows:  2004
  
  2003
  
  2002Accounts
  receivable
  
  (16
  )
  6
  
  36Inventories
  
  (24
  )
  5
  
  (20
  )Accounts
  payable and accrued liabilities
  
  38
  
  (43
  )
  7(2
  )
  (32
  )
  23  b)
Additional information  2004
  
  2003
  
  2002Amortization
  of deferred financing costs included in interest expense
  
  4
  
  4
  
  1Interest
  paid
  
  76
  
  73
  
  78Income
  taxes paid
  
  9
  
  37
  
  62Business
  acquisition in exchange for non-monetary consideration
  
  
  
  6
  
  6Settlement
  with dissenting shareholders by issuance of common share
  
  
  
  
  
  5  c) Cost
of sales  2004
  
  2003
  
  2002Foreign
  exchange gain (loss)
  
  4
  
  (9
  )
  3  67


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  18
Employee future benefits  a) The expense for
employee future benefits as at December 31 is as follows:  2004
  
  2003Pension plans
  
  Other plans
  
  Pension plans
  
  Other plansCurrent
  service cost
  
  14
  
  5
  
  12
  
  2Interest
  cost
  
  31
  
  4
  
  30
  
  4Past
  service costs
  
  3
  
  2
  
  3
  
  2Actual
  return on plan assets
  
  (48
  )
  
  
  (60
  )
  Actuarial
  losses on accrued benefit obligation
  
  24
  
  3
  
  8
  
  4Others
  
  4
  
  (1
  )
  3
  
  2Benefits
  costs before adjustments to recognize the long-term nature of employee future
  benefit costs
  
  28
  
  13
  
  (4
  )
  14Difference
  between expected return and actual return on plan assets for the year
  
  15
  
  
  
  29
  
  Difference
  between actuarial loss the year of and actuarial loss on accrued benefit
  obligation for the year
  
  (22
  )
  (2
  )
  (6
  )
  (4
  )Difference
  between amortization of past service costs and actual plan amendments for the
  year
  
  (2
  )
  (1
  )
  (2
  )
  (1
  )Others
  
  (4
  )
  
  
  (3
  )
  Adjustments
  to recognize the long-term nature of employee future benefits costs
  
  (13
  )
  (3
  )
  18
  
  (5
  )Recognized
  costs for defined benefit pension plans
  
  15
  
  10
  
  14
  
  9Recognized
  costs for defined contribution pension plans
  
  2
  
  
  
  2
  
  Total
  expense for employee future benefits
  
  17
  
  10
  
  16
  
  9  Total cash
payments for employee future benefits for 2004, consisting of cash contributed
by Cascades to its funded pension plans, including its define contribution
plans and cash payments directly to beneficiaries for its unfunded other
benefit plans, excepted collective RRSPs are $26 million (2003  $16 million
and 2002  $14 million). Total estimated cash payments for employee future
benefits are $24 million for 2005.  Actuarial
valuation for capitalization purpose is done at least every three years in
order to determine the actuarial value of pension plan benefits and other
benefit plan. More than half of the pension plan were
evaluated as of December 31, 2003.  68


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  b) The funded status of
the defined benefit plans and the other complementary retirement benefit plans
and post-employment benefit plans as at December 31 are as follows:  2004
  
  2003Pension plans
  
  Other plans
  
  Pension plans
  
  Other plansAccrued benefit obligationBeginning
  of year
  
  480
  
  78
  
  440
  
  66Current
  service cost
  
  14
  
  5
  
  12
  
  2Interest
  cost
  
  31
  
  4
  
  30
  
  4Employees
  contributions
  
  6
  
  
  
  6
  
  Actuarial
  losses
  
  24
  
  3
  
  8
  
  4Benefits
  paid
  
  (29
  )
  (6
  )
  (24
  )
  (2
  )Business
  acquisitions and disposals
  
  10
  
  (1
  )
  7
  
  Past
  service costs
  
  3
  
  2
  
  3
  
  2Others
  
  (3
  )
  
  
  (2
  )
  2End
  of year
  
  536
  
  85
  
  480
  
  78Plan assetsBeginning
  of year
  
  468
  
  
  
  411
  
  Actual
  return on plan assets
  
  48
  
  
  
  60
  
  Employers
  contributions
  
  18
  
  6
  
  11
  
  2Employees
  contributions
  
  6
  
  
  
  6
  
  Benefits
  paid
  
  (29
  )
  (6
  )
  (24
  )
  (2
  )Business
  acquisitions and disposals
  
  5
  
  
  
  4Others
  
  (2
  )
  
  
  
  
  End
  of year
  
  514
  
  
  
  468
  
  Reconciliation of funded statusFair
  value of plan assets
  
  514
  
  
  
  468
  
  Accrued
  benefit obligation
  
  536
  
  85
  
  480
  
  78Funded
  status of plandeficit
  
  (22
  )
  (85
  )
  (12
  )
  (78
  )Unrecognized
  net actuarial loss
  
  58
  
  8
  
  51
  
  6Unamortized
  transitional balance
  
  (2
  )
  
  
  (2
  )
  Unamortized
  past service costs
  
  9
  
  4
  
  3
  
  2Others
  
  (1
  )
  (1
  )
  
  
  Accrued
  benefit asset (liability)End of year
  
  42
  
  (74
  )
  40
  
  (70
  )  69


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  The net amount recognized
on the balance sheet as at December 31 is detailed as follows:  2004Pension plans
  
  Other plans
  
  TotalEmployee
  future benefit asset, included in Other assets
  
  52
  
  
  
  52Employee
  future benefit liability, included in Other liabilities
  
  (10
  )
  (74
  )
  (84
  )42
  
  (74
  )
  (32
  )  2003Pension
  plans
  
  Other
  plans
  
  TotalEmployee
  future benefit asset, included in Other assets
  
  50
  
  
  
  50Employee
  future benefit liability, included in Other liabilities
  
  (10
  )
  (70
  )
  (80
  )40
  
  (70
  )
  (30
  )  c) The following amounts
relate to plans that are not fully funded as at December 31:  2004
  
  2003Pension plans
  
  Other plans
  
  Pension plans
  
  Other plansFair
  value of plan asset
  
  240
  
  
  
  275
  
  Accrued
  benefit obligation
  
  (283
  )
  (85
  )
  (308
  )
  (78
  )Funded
  deficit
  
  (43
  )
  (85
  )
  (33
  )
  (78
  )  d) The main actuarial assumptions
adopted in measuring the accrued benefit obligation and expenses as at December 31
are as follows:  2004
  
  2003Pension plans
  
  Other plans
  
  Pension plans
  
  Other plansAccrued benefit obligation as at December 31Discount
  rate
  
  6.00
  %
  6.00
  %
  6.25
  %
  6.25
  %Rate
  of compensation increase
  
  2.504.25
  %
  2.504.25
  %
  2.504.25
  %
  2.504.25
  %Benefit costs for years ended December 31Discount
  rate
  
  6.25
  %
  6.25
  %
  6.75
  %
  6.75
  %Expected
  long-term return on assets
  
  7.00
  %
  
  
  7.00
  %
  Rate
  of compensation increase
  
  2.504.25
  %
  2.504.25
  %
  2.504.25
  %
  2.504.25
  %Assumed health care cost trend rates at December 31Rate
  increase in health care costs
  
  
  
  7.3012.50
  %
  
  
  6.0013.00
  %Cost
  trend rate decline to
  
  
  
  4.708.00
  %
  
  
  4.308.00
  %Year
  the rate should stabilize
  
  
  
  2012
  
  
  
  2012  70


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  e) Assumed rate increases
in health care cost have a significant effect on the amounts reported for the
health-care plans. A 1% change in assumed health-care cost trend rates would
have the following effects for 2004:  Increase of 1%
  
  Decrease of 1%Current
  service costs and interest costs
  
  1
  
  (1
  )Accrued
  benefit obligation, end of year
  
  7
  
  (5
  )  f) The plan assets
allocation and the investment target allocation as of December 31, is
detailed as follows:  Plan
  assets allocation
  
  2004
  
  2003Money
  market
  
  2
  %
  2
  %Debt
  securities
  
  38
  %
  37
  %Equity
  securities
  
  60
  %
  61
  %Total
  
  100
  %
  100
  %  The plan assets do not
includes shares of the Company. Annual benefits annuity, of
an approximative value of $6 million are pledged by insurance contract
established by the Company.  Investment
  target allocation
  
  2004
  
  2003Money
  market
  
  3
  %
  3
  %Debt
  securities
  
  40
  %
  40
  %Equity
  securities
  
  57
  %
  57
  %Total
  
  100
  %
  100
  %  Target allocation
is established so as to maximize return while considering an acceptable level
of risk in order to meet the plan obligations on a long-term basis.  Investment
objectives for the plan assets are the following: optimizing return while
considering an acceptable level of risk, maintaining an adequate
diversification, controlling the risk according to different asset categories,
and maintaining a long-term objective of return on investments.  Investment
guidance is established for each investment manager. It includes parameters
that must be followed by managers and presents criteria for diversification,
non-eligible assets and minimum quality of investments as well as for return
objectives. Unless indicated otherwise, the managers cannot use any derivative
product or invest more than 10% of their assets in one particular security.  g) Estimated future benefit payments  Future benefit payments for
defined benefit pension plans and other post-employment benefits, considering
future participation, are estimated as follows:  Pension Plan
  
  Other Plan2005
  
  24
  
  22006
  
  25
  
  22007
  
  26
  
  22008
  
  27
  
  22009
  
  29
  
  220102014
  
  176
  
  14  71


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  19
Commitments and contingencies  a) Future minimum
payments under operating leases and other commercial commitments (mainly
composed of raw materials, natural gas, steam and electricity) for the next
years are as follows:  Years
  ending December 31
  
  Operating leases
  
  Other commercial commitments2005
  
  42
  
  972006
  
  36
  
  512007
  
  30
  
  282008
  
  23
  
  242009
  
  17
  
  15Thereafter
  
  41
  
  76  b)  The Company
has guaranteed the payment of approximately $4 million under operating leases
held by third parties. The Company also guaranteed residual values at the
expiration of lease contracts of certain equipment for an approximate amount of
$3 million. Management of the Company does not believe that these guarantees
are likely to be called and, as such, no liability has been recognized in the
consolidated financial statements. In addition a subsidiary of the Company has guaranteed
the debt of one of its joint venture. The maximum amount guaranteed is US$4.6
million. As at December 31, 2004, the debt of this joint venture,
guaranteed by that subsidiary, amounts to US$3.5 million. Management of that
subsidiary does not believe that this guarantee is likely to be called and, as
a result, no liability has been recognized in the consolidated financial
statements.  c)  In 2003,
the Company was informed that one of its divisions, Cascades Resources, is the
subject of an inquiry by the Canadian Commissioner of Competition as to whether
Cascades Resources and its competitors had colluded to unduly reduce market
competition between paper merchants in Canada. In 2004, The Competition Bureau
increased the scope of its investigation to a larger number of products and for
a longer period of time. The Competition Bureau has not informed the Company
regarding the status of the inquiry or whether charges will be brought against
that division. As this inquiry is still in an early stage, the Companys
management is unable to assess what further action, if any, the Competition
Bureau may take or the possible impact of the outcome of the inquiry on the
Company. Based on the information currently available, the Companys is unable
to determine the outcome of the investigation.  d)  An action
was filed against the Company on October 4, 2004, in the Supreme Court of
the State of New York, Niagara County by ServiceCore, Inc., alleging that
the Company breached a Finders Agreement in respect of gypsum board dated April 1999.
The Company has filed an answer denying the allegations of breach of the Finders
Agreement. The Company is unable to determine the outcome of this action at
this time. If the Court were to find against the Corporation, management believes
the amount of damages would be based on a percentage of sales of gypsum board
by Norampac Inc., a joint venture, in the period from April 2, 2001 to the
date of judgement. If the judgement had been rendered in respect of the period
ended December 31, 2004, management believes the total amount of damages
would not have exceeded $3 million.  72


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  20
Financial instruments  The Company and some of
its subsidiaries and some of its joint ventures utilize a variety of derivative
financial instruments to limit their exposure to foreign currency and commodity
fluctuations as well as changing interest rates but do not hold or issue such
financial instruments for trading purposes with the exception of certain
interest rate swap agreements as described below.  Currency
risks  The Company is exposed to
currency risks as a result of its export of goods produced in Canada, the
United States, France, Germany, Sweden and England. These risks are partially
covered by purchases, debt service and forward exchange contracts.  The Company and a
joint venture entered into contracts to sell forward U.S. dollars and European
currencies in exchange for Canadian dollars. As at December 31, 2004, the
Company and a joint venture held foreign exchange forward contracts with a
notional amount of US$72 million (2003  US$101 million) maturing in 2005 and
2006, at a weighted average exchange rate of 1.3479. As at December 31,
2004, the fair value of these instruments represented an unrealized gain of
$10.4 million. As at December 31, 2003, these instruments represented an
unrealized gain of $6.8 million. However, these instruments did not represent
any unrealized loss or gain as at December 31, 2002. Also, the Company
entered into contracts to sell forward European currencies with a notional
amount of 29 million maturing in 2005, at a weighted average exchange rate of
1.6641. The fair value of these instruments represented an unrealized gain of
$1.3 million. This gain has been recognized in earnings since these contracts
were not designated as hedges.  As at December 31,
2004, the Company held foreign exchange forward contracts with a notional
amount of US$44 million maturing in 2005, at a weighted average exchange rate
of 1.1796. As at December 31, 2004, the fair value of these instruments
represented an unrealized gain of $0.9 million.  The European
subsidiaries entered into foreign exchange forward contracts maturing in less
than a year to hedge their currency risks resulting from sales and purchases in
European currencies, U.S. dollars, British pounds and Swedish krona. As at December 31, 2004, the fair value of these instruments
represented an unrealized loss of $0.2 million (2003  unrealized gain of $0.1
million; 2002  unrealized loss of $0.5 million) on a notional amount of $23
million (2003  $20 million and 2002  $25 million).  Furthermore, one
of the joint ventures entered into various currency options. These options
entered into by the joint venture are contracts whereby the joint venture has
the right, but not the obligation, to sell U.S. dollars at the strike rate if
the U.S. dollars trade below that rate. In addition, in accordance with the
contracts, the joint venture has the obligation to sell U.S. dollars at the
strike rate if the U.S. dollars trade above a specific rate. As at December 31,
2004, the currency options entered into by the joint venture for a nominal
amount of US$16.8 million (the share of the Company is US$8.4 million) had
strike prices varying from 1.40 to 1.45 with maturities up to 12 months. These
instruments did not represent any unrealized loss or gain as at December 31,
2004.  Interest
rate risks  As at December 31,
2004, approximately 17% (2003  18%) of the Companys long-term debt was at
variable rates. In 2002, interest rate swaps had been contracted to fix
interest at a weighted average rate of 6.94% on a notional amount of $50
million. These instruments which represented an unrealized loss of $1.5 million
as at December 31, 2002 were terminated in 2003.  In addition, a
joint venture holds certain interest rate swap agreements not designated as
hedges. These agreements, maturing from 2008 to 2012, have been contracted to
fix interest at a weighted average rate of 8.18% on a notional amount of US$5.5
million (the share of the Company is US$2.8 million). As at December 31,
2004, these agreements are recorded as liabilities at their fair value of $0.6
million (2003  $0.6 million).  In April 2004,
a joint venture entered into interest rate swaps. These contracts are designated
as hedges of the change in fair value of a portion of the joint ventures
long-term debt. Accordingly, the interest rate went from a fixed rate of 6.75%
to an average variable rate in 2004 of 3.96% for a notional amount of US$50
million (the share of the Company is US$25 million) and mature in 2013. As at December 31,
2004, the fair value of these instruments represented an unrealized gain of
$0.8 million.  73


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Credit
risks  The Company is exposed to
credit risk on the accounts receivable from its customers. In order to reduce
this risk, the Companys credit policies include the analysis of the financial
position of its customers and the regular review of their credit limits. In
addition, the Company believes there is no particular concentration of credit
risks due to the geographic diversity of customers and the procedures for the
management of commercial risks. Derivative financial instruments include an
element of credit risk should the counterparty be unable to meet its
obligations. The Company reduces this risk by dealing with creditworthy
financial institutions.  Commodity
price risk  The Company and a joint
venture entered into various derivatives financial instruments whereby it sets
the price for notional quantities of sorted office papers, old corrugated
containers, bleached softwood kraft, electricity, natural gas, 42-lb.
kraft linerboard and 26-lb. semichemical corrugating medium. In 2003,
gains and losses resulting from these contracts were applied to earnings only
when they were realized. In 2004, gains and losses arising from electricity
contracts are applied to earnings only when they are realized whereas all other
types of contracts are accounted for at fair value. As at December 2004,
the fair value of these contracts represented an unrealized gain of $6.3 million,
(2003  unrealized gain of $4.7 million, 2002  unrealized gain of $1.5
million). In 2004, an unrealized gain of $0.5 million was recorded in
earnings for contracts not designated as hedges. In addition, an amount of $1.7
million was recorded in 2004 with respect to the amortization of the
transitional deferred unrealized gain under AcG-13.  21
Cumulative translation adjustments  2004
  
  2003
  
  2002BalanceBeginning of the period
  
  14
  
  48
  
  16Effect
  of charges in exchange rates during the year:On
  net investment in self sustaining foreign subsidiaries
  
  (36
  )
  (90
  )
  30On
  certain long-term debt denominated in foreign currency designated as a hedge
  of the net investments in self sustaining foreign subsidiaries
  
  41
  
  69
  
  2Future
  income taxes on net investment hedge
  
  (8
  )
  (13
  )
  BalanceEnd of the period
  
  11
  
  14
  
  48  22
Related party transactions  The Company entered into
the following transactions with related parties:  2004
  
  2003
  
  2002Joint
  ventures(1)Sales
  
  25
  
  26
  
  19Revenue
  from services
  
  12
  
  21
  
  22Purchases
  
  27
  
  26
  
  24Significantly
  influenced companiesSales
  
  11
  
  48
  
  58Purchases
  
  15
  
  15
  
  13Entity
  controlled by a related director of the CompanyPurchases
  
  6
  
  7
  
  5  These transactions
occurred in the normal course of operations and are measured at the exchange
amount, which is the amount of consideration established and agreed to by the
related parties.  74


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  The
balance sheets as at December 31 included the following balances with related
parties:  2004
  
  2003Joint
  ventures(1)Accounts
  receivable
  
  5
  
  6Accounts
  payable
  
  5
  
  3Significantly
  influenced companiesAccounts
  receivable
  
  1
  
  Entity
  controlled by a related director of the CompanyAccounts
  payable
  
  1
  
  1  
 (1)Represent
the portion of transactions or balances not eliminated upon proportionate
consolidation of the joint ventures.  23 Interests in joint ventures  The major components of
the interests in joint ventures in the consolidated financial statements are as
follows:  2004
  
  2003
  
  2002Consolidated
  balance sheetsCurrent
  assets
  
  195
  
  237
  
  191Long-term
  assets
  
  480
  
  572
  
  465Current
  liabilities
  
  101
  
  121
  
  123Long-term
  debt, net
  
  169
  
  188
  
  182Consolidated
  statements of earningsSales
  
  847
  
  756
  
  712Depreciation
  and amortization
  
  40
  
  34
  
  29Operating
  income
  
  78
  
  61
  
  88Financial
  expenses
  
  13
  
  17
  
  19Net
  earnings
  
  50
  
  25
  
  46Consolidated
  statements of cash flowsOperating
  activities
  
  56
  
  42
  
  63Investing
  activities
  
  (65
  )
  (44
  )
  (58
  )Financing
  activities
  
  8
  
  2
  
  3Additional
  informationCash
  and cash equivalents at end of year
  
  7
  
  12
  
  13Total
  assets
  
  675
  
  809
  
  656Total
  debt(1)
  
  191
  
  211
  
  218Dividends
  received by the Company from joint ventures
  
  19
  
  16
  
  17  
 (1)  Includes bank loans and advances, current
portion of long-term debt, and long-term debt.  75


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  24
Summary of differences between Canadian and United States generally accepted
accounting principles  The consolidated
financial statements have been prepared in accordance with Canadian GAAP which
differs in certain respects from U.S. GAAP. Such differences, as they relate to
the Company, are summarized below.  New accounting policies under
U.S. GAAP  a)Variable interest entitiesEffective January 1,
2004, the Company adopted FIN 46, Consolidation
of Variable Interest Entities.The primary objective of this
interpretation is to provide guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights; such entities are known as variable interest entities (VIEs).
The adoption of this standard did not have any material impact on the financial
position or results of operations of the Company.  b)  Financial
instrumentsOn July 1,
2003, the Company applied SFAS 150, Accounting
for Certain Financial Instruments with Characteristics of Liabilities and
Equity.SFAS 150 requires mandatorily redeemable instruments to be
classified as liabilities if they embody an obligation outside the control of
the issuer and the holder to redeem the instrument, and if the obligation is
required to be redeemed at a specified or determinable date or upon an event
certain to occur. The adoption of this standard resulted in the
reclassification of mandatorily redeemable preferred shares amounting to $4.2
million from other liabilities (non-controlling interest) to long-term debt.
The measurement of these instruments at fair value did not result in any
significant adjustment.  c)Accounting for Asset Retirement
ObligationOn January 1,
2003, the Company applied SFAS 143, Accounting
for Asset Retirement Obligation.This standard requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The application of this standard did not have any impact on the
financial position or results of operations of the Company.  d)Costs Associated with Exit or Disposal
ActivitiesOn January 1,
2003, the Company applied SFAS 146, Accounting
for Costs Associated with Exit or Disposal Activities.The
statement changes the measurement and timing of recognition for exit costs,
including restructuring charges. The application of this standard did not have
any impact on the financial position or results of operations of the Company.  e)  GuaranteesOn January 1, 2003,
the Company applied FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.FIN 45 elaborates on the
disclosure requirements of a company with respect to its obligations under
certain guarantees. It also clarifies that a company is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation then undertaken whether or not payment is probable. Similar
accounting guidelines exist in Canada (refer to note 2(f)) but do not require
liability recognition at the inception. For U.S. GAAP purposes, no liabilities
were recognized as at January 1, 2003 and December 31, 2003 as a
result of the application of FIN 45.  Reconciliation
of net earnings, shareholders equity and balance sheet  f)  The
following summary sets out the material adjustments to the Companys reported
net earnings, shareholders equity and balance sheet which would be made in
order to reconcile to U.S. GAAP. It also sets out a reconciliation of
shareholders equity under U.S. GAAP:  76


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Reconciliation of net earnings
  
  Note
  
  2004
  
  2003
  
  2002Net
  earnings under Canadian GAAP
  
  
  
  23
  
  55
  
  169U.S.
  GAAP adjustments:Start-up costs
  
  g)
  
  (2
  )
  
  
  4Gain
  realized on formation of Norampac
  
  h)
  
  (5
  )
  (4
  )
  (5
  )Unrealized
  exchange gains (losses) arising from foreign exchange forward contracts
  
  i)
  
  (2
  )
  7
  
  3Unrealized
  gains (losses) arising from change in fair values of commodity derivative
  financial instruments
  
  j)
  
  (1
  )
  3
  
  1Provision
  for derivative instruments currently in default
  
  
  
  
  
  
  
  2Unrealized
  gains from interest rate swaps
  
  k)
  
  
  
  1
  
  1Employee
  future benefits
  
  1)
  
  1
  
  2
  
  1Dividends
  on preferred shares of a subsidiary
  
  n)
  
  
  
  1
  
  3Excess
  of redemption price of Class B preferred shares on their paid up capital
  
  z)
  
  (1
  )
  
  
  Tax
  effect on above adjustments
  
  
  
  3
  
  (4
  )
  (3
  )Non-controlling
  interests
  
  
  
  
  
  (1
  )
  (3
  )Net
  earnings under U.S. GAAP
  
  
  
  16
  
  60
  
  173Net
  earnings under U.S. GAAP from continuing operations
  
  
  
  13
  
  56
  
  170Net
  earnings under U.S. GAAP from assets held for sales
  
  
  
  3
  
  4
  
  316
  
  60
  
  173Basic
  net earnings under U.S. GAAP from continuing operations per common share
  
  
  
  0.17
  
  0.68
  
  2.08Net
  earnings under U.S. GAAP per common shareBasic
  
  
  
  0.20
  
  0.73
  
  2.11Diluted
  
  
  
  0.20
  
  0.73
  
  2.09  77


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Statement of changes in
  shareholders equity
  
  2004
  
  2003
  
  2002under U.S. GAAP
  
  Number of shares
  
  $
  
  Number of shares
  
  $
  
  Number of shares
  
  $Common
  stockBalance
  at beginning of year
  
  81,731,387
  
  262
  
  81,826,272
  
  261
  
  80,987,466
  
  254Shares
  issued on exercise of stock options
  
  133,893
  
  1
  
  180,115
  
  2
  
  407,062
  
  3Redemption
  of common shares
  
  (503,700
  )
  (2
  )
  (275,000
  )
  (1
  )
  (238,400
  )
  (1
  )Shares
  issued in connection with the 2000 privatization
  
  
  
  
  
  
  
  
  
  670,144
  
  5Balance
  at end of year
  
  81,361,580
  
  261
  
  81,731,387
  
  262
  
  81,826,272
  
  261Adjustment
  relating to stock optionsBalance
  at beginning of year
  
  
  
  4
  
  
  
  3
  
  
  
  2Adjustment
  of the year
  
  
  
  3
  
  
  
  1
  
  
  
  1Balance
  at end of year
  
  
  
  7
  
  
  
  4
  
  
  
  3Retained
  earningsBalance
  at beginning of year
  
  
  
  832
  
  
  
  788
  
  
  
  629Net
  earnings for the year
  
  
  
  16
  
  
  
  60
  
  
  
  173Dividend
  on common shares
  
  
  
  (13
  )
  
  
  (13
  )
  
  
  (10
  )Dividend
  on preferred shares
  
  
  
  
  
  
  
  (1
  )
  
  
  (1
  )Excess
  of common share redemption price over their paid-up capital
  
  
  
  (5
  )
  
  
  (2
  )
  
  
  (3
  )Balance
  at end of vear
  
  
  
  830
  
  
  
  832
  
  
  
  788Cumulative
  other comprehensive earningsBalance
  at beginning of year
  
  
  
  4
  
  
  
  38
  
  
  
  12Annual
  changesnet of taxTranslation
  adjustments
  
  
  
  (3
  )
  
  
  (34
  )
  
  
  32Minimum
  pension liability
  
  
  
  (4
  )
  
  
  
  
  
  
  (6
  )Unrealized
  exchange gains arising from foreign exchange forward contracts designated as
  hedges
  
  
  
  5
  
  
  
  
  
  
  
  Reclass
  to earnings of cumulative net loss on adoption of SFAS 133 and 138
  
  
  
  
  
  
  
  
  
  
  
  (1
  )Rounding
  
  
  
  
  
  
  
  
  
  
  
  1Balance
  at end of year
  
  
  
  2
  
  
  
  4
  
  
  
  38Rounding
  
  
  
  1
  
  
  
  1
  
  
  
  Shareholders
  equityEnd of year
  
  
  
  1,101
  
  
  
  1,103
  
  
  
  1,090  78


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Reconciliation of shareholders
  equity
  
  Note
  
  2004
  
  2003
  
  2002Shareholders
  equity under Canadian GAAP
  
  
  
  1,059
  
  1,056
  
  1,065U.S.
  GAAP adjustments:Start-up
  costs
  
  g)
  
  (7
  )
  (5
  )
  (5
  )Gain
  realized on formation of Norampac
  
  h)
  
  57
  
  62
  
  66Unrealized
  exchange gains arising from foreign exchange forward contracts
  
  i)
  
  12
  
  7
  
  Unrealized
  gains arising from change in fair values of commodity derivative financial
  instruments net of provision for instruments currently in default
  
  j)
  
  3
  
  4
  
  1Unrealized
  losses from interest rate swaps
  
  k)
  
  
  
  
  
  (2
  )Employee
  future benefits
  
  1)
  
  (9
  )
  (10
  )
  (12
  )Minimum
  pension liability
  
  m)
  
  (21
  )
  (16
  )
  (15
  )Privatization
  
  p)
  
  
  
  
  
  (1
  )Tax
  effect on above adjustments
  
  
  
  (2
  )
  (5
  )
  (1
  )Class B
  preferred shares
  
  z)
  
  
  
  
  
  (6
  )Excess
  of redemption price of Class B preferred shares on their paid-up capital
  
  z)
  
  9
  
  10
  
  Shareholders
  equity under U.S. GAAP
  
  
  
  1,101
  
  1,103
  
  1,090  2004
  
  2003Reconciliation of balance sheet
  
  Note
  
  Canadian GAAP
  
  U.S. GAAP
  
  Canadian GAAP
  
  U.S. GAAPProperty,
  plant and equipment
  
  h) p) and z)
  
  1,700
  
  1,742
  
  1,636
  
  1,684Other
  assets and goodwill (long-term)
  
  g) to l) and w)
  
  328
  
  354
  
  269
  
  297Accounts
  payable and accrued liabilities
  
  i) j) and k)
  
  509
  
  507
  
  453
  
  452Other
  liabilities (long-term)
  
  g) h) i) j) m)
  n) p) q) and z)
  
  303
  
  331
  
  265
  
  293Shareholders
  equity
  
  g) to p) and z)
  
  1,059
  
  1,101
  
  1,056
  
  1,103  79


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  The amounts shown in the
above table include joint ventures accounted for by the proportionate
consolidation method, as indicated in note 24 (v), in accordance with both
Canadian and U.S. GAAP.  g) Under Canadian GAAP,
start-up costs are deferred and amortized over a period not exceeding five
years. Under U.S. GAAP, start-up costs are accounted for under Statement of
Position (SOP) No. 98-5, Reporting
on the Costs of Start-up Activities,and are included in the
statement of earnings in the period they are incurred.  h) On December 30,
1997, the Company and Domtar Inc. merged their respective containerboard and
corrugated packaging operations to form Norampac Inc., a 50-50 joint
venture. Under Canadian GAAP, a portion of the gain realized on the transaction
of an original amount of approximately $58 million, net of tax, 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.  In addition, under
U.S. GAAP, additional liabilities would have been included in the allocation of
the purchase price at the date of the transaction with respect to employee
future benefits with a corresponding adjustment to goodwill.  i) Under Canadian GAAP,
gains and losses arising from foreign exchange forward contracts used to hedge
anticipated sales, purchases or interests are charged to earnings as an
adjustment of sales, cost of sales or financial expenses when the underlying
sale, purchase or interest is recorded. Under U.S. GAAP, the foreign exchange
forward contracts concluded before January 1, 2004 are not designated as
hedges as defined in SFAS 133, Accounting
for Derivative Instruments and Hedging Activities;therefore the
unrealized gains and losses from these contracts are charged to earnings as
they arise. Under U.S. GAAP, foreign exchange forward contracts entered into
after January 1, 2004 are designated as hedges, as defined by SFAS 133.  j) Under Canadian GAAP,
gains and losses arising from swap commodity contracts designated as hedging
instrument are charged to earnings only when realized. Under U.S. GAAP, the
unrealized gains and losses arising from these contracts, which do not meet
requirements of hedging as defined in SFAS 133, Accounting for Derivative Instruments and Hedging Activities,are
charged to earnings.  k) Under Canadian GAAP,
unrealized gains and losses on interest rate swaps contracted before January 1,
2004 and designated as hedges are not recognized in the financial statements.
Under U.S. GAAP, these contracts are not designated as hedges and therefore,
the unrealized gains and losses are charged to earnings.  1) Before the adoption of
CICA 3461, Employee Future Benefits,on
January 1, 2000, the discount rate used in the measurement of pension
costs and obligations under U.S. GAAP differed from the one used under Canadian
GAAP. In addition, as allowed by Canadian GAAP before January 1, 2000, the
Company recognized post-employment costs and obligations using the cash basis
of accounting. Under CICA 3461, the treatment of pension costs is not
materially different from U.S. GAAP. The remaining adjustments result from the
amortization of actuarial losses and gains which arose prior to January 1,
2000.  m) Under U.S. GAAP, a
minimum pension liability adjustment must be recorded when the accumulated
benefit obligation of a plan is greater than the fair value of its assets. The
excess of its liability over the intangible asset, which can also be recorded
for the plan, is recorded in comprehensive earnings in shareholders equity.  n) Under Canadian GAAP,
dividends on mandatorily redeemable preferred shares of a subsidiary are
charged to earnings as interest expense. Under U.S. GAAP, declared dividends
prior to July 1, 2003 are charged to earnings but as non-controlling interests.
Since July 1, 2003, in accordance with SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of Liabilities and Equity,dividends are charged to
earnings as interest expense.  In addition, under
U.S. GAAP, declared dividends prior to July 1, 2003 would have been shown
as a financing activity in the cash flows statement. Since July 1, 2003,
these dividends are shown as an operating activity, as they are under Canadian
GAAP.  80


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  o) Under Canadian GAAP,
income tax rates of substantively enacted tax laws can be used to calculate
future income tax assets and liabilities while under U.S. GAAP, only income tax
rates of enacted laws can be used.  p) On December 31,
2000, the Company acquired shares held by non-controlling shareholders in three
of its subsidiaries (the privatized subsidiaries) in exchange for common
shares of the Company. Under Canadian GAAP, the fair value of $6.85 attributed
to the shares issued represents the quoted market value of the Companys shares
at the date of privatization. Under U.S. GAAP, the fair value attributed to the
shares issued would have been $6.67 which represents the quoted market value of
the Companys shares during a reasonable period before and after the date the
transaction was agreed upon and announced. Since the excess of the net book
value of the non-controlling interests over their purchase price has been
recorded under Canadian GAAP as a decrease of property, plant and equipment and future income tax liabilities,
the adjustment resulting from a different measurement date as stated above
would affect these accounts accordingly.  In addition,
Canadian GAAP to U.S. GAAP reconciliation items described in note 24(g) to
(o) and affecting the privatized subsidiaries prior to December 31, 2000
would affect the computation of the net book value of the non-controlling
interests and therefore the adjustment to property, plant and equipment and
future income tax liabilities at the date of the privatization.  q) Comprehensive earnings  2004
  
  2003
  
  2002Net
  earnings under U.S. GAAP
  
  16
  
  60
  
  173Translation
  adjustments
  
  (3
  )
  (34
  )
  32Minimum
  pension liability adjustment, net of related income taxes(1)
  
  (4
  )
  
  
  (6
  )Unrealized
  exchange gains arising from foreign exchange forward contracts designated as
  hedges, net of related income taxes(2)
  
  5
  
  
  
  Reclass
  to earnings of cumulative net loss on adoption of SFAS 133 and 138, net of
  related income taxes
  
  
  
  
  
  (1
  )Comprehensive
  earnings under U.S. GAAP
  
  14
  
  26
  
  198  
 (1)The minimum
pension liability adjustment represents $4.4 million, $0.3 million and $6.3
million for the years ended December 31,2004, 2003 and 2002 respectively, net of related income taxes of
$1.5 million, $0.1 million and $3.2 million for the years ended December 31,
2004, 2003 and 2002 respectively. (2)The unrealized
exchange gain of $5.1 million for the period ended December 31, 2004 is
net of related income taxes of $2.7 million.  r) Accumulated other
comprehensive earnings  2004
  
  2003Cumulative
  translation adjustments
  
  11
  
  14Cumulative
  minimum pension liability adjustments, net of related income taxes
  
  (14
  )
  (10
  )Cumulative
  unrealized exchange gains arising from foreign exchange forward contract designated
  as hedges, net of related income taxes
  
  5
  
  2
  
  4  s) For pension plans
where the accumulated benefit obligation (ABO) exceeds the fair value of plan
assets under U.S. GAAP, the projected benefit obligation (PBO), ABO and fair
value of plan assets are as follows:  2004
  
  2003PBO
  
  166
  
  126ABO
  
  154
  
  120Fair
  value of plan assets
  
  122
  
  102  81


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  t) The following
disclosure is required by U.S. GAAP. However, the information presented is
based on amounts published according to Canadian GAAP.  2004Canada
  
  Other countries
  
  TotalNet
  earnings from continuing operations before provision for income taxes, share
  of results of significantly influenced companies and share of earnings
  attributed to non controlling interests
  
  (24
  )
  44
  
  20Provision
  for income taxesCurrent
  
  6
  
  16
  
  22Future
  
  (14
  )
  (6
  )
  (20
  )(8
  )
  10
  
  2Net
  earnings from continuing operations before share of results of significantly
  influenced companies and share of earnings attributed to non controlling
  interests
  
  (16
  )
  34
  
  18  2003Canada
  
  Other countries
  
  TotalNet
  earnings from continuing operations before provision for income taxes, share
  of results of significantly influenced companies and share of earnings
  attributed to non controlling interests
  
  47
  
  17
  
  64Provision
  for income taxesCurrent
  
  7
  
  4
  
  11Future
  
  
  
  (6
  )
  (6
  )Future
  income taxes resulting from an increase in income taxes
  
  5
  
  
  
  512
  
  (2
  )
  10Net
  earnings from continuing operations before share of results of significantly
  influenced companies and share of earnings attributed to non controlling
  interests
  
  35
  
  19
  
  54  2002Canada
  
  Other countries
  
  TotalNet
  earnings from continuing operations before provision for income taxes, share
  of results of significantly influenced companies and share of earnings
  attributed to non controlling interests
  
  126
  
  79
  
  205Provision
  for income taxesCurrent
  
  37
  
  10
  
  47Future
  
  
  
  14
  
  14Future
  income tax benefits resulting from a reduction in income taxes
  
  (1
  )
  
  
  (1
  )36
  
  24
  
  60Net
  earnings from continuing operations before share of results of significantly
  influenced companies and share of earnings attributed to non controlling
  interests
  
  90
  
  55
  
  145  82


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  u) The disclosure of the
following amounts is required by U.S. GAAP:  2004
  
  2003
  
  2002Payment
  on operating lease, including rent of building
  
  45
  
  37
  
  35Payment
  on capital lease
  
  2
  
  7
  
  10Loss
  (gain) on foreign currencyRealized
  
  1
  
  7
  
  (2
  )Unrealized
  
  3
  
  2
  
  (1
  )  2004
  
  2003Accounts
  receivable
  
  452
  
  434Provision
  for bad debt
  
  (13
  )
  (13
  )Accounts
  receivable from related companies
  
  7
  
  8Other
  accounts receivable
  
  44
  
  27Income
  tax receivable
  
  19
  
  23Prepaid
  expenses
  
  18
  
  15527
  
  494Accounts
  payable
  
  351
  
  300Accounts
  payable to related companies
  
  7
  
  7Marginal
  salaries and benefits payable
  
  79
  
  64Interest
  payable
  
  25
  
  20Income
  taxes payable on benefit
  
  5
  
  7Capital
  expenses included in accounts payable
  
  13
  
  11Others
  
  28
  
  44509
  
  453  2004Balance
  
  Additions
  
  
  
  Balanceat the beginning
  
  Charged
  
  
  
  at the endValuation and qualifying
  accounts
  
  of the period
  
  to expenses
  
  Deductions
  
  of the periodProvision
  for doubtful accounts
  
  13
  
  6
  
  (6
  )
  13Provision
  for obsolete inventory
  
  8
  
  
  
  
  
  8Valuation
  allowance for tax purposes(1)
  
  28
  
  
  
  (3
  )
  25  2003Balance
  
  Additions
  
  
  
  BalanceAt the beginning
  
  charged
  
  
  
  at the endof the period
  
  to expenses
  
  Deductions
  
  of the periodProvision
  for doubtful accounts
  
  11
  
  7
  
  (5
  )
  13Provision
  for obsolete inventory
  
  11
  
  
  
  (3
  )
  8Valuation
  allowance for tax purposes(1)
  
  33
  
  
  
  (5
  )
  28  2002Balance
  
  Additions
  
  
  
  BalanceAt the beginning
  
  charged
  
  
  
  at the endof the period
  
  to expenses
  
  Deductions
  
  of the periodProvision
  for doubtful accounts
  
  17
  
  7
  
  (13
  )
  11Provision
  for obsolete inventory
  
  9
  
  2
  
  
  
  11Valuation
  allowance for tax purposes(1)
  
  41
  
  
  
  (8
  )
  33  83


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  1.  The deductions in the valuation allowance for
tax purposes.  2004
  
  2003
  
  2002Foreign
  currency translation
  
  1
  
  2
  
  Unrecognized
  tax benefit arising from current losses of subsidiaries
  
  1
  
  2
  
  2Recognized
  tax benefit arising from previously incurred losses of subsidiaries
  
  (5
  )
  (9
  )
  (10
  )(3
  )
  (5
  )
  (8
  )
  v) Under Canadian GAAP,
investments in joint ventures are accounted for using the proportionate
consolidation method. Under U.S. GAAP, investments in joint ventures are
accounted for using the equity method. The different accounting treatment
affects only the display and classification of financial statement items and
not net earnings or shareholders equity. Rules prescribed by the Securities and Exchange Commissionof the
United States (SEC) permit the use of the proportionate consolidation method
in the reconciliation to U.S. GAAP provided the joint venture is an operating
entity and the significant financial operating policies are, by contractual
arrangement, jointly controlled by all parties having an equity interest in the
joint venture. In addition, the Company discloses in note 23 the major
components of its financial statements resulting from the use of the
proportionate consolidation method to account for its interests in joint
ventures.  w) Under Canadian GAAP,
the Companys deferred financing costs are amortized on a straight-line basis
over the anticipated period of repayment of the underlying debt. Under U.S.
GAAP, such costs are amortized under the interest method. Amortization under
both methods was not materially different for each of the periods presented.  x) Under U.S. GAAP, the
dilution gains of 2002 amounting to $1 million as described in note 13(a) would
have been disclosed separately on the statement of earnings.  y) Under U.S. GAAP, the
premium paid on redemption of long-term debt would be classified as an
operating activity and not as cash flow used in financing activities. In
addition, under U.S. GAAP, financing charges incurred in 2004 and 2003
amounting to $2 million and $29 million respectively would be classified under
operating activities rather than financing activities.  z) Under Canadian GAAP,
the Class B preferred shares of a subsidiary are included under capital
stock (note ll(b)). Under U.S. GAAP, these preferred
shares would be shown on the balance sheet as a non-controlling interest. As
described in note ll(b), in 2003, the Company redeemed
all of the outstanding Class B preferred shares of a subsidiary for a
consideration of $16 million. Under Canadian GAAP, the excess of the redemption
price of $10 million over the recorded capital was included in retained earnings.
Under U.S. GAAP, as these preferred shares represent a non-controlling
interest, the excess of $10 million would have been recorded as an increase of
$15 million in property, plant and equipment and an increase of $5 million in
future income tax liabilities. The adjustment of $15 million in property, plant
and equipment 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 be
classified under investing activities rather than financing activities.  84


Notes to Consolidated Financial Statements  For the three-year period
ended December 31, 2004 (tabular
amounts in millions of Canadian dollars, except per share amounts) (Continued)  Accounting
pronouncement not yet implemented under U.S. GAAP  aa)
InventoryIn November 2004, the FASB published SFAS 151 Inventory cost an amendments to ARB No. 43,
Chapter 4.This standard imposes to inventory the allocation of
fixed general manufacturing costs that exceed the costs related to a normal and
stable production. It also imposes to inventory the allocation of abnormal
costs related to assets not in service, freight costs, handling costs, and
production of non-standard products. The SFAS 151 applies to open periods as of
June 15, 2005 and its anticipated application is however permitted. The
Company is presently evaluating the impact of this new standard.  85