Sun Media 20F/A 2007 Annual report (foreign) (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F/A

(Mark One)


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 333-6690

SUN MEDIA CORPORATION / CORPORATION SUN MEDIA

(Exact name of Registrant as specified in its charter)

BRITISH COLUMBIA, CANADA

(JURISDICTION OF INCORPORATION OR ORGANIZATION)

333 KING STREET EAST, TORONTO, ONTARIO, CANADA M5A 3X5

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class		Name of each exchange on which registered

None		None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

7⁵/⁸% Senior Notes due February 15, 2013
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

1,261,001 Class A Shares issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes þ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ

Indicate by check mark which financial statement item the registrant has elected to follow.

þ Item 17 o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

TABLE OF CONTENTS


	Page
Amendment Explanatory Note	ii

Forward-Looking Statements	ii

Presentation of financial Information	iii

PART I

Item 3. — Key Information		1
Item 5. — Operating And Financial Review And Prospects		5

PART III

Item 17. — Financial Statements		27
Item 19. — Exhibits		27

Signature		28

Index to Historical Financial Statements		29
Certification of Pierre Francoeur
Certification of Michel Slight
Certification of Pierre Francoeur
Certification of Michel Slight

AMENDMENT EXPLANATORY NOTE

Restatement of U.S. GAAP Reconciliation Note to Financial Statements Relating to
Accounting for Fair Value Hedge Relationships

This Amendment No. 1 (this “Form 20-F/A”) to our Annual Report on Form 20-F for the year ended December 31, 2006 that was originally filed on March 28, 2007 (the “Original Filing”), is being filed to reflect a restatement of Note 19, “Material Differences Between Generally Accepted Accounting Principles (GAAP) in Canada and the United States”, as at December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006. In the context of its continuous review of accounting standards, Sun Media determined that corrections to previously reported financial information relating to the accounting of certain fair value hedge relationships were appropriate. Restated Note 19 also includes tables that set forth Sun Media’s previously reported and restated unaudited consolidated statements of income calculated in accordance with GAAP in the United States for each of the quarters in fiscal year 2006. Management of Sun Media is of the opinion that this restatement of U.S. GAAP financial information is appropriate to correct a misinterpretation of the applicable GAAP and has concluded that the restatement does not result from a deficiency in internal controls over financial reporting.

For a description of the restatement, see “Material Differences Between Generally Accepted Accounting Principles (GAAP) in Canada and the United States — Restatement of U.S. GAAP Reconciliation Note to Financial Statements Relating to Accounting for Fair Value Hedge Relationships” in restated Note 19 to the accompanying audited consolidated financial statements in this Amendment No. 1. No adjustments are required to financial information prepared in accordance with GAAP in Canada due to the subject matter of the restatement. Although the financial statements in their entirety are included in this Amendment No. 1, only Note 19 has been modified from the Original Filing.

This Amendment No. 1 amends and restates Item 3A, Item 5 (provided for convenience in its entirety although only the section “Operating and Financial Review and Prospects — Operating Results — Adjusted EBITDA” has been modified), Item 17 and Item 19 (for the inclusion of new certifications only) of the Original Filing and, except for such items, this Amendment No. 1 does not, and does not purport to, amend, update or restate the information in any other item of the Original Filing. The explanatory caption at the beginning of each item of this Amendment No. 1 sets forth the nature of the revisions to that item.

Except for the certifications, this Amendment No. 1 speaks as of the filing date of the Original Filing.

On the date hereof, we are also furnishing to the SEC a report on Form 6-K/A containing an amended and restated Quarterly Report for the three months ended March 31, 2007 and 2006, as well as restated unaudited quarterly financial statements.

All references in this Amendment No. 1 to “Sun Media” or the “Company”, as well as use of the terms “we”, “us”, “our” or similar terms, are references to Sun Media Corporation, a company continued under the laws of British Columbia, and, unless the context otherwise requires, its subsidiaries and operating companies. All references in this Amendment No. 1 to “Quebecor Media” are references to Quebecor Media Inc., our indirect sole shareholder.

Unless otherwise indicated, information provided in this Amendment No. 1, including all operating data presented, is as of December 31, 2006.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements with respect to our financial condition, results of operations and business and certain of our plans and objectives. These forward-looking statements are made pursuant to the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate as well as beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, prospects, financial position and business strategies. Words such as “may”, “will”, “expect”, “continue”, “intend”, “estimate”, “anticipate”, “plan”, “foresee”, “believe” or “seek” or the negatives of these terms or variations of them or similar terminology are intended to identify such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; anticipated trends in our business; and our ability to continue to control costs. We can give no assurance that these estimates and expectations will prove to be correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, but are not limited to:

	•		general economic, financial or market conditions;

	•		the intensity of competition within the newspaper industry and from other communications and advertising media and platforms;

	•		cyclical and seasonal variations in the businesses of our local, regional or national advertisers and in our advertising revenue;

	•		labour disputes or strikes;

	•		changes in our ability to obtain raw materials critical to our operations, such as newsprint, in sufficient quantities and at reasonable prices;

	•		exchange rate fluctuations that affect our ability to repay our U.S. dollar-denominated debt; and

	•		interest rate fluctuations that affect our ability to repay our U.S. dollar-denominated debt, or that could impact our accounting estimates.

We caution you that the above list of cautionary statements is not exhaustive. These and other factors are discussed in further detail elsewhere in this annual report, including under the section “Risk Factors”. Each of these forward-looking statements speaks only as of the date of this annual report. We will not update these statements unless the securities laws require us to do so. We advise you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission (“SEC”), as described under Item 10. “Additional Information — Documents on Display”.

PRESENTATION OF FINANCIAL INFORMATION

We present our consolidated financial statements in Canadian dollars. In this annual report, references to dollars, $, Canadian dollars or Cdn$ are to the currency of Canada, and references to U.S. dollars or US$ are to the currency of the United States.

Our consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in Canada, or Canadian GAAP. For a discussion of the principal differences between Canadian GAAP and the accounting principles generally accepted in the United States, or U.S. GAAP, see Note 19 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

iii

statement of cash flows as a measure of liquidity. You should not consider this adjusted EBITDA in isolation from, or as a substitute for analysis of, our financial information reported under Canadian GAAP and U.S. GAAP. We use adjusted EBITDA because management believes it is a meaningful measure of performance commonly used in the publishing industry and by financial analysts and other users of our financial information to analyze and compare companies in our industry. Adjusted EBITDA has limitations as an analytical tool, including:

	•		it does not reflect interest expense or the cash necessary to make interest payments;

	•		it does not reflect income tax expense or the cash necessary to pay income taxes;

	•		although depreciation and amortization are non-cash charges, the assets being amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such capital expenditures;

	•		it does not reflect financial expenses or the cash necessary to pay financial expenses;

	•		its does not reflect the cash necessary to pay expenses relating to our restructuring initiatives;

	•		it does not reflect cash outlays for future contractual commitments;

	•		it does not reflect impairments or equity losses, including our equity losses in SUN TV; and

	•		it does not reflect potential cash requirements to maintain our interest in SUN TV.

You should note that our definition of adjusted EBITDA may not be identical to similarly titled measures reported by other companies, limiting the usefulness of adjusted EBITDA as a comparative measure. We provide a reconciliation of adjusted EBITDA to net income and to cash provided by operating activities of continuing operations under Canadian GAAP and U.S. GAAP under “Item 5. Operating and Financial Review and Prospects — Operating Results — Adjusted EBITDA”.

PART I

Item 3.— Key Information

The U.S. GAAP “selected financial data” as at and for the years ended December 31, 2002, 2003, 2004, 2005 and 2006 set forth in this Item 3A has been revised to reflect the restatement described under “Amendment Explanatory Note”. Except for such revisions and cross-references to the relevant notes to our consolidated financial statements, this Item 3A has not been revised and does not reflect events or developments subsequent to the date of the Original Filing.

A — Selected Financial Data

The following table presents selected consolidated financial information for our business for each of the years 2002 through 2006. We derived the selected financial information from our consolidated financial statements. Our consolidated balance sheets as at December 31, 2005 and 2006 and our consolidated statements of income for each of the years ended December 31, 2004, 2005 and 2006 have been audited by KPMG LLP, an independent registered public accounting firm and are included in “Item 17. Financial Statements” of this annual report. KPMG LLP’s report on our consolidated financial statements is included in this annual report. The consolidated financial information as at December 31, 2002, 2003 and 2004 and for the years ended December 31, 2002 and 2003 has been derived from our audited consolidated financial statements not included in this annual report. The information presented under the caption “Operating Data” below is not derived from our audited consolidated financial statements. All information contained in the following tables should be read in conjunction with our audited consolidated financial statements and the notes thereto and with “Item 5. Operating and Financial Review and Prospects”.

Our consolidated financial statements have been prepared in accordance with Canadian GAAP. For a discussion of the principal differences between Canadian GAAP and U.S. GAAP, see Note 19 to our audited consolidated financial statements.


	Year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except Adjusted EBITDA margin, ratio and operating data)
AMOUNTS UNDER CANADIAN GAAP
Statement of Income Data:

Revenues	$	831,572		$	845,922		$	888,149		$	915,627		$	928.176
Operating expenses		612,127			621,168			660,304			693,452			719,042
Depreciation and amortization of intangible assets		26,530			27,582			26,038			30,324			36,549
Restructuring charges (1)		2,195			—			—			—			17,033


Operating income		190,720			197,172			201,807			191,851			155,552
Financial expenses (2)		33,493			43,950			51,138			46,738			50,535
Dividend income		(203,168	)		(224,589	)		(147,462	)		(152,628	)		(144,031	)
Interest on convertible obligations		197,479			218,301			143,333			148,232			139,834
Income tax expense (recovery) (3)		(16,937	)		(20,266	)		4,565			3,347			(10,127	)
Income from continuing operations		178,735			186,207			156,745			141,927			106,772
Net income	$	180,741		$	189,690		$	156,745		$	141,927		$	106,772


Balance Sheet Data (at period end):
Cash and cash equivalents	$	51,046		$	29,288		$	33,594		$	22,820		$	3,865
Total assets (4)		3,335,892			2,885,597			2,413,931			2,539,852			1,785,545
Total debt		2,465,147			2,141,687			1,624,324			1,748,560			1,076,092


	Year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except Adjusted EBITDA margin, ratio and operating data)
Capital stock		301,801			301,801			301,801			301,801			261,801
Shareholder’s equity		555,991			334,260			357,149			329,423			300,695

Other Financial Data:
Cash provided by operating activities of continuing operations	$	202,497		$	225,045		$	177,395		$	181,383		$	144,750
Cash (used in) provided by financing activities of continuing operations		240,628			(639,009	)		(615,677	)		(32,580	)		(817,171	)
Cash (used in) provided by investing activities of continuing operations		(431,912	)		392,252			442,588			(159,577	)		653,466
Adjusted EBITDA (unaudited) (5)		219,445			224,754			227,845			222,175			209,134
Adjusted EBITDA margin (unaudited) (5)		26.4	%		26.6	%		25.7	%		24.3	%		22.5	%
Capital expenditures		9,920			14,309			18,820			15,675			15,801
Ratio of earnings to fixed charges (unaudited)(6)		5.6x			4.7x			4.7x			4.4x			3.0x

Operating Data (unaudited):
Monday to Friday paid circulation (7)		937,600			953,000			938,500			925,300			920,900
Saturday paid circulation (7)		1,004,300			1,002,900			947,900			929,200			921,100
Sunday paid circulation (7)		1,082,900			1,090,000			1,064,100			1,038,800			1,041,000
Paid daily publications (at period end)		15			17			17			17			17
Weekly publications (at period end)		175			171			167			167			171
Other publications (at period end)		18			18			18			22			23
Total publications (at period end)		208			206			202			206			211


	Year ended December 31,
	2002			2003			2004			2005			2006
				(restated) (8)			(restated) (8)			(restated) (8)			(restated) (8)
	(in thousands, except Adjusted EBITDA margin, ratio and operating data)
AMOUNTS UNDER U.S. GAAP(8)
Statement of Income Data:
Revenues	$	831,572		$	845,922		$	888,149		$	915,627		$	928,176
Operating expenses		613,082			621,561			655,703			694,081			719,733
Depreciation and amortization of intangible assets		26,530			27,582			26,038			30,355			36,610
Restructuring charges (1)		2,195			—			—			—			17,033


Operating income		189,765			196,779			206,408			191,191			154,800
Financial expenses		31,800			48,387			53,633			48,423			51,428
Dividend income		(203,168	)		(224,589	)		(147,462	)		(152,628	)		(144,031	)
Interest on convertible obligations		197,479			218,301			143,333			148,232			139,834
Income taxes (recovery) expense (3)		16,724			22,306			8,389			(8,224	)		(10,281	)
Income from continuing operations		179,260			183,537			155,027			153,009			105,281
Net income	$	181,266		$	187,020		$	155,027		$	153,009		$	105,281


Balance Sheet Data (at period end):
Cash and cash equivalents	$	51,046		$	29,288		$	33,594		$	22,820		$	3,865
Total assets (4)		3,385,388			2,878,892			2,397,041			2,525,560			1,767,246
Total debt		2,506,792			2,118,398			1,603,245			1,729,688			1,061,463


	Year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except Adjusted EBITDA margin, ratio and operating data)
Capital stock		301,801			301,801			301,801			301,801			261,801
Shareholder’s equity		558,453			322,058			339,816			317,306			291,779

Other Financial Data (unaudited):
Adjusted EBITDA (5)	$	218,490		$	224,361		$	232,446		$	221,546		$	208,443
Adjusted EBITDA margin (5)		26.3	%		26.5	%		26.2	%		24.2	%		22.5	%
Ratio of earnings to fixed charges (6)		6.6x			5.6x			4.8x			4.4x			2.9x


(1)		During 2002, we implemented restructuring initiatives, which resulted in the termination of approximately 60 employees. The 2002 results include a charge of $2.2 million representing severance and other personnel-related costs relating to these initiatives.

		During 2006, the Company recorded charges for the restructuring of its operations, consisting substantially of employee termination benefits, summarized as follows:


	Estimated Number of
	Full-Time Equivalent		Restructuring
	Positions Affected		Charges
				(in thousands)
Restructuring of printing facilities
—The London Free Press		114	$	4,435
—The Toronto Sun		194		4,371
—The Ottawa Sun		39		1,260
—Le Journal de Montréal		146		910
Restructuring of news production operations		85		2,881
General workforce reduction		98		3,176

		676	$	17,033

		These restructuring initiatives are described in further detail under “Item 5. Operating and Financial Review and Prospects” and in Note 3 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

(2)		During 2004, we determined that one of our financial instruments, used to hedge foreign exchange fluctuations on a portion of the principal and interest of our 7⁵/⁸% Senior Notes due 2013, was no longer providing an effective hedge. Accordingly, we discontinued the application of hedge accounting for that financial instrument and the associated debt on April 1, 2004. For the year ended December 31, 2006, we recorded a loss on financial instruments of $3.6 million (2005 — $10.9 million; 2004 — $21.3 million), offset by an unrealized foreign currency translation gain of $2.9 million (2005 — $7.6 million; 2004 — $15.0 million) on the portion of our Senior Notes no longer considered hedged. Despite the Company’s discontinuation of hedge accounting for that financial instrument and the associated debt, as required by CICA Accounting Guideline AcG-13,Hedging Relationships, the Company believes that all of its financial instruments continue to adequately serve their original intended purpose of managing Sun Media’s exposure to fluctuations in foreign currency exchange rates.

(3)		The net cash receipts for income taxes on continuing operations were $3.7 million in the year ended December 31, 2002, $21.2 million in the year ended December 31, 2003, $10.7 million in the year ended December 31, 2004 and net cash payments were $1.3 million in the year ended December 31, 2005. Net cash payments were $2.3 million in the year ended December 31, 2006. The existence of cash tax receipts since 2002 is the result of transactions we entered into with Quebecor Media to reduce our tax obligations. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Liquidity and capital resource requirements — Purchase and/or sale of Preferred Shares of Quebecor Media and SUN TV and convertible obligations issued to and/or redeemed from Quebecor Media and Sun TV”.

(4)		Total assets as at December 31, 2006 include our investment in Quebecor Media and SUN TV Company preferred shares of $589.4 million. Our investment in Quebecor Media and SUN TV preferred shares was $1.950 billion, $1.590 billion, $1.140 billion and $1.282 billion as at December 31, 2002, 2003, 2004 and 2005, respectively. See Notes 6 and 7 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

(5)		We use the supplemental financial measure adjusted EBITDA to assess our operating results and financial performance. Adjusted EBITDA, and ratios using this measure, are not required by or recognized under Canadian GAAP or U.S. GAAP. We define adjusted EBITDA as net income before depreciation and amortization of intangible assets, financial expenses, dividend income, interest on convertible obligations to Quebecor Media and SUN TV, gains on dispositions of investments, gains on refinancing of long-term debt, restructuring charges, income taxes, equity and impairment losses, non-controlling interest and discontinued operations. Adjusted EBITDA and ratios using this measure are not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses, and this non-GAAP measure is not intended or designed to replace other financial operating performance measures or the statement of cash flows as a measure of liquidity. You should not consider this adjusted EBITDA in isolation from, or as a substitute for analysis of, our financial information reported under Canadian GAAP and U.S. GAAP. You should note that our definition of adjusted EBITDA may not be identical to similarly titled measures reported by other companies, limiting the usefulness of adjusted EBITDA as a comparative measure. We provide a reconciliation of adjusted EBITDA to net income and to cash provided by operating activities of continuing operations under Canadian GAAP and U.S. GAAP under “Item 5. Operating and Financial Review and Prospects — Operating Results — Adjusted EBITDA”.

(6)		For the purpose of calculating the ratios of earnings to fixed charges, (i) earnings consist of income from continuing operations before income tax (recovery) expense and non-controlling interest, plus fixed charges, and (ii) fixed charges consist of interest expensed and capitalized, plus amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of the interest within rental expense.

(7)		Circulation figures represent the average daily paid circulation for the period indicated and include only the 17 paid daily newspapers that we publish.

(8)		Refer to Note 19 of the audited consolidated financial statements for the year ended December 31, 2006.

Item 5. — Operating and Financial Review and Prospects

The following operating and financial review provides information concerning the operating results and financial condition of Sun Media for the year ended December 31, 2006 and the major changes from the last financial year. Our consolidated financial statements have been prepared in accordance with Canadian GAAP, which differs from U.S. GAAP in certain respects. For a discussion of the principal differences between Canadian GAAP and U.S. GAAP, and the extent to which these differences affect our consolidated financial statements, see Note 19 to our audited consolidated financial statements for the years ended December 31, 2004, 2005 and 2006. This discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes included in “Item 17. Financial Statements” of this annual report. This discussion contains forward-looking statements which are subject to a variety of factors that could cause actual results to differ materially from those expressed in, or contemplated by, these statements. See “Forward-Looking Statements” and “Item 3. Key Information — Risk Factors”.

Overview

Sun Media operates its newspaper businesses in both urban and community markets in Canada. Sun Media’s Urban Daily Group consists of 8 paid daily newspapers, 7 free daily commuter publications and 3 free weekly publications in nine of the ten most populated markets in Canada. The Urban Daily Group also includes Sun Media’s distribution business,Messageries Dynamiques. Sun Media’s Community Newspaper Group includes the majority of Sun Media’s other publications, including nine paid daily community newspapers, 168 weekly newspapers and weekly shopping guides, and 18 agricultural and other specialty publications. The Community Newspaper Group includesNetMedia, which coordinates the distribution of advertising and promotional products across Canada. Sun Media also has 24 web press and 10 sheetfed press operations across Canada.

In fiscal 2006, the Urban Daily Group accounted for 73.2% of Sun Media’s revenues and 73.4% of its adjusted EBITDA. We provide a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to the most directly comparable Canadian GAAP measure under “Operating Results and Adjusted EBITDA” of this Item. Two of Sun Media’s daily newspapers,Le Journal de MontréalandThe Toronto Sun, represent a significant portion of Sun Media’s revenues. In fiscal 2006, these two daily newspapers alone generated 31.7% of Sun Media’s consolidated revenue. Over the same period, the Community Newspaper Group accounted for 26.8% of Sun Media’s revenues and together with Sun Media’s corporate office accounted for 26.6% of its adjusted EBITDA.

Sun Media’s primary sources of revenue are advertising and paid circulation. Its principal categories of advertising revenues are classified, retail and national advertising. Classified advertising is made up of four principal categories: automobiles, private party, recruitment and real estate. Retail advertising is display advertising generally placed by local businesses and organizations. National advertising is display advertising primarily from advertisers promoting products or services on a national basis. Circulation revenues are derived from single copy sales made through retailers and vending boxes and subscription sales delivered to subscriber homes.

Developments in 2006

In 2006, Sun Media recorded restructuring charges, consisting substantially of employee termination benefits for production and editorial staff, totaling $17.0 million. This included restructuring charges of $11.0 million for the restructuring of printing facilities atThe London Free Press,The Toronto Sun,The Ottawa SunandLe Journal de Montréal. In addition, restructuring charges of $2.9 million and $3.1 million were recorded for the restructuring of Sun Media’s news production operations and general workforce reductions, respectively. These restructuring initiatives are ultimately expected to impact the equivalent of 676 full-time positions at Sun Media.

In 2006, Sun Media increased its equity investment by $0.9 million to reflect the final purchase price adjustment on the acquisition of SUN TV. In addition, during 2006, Sun Media made additional cash contributions to SUN TV in the amount of $5.2 million maintaining its 25% equity interest in SUN TV. In addition, during 2006, Sun Media performed the annual impairment tests for its equity investment in SUN TV, and concluded that some intangible assets were impaired, mainly broadcasting licenses and goodwill. Accordingly, Sun Media recorded a non-cash impairment charge of $7.8 million

on its equity investment in SUN TV. As at December 31, 2006, Sun Media’s equity investment in SUN TV was $3.7 million.

On January 17, 2006, Sun Media’s parent company, Quebecor Media Inc. (“Quebecor Media”), refinanced its debt. Concurrent with the closing of this refinancing, Sun Media’s credit agreement was amended for the addition of a new Term Loan C credit facility with a principal amount of $40.0 million that will mature on February 7, 2009. On that same date, the proceeds of our new Term Loan C credit facility were paid as a reduction of paid-up capital to Quebecor Media.

On May 1, 2006, Sun Media acquired two community publications,The Devon Dispatch NewsandThe Nouvelle Beaumont News, for total cash consideration of $1.1 million.

On June 12, 2006, Sun Media sold $255.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $255.0 million of its 2007 convertible obligation issue. In addition, Sun Media issued a new convertible obligation to Quebecor Media in the amount of $120.0 million (“2021 Convertible Obligation Issue”). This new convertible obligation matures on June 12, 2021, bears interest at 10.5% payable semi-annually and otherwise has terms and conditions substantially similar to existing convertible obligations. Sun Media used the proceeds from the issuance of the 2021 Convertible Obligation Issue to invest in an additional $120.0 million of Series F Cumulative First Preferred Shares of Quebecor Media, carrying a 10.85% annual fixed cumulative preferential dividend payable semi-annually and otherwise having terms and conditions substantially similar to its Preferred Shares of Quebecor Media.

On October 6, 2006, Sun Media acquiredLe Choix d’Antoine Labelle, a community publication in Mont Laurier, Quebec, for total cash consideration of $0.4 million.

On December 20, 2006, Sun Media sold $2.9 million of its investment in SUN TV Preferred Shares and used the proceeds to redeem $2.9 million of its convertible obligation.

On December 28, 2006, Sun Media sold $500.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $385.0 million of its 2007 convertible obligation issue and $115.0 million of its 2008 convertible obligation issue. In addition, Sun Media sold $55.0 million of its investment in the Series F Cumulative First Preferred Shares of Quebecor Media and used the proceeds to redeem $55.0 million of its 2020 convertible obligation issue.

On December 29, 2006, Sun Media made a partial repayment of US$15.0 million of its Term Loan B credit facility and unwound a related portion of its hedging contract.

Trends

Sun Media is highly dependent on advertising sales, which comprised 71.9% of total revenues in 2006. Advertising revenues are highly cyclical and seasonal in nature. In addition to our sensitivity to local, regional and national economic conditions, our newspapers rely heavily on advertising revenues from a relatively small number of industries. The most significant portion of Sun Media’s advertising revenues are derived from retail, classified and national advertising. Therefore, Sun Media’s ability to achieve revenue growth depends to a large degree on industries which have historically been sensitive to general economic cycles. Over the past few years, the traditional run of press advertising market for major multi-market retailers has been declining due to consolidation in the retail industry combined with a shift in marketing strategy toward other media. Furthermore, a reduction in the newspaper advertising market relating to the automotive sector has had a negative impact on our national sales. While these trends continue, Sun Media intends to reposition its products and distribution networks in order to sustain and grow its market share.

Circulation sales are another important revenue source for Sun Media, comprising 17.0% of total revenues. Circulation, measured in terms of copies sold, has been in general decline across the industry over the last ten years due to changing reader habits and the availability of other news sources such as television, radio and the Internet. In 2006, Sun

Media’s circulation revenues declined by $6.2 million or 3.8% as compared to 2005, with the largest single decline inThe Toronto Sun. Sun Media will continue to explore opportunities for strategic cover price changes and expanded home delivery sales in 2007 to manage circulation levels and maintain market share.

Competition continues to be intense in the newspaper industry. The increasing number of free commuter papers launched by our competition in urban markets and the growing number of competing daily newspapers and online services have put downward pressure on advertising and circulation revenue. In an effort to capitalize on the growing popularity of the commuter papers, Sun Media launched two additional24 Hourspublications in 2006, one in English and one in French, in the Ottawa region. In February 2007, Sun Media launched24 Hours Calgaryand24 Hours Edmonton. In total, Sun Media has launched24 Hourspublications in six of Canada’s largest cities since 2003. Sun Media continues to expand its Internet presence through joint initiatives with other Quebecor Media affiliates in order to develop new revenue streams. Sun Media will continue to seek opportunities to grow its business by leveraging its existing brands.

Salaries and benefits, which represented 49.1% ($353.1 million) of operating expenses, before restructuring charges, depreciation and amortization, in 2006, is Sun Media’s largest operating expense. Accordingly, rising labour, health care benefit and pension costs have had, and may in the future have, a negative effect on Sun Media’s operating results. Furthermore, labour relations could affect Sun Media’s business and results of operations, as approximately one-third of Sun Media’s employees are unionized. As of February 28, 2007, 15 of Sun Media’s collective bargaining agreements, representing approximately 642 or 31% of Sun Media’s 2,057 unionized employees, have expired. Negotiations regarding these 15 collective bargaining agreements are either in progress or will be undertaken in 2007. Sun Media cannot predict the outcome of our current negotiations or any future negotiations relating to collective bargaining agreements or union representation. Pending the outcome of such negotiations, Sun Media may experience work stoppages, strikes or other forms of labour protests, which could disrupt operations and adversely affect Sun Media’s business and results of operations.

Changes in the price of newsprint can have a significant effect on Sun Media’s operating results as newsprint is Sun Media’s principal expense besides wages and benefits and represented 15.0% ($107.8 million) of operating expenses, excluding restructuring charges and depreciation and amortization, in 2006. The newsprint industry is highly cyclical, and newsprint prices have historically experienced significant volatility. We manage the effects of newsprint price increases through a combination of, among other things, waste management, technology improvements, web width reduction, inventory management, and by controlling the mix of editorial versus advertising content. To obtain more favorable newsprint pricing, we were party to a newsprint supply agreement which provided for a discount to market prices and certain volume discounts for purchases above certain thresholds. This supply agreement expired on December 31, 2006, although the supplier has continued to supply newsprint to us on substantially the same terms while we negotiate the renewal of the agreement. There can be no assurance that we will be able to renew this agreement on terms as favorable or at all.

Operating Results


	Year Ended December 31,
	2004		2005		2006
	(in millions, except adjusted EBITDA margin)
Revenues:
Advertising	$	619.2	$	647.2	$	667.3
Circulation		170.3		164.3		158.1
Commercial printing, distribution and other		98.6		104.1		102.8

Total revenues	$	888.1	$	915.6	$	928.2


	Year Ended December 31,
	2004			2005			2006
	(in millions, except adjusted EBITDA margin)
Operating Expenses:
Wages and employee benefits	$	338.1		$	346.3		$	353.1
Newsprint		104.7			104.2			107.8
Other operating expenses		217.5			243.0			258.2

Total operating expenses before depreciation, amortization of intangible assets and restructuring charges	$	660.3		$	693.5		$	719.1


Adjusted EBITDA	$	227.8		$	222.1		$	209.1
Adjusted EBITDA margin⁽¹⁾		25.7	%		24.3	%		22.5	%
Net Income	$	156.7		$	141.9		$	106.8


(1)		We define adjusted EBITDA margin as adjusted EBITDA as a percentage of total revenues.

Adjusted EBITDA

We use the supplemental financial measure adjusted EBITDA to assess our operating results and financial performance. Adjusted EBITDA, and ratios using this measure, are not required by or recognized under Canadian GAAP or U.S. GAAP. We define adjusted EBITDA as net income before depreciation and amortization of intangible assets, financial expenses, dividend income, interest on convertible obligations to Quebecor Media and SUN TV, gains on dispositions of investments, gains on refinancing of long-term debt, restructuring charges, income taxes, equity and impairment losses, non-controlling interest and discontinued operations. Adjusted EBITDA and ratios using this measure are not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses, and this non-GAAP measure is not intended or designed to replace other financial operating performance measures or to the statement of cash flows as a measure of liquidity. You should not consider this adjusted EBITDA in isolation from, or as a substitute for analysis of, our financial information reported under Canadian GAAP and U.S. GAAP. We use adjusted EBITDA because management believes it is a meaningful measure of performance commonly used in the publishing industry and by financial analysts and other users of our financial information to analyze and compare companies in our industry. Adjusted EBITDA has limitations as an analytical tool, including:

	•		it does not reflect interest expense or the cash necessary to make interest payments;

	•		it does not reflect income tax expense or the cash necessary to pay income taxes;

	•		although depreciation and amortization are non-cash charges, the assets being amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such capital expenditures;

	•		it does not reflect financial expenses the cash necessary to pay financial expenses;

	•		its does not reflect the cash necessary to pay expenses relating to our restructuring initiatives;

	•		it does not reflect cash outlays for future contractual commitments;

	•		it does not reflect impairments or equity losses, including our equity losses in SUN TV; and

	•		it does not reflect potential cash requirements to maintain our interest in SUN TV.

The two following tables provide reconciliations of adjusted EBITDA as defined herein to the net income and to cash provided by operating activities of continuing operations, in each case as calculated under Canadian GAAP and U.S. GAAP, respectively, for the years ended December 31, 2002 through 2006.


	Year Ended December 31,
	2002			2003			2004			2005			2006
	(in thousands)
RECONCILIATION UNDER CANADIAN GAAP

Net income	$	180,741		$	189,690		$	156,745		$	141,927		$	106,772
Depreciation and amortization of intangible assets		26,530			27,582			26,038			30,324			36,549
Financial expenses		33,493			43,950			51,138			46,738			50,535
Dividend income on preferred shares of Quebecor Media Inc. and SUN TV Company		(203,168	)		(224,589	)		(147,462	)		(152,628	)		(144,031	)
Interest on convertible obligations to Quebecor Media Inc. and SUN TV Company		197,479			218,301			143,333			148,232			139,834
Gain on disposition of CP24		—			—			(8,000	)		—			—
Gain on refinancing of long-term debt		—			(7,463	)		—			—			—
Restructuring charges		2,195			—			—			—			17,033
Income tax expense (recovery)		(16,937	)		(20,266	)		4,565			3,347			(10,127	)
Equity loss on investment in SUN TV		—			—			147			2,747			3,252
Impairment of Equity Investment in SUN TV Company		—			—			—			—			7,819
Non-controlling interest		1,118			1,032			1,341			1,488			1,498
Discontinued operations		(2,006	)		(3,483	)		—			—			—


Adjusted EBITDA as defined		219,445			224,754			227,845			222,175			209,134
Financial expenses		(33,493	)		(43,950	)		(51,138	)		(46,738	)		(50,535	)
Dividend income on preferred shares of Quebecor Media Inc. and SUN TV Company		203,168			224,589			147,462			152,628			144,031
Interest on convertible obligations to Quebecor Media Inc. and SUN TV Company		(197,479	)		(218,301	)		(143,333	)		(148,232	)		(139,834	)
Restructuring charges paid		(2,195	)		—			—			—			(4,255	)
Current income taxes		21,687			10,851			(2,231	)		(1,066	)		(1,055	)
Net unrealized loss on foreign currency translation and financial instruments		—			—			6,779			4,100			1,702
Other items not involving cash		645			1,894			1,698			1,718			1,810
Change in non-cash operating working capital, net of effects from acquisitions		(9,281	)		25,208			(9,687	)		(3,202	)		(16,248	)


Cash provided by operating activities of continuing operations	$	202,497		$	225,045		$	177,395		$	181,383		$	144,750


	Year Ended December 31,
	2002			2003			2004			2005			2006
				(restated)			(restated)			(restated)			(restated)
				(1)			(1)			(1)			(1)
	(in thousands)
RECONCILIATION UNDER U.S. GAAP

Net income	$	181,266		$	187,020		$	155,027		$	153,009		$	105,281
Depreciation and amortization of intangible assets		26,530			27,582			26,038			30,355			36,610
Financial expenses		31,800			48,387			53,633			48,423			51,428
Dividend income on preferred shares of Quebecor Media Inc. and SUN TV Company		(203,168	)		(224,589	)		(147,462	)		(152,628	)		(144,031	)
Interest on convertible obligations to Quebecor Media Inc. and SUN TV Company		197,479			218,301			143,333			148,232			139,834
Gain on disposition of publication		—			—			—			(1,856	)		—
Gain on disposition of CP24		—			—			(8,000	)		—			—
Gain on refinancing of long-term debt		—			(7,583	)		—			—			—
Restructuring charges		2,195			—			—			—			17,033
Income tax expense (recovery)		(16,724	)		(22,306	)		8,389			(8,224	)		(10,281	)
Equity loss on investment in SUN TV Company		—			—			147			2,747			3,252
Impairment of Equity Investment in SUN TV Company		—			—			—			—			7,819
Non-controlling interest		1,118			1,032			1,341			1,488			1,498
Discontinued operations		(2,006	)		(3,483	)		—			—			—


Adjusted EBITDA as defined		218,490			224,361			232,446			221,546			208,443
Financial expenses		(31,800	)		(48,387	)		(53,633	)		(48,423	)		(51,428	)
Dividend income on preferred shares of Quebecor Media Inc. and SUN TV Company		203,168			224,589			147,462			152,628			144,031
Interest on convertible obligations to Quebecor Media Inc. and SUN TV Company		(197,479	)		(218,301	)		(143,333	)		(148,232	)		(139,834	)
Restructuring charges paid		(2,195	)		—			—			—			(4,255	)
Current income taxes		21,687			10,850			(2,232	)		(1,066	)		(1,055	)
Other items not involving cash		(475	)		9,028			10,973			7,503			4,405
Change in non-cash operating working capital, net of effects from acquisitions		(8,899	)		22,905			(14,288	)		(2,573	)		(15,557	)


Cash provided by operating activities of continuing operations	$	202,497		$	225,045		$	177,395		$	181,383		$	144,750


(1)		Refer to Note 19 of our audited restated consolidated financial statements for the year ended December 31, 2006.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

Revenues

Consolidated revenues for the year ended December 31, 2006 were $928.2 million, compared to $915.6 million for 2005, an increase of $12.6 million, or 1.4%.

Advertising revenues were $667.3 million for the year ended December 31, 2006, an increase of $20.1 million, or 3.1%, from $647.2 million for fiscal 2005. Advertising revenues for the Urban Daily Group increased $9.1 million, or 2.0%. Significant growth drivers during 2006 were our free daily commuter publications, including our two new24 Hourspublications in the Ottawa region, which collectively increased advertising revenues by $7.9 million. The growth in advertising revenues at our other urban dailies was partially offset by declines atThe Toronto SunandLe Journal de Montréal.

Advertising volumes for the paid urban daily newspapers increased 0.3% in fiscal 2006 compared to the same period last year. Sun Media experienced continued growth in local sales, while corporate sales continued to be soft, as several large national advertisers reduced their spending in 2006. Advertising revenues in the Community Newspaper Group were very strong, increasing $10.0 million or 5.2% during the year ended December 31, 2006. The Community

Newspaper Group operations experienced solid growth in most markets, including strong results in Western Canada and to a lesser extent in the Quebec region. Our three community publication acquisitions also contributed to the growth in the Community Newspaper Group.

Circulation revenues were $158.1 million for the year ended December 31, 2006, a decrease of $6.2 million, or 3.8%, from $164.3 million in 2005. Circulation revenues for the urban daily newspapers decreased 4.3% and average circulation volumes declined 0.4%. Circulation revenues declined most significantly in the highly competitive Toronto market whereThe Toronto Sun implemented an aggressive pricing strategy in 2006 to maintain circulation levels and market share. This pricing strategy positively impacted the circulation volumes ofThe Toronto Sunwhere average paid circulation increased 2.2% compared to 2005.

Distribution, commercial printing and other revenues were $102.8 million for the year ended December 31, 2006, a decrease of $1.3 million, or 1.2%, from $104.1 million in 2005. This decrease was due partly to the transfer of certain external commercial printing jobs to the new Quebecor Media printing facility in Saint-Janvier-de-Mirabel.

Operating expenses

Wages and employee benefits were $353.1 million, an increase of $6.8 million, or 2.0%, from $346.3 million during 2005. The increase in wages and employee benefit expenses was the result of normal wage increases, higher pension and post-retirement costs, due in part to a curtailment gain recognized in 2005 and higher stock compensation expense of $2.5 million. These costs were partially offset by labour savings resulting from a five month labour disruption atLe Journal de Montréalwhich began in June 2006 and labour savings from Sun Media’s restructuring initiatives.

Newsprint expense was $107.8 million, an increase of $3.6 million, or 3.5%, from $104.2 million in 2005. The increase was a result of lower rebates obtained by Sun Media on newsprint purchases, and higher newsprint prices, offset in part by lower advertising volumes and certain page count reductions compared to the prior year.

Other operating expenses were $258.2 million, an increase of $15.2 million, or 6.3%, from $243.0 million in 2005. The increase was mainly due to higher circulation costs of $7.7 million resulting from new circulation initiatives inThe Toronto Sunand the circulation of new products, as well as a loss of $1.1 million due to the discontinuance of CD and DVD distribution at Messageries Dynamiques. In addition, external printing costs were higher by $3.4 million due to increased page counts in some publications and the transfer of printing ofThe Ottawa Sunand certain community publications to the new press facilities in Saint-Janvier-de-Mirabel, Quebec. Administration costs were also higher by $4.7 million due to additional security and other costs incurred byLe Journal de Montréalas a result of the labour disruption compared to the prior year. In addition, Sun Media incurred a charge of $1.6 million for the write-down of excess spare parts inventory. These negative variances were offset in part by a favourable commodity tax recovery of $1.3 million during the year.

Adjusted EBITDA.Adjusted EBITDA for the year ended December 31, 2006 of $209.1 million was $13.0 million, or 5.9%, lower than adjusted EBITDA in 2005 of $222.1 million. The decline in adjusted EBITDA resulted primarily from a decline in the operational results ofThe Toronto SunandLe Journal de Montréal, offset partly by improvements in the operational results of our Western urban and community newspapers.

Adjusted EBITDA margin represents adjusted EBITDA as a percentage of revenues. Sun Media’s adjusted EBITDA margin for fiscal 2006 was 22.5%, compared to 24.3% for fiscal 2005.

Depreciation and amortization.Depreciation and amortization expense was $36.5 million in the year ended December 31, 2006, an increase of $6.2 million, or 20.5%, from $30.3 million in the prior year. The results for fiscal 2006 include additional depreciation expense of $12.1 million, compared to additional depreciation expense of $4.6 million in 2005, relating to the shortened estimated useful life of the production equipment at certain Sun Media printing facilities. These printing facilities have been or are expected to be relocated to the new printing facilities in Islington, Ontario and Saint-Janvier-de-Mirabel, Quebec.

Restructuring charges.During 2006, Sun Media recorded charges for the restructuring of its operations, consisting substantially of employee termination benefits, summarized as follows:


	Estimated							Restructuring
	Number of Full-							Accrual as at
	Time Equivalent		Restructuring		Payments			December 31,
	Positions Affected		Charges		in 2006			2006
			(dollars in thousands)
Restructuring of printing facilities - -The London Free Press		114	$	4,435	$	—		$	4,435
—The Toronto Sun		194		4,371		—			4,371
—The Ottawa Sun		39		1,260		(130	)		1,130
—Le Journal de Montréal		146		910		—			910
Restructuring of news production operations		85		2,881		(2,554	)		327
General workforce reduction		98		3,176		(1,571	)		1,605

		676	$	17,033	$	(4,255	)	$	12,778

Restructuring of printing facilities

In August 2005, Quebecor Media announced a plan to invest in a new printing facility located in Toronto, Ontario. As part of this plan, Sun Media will transfer the printing of certain of its publications in Ontario to the new facility. In addition, in August 2005, Quebecor Media announced a plan to relocate the printing of certain Sun Media publications to a new printing facility owned by Quebecor Media, located in Saint-Janvier-de-Mirabel, Quebec.

During 2006, Sun Media finalized the details of the plan and costs associated with the elimination of an estimated equivalent of 114 full-time unionized production positions atThe London Free Pressand an estimated equivalent of 194 full-time non-unionized production positions atThe Toronto Sun, due to the transfer of its printing operations to the new printing facility being constructed in Islington, Ontario, as described above. Sun Media anticipates that the printing ofThe London Free PressandThe Toronto Sunwill be transferred to the new facility by mid-2007. Sun Media has recorded contractual termination benefits of $4.4 million and $4.4 million relating to employees ofThe London Free PressandThe Toronto Sun, respectively, which will be payable upon the termination of its employees.

During 2006, Sun Media also recorded $1.3 million of termination benefits relating to the elimination of an equivalent of 39 full-time non-unionized production positions atThe Ottawa Sun. As at December 31, 2006, payments of $0.1 million have been made.

In addition, Sun Media finalized the details of special termination benefits to be paid in connection with the elimination of an estimated equivalent of 146 inserter positions atLe Journal de Montréalin 2007. As a result, Sun Media has accrued termination benefits of $0.9 million. As at December 31, 2006, no payments have been made.

Restructuring of news production operations

In June 2006, Sun Media announced a plan to restructure its news production operations by introducing new content management technologies and streamlining the news gathering process. Sun Media expects to invest approximately $7.0 million in new technologies. During 2006, Sun Media recorded severance costs of $2.9 million relating to the elimination of the equivalent of 85 full-time editorial positions in operations across our organization. As at December 31, 2006, payments of $2.6 million have been made.

General workforce reductions

During 2006, Sun Media implemented a voluntary workforce reduction program atThe London Free Pressand several smaller involuntary workforce reduction programs, primarily impactingThe Toronto SunandBowes Publishers. Sun Media has recorded termination benefits of $3.2 million for the elimination of 98 positions relating to these workforce reduction initiatives. As at December 31, 2006, payments of $1.6 million have been made.

Sun Media currently expects that in 2007, it will record additional restructuring charges relating to special termination benefits forThe Toronto Sunprinting facilities, ranging from $2.0 million to $3.0 million. Sun Media also anticipates that it will record additional restructuring charges relating to its news production operations and other potential workforce reduction initiatives.

Financial expenses. Financial expenses for the year ended December 31, 2006 were $50.5 million, compared to $46.7 million for the year ended December 31, 2005. During 2006, Sun Media recorded a net unrealized loss on foreign currency translation and financial instruments relating to its ineffective hedge of $1.7 million, compared to $4.1 million in 2005. Excluding these unrealized losses, interest expense increased by $6.2 million in 2006. The increase in interest expense is due to higher variable rates than last year, the new Term Loan C credit facility and a loss of $0.5 million on the voluntary repayment of debt.

Dividend income and interest on convertible obligations.In a series of tax consolidation transactions, Sun Media invested in certain preferred shares issued by Quebecor Media and SUN TV, and concurrently issued convertible obligations to Quebecor Media and SUN TV. In 2006, Sun Media earned dividend income of $144.0 million (2005 — $152.6 million), comprised of $140.0 million (2005 — $150.7 million) on its investment in Quebecor Media Preferred Shares and $4.0 million (2005 — $1.9 million) on its investment in SUN TV Preferred Shares. In the same period, Sun Media incurred interest expense of $139.8 million (2005 — $148.3 million) on its convertible obligations during the year ended December 31, 2006, comprised of interest expense on its convertible obligation to Quebecor Media of $135.9 million (2005 — $146.4 million) and interest expense on its convertible obligation to SUN TV of $3.9 million (2005 — $1.9 million). The decrease in dividend income and interest expense resulted mainly from a decrease in Sun Media’s investment in Quebecor Media Preferred Shares and its convertible obligations to Quebecor Media. In June 2006, Sun Media sold $255.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $255.0 million of its 2007 convertible obligation issue. In addition, Sun Media issued a new convertible obligation due in 2021 to Quebecor Media in the amount of $120.0 million. Sun Media used the proceeds from the issuance of the 2021 convertible obligation issue to invest in an additional $120.0 million of Quebecor Media Series F Cumulative First Preferred Shares. In December 2006, Sun Media sold $500.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media and $55.0 million of its investment in the Series F Cumulative First Preferred Shares of Quebecor Media. Sun Media then used the proceeds to redeem $555.0 million of its 2007, 2008 and 2020 convertible obligations. As at December 31, 2006, Sun Media had an investment balance and a principal convertible obligation balance of $555.0 million with Quebecor Media. In addition, in December 2006, Sun Media sold $2.9 million of its Class A Preferred Shares of Sun TV and then redeemed $2.9 million of its convertible obligation to SUN TV. As at December 31, 2006, Sun Media had an investment balance and a principle convertible obligation balance of $34.4 million with SUN TV.

See “Liquidity and Capital Resources — Liquidity and capital resource requirements — Purchase and/or sale of Preferred Shares of Quebecor Media and SUN TV and convertible obligations issued to and/or redeemed from Quebecor Media and SUN TV”.

Income taxes.Sun Media’s income tax recovery was $10.1 million for the twelve months ended December 31, 2006 compared to an income tax expense of $3.3 million for the twelve months ended December 31, 2005. The following table summarizes the main components which resulted in Sun Media’s income tax expense (recovery) for the twelve months ended December 31, 2005 and 2006:


	Twelve months ended December 31,
	2005			2006
	(dollars in millions)
Income before income taxes, equity and impairment losses, and non- controlling interest	$	149.5		$	109.2
Less: non-taxable dividend income		(152.6	)		(144.0	)

Loss before income taxes, equity and impairment losses, and non-controlling interest and non-taxable dividend income		(3.1	)		(34.8	)
National statutory tax rate		34.3	%		33.8	%

		(1.1	)		(11.8	)


	Twelve months ended December 31,
	2005		2006
	(dollars in millions)
Valuation allowance and non-deductible portion of capital losses relating to ineffective hedge		2.4		0.4

		1.3		(11.4	)
Large corporation taxes and other		2.0		1.3

Income tax expense (recovery)	$	3.3	$	(10.1	)

During the twelve months ended December 31, 2006, Sun Media also recorded the tax impact associated with the enactment of the 2006 Federal Budget in June 2006, which resulted in the elimination of the Large Corporations Tax and a small net decrease in Sun Media’s future income tax recovery.

Impairment of equity investment in SUN TV.During the fourth quarter of 2006, in conjunction with our partner TVA, we performed the annual impairment tests for our joint investment in SUN TV. As Sun Media concluded that some intangible assets were impaired, mainly goodwill and the broadcasting licence, Sun Media recorded a non-cash impairment charge of $7.8 million during the quarter for this investment.

Net income.Net income for the year ended December 31, 2006 was $106.8 million, compared to $141.9 million for the same period in fiscal 2005, a decrease of $35.1 million, or 24.7%. The decrease in net income was primarily due to restructuring charges of $17.0 million, a reduction in adjusted EBITDA of $13.0 million, an impairment loss recognized on the equity investment of SUN TV of $7.8 million and higher financial expenses of $3.8 million, offset partly by a favourable income tax variance of $13.5 million.

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

Revenues

The consolidated results for the year ended December 31, 2005 include 52 weeks as compared to the year ended December 31, 2004, which contained 53 weeks. The 53^rd week in 2004 resulted in total additional revenues of approximately $14.3 million and total additional operating expenses of approximately $12.2 million as compared to the year ended December 31, 2005.

Consolidated revenues for the year ended December 31, 2005 were $915.6 million, compared to $888.1 million for 2004, an increase of $27.5 million, or 3.1%.

Advertising revenues were $647.2 million for the year ended December 31, 2005, an increase of $28.0 million, or 4.5%, from $619.2 million for fiscal 2004. Advertising revenues for the Urban Daily Group increased $15.3 million, or 3.5%. Significant growth drivers were our free daily commuter publications, including the newVancouver 24 Hourspublication in Vancouver launched in March of 2005, which, collectively, increased advertising revenue by $8.5 million.

Advertising volumes for the Urban Daily Group newspapers increased 3.5% in fiscal 2005 compared to the same period last year, despite a 53^rd week in 2004. Sun Media experienced strong growth in local sales, while corporate sales continued to be soft, as several large national advertisers reduced their spending in 2005. Advertising revenues in the Community Newspaper Group were very strong, increasing $12.6 million or 7.0% during the year ended December 31, 2005. The Community Newspaper Group operations experienced solid growth in all markets, including very strong results in the publications in Northern Alberta. Acquisitions and new products also contributed to the growth in the Community Newspaper Group.

Circulation revenues were $164.3 million for the year ended December 31, 2005, a decrease of $6.0 million, or 3.5%, from $170.3 million in 2004. Circulation revenues for the urban daily newspapers decreased 3.9% and average circulation levels declined 1.6%, which is consistent with the trend of declining circulation over the past several years. Circulation revenues declined most significantly in highly competitive Toronto and Montreal markets which have implemented aggressive pricing strategies to maintain circulation levels and market share.

Distribution, commercial printing and other revenues were $104.1 million for the year ended December 31, 2005,

an increase of $5.5 million, or 5.6%, from $98.6 million in 2004. This increase is largely attributable to strong distribution revenues, which include advertising inserts and flyers.

Operating expenses

Wages and employee benefits were $346.3 million, an increase of $8.2 million, or 2.4%, from $338.1 million during 2004. The increase in wages and employee benefit expenses was the result of normal wage increases, increased commissions related to higher advertising revenues, as well as workforce increases relating to acquisitions and new products.

Newsprint expense was $104.2 million, a decrease of $0.5 million from 2004. The decrease was due mainly to lower average newsprint prices and lower usage relating to decreased average circulation. These decreases were partly offset with increased costs relating to higher advertising volumes as well as acquisitions.

Other operating expenses were $243.0 million for the year ended December 31, 2005, an increase of $25.5 million, or 11.7%, from $217.5 million in 2004. The increase was mainly due to higher external printing and circulation costs associated with the commuter papers and new products, as well as additional distribution costs relating to the sampling of newspapers. In addition, operating costs increased due to higher management fees paid to Quebecor Media.

Adjusted EBITDA.Adjusted EBITDA for the year ended December 31, 2005 of $222.1 million was $5.7 million, or 2.5%, lower than adjusted EBITDA in 2004 of $227.8 million. The decline in adjusted EBITDA resulted from having a 53^rd week in 2004, losses from start-up operations, and declining results in the large Toronto and Montreal markets due to competitive pressures. The declines are partially offset by strong results in the Alberta urban dailies and the community newspapers.

Adjusted EBITDA margin represents adjusted EBITDA as a percentage of revenues. Sun Media’s adjusted EBITDA margin for fiscal 2005 was 24.3%, compared to 25.7% for fiscal 2004.

Depreciation and amortization.Depreciation and amortization was $30.3 million in the year ended December 31, 2005, an increase of $4.3 million, or 16.5%, from $26.0 million in the prior year. The results for fiscal 2005 include an additional depreciation charge of $4.6 million relating to the shortened estimated useful life of the production equipment at certain Sun Media printing facilities which will be relocated to the new printing facilities in Islington, Ontario and Saint-Janvier-de-Mirabel, Quebec.

Financial expenses.Financial expenses for the year ended December 31, 2005 were $46.7 million, compared to $51.1 million for the year ended December 31, 2004. The decrease of $4.4 million was largely due to a lower loss on financial instruments of $10.4 million, offset by a reduced foreign currency translation gain of $7.3 million. Furthermore, interest on long-term debt was lower by $0.5 million due to lower average debt.

Dividend income and interest on convertible obligations.In 2005, Sun Media earned dividend income of $152.6 million (2004 — $147.5 million), comprised of $150.7 million (2004 — $147.5 million) on its investment in Quebecor Media Preferred Shares and $1.9 million (2004 — $nil) on its investment in SUN TV Preferred Shares. In the same period, Sun Media incurred interest expense of $148.2 million (2004 — $143.3 million) on its convertible obligations during the year ended December 31, 2005, comprised of interest expense on its convertible obligation to Quebecor Media of $146.4 million (2004 — $143.3 million) and interest expense on its convertible obligation to SUN TV of $1.9 million (2004 — $nil). The increase in dividend income and interest expense resulted mainly from an increase in Sun Media’s investment in Quebecor Media Preferred Shares and its convertible obligations to Quebecor Media. As at January 1, 2005, Sun Media’s aggregate investment in Quebecor Media Preferred Shares, and the convertible obligations to Quebecor Media, was $1.140 billion. In January 2005, Sun Media sold $150.0 million of its investment in Quebecor Media Preferred Shares and used the proceeds to redeem $150.0 million of its convertible obligations. In addition, in the same month, Sun Media increased its investment in Quebecor Media Preferred Shares by $255.0 million, and issued $255.0 million of its convertible obligations to Quebecor Media in exchange. As at December 31, 2005, Sun Media had

an investment balance and a principal convertible obligation balance of $1.245 billion. In addition, in July 2005, Sun Media issued a $37.3 million convertible obligation to SUN TV, a related company in which we hold an investment. The convertible obligation matures on July 6, 2020, and bears interest at 10.50% payable semi-annually. Concurrently, Sun Media invested $37.3 million in Class A Preferred Shares of SUN TV.

Income taxes.Sun Media’s income tax expense was $3.3 million for the twelve months ended December 31, 2005 compared to an income tax expense of $4.6 million for the twelve months ended December 31, 2004. The following table summarizes the main components which resulted in Sun Media’s income tax expense for the twelve months ended December 31, 2004 and 2005:


	Twelve months ended December 31,
	2004			2005
	(dollars in millions)
Income before income taxes, equity loss and non-controlling interest	$	162.8		$	149.5
Less: non-taxable dividend income		(147.5	)		(152.6	)

Loss before income taxes, equity loss, non-controlling interest and non-taxable dividend income		15.3			(3.1	)
National statutory tax rate		34.2	%		34.3	%

		5.2			(1.1	)
Valuation allowance and non-deductible portion of capital losses relating to ineffective hedge		1.1			2.4

		6.3			1.3
Large corporation taxes and other^(*)		(1.7	)		2.0

Income tax recovery	$	4.6		$	3.3


* 2004 includes a non-taxable gain of $8.0 million on the sale of CP24.

Net income.Net income for the year ended December 31, 2005 was $141.9 million, compared to $156.7 million for the same period in fiscal 2004, a decrease of $14.8 million, or 9.5%. The decrease in net income was primarily due to an increase of $27.5 million in consolidated revenues, offset by a $37.4 million increase in operating expenses. In addition, results in 2004 included a gain of $8.0 million on the sale of CP24, while no such gain was recorded in 2005. These year-over-year declines were partially offset by lower interest expenses and lower tax expenses in 2005 compared to 2004.

Liquidity and Capital Resources

Liquidity and capital resource requirements

Sun Media’s principal liquidity and capital resource requirements consist of:

	•		Contractual requirements and other commercial commitments;

	•		Service and repayment of debt;

	•		Capital expenditures to augment and update facilities, equipment and processes;

	•		Purchase and/or sale of Preferred Shares of Quebecor Media and SUN TV and convertible obligations issued to and/or redeemed from Quebecor Media and SUN TV;

	•		Business and publication acquisitions; and

	•		Payment of dividends or other distributions.

Contractual requirements.Sun Media’s material obligations under firm contractual arrangements, including commitments for future payments under the convertible obligations, long-term debt arrangements and operating lease arrangements as of December 31, 2006, are described in Notes 6, 7, 10 and 16 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report, and can be summarized as follows:


	Payments Due By Period
					2008		2010		More than
Contractual Obligations	Total		2007		and 2009		and 2011		5 years
					(in millions)
Convertible obligations	$	589.4	$	—	$	235.0-	$	—	$	354.4
Interest payments on convertible obligations		519.8		52.5		74.4		74.4		318.5
Long-term debt		486.7		3.1		247.2		—		236.4
Interest payments⁽¹⁾		211.9		47.5		74.5		50.6		39.3
Operating leases and other		41.2		14.7		14.4		6.2		5.9


Total contractual cash obligations	$	1,849.0	$	117.8	$	645.5	$	131.2	$	954.5


(1)		Estimate of interest to be paid on long-term debt based on the interest rates and foreign exchange rate as at December 31, 2006.

As of December 31, 2006, the outstanding principal balance on the convertible obligations was $589.4 million and $28.9 million in unpaid interest which was due and paid on January 14, 2007 and $0.1 million in unpaid interest which is due and payable on June 20, 2007. The principal amount of $235.0 million matures on November 11, 2008, and the principal amount of $200.0 million matures on January 14, 2020. The remaining principal amount of $120.0 million matures in June 12, 2021. The principal amount of $34.4 million on our SUN TV convertible obligation matures on July 6, 2020.

Sun Media’s long-term debt consists of our $75.0 million five-year revolving credit facility, which matures on February 7, 2008, US$230.0 million Term Loan B credit facility and $40.0 million Term Loan C credit facility, both maturing on February 7, 2009, and our 7⁵/₈% Senior Notes due February 15, 2013. As at December 31, 2006, no amounts were drawn on our $75.0 million revolving credit facility and the aggregate amounts outstanding under our term loans were $211.4 million on the Term Loan B credit facility with an effective interest rate of 7.13% and $39.3 million on the Term Loan C credit facility with an effective interest rate of 5.85%. The Term Loan B credit facility is subject to mandatory repayments of US$0.6 million per quarter during the term of the loan and the Term Loan C credit facility is subject to repayments of $0.1 million per quarter during the term of the loan.

As at December 31, 2006, the outstanding principal amount of our 7⁵/₈% Senior Notes was US$205.0 million.

Sun Media rents equipment and premises under various operating leases, and enters into long-term commitments to purchase services and capital. As of December 31, 2006, minimum payments under these leases and agreements over the next five years and thereafter will be approximately $41.2 million in aggregate.

Other commercial commitments.Sun Media had an agreement, which expired on December 31, 2006, with a newsprint manufacturer for the supply of all of its newsprint purchases. Although the agreement has expired, the supplier has continued to supply newsprint to us on substantially the same terms while we negotiate a renewal of this agreement. This agreement provided for a discount to market prices and additional volume discounts for purchases above certain thresholds. Under this agreement, Sun Media committed to purchasing its newsprint supply exclusively from this manufacturer, and committed to a minimum annual purchase of 15,000 metric tonnes of newsprint. Sun Media used approximately 144,000 metric tonnes of newsprint in our operations in 2006.

In 2002, Sun Media began paying an annual management fee to Quebecor Media for services rendered to Sun Media pursuant to a five-year management services agreement, which expired on December 31, 2006. These services included internal audit, legal and corporate, financial planning and treasury, tax, real estate, human resources, risk management, public relations and other services. The agreement provided for an annual management fee. In 2006, the annual management fee was $8.6 million (2005 — $9.1 million; 2004 — $6.6 million). In addition, Quebecor Media was entitled to the reimbursement of out-of-pocket expenses incurred in connection with the services provided under the agreement. The agreement also provided that in no event could the fees and reimbursements paid to Quebecor Media for any given year exceed 1.5% of Sun Media’s consolidated revenues for such year. Sun Media is in the process of renewing its management services agreement with Quebecor Media.

Service and repayment of debt.During the year ended December 31, 2006, Sun Media made net cash interest payments of $46.2 million and debt repayments of $26.6 million on its long-term debt, including a US$15.0 million voluntary pre-payment on December 29, 2006. In the year ended December 31, 2005, Sun Media made net cash interest payments of $40.4 million and repayments on its long-term debt of $3.5 million.

Capital expenditures to augment and update facilities, equipment and processes.In the year ended December 31, 2006, Sun Media spent $15.8 million to fund capital expenditures such as investing in new information systems across Sun Media. During 2006, Sun Media spent approximately $4.0 million on new editorial content management systems to streamline the news gathering process and expects to spend an additional $3.0 million to complete its installation in 2007. In addition, during 2006, Sun Media spent $1.5 million on new circulation and classified advertising systems. This new technology will replace old systems and should enable Sun Media to realize operational efficiencies and cost savings and improve customer service levels. In 2007, Sun Media expects that its capital spending may increase to approximately $30.0 million. The expected increase in capital expenditures, compared to prior years, will substantially be related to standardizing, improving and streamlining Sun Media’s business processes.

Other than new editorial content management systems, Sun Media does not currently have any significant capital commitments; however, management is currently evaluating several capital projects for opportunities to improve the operational efficiency and financial results of Sun Media.

Purchase and/or sale of Preferred Shares of Quebecor Media and SUN TV and convertible obligations issued to and/or redeemed from Quebecor Media and SUN TV.Unlike corporations in the United States, corporations in Canada are not permitted to file consolidated tax returns. As a result, Sun Media has in the past entered into certain transactions involving the purchase and sale of preferred shares of its parent, Quebecor Media and a related company, SUN TV, and the corresponding issuance of and/or redemption of convertible obligations to these entities. As a result of these transactions, we recognize significant income tax benefits.

In June 2006, Sun Media sold $255.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $255.0 million of its 2007 convertible obligation issue. In addition, Sun Media issued a new convertible obligation due in 2021 to Quebecor Media in the amount of $120.0 million. Sun Media used the proceeds from the issuance of the 2021 convertible obligation issue to invest in an additional $120.0 million of Quebecor Media Series F Cumulative First Preferred Shares.

In December 2006, Sun Media sold $500.0 million of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media and $55.0 million of its investment in the Series F Cumulative First Preferred Shares of Quebecor Media. Sun Media then used the proceeds to redeem $555.0 million of its 2007, 2008 and 2020 convertible obligations.

The following tables summarize Sun Media’s issuance and redemption of convertible obligations to Quebecor Media, and investments in Quebecor Media Preferred Shares:


	Convertible Obligation Issue
Issue or Redemption date	2007			2008		2020		2021		Total
	(in millions)
July 9, 2001	$	1,600.0		$	—	$	—	$	—	$	1,600.0
Balance — December 31, 2001		1,600.0			—		—		—		1,600.0
November 28, 2002		—			350.0		—		—		350.0
Balance — December 31, 2002		1,600.0			350.0		—		—		1,950.0
July 31, 2003		(360.0	)		—		—		—		(360.0	)
Balance — December 31, 2003		1,240.0			350.0		—		—		1,590.0
January 14, 2004		(450.0	)		—		—		—		(450.0	)
Balance — December 31, 2004		790.0			350.0		—		—		1,140.0
January 14, 2005		(150.0	)		—		255.0		—		105.0


	Convertible Obligation Issue
Issue or Redemption date	2007			2008			2020			2021		Total
	(in millions)
Balance — December 31, 2005		640.0			350.0			255.0			—		1,245.0
June 12, 2006		(255.0	)		—			—			120.0		(135.0	)
December 28, 2006		(385.0	)		(115.0	)		(55.0	)		—		(555.0	)
Balance — December 31, 2006	$	—		$	235.0		$	200.0		$	120.0	$	555.0


	Quebecor Media Preferred Shares
Issue or Redemption date	12.5% Series A			10.85% Series F			Total
				(in millions)
July 9, 2001	$	1,600.0		$	—		$	1,600.0
Balance — December 31, 2001		1,600.0			—			1,600.0
November 28, 2002		350.0			—			350.0
Balance — December 31, 2002		1,950.0			—			1,950.0
July 31, 2003		(360.0	)		—			(360.0	)
Balance — December 31, 2003		1,590.0			—			1,590.0
January 14, 2004		(450.0	)		—			(450.0	)
Balance — December 31, 2004		1,140.0			—			1,140.0
January 14, 2005		(150.0	)		255.0			105.0
Balance — December 31, 2005		990.0			255.0			1,245.0
June 12, 2006		(255.0	)		120.0			(135.0	)
December 28, 2006		(500.0	)		(55.0	)		(555.0	)
Balance — December 31, 2006	$	235.0		$	320.0		$	555.0

See also Note 6 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

In December 2006, Sun Media redeemed $2.9 million of its convertible obligation to SUN TV, and then sold $2.9 million of its Class A Preferred Shares of SUN TV. As at December 31, 2006, Sun Media had an investment balance and a principle convertible obligation balance of $34.4 million with SUN TV.

As at December 31, 2006, Sun Media’s total investment in the Quebecor Media and SUN TV Preferred Shares was $589.4 million, with dividend income receivable of $30.0 million. During the year ended December 31, 2006, Sun Media made cash interest payments of $175.9 million (2005 — $142.7 million) on the convertible obligations to Quebecor Media and $3.9 million (2005 — $1.7 million) on the convertible obligations to SUN TV. During the same period, Sun Media received cash dividends of $181.1 million (2005 — $146.9 million) from its investment in the Quebecor Media Preferred Shares, and $4.0 million (2005 — $1.9 million) from its SUN TV Preferred Shares.

Business and publication acquisitions.In the year ended December 31, 2006, Sun Media acquired three community newspaper operations for total cash consideration of $1.5 million, including acquisition costs. See also Note 2 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

Payment of dividends or distributions.In the year ended December 31, 2006, Sun Media paid dividends of $95.5 million, or $75.73 per common share on our 1,261,001 outstanding common shares, to its shareholder. In 2005, Sun Media paid dividends of $169.7 million, or $134.54 per common share, to its shareholder. Sun Media’s Board of Directors has not determined what level of dividends or other distributions, if any, Sun Media will, to the extent permitted by the terms of its indebtedness and applicable law, pay to its shareholder in 2007.

Sources of Liquidity and Capital Resources

Sun Media’s primary sources of liquidity and capital resources are:

	•		Funds from operations;

	•		Debt from capital markets borrowings and bank financing; and

	•		Financing from related party transactions.

Funds from operations.In 2006, cash provided by operating activities decreased to $144.8 million or by $36.6 million from $181.4 million in 2005. Cash provided by operating activities before charges in non-cash working capital decreased to $161.0 million, or by $23.6 million, from $184.6 million in 2005, primarily due to a decrease in Adjusted EBITDA of $13.0 million and higher interest expense. The change in non-cash operating working capital in 2006 was negative $16.2 million compared to negative $3.2 million in the prior year. The decline in non-cash working capital was due to the timing of newsprint and other operating expense payments which reduced Sun Media’s accrued liabilities in 2006 compared to the prior year. This was partly offset by the improved collections of accounts receivable in 2006 compared to 2005.

Debt from capital market borrowings and bank financing.A principal source of cash for Sun Media is its Credit Facilities and Senior Notes. Sun Media’s Credit Facilities as amended on January 17, 2006, are comprised of (i) a revolving credit facility amount to $75.0 million, maturing February 7, 2008, a Term Loan B credit facility amounting to US$230.0 million maturing February 7, 2009, and Term Loan C credit facility amounting to $40.0 million maturing February 7, 2009. The Credit Facilities are collateralized by liens on all of the property and assets of Sun Media and its operating subsidiaries owned or acquired thereafter. The Credit Facilities contain covenants that restrict the declaration and payment of dividends and certain other distributions, as well as certain financial ratios. Any amount borrowed under the revolving credit facility bears interest at Canadian bankers’ acceptance and/or Canadian prime rate plus an applicable margin determined by financial ratios. Advances under the Term Loan B credit facility bear interest at LIBOR plus a margin of 1.75% per annum, or at U.S. prime rate plus a margin of 0.75% per annum. Advances under the Term Loan C credit facility bear interest at bankers’ acceptance plus a margin of 1.50% per annum, or at Canadian prime rate plus a margin of 0.50% per annum. Sun Media has fully hedged the foreign currency risk associated with the Term Loan B credit facility by using cross-currency interest rate swaps under which all payments were set in Canadian dollars. In 2006, no amounts were drawn on the revolving credit facility.

The Senior Notes were issued in 2003 at discount for net proceeds of US$201.5 million, before issuance fees of US$4.1 million. These notes bear interest at a rate of 7.625% and mature on February 15, 2013. The Senior Notes contain certain restrictions applicable to Sun Media, including limitations on its ability to incur additional indebtedness. The Senior Notes are unsecured and are guaranteed by certain subsidiaries of Sun Media. Sun Media has fully hedged the foreign currency risk associated with the Senior Notes by using cross-currency interest rate swaps and a foreign exchange forward contract, under which all payments were set in Canadian dollars. The notes are redeemable, in whole or in part, at any time on or after February 15, 2008, at specified redemption prices.

Sun Media has always operated within its financial ratios and expects to continue to do so in 2007.

Financing from related party transactions.Sun Media has entered into certain tax loss consolidation transactions with its parent company, Quebecor Media and a related company, SUN TV. These transactions involve the purchase and/or sale of preferred shares and the issuance or redemption of convertible obligations, as further described under “Liquidity and capital resource requirements — Purchase and/or sale of Preferred Shares of Quebecor Media and SUN TV and convertible obligations issued to and/or redeemed from Quebecor Media and SUN TV”.

Cash management and financial position

Management expects that in 2007 its principal needs for cash relating to Sun Media’s existing operations will be to fund operating activities and working capital, capital expenditures, debt repayment, debt service and, if any, distributions to shareholders as determined by the Board of Directors. We believe that cash flow from operations and the

available sources of financing described above will be sufficient to cover our cash requirements. Sun Media also intends to continue investigating potential business acquisitions that would complement existing operations.

As at December 31, 2006, Sun Media had cash and cash equivalents of $3.9 million ($22.8 million at December 31, 2005) and total long-term debt, including the current portion, was $486.7 million. This represents an increase in long-term debt of $20.4 million from the December 31, 2005 balance of $466.3 million, resulting from the new Term Loan C credit facility of $40.0 million, offset by the partial repayment of US$15.0 million of its Term Loan B credit facility and fluctuations in the U.S. exchange rate.

Financial instruments

On February 7, 2003, Sun Media entered into forward contracts to hedge foreign exchange fluctuations related to the principal amount of the Senior Notes maturing in February 2013. These contracts have the effect of converting the principal repayment on maturity of the Senior Notes from US$205.0 million to Cdn$312.2 million. Sun Media also entered into fixed and floating cross currency interest rate swaps to hedge foreign exchange fluctuations related to (i) the interest on the Senior Notes and (ii) the principal and interest on the portion of the credit facility denominated in U.S. dollars. The effect of these agreements is to convert Sun Media’s obligation to service interest and principal payments on the debt from U.S. dollars to Canadian dollars.

Furthermore, Sun Media may use financial instruments to manage interest rate and foreign exchange exposure on material purchases in foreign currency, such as capital equipment. Sun Media does not use financial instruments for trading or speculative purposes.

In the second quarter of 2004 Sun Media discontinued hedge accounting for one of its financial instruments used to hedge foreign exchange fluctuations on a portion of the principal and interest of Sun Media’s Senior Notes, as it was no longer considered an effective hedge under CICA Accounting Guideline AcG-13,Hedging Relationships. Despite Sun Media’s discontinuation of hedge accounting for that financial instrument and the associated debt, Sun Media believes that all of its financial instruments continue to adequately serve their original intended purpose of managing Sun Media’s exposure to fluctuations in foreign currency exchange rates.

Off-Balance Sheet Arrangements

Guarantee and indemnity agreements

Sun Media has entered into guarantee agreements with third parties that may result in an obligation to Sun Media, depending on certain events that would trigger the liability. These guarantees are described below:

Operating leases.Sun Media has guaranteed a portion of the residual values of certain leased assets under operating leases that expire between 2007 and 2011. If the fair value of an asset at the end of its lease term is less than the expected fair value as estimated at the inception of the lease, then Sun Media must, under certain conditions, compensate the lessor for a portion of the shortfall. As at December 31, 2006, the maximum aggregate exposure to Sun Media in respect of these guarantees was $2.1 million. Sun Media has not recorded a liability associated with these guarantees, as it is unable to estimate potential payments under such guarantees. Historically, payments of this nature have not been significant.

Business and asset disposals.In connection with certain dispositions of businesses and/or assets, Sun Media may provide customary representations and warranties whose terms range in duration and may not be explicitly defined. In addition to possible indemnification relating to failure to perform covenants and breach of representations and warranties, Sun Media may agree to indemnify against claims from Sun Media’s past conduct of the business. Sun Media is unable to estimate an aggregate exposure in respect of these indemnity provisions because the provisions may not limit Sun Media’s potential liability if a triggering event were to occur. Accordingly, amounts are generally not accrued in the consolidated financial statements with respect to these indemnification agreements unless it is probable that Sun Media will make payments pertaining to these guarantees.

Senior Notes.Under the terms of its Senior Notes, Sun Media has agreed to indemnify its lenders for the amount of changes in withholding tax laws which would reduce the amount of proceeds receivable by the noteholder per the terms of the Senior Notes. These indemnifications extend for the term of the Senior Notes and do not provide any limit on the maximum potential liability. Any amounts payable under the indemnity would increase the future effective cost of borrowing. Due to the nature of the indemnification agreement, Sun Media is unable to estimate the maximum potential liability it could be required to pay to noteholders. Accordingly, no amount has been accrued in the consolidated financial statements with respect to the agreement.

Other indemnities.In the normal course of its operations, Sun Media provides indemnification agreements to counterparties in transactions such as purchase contracts, service agreements, leasing transactions and licensing agreements. These indemnification agreements require Sun Media to compensate the counterparties for costs incurred as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. Sun Media also provides indemnification agreements to its directors and officers as a result of litigation claims. The terms of these indemnification agreements will vary based upon the contract. The nature of the indemnification agreements prevents Sun Media from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, Sun Media has not made any significant payments under such indemnification.

Contingencies

Sun Media experiences routine litigation, including defamation actions, in the normal course of its business. Sun Media is currently involved in a number of legal proceedings pending against it and its subsidiaries. Sun Media believes that the outcome of these pending legal actions will not have a material adverse effect on Sun Media’s results of operations, liquidity or its financial position.

Critical Accounting Policies and Estimates

Use of estimates

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to the determination of pension and other post-retirement benefits, key economic assumptions used in determining the allowance for doubtful accounts, restructuring accruals, the useful life of assets for amortization and evaluation of expected future undiscounted cash flows to be generated by assets, the determination of fair value of assets acquired and liabilities assumed in business combinations, implied fair value of goodwill, provisions for income taxes, and determination of future income tax assets, liabilities, the determination of the fair value of financial instruments and the determination of the fair value of stock-based compensation. Actual results could differ from these estimates.

Revenue recognition

As a general principle, Sun Media recognizes its operating revenues when the following criteria are met:

	•		Persuasive evidence of an arrangement exists;

	•		Delivery has occurred or services have been rendered;

	•		The seller’s price to the buyer is fixed or determinable, and

	•		The collection of the sale is reasonably assured.

provisions for estimated returns, based on Sun Media’s historical rate of return. Revenue from commercial printing contracts is recognized once the service is rendered.

Sun Media evaluates its allowance for uncollectible trade accounts receivable based on customers’ credit history and payment trends.

Long-lived assets and Goodwill

Sun Media reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset or group of assets held for use exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. Measurement of an impairment loss is based on the amount by which the group of assets carrying amount exceeds its fair value. Fair value is determined using quoted market prices, when available or using accepted valuation techniques such as the discounted future cash flows method.

Sun Media tests its goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is not required. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statement of income.

In management’s determination of the recoverability of long-lived assets, intangible assets and goodwill, estimates used in preparing the undiscounted cash flows and determining the fair values of reporting units are based on quoted prices, industry trends and existing competitive factors believed to be reasonable under the circumstances. Actual results may differ from these estimates due to changes in assumptions or conditions, potentially resulting in an impairment of the value and life of long-lived assets.

Employee future benefits

Pension Plans.Sun Media offers defined benefit pension plans and defined contribution pension plans to various employee groups. Defined benefit pension plan costs are determined using actuarial methods and are funded through contributions determined in accordance with the projected benefit method pro-rated on service, which incorporates management’s best estimate of future salary levels, other cost escalations, retirement ages of employees and other actuarial factors. Pension plan expense is charged to operations and includes:

	•		Cost of pension plan benefits provided in exchange for employee services rendered during the year;

	•		Amortization of prior service costs and amendments on a straight-line basis over the expected average remaining service period of the active employee group covered by the plans; and

	•		Interest cost of pension plan obligations, expected return on pension fund assets, and amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of plan assets at the beginning of the year over the expected average remaining service period of the active employee group covered by the plans.

Actuarial gains and losses arise from the difference between the actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to determine the accrued benefit obligation.

Weighted average assumptions for the pension benefit plans in 2006 included a discount rate of 5% (2005 — 5%) on Sun Media’s benefit obligation and 5% (2005 — 6%) on Sun Media’s current pension expense, an expected return on

plan assets of 7.25% (2005 — 7.5%) and compensation increases of 3.5% (2005 — 3.5%). The expected average remaining service period of the active employee group covered by the plans is between 10 and 19 years. Sun Media uses the fair value at year-end to evaluate plan assets for the purpose of calculating the expected return on plan assets.

Post-retirement benefits.Sun Media offers health care plans to various retired employee groups. The costs of these benefits are accounted for during the employee’s active service period. Sun Media funds these benefits as they become due. Sun Media amortizes the cumulative unrecognized net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning of the year over the expected average remaining service life of the active employee group covered by the plans.

Weighted average assumptions for other benefit plans in 2006 included a discount rate of 5% (2005 — 5%) on Sun Media’s benefit obligation, and 5% (2005 — 6%) on the current pension expense, and a compensation increase of 3.5% (2005 — 3.5%). The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 8.6%. This rate was assumed to decrease gradually to 5% over nine years and remain at that level thereafter. An increase of 1% in the assumed health care cost trend would increase the current annual service and interest costs by $0.5 million and benefit obligations by $5.6 million. A decrease of 1% in the assumed health care cost trend would decrease the current annual service and interest costs by $0.4 million and benefit obligations by $4.3 million.

Derivative financial instruments

Sun Media uses various derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. Sun Media does not hold or use any derivative instruments for trading purposes.

Sun Media documents all relationships between derivatives and hedged items, as well as its strategy for using hedges and its risk-management objective. Sun Media assesses the effectiveness of derivatives at the inception of the hedge and on a quarterly basis.

Sun Media enters into cross currency and interest rate swap agreements to hedge its foreign currency denominated long-term debt. For derivatives that are determined to be effective, foreign exchange translation gains and losses on the hedged debt are deferred and recorded in other current or non-current assets or liabilities. Premiums or discounts for these swap agreements are amortized, using the effective interest rate method, as an adjustment to financial expenses over the term of the agreement.

Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other current or non-current assets or liabilities on the balance sheet and recognized in income in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recorded in financial expenses.

Derivative instruments that are ineffective or that are not designated as a hedge are reported on a mark-to-market basis in the consolidated financial statements. Any change in the fair value of these derivative instruments is recorded in financial expenses.

Deferred assets or liabilities relating to hedges that have become ineffective are amortized, using the effective interest rate method, over the term of the related financial instrument.

Income taxes

Management uses judgment and estimates in determining the appropriate rates and amount to record for future taxes, giving consideration to timing and probability. This would include estimating the timing of reversals in differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The recording of future tax assets also requires an assessment of recoverability. A valuation allowance is recorded when Sun Media does not believe, based on all available evidence, that it is more likely than not that all of the future tax assets recognized will be realized prior to their expiration. This assessment includes a projection of future year earnings based

on historical results and changes in operations.

Canadian and United States Accounting Policy Differences

Sun Media prepares its financial statements in accordance with Canadian GAAP, which differs in certain respects from GAAP in the United States. The areas of material differences and their impact on the financial statements are described in Note 19 to our audited consolidated financial statements included in “Item 17. Financial Statements” of this annual report.

Recent Canadian GAAP Accounting Pronouncements

Recent accounting developments in Canada

In 2005, CICA published Handbook Section 3855,Financial Instruments — Recognition and Measurement(CICA 3855), Handbook Section 3865,Hedges(CICA 3865), and Handbook Section 1530,Comprehensive Income(CICA 1530).

CICA 3855 sets forth standards governing when and in what amount a financial instrument is to be recorded on the balance sheet. Financial instruments are to be recognized at fair value in some cases, at cost-based value in others. The section also provides standards for reporting gains and losses on financial instruments.

CICA 3865 is an optional application that allows entities to apply treatments other than those provided under CICA 3855 to eligible operations they choose to designate, for accounting purposes, as being part of a hedging relationship. It expands on the guidance in AcG-13,Hedging Relationships, and CICA 1650,Foreign Currency Translation, specifying the application of hedge accounting and the information that is to be reported by the entity.

CICA 1530 sets forth a new requirement that certain gains and losses be temporarily accumulated outside net income and recognized in other comprehensive income.

New standards in CICA 3855, 3865 and 1530 became effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. Sun Media is currently assessing the impact that these new standards will have on its consolidated financial statements prepared in accordance with Canadian GAAP. Sun Media believes, however, that the impact of these new standards for Sun Media will be similar to those currently used for U.S. GAAP purposes.

Recent United States GAAP Accounting Pronouncements

Recent accounting developments in the United States

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(FAS158). Effective for fiscal years ended after December 15, 2006, FAS158 requires the recognition in the consolidated balance sheet of the over or under funded positions of defined benefit pension and other postretirement plans, along with a corresponding non-cash adjustment, which will be recorded in the accumulated other comprehensive loss. The recognition and disclosure provisions of FAS158 are effective prospectively for fiscal years ended after December 15, 2006. The adoption of FAS158 did not have an impact on Sun Media’s consolidated statement of income.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB108),Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB108 did not have an impact on Sun Media’s consolidated statements of income.

In June, 2006, the FASB issued interpretation No. 48,Accounting for Uncertainty in Income Taxes (FIN48) — an interpretation of FASB Statement No. 109. FIN48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxesand prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN48 is effective for fiscal years beginning after December 15, 2006. Sun Media is currently assessing the potential impact that adoption of FIN48 will have on its consolidated financial statements.

PART III

Item 17. — Financial Statements

The consolidated financial statements included in this Item 17 include a new report of the auditors. In addition, Note 19 “Material Differences Between Generally Accepted Accounting Principles (GAAP) in Canada and the United States” has been revised to reflect the restatement. Except for those revisions, the consolidated financial statements included in this Item 17 have not been restated.

The consolidated financial statements of Sun Media, together with the notes thereto and the auditor’s report thereon, are set forth beginning on pages F-1 of this Amendment No. 1 and under Item 17 of the Original Filing, as amended and restated hereby.

Item 19. — Exhibits

Other than the certifications, which are updated for this filing, no other new exhibits are filed and all other exhibits to the Original Filing remain unchanged.

The following documents are filed as exhibits to this annual report on Form 20-F:


Exhibit
Number		Description

12.1		Certification of Pierre Francoeur, President and Chief Executive Officer of Sun Media Corporation, pursuant to 15 U.S.C. Section 78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2		Certification of Michel Slight, Executive Vice President, Finance, of Sun Media Corporation, pursuant to 15 U.S.C. Section 78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1		Certification of Pierre Francoeur, President and Chief Executive Officer of Sun Media Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2		Certification of Michel Slight, Executive Vice President, Finance, of Sun Media Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


SUN MEDIA CORPORATION
By:	/s/ Michel Slight
	Name:	Michel Slight
	Title:	Executive Vice President, Finance

Dated: June 22, 2007

SUN MEDIA CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004


Report of Independent Registered Public Accounting Firm		F-1

Financial Statements
Consolidated statements of income	��	F-2
Consolidated statements of shareholder’s equity		F-3
Consolidated statements of cash flows		F-4
Consolidated balance sheets		F-6
Notes to consolidated financial statements		F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholder and Directors of Sun Media Corporation

We have audited the accompanying consolidated balance sheets of Sun Media Corporation (“Sun Media” or “the Company”) and subsidiaries as of December 31, 2005 and 2006, and the related consolidated statements of income, shareholder’s equity, and cash flows for the years ended December 31, 2004, 2005 and 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about 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. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sun Media and subsidiaries as of December 31, 2005 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2004, 2005 and 2006 in conformity with Canadian generally accepted accounting principles.

Canadian generally accepted accounting principles vary in certain significant respects from US generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 19 to the consolidated financial statements. Also, as discussed in note 19 to the consolidated financial statements, in 2006 the Company changed in its US generally accepted accounting principles reconciliation (i) its method of accounting for share-based payment; and (ii) its method of accounting for pensions and other post-retirement benefit plans. As described in note 19, the Company has restated its US generally accepted accounting principles reconciliation from that previously issued.

/s/ KPMG LLP
Chartered Accountants, Licensed Public Accountants

Toronto, Canada
February 16, 2007, except
as to note 19 which is
as of June 21, 2007

F-1

SUN MEDIA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars)


	2004			2005			2006
REVENUES	$	888,149		$	915,627		$	928,176

OPERATING EXPENSES

Wages and employee benefits		338,105			346,253			353,086
Newsprint		104,698			104,182			107,766
Other operating expenses (note 14)		217,501			243,017			258,190
Depreciation (note 3(a)(i))		23,368			27,614			34,001
Amortization of intangible assets		2,670			2,710			2,548
Restructuring charges (note 3)		—			—			17,033

		686,342			723,776			772,624


OPERATING INCOME		201,807			191,851			155,552

Financial expenses (note 4)		51,138			46,738			50,535
Dividend income on preferred shares of Quebecor Media Inc. (note 6)		(147,462	)		(150,710	)		(140,005	)
Interest on convertible obligations to Quebecor Media Inc. (note 6)		143,333			146,376			135,937
Dividend income on preferred shares of SUN TV Company (note 7)		—			(1,918	)		(4,026	)
Interest on convertible obligations to SUN TV Company (note 7)		—			1,856			3,897
Gain on disposition of CP24 (note 2(c))		(8,000	)		—			—

		39,009			42,342			46,338

INCOME BEFORE THE UNDERNOTED ITEMS		162,798			149,509			109,214

Income taxes (note 5)
Current		2,231			1,066			1,055
Future		2,334			2,281			(11,182	)
Equity loss on investment in SUN TV Company (note 2(c))		147			2,747			3,252
Impairment of equity investment in SUN TV Company (note 2(c))		—			—			7,819
Non-controlling interest		1,341			1,488			1,498


NET INCOME	$	156,745		$	141,927		$	106,772

See accompanying notes to consolidated financial statements.

F-2

SUN MEDIA CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars)


							Total
	Capital			Retained			Shareholder’s
	Stock			Earnings			Equity
BALANCE — DECEMBER 31, 2003	$	301,801		$	33,718		$	335,519

Net income		—			156,745			156,745
Dividends		—			(135,115	)		(135,115	)


BALANCE — DECEMBER 31, 2004	$	301,801		$	55,348		$	357,149

Net income		—			141,927			141,927
Dividends		—			(169,653	)		(169,653	)


BALANCE — DECEMBER 31, 2005	$	301,801		$	27,622		$	329,423

Net income		—			106,772			106,772
Dividends		—			(95,500	)		(95,500	)
Reduction in paid-up capital (note 12)		(40,000	)		—			(40,000	)


BALANCE — DECEMBER 31, 2006	$	261,801		$	38,894		$	300,695

See accompanying notes to consolidated financial statements.

F-3

SUN MEDIA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars)


	2004			2005			2006
CASH PROVIDED BY (USED IN):

OPERATING ACTIVITIES
Net income	$	156,745		$	141,927		$	106,772
Items not involving cash:
Depreciation of property, plant and equipment		23,368			27,614			34,001
Amortization of intangible assets		2,670			2,710			2,548
Restructuring charges (note 3)		—			—			12,778
Future income taxes		2,334			2,281			(11,182	)
Non-controlling interest		1,341			1,488			1,498
Equity loss on investment in SUN TV Company (note 2(c))		147			2,747			3,252
Impairment of equity investment in SUN TV Company (note 2(c))		—			—			7,819
Net unrealized loss on foreign currency translation and financial instruments (note 4)		6,779			4,100			1,702
Gain on disposition of CP24 (note 2(c))		(8,000	)		—			—
Other		1,698			1,718			1,810

		187,082			184,585			160,998
Changes in non-cash operating working capital, net of effects from acquisitions		(9,687	)		(3,202	)		(16,248	)

Cash provided by operating activities		177,395			181,383			144,750

FINANCING ACTIVITIES
Borrowings on Term Loan C Facility, net of financing fees (note 10)		—			—			39,604
Issuance of convertible obligations to Quebecor Media Inc. (note 6)		—			255,000			120,000
Redemption of convertible obligations to Quebecor Media Inc. (note 6)		(450,000	)		(150,000	)		(810,000	)
Issuance of convertible obligations to SUN TV Company (note 7)		—			37,300			—
Redemption of convertible obligations to SUN TV Company (note 7)		—			—			(2,925	)
Dividends		(135,115	)		(169,653	)		(95,500	)
Repayment of loans and unwinding of hedging contracts		(29,288	)		(3,490	)		(26,553	)
Reduction in paid-up capital (note 12)		—			—			(40,000	)
Other		(1,274	)		(1,737	)		(1,797	)

Cash used in financing activities		(615,677	)		(32,580	)		(817,171	)

INVESTING ACTIVITIES
Investment in preferred shares of Quebecor Media Inc. (note 6)		—			(255,000	)		(120,000	)
Disposal of preferred shares of Quebecor Media Inc. (note 6)		450,000			150,000			810,000
Investment in preferred shares of SUN TV Company (note 7)		—			(37,300	)		—
Disposal of preferred shares of SUN TV Company (note 7)		—			—			2,925
Business acquisitions (note 2)		(417	)		(2,062	)		(1,475	)
Equity investment in SUN TV Company (note 2(c))		(3,675	)		—			(6,035	)
Acquisition of non-capital tax losses (note 5)		—			—			(16,142	)
Decrease in temporary investments		16,380			—			—
Additions to property, plant and equipment		(18,820	)		(15,675	)		(15,801	)
Proceeds from disposal of property, plant and equipment		628			526			484
Other		(1,508	)		(66	)		(490	)

Cash provided by (used in) investing activities		442,588			(159,577	)		653,466


Increase (decrease) in cash and cash equivalents		4,306			(10,774	)		(18,955	)
Cash and cash equivalents — beginning of year		29,288			33,594			22,820


Cash and cash equivalents — end of year	$	33,594		$	22,820		$	3,865

F-4

SUN MEDIA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars)


	2004			2005			2006
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Accounts receivable	$	(3,635	)	$	(14,832	)	$	(1,701	)
Inventories		(2,159	)		410			2,697
Accounts payable and accrued liabilities		(15,661	)		17,915			(12,398	)
Dividend income receivable from Quebecor Media Inc.		23,784			(3,787	)		41,086
Interest expense payable to Quebecor Media Inc.		(23,119	)		3,627			(39,949	)
Dividend income receivable from SUN TV Company		—			(133	)		21
Interest expense payable to SUN TV Company		—			129			(20	)
Other		11,103			(6,531	)		(5,984	)

	$	(9,687	)	$	(3,202	)	$	(16,248	)


NON-CASH FINANCING AND INVESTING ACTIVITIES
Acquisition of SUN TV Company (note 2(c))	$	(8,000	)		—			—
Disposition of CP24 (note 2(c))	$	8,000			—			—
Exchange of publications with Transcontinental Media G.P. (note 2(b))		—		$	1,111			—

ADDITIONAL INFORMATION
Cash interest payments	$	43,231		$	41,053		$	46,905


Cash interest receipts	$	672		$	631		$	700


Cash tax payments	$	2,651		$	2,613		$	2,716


Cash tax receipts	$	13,349		$	1,314		$	378

See accompanying notes to consolidated financial statements

F-5

SUN MEDIA CORPORATION

CONSOLIDATED BALANCE SHEETS

As of December 31, 2005 and 2006
(In thousands of Canadian dollars, except for share information)


	2005		2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	22,820	$	3,865
Accounts receivable, net of allowance for doubtful accounts of $6,836 (2005 - $5,402)		138,408		140,109
Dividend receivable from Quebecor Media Inc. (note 6)		70,938		29,852
Dividend receivable from SUN TV Company (note 7)		133		112
Inventories		11,289		8,592
Prepaid expenses		4,740		4,881
Future income taxes (note 5)		6,222		26,869

TOTAL CURRENT ASSETS		254,550		214,280

INVESTMENT IN QUEBECOR MEDIA INC. PREFERRED SHARES (note 6)		1,245,000		555,000
INVESTMENT IN SUN TV COMPANY (note 7)		37,300		34,375
EQUITY INVESTMENT IN SUN TV COMPANY (note 2(c))		8,781		3,745
PROPERTY, PLANT AND EQUIPMENT (note 8)		174,115		155,680
GOODWILL (note 2)		755,662		756,115
FUTURE INCOME TAXES (note 5)		32,664		34,047
INTANGIBLE AND OTHER ASSETS (note 9)		31,780		32,303


TOTAL ASSETS	$	2,539,852	$	1,785,545


LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	140,142	$	148,922
Income and other taxes payable		6,442		3,763
Interest payable to Quebecor Media Inc. (note 6)		68,897		28,948
Interest payable to SUN TV Company (note 7)		129		109
Deferred revenue		18,971		19,340
Current portion of long-term debt (note 10)		2,675		3,080

TOTAL CURRENT LIABILITIES		237,256		204,162

LONG-TERM DEBT (note 10)		463,585		483,637
FUTURE INCOME TAXES (note 5)		36,674		22,981
OTHER LIABILITIES (note 11)		188,894		182,975
NON-CONTROLLING INTEREST		1,720		1,720
CONVERTIBLE OBLIGATIONS TO QUEBECOR MEDIA INC. (note 6)		1,245,000		555,000
CONVERTIBLE OBLIGATIONS TO SUN TV COMPANY (note 7)		37,300		34,375

TOTAL LIABILITIES		2,210,429		1,484,850

SHAREHOLDER’S EQUITY
Capital stock (note 12)		301,801		261,801
— Authorized: 10,000,000,000 Voting Class A Common Shares, nil par value 10,000,000,000 Non-voting redeemable Class B Preferred Shares, nil par value 10,000,000,000 Non-voting Class C Preferred Shares, nil par value
— Issued and outstanding at December 31, 2005 and 2006: 1,261,001 Voting Class A Common Shares
Retained earnings		27,622		38,894


TOTAL SHAREHOLDER’S EQUITY		329,423		300,695


TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	2,539,852	$	1,785,545


COMMITMENTS AND CONTINGENCIES (note 16)
GUARANTEES (note 17)

See accompanying notes to consolidated financial statements.

F-6

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

NATURE OF BUSINESS

The primary operation of Sun Media Corporation (“Sun Media” or “the Company”) is newspaper publishing. The Company publishes urban daily newspapers, community newspapers, as well as other specialty publications in communities across Canada. Sun Media is also active in the newspaper, magazine and flyer distribution business. In addition, Sun Media provides a wide range of commercial printing and other related services to third parties through its national network of production and printing facilities. Sun Media also owns a 25% interest in SUN TV Company (“SUN TV”), a general interest television station in Toronto, Ontario.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). The significant differences between generally accepted accounting principles in Canada and in the United States are described in note 19.

(a) Basis of presentation

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its 50.01% owned subsidiary,Le Courrier du Sud Inc.Investments in joint ventures, includingVancouver 24 Hours, are accounted for using the proportionate consolidation method. Intercompany transactions and balances are eliminated on consolidation. Certain comparative figures for the years 2004 and 2005 have been reclassified to conform with the presentation adopted for the year ended December 31, 2006.

(b) Use of estimates

The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to the determination of pension and other post-retirement benefits, key economic assumptions used in determining the allowance for doubtful accounts, restructuring accruals, the useful life of assets for amortization and evaluation of expected future undiscounted cash flows to be generated by assets, the determination of fair value of assets acquired and liabilities assumed in business combinations, implied fair value of goodwill, provisions for income taxes and determination of future income tax assets, liabilities, the determination of the fair value of financial instruments and the determination of the fair value of stock-based compensation. Actual results could differ from these estimates.

(c) Impairment of long-lived assets

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset or group of assets held for use exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. Measurement of an impairment loss is based on the amount by which the group of assets carrying amount exceeds its fair value. Fair value is determined using quoted market prices, when available or using accepted valuation techniques such as the discounted future cash flows method.

F-7

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(d) Revenue recognition

As a general principle, the Company recognizes its operating revenues when the following criteria are met:

—		Persuasive evidence of an arrangement exists;

—		Delivery has occurred or services have been rendered;

—		The seller’s price to the buyer is fixed or determinable, and

—		The collection of the sale is reasonably assured.

Circulation and advertising revenue from publishing activities is recognized in income when the publication is delivered. Prepaid subscription revenue is recorded under deferred revenue and taken into income pro-rata over the term of the subscription. Revenue from the distribution of publications and products is recognized upon delivery, net of provisions for estimated returns, based on the Company’s historical rate of return. Revenue from commercial printing contracts is recognized once the service is rendered.

The Company evaluates its allowance for uncollectible trade accounts receivable based on customers’ credit history and payment trends.

(e) Barter transactions

In the normal course of operations, the Company provides advertising services to customers in exchange for advertising or other services. Revenue and expenses from advertising barter transactions with third parties are measured based on the fair value of the services provided by the Company for similar cash transactions. Revenues and expenses from barter transactions with related parties are measured at their exchange values. For the year ended December 31, 2006, the Company recorded $10,379 of barter advertising (2004 — $8,506; 2005 — $10,835), including $2,197 with related parties (2004 — $1,496; 2005 — $2,852).

(f) Cash and cash equivalents

Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost, which approximate market value.

(g) Inventories

Inventories, consisting primarily of newsprint and ink, are valued at the lower of cost, net of rebates, determined on a first-in, first-out basis, and replacement cost.

(h) Property, plant and equipment

Property, plant and equipment are stated at cost. Cost represents acquisition or construction costs, including preparation, installation and testing changes and interest incurred with respect to the property, plant and equipment until they are ready for commercial production. Projects under development may also be comprised of advances for equipment under construction. Interest on debt relating to projects under development is capitalized. Expenditures for additions, improvements and replacements are capitalized, whereas maintenance and repair expenditures are charged to other operating expenses. Depreciation is calculated on a straight-line basis over the following estimated useful lives:


Buildings		25-40 years
Machinery and equipment		3-20 years

F-8

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(i) Income taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rate on future income tax assets and liabilities is recognized in income in the period that includes the enactment or substantive enactment date. Future income tax assets are recognized and a valuation allowance is provided if realization is not considered “more likely than not”.

(j) Goodwill, intangible assets and deferred financing fees

Goodwill is not amortized. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is not required. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statement of income.

Intangible assets consist of customer relationships and non-competition agreements. Intangible assets with finite useful lives are amortized over their estimated useful lives using the straight-line method over a period of five to ten years.

Financing fees related to long-term financing are amortized using the straight-line method over the term of the related long-term debt.

(k) Long-term investments

Investments in companies subject to significant influence are accounted for using the equity method. Portfolio investments are accounted for using the cost method. Investments in joint ventures, which represent a negligible part of the Company’s operations, are accounted for using the proportionate consolidation method. A provision for loss in the value of investments is made when a decline in fair value is considered other than temporary.

(l) Stock-based compensation

The compensation expense attributable to stock-based awards made by Sun Media’s parent company Quebecor Media Inc. (“Quebecor Media”) and Quebecor Inc. to employees of the Company that call for settlement in cash or other assets, at the option of the employee, is recognized in wages and employee benefits over the vesting period. Changes in the intrinsic value of the stock option awards between the grant date and the measurement date result in a change in the measurement of the liability and compensation expense.

(m) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities, revenue and expenses are translated at the exchange rate in effect at the transaction date. Exchange gains and losses are recognized in income.

F-9

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(n) Derivative financial instruments

The Company uses various derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. The Company does not hold or use any derivative instruments for trading purposes.

The Company documents all relationships between derivatives and hedged items, as well as its strategy for using hedges and its risk-management objective. The Company assesses the effectiveness of derivatives at the inception of the hedge and on a quarterly basis.

The Company enters into cross currency and interest rate swap agreements to hedge its foreign currency denominated long-term debt. For derivatives that are determined to be effective, foreign exchange translation gains and losses on the hedged debt are deferred and recorded in other current or non-current assets or liabilities. Premiums or discounts for these swap agreements are amortized, using the effective interest rate method, as an adjustment to financial expenses over the term of the agreement.

Deferred assets or liabilities relating to hedges that have become ineffective are amortized, using the effective interest rate method, over the term of the related financial instrument.

(o) Pension plans and post-retirement benefits

(i) Pension plans:

The Company offers defined benefit pension plans and defined contribution pension plans to various employee groups. Defined benefit pension plan costs are determined using actuarial methods and are funded through contributions determined in accordance with the projected benefit method pro-rated on service, which incorporates management’s best estimate of future salary levels, other cost escalations, retirement ages of employees and other actuarial factors. Pension plan expense is charged to wages and employee benefits and includes:

—		Cost of pension plan benefits provided in exchange for employee services rendered during the year;

—		Amortization of prior service costs and amendments on a straight-line basis over the expected average remaining service period of the active employee group covered by the plans; and

—		Interest cost of pension plan obligations, expected return on pension fund assets, and amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of plan assets at the beginning of the year over the expected average remaining service period of the active employee group covered by the plans, ranging from 10 to 19 years.

F-10

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The measurement date for calculating the fair value of plan assets, for the purpose of calculating the expected return on plan assets, and accrued benefit obligations is December 31.

For defined contribution plans, the pension plan expense is the Company’s contribution to the plan.

(ii) Post-retirement benefits:

The Company offers health, life and dental insurance plans to some of its retired employees. The Company accrues the cost of post-retirement benefits, other than pensions. These benefits are funded by the Company as they become due. The Company amortizes the cumulative unrecognized net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning of the year over the expected average remaining service period of the active employee group covered by the plans.

2. ACQUISITIONS AND DISPOSITIONS

(a) Acquisitions of community publications

During the years ended December 31, 2006 and 2005, the Company acquired several community publications and has accounted for these acquisitions using the purchase method. Certain purchase price allocations related to 2006 acquisitions are preliminary and will be finalized when the Company’s management has gathered all the significant information believed to be available and considered necessary. The results of operations of these businesses have been included in the Company’s consolidated financial statements from the dates of their respective acquisitions.

Effective October 6, 2006, the Company acquiredLe Choix d’Antoine Labelle, a community publication for total cash consideration of $350. The acquisition resulted in an intangible asset, consisting of a non-competition agreement with the vendor of $350, which is being amortized over five years.

Effective May 1, 2006, the Company acquired two community publications,The Devon Dispatch NewsandThe Nouvelle Beaumont Newsfor total cash consideration of $1,125. The acquisition resulted in intangible assets, consisting of customer relationships and goodwill of $490 and $453, respectively. Customer relationships are being amortized over ten years.

In 2005, the Company acquired the following community publications:

—		The Londoner, a free weekly publication located in London, Ontario;

—		The Weekender and L’Horizon,two free weekly publications located in northern Ontario; and

—		Morinville MirrorandRedwater Tribune, two free weekly publications located near Edmonton, Alberta.

Total cash consideration for these purchases was $1,791. The acquisitions resulted in goodwill recognition of $1,955.

The purchase and sale agreement forThe Londonerincludes a price adjustment clause, which requires Sun Media to make additional payments if certain financial results are achieved by March 2008. The Company has not made any payments pursuant to this clause and has not otherwise recorded a liability associated with this price adjustment clause, as it is unable to estimate potential payments pertaining to this clause.

F-11

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(b) Exchange of publications with Transcontinental Media G.P. (“Transcontinental”)

Effective April 4, 2005, the Company sold to Transcontinental the operating assets ofBeauport Express, a free weekly community newspaper located in Beauport, Quebec. Concurrent with the disposition ofBeauport Express, the Company acquired from Transcontinental the operating assets ofJournal la Vallée, a free weekly community newspaper located in St-Sauveur, Quebec. As this was a non-monetary exchange of similar productive assets, this transaction was recorded at the carrying amounts of the net assets disposed and therefore, no gains or losses were recorded.

The carrying amounts of the net assets disposed by major class of asset and liability are as follows:


Non-cash working capital	$	148
Property, plant and equipment		5
Goodwill		958

Total net assets disposed	$	1,111

The Company used the purchase method to account for the acquisition ofJournal la Valléeand, therefore, the operating results reflect the revenues and expenses of the acquired operation from the date of acquisition. The purchase price, comprising the operating assets ofBeauport Express with a carrying value of $1,111 and cash consideration of $271, was allocated to assets and liabilities, as follows:


Non-cash working capital	$	244
Property, plant and equipment		20
Customer relationships		1,118

Total net assets acquired	$	1,382

Customer relationships are being amortized over ten years.

(c) SUN TV

On December 2, 2004, the Company acquired 25% of the outstanding shares of SUN TV, a general interest television station in Toronto, Canada for consideration, including acquisition costs, of $10,812, consisting of $2,812 in cash and the Company’s 29.9% interest in CP24, a 24-hour local news channel in Toronto, valued at $8,000. TVA Group Inc., also a subsidiary of Quebecor Media, acquired the other 75% of the outstanding shares of SUN TV. The Company recorded a net gain on the disposal of CP24 of $8,000.

In 2006, the Company increased its equity investment by $885 to reflect the final purchase price adjustment on the acquisition of SUN TV. In addition, during 2006, the Company made additional cash contributions to SUN TV in the amount of $5,150 (2004 — $863; 2005 — $nil) to maintain its 25% equity interest in SUN TV.

The Company has recorded its 25% interest in SUN TV using the equity method of accounting and for the year ended December 31, 2006, recorded an equity loss on its investment in SUN TV of $3,252 (2004 — $147; 2005 — $2,747).

In addition, during 2006, the Company reviewed the recoverability of its equity investment in SUN TV, and determined that the carrying value of SUN TV’s broadcasting licences and goodwill were no longer recoverable. Accordingly, the Company recorded an impairment loss of $7,819 on its equity investment in SUN TV.

As at December 31, 2006, the Company’s equity investment in SUN TV was $3,745 (December 31, 2005 — $8,781).

F-12

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

3. RESTRUCTURING CHARGES

During 2006, the Company recorded charges for the restructuring of its operations, consisting substantially of employee termination benefits, summarized as follows:


	Estimated
	Number of Full-							Restructuring
	time Equivalent							Accrual at
	Positions		Restructuring		Payments			December 31,
	Affected		Charges		in 2006			2006
(a) Restructuring of printing facilities
—London Free Press(*)		114	$	4,435	$	—		$	4,435
—Toronto Sun		194		4,371		—			4,371
—Ottawa Sun		39		1,260		(130	)		1,130
—Le Journal de Montréal		146		910		—			910
(b) Restructuring of news production operations		85		2,881		(2,554	)		327
(c) General workforce reduction		98		3,176		(1,571	)		1,605

		676	$	17,033	$	(4,255	)	$	12,778


*	Initial restructuring charge of $4,700 was reduced by $265 in the fourth quarter of 2006 to reflect revised estimates.

(a) Restructuring of printing facilities

In August 2005, Quebecor Media announced a plan to invest in a new printing facility to be located in Toronto, Ontario. As part of this plan, Sun Media will transfer the printing of its publications in Ontario to the new facility. In addition, in August 2005, Quebecor Media announced a plan to relocate the printing of certain Sun Media publications to a new printing facility owned by Quebecor Media and located in Saint-Janvier-de-Mirabel, Québec.

(i) Property, plant and equipment

As a result of these new investments, the Company accelerated the depreciation of certain presses and related equipment to reflect the shortened useful life of such equipment beginning in the fourth quarter of 2005. For the year ended December 31, 2006, the Company recorded additional depreciation expense of $12,073 (2005 — $4,568).

(ii) Severance and termination benefits

During 2006, the Company finalized the details of the plan and costs associated with the elimination of an estimated equivalent of 114 full-time unionized production positions at theLondon Free Pressand an estimated equivalent of 194 full-time non-unionized production positions at theToronto Sun, due to the transfer of its printing operations to the new printing facility being constructed in Toronto, Ontario, as described above. The Company anticipates that the printing of theLondon Free Pressand theToronto Sunwill be transferred to the new facility by mid-2007. Sun Media has recorded contractual termination benefits of $4,435 and $4,371 relating to employees of theLondon Free Pressand theToronto Sun, respectively, which will be payable upon the termination of its employees.

During 2006, the Company also recorded $1,260 of termination benefits relating to the elimination of an equivalent of 39 full-time non-unionized production positions atThe Ottawa Sun. As at December 31, 2006, payments of $130 have been made.

F-13

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

In addition, the Company finalized the details of special termination benefits to be paid in connection with the elimination of an estimated equivalent of 146 full-time inserter positions atLe Journal de Montréalin 2007. As a result, Sun Media has accrued termination benefits of $910. As at December 31, 2006, no payments have been made.

(b) Restructuring of news production operations

In June 2006, Sun Media announced a plan to restructure its news production operations by introducing new content management technologies and streamlining the news gathering process. During 2006, the Company recorded severance costs of $2,881 relating to the elimination of the equivalent of 85 full-time editorial positions in operations across the organization. As at December 31, 2006, payments of $2,554 have been made.

(c) General workforce reductions

During 2006, Sun Media implemented a voluntary workforce reduction program at theLondon Free Press and several smaller involuntary workforce reduction programs, primarily impacting theToronto Sun andBowes Publishers. The Company has recorded termination benefits of $3,176 for the elimination of an equivalent of 98 full-time positions relating to these workforce reduction initiatives. As at December 31, 2006, payments of $1,571 have been made.

4. FINANCIAL EXPENSES


	2004			2005			2006
Interest on long-term debt	$	41,105		$	40,574		$	47,053
Unrealized loss on derivative financial instruments		21,277			10,926			3,586
Unrealized foreign currency translation gain on a portion of Senior Notes		(14,950	)		(7,628	)		(2,896	)
Amortization of deferred asset relating to ineffective hedge		452			802			1,012
Amortization of deferred financing costs		1,604			1,399			1,475
Loss on voluntary repayment of debt (note 10(a))		551			—			514
Other		1,099			665			(209	)


Total financial expenses	$	51,138		$	46,738		$	50,535

5. INCOME TAXES

The Company’s income tax expense (recovery) is comprised of the following:


	2004		2005		2006
Current income taxes	$	2,231	$	1,066	$	1,055
Future income taxes		2,334		2,281		(11,182	)

Income tax expense (recovery)	$	4,565	$	3,347	$	(10,127	)

F-14

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The following table reconciles the difference between the statutory tax rate and the effective tax rate used by the Company and its subsidiaries in the determination of income:


	2004			2005			2006
Statutory tax rate — Ontario		36.1	%		36.1	%		36.1	%
Effect of provincial tax rate differences		(1.9	)%		(1.8	)%		(2.3	)%

National statutory tax rate		34.2	%		34.3	%		33.8	%
Increase (reduction) resulting from:
Effect of non-taxable income		(31.8	)%		(34.2	)%		(43.9	)%
Effect of non-deductible charges and/or other tax rate differences		(0.4	)%		0.6	%		(1.0	)%
Change in valuation allowance		—			0.8	%		1.8	%
Large corporation taxes		0.8	%		0.7	%		—


Effective tax rate		2.8	%		2.2	%		(9.3	)%

The tax effects of significant items which result in the Company’s net future tax assets (liabilities) are as follows:


	2005			2006
Future income tax assets (liabilities):
Loss carryforwards	$	9,671		$	39,341
Property, plant and equipment		(20,596	)		(14,857	)
Accounts payable, accrued charges and deferred revenue		5,395			6,172
Reserve for restructuring of operations		1,225			4,359
Pension plan liability and post-retirement benefits		6,711			5,263
Goodwill and intangible assets		(63	)		(1,535	)
Other		1,729			3,433

		4,072			42,176
Valuation allowance		(1,860	)		(4,241	)


Net future income tax assets	$	2,212		$	37,935

The current and long-term future income tax assets and liabilities are presented in the consolidated balance sheet as follows:


	2005			2006
Future income tax assets:
Current	$	6,222		$	26,869
Long-term		32,664			34,047

		38,886			60,916
Future income tax liabilities:
Long-term		(36,674	)		(22,981	)


Net future income tax assets	$	2,212		$	37,935

The valuation allowances of $1,860 and $4,241 as at December 31, 2005 and 2006, respectively, relate to capital losses arising during the year. Subsequent recognition of the tax benefit relating to this valuation allowance, if any, would be reported in the consolidated statement of income.

In 2005, the Company determined that a future income tax liability of $10,200 recorded on the acquisition of Sun Media Corporation on January 7, 1999, was no longer required. Accordingly, the benefit recognized on the reversal of this liability was applied against the unamortized goodwill relating to the acquisition.

F-15

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

On September 30, 2006, Sun Media’s ultimate parent company, Quebecor Inc., transferred to the Company $74,171 of non-capital tax losses in exchange for net cash consideration of $16,142. This transaction was recorded at the exchange amount. As a result, the Company recorded an income tax asset of $24,542 and the difference of $8,400 between the net cash consideration and the income tax asset was recorded as a deferred credit, included in accounts payable and accrued liabilities, which will reduce the income tax expense in the future as these tax deductions are used.

As at December 31, 2006, the Company had federal operating loss carryforwards for income tax purposes available to reduce future taxable income of $106,383, which expire as follows:


	Operating loss
Year Ending	carryforwards
2009	$	56
2010		198
2014		38
2015		12,836
2026		93,255

	$	106,383

6. INVESTMENT IN AND CONVERTIBLE OBLIGATIONS ISSUED TO QUEBECOR MEDIA INC.

On January 14, 2005, Sun Media sold $150,000 of its investment in the Cumulative First Preferred Shares of Quebecor Media and used the proceeds to redeem $150,000 of its convertible obligations. In addition, the Company issued a new convertible obligation to Quebecor Media in the amount of $255,000 (“2020 Convertible Obligation Issue”). This new convertible obligation matures on January 14, 2020, bears interest at 10.5% payable semi-annually and otherwise has terms and conditions substantially similar to its existing convertible obligations. The Company used the proceeds from the 2020 Convertible Obligation Issue to invest in an additional $255,000 of Quebecor Media Preferred Shares carrying a 10.85% annual fixed cumulative preferential dividend payable semi-annually and otherwise having terms and conditions substantially similar to its existing Preferred Shares in Quebecor Media.

As a result of the transactions completed on January 14, 2005, the Company’s investment in Quebecor Media Preferred Shares and the principal balance of its convertible obligations was $1,245,000 as at December 31, 2005.

On June 12, 2006, Sun Media sold $255,000 of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $255,000 of its 2007 convertible obligation issue. In addition, the Company issued a new convertible obligation to Quebecor Media in the amount of $120,000 (“2021 Convertible Obligation Issue”). This new convertible obligation matures on June 12, 2021, bears interest at 10.5% payable semi-annually and otherwise has terms and conditions substantially similar to existing convertible obligations. The Company used the proceeds from the issuance of the 2021 Convertible Obligation Issue to invest in an additional $120,000 of Quebecor Media Series F Cumulative First Preferred Shares carrying a 10.85% annual fixed cumulative preferential dividend payable semi-annually and otherwise having terms and conditions substantially similar to its Preferred Shares of Quebecor Media.

On December 28, 2006, Sun Media sold $500,000 of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media, and used the proceeds to redeem $385,000 of its 2007 convertible obligation issue and $115,000 of its 2008 convertible obligation issue. In addition, Sun Media sold $55,000 of its investment in the Series F Cumulative First Preferred Shares of Quebecor Media and used the proceeds to redeem $55,000 of its 2020 convertible obligation issue.

As a result of the transactions completed on June 12, 2006 and December 28, 2006, the Company’s investment in Quebecor Media Preferred Shares and the principal balance of its convertible obligations was $555,000 as at December 31, 2006.

F-16

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The following tables summarize the Company’s issuance of convertible obligations and their maturities, and investments in Quebecor Media Preferred Shares:


	Convertible Obligation Issue
	2007			2008			2020			2021		Total
Issue or Redemption Date

Balance — January 1, 2004	$	1,240,000		$	350,000		$	—		$	—	$	1,590,000
January 14, 2004		(450,000	)		—			—			—		(450,000	)

Balance — December 31, 2004		790,000			350,000			—			—		1,140,000
January 14, 2005		(150,000	)		—			255,000			—		105,000

Balance — December 31, 2005		640,000			350,000			255,000			—		1,245,000
June 12, 2006		(255,000	)		—			—			120,000		(135,000	)
December 28, 2006		(385,000	)		(115,000	)		(55,000	)		—		(555,000	)

Balance — December 31, 2006	$	—		$	235,000		$	200,000		$	120,000	$	555,000


	Quebecor Media Preferred Shares
	12.5%			10.85%
	Series A			Series F			Total
Issue or Redemption Date
Balance — January 1, 2004	$	1,590,000		$	—			$	1,590,000
January 14, 2004		(450,000	)		—				(450,000	)

Balance — December 31, 2004		1,140,000			—				1,140,000
January 14, 2005		(150,000	)		255,000				105,000

Balance — December 31, 2005		990,000			255,000				1,245,000
June 12, 2006		(255,000	)		120,000				(135,000	)
December 28, 2006		(500,000	)		(55,000	)			(555,000	)

Balance — December 31, 2006	$	235,000		$	320,000			$	555,000

During the year ended December 31, 2006, the interest expense on the convertible obligations amounted to $135,937 (2004 — $143,333; 2005 — $146,376). For the year ended December 31, 2006, the total interest paid on the convertible obligations was $175,886 (2004 — $166,452; 2005 — $142,749). As at December 31, 2006, the unpaid interest on the convertible obligations was $28,948 (December 31, 2005 — $68,897).

During the year ended December 31, 2006, dividends of $140,005 (2004 — $147,462; 2005 — $150,710) were declared on the Cumulative First Preferred Shares of Quebecor Media. For the year ended December 31, 2006 Sun Media received payments of dividend income of $181,091 (2004 — $171,246; 2005 — $146,923) from Quebecor Media. As at December 31, 2006, the unpaid dividend receivable from Quebecor Media was $29,852 (December 31, 2005 — $70,938).

7. INVESTMENT IN AND CONVERTIBLE OBLIGATION ISSUED TO SUN TV

On July 12, 2005, Sun Media issued a $37,300 convertible obligation to SUN TV, a significantly influenced investee. The convertible obligation matures on July 6, 2020, and bears interest at 10.50% payable semi-annually on June 20 and December 20. Concurrently, the Company invested $37,300 in Class A Preferred Shares of SUN TV (“SUN TV Preferred Shares”). The SUN TV Preferred Shares are redeemable at the option of the issuer or retractable at the option of the Company at the paid-up value, are non-voting and carry a 10.85% annual fixed cumulative preferential dividend payable semi-annually.

On December 20, 2006, Sun Media sold $2,925 of its investment in SUN TV Preferred Shares and used the proceeds to redeem $2,925 of its convertible obligation. As at December 31, 2006, the Company’s investment in SUN TV Preferred Shares and the principal balance of its convertible obligations was $34,375.

F-17

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

During the year ended December 31, 2006, interest expense on the convertible obligation amounted to $3,897 (2005 — $1,856). As at December 31, 2006 the unpaid interest on the convertible obligation was $109 (2005 — $129).

During the year ended December 31, 2006, dividends of $4,026 (2005 — $1,918) were declared on the SUN TV Preferred Shares. As at December 31, 2006, the unpaid dividend receivable from SUN TV was $112 (2005 — $133).

8. PROPERTY, PLANT AND EQUIPMENT


	2005
			Accumulated			Net Book
	Cost		Depreciation			Value

Land	$	19,184	$	—		$	19,184
Buildings		108,048		(34,217	)		73,831
Machinery and equipment		255,369		(177,727	)		77,642
Projects under development		3,458		—			3,458


Total	$	386,059	$	(211,944	)	$	174,115


	2006
			Accumulated			Net Book
	Cost		Depreciation			Value

Land	$	19,116	$	—		$	19,116
Buildings		108,251		(37,400	)		70,851
Machinery and equipment		267,338		(207,192	)		60,146
Projects under development		5,567		—			5,567


Total	$	400,272	$	(244,592	)	$	155,680

9. INTANGIBLE AND OTHER ASSETS


	2005		2006

Deferred financing fees, net of amortization	$	7,664	$	6,384
Deferred asset relating to ineffective hedge, net of amortization		11,660		10,648
Customer relationships, net of accumulated amortization of $3,363 (2005 — $2,200)		8,780		8,107
Non-competition agreements, net of accumulated amortization of $5,000 (2005 — $3,622)		1,378		350
Deferred pension (note 15)		720		4,750
Other		1,578		2,064


Total	$	31,780	$	32,303

F-18

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

10. LONG-TERM DEBT


	Effective Interest Rate			Years of
	as at December 31			Maturity	2005		2006

Term Loan B Credit Facility (a)		7.13	%	2008-2009	$	231,059	$	211,374
Term Loan C Credit Facility (a)		5.85	%	2009		—		39,304
Senior Notes (b)		7.88	%	2013		235,201		236,039

Total debt						466,260		486,717
Less current portion						2,675		3,080


Total long-term debt					$	463,585	$	483,637

(a) Credit Facilities

The Company’s Credit Facilities, amended on January 17, 2006, are comprised of (i) a revolving credit facility amount to $75,000, maturing February 7, 2008, a Term Loan B Credit Facility amounting to US$230,000 maturing February 7, 2009, and Term Loan C Credit Facility amounting to $40,000 maturing February 7, 2009. The Credit Facilities are collateralized by liens on all of the property and assets of the Company and its operating subsidiaries owned or acquired thereafter. The Credit Facilities contain covenants that restrict the declaration and payment of dividends and certain other distributions, as well as financial ratios. Any amount borrowed under the revolving credit facility bears interest at Canadian bankers’ acceptance and/or Canadian prime rate plus an applicable margin determined by financial ratios. Advances under the Term Loan B Credit Facility bear interest at LIBOR plus a margin of 1.75% per annum, or at U.S. prime rate plus a margin of 0.75% per annum. Advances under the Term Loan C Credit Facility bear interest at bankers’ acceptance plus a margin of 1.50% per annum, or at Canadian prime rate plus a margin of 0.50% per annum. Sun Media has fully hedged the foreign currency risk associated with the Term Loan B by using cross-currency interest rate swaps under which all payments were set in Canadian dollars.

On December 29, 2006, the Company made a partial prepayment of US$15,000 of its Term Loan B Credit Facility and unwound a related portion of its hedging contract. As a result, the Company recorded a loss on voluntary repayment of debt of $514, including the write-off of deferred financing fees.

As of December 31, 2006, no amount had been drawn on the revolving credit facility.

(b) Senior Notes

The Senior Notes were issued at discount for net proceeds of US$201,500, before issuance fees of US$4,100. These notes bear interest at a rate of 7.625% and mature on February 15, 2013. The Senior Notes contain certain restrictions applicable to the Company, including limitations on its ability to incur additional indebtedness. The Senior Notes are unsecured and are guaranteed by certain subsidiaries of the Company. Sun Media has fully hedged the foreign currency risk associated with the Senior Notes by using cross-currency interest rate swaps and a foreign exchange forward contract, under which all payments were set in Canadian dollars. The notes are redeemable, in whole or in part, at any time on or after February 15, 2008, at specified redemption prices.

(c) Principal repayments

Principal repayments on long-term debt over the next five years are as follows:


2007	$	3,080
2008		3,080
2009		244,114


	$	250,274

F-19

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

There are no principal repayments for the Senior Notes over the next five years.

11. OTHER LIABILITIES


	2005		2006
Derivative financial instruments	$	165,714	$	159,458
Pension and post-retirement liabilities (note 15)		20,388		21,283
Other		2,792		2,234


	$	188,894	$	182,975

12. CAPITAL STOCK

The Class A common shares are voting, participating and entitle their holders to receive dividends as declared by the Board of Directors.

The Class B preferred shares are non-voting and redeemable at the option of the Company. Under certain circumstances the Company has the right to purchase all or part of the then issued Class B Preferred Shares at its own option, or by mutual agreement with the holders of the then outstanding Class B Preferred Shares. The Class B Preferred Shares entitle their holders to receive a non-cumulative dividend at a rate that shall be determined from time to time by the Board of Directors.

The Class C Preferred Shares are non-voting and are issuable in series. Terms and conditions of the Class C Preferred Shares are to be determined from time to time, by the Board of Directors.

On January 17, 2006 the $40,000 proceeds of the new Term Loan C Credit Facility were paid to Quebecor Media and accounted for as a reduction in paid-up capital of the Class A Common Shares of the Company.

Dividends

The dividends declared and paid by the Company for the year ended December 31, 2006 totalled $95,500 or $75.73 per share (2004 — $135,115 or $107.15 per share; 2005 — $169,653 or $134.54 per share).

Quebecor Media stock option plan

Under a stock option plan established by Quebecor Media, 6,185,714 Common Shares of Quebecor Media were set aside for officers, senior employees, directors and other key employees of Quebecor Media and its subsidiaries. Each option may be exercised within a maximum period of ten years following the date of grant at an exercise price not lower than, as the case may be, the fair market value of the Common Shares of Quebecor Media at the date of grant, as determined by its Board of Directors (if the Common Shares of Quebecor Media are not listed on a stock exchange at the time of the grant) or the five-day weighted average closing price ending on the day preceding the date of grant of the Common Shares of Quebecor Media on the stock exchanges where such shares are listed at the time of grant. Unless authorized by the Quebecor Media Compensation Committee in the context of a change of control, no options may be exercised by an optionee if the shares of Quebecor Media have not been listed on a recognized stock exchange. If the Common Shares of Quebecor Media have not been so listed on March 1, 2008, optionees may exercise, from March 1 to March 30, from June 1 to June 29, from September 1 to September 29 and from December 1, to December 30 of each year, starting March 1, 2008, their right to receive an amount in cash equal to the difference between the fair market value, as determined by Quebecor Media’s Board of Directors, and the exercise price of their vested options or, subject to certain stated conditions, Common Shares of Quebecor Media. Except under specific circumstances, and unless the Compensation Committee decides otherwise, options vest over a five-year period in accordance with one of the following vesting schedules as determined by the Compensation Committee at the time of grant: (i) equally over five years with the first 20% vesting on the first anniversary of the date of the grant; (ii) equally over four years with the first 25% vesting on the second anniversary

F-20

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

of the date of grant; and (iii) equally over three years with the first 33% vesting on the third anniversary of the date of grant.

The following table provides summary information on outstanding options granted to the Company’s employees, directors and officers, under the Quebecor Media plan as at December 31, 2005 and 2006:


	2005					2006
				Weighted					Weighted
				average					average
	Options			exercise price		Options			exercise price
Balance at beginning of year		741,593		$	16.77		759,665		$	17.17
Granted		30,147			27.86		100,906			30.47
Cancelled		(12,075	)		19.46		(82,951	)		20.22


Balance at end of year		759,665		$	17.17		777,620		$	18.57


Vested options at end of year		291,619		$	16.45		450,605		$	16.52

The following table gives summary information on outstanding options as at December 31, 2006:


	Outstanding options						Options exercisable
			Weighted		Weighted				Weighted
Range of			average years		average				average
exercise price	Number		to maturity		exercise price		Number		exercise price
$15.00 — $21.00		605,504		5.4	$	16.07		422,589	$	16.09
$21.01 — $31.00		172,116		8.3		27.32		28,016		23.04


$15.00 — $31.00		777,620		6.1	$	18.57		450,605	$	16.52

For the year ended December 31, 2006, compensation expense of $5,341 (2004 — $4,114; 2005 — $2,824) has been recorded by the Company in wages and employee benefits expense for options issued to its employees under the Quebecor Media plan.

13. FINANCIAL INSTRUMENTS

(a) Credit risk

The Company does not have a significant exposure to any individual customer or counter-party. The Company is exposed to credit risk in the event of non-performance by counter-parties in connection with its foreign currency interest rate swap agreements. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but mitigates this risk by dealing only with major Canadian and U.S. financial institutions and, accordingly, does not anticipate loss for non-performance.

(b) Interest rate and currency risk

On February 7, 2003, the Company entered into forward contracts to hedge foreign exchange fluctuations related to the principal amount of its Senior Notes (note 10). These contracts have the effect of converting the Company’s obligation to make a principal payment on maturity of the Senior Notes from US$205,000 to Cdn$312,154.

F-21

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The Company also entered into cross-currency interest rate swaps to hedge foreign exchange fluctuations related to (i) the interest on the Senior Notes and (ii) the principal and interest on the portion of the Term Loan B Credit Facility denominated in a foreign currency. The effect of these agreements is to convert the Company’s obligation to service interest and principal payments on the debt from U.S. dollars to Canadian dollars, as follows:

Cross-currency interest rate swaps and forward contracts:

As at December 31, 2006

Annual

Exchange rate on

Cdn$

effective

interest rate

interest and principal

equivalent

interest rate

Debt

Period

on US$

Notional

payments

of notional

on Cdn$

instrument

covered

amount

(Cdn$ per US$1.00)

amount

equivalent

Senior Notes

2003 — 2008

7.625

US$155,000

1.5227

236,019

8.17%

Senior Notes

2008 — 2013

7.625

US$155,000

1.5227

236,019

Bankers’
acceptances
3 months
+3.696%

Senior Notes

2003 — 2013

7.625

US$50,000

1.5227

76,135

Bankers’
acceptances
3 months
+3.696%

Term Loan B Credit Facility

2003 — 2009

LIBOR
+1.75%

US$181,375

1.5175

275,237

Bankers’
acceptances
3 months
+2.29%

The cross-currency interest rate swaps related to the Senior Notes include an option that allows each party to unwind the transaction on February 15, 2008, at the then-market value.

(c) Fair values

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.

The carrying value and estimated fair value of the Company’s debt and financial instruments, as at December 31, are as follows:


	2005
	Carrying
	Amount		Fair Value

Term Loan B Credit Facility	$	231,059	$	231,059
Senior Notes		235,201		244,971
Derivative financial instruments (note 11)		165,714		186,512


	$	631,974	$	662,542

F-22

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)


	2006
	Carrying
	Amount		Fair Value

Term Loan B Credit Facility	$	211,374	$	211,374
Term Loan C Credit Facility		39,304		39,304
Senior Notes		236,039		242,192
Derivative financial instruments (note 11)		159,458		176,096


	$	646,175	$	668,966

The fair market value of the Term Loan B and Term Loan C Credit Facilities are estimated to approximate carrying values as rates are tied to short-term indices and the fair value of the Senior Notes are estimated based on their quoted market prices. The fair values of derivative instruments are estimated using year-end market rates and reflect the amount the Company would receive or pay if the instruments were closed out at those dates.

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, convertible obligations and other liabilities in the consolidated balance sheet approximate fair values because of the short-term maturity of these instruments.

14. RELATED PARTY TRANSACTIONS

The Company has earned revenue for advertising and other services, and incurred expenses for purchases and services, with related companies under common control in the normal course of operations. Those transactions were concluded and accounted for at the exchange amount and are summarized as follows:


	2004		2005		2006
Revenues	$	10,933	$	12,527	$	15,401
Accounts receivable		1,793		1,903		5,347
Purchases and services		20,179		27,279		31,522
Accounts payable		12,320		17,752		23,458

Revenues include $2,197 of barter advertising with related parties (2004 — $1,496; 2005 — $2,852).

For the year ended December 31, 2006, the Company paid Quebecor Media management fees of $8,685 (2004 — $6,600; 2005 — $9,100), which is reflected in other operating expenses. As at December 31, 2006, there was no outstanding balance relating to these fees (2005 — $nil).

15. PENSION PLANS AND POST-RETIREMENT BENEFITS

The Company maintains various flat-benefit plans and various final-pay plans with an indexation feature from 0% to 2.0% and defined contribution plans. The Company’s policy is to maintain its contribution at a level sufficient to cover benefits. Actuarial valuations of the Company’s numerous pension plans were performed at different dates in the last three years and the next required valuations will be performed at various dates over the next three years.

The Company provides post-retirement benefits to eligible employees. The costs of these benefits, which are principally health care, are accounted for during the employee’s active service period.

F-23

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The following tables give a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets for the years ended December 31, 2005 and 2006, and a statement of the funded status as at those dates.

(a) Change in benefit obligations


	Pension Benefits						Post-retirement Benefits
	2005			2006			2005			2006
Benefit obligations at beginning of year	$	243,266		$	292,727		$	25,809		$	26,688
Service cost		7,021			10,387			1,408			1,888
Interest cost		15,065			15,197			1,599			1,184
Plan participants’ contributions		4,359			4,887			—			—
Plan amendments		—			—			—			(2,950	)
Curtailment gain		—			—			(2,369	)		—
Actuarial loss		29,947			404			1,122			—
Benefits and settlements paid		(6,931	)		(11,108	)		(881	)		(1,917	)


Benefit obligations at end of year	$	292,727		$	312,494		$	26,688		$	24,893

(b) Change in plan assets


	Pension Benefits						Post-retirement Benefits
	2005			2006			2005		2006
Fair value of plan assets at beginning of year	$	223,391		$	255,461		$	—	$	—
Actual return on plan assets		22,755			35,719			—		—
Employer contributions		11,887			13,581			—		—
Plan participants’ contributions		4,359			4,887			—		—
Benefits and settlements paid		(6,931	)		(11,108	)		—		—


Fair value of plan assets at end of year	$	255,461		$	298,540		$	—	$	—

The plan assets are comprised of:


	2005			2006
Equity securities		52.2	%		59.2	%
Debt securities		47.4	%		38.1	%
Other		0.4	%		2.7	%


		100.0	%		100.0	%

As at December 31, 2006, plan assets included shares of Quebecor Inc., representing an amount of $1,724 (2005 — $1,382).

F-24

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(c) Reconciliation of funded status


	Pension Benefits						Post-retirement Benefits
	2005			2006			2005			2006
Excess of benefit obligations over fair value of plan assets at end of year	$	(37,266	)	$	(13,954	)	$	(26,688	)	$	(24,893	)
Unrecognized actuarial loss		39,280			21,444			7,269			7,003
Unrecognized prior service cost		7,073			6,367			(969	)		(3,393	)
Valuation allowance		(8,367	)		(9,107	)		—			—


Net amount recognized	$	720		$	4,750		$	(20,388	)	$	(21,283	)

Included in the above benefit obligations and fair value of plan assets at year-end are the following amounts in respect of plans that are not fully funded:


	Pension Benefits						Post-retirement Benefits
	2005			2006			2005			2006
Benefit obligations	$	(214,793	)	$	(228,779	)	$	(26,688	)	$	(24,893	)
Fair value of plan assets		177,135			208,832			—			—


Funded status — plan deficit	$	(37,658	)	$	(19,947	)	$	(26,688	)	$	(24,893	)

Amounts recognized in the consolidated balance sheets are as follows:


	Pension Benefits				Post-retirement Benefits
	2005		2006		2005			2006
Accrued benefit liability (note 11)	$	—	$	—	$	(20,388	)	$	(21,283	)
Prepaid benefit costs (note 9)		720		4,750		—			—


Net amount recognized	$	720	$	4,750	$	(20,388	)	$	(21,283	)

F-25

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

(d) Components of the net benefit costs are as follows:


	Pension Benefits									Post-retirement Benefits
	2004			2005			2006			2004			2005			2006

Service cost	$	6,208		$	7,021		$	10,387		$	1,142		$	1,408		$	1,888
Interest cost		14,615			15,065			15,197			1,398			1,599			1,184
Curtailment gain		—			—			—			—			(1,619	)		—
Actual return on plan assets		(18,045	)		(22,755	)		(35,719	)		—			—			—
Plan amendment		—			—			—			—			—			(2,950	)
Current actuarial loss (gain)		(2,221	)		29,947			404			2,416			1,122			—
Current prior service costs		270			—			—			—			—			—

Elements of net benefit costs, before adjustments to recognize the long-term nature of benefit costs and valuation allowance		827			29,278			(9,731	)		4,956			2,510			122

Difference between actual and expected return on plan assets		2,502			5,651			16,822			—			—			—
Deferral of actuarial loss (gain) on accrued benefit obligation		2,221			(29,947	)		(404	)		(2,416	)		(1,122	)		—
Deferral of past service costs		(270	)		—			—			—			—			2,950
Amortization of net actuarial loss (gain)		1,195			438			1,418			65			(48	)		266
Amortization of past service costs (benefits)		706			706			708			(286	)		(286	)		(526	)

Total adjustments to recognize the long-term nature of benefit costs		6,354			(23,152	)		18,544			(2,637	)		(1,456	)		2,690

Change in valuation allowance		723			30			740			—			—			—


Net benefit costs	$	7,904		$	6,156		$	9,553		$	2,319		$	1,054		$	2,812

F-26

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

The expense related to defined contribution pension plans amounted to $3,019 for the year ended December 31, 2006 (2004 — $3,459; 2005 — $3,394).

Also the total cash amount paid or payable for employee future benefits for all plans is $18,517 for the year ended December 31, 2006 (2004 — $16,144; 2005 — $16,162).

The weighted average rates used in the measurement of the Company’s benefit obligations are as follows:


	Pension Benefits									Post-retirement Benefits
	2004			2005			2006			2004			2005			2006
Discount rate	��	6.00	%		5.00	%		5.00	%		6.00	%		5.00	%		5.00	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%

The weighted average rates used in the measurement of the Company’s current pension expense is as follows:


	Pension Benefits									Post-retirement Benefits
	2004			2005			2006			2004			2005			2006
Discount rate		6.25	%		6.00	%		5.00	%		6.25	%		6.00	%		5.00	%
Expected return on plan assets		7.75	%		7.50	%		7.25	%		—	%		—	%		—	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%

The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligations was 8.6%. The cost, as per an estimate, is expected to decrease gradually for the next nine years to 5.0% and remain at that level thereafter. A one-percentage point change in the assumed health care cost trend would have the following effects:


	Post-retirement Benefits
Sensitivity analysis		1% increase		1% decrease
Effect on service and interest costs	$	522	$	(393	)
Effect on benefit obligation	$	5,636	$	(4,335	)

F-27

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

16. COMMITMENTS AND CONTINGENCIES

(a) Leases and commitments

The Company rents premises and equipment under operating leases, which expire at various dates up to 2015. The 2006 rental expense for these operating leases was $6,989 (2004 — $6,808; 2005 — $6,830). The Company has also entered into long-term commitments to purchase services and capital equipment over periods which expire at various dates up to 2011. In addition, the Company has guaranteed a portion of residual values for certain leased assets under operating leases with various expiry dates between 2007 and 2011. Minimum payments under these arrangements for each of the next five years and thereafter are as follows:


			Other
Year Ending December 31	Leases		Commitments
2007	$	6,122	$	8,607
2008		5,506		3,075
2009		4,802		967
2010		3,743		15
2011		2,470		15
Thereafter		5,867		—


	$	28,510	$	12,679

(b) Newsprint

Newsprint represents a significant input and component of operating costs for the Company. The Company uses one newsprint manufacturer to supply substantially all of its requirements, and entered into an agreement with this supplier which expired December 31, 2006. The Company is currently renegotiating this contract.

(c) Management fee

In 2002, the Company began paying an annual management fee to Quebecor Media for services rendered to the Company pursuant to a five-year management services agreement, which expired on December 31, 2006. These services included internal audit, legal and corporate, financial planning and treasury, tax, real estate, human resources, risk management, public relations and other services. The agreement provided for an annual management fee. In 2006, the annual management fee was $8,685 (2004 — $6,600; 2005 — `$9,100). In addition, Quebecor Media was entitled to the reimbursement of out-of-pocket expenses incurred in connection with the services provided under the agreement. The agreement also provided that in no event may the fees and reimbursements paid to Quebecor Media for any given year exceed 1.5% of the Company’s consolidated revenues for such year. The Company intends to renew its management services agreement with Quebecor Media in 2007.

(d) Legal actions

A number of legal actions against the Company are pending. In the opinion of management the outcome of these pending legal actions will not have a material adverse effect on the Company’s results of operations, liquidity or its financial position.

F-28

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

17. GUARANTEES

(a) Operating leases

The Company has guaranteed a portion of the residual values of certain leased assets under operating leases with expiry dates between 2007 and 2011, for the benefit of the lessor. If the fair value of the assets at the end of their respective lease term is less than the expected fair value as estimated at the inception of the lease, the Company must, under certain conditions, compensate the lessor for a portion of the shortfall. As at December 31, 2006, the maximum exposure to the Company in respect of these guarantees was $2,068 (2005 — $2,052). The Company has not recorded a liability associated with these guarantees, as it is unable to estimate potential payments pertaining to the guarantees of these leases. Historically, payments of this nature have not been significant.

(b) Business and asset disposals

In connection with certain dispositions of businesses and/or assets, the Company may provide customary representations and warranties whose terms range in duration and may not be explicitly defined. In addition to possible indemnification relating to failure to perform covenants and breach of representations and warranties, the Company may agree to indemnify against claims from its past conduct of the business. The Company is unable to estimate the maximum potential liability for these indemnifications due to the uncertain nature of these agreements. Accordingly, amounts are not accrued in the consolidated financial statements with respect to these indemnification agreements unless it is probable that the Company will make payments pertaining to these guarantees.

(c) Senior notes

Under the terms of its Senior Notes, the Company has agreed to indemnify its lenders for the amount of changes in withholding tax laws which would reduce the amount of proceeds receivable by the noteholder per the terms of the Senior Notes. These indemnifications extend for the term of the Senior Notes and do not provide any limit on the maximum potential liability. Any amounts payable under the indemnity would increase the future effective cost of borrowing.

Due to the nature of the indemnification agreement, the Company is unable to estimate the maximum potential liability it could be required to pay to noteholders. Accordingly, no amount has been accrued in the consolidated financial statements with respect to the agreement.

(d) Other indemnification agreements

In the normal course of its operations, the Company provides indemnification agreements to counterparties in transactions such as purchase contracts, service agreements, leasing transactions and licensing agreements. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The Company also provides indemnification agreements to its directors and officers as a result of litigation claims. The terms of these indemnification agreements will vary based upon the contract. The nature of the indemnification agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification.

18. SEGMENTED INFORMATION

Management determined that there are no reportable segments requiring disclosure. This conclusion was reached on the basis that the Company’s newspaper divisions exhibit similar economic characteristics, with similar products, production processes, and classes of customers.

F-29

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

19. MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN CANADA AND THE UNITED STATES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in Canada which are different in some respects from those applicable in the United States, as described below. The following tables set forth the impact of material differences between GAAP in Canada and GAAP in the United States on the Company’s consolidated financial statements.

Restatement of U.S. GAAP Reconciliation Note to Financial Statements Relating to Accounting for Fair Value Hedge Relationships

The following 2004, 2005 and 2006 U.S. GAAP financial information from the consolidated statements of income, comprehensive income and consolidated balance sheets have been restated to reflect certain adjustments to previously reported financial information for the correction of an error related to the accounting for certain fair value hedge relationships.

As described in Note 19(iii), the Company has entered into fair value hedges of its debt with derivative instruments. The accounting for a fair value hedge in accordance with GAAP in the United States requires that the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the hedged risk, be recognized currently in earnings. The Company has determined that the adjustment to the carrying value of the debt (hedged item) attributable to the hedged risks was calculated and recorded incorrectly in previously presented financial information calculated in accordance with GAAP in the United States due to a misinterpretation of the applicable GAAP in the United States.

The following tables summarize the effects of the adjustments on the previously reported financial information.

Consolidated statements of income and Comprehensive Income


	2004			2005			2006
Decrease in change in fair value and ineffective portion of derivative instruments	$	(9,307	)	$	(9,911	)	$	(11,413	)
Decrease in income taxes expense		—			3,324			1,559


Net decrease of net income and comprehensive income	$	(9,307	)	$	(6,587	)	$	(9,854	)

F-30

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

ConsolidatedBalanceSheets


	December 31,		December 31,			December 31,
	2004		2005			2006
Increase in long-term debt	$	8,059	$	17,970		$	29,383
Decrease in future income taxes liabilities		—		(3,324	)		(4,883	)
Decrease in retained earnings	$	8,059	$	14,646		$	24,500

F-31

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

Restatement of U.S. GAAP Reconciliation Note to Financial Statements Relating to Accounting for Fair Value Hedge Relationships (continued)

Adjustment to unaudited interim financial information calculated in accordance with U.S. GAAP:


	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
	2006			2006			2006			2006
Decrease in change in fair value and ineffective portion of derivative instruments	$	(2,568	)	$	(2,568	)	$	(2,569	)	$	(3,708	)
Decrease in income tax expense		450			65			427			615


Net decrease of net income and comprehensive income	$	(2,118	)	$	(2,503	)	$	(2,142	)	$	(3,093	)

Consolidated statements of income


	2004			2005			2006
	(restated)			(restated)			(restated)
Net income for the year per Canadian GAAP	$	156,745		$	141,927		$	106,772
Adjustments:
Pension and post-retirement benefits (i)		4,601			(629	)		209
Derivative financial instruments (iii)		(2,495	)		(1,686	)		(893	)
Non-monetary transactions (iv)		—			1,826			(61	)
Share-based payments (v)		—			—			(900	)
Income taxes (vii)		(3,824	)		11,571			154


Net income for the year per U.S. GAAP	$	155,027		$	153,009		$	105,281

Consolidated statements of comprehensive income (vi)


	2004			2005			2006
	(restated)			(restated)			(restated)
Comprehensive income:
Net income as adjusted per U.S. GAAP	$	155,027		$	153,009		$	105,281
Pension and post-retirement benefits (i)		(2,844	)		(11,429	)		11,963
Derivative financial instruments (iii)		(2,247	)		47			913
Income taxes (vii)		1,678			5,516			(5,151	)


Comprehensive income per U.S. GAAP	$	151,614		$	147,143		$	113,006

Accumulated other comprehensive income


	2004			2005			2006
Cumulative adjustments:
Pension and post-retirement benefits (i)	$	(9,203	)	$	(20,632	)	$	(25,440	)
Derivative financial instruments		(2,401	)		(2,354	)		(1,441	)
Income taxes (i)		3,955			9,471			9,658


Accumulated other comprehensive income per U.S. GAAP	$	(7,649	)	$	(13,515	)	$	(17,223	)

F-32

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

Consolidated shareholder’s equity


	2004			2005			2006
	(restated)			(restated)			(restated)
Shareholder’s equity per Canadian GAAP	$	357,149		$	329,423		$	300,695
Cumulative adjustments:
Pension and post-retirement benefits (i)		(5,658	)		(17,716	)		(22,315	)
Restructuring charges (ii)		(6,981	)		(6,981	)		(6,981	)
Derivative instruments (iii)		(9,333	)		(10,972	)		(10,952	)
Non-monetary transactions (iv)		—			1,826			1,765
Share-based payments (v)		—			—			(900	)
Related party transactions (viii)		—			—			8,400
Income taxes (vii)		4,639			21,726			22,067


Shareholder’s equity per U.S. GAAP	$	339,816		$	317,306		$	291,779

Consolidated balance sheet data


	December 31, 2005				December 31, 2006
	CDN GAAP		U.S. GAAP		CDN GAAP		U.S. GAAP
			(restated)				(restated)
Current assets	$	254,550	$	254,550	$	214,280	$	214,280
Goodwill		755,662		752,239		756,115		752,692
Future income tax asset		32,664		32,664		34,047		34,047
Other assets		31,780		20,911		32,303		17,427

Current liabilities		237,256		237,256		204,162		196,662
Future income tax liability		36,674		17,264		22,981		3,230
Long-term debt		463,585		444,713		483,637		469,008
Convertible obligations		1,282,300		1,282,300		589,375		589,375
Other liabilities		188,894		225,001		182,975		215,472
Total shareholder’s equity		329,423		317,306		300,695		291,779

Consolidated statements of cash flows

The disclosure of a subtotal of the amount of cash provided by operating activities before changes in non-cash operating working capital items in the consolidated statement of cash flows is allowed under Canadian GAAP while it is not allowed under U.S. GAAP.

(i) Pension and post-retirement benefits

Under U.S. GAAP, Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans(SFAS158), was issued in 2006 and requires the recognition in the consolidated balance sheet of the over or under funded positions of defined benefit pension and other post-retirement plans, along with a corresponding non-cash adjustment, which is recorded in the accumulated other comprehensive loss. The recognition and disclosure provisions of SFAS158 was adopted prospectively on December 31, 2006 and did not have an impact on the Company’s consolidated statements of income.

F-33

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

Under U.S. GAAP, for 2006 and prior years, if the accumulated benefit obligation exceeded the fair value of a pension plan’s assets, the Company was required to recognize a minimum accrued liability equal to the unfunded accumulated benefit obligation, which was recorded in accumulated other comprehensive loss. The additional minimum liability concept has been eliminated with the adoption of SFAS158.

As a result of the adoption of SFAS158, an adjustment of $11,433 (net of income taxes of $5,338) was recorded as a component of the ending balance of accumulated comprehensive income to reflect the unfunded status of benefit plans and the reversal of the minimum pension liability that was recognized in accordance with the SFAS87.

Under Canadian GAAP, a company is not required to recognize the over or under funded positions or to recognize an additional minimum liability. However, when a defined benefit plan gives rise to an accrued benefit asset, a company must recognize a valuation allowance for the excess of the adjusted benefit asset over the expected future benefit to be realized from the plan asset. U.S. GAAP does not provide for a valuation allowance against pension assets.

(ii) Restructuring charges

In respect of the 1999 acquisition of Sun Media, certain of the restructuring charges related to the acquired newspapers are recorded in the purchase equation as goodwill under Canadian GAAP, but are excluded from the purchase equation and expensed under U.S. GAAP.

(iii) Derivative financial instruments

Under U.S. GAAP, Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, (SFAS133), establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recorded as either assets or liabilities in the consolidated balance sheet at fair value. In accordance with SFAS133, for derivative instruments designated as fair value hedges, changes in the fair value of the derivative instruments are substantially offset in the consolidated statements of income by changes in the fair value of the hedged item. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income (loss) until it is recognized in income during the same period in which the hedged item affects income, while the current ineffective portion of hedges is recognized in the consolidated statements of income each period.

Under Canadian GAAP, derivative financial instruments are accounted on an accrual basis. Realized and unrealized gains and losses are deferred and recognized in income in the same period and in the same financial statement category as the income or expense arising from the corresponding hedged positions.

Further differences result from the different transition rules and timing of the adoption of the current standards in Canada and in the United States for derivative financial instruments and hedge accounting.

(iv) Non-monetary transactions

In April 2005, the Company exchanged a community publication for another community publication. Under U.S. GAAP, this exchange of businesses is recorded in accordance with Financial Accounting Standards No. 141,Business Combinationsand the cost of the purchase is determined as the fair value of the consideration given or the fair value the net assets or equity interest received, whichever is more reliably measurable. Under Canadian GAAP, since this exchange of businesses is a non-monetary transaction, it is accounted for in accordance with CICA Handbook 3830,Non-monetary Transactions, and recorded at the carrying value of the asset or service given up in the exchange adjusted by any monetary consideration received or given.

F-34

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

Accordingly, under U.S. GAAP, this transaction resulted in a gain on disposal of the Company’s publication and also resulted in an increase of the purchase price of the publication acquired. A portion of the increase in purchase price was allocated to amortizable intangible assets for U.S. GAAP purposes, and it is being amortized over 10 years.

(v) Share-based payments

Under U.S. GAAP, the Company adopted Financial Accounting Standards No. 123R,Share-Based Payments (SFAS123R). In accordance with SFAS123R, the liability related to stock-based awards that call for settlement in cash or other assets must be measured at its fair value based on the fair value of stock option awards, and shall be remeasured at the end of each reporting period until settled. Under Canadian GAAP, the liability is measured and remeasured based on the intrinsic value of the stock option awards instead of the fair value.

(vi) Comprehensive income

Comprehensive income is measured in accordance with Financial Accounting Standards No. 130,Reporting Comprehensive Income. This standard defines comprehensive income as all changes in equity other than those resulting from investments by owners and distributions to owners. Other comprehensive income consists of adjustments to shareholder’s equity and non-cash adjustments relating to the recognition in the consolidated balance sheet of the over or under funded positions of defined benefit and post-retirement plans, and the net gain or loss on derivative instruments designated as cash flow hedges net of taxes.

(vii) Income taxes

This adjustment represents the tax impact of the U.S. GAAP adjustments. In 2005, the Company concluded that the realization of deferred income tax assets related to its derivative financial instruments was now considered “more likely than not”. Consequently, the tax benefits are recognized since that period in the consolidated statements of income and comprehensive income.

(viii) Related party transactions

In 2006, the Company entered into a tax consolidation transaction by which Quebecor Inc., the ultimate parent company, transferred to the Company non-capital tax losses for net cash consideration of $16,142. Under Canadian GAAP, the transaction was recorded in accordance with CICA Handbook 3840,Related Party Transactions, and resulted in the recognition of a deferred credit of $8,400 in 2006, which will reduce future income tax expense as these tax deductions are used. Under U.S. GAAP, since this transaction related to an asset transfer from Quebecor Inc. to the Company, the difference between the carrying value of the tax deductions transferred and the cash consideration paid recognized in contributed surplus.

(viiii) Guaranteed debt

The consolidating information below has been presented in accordance with the requirements of the Securities and Exchange Commission.

The Company’s Senior Notes are guaranteed by certain subsidiaries of the Company (the “Subsidiary Guarantors”). The accompanying consolidating financial information as at December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 has been prepared in accordance with U.S. GAAP, which includes push-down accounting adjustments arising from a previous acquisition on January 7, 1999. The information under the column headed “Combined Guarantors” is for all the Subsidiary Guarantors. Investments in the Subsidiary Guarantors are accounted for by the equity method in the separate column headed “Sun Media”. Each Subsidiary Guarantor is wholly-owned by the Company. The non-guarantor subsidiaries, which are individually and in aggregate minor subsidiaries, have been included in the column headed “Sun Media”. All guarantees are full and unconditional, and

F-35

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

joint and several (to the extent permitted by applicable law). The other U.S. GAAP adjusting entries already described above have been reflected in the appropriate column.

F-36

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF INCOME

For the year ended December 31, 2004


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations				Consolidated
	(restated)										(restated)
REVENUES	$	581,640		$	314,596		$	(8,087	)		$	888,149

OPERATING EXPENSES
Wages and employee benefits		217,163			116,341			—				333,504
Newsprint		64,376			40,322			—				104,698
Other operating expenses		151,510			74,078			(8,087	)			217,501
Depreciation and amortization		14,672			11,366			—				26,038

		447,721			242,107			(8,087	)			681,741


OPERATING INCOME		133,919			72,489			—				206,408

Financial expenses		60,106			(6,473	)		—				53,633
Dividend income on preferred shares of Quebecor Media Inc.		(85,205	)		(62,257	)		—				(147,462	)
Interest on convertible obligations to Quebecor Media Inc.		82,321			61,012			—				143,333
Gain on disposition of CP24		(8,000	)		—			—				(8,000	)


INCOME BEFORE THE UNDERNOTED ITEMS		84,697			80,207			—				164,904

Income tax expense		2,120			6,269			—				8,389
Equity earnings of combined guarantors		(73,938	)		—			(73,938	)			—
Equity loss on investment in SUN TV Company		147			—			—		��		147
Non-controlling interest		1,341			—			—				1,341


NET INCOME	$	155,027		$	73,938		$	(73,938	)		$	155,027

CONSOLIDATING STATEMENT OF RETAINED EARNINGS

For the year ended December 31, 2004


						Adjustments
				Combined		and
	Sun Media			Guarantors		Eliminations			Consolidated
	(restated)								(restated)
RETAINED EARNINGS, BEGINNING OF YEAR	$	24,493		$	238,085	$	(238,085	)	$	24,493
Net income		155,027			73,938		(73,938	)		155,027
Dividends		(135,115	)		6,710		(6,710	)		(135,115	)
Recognition of prior year losses on related party transaction		1,259			—		—			1,259


RETAINED EARNINGS, END OF YEAR	$	45,664		$	318,733	$	(318,733	)	$	45,664

F-37

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2004


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income	$	155,027		$	73,938		$	(73,938	)	$	155,027
Items not involving cash:
Depreciation and amortization		14,672			11,366			—			26,038
Deferred income taxes		3,411			2,746			—			6,157
Non-controlling interest		1,341			—			—			1,341
Equity earnings of combined guarantors		(73,938	)		—			73,938			—
Equity loss on investment in SUN TV Company		147			—			—			147
Gain on disposition of CP24		(8,000	)		—			—			(8,000	)
Other		13,714			(2,741	)		—			10,973
Changes in non-cash operating working capital		72,667			(86,955	)		—			(14,288	)

Cash provided by operating activities		179,041			(1,646	)		—			177,395

FINANCING ACTIVITIES

Redemption of convertible obligations to Quebecor Media Inc.		(450,000	)		—			—			(450,000	)
Dividends		(135,115	)		—			—			(135,115	)
Repayment of loans		(29,288	)		—			—			(29,288	)
Distributions to parent company		—			(2,623	)		2,623			—
Other		(1,274	)		—			—			(1,274	)

Cash used in financing activities		(615,677	)		(2,623	)		2,623			(615,677	)

INVESTING ACTIVITIES
Disposal of preferred shares of Quebecor Media Inc.		450,000			—			—			450,000
Business acquisitions		(3,675	)		(417	)		—			(4,092	)
Decrease (increase) in temporary investments		1,523			14,857			—			16,380
Additions to property, plant and equipment		(12,700	)		(6,120	)		—			(18,820	)
Proceeds from disposal of property, plant and equipment		296			332			—			628
Distributions received from combined guarantors		2,623						(2,623	)		—
Other		(1,508	)		—			—			(1,508	)

Cash provided by investing activities		436,559			8,652			(2,623	)		442,588

Increase (decrease) in cash and cash equivalents		(77	)		4,383			—			4,306
Cash and cash equivalents — beginning of year		4,133			25,155			—			29,288


Cash and cash equivalents — end of year	$	4,056		$	29,538		$	—		$	33,594

F-38

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING BALANCE SHEET


								Adjustments
					Combined			and
As at December 31, 2005	Sun Media				Guarantors			Eliminations			Consolidated
	(restated)										(restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,603			$	21,217		$	—		$	22,820
Accounts receivable		91,126				47,282			—			138,408
Dividend receivable from Quebecor Media Inc.		29,281				41,657			—			70,938
Dividend receivable from SUN TV Company		133				—			—			133
Due from parent/guarantor subsidiaries		40,785				344,767			(385,552	)		—
Inventories		7,589				3,700			—			11,289
Prepaid expenses		2,166				2,574			—			4,740
Deferred income taxes		5,749				473			—			6,222

TOTAL CURRENT ASSETS		178,432				461,670			(385,552	)		254,550

INVESTMENT IN QUEBECOR MEDIA INC.
PREFERRED SHARES		500,000				745,000			—			1,245,000
INVESTMENT IN SUN TV COMPANY		37,300				—			—			37,300
EQUITY INVESTMENT IN SUN TV COMPANY		8,781				—			—			8,781
INVESTMENTS IN GUARANTOR SUBSIDIARIES		1,639,640				—			(1,639,640	)		—
PROPERTY, PLANT AND EQUIPMENT		92,343				81,772			—			174,115
GOODWILL		352,317				399,922			—			752,239
DEFERRED INCOME TAXES		(2,544	)			35,208			—			32,664
INTANGIBLE AND OTHER ASSETS		13,195				7,716			—			20,911


TOTAL ASSETS	$	2,819,464			$	1,731,288		$	(2,025,192	)	$	2,525,560


LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	110,163			$	29,979		$	—		$	140,142
Due to parent/guarantor subsidiaries		344,767				40,785			(385,552	)		—
Income and other taxes payable		7,229				(787	)		—			6,442
Interest payable to Quebecor Media Inc.		68,897		��		—			—			68,897
Interest payable to SUN TV Company		129				—			—			129
Deferred revenue		12,445				6,526			—			18,971
Current portion of long-term debt		2,675				—			—			2,675

TOTAL CURRENT LIABILITIES		546,305				76,503			(385,552	)		237,256

LONG-TERM DEBT		444,713				—			—			444,713
DEFERRED INCOME TAXES		3,453				13,811			—			17,264
OTHER LIABILITIES		223,667				1,334			—			225,001
NON-CONTROLLING INTEREST		1,720				—			—			1,720
CONVERTIBLE OBLIGATIONS TO QUEBECOR MEDIA INC.		1,245,000				745,000			(745,000	)		1,245,000
CONVERTIBLE OBLIGATIONS TO SUN TV COMPANY		37,300				—			—			37,300


TOTAL LIABILITIES		2,502,158				836,648			(1,130,552	)		2,208,254

SHAREHOLDER’S EQUITY
Capital stock		301,801				492,366			(492,366	)		301,801
Retained earnings		29,020				400,523			(400,523	)		29,020
Contributed surplus		—				1,751			(1,751	)		—
Other comprehensive income		(13,515	)			—			—			(13,515	)

TOTAL SHAREHOLDER’S EQUITY		317,306	��			894,640			(894,640	)		317,306


TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	2,819,464			$	1,731,288		$	(2,025,192	)	$	2,525,560

F-39

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF INCOME

For the year ended December 31, 2005


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
REVENUES	$	610,733		$	314,136		$	(9,242	)	$	915,627

OPERATING EXPENSES
Wages and employee benefits		229,275			117,607			—			346,882
Newsprint		65,218			38,964			—			104,182
Other operating expenses		176,631			75,628			(9,242	)		243,017
Depreciation and amortization		16,962			13,393			—			30,355

		488,086			245,592			(9,242	)		724,436


OPERATING INCOME		122,647			68,544			—			191,191

Financial expenses		57,241			(8,818	)		—			48,423
Dividend income on preferred shares of Quebecor Media Inc.		(62,954	)		(87,756	)		—			(150,710	)
Interest on convertible obligations to Quebecor Media Inc.		60,448			85,928			—			146,376
Dividend income on preferred shares of SUN TV Company		(1,918	)		—			—			(1,918	)
Interest on convertible obligations to SUN TV Company		1,856			—			—			1,856
Gain on disposition of publication		(1,856	)		—			—			(1,856	)


INCOME BEFORE THE UNDERNOTED ITEMS		69,830			79,190			—			149,020

Income tax expense (recovery)		(5,624	)		(2,600	)		—			(8,224	)
Equity earnings of combined guarantors		(81,790	)		—			81,790			—
Equity loss on investment in SUN TV Company		2,747			—			—			2,747
Non-controlling interest		1,488			—			—			1,488


NET INCOME	$	153,009		$	81,790		$	(81,790	)	$	153,009

CONSOLIDATING STATEMENT OF RETAINED EARNINGS

For the year ended December 31, 2005


						Adjustments
				Combined		and
	Sun Media			Guarantors		Eliminations			Consolidated
	(restated)								(restated)
RETAINED EARNINGS, BEGINNING OF YEAR	$	45,664		$	318,733	$	(318,733	)	$	45,664
Net income		153,009			81,790		(81,790	)		153,009
Dividends		(169,653	)		—		—			(169,653	)


RETAINED EARNINGS, END OF YEAR	$	29,020		$	400,523	$	(400,523	)	$	29,020

F-40

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2005


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income	$	153,009		$	81,790		$	(81,790	)	$	153,009
Items not involving cash:
Depreciation and amortization		16,962			13,393			—			30,355
Deferred income taxes		(5,185	)		(4,105	)		—			(9,290	)
Non-controlling interest		1,488			—			—			1,488
Equity earnings of combined guarantors		(81,790	)		—			81,790			—
Equity loss on investment in SUN TV Company		2,747			—			—			2,747
Gain on disposition of publication		(1,856	)		—			—			(1,856	)
Other		7,610			(107	)		—			7,503
Changes in non-cash operating working capital		89,252			(91,825	)		—			(2,573	)

Cash provided by operating activities		182,237			(854	)		—			181,383

FINANCING ACTIVITIES
Issuance of convertible obligations to Quebecor Media Inc.		255,000			—			—			255,000
Redemption of convertible obligations to Quebecor Media Inc.		(150,000	)		—			—			(150,000	)
Issuance of convertible obligations to SUN TV Company		37,300			—			—			37,300
Issuance of convertible obligations to parent company					255,000			(255,000	)		—
Dividends		(169,653	)		—			—			(169,653	)
Repayment of loans		(3,490	)		—			—			(3,490	)
Other		(1,737	)		—			—			(1,737	)

Cash used in financing activities		(32,580	)		255,000			(255,000	)		(32,580	)

INVESTING ACTIVITIES
Investment in preferred shares of Quebecor Media Inc.		—			(255,000	)		—			(255,000	)
Disposal of preferred shares of Quebecor Media Inc.		150,000			—			—			150,000
Investment in preferred shares of SUN TV Company		(37,300	)		—			—			(37,300	)
Investment in guarantor subsidiaries		(255,000	)					255,000			—
Business acquisitions		(271	)		(1,791	)		—			(2,062	)
Additions to property, plant and equipment		(9,473	)		(6,202	)		—			(15,675	)
Proceeds from disposal of property, plant and equipment		—			526			—			526
Other		(66	)		—			—			(66	)

Cash used in investing activities		(152,110	)		(262,467	)		255,000			(159,577	)

Increase (decrease) in cash and cash equivalents		(2,453	)		(8,321	)		—			(10,774	)
Cash and cash equivalents — beginning of year		4,056			29,538			—			33,594


Cash and cash equivalents — end of year	$	1,603		$	21,217		$	—		$	22,820

F-41

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING BALANCE SHEET

As at December 31, 2006


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,098		$	(4,233	)	$	—		$	3,865
Accounts receivable		90,551			49,558			—			140,109
Dividend receivable from Quebecor Media Inc.		—			29,852			—			29,852
Dividend receivable from SUN TV Company		112			—			—			112
Due from parent/guarantor subsidiaries		83,790			10,869			(94,659	)		—
Inventories		5,355			3,237			—			8,592
Prepaid expenses		2,826			2,055			—			4,881
Deferred income taxes		26,211			658			—			26,869

TOTAL CURRENT ASSETS		216,943			91,996			(94,659	)		214,280

INVESTMENT IN QUEBECOR MEDIA INC. PREFERRED SHARES		—			555,000			—			555,000
INVESTMENT IN SUN TV COMPANY		34,375			—			—			34,375
EQUITY INVESTMENT IN SUN TV COMPANY		3,745			—			—			3,745
INVESTMENTS IN GUARANTOR SUBSIDIARIES		1,030,505			—			(1,030,505	)		—
PROPERTY, PLANT AND EQUIPMENT		83,703			71,977			—			155,680
GOODWILL		352,317			400,375			—			752,692
DEFERRED INCOME TAXES		(5,122	)		39,169			—			34,047
INTANGIBLE AND OTHER ASSETS		10,270			7,157			—			17,427


TOTAL ASSETS	$	1,726,736		$	1,165,674		$	(1,125,164	)	$	1,767,246


LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	105,221		$	36,201		$	—		$	141,422
Due to parent/guarantor subsidiaries		10,869			83,790			(94,659	)		—
Income and other taxes payable		6,739			(2,976	)		—			3,763
Interest payable to Quebecor Media Inc.		28,948			—			—			28,948
Interest payable to SUN TV Company		109			—			—			109
Deferred revenue		13,086			6,254			—			19,340
Current portion of long-term debt		3,080			—			—			3,080

TOTAL CURRENT LIABILITIES		168,052			123,269			(94,659	)		196,662

LONG-TERM DEBT		469,008			—			—			469,008
DEFERRED INCOME TAXES		(8,087	)		11,317			—			3,230
OTHER LIABILITIES		214,889			583			—			215,472
NON-CONTROLLING INTEREST		1,720			—			—			1,720
CONVERTIBLE OBLIGATIONS TO QUEBECOR MEDIA INC.		555,000			555,000			(555,000	)		555,000
CONVERTIBLE OBLIGATIONS TO SUN TV COMPANY		34,375			—			—			34,375


TOTAL LIABILITIES		1,434,957			690,169			(649,659	)		1,475,467

SHAREHOLDER’S EQUITY
Capital stock		261,801			292,362			(292,362	)		261,801
Retained earnings		38,801			181,392			(181,392	)		38,801
Contributed surplus		8,400			1,751			(1,751	)		8,400
Other comprehensive income		(17,223	)		—			—			(17,223	)

TOTAL SHAREHOLDER’S EQUITY		291,779			475,505			(475,505	)		291,779


TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	1,726,736		$	1,165,674		$	(1,125,164	)	$	1,767,246

F-42

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF INCOME

For the year ended December 31, 2006


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
REVENUES	$	627,369		$	318,803		$	(17,996	)	$	928,176

OPERATING EXPENSES
Wages and employee benefits		233,466			120,311			—			353,777
Newsprint		63,986			43,780			—			107,766
Other operating expenses		195,156			81,030			(17,996	)		258,190
Depreciation and amortization		22,603			14,007			—			36,610
Restructuring charges		10,684			6,349			—			17,033

		525,895			265,477			(17,996	)		773,376


OPERATING INCOME		101,474			53,326			—			154,800

Financial expenses		52,660			(1,232	)		—			51,428
Dividend income on preferred shares of Quebecor Media Inc.		(61,815	)		(78,190	)		—			(140,005	)
Interest on convertible obligations to Quebecor Media Inc.		59,416			76,521			—			135,937
Dividend income on preferred shares of SUN TV Company		(4,026	)		—			—			(4,026	)
Interest on convertible obligations to SUN TV Company		3,897			—			—			3,897


INCOME BEFORE THE UNDERNOTED ITEMS		51,342			56,227			—			107,569

Income tax expense (recovery)		(2,639	)		(7,642	)		—			(10,281	)
Equity earnings of combined guarantors		(63,869	)		—			63,869			—
Equity loss on investment in SUN TV Company		3,252			—			—			3,252
Impairment of equity investment in SUN TV Company		7,819			—			—			7,819
Non-controlling interest		1,498			—			—			1,498


NET INCOME	$	105,281		$	63,869		$	(63,869	)	$	105,281

CONSOLIDATING STATEMENT OF RETAINED EARNINGS

For the year ended December 31, 2006


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
RETAINED EARNINGS, BEGINNING OF YEAR	$	29,020		$	400,523		$	(400,523	)	$	29,020
Net income		105,281			63,869			(63,869	)		105,281
Dividends		(95,500	)		(283,000	)		283,000			(95,500	)


RETAINED EARNINGS, END OF YEAR	$	38,801		$	181,392		$	(181,392	)	$	38,801

F-43

SUN MEDIA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006
(In thousands of Canadian dollars except for share information)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2006


							Adjustments
				Combined			and
	Sun Media			Guarantors			Eliminations			Consolidated
	(restated)									(restated)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income	$	105,281		$	63,869		$	(63,869	)	$	105,281
Items not involving cash:
Depreciation and amortization		22,603			14,007			—			36,610
Restructuring charges		7,659			5,119			—			12,778
Deferred income taxes		(3,694	)		(7,642	)		—			(11,336	)
Non-controlling interest		1,498			—			—			1,498
Equity earnings of combined guarantors		(63,869	)		—			63,869			—
Equity loss on investment in SUN TV Company		3,252			—			—			3,252
Impairment of equity investment in SUN TV Company		7,819			—			—			7,819
Other		4,691			(286	)		—			4,405
Changes in non-cash operating working capital		(402,016	)		386,459			—			(15,557	)

Cash provided (used in) by operating activities		(316,776	)		461,526			—			144,750

FINANCING ACTIVITIES
Borrowings on Term Loan C Facility, net of financing fees		39,604			—			—			39,604
Issuance of convertible obligations to Quebecor Media Inc.		120,000			—			—			120,000
Redemption of convertible obligations to Quebecor Media Inc.		(810,000	)		—			—			(810,000	)
Redemption of convertible obligations to SUN TV Company		(2,925	)		—			—			(2,925	)
Issuance of convertible obligations to parent company		—			120,000			(120,000	)		—
Redemption of convertible obligations to parent company		—			(310,000	)		310,000			—
Dividends		(95,500	)		(283,000	)		283,000			(95,500	)
Repayment of loans and unwinding of hedging contracts		(26,553	)		—			—			(26,553	)
Reduction in paid-up capital		(40,000	)		(200,000	)		200,000			(40,000	)
Other		(1,797	)		—			—			(1,797	)

Cash provided (used in) by financing activities		(817,171	)		(673,000	)		673,000			(817,171	)

INVESTING ACTIVITIES
Investment in preferred shares of Quebecor Media Inc.		—			(120,000	)		—			(120,000	)
Disposal of preferred shares of Quebecor Media Inc.		500,000			310,000			—			810,000
Disposal of preferred shares of SUN TV Company		2,925			—			—			2,925
Investment in guarantor subsidiaries		673,000			—			(673,000	)		—
Equity investment in SUN TV Company		(6,035	)		—			—			(6,035	)
Business acquisitions		(350	)		(1,125	)		—			(1,475	)
Acquisition of non-capital losses		(16,142	)		—			—			(16,142	)
Additions to property, plant and equipment		(12,472	)		(3,329	)		—			(15,801	)
Proceeds from disposal of property, plant and equipment		6			478			—			484
Other		(490	)		—			—			(490	)

Cash provided (used in) by investing activities		1,140,442			186,024			(673,000	)		653,466

Increase (decrease) in cash and cash equivalents		6,495			(25,450	)		—			(18,955	)
Cash and cash equivalents — beginning of year		1,603			21,217			—			22,820


Cash and cash equivalents — end of year	$	8,098		$	(4,233	)	$	—		$	3,865

F-44

Sun Media Inactive 20-F/A2007 FY Annual report (foreign) (amended)