Unaudited interim consolidated financial statements of Tembec Inc.



 Exhibit 4.5 
 TEMBEC INC. 
 CONSOLIDATED BALANCE SHEETS 

(unaudited) (in millions of Canadian dollars) 
  

									
	 	  	Dec. 25,
2010	 	 	Sept. 25,
2010
(Audited)	 
	 ASSETS
	  				 			
	 Current assets:
	  				 			
	 Cash and cash equivalents
	  	$	56	  	 	$	68	  
	 Cash held in trust
	  	 	5	  	 	 	6	  
	 Accounts receivable
	  	 	168	  	 	 	209	  
	 Inventories (note 3)
	  	 	266	  	 	 	255	  
	 Prepaid expenses
	  	 	7	  	 	 	7	  
		  	 	 	 	 	 	 	 
		  	 	502	  	 	 	545	  
	 Fixed assets
	  	 	494	  	 	 	498	  
	 Other assets (note 4)
	  	 	38	  	 	 	34	  
	 Future income taxes (note 10)
	  	 	25	  	 	 	27	  
		  	 	 	 	 	 	 	 
		  	$	1,059	  	 	$	1,104	  
		  	 	 	 	 	 	 	 
	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  				 			
	 Current liabilities:
	  				 			
	 Operating bank loans (note 5)
	  	$	3	  	 	$	1	  
	 Accounts payable and accrued charges
	  	 	213	  	 	 	238	  
	 Interest payable
	  	 	1	  	 	 	3	  
	 Current portion of long-term debt (note 5)
	  	 	17	  	 	 	17	  
		  	 	 	 	 	 	 	 
		  	 	234	  	 	 	259	  
	 Long-term debt (note 5)
	  	 	263	  	 	 	271	  
	 Other long-term liabilities and credits (note 6)
	  	 	209	  	 	 	209	  
	 Shareholders’ equity:
	  				 			
	 Share capital (note 7)
	  	 	570	  	 	 	570	  
	 Contributed surplus
	  	 	5	  	 	 	5	  
	 Deficit
	  	 	(222	) 	 	 	(210	) 
		  	 	 	 	 	 	 	 
		  	 	353	  	 	 	365	  
		  	 	 	 	 	 	 	 
		  	$	1,059	  	 	$	1,104	  
		  	 	 	 	 	 	 	 








 TEMBEC INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT 
 Quarters ended December 25, 2010
and December 26, 2009 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 

 

									
	 	  	Quarters ended	 
	 	  	Dec. 25,
2010	 	 	Dec. 26,
2009	 
	 Sales
	  	$	422	  	 	$	412	  
	 Freight and other deductions
	  	 	57	  	 	 	49	  
	 Lumber duties and export taxes
	  	 	3	  	 	 	2	  
	 Cost of sales
	  	 	329	  	 	 	339	  
	 Selling, general and administrative
	  	 	18	  	 	 	18	  
	 Share-based compensation (note 7)
	  	 	4	  	 	 	—  	  
	 Depreciation and amortization
	  	 	12	  	 	 	15	  
	 Other items (note 8)
	  	 	3	  	 	 	(1	) 
		  	 	 	 	 	 	 	 
	 Operating loss
	  	 	(4	) 	 	 	(10	) 
	 Interest, foreign exchange and other (note 9)
	  	 	13	  	 	 	13	  
	 Exchange gain on long-term debt
	  	 	(6	) 	 	 	(16	) 
		  	 	 	 	 	 	 	 
	 Loss before income taxes and non-controlling interest
	  	 	(11	) 	 	 	(7	) 
	 Income tax expense (note 10)
	  	 	1	  	 	 	1	  
	 Non-controlling interest
	  	 	—  	  	 	 	1	  
		  	 	 	 	 	 	 	 
	 Net loss and comprehensive loss
	  	 	(12	) 	 	 	(9	) 
	 Deficit, beginning of period
	  	 	(210	) 	 	 	(262	) 
		  	 	 	 	 	 	 	 
	 Deficit, end of period
	  	$	(222	) 	 	$	(271	) 
		  	 	 	 	 	 	 	 
	 Basic and diluted loss per share (note 7)
	  	$	(0.12	) 	 	$	(0.09	) 
		  	 	 	 	 	 	 	 


  
 - 2 -









 TEMBEC INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 Quarters ended December 25, 2010 and
December 26, 2009 
 (unaudited) (in millions of Canadian dollars) 

 

									
	 	  	Quarters ended	 
	 	  	Dec. 25,
2010	 	 	Dec. 26,
2009	 
	 Cash flow from operating activities:
	  				 			
	 Net loss
	  	$	(12	) 	 	$	(9	) 
	 Adjustments for:
	  				 			
	 Depreciation and amortization
	  	 	12	  	 	 	15	  
	 Unrealized foreign exchange and other
	  	 	1	  	 	 	4	  
	 Exchange gain on long-term debt
	  	 	(6	) 	 	 	(16	) 
	 Future income tax expense (recovery) (note 10)
	  	 	—  	  	 	 	1	  
	 Other items (note 8)
	  	 	—  	  	 	 	(1	) 
	 Excess cash contributions over pension expense
	  	 	(5	) 	 	 	—  	  
		  	 	 	 	 	 	 	 
		  	 	(10	) 	 	 	(6	) 
	 Changes in non-cash working capital:
	  				 			
	 Accounts receivable
	  	 	39	  	 	 	18	  
	 Inventories
	  	 	(12	) 	 	 	(2	) 
	 Prepaid expenses
	  	 	1	  	 	 	1	  
	 Accounts payable and accrued charges
	  	 	(23	) 	 	 	(19	) 
		  	 	 	 	 	 	 	 
		  	 	5	  	 	 	(2	) 
		  	 	 	 	 	 	 	 
		  	 	(5	) 	 	 	(8	) 
		  	 	 	 	 	 	 	 
	 Cash flows from investing activities:
	  				 			
	 Additions to fixed assets
	  	 	(8	) 	 	 	(6	) 
	 Proceeds on land sales and other
	  	 	—  	  	 	 	2	  
	 Other
	  	 	(1	) 	 	 	(1	) 
		  	 	 	 	 	 	 	 
		  	 	(9	) 	 	 	(5	) 
	 Cash flows from financing activities:
	  				 			
	 Change in operating bank loans
	  	 	2	  	 	 	(10	) 
	 Repayments of long-term debt
	  	 	(2	) 	 	 	(3	) 
	 Change in other long-term liabilities
	  	 	2	  	 	 	2	  
	 Other
	  	 	2	  	 	 	—  	  
		  	 	 	 	 	 	 	 
		  	 	4	  	 	 	(11	) 
		  	 	 	 	 	 	 	 
		  	 	(10	) 	 	 	(24	) 
	 Foreign exchange on cash and cash equivalents held in foreign currencies
	  	 	(2	) 	 	 	(1	) 
		  	 	 	 	 	 	 	 
	 Net decrease in cash and cash equivalents
	  	 	(12	) 	 	 	(25	) 
	 Cash and cash equivalents, net of bank indebtedness, beginning of period
	  	 	68	  	 	 	105	  
		  	 	 	 	 	 	 	 
	 Cash and cash equivalents, net of bank indebtedness, end of period
	  	$	56	  	 	$	80	  
		  	 	 	 	 	 	 	 
	 Supplemental information:
	  				 			
	 Interest paid
	  	$	9	  	 	$	9	  
	 Income taxes paid
	  	$	—  	  	 	$	—  	  
		  	 	 	 	 	 	 	 


  
 - 3 -









 TEMBEC INC. 
 CONSOLIDATED BUSINESS SEGMENT INFORMATION 
 Quarters ended December 25, 2010 and
December 26, 2009 
 (unaudited) (in millions of Canadian dollars) 

 

																									
	 	  	Quarter ended December 25, 2010	 
	 	  	Forest
Products	 	 	Dissolving
& 
Chemical
Pulp	 	  	High-Yield
Pulp	 	  	Paper	 	 	Corporate
& other	 	 	Consolidated	 
	 Sales:
	  				 				  				  				 				 			
	 External
	  	$	90	  	 	$	145	  	  	$	100	  	  	$	87	  	 	$	—  	  	 	$	422	  
	 Internal
	  	 	23	  	 	 	3	  	  	 	7	  	  	 	—  	  	 	 	1	  	 	 	34	  
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 
		  	 	113	  	 	 	148	  	  	 	107	  	  	 	87	  	 	 	1	  	 	 	456	  
	 Earnings (loss) before the following:
	  	 	(11	) 	 	 	19	  	  	 	7	  	  	 	4	  	 	 	(8	) 	 	 	11	  
	 Depreciation and amortization
	  	 	4	  	 	 	5	  	  	 	2	  	  	 	1	  	 	 	—  	  	 	 	12	  
	 Other items (note 8)
	  	 	—  	  	 	 	—  	  	  	 	—  	  	  	 	—  	  	 	 	3	  	 	 	3	  
	 Operating earnings (loss)
	  	 	(15	) 	 	 	14	  	  	 	5	  	  	 	3	  	 	 	(11	) 	 	 	(4	) 
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	2	  	 	 	5	  	  	 	—  	  	  	 	1	  	 	 	—  	  	 	 	8	  
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 
		
	 	  	Quarter ended December 26, 2009	 
	 	  	Forest
Products	 	 	Dissolving
& Chemical
Pulp	 	  	High-Yield
Pulp	 	  	Paper	 	 	Corporate
& other	 	 	Consolidated	 
	 Sales:
	  				 				  				  				 				 			
	 External
	  	$	74	  	 	$	204	  	  	$	55	  	  	$	79	  	 	$	—  	  	 	$	412	  
	 Internal
	  	 	21	  	 	 	7	  	  	 	7	  	  	 	—  	  	 	 	2	  	 	 	37	  
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 
		  	 	95	  	 	 	211	  	  	 	62	  	  	 	79	  	 	 	2	  	 	 	449	  
	 Earnings (loss) before the following:
	  	 	(8	) 	 	 	15	  	  	 	4	  	  	 	(2	) 	 	 	(5	) 	 	 	4	  
	 Depreciation and amortization
	  	 	4	  	 	 	7	  	  	 	3	  	  	 	1	  	 	 	—  	  	 	 	15	  
	 Other items (note 8)
	  	 	(1	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	(1	) 
	 Operating earnings (loss)
	  	 	(11	) 	 	 	8	  	  	 	1	  	  	 	(3	) 	 	 	(5	) 	 	 	(10	) 
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	2	  	 	 	2	  	  	 	1	  	  	 	1	  	 	 	—  	  	 	 	6	  
		  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 


  
 - 4 -









 TEMBEC INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars,
unless otherwise noted) 
  
  

 

	1.	Business of the Company 


The Company operates an integrated forest products business. The performance of each segment is evaluated by the management of the Company
against short-term and long-term financial objectives as well as environmental, safety and other key criteria. During the December 2010 quarter, the Company reorganized its internal reporting structure, which impacted the operating segment
disclosure included in the current period financial statements. Prior to the changes, the Company had reported its financial results based on five reportable segments: Forest Products, Pulp, Paper, Chemicals, and Corporate. The Pulp segment included
six pulp mills. Subsequent to the organizational changes, the Pulp segment has been divided into two segments: Dissolving and Chemical Pulp and High-Yield Pulp. Each segment includes three pulp mills. As well, the Chemicals segment is now part of
the Dissolving and Chemical Pulp segment. A significant portion of Chemicals sales are related to by-products generated by the two dissolving pulp mills. The Forest Products, Paper and Corporate segments were unaffected by the organizational
changes. The Forest Products segment consists primarily of forest and sawmill operations, which produce lumber and building materials. The Dissolving and Chemical Pulp segment consists primarily of manufacturing and marketing activities of
dissolving and chemical pulps including the transformation and sale of resins and pulp by-products. The High-Yield Pulp segment includes the manufacturing and marketing activities of high-yield pulps. The Paper segment consists primarily of
production and sales of bleached board and newsprint. Intersegment transfers of wood chips, pulp and other services are recorded at transfer prices agreed to by the parties, which are intended to approximate fair market value. The accounting
policies used in these business segments are the same as those described in the annual audited consolidated financial statements. Comparative prior period segment information has been restated to conform with the new segment presentation.

  

	2.	Significant accounting policies 

 These interim consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), which require management to make assumptions and estimates that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. These interim consolidated financial statements do not include all disclosures required under Canadian GAAP for annual financial statements and, accordingly, should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company’s latest annual consolidated financial statements. The same accounting policies as described in the Company’s latest annual consolidated financial statements have been used.

  

	3.	Inventories 

  

									
	 	  	Dec. 25,
2010	 	  	Sept. 25,
2010	 
	 Finished goods
	  	$	118	  	  	$	111	  
	 Logs and wood chips
	  	 	68	  	  	 	64	  
	 Supplies and materials
	  	 	80	  	  	 	80	  
		  	 	 	 	  	 	 	 
		  	$	266	  	  	$	255	  
		  	 	 	 	  	 	 	 

 The provision to adjust inventories to net realizable values relating to logs and finished goods was $3 million (Sept. 2010
- $4 million). 

  
 - 5 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  


	4.	Other assets 

  

									
	 	  	Dec. 25,
2010	 	  	Sept. 25,
2010	 
	 Loan receivable - Temlam
	  	$	23	  	  	$	23	  
	 Note receivable
	  	 	2	  	  	 	2	  
	 Long-term loans to employees
	  	 	2	  	  	 	2	  
	 Deferred pension costs
	  	 	9	  	  	 	6	  
	 Other
	  	 	2	  	  	 	1	  
		  	 	 	 	  	 	 	 
		  	$	38	  	  	$	34	  
		  	 	 	 	  	 	 	 

  

	5.	Operating bank loans and long-term debt 

 Operating bank loans 
 As part of the financial recapitalization that
occurred in February 2008, the Company negotiated a $205 million revolving working capital facility maturing in December 2011. The facility is subject to a permanent availability reserve of $25 million. This amount can be increased to $35 million if
the Company’s trailing 12-month EBITDA (as defined in the agreement) falls below $80 million. The facility has a first priority charge over the receivables and inventories and a second priority charge over the remainder of the assets of the
Company’s significant North American operations. As part of the long-term debt refinancing that occurred during the September 2010 quarter and which is discussed in the following section, the lenders of the revolving working capital facility
sought and obtained an increase of US $50 million to the availability reserve. As at December 25, 2010, the amount available and unused was $91 million and $34 million was reserved for letters of credit. 

The French operations are supported by mill specific “receivable factoring” agreements. As such, the borrowing base fluctuates
periodically, depending on shipments and cash receipts. As at the end of December 2010, the unused amount available was $21 million net of borrowings of $3 million. 
 Long-term debt 
  

													
	  	  	Maturity	 	  	Dec. 25,
2010	 	  	Sept. 25,
2010	 
	 Tembec Inc. - 6% unsecured notes
	  	 	09/2012	  	  	$	7	  	  	$	9	  
	 Tembec Industries - US $255 million, 11.25% senior secured notes
	  	 	12/2018	  	  	 	257	  	  	 	261	  
	 Tembec SAS
	  	 	09/2020	  	  	 	12	  	  	 	14	  
	 Tembec Envirofinance SAS
	  	 	06/2016	  	  	 	7	  	  	 	7	  
	 Kirkland Lake Engineered Wood Products Inc.
	  	 	Various	  	  	 	8	  	  	 	8	  
	 Other
	  	 	Various	  	  	 	2	  	  	 	2	  
		  				  	 	 	 	  	 	 	 
		  				  	 	293	  	  	 	301	  
	 Less current portion
	  				  	 	17	  	  	 	17	  
	 Less unamortized financing costs
	  				  	 	13	  	  	 	13	  
		  				  	 	 	 	  	 	 	 
		  				  	$	263	  	  	$	271	  
		  				  	 	 	 	  	 	 	 

 On August 17, 2010, the Company completed a private offering of US $255 million in aggregate principal
amount of 11.25% senior secured notes due December 15, 2018. The notes are senior obligations secured by a first priority lien on certain of the property and assets of the Company and the guarantors of the notes, other than receivables,
inventory and certain intangibles upon which the note holders have a second priority lien. The notes are guaranteed by the Company and certain of its subsidiaries. The proceeds from the offering, together with cash on hand, were used to permanently
repay all outstanding indebtedness under the previous US $300 million term loan facility, to pay prepayment premiums in connection therewith and to pay fees and expenses related to the offering. 

  
 - 6 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	6.	Other long-term liabilities and credits 

  


									
	 	  	Dec. 
25,
2010	 	  	Sept. 25,
2010	 
	 	  	  
	 Accrued benefit liability - pension benefit plans
	  	$	128	  	  	$	130	  
	 Accrued benefit liability - other benefit plans
	  	 	57	  	  	 	57	  
	 Reforestation - BC operations
	  	 	11	  	  	 	9	  
	 Environmental and other asset retirement obligations
	  	 	4	  	  	 	4	  
	 Other
	  	 	9	  	  	 	9	  
		  	 	 	 	  	 	 	 
		  	$	209	  	  	$	209	  
		  	 	 	 	  	 	 	 

  

	7.	Share capital 


Authorized 
 Unlimited number of common voting shares, without par value. 
 Unlimited number of
non-voting Class A Preferred shares issuable in series without par value, with other attributes to be determined at time of issuance. 
 11,111,111 warrants convertible in equal amount of common shares and expiring February 29, 2012. The warrants shall be deemed to be exercised and shall be automatically converted into new common
shares when the 20-day volume- weighted average trading price of a single common share reaches or exceeds $12.00 or immediately prior to any transaction that would constitute a change of control. 

 

	 	a)	Common shares and warrants issued 

  

									
	 	  	Dec. 
25,
2010	 	  	Sept. 25,
2010	 
	 	  	  
	 Issued and fully paid:
	  				  			
	 100,000,000 common shares
	  	$	564	  	  	$	564	  
	 11,093,943 warrants
	  	 	6	  	  	 	6	  
		  	 	 	 	  	 	 	 
		  	$	570	  	  	$	570	  
		  	 	 	 	  	 	 	 

  

	 	b)	Loss per share 

 The following
table provides the reconciliation between basic and diluted earnings (loss) per share: 
  

									
	 	  	Quarters ended	 
	 	  	Dec.
25,
2010	 	 	Dec. 26,
2009	 
	 	  	 
	 Net loss
	  	$	(12	) 	 	$	(9	) 
	 Weighted average number of common shares outstanding
	  	 	100,000,000	  	 	 	100,000,000	  
	 Dilutive effect of employees stock options and warrants
	  	 	—  	  	 	 	—  	  
	 Weighted averaged number of diluted common shares outstanding
	  	 	100,000,000	  	 	 	100,000,000	  
	 Basic and diluted loss per share
	  	$	(0.12	) 	 	$	(0.09	) 

 The warrants and the
employees stock options had no dilutive effect for the above periods; however, these securities could potentially dilute earnings per share in future periods. 

  
 - 7 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	7.	Share capital (continued) 

  


	 	c)	Share-based compensation 

 Under
the prior Long-Term Incentive Plan, the Company had, from time to time, granted options to its employees. The plan provided for the issuance of common shares at an exercise price equal to the market price of the Company’s common shares on the
date of the grant. These options vest over a five-year period and expire ten years from the date of issue. 
 The following table
summarizes the changes in options outstanding and the impact on weighted average per share exercise price during the period: 
  

									
	 	  	 	 	  	December 25, 2010	 
	 	  	Shares	 	  	Weighted average
exercise
price	 
	 	  	  
	 Balance, beginning of fiscal year
	  	 	161,123	  	  	$	89.01	  
	 Options cancelled
	  	 	2,858	  	  	 	172.59	  
		  	 	 	 	  	 	 	 
	 Balance, end of December 2010
	  	 	158,265	  	  	$	87.50	  
		  	 	 	 	  	 	 	 

 Of the total 2,858 options cancelled, 2,383 expired and 475 were forfeited. 

During the December 2010 quarter, the Company recorded $3 million compensation expense relating to its Performance-Conditioned Restricted
Share Unit plan and $1 million under the Directors’ Share Award plan for a total of $4 million for these programs. 
 On
November 17, 2010, non-executive members of the Board were granted 655,175 Deferred Share Units (DSUs). These DSUs will vest in three equal amounts over the next three Annual General Shareholders’ meetings beginning on January 27,
2011. 
  

	8.	Other items 

 2010

 As a result of an order issued by the Ontario Ministry of the Environment, the Company has had to undertake the removal of
black liquor from storage tanks and pipelines of the bankrupt Marathon, Ontario pulp facility. Costs for the December 2010 quarter amounted to $1 million. 
 Also during the December 2010 quarter, the Company recorded a charge of $2 million for shutdown related and legacy costs for the closed newsprint mill located in Pine Falls, Manitoba. 

2009 

During the December 2009 quarter, the Company completed the sale of a number of land properties and recorded a gain of $1 million.


  
 - 8 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	9.	Interest, foreign exchange, and other 

  


									
	 	  	Quarters ended	 
	 	  	Dec. 
25,
2010	 	 	Dec. 26,
2009	 
	 	  	 
	 Interest on long-term debt
	  	$	8	  	 	$	7	  
	 Interest on short-term debt
	  	 	—  	  	 	 	1	  
		  	 	 	 	 	 	 	 
		  	 	8	  	 	 	8	  
		  	 	 	 	 	 	 	 
	 Exchange loss on conversion of integrated foreign subsidiaries
	  	 	2	  	 	 	3	  
	 Other foreign exchange items
	  	 	3	  	 	 	2	  
		  	 	 	 	 	 	 	 
		  	 	5	  	 	 	5	  
		  	 	 	 	 	 	 	 
		  	$	13	  	 	$	13	  
		  	 	 	 	 	 	 	 
			
	Foreign exchange items included in the financial statements are as follows:	  				 			
		
	 	  	Quarters ended	 
	 	  	Dec.
25,
2010	 	 	Dec. 26,
2009	 
	 	  	 
	 Exchange gain on long-term debt
	  	$	(6	) 	 	$	(16	) 
	 Exchange loss on conversion of integrated foreign subsidiaries
	  	 	2	  	 	 	3	  
	 Other foreign exchange items
	  	 	3	  	 	 	2	  
		  	 	 	 	 	 	 	 
		  	$	(1	) 	 	$	(11	) 
		  	 	 	 	 	 	 	 

  

	10.	Income taxes 

  

									
	 	  	Quarters ended	 
	 	  	Dec.25,
2010	 	 	Dec. 26,
2009	 
	 	  	 
	 Loss before income taxes and non-controlling interest
	  	$	(11	) 	 	$	(7	) 
	 Income tax recovery based on combined federal and provincial income tax rates of 27.8% (2009 - 29.8%)
	  	$	(3	) 	 	$	(2	) 
	 Increase (decrease) resulting from:
	  				 			
	 Future income tax adjustment due to rate enactments
	  	 	—  	  	 	 	2	  
	 Change in valuation allowance
	  	 	4	  	 	 	5	  
	 Difference in statutory income tax rate
	  	 	1	  	 	 	—  	  
	 Permanent differences:
	  				 			
	 Non-taxable portion of exchange gain on long-term debt
	  	 	(1	) 	 	 	(2	) 
	 Non-deductible (taxable) exchange loss (gain) on conversion of integrated foreign subsidiaries
	  	 	—  	  	 	 	(4	) 
	 Other permanent differences
	  	 	—  	  	 	 	2	  
		  	 	 	 	 	 	 	 
		  	 	4	  	 	 	3	  
		  	 	 	 	 	 	 	 
	 Income tax expense
	  	$	1	  	 	$	1	  
		  	 	 	 	 	 	 	 
	 Income taxes:
	  				 			
	 Current
	  	$	1	  	 	$	—  	  
	 Future
	  	 	—  	  	 	 	1	  
		  	 	 	 	 	 	 	 
	 Income tax expense
	  	$	1	  	 	$	1	  
		  	 	 	 	 	 	 	 


  
 - 9 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	11.	Employee future benefits 

  

 The following table presents the Company’s future benefit costs: 

 

									
	 	  	Quarters ended	 
	 	  	Dec. 
25,
2010	 	  	Dec. 26,
2009	 
	 	  	  
	 Defined benefit pension plans
	  	$	3	  	  	$	5	  
	 Other employee future benefit plans
	  	 	1	  	  	 	1	  
	 Defined contribution and other retirement plans
	  	 	3	  	  	 	2	  
		  	 	 	 	  	 	 	 
		  	$	7	  	  	$	8	  
		  	 	 	 	  	 	 	 

  

	12.	Financial instruments 


Fair value 

The carrying amount of cash and cash equivalents, accounts receivable, operating bank loans, accounts payable and accrued charges
approximates their fair values because of the near-term maturity of those instruments. 
 The carrying value and the fair value
of long-term debt were as follows: 
  

									
	 	  	Dec. 
25,
2010	 	  	Sept. 25,
2010	 
	 	  	  
	 Carrying value
	  	$	280	  	  	$	288	  
	 Fair value
	  	$	293	  	  	$	301	  

 Credit risk

 The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the
reporting date was: 
  

									
	 	  	Dec. 
25,
2010	 	  	Sept. 25,
2010	 
	 	  	  
	 Loans and receivables
	  	$	195	  	  	$	236	  
	 Cash, cash equivalents and cash held in trust
	  	$	61	  	  	$	74	  

 Liquidity risk

 A liquidity reserve in the form of cash and undrawn revolving credit facilities is maintained to assist in the solvency
and financial flexibility of the Company. Liquidity reserves totaled $139 million at December 25, 2010. Repayment of amounts due within one year may also be funded by normal collection of current trade accounts receivable and cash on hand.

 The following are the contractual maturities of financial liabilities, including interest payments and excluding the impact
of netting agreements: 
  

																													
	 	  	Carrying
amount	 	  	Contractual
cash flows	 	  	6 months
or less	 	  	6-12
months	 	  	1-2
years	 	  	2-5
years	 	  	More than
5 years	 
	 Secured bank loans
	  	$	 265	  	  	$	 499	  	  	$	 15	  	  	$	 15	  	  	$	 31	  	  	$	 92	  	  	$	 346	  
	 Unsecured loans
	  	 	28	  	  	 	32	  	  	 	5	  	  	 	4	  	  	 	8	  	  	 	11	  	  	 	4	  
	 Operating bank loans
	  	 	3	  	  	 	3	  	  	 	3	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Trade and others
	  	 	215	  	  	 	215	  	  	 	215	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	 511	  	  	$	 749	  	  	$	 238	  	  	$	 19	  	  	$	 39	  	  	$	 103	  	  	$	 350	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 


  
 - 10 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  


	13.	Capital management 

 It is
the Company’s objective to manage its capital to ensure adequate capital resources exist to support operations while maintaining its business growth. The Company sets the amount of capital in proportion to risk. The Company manages the capital
structure and makes adjustments to it in light of changes in economic conditions and the risk of characteristics of the underlying assets. 
 The Company monitors capital on the basis of net debt to total capitalization ratio. Net debt is calculated as a total debt (long-term debt plus bank indebtedness/operating lines) less cash, cash
equivalents, and cash held in trust. Total capitalization includes net debt plus future income taxes, other long-term liabilities and credits, and shareholders’ equity. 
 The Company’s strategy is to maintain the net debt to total capitalization ratio at 40% or less. The objective is to keep a strong balance sheet and maintain the ability of the Company to access
capital markets at favourable rates. The debt to total capitalization ratio for the Company as at December 25, 2010 and September 25, 2010, was at 28% and 27%, respectively. 

 

	14.	Supplemental condensed consolidating financial information 

 The following condensed consolidating financial information has been included in these consolidated financial statements in compliance with National Instrument 51-102 – Continuous Disclosure
Obligations under Canadian provincial securities laws. 
 The senior secured notes (the “Notes”) of Tembec
Industries Inc. (the “Subsidiary Issuer”) are fully and unconditionally guaranteed on a joint and several basis by Tembec Inc. (the “Parent Company”) and most of the Subsidiary Issuer’s subsidiaries located in Canada (the
“Guarantor Subsidiaries”). The Subsidiary Issuer and each of the Guarantor Subsidiaries are 100% owned by the Parent Company. The Notes are not guaranteed by the Company’s other subsidiaries (the “Other Subsidiaries”).

 The Subsidiary Issuer and the Guarantor Subsidiaries have agreed to enter into a registration rights agreement with the
initial purchasers pursuant to which they have agreed to use commercially reasonable efforts to register with the SEC new notes (the “Exchange Notes”) having substantially identical terms as the Notes. The Exchange Notes will not contain
terms with respect to restrictions on transfer or additional interest. The Subsidiary Issuer and the Guarantor Subsidiaries will use commercially reasonable efforts to cause the exchange offer to be completed within 270 calendar days after the
original issue date of the Notes, and under certain circumstances, file a shelf registration statement with respect to the Notes. In addition, the Parent Company, the Subsidiary Issuer, and the Guarantor Subsidiaries must maintain their registration
with the SEC throughout the life of the Exchange Notes. If the Subsidiary Issuer and the Guarantor Subsidiaries fail to satisfy their obligations under the registration rights agreement, they will be required to pay additional interest to the
holders of the Notes of a maximum annual amount of US $2.5 million, under certain circumstances. 
 The Notes are also subject to
customary covenants, which may restrict the Parent Company’s ability to, among other things, pay dividends and make other restricted payments as defined in the Indenture dated August 17, 2010. 

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets as at
December 25, 2010, September 25, 2010 and December 26, 2009, and the statements of operations and cash flows for the quarters ended December 25, 2010 and December 26, 2009, for the Parent Company and for the Subsidiary
Issuer. It also provides the same information on a combined basis for the Guarantor Subsidiaries and the Other Subsidiaries. 

The supplemental condensed consolidating financial information, which has been prepared in accordance with Canadian GAAP, reflects the
investments of the Parent Company in the Subsidiary Issuer using the equity method. Investments of the Subsidiary Issuer in the Guarantor Subsidiaries and Other Subsidiaries are also accounted for using this method. 

  
 - 11 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 

 Condensed consolidated balance sheets under Canadian GAAP 

 

																									
	 	  	December 25, 2010	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
Adjustments	 	 	Consolidated	 
	 ASSETS
	  				 				 				 				 				 			
	 Current assets:
	  				 				 				 				 				 			
	 Cash and cash equivalents
	  	$	—  	  	 	$	2	  	 	$	12	  	 	$	42	  	 	$	—  	  	 	$	56	  
	 Cash held in trust
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	5	  	 	 	—  	  	 	 	5	  
	 Accounts receivable
	  	 	36	  	 	 	301	  	 	 	137	  	 	 	38	  	 	 	(344	) 	 	 	168	  
	 Inventories
	  	 	—  	  	 	 	—  	  	 	 	245	  	 	 	21	  	 	 	—  	  	 	 	266	  
	 Prepaid expenses
	  	 	—  	  	 	 	1	  	 	 	5	  	 	 	1	  	 	 	—  	  	 	 	7	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	36	  	 	 	304	  	 	 	399	  	 	 	107	  	 	 	(344	) 	 	 	502	  
	 Investments
	  	 	325	  	 	 	622	  	 	 	—  	  	 	 	—  	  	 	 	(947	) 	 	 	—  	  
	 Fixed assets
	  	 	—  	  	 	 	5	  	 	 	398	  	 	 	91	  	 	 	—  	  	 	 	494	  
	 Other assets
	  	 	—  	  	 	 	27	  	 	 	10	  	 	 	1	  	 	 	—  	  	 	 	38	  
	 Future income taxes
	  	 	1	  	 	 	—  	  	 	 	—  	  	 	 	24	  	 	 	—  	  	 	 	25	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	362	  	 	$	958	  	 	$	807	  	 	$	223	  	 	$	(1,291	) 	 	$	1,059	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  				 				 				 				 				 			
	 Current liabilities:
	  				 				 				 				 				 			
	 Operating bank loans
	  	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	3	  	 	$	—  	  	 	$	3	  
	 Accounts payable and accrued charges
	  	 	—  	  	 	 	195	  	 	 	275	  	 	 	88	  	 	 	(344	) 	 	 	214	  
	 Current portion of long-term debt
	  	 	5	  	 	 	—  	  	 	 	—  	  	 	 	12	  	 	 	—  	  	 	 	17	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	5	  	 	 	195	  	 	 	275	  	 	 	103	  	 	 	(344	) 	 	 	234	  
	 Long-term debt
	  	 	4	  	 	 	243	  	 	 	—  	  	 	 	22	  	 	 	(6	) 	 	 	263	  
	 Other long-term liabilities and credits
	  	 	—  	  	 	 	133	  	 	 	49	  	 	 	27	  	 	 	—  	  	 	 	209	  
	 Future income taxes
	  	 	—  	  	 	 	57	  	 	 	(55	) 	 	 	(2	) 	 	 	—  	  	 	 	—  	  
	 Shareholders’ equity:
	  				 				 				 				 				 			
	 Share capital
	  	 	570	  	 	 	551	  	 	 	668	  	 	 	34	  	 	 	(1,253	) 	 	 	570	  
	 Contributed surplus
	  	 	5	  	 	 	5	  	 	 	—  	  	 	 	5	  	 	 	(10	) 	 	 	5	  
	 Deficit
	  	 	(222	) 	 	 	(226	) 	 	 	(130	) 	 	 	34	  	 	 	322	  	 	 	(222	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	353	  	 	 	330	  	 	 	538	  	 	 	73	  	 	 	(941	) 	 	 	353	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	362	  	 	$	958	  	 	$	807	  	 	$	223	  	 	$	(1,291	) 	 	$	1,059	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  
 - 12 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 


 Condensed consolidated balance sheets under Canadian GAAP (continued)

  


																									
	 	  	September 25, 2010	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
Adjustments	 	 	Consolidated	 
	 ASSETS
	  				 				 				 				 				 			
	 Current assets:
	  				 				 				 				 				 			
	 Cash and cash equivalents
	  	$	—  	  	 	$	1	  	 	$	24	  	 	$	43	  	 	$	—  	  	 	$	68	  
	 Cash held in trust
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	6	  	 	 	—  	  	 	 	6	  
	 Accounts receivable
	  	 	38	  	 	 	350	  	 	 	175	  	 	 	41	  	 	 	(395	) 	 	 	209	  
	 Inventories
	  	 	—  	  	 	 	—  	  	 	 	231	  	 	 	24	  	 	 	—  	  	 	 	255	  
	 Prepaid expenses
	  	 	—  	  	 	 	1	  	 	 	5	  	 	 	1	  	 	 	—  	  	 	 	7	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	38	  	 	 	352	  	 	 	435	  	 	 	115	  	 	 	(395	) 	 	 	545	  
	 Investments
	  	 	337	  	 	 	565	  	 	 	—  	  	 	 	—  	  	 	 	(902	) 	 	 	—  	  
	 Fixed assets
	  	 	—  	  	 	 	5	  	 	 	404	  	 	 	89	  	 	 	—  	  	 	 	498	  
	 Other assets
	  	 	—  	  	 	 	27	  	 	 	6	  	 	 	1	  	 	 	—  	  	 	 	34	  
	 Future income taxes
	  	 	1	  	 	 	—  	  	 	 	—  	  	 	 	26	  	 	 	—  	  	 	 	27	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	376	  	 	$	949	  	 	$	845	  	 	$	231	  	 	$	(1,297	) 	 	$	1,104	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  				 				 				 				 				 			
	 Current liabilities:
	  				 				 				 				 				 			
	 Operating bank loans
	  	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	1	  	 	$	—  	  	 	$	1	  
	 Accounts payable and accrued charges
	  	 	—  	  	 	 	173	  	 	 	305	  	 	 	157	  	 	 	(394	) 	 	 	241	  
	 Current portion of long-term debt
	  	 	5	  	 	 	—  	  	 	 	—  	  	 	 	12	  	 	 	—  	  	 	 	17	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	5	  	 	 	173	  	 	 	305	  	 	 	170	  	 	 	(394	) 	 	 	259	  
	 Long-term debt
	  	 	6	  	 	 	248	  	 	 	—  	  	 	 	23	  	 	 	(6	) 	 	 	271	  
	 Other long-term liabilities and credits
	  	 	—  	  	 	 	133	  	 	 	48	  	 	 	28	  	 	 	—  	  	 	 	209	  
	 Future income taxes
	  	 	—  	  	 	 	54	  	 	 	(53	) 	 	 	(1	) 	 	 	—  	  	 	 	—  	  
	 Shareholders’ equity:
	  				 				 				 				 				 			
	 Share capital
	  	 	570	  	 	 	551	  	 	 	669	  	 	 	(27	) 	 	 	(1,193	) 	 	 	570	  
	 Contributed surplus
	  	 	5	  	 	 	5	  	 	 	—  	  	 	 	5	  	 	 	(10	) 	 	 	5	  
	 Deficit
	  	 	(210	) 	 	 	(215	) 	 	 	(124	) 	 	 	33	  	 	 	306	  	 	 	(210	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	365	  	 	 	341	  	 	 	545	  	 	 	11	  	 	 	(897	) 	 	 	365	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	376	  	 	$	949	  	 	$	845	  	 	$	231	  	 	$	(1,297	) 	 	$	1,104	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  
 - 13 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 


 Condensed consolidated balance sheets under Canadian GAAP (continued)

  


																									
	 	  	December 26, 2009	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
Adjustments	 	 	Consolidated	 
	 ASSETS
	  				 				 				 				 				 			
	 Current assets:
	  				 				 				 				 				 			
	 Cash and cash equivalents
	  	$	—  	  	 	$	2	  	 	$	56	  	 	$	22	  	 	$	—  	  	 	$	80	  
	 Cash held in trust
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
	 Accounts receivable
	  	 	40	  	 	 	454	  	 	 	120	  	 	 	118	  	 	 	(473	) 	 	 	259	  
	 Inventories
	  	 	—  	  	 	 	—  	  	 	 	258	  	 	 	60	  	 	 	—  	  	 	 	318	  
	 Prepaid expenses
	  	 	—  	  	 	 	1	  	 	 	7	  	 	 	4	  	 	 	—  	  	 	 	12	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	40	  	 	 	457	  	 	 	441	  	 	 	204	  	 	 	(473	) 	 	 	669	  
	 Investments
	  	 	276	  	 	 	466	  	 	 	—  	  	 	 	—  	  	 	 	(742	) 	 	 	—  	  
	 Fixed assets
	  	 	—  	  	 	 	7	  	 	 	424	  	 	 	186	  	 	 	—  	  	 	 	617	  
	 Other assets
	  	 	—  	  	 	 	14	  	 	 	5	  	 	 	—  	  	 	 	—  	  	 	 	19	  
	 Future income taxes
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	316	  	 	$	944	  	 	$	870	  	 	$	390	  	 	$	(1,215	) 	 	$	1,305	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  				 				 				 				 				 			
	 Current liabilities:
	  				 				 				 				 				 			
	 Operating bank loans
	  	$	—  	  	 	$	—  	  	 	$	81	  	 	$	27	  	 	$	—  	  	 	$	108	  
	 Accounts payable and accrued charges
	  	 	—  	  	 	 	136	  	 	 	267	  	 	 	324	  	 	 	(472	) 	 	 	255	  
	 Current portion of long-term debt
	  	 	5	  	 	 	—  	  	 	 	—  	  	 	 	14	  	 	 	—  	  	 	 	19	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	5	  	 	 	136	  	 	 	348	  	 	 	365	  	 	 	(472	) 	 	 	382	  
	 Long-term debt
	  	 	7	  	 	 	315	  	 	 	—  	  	 	 	48	  	 	 	(6	) 	 	 	364	  
	 Other long-term liabilities and credits
	  	 	—  	  	 	 	160	  	 	 	50	  	 	 	44	  	 	 	—  	  	 	 	254	  
	 Future income taxes
	  	 	—  	  	 	 	45	  	 	 	(44	) 	 	 	—  	  	 	 	—  	  	 	 	1	  
	 Shareholders’ equity:
	  				 				 				 				 				 			
	 Share capital
	  	 	570	  	 	 	551	  	 	 	668	  	 	 	(24	) 	 	 	(1,195	) 	 	 	570	  
	 Contributed surplus
	  	 	5	  	 	 	5	  	 	 	—  	  	 	 	5	  	 	 	(10	) 	 	 	5	  
	 Deficit
	  	 	(271	) 	 	 	(268	) 	 	 	(152	) 	 	 	(48	) 	 	 	468	  	 	 	(271	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	304	  	 	 	288	  	 	 	516	  	 	 	(67	) 	 	 	(737	) 	 	 	304	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	$	316	  	 	$	944	  	 	$	870	  	 	$	390	  	 	$	(1,215	) 	 	$	1,305	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  
 - 14 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 

 Condensed consolidated statements of operations and deficit under Canadian GAAP

  

																									
	 	  	Quarter ended December 25, 2010	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
Adjustments	 	 	Consolidated	 
	 Sales
	  	$	 -	  	 	$	 1	  	 	$	 378	  	 	$	 47	  	 	$	  	(4) 	 	$	 422	  
	 Freight and other deductions
	  	 	-	  	 	 	-	  	 	 	55	  	 	 	4	  	 	 	(2	) 	 	 	57	  
	 Lumber duties and export taxes
	  	 	-	  	 	 	-	  	 	 	3	  	 	 	-	  	 	 	-	  	 	 	3	  
	 Cost of sales
	  	 	-	  	 	 	-	  	 	 	293	  	 	 	38	  	 	 	(2	) 	 	 	329	  
	 Selling, general and administrative
	  	 	—  	  	 	 	2	  	 	 	15	  	 	 	1	  	 	 	—  	  	 	 	18	  
	 Share-based compensation
	  	 	—  	  	 	 	4	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	4	  
	 Depreciation and amortization
	  	 	—  	  	 	 	—  	  	 	 	10	  	 	 	2	  	 	 	—  	  	 	 	12	  
	 Other items
	  	 	—  	  	 	 	1	  	 	 	2	  	 	 	—  	  	 	 	—  	  	 	 	3	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Operating earnings (loss)
	  	 	—  	  	 	 	(6	) 	 	 	—  	  	 	 	2	  	 	 	—  	  	 	 	(4	) 
	 Interest, foreign exchange and other
	  	 	—  	  	 	 	4	  	 	 	8	  	 	 	1	  	 	 	—  	  	 	 	13	  
	 Exchange loss (gain) on long-term debt
	  	 	—  	  	 	 	(5	) 	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	(6	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Earnings (loss) before income taxes and non-controlling interest
	  	 	—  	  	 	 	(5	) 	 	 	(8	) 	 	 	2	  	 	 	—  	  	 	 	(11	) 
	 Income tax expense (recovery)
	  	 	—  	  	 	 	2	  	 	 	(2	) 	 	 	1	  	 	 	—  	  	 	 	1	  
	 Share of results of significantly influenced companies
	  	 	12	  	 	 	4	  	 	 	—  	  	 	 	—  	  	 	 	(16	) 	 	 	—  	  
	 Non-controlling interest
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net earnings (loss) and comprehensive earnings (loss)
	  	 	(12	) 	 	 	(11	) 	 	 	(6	) 	 	 	1	  	 	 	16	  	 	 	(12	) 
	 Deficit, beginning of year
	  	 	(210	) 	 	 	(215	) 	 	 	(124	) 	 	 	33	  	 	 	306	  	 	 	(210	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Deficit, end of year
	  	$	(222	) 	 	$	(226	) 	 	$	(130	) 	 	$	34	  	 	$	322	  	 	$	(222	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Basic and diluted loss per share
	  				 				 				 				 				 	$	(0.12	) 
		  				 				 				 				 				 	 	 	 


  
 - 15 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 


 Condensed consolidated statements of operations and deficit under Canadian GAAP
(continued) 
  


																									
	 	  	Quarter ended December 26, 2009	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
Adjustments	 	 	Consolidated	 
	 	  	 	 	 	 	 
	 Sales
	  	$	—  	  	 	$	—  	  	 	$	295	  	 	$	121	  	 	$	(4	) 	 	$	412	  
	 Freight and other deductions
	  	 	—  	  	 	 	—  	  	 	 	42	  	 	 	8	  	 	 	(1	) 	 	 	49	  
	 Lumber duties and export taxes
	  	 	—  	  	 	 	—  	  	 	 	2	  	 	 	—  	  	 	 	—  	  	 	 	2	  
	 Cost of sales
	  	 	—  	  	 	 	—  	  	 	 	243	  	 	 	99	  	 	 	(3	) 	 	 	339	  
	 Selling, general and administrative
	  	 	—  	  	 	 	—  	  	 	 	14	  	 	 	4	  	 	 	—  	  	 	 	18	  
	 Depreciation and amortization
	  	 	—  	  	 	 	—  	  	 	 	10	  	 	 	5	  	 	 	—  	  	 	 	15	  
	 Other items
	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Operating earnings (loss)
	  	 	—  	  	 	 	—  	  	 	 	(15	) 	 	 	5	  	 	 	—  	  	 	 	(10	) 
	 Interest, foreign exchange and other
	  	 	—  	  	 	 	15	  	 	 	10	  	 	 	(12	) 	 	 	—  	  	 	 	13	  
	 Exchange loss (gain) on long-term debt
	  	 	—  	  	 	 	(13	) 	 	 	—  	  	 	 	(3	) 	 	 	—  	  	 	 	(16	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Earnings (loss) before income taxes and non-controlling interest
	  	 	—  	  	 	 	(2	) 	 	 	(25	) 	 	 	20	  	 	 	—  	  	 	 	(7	) 
	 Income tax expense (recovery)
	  	 	—  	  	 	 	6	  	 	 	(6	) 	 	 	1	  	 	 	—  	  	 	 	1	  
	 Share of results of significantly influenced companies
	  	 	9	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(9	) 	 	 	—  	  
	 Non-controlling interest
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	1	  	 	 	—  	  	 	 	1	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net earnings (loss) and comprehensive earnings (loss)
	  	 	(9	) 	 	 	(8	) 	 	 	(19	) 	 	 	18	  	 	 	9	  	 	 	(9	) 
	 Deficit, beginning of year
	  	 	(262	) 	 	 	(260	) 	 	 	(133	) 	 	 	(66	) 	 	 	459	  	 	 	(262	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Deficit, end of year
	  	$	(271	) 	 	$	(268	) 	 	$	(152	) 	 	$	(48	) 	 	$	468	  	 	$	(271	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Basic and diluted loss per share
	  				 				 				 				 				 	$	(0.09	) 
		  				 				 				 				 				 	 	 	 


  
 - 16 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 


 Condensed consolidated statements of cash flows under Canadian GAAP 

 


																									
	 	  	Quarter ended December 25, 2010	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries
	 	 	Other
Subsidiaries
	 	 	Consolidation
Adjustments
	 	 	Consolidated	 
	 	  	 	 	 	 	 
	 Cash flows from operating activities:
	  				 				 				 				 				 			
	 Net earnings (loss)
	  	$	(12	) 	 	$	(11	) 	 	$	(6	) 	 	$	1	  	 	$	16	  	 	$	(12	) 
	 Adjustments for:
	  				 				 				 				 				 			
	 Depreciation and amortization
	  	 	—  	  	 	 	—  	  	 	 	10	  	 	 	2	  	 	 	—  	  	 	 	12	  
	 Unrealized foreign exchange and others
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	1	  	 	 	—  	  	 	 	1	  
	 Exchange loss (gain) on long-term debt
	  	 	—  	  	 	 	(5	) 	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	(6	) 
	 Future income tax expense (recovery)
	  	 	—  	  	 	 	2	  	 	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  
	 Other items
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
	 Excess cash contributions over pension expense
	  	 	—  	  	 	 	(1	) 	 	 	(3	) 	 	 	(1	) 	 	 	—  	  	 	 	(5	) 
	 Share of results of significantly influenced companies
	  	 	12	  	 	 	4	  	 	 	—  	  	 	 	—  	  	 	 	(16	) 	 	 	—  	  
	 Other
	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	1	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	—  	  	 	 	(11	) 	 	 	(2	) 	 	 	3	  	 	 	—  	  	 	 	(10	) 
	 Changes in non-cash working capital:
	  				 				 				 				 				 			
	 Accounts receivables
	  	 	2	  	 	 	30	  	 	 	36	  	 	 	(29	) 	 	 	—  	  	 	 	39	  
	 Inventories
	  	 	—  	  	 	 	—  	  	 	 	(14	) 	 	 	2	  	 	 	—  	  	 	 	(12	) 
	 Prepaid expenses
	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	—  	  	 	 	—  	  	 	 	1	  
	 Accounts payable and accrued charges
	  	 	—  	  	 	 	(19	) 	 	 	(31	) 	 	 	27	  	 	 	—  	  	 	 	(23	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	2	  	 	 	11	  	 	 	(8	) 	 	 	—  	  	 	 	—  	  	 	 	5	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	2	  	 	 	—  	  	 	 	(10	) 	 	 	3	  	 	 	—  	  	 	 	(5	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash flows from investing activities:
	  				 				 				 				 				 			
	 Additions to fixed assets
	  	 	—  	  	 	 	—  	  	 	 	(4	) 	 	 	(4	) 	 	 	—  	  	 	 	(8	) 
	 Proceeds on land sales and other
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
	 Decrease in investments
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
	 Other
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	—  	  	 	 	—  	  	 	 	(4	) 	 	 	(5	) 	 	 	—  	  	 	 	(9	) 
	 Cash flows from financing activities:
	  				 				 				 				 				 			
	 Change in operating bank loans
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	2	  	 	 	—  	  	 	 	2	  
	 Repayments of long-term debt
	  	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(2	) 
	 Change in other long-term liabilities
	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	  	 	 	—  	  	 	 	2	  
	 Other
	  	 	—  	  	 	 	1	  	 	 	1	  	 	 	—  	  	 	 	—  	  	 	 	2	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	(2	) 	 	 	1	  	 	 	2	  	 	 	3	  	 	 	—  	  	 	 	4	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	—  	  	 	 	1	  	 	 	(12	) 	 	 	1	  	 	 	—  	  	 	 	(10	) 
	 Foreign exchange on cash and cash equivalents held in foreign currencies
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	(2	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net increase (decrease) in cash and cash equivalents
	  	 	—  	  	 	 	1	  	 	 	(12	) 	 	 	(1	) 	 	 	—  	  	 	 	(12	) 
	 Cash and cash equivalents, net of bank indebtedness, beginning of period
	  	 	—  	  	 	 	1	  	 	 	24	  	 	 	43	  	 	 	—  	  	 	 	68	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash and cash equivalents, net of bank indebtedness, end of period
	  	$	—  	  	 	$	2	  	 	$	12	  	 	$	42	  	 	$	—  	  	 	$	56	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Supplemental information:
	  				 				 				 				 				 			
	 Interest paid
	  				 				 				 				 				 	$	9	  
	 Income tax paid
	  				 				 				 				 				 	$	—  	  
		  				 				 				 				 				 	 	 	 


  
 - 17 -










 TEMBEC INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 
  

 
  



	14.	Supplemental condensed consolidating financial information (continued) 


 


 Condensed consolidated statements of cash flows under Canadian GAAP (continued)

  


																									
	 	  	Quarter ended December 26, 2009	 
	 	  	Parent
Company	 	 	Subsidiary
Issuer	 	 	Guarantor
Subsidiaries	 	 	Other
Subsidiaries	 	 	Consolidation
adjustments	 	 	Consolidated	 
	 Cash flows from operating activities:
	  				 				 				 				 				 			
	 Net earnings (loss)
	  	$	(9	) 	 	$	(8	) 	 	$	(19	) 	 	$	18	  	 	$	9	  	 	$	(9	) 
	 Adjustments for:
	  				 				 				 				 				 			
	 Depreciation and amortization
	  	 	—  	  	 	 	—  	  	 	 	11	  	 	 	4	  	 	 	—  	  	 	 	15	  
	 Unrealized foreign exchange and others
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	4	  	 	 	—  	  	 	 	4	  
	 Exchange loss (gain) on long-term debt
	  	 	—  	  	 	 	(13	) 	 	 	—  	  	 	 	(3	) 	 	 	—  	  	 	 	(16	) 
	 Future income tax expense (recovery)
	  	 	—  	  	 	 	7	  	 	 	(6	) 	 	 	—  	  	 	 	—  	  	 	 	1	  
	 Other items
	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	(1	) 
	 Excess cash contributions over pension expense
	  	 	—  	  	 	 	2	  	 	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	—  	  
	 Share of results of significantly influenced companies
	  	 	9	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(9	) 	 	 	—  	  
	 Other
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	—  	  	 	 	(12	) 	 	 	(15	) 	 	 	21	  	 	 	—  	  	 	 	(6	) 
	 Changes in non-cash working capital:
	  				 				 				 				 				 			
	 Accounts receivables
	  	 	2	  	 	 	—  	  	 	 	17	  	 	 	(1	) 	 	 	—  	  	 	 	18	  
	 Inventories
	  	 	—  	  	 	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	(2	) 
	 Prepaid expenses
	  	 	—  	  	 	 	—  	  	 	 	2	  	 	 	(1	) 	 	 	—  	  	 	 	1	  
	 Accounts payable and accrued charges
	  	 	(1	) 	 	 	—  	  	 	 	(10	) 	 	 	(8	) 	 	 	—  	  	 	 	(19	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	1	  	 	 	—  	  	 	 	7	  	 	 	(10	) 	 	 	—  	  	 	 	(2	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	1	  	 	 	(12	) 	 	 	(8	) 	 	 	11	  	 	 	—  	  	 	 	(8	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash flows from investing activities:
	  				 				 				 				 				 			
	 Additions to fixed assets
	  	 	—  	  	 	 	—  	  	 	 	(5	) 	 	 	(1	) 	 	 	—  	  	 	 	(6	) 
	 Proceeds on land sales and other
	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	  	 	 	—  	  	 	 	2	  
	 Decrease in investments
	  	 	2	  	 	 	—  	  	 	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	—  	  
	 Other
	  	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	1	  	 	 	—  	  	 	 	(4	) 	 	 	(2	) 	 	 	—  	  	 	 	(5	) 
	 Cash flows from financing activities:
	  				 				 				 				 				 			
	 Change in operating bank loans
	  	 	—  	  	 	 	—  	  	 	 	(15	) 	 	 	5	  	 	 	—  	  	 	 	(10	) 
	 Repayments of long-term debt
	  	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	(3	) 
	 Change in other long-term liabilities
	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	  	 	 	—  	  	 	 	2	  
	 Other
	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	1	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	(2	) 	 	 	—  	  	 	 	(15	) 	 	 	6	  	 	 	—  	  	 	 	(11	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	—  	  	 	 	(12	) 	 	 	(27	) 	 	 	15	  	 	 	—  	  	 	 	(24	) 
	 Foreign exchange on cash and cash equivalents held in foreign currencies
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net increase (decrease) in cash and cash equivalents
	  	 	—  	  	 	 	(12	) 	 	 	(27	) 	 	 	14	  	 	 	—  	  	 	 	(25	) 
	 Cash and cash equivalents, net of bank indebtedness, beginning of period
	  	 	—  	  	 	 	14	  	 	 	83	  	 	 	8	  	 	 	—  	  	 	 	105	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash and cash equivalents, net of bank indebtedness, end of period
	  	$	—  	  	 	$	2	  	 	$	56	  	 	$	22	  	 	$	—  	  	 	$	80	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Supplemental information:
	  				 				 				 				 				 			
	 Interest paid
	  				 				 				 				 				 	$	9	  
	 Income tax paid
	  				 				 				 				 				 	$	—  	  
		  				 				 				 				 				 	 	 	 

  

	15.	Comparative figures 


Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current period.


  
 - 18 -