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Annual Report

Management's Discussion and Analysis of Operating Results, Financial Position and Cash Flows

Financial Highlights 2007 

Strategic Orientations and Mission 

Message from the Chairman 

Message from the President and General Manager 

Questions and Answers 

Impact on the Québec Economy 

Review of Activities 

Financial Review 

Board of Directors and Corporate Governance 

Officers and Management Committee 

Previous Reports 



SGF posted net earnings of $57 million for the fiscal year ended December 31, 2007, compared with $75 million for the previous year. This decrease is attributable to an increase in losses on investments and lower investment results, offset in part by greater gains on disposal of investments.

SGF’s investments sustained a considerable decline in profitability, which decreased from $62 million in 2006 to $26 million in 2007, due mainly to the major losses incurred by the Energy, Environment sector of activity.

The Mines, Materials, Energy, Environment Group includes two segments. The first, Mines, Materials, posted a profit of $41 million in 2007, down from $55 million in 2006. Higher raw material prices coupled with the rise in the value of the Canadian dollar in relation to the U.S.&NBSPdollar brought down Albecour’s gross margin in the aluminum segment. The second segment, Energy, Environment, sustained losses of $45 million in 2007, compared with $7 million in 2006. This major increase in losses is due mainly to the continued appreciation of the Canadian dollar in relation to the U.S. dollar and surging oil prices, which caused profit margins in the petrochemicals segment to fall sharply.

In the Forest Products Group, the steady decline in housing starts in the United States and the weak demand for some types of paper, such as coated paper, had a negative impact on the Group’s profitability. Losses totalled $19 million in 2007, compared with $9 million in 2006.
The Agri-Food Group achieved a profit of $15 million, up by $6 million over 2006. This strong performance is largely attributable to one of our agri-food processing companies, which returned to profitability in 2007 thanks to its cost-cutting program.

Changes in the fair market value of venture capital investments resulted in a gain of $24 million in 2007, up from $5 million a year earlier. This improvement is due to the strong stock market performance of CryoCath Technologies and Cambridge Display Technology, the latter having been the subject of a takeover by Sumitomo Chemical.

The gain on disposal of investments and other amounted to $169 million in 2007, versus $102 million in 2006. The gains realized in 2007 are due primarily to the sale of all the shares of Theratechnologies and ADF Group, the divestiture of part of the equity interest in Atrium Innovations, a gain on renegotiation of the long-term debt in a joint venture and a foreign exchange gain on debts denominated in U.S. dollars.


SGF’s operating expenses amounted to $34 million in 2007, an increase of $1 million over 2006. These expenses represent 1.8% of shareholder’s equity in 2007 and 2006.

Losses on investments totalled $104 million in 2007, compared with $56 million in 2006. Losses recognized in 2007 reflect the write-down of the investment in Petromont, subsequent to the announcement that this company would shut down for an indefinite time period on February 12, 2008, the write-down of liquidity invested in non-bank-sponsored asset-backed commercial paper (ABCP) subsequent to the reclassification of this item as a long-term investment, and the impairment of certain other assets..


Subsequent to the adoption by SGF of three new accounting standards relating to financial instruments effective January 1, 2007, a significant portion of SGF’s balance sheet is now measured at fair value (the reader is referred to Note 1 – Changes in Accounting Policies).

Pursuant to these new standards, all investments, except for investments in subsidiaries, joint ventures, companies subject to significant influence, investment companies, and loans and receivables, are classified as “available-for-sale”, and those quoted in an active market are measured at fair value. Any change in fair value is recorded in other comprehensive income as unrealized gains and losses. At the time of disposal or a permanent impairment in fair value, such gains or losses become realized and are reclassified to the consolidated statement of operations.

Shareholder’s equity rose from $1,900 million at the end of 2006 to $1,910 million as at December 31, 2007, due mainly to the net earnings recorded in 2007, offset in part by the accumulated other comprehensive income.

As at December 31, 2007, accumulated other comprehensive income posted a negative balance of $42 million, compared with a positive balance of $63 million at the beginning of the year, representing a negative change of $105 million. This negative change, recorded in other comprehensive income during the year, is due mainly to the unrealized decrease in the fair value of listed investments and the reclassification of gains realized during the year to the consolidated statement of operations..


Sources of Funds
Cash flows from the disposal of investments amounted to $210 million in 2007, up from $201 million in 2006. Dividends, interest and other totalled $154 million in 2007, compared with $63 million a year earlier.

Use of Funds

Cash flows used for investments totalled $233 million in 2007, being the same amount as in 2006. Operating expenses, capital taxes and other increased to $41 million, up from $35 million the previous year. In 2007, SGF reclassified the $132 million held in ABCP as long-term investments.

Cash and cash equivalents were reduced from $146 million as at December 31, 2006 to $104 million by the end of 2007.
As at December 31, 2007, SGF as the parent company had available authorized credit facilities of $400 million pursuant to credit agreements with two Canadian banks.


SGF’s investments totalled $233 million in 2007. Principal investments in 2007 were made in Alliance Films, Induspac, Le Massif, Lionsgate Entertainment, Logibec and the Ungava diamond mining project.

In pursuing its mission to carry out economic development projects in compliance with accepted profitability requirements and in cooperation with partners, SGF is exposed to the major risks set forth below. SGF’s portfolio consists exclusively of high-risk investments in development capital, unlike certain tax-advantaged private investment institutions that benefit from the possibility of diversifying their portfolio holdings in lower-risk securities and bonds.

Global or Segmented Economic Cycles – Most of the companies in SGF’s portfolio are exposed to global market trends, which include fluctuations in exchange rates and in the price of raw material and alternate products, as well as economic growth. These factors combine to make forecasting difficult, especially since SGF often invests in long-term projects. Unfavourable variations in any one of these factors can have a major impact on the value of companies in the portfolio.

Risks Specific to the Technologies and Life Sciences Segments – Risks specific to these two segments include the difficulty in selecting products and technologies that present true commercial potential or value, the difficulty in profitably applying such products or technologies to specific industrial processes, the emergence of alternate technologies and obsolescence.

Mining-Specific Risks – The mining sector in general, and mining exploration in particular, is a speculative field subject to inherent risks, including the possibility that deposits will prove to be unprofitable and that liquidating certain investments under optimum conditions may be difficult.

Partners – In pursuing its mission, SGF teams up with strategic partners. Occasionally such partners may be unable to meet their commitments, which could have a material impact on SGF’s projects and obligations. Furthermore, it may be difficult to find replacement partners.

Human Resources – SGF’s success depends largely on its ability to recruit and retain skilled staff, including experienced managers and analysts. SGF might have trouble deploying its strategies and executing its business plans if it could not rely on these necessary skills.


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