Audited consolidated financial statements of Tembec Inc.



 Exhibit 4.2 

	
	
	
	
	
	
	
	
	
	

 Consolidated 

Financial Statements 
 of Tembec Inc. 

 
 Years ended September 25, 2010 and September 26, 2009 







 TEMBEC Consolidated Financial Statements 2010 

Auditors’ Report 
 to the Board of
Directors 
 We have audited the consolidated balance sheets of Tembec Inc. as at September 25, 2010 and September 26, 2009, the
consolidated statements of operations and deficit and the consolidated statements of cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits. 
 We conducted our audits in accordance with Canadian Generally Accepted Auditing Standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
September 25, 2010 and September 26, 2009, and the results of its operations and its cash flows for the years then ended in accordance with Canadian Generally Accepted Accounting Principles. 

 

	
	
	 /s/ KPMG LLP
  

	Chartered Accountants
	
	 Montreal, Canada

November 12, 2010, except for note 20 which is dated January 28, 2011



 

	*CA	Auditor permit no. 14114 


  
 1 










			
	TEMBEC Consolidated Financial Statements 2010	  	

  

 CONSOLIDATED BALANCE SHEETS 
 As at September 25, 201 0 and September 26, 2009 
 (in millions of dollars) 

 

									
	 	  	2010	 	 	2009	 
	 ASSETS
	  				 			
	 Current assets:
	  				 			
	 Cash and cash equivalents
	  	$	68	  	 	$	105	  
	 Cash held in trust (note 13)
	  	 	6	  	 	 	—  	  
	 Accounts receivable (notes 8 and 17)
	  	 	209	  	 	 	283	  
	 Inventories (notes 4 and 8)
	  	 	255	  	 	 	319	  
	 Prepaid expenses
	  	 	7	  	 	 	13	  
		  	 	 	 	 	 	 	 
		  	 	545	  	 	 	720	  
	 Fixed assets (note 6)
	  	 	498	  	 	 	626	  
	 Other assets (note 7)
	  	 	34	  	 	 	20	  
	 Future income taxes (note 15)
	  	 	27	  	 	 	—  	  
		  	 	 	 	 	 	 	 
		  	$	1,104	  	 	$	1,366	  
		  	 	 	 	 	 	 	 
	 LIABILITIES AND SHAREHOLDERS’ EQUITY
	  				 			
	 Current liabilities:
	  				 			
	 Operating bank loans (note 8)
	  	$	1	  	 	$	118	  
	 Accounts payable and accrued charges
	  	 	238	  	 	 	278	  
	 Interest payable
	  	 	3	  	 	 	3	  
	 Current portion of long-term debt (note 9)
	  	 	17	  	 	 	19	  
		  	 	 	 	 	 	 	 
		  	 	259	  	 	 	418	  
	 Long-term debt (note 9)
	  	 	271	  	 	 	383	  
	 Other long-term liabilities and credits (note 10)
	  	 	209	  	 	 	252	  
	 Shareholders’ equity:
	  				 			
	 Share capital (note 11)
	  	 	570	  	 	 	570	  
	 Contributed surplus (note 3)
	  	 	5	  	 	 	5	  
	 Deficit
	  	 	(210	) 	 	 	(262	) 
		  	 	 	 	 	 	 	 
		  	 	365	  	 	 	313	  
		  	 	 	 	 	 	 	 
		  	$	1,104	  	 	$	1,366	  
		  	 	 	 	 	 	 	 

 Guarantees, commitments and contingencies (note 12) 
 See accompanying notes to consolidated financial statements. 
  

					
	On behalf of the Board:	 		 	
			
	/s/ James V. Continenza	 		 	/s/ James M. Lopez
	James V. Continenza	 		 	James M. Lopez
	Chairman of the Board	 		 	President and Chief Executive Officer


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  

 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT 

Years ended September 25, 2010 and September 26, 2009 
 (in millions of dollars, unless otherwise noted) 
  

									
	  	  	2010	 	 	2009	 
	 Sales
	  	$	1,877	  	 	$	1,786	  
	 Freight and sales deductions
	  	 	234	  	 	 	224	  
	 Lumber duties and export taxes (note 12)
	  	 	10	  	 	 	4	  
	 Cost of sales
	  	 	1,426	  	 	 	1,578	  
	 Selling, general and administrative
	  	 	75	  	 	 	88	  
	 Depreciation and amortization
	  	 	56	  	 	 	73	  
	 Other items (note 13)
	  	 	12	  	 	 	(3	) 
		  	 	 	 	 	 	 	 
	 Operating earnings (loss) from continuing operations
	  	 	64	  	 	 	(178	) 
	 Interest, foreign exchange and other (note 14)
	  	 	52	  	 	 	22	  
	 Exchange loss (gain) on long-term debt
	  	 	(27	) 	 	 	21	  
		  	 	 	 	 	 	 	 
	 Earnings (loss) from continuing operations before income taxes and non-controlling interest
	  	 	39	  	 	 	(221	) 
	 Income tax recovery (note 15)
	  	 	(15	) 	 	 	(1	) 
	 Non-controlling interest
	  	 	2	  	 	 	(1	) 
		  	 	 	 	 	 	 	 
	 Net earnings (loss) from continuing operations
	  	 	52	  	 	 	(219	) 
	 Earnings from discontinued operations (note 3)
	  	 	—  	  	 	 	5	  
		  	 	 	 	 	 	 	 
	 Net earnings (loss) and comprehensive earnings (loss)
	  	 	52	  	 	 	(214	) 
	 Deficit, beginning of year
	  	 	(262	) 	 	 	(48	) 
		  	 	 	 	 	 	 	 
	 Deficit, end of year
	  	 	(210	) 	 	 	(262	) 
		  	 	 	 	 	 	 	 
	 Basic and diluted earnings (loss) per share from continuing operations (note 11)
	  	$	0.52	  	 	$	(2.19	) 
		  	 	 	 	 	 	 	 
	 Basic and diluted earnings per share from discontinued operations (note 3)
	  	$	—  	  	 	$	0.05	  
		  	 	 	 	 	 	 	 
	 Basic and diluted earnings (loss) per share (note 11)
	  	$	0.52	  	 	$	(2.14	) 
		  	 	 	 	 	 	 	 

 See accompanying notes to consolidated financial statements. 

  

			
		  	3











			
	TEMBEC Consolidated Financial Statements 2010	  	

  

 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 Years ended September 25, 2010 and September 26, 2009 
 (in millions of dollars)


									
	 	  	2010	 	  	2009	 
	 Cash flows from operating activities:
	  				  			
	 Net earnings (loss)
	  	$	52	  	  	$	(214)	  
	 Adjustments for:
	  				  			
	 Depreciation and amortization
	  	 	56	  	  	 	73	  
	 Unrealized foreign exchange and others
	  	 	(1)	  	  	 	(4)	  
	 Exchange loss (gain) on long-term debt
	  	 	(27)	  	  	 	21	  
	 Future income taxes (recovery) (notes 3 and 15)
	  	 	(15)	  	  	 	3	  
	 Investment tax credits and income tax refunds
	  	 	—  	  	  	 	17	  
	 Other items (note 13)
	  	 	12	  	  	 	(3)	  
	 Gain on sale of mill site-discontinued operations (note 3)
	  	 	—  	  	  	 	(16)	  
	 Excess cash contributions over pension expenses
	  	 	(20)	  	  	 	(9)	  
	 Other
	  	 	1	  	  	 	—  	  
		  	 	 	 	  	 	 	 
		  	 	58	  	  	 	(132)	  
	 Changes in non-cash working capital:
	  				  			
	 Accounts receivable
	  	 	(41)	  	  	 	82	  
	 Inventories
	  	 	16	  	  	 	86	  
	 Prepaid expenses
	  	 	5	  	  	 	6	  
	 Accounts payable and accrued charges
	  	 	40	  	  	 	(103)	  
		  	 	 	 	  	 	 	 
		  	 	20	  	  	 	71	  
		  	 	 	 	  	 	 	 
		  	 	78	  	  	 	(61)	  
		  	 	 	 	  	 	 	 
	 Cash flows from investing activities:
	  				  			
	 Reduced participation in joint ventures
	  	 	—  	  	  	 	18	  
	 Additions to fixed assets
	  	 	(25)	  	  	 	(42)	  
	 Proceeds on land sales and other
	  	 	7	  	  	 	1	  
	 Proceeds on sale of mill site-discontinued operations (note 3)
	  	 	—  	  	  	 	7	  
	 Proceeds on sale of French mills (note 13)
	  	 	86	  	  	 	—  	  
	 Other
	  	 	(1)	  	  	 	5	  
		  	 	 	 	  	 	 	 
		  	 	67	  	  	 	(11)	  
	 Cash flows from financing activities:
	  				  			
	 Change in operating bank loans
	  	 	(117)	  	  	 	69	  
	 Cash held in trust (note 13)
	  	 	(6)	  	  	 	—  	  
	 Increase in long-term debt
	  	 	272	  	  	 	9	  
	 Repayments of long-term debt
	  	 	(318)	  	  	 	(20)	  
	 Change in other long-term liabilities
	  	 	2	  	  	 	—  	  
	 Financing costs and other
	  	 	(15)	  	  	 	5	  
		  	 	 	 	  	 	 	 
		  	 	(182)	  	  	 	63	  
		  	 	 	 	  	 	 	 
		  	 	(37)	  	  	 	(9)	  
	 Foreign exchange on cash and cash equivalents held in foreign currencies
	  	 	—  	  	  	 	2	  
		  	 	 	 	  	 	 	 
	 Net decrease in cash and cash equivalents
	  	 	(37)	  	  	 	(7)	  
	 Cash and cash equivalents, net of bank indebtedness, beginning of year
	  	 	105	  	  	 	112	  
		  	 	 	 	  	 	 	 
	 Cash and cash equivalents, net of bank indebtedness, end of year
	  	$	68	  	  	$	105	  
		  	 	 	 	  	 	 	 

 Interest paid in 2010 totalled $29 million ($37 million in 2009) and income taxes recovered amounted to nil ($16 million in
2009). 
 See accompanying notes to consolidated financial statements. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  

 CONSOLIDATED BUSINESS SEGMENT INFORMATION 

Years ended September 25, 2010 and September 26, 2009 
 (in millions of dollars) 

																									
	 	  	2010	 
	 	  	Forest	 	 	 	 	 	 	 	 	 	 	  	Corporate	 	 	 	 
	 	  	Products	 	 	Pulp	 	 	Paper	 	 	Chemicals	 	  	and other	 	 	Consolidated	 
	 Sales:
	  				 				 				 				  				 			
	 External
	  	$	346	  	 	$	1,090	  	 	$	348	  	 	$	93	  	  	$	—  	  	 	$	1,877	  
	 Internal
	  	 	88	  	 	 	62	  	 	 	—  	  	 	 	—  	  	  	 	5	  	 	 	155	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
		  	 	434	  	 	 	1,152	  	 	 	348	  	 	 	93	  	  	 	5	  	 	 	2,032	  
	 Earnings (loss) before the following:
	  	 	(10	) 	 	 	157	  	 	 	(2	) 	 	 	10	  	  	 	(23	) 	 	 	132	  
	 Depreciation and amortization
	  	 	16	  	 	 	35	  	 	 	3	  	 	 	2	  	  	 	—  	  	 	 	56	  
	 Other items (note 13)
	  	 	(2	) 	 	 	(12	) 	 	 	7	  	 	 	—  	  	  	 	19	  	 	 	12	  
	 Operating earnings (loss) from continuing operations
	  	 	(24	) 	 	 	134	  	 	 	(12	) 	 	 	8	  	  	 	(42	) 	 	 	64	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	7	  	 	 	14	  	 	 	3	  	 	 	1	  	  	 	—  	  	 	 	25	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Identifiable assets-excluding cash and cash equivalents
	  	 	241	  	 	 	623	  	 	 	123	  	 	 	34	  	  	 	15	  	 	 	1,036	  
	 Cash and cash equivalents
	  				 				 				 				  				 	 	68	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Total assets
	  				 				 				 				  				 	$	1,104	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
		
	 	  	2009	 
	 	  	Forest	 	 	 	 	 	 	 	 	 	 	  	Corporate	 	 	 	 
	 	  	Products	 	 	Pulp	 	 	Paper	 	 	Chemicals	 	  	and other	 	 	Consolidated	 
	 Sales:
	  				 				 				 				  				 			
	 External
	  	$	304	  	 	$	932	  	 	$	452	  	 	$	98	  	  	$	—  	  	 	$	1,786	  
	 Internal
	  	 	103	  	 	 	78	  	 	 	—  	  	 	 	—  	  	  	 	4	  	 	 	185	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
		  	 	407	  	 	 	1,010	  	 	 	452	  	 	 	98	  	  	 	4	  	 	 	1,971	  
	 Earnings (loss) before the following:
	  	 	(67	) 	 	 	(61	) 	 	 	27	  	 	 	10	  	  	 	(17	) 	 	 	(108	) 
	 Depreciation and amortization
	  	 	24	  	 	 	44	  	 	 	3	  	 	 	2	  	  	 	—  	  	 	 	73	  
	 Other items (note 13)
	  	 	(3	) 	 	 	(4	) 	 	 	2	  	 	 	1	  	  	 	1	  	 	 	(3	) 
	 Operating earnings (loss) from continuing operations
	  	 	(88	) 	 	 	(101	) 	 	 	22	  	 	 	7	  	  	 	(18	) 	 	 	(178	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	6	  	 	 	31	  	 	 	4	  	 	 	1	  	  	 	—  	  	 	 	42	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Identifiable assets-excluding cash and cash equivalents
	  	 	252	  	 	 	830	  	 	 	127	  	 	 	36	  	  	 	16	  	 	 	1,261	  
	 Cash and cash equivalents
	  				 				 				 				  				 	 	105	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Total assets
	  				 				 				 				  				 	$	1,366	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 


  

			
		  	5











			
	TEMBEC Consolidated Financial Statements 2010	  	

  

 CONSOLIDATED GEOGRAPHIC SEGMENT INFORMATION 

Years ended September 25, 2010 and September 26, 2009 
 (in millions of dollars) 

																					
	 	  	2010	 
	 	  	Forest
Products	 	  	Pulp	 	  	Paper	 	  	Chemicals	 	  	Consolidated	 
	 Sales (by final destination):
	  				  				  				  				  			
	 Canada
	  	$	212	  	  	$	38	  	  	$	70	  	  	$	47	  	  	$	367	  
	 United States
	  	 	126	  	  	 	173	  	  	 	259	  	  	 	24	  	  	 	582	  
	 Pacific Rim and India
	  	 	6	  	  	 	467	  	  	 	—  	  	  	 	4	  	  	 	477	  
	 United Kingdom, Europe and other
	  	 	2	  	  	 	412	  	  	 	19	  	  	 	18	  	  	 	451	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	346	  	  	$	1,090	  	  	$	348	  	  	$	93	  	  	$	1,877	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		
	 	  	2009	 
	 	  	Forest
Products	 	  	Pulp	 	  	Paper	 	  	Chemicals	 	  	Consolidated	 
	 Sales (by final destination):
	  				  				  				  				  			
	 Canada
	  	$	190	  	  	$	19	  	  	$	75	  	  	$	42	  	  	$	326	  
	 United States
	  	 	110	  	  	 	176	  	  	 	349	  	  	 	32	  	  	 	667	  
	 Pacific Rim and India
	  	 	4	  	  	 	278	  	  	 	4	  	  	 	2	  	  	 	288	  
	 United Kingdom, Europe and other
	  	 	—  	  	  	 	459	  	  	 	24	  	  	 	22	  	  	 	505	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	304	  	  	$	932	  	  	$	452	  	  	$	98	  	  	$	1,786	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 

  

									
	 	  	2010	 	  	2009	 
	 Fixed assets:
	  				  			
	 Canada
	  	$	419	  	  	$	449	  
	 France
	  	 	76	  	  	 	175	  
	 Other
	  	 	3	  	  	 	2	  
		  	 	 	 	  	 	 	 
		  	$	498	  	  	$	626	  
		  	 	 	 	  	 	 	 


  

			
		  	











			
	Notes to Consolidated Financial Statements	  	

  

 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. The Forest Products segment consists primarily of forest and sawmill operations, which produce lumber and building materials. The Pulp segment includes the manufacturing and marketing activities of a
number of different types of pulps. The Paper segment consists primarily of production and sales of newsprint and bleached board. The Chemicals segment consists primarily of the transformation and sale of resins and pulp by-products. 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 value. The accounting policies used in these business segments are the same as those described below.

  

	1.	SIGNIFICANT ACCOUNTING POLICIES 

 BASIS
OF CONSOLIDATION 
 These consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles
(GAAP) and include the accounts of the Company, Tembec Inc. (the “Corporation”), and all its subsidiaries and joint ventures (collectively “Tembec” or the “Company”). Investments over which the Corporation has effective
control are fully consolidated. Investments over which the Corporation exercises significant influence are accounted for by the equity method. The Corporation’s interest in joint ventures is accounted for by the proportionate consolidation
method. 
 USE OF ESTIMATES 

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant areas requiring the use of management
estimates are: useful lives of plant and equipment, value of long-term receivables, impairment of long-lived assets, employee future benefits, income taxes, asset retirement obligations and environmental accruals. Actual results could differ from
those estimates. 
 REVENUE 

The Company recognizes revenue when persuasive evidence of an arrangement exists, goods have been delivered, there are no uncertainties surrounding
product acceptance, the related revenue is fixed and determinable and collection is reasonably assured. 
 FINANCIAL INSTRUMENTS

 The Company classifies its cash and cash equivalents as held-for-trading. Accounts receivable and long-term receivables are classified as
loans and receivables. Bank indebtedness, operating bank loans, accounts payable and accrued charges, long-term debt, including interest payable, are classified as other liabilities, all of which are measured at amortized cost. The Company measures
all derivatives and embedded derivatives at fair value and the Company has maintained its policy not to use hedge accounting. 
 Transaction
costs incurred upon the issuance of debt instruments or modification of a financial liability are deducted from the financial liability and are amortized using the effective interest method over the expected life of the related liability.


  

			
		  	7











			
	Notes to Consolidated Financial Statements	  	

  


	1.	SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

 CASH AND CASH EQUIVALENTS 
 Cash and cash equivalents, including cash on hand, demand
deposits, banker’s acceptances and commercial paper with maturities of three months or less from date of purchase, are recorded at fair value. 
 INVENTORIES 
 Finished goods, work in process, wood chips, logs and other raw materials are
valued at the lower of cost, determined on an average cost basis, and net realizable value. For all raw materials to be used in the production of finished goods, net realizable value is determined on an as converted to finished goods basis.
Operating, maintenance and spare parts inventories are valued at lower of cost and net realizable value. 
 FIXED ASSETS AND GOVERNMENT
ASSISTANCE 
 Fixed assets are recorded at cost after deducting investment tax credits and government assistance. Depreciation and
amortization are provided over their estimated useful lives, generally on a straight-line basis, as follows: 
  

					
	 Assets
	  	Period	 
	 Buildings, pulp and newsprint production equipment
	  	 	20 -30 years	  
	 Sawmill production equipment
	  	 	10 -15 years	  
	 Paperboard mill production equipment
	  	 	25 - 30 years	  

 Forest access roads and timber
holdings are depreciated over their expected useful life. Major start-ups of new or modernized production lines may be depreciated using units of production method until the unit reaches targeted capacity after which the straight-line method is
adopted. Repairs and maintenance as well as planned shutdown maintenance are charged to expense as incurred. 
 Capitalized interest is based on
the average cost of construction of major projects in progress during the year, using interest rates actually paid on long-term debt. 

IMPAIRMENT OF LONG-LIVED ASSETS 

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

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	1.	SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

 ENVIRONMENTAL COSTS 
 The Company is subject to environmental laws and regulations enacted
by federal, provincial, state and local authorities. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which are
not expected to contribute to current or future operations are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are likely, and when the costs, based on a specific plan of action in terms of the technology to
be used and the extent of the corrective action required, can be reasonably estimated. 
 ASSET RETIREMENT OBLIGATIONS 

Asset retirement obligations are recognized, at fair value, in the period in which the Company incurs a legal obligation associated with the retirement of
an asset. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using a credit adjusted risk-free interest rate. 

EMPLOYEE FUTURE BENEFITS 
 Employee
future benefits include pension plans and other employee future benefit plans. Other employee future benefit plans include post-retirement life insurance programs, healthcare and dental care benefits as well as certain post-employment benefits
provided to disabled employees. Registered pension plans are funded in accordance with applicable legislation and their assets are held by an independent trustee. The obligations of non-registered pension plans and other employee future benefit
plans are funded by the Company as they become due. 
 The Company accrues the cost of defined benefit plans as determined by independent
actuaries based on assumptions determined by the Company. The net periodic benefit cost includes: 
  

	 	•	 	 The cost of employee future benefits provided in exchange for employees’ services rendered during the year; 



 

	 	•	 	 The interest cost on employee future benefit obligations; 



 

	 	•	 	 The expected return on pension fund assets based on the fair value of plan assets; 



 

	 	•	 	 Gains or losses on settlements or curtailments where, when the restructuring of a defined benefit plan gives rise to both a curtailment and a
settlement of obligations, the curtailment is accounted for prior to the settlement; 


  

	 	•	 	 The straight-line amortization of past service costs and plan amendments over the average remaining service period to full eligibility of the active
employee group covered by the defined benefit plans or the average remaining lifetime of those entitled to benefits for plans covering only inactive participants; and 



 

	 	•	 	 The amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation or fair
value of plan assets at the beginning of the year, over the average remaining service period of the active employee group covered by the defined benefit plans or the average remaining lifetime of those entitled to benefits for plans covering only
inactive participants. 


 The employee future benefit obligations are determined in accordance with the projected benefit
method prorated on services. 

  

			
		  	9











			
	Notes to Consolidated Financial Statements	  	

  


	1.	SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

 TRANSLATION OF FOREIGN CURRENCIES 
 Monetary assets and liabilities of domestic and
integrated foreign operations denominated in foreign currencies are translated at year-end exchange rates. Non-monetary assets and liabilities of integrated foreign operations are translated at the historical rate relevant for the particular asset
or liability. The exchange gains or losses resulting from the translations are included in “Interest, foreign exchange and other” expenses. Revenues and expenses are translated at prevailing exchange rates during the year. 

INCOME TAXES 
 The Company accounts for
income taxes using the asset and liability method. Under this method, future income tax assets and liabilities are determined based on the temporary differences between the accounting basis and the tax basis of assets and liabilities. These
temporary differences are measured using the enacted or substantially enacted tax rates and laws expected to apply when these differences reverse. Future tax benefits are recognized to the extent that realization of such benefits is considered more
likely than not. The effect on future tax assets and liabilities of a change in income tax rates is recognized in earnings in the period that includes the substantive enactment date. 
 INVESTMENT TAX CREDITS 
 Investment tax credits related to research and development are
recognized in earnings as a reduction of such expenses when the Company has made the qualifying expenditures and there is reasonable assurance that the credits will be realized. 
 STOCK-BASED COMPENSATION PLANS 
 The Company uses the fair value based approach of
accounting for all stock options granted to its employees, whereby a compensation expense is recognized over the vesting period of the options, with a corresponding increase to contributed surplus. The Company bases the accruals of compensation cost
on the best available estimate of the number of options that are expected to vest and revises that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial estimates. Any consideration paid by plan
participants in the exercise of share options or purchase of stock is credited to capital stock. The contributed surplus component of stock-based compensation is transferred to capital stock upon the issuance of common shares. 

Deferred Share Units (DSUs) are recognized in compensation expense and accrued liabilities as they are awarded. DSUs are remeasured at each reporting
period, until settlement, using the trading price of the common shares of the Company. 
 Performance Conditioned Restricted Share Units
(PCRSUs) are recognized in compensation expense and accrued liabilities when it is likely that the performance conditions attached to the unit will be met. Compensation cost is prorated based on the underlying service period and the liability is
remeasured at each reporting period, until settlement, using the trading price of the common shares of the Company. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	1.	SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

 DERIVATIVE FINANCIAL INSTRUMENTS 
 The Company manages, from time to time, its foreign
exchange exposure on anticipated net cash inflows, principally US dollars and euros, through the use of options and forward contracts. 
 The
Company may, from time to time, manage its exposure to commodity price risk associated with sales of lumber, pulp and newsprint through the use of cash-settled hedge (swap) contracts. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes. 
 The Company does not currently apply hedge accounting for these derivative financial
instruments. These are measured at fair value, with changes in fair value recognized in earnings. 
 EMISSION RIGHTS AND TRADING

 The Company is participating in European Emissions Trading, in which it has been allocated allowances to emit a fixed tonnage of carbon
dioxide in a fixed period of time. 
 Emission allowances are initially recorded as intangible assets with a credit to deferred income. They are
recognized when the Company is able to exercise control and are measured at fair value at the date of initial recognition. The balances are netted for reporting purposes. 
 The liability to deliver allowances is recognized based on actual emissions and will be settled using allowances on hand measured at their carrying amount, with any excess emissions being measured at the
market value of the allowances at period-end. The resulting charge to cost of sales will be offset by the income from the original grant of the rights, together with income from the release or sale of surplus rights. 

 

	2.	CHANGES IN ACCOUNTING POLICIES 


CURRENT CHANGES IN ACCOUNTING POLICIES 

In June 2009, the CICA amended CICA HB 3862 – Financial Instruments – Disclosures. The amendments enhance disclosures about fair value
measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. CICA HB 3862 requires that all financial instruments measured at fair value be categorized into one of
three levels of hierarchy. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities: 

Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets; 
 Level 2 – inputs do not have quoted prices, but are observable for the asset or liability, either directly or indirectly; and 
 Level 3 – inputs are not based on observable market data. 
 The adoption of those new
requirements did not have a material impact on the Company’s financial statements. The required disclosures are provided in Note 17. 

  

			
		  	11











			
	Notes to Consolidated Financial Statements	  	

  


	2.	CHANGES IN ACCOUNTING POLICIES (CONTINUED) 


FUTURE CHANGES IN ACCOUNTING POLICIES 
 In
January 2009, the CICA issued three new accounting standards: Section 1582, Business Combinations, Section 1 601, Consolidated Financial Statements, and Section 1602, Non-controlling Interest. 

Section 1582 replaces former Section 1581 and establishes standards for the accounting of a business combination and is mostly aligned with
International Financial Reporting Standards 3 (IFRS 3), Business Combinations. This section specifies an expanded definition of a business that most assets acquired and liabilities assumed will be measured at fair value and that acquisition
costs will be recognized as expenses. 
 Sections 1601 and 1602 together replace former Section 1600, Consolidated Financial Statements.
Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602, which converges with the requirements of International Accounting Standard 27 (IAS 27), Consolidated and Separate Financial
Statements, establishes standards for accounting of a non-controlling interest resulting from a business acquisition, recognized as a distinct component of shareholders’ equity. Net income will present the allocation between the controlling
and non-controlling interest. 
 For the Company, these three standards will become effective for business combinations for which the
acquisition date is on or after September 25, 2011. As Section 1582 is applicable only to future business combinations, the Company does not expect these new standards to have a material impact on the Company’s consolidated financial
statements prior to such acquisitions. 
 TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 

In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with International Financial
Reporting Standards (IFRS). On February 13, 2008, the AcSB confirmed that publicly accountable enterprises would be required to apply, and report in accordance with IFRS, in full and without modification, effective in fiscal years beginning on
or after January 1, 2011, which, in the case of the Company, represents interim and fiscal year-end period beginning on September 25, 2011 (the “Changeover” date). In the Company’s reporting in those periods following the
Changeover date, the Company will be required to present comparative data for equivalent periods in the previous fiscal year, making September 26, 2010, the “Transition” date for the Company. 

 

	3.	DISCONTINUED OPERATIONS 

 During fiscal
2009, the Company sold its coated paper mill assets in St. Francisville, Louisiana, that had been indefinitely idled since July 2007. Sales proceeds totalled US $16 million, made up of US $6 million cash and US $10 million interest bearing notes. As
a result, the Company generated a pre-tax gain of $16 million. Because the tax benefits had been accounted for prior to the Company’s recapitalization, the tax effect relating to this transaction amounting to $5 million has been accounted for
as contributed surplus. As this operation was the only coated paper facility, its financial results have been reclassified as discontinued operations. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	4.	INVENTORIES 

  

									
	 	  	2010	 	  	2009	 
	 Finished goods
	  	$	111	  	  	$	120	  
	 Logs and wood chips
	  	 	64	  	  	 	102	  
	 Supplies and materials
	  	 	80	  	  	 	97	  
		  	 	 	 	  	 	 	 
		  	$	255	  	  	$	319	  
		  	 	 	 	  	 	 	 

 The provision for net realizable values relating to logs and finished goods were
as follows: 
  

									
	 	  	2010	 	  	2009	 
	 Forest Products
	  	$	4	  	  	$	15	  
	 Pulp
	  	 	—  	  	  	 	9	  
	 Paper
	  	 	—  	  	  	 	2	  
		  	 	 	 	  	 	 	 
		  	$	4	  	  	$	26	  
		  	 	 	 	  	 	 	 

  

	5.	INVESTMENTS IN JOINT VENTURES 

 Since
September 2009, the Company no longer has interest in joint ventures. 
 For the year ended September 26, 2009, the consolidated statements
of operations and cash flows include the Company’s proportionate share of the revenues and expenses of 1387332 Ontario Limited (Marathon Pulp joint venture) (to January 31, 2009) and Temrex Forest Products Limited Partnership (to
August 29, 2009), each at 50%. 
  

					
	 	  	2009	 
	 Sales
	  	$	43	  
	 Expenses
	  	 	44	  
		  	 	 	 
	 Loss before income taxes, interest, and non-controlling interest
	  	$	(1	) 
		  	 	 	 
	 Net loss
	  	$	(1	) 
		  	 	 	 
	 Cash provided by (used in):
	  			
	 Operating
	  	$	3	  
	 Investing
	  	 	—  	  
	 Financing
	  	 	(2	) 
		  	 	 	 
		  	$	1	  
		  	 	 	 


  

			
		  	13











			
	Notes to Consolidated Financial Statements	  	

  


	6.	FIXED ASSETS 

  

																									
	 	  	2010	 	  	2009	 
	 	  	Cost	 	  	Accumulated
depreciation
	 	  	Net
book
value	 	  	Cost	 	  	Accumulated
depreciation
	 	  	Net
book
value	 
	  	  	  	  	  	  
	  	  	  	  	  	  
	 Land
	  	$	12	  	  	$	—  	  	  	$	12	  	  	$	20	  	  	$	—  	  	  	$	20	  
	 Production buildings and equipment:
	  				  				  				  				  				  			
	 Pulp mills
	  	 	428	  	  	 	76	  	  	 	352	  	  	 	521	  	  	 	67	  	  	 	454	  
	 Newsprint and paper mills
	  	 	50	  	  	 	9	  	  	 	41	  	  	 	49	  	  	 	7	  	  	 	42	  
	 Sawmills
	  	 	109	  	  	 	55	  	  	 	54	  	  	 	107	  	  	 	39	  	  	 	68	  
	 Roads and timber holdings
	  	 	11	  	  	 	—  	  	  	 	11	  	  	 	7	  	  	 	—  	  	  	 	7	  
	 Other buildings and equipment
	  	 	21	  	  	 	4	  	  	 	17	  	  	 	20	  	  	 	3	  	  	 	17	  
	 Assets under construction
	  	 	11	  	  	 	—  	  	  	 	11	  	  	 	18	  	  	 	—  	  	  	 	18	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	642	  	  	$	144	  	  	$	498	  	  	$	742	  	  	$	116	  	  	$	626	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 

  

	7.	OTHER ASSETS 

  

									
	 	  	2010	 	  	2009	 
	 Loan receivable - Temlam
	  	$	23	  	  	$	—  	  
	 Notes receivable
	  	 	2	  	  	 	15	  
	 Long-term loans to employees
	  	 	2	  	  	 	2	  
	 Deferred pension costs
	  	 	6	  	  	 	2	  
	 Other
	  	 	1	  	  	 	1	  
		  	 	 	 	  	 	 	 
		  	$	34	  	  	$	20	  
		  	 	 	 	  	 	 	 

 During the year, the Company reclassified a current loan receivable of $23 million to other assets. In October 2008, the
Company had assumed the rank of secured lender to Temlam by effecting a payment of $22 million plus $1 million of custodial fees. At that time, the Company had anticipated a more timely disposal of the Temlam assets. A full recovery in the lumber
market is occurring at a much slower pace than originally anticipated and the amount has been reclassified to long-term. 
  

	8.	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. At the end of September 2010, the unused amount available was $75 million (2009 - $14 million) net of borrowings of nil (2009 - $96
million). 
 The French operations are supported by mill specific “receivable factoring” agreements. As such, the borrowing base
fluctuates periodically, depending on shipments and cash receipts. At the end of September 2010, the unused amount available was $25 million (2009 - $51 million) net of borrowings of $1 million (2009 - $22 million). 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	9.	LONG-TERM DEBT 

  

									
	 	  	2010	 	  	2009	 
	 Tembec Inc.
	  				  			
	 6% unsecured notes, repayable in semi-annual instalments of $2 million beginning March 30, 2008, with the balance due on
September 30, 2012
	  	$	9	  	  	$	12	  
	 Tembec Industries Inc.
	  				  			
	 11.25% senior secured notes US $255 million, due December 15, 2018, with semi-annual interest payments due June 15 and
December 15 of each year
	  	 	261	  	  	 	—  	  
	 Term loan US $300 million secured facility
	  	 	—  	  	  	 	328	  
	 Tembec SAS
	  				  			
	 Unsecured term loans € 9 million, non-interest bearing, repayable and maturing at various dates from June 2014 to
September 2020
	  	 	12	  	  	 	—  	  
	 Unsecured term loans € 1 million (€ 1 million in 2009), bearing interest at rates up to 1.5%, repayable and
maturing at various dates to December 2013
	  	 	1	  	  	 	2	  
	 Other Tembec SAS obligations
	  	 	1	  	  	 	4	  
	 Tembec Envirofinance SAS
	  				  			
	 Unsecured term loans € 5 million (€ 23 million in 2009), non-interest bearing, repayable and maturing at
various dates from June 2015 to June 2016
	  	 	7	  	  	 	30	  
	 Tembec Energie SAS
	  	 	—  	  	  	 	8	  
	 Bioenerg SAS
	  	 	—  	  	  	 	8	  
	 Kirkland Lake Engineered Wood Products Inc.
	  	 	8	  	  	 	8	  
	 Other long-term obligations
	  	 	2	  	  	 	2	  
		  	 	 	 	  	 	 	 
		  	$	301	  	  	$	402	  
	 Less current portion
	  	 	17	  	  	 	19	  
	 Less unamortized financing costs
	  	 	13	  	  	 	—  	  
		  	 	 	 	  	 	 	 
		  	$	271	  	  	$	383	  
		  	 	 	 	  	 	 	 


  

			
		  	15











			
	Notes to Consolidated Financial Statements	  	

  


	9.	LONG-TERM DEBT (CONTINUED) 

 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. 
 Instalments on consolidated long-term debt for the five years following September 25,
2010, are as follows: 
  

					
	 2011
	  	$	17	  
	 2012
	  	 	8	  
	 2013
	  	 	5	  
	 2014
	  	 	3	  
	 2015
	  	 	3	  

  

	10.	OTHER LONG-TERM LIABILITIES AND CREDITS 

  

									
	 	  	2010	 	  	2009	 
	 Accrued benefit liability - pension benefit plans
	  	$	130	  	  	$	169	  
	 Accrued benefit liability - other benefit plans
	  	 	57	  	  	 	59	  
	 Reforestation - BC operations
	  	 	9	  	  	 	8	  
	 Environmental and other asset retirement obligations
	  	 	4	  	  	 	4	  
	 Deferred government assistance
	  	 	—  	  	  	 	3	  
	 Other
	  	 	9	  	  	 	9	  
		  	 	 	 	  	 	 	 
		  	$	209	  	  	$	252	  
		  	 	 	 	  	 	 	 

  

	11.	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 on 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. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	11.	SHARE CAPITAL (CONTINUED) 

  

	(a)	Common shares and warrants issued 

  

									
	 	  	2010	 	  	2009	 
	 Issued and fully paid:
	  				  			
	 100,000,000 common shares
	  	$	564	  	  	$	564	  
	 11,093,943 (2009 - 11,094,340) warrants
	  	 	6	  	  	 	6	  
		  	 	 	 	  	 	 	 
		  	$	570	  	  	$	570	  
		  	 	 	 	  	 	 	 

 On February 29, 2008, the Predecessor of the Company implemented the plan of arrangement approved by
the Ontario Superior Court having the following key elements: 
  

	 	•	 	 Conversion of US $1.2 billion of the Predecessor’s senior unsecured debt into equity of the Company; 



 

	 	•	 	 Noteholders received 88% of the equity of the Company in full settlement of their notes; 



 

	 	•	 	 An additional 7% of the equity of the Company was allocated to noteholders who backstopped the new loan described below; 



 

	 	•	 	 Existing shareholders received 5% of the equity of the Company and “cashless” warrants to acquire additional shares; and



  

	 	•	 	 A new four-year term loan of US $300 million was obtained to provide additional liquidity. 



With respect to the extinguishment of the senior unsecured debt, the Company recorded a gain of $1,179 million to contributed
surplus. A further gain of $28 million was recorded following the refinancing of other prior obligations. Issuance costs relating to the new shares totalling $12 million were also provided. The Company then recorded $1,089 million deficit in
shareholders’ equity, including the elimination of the $373 million accumulated deficit, as a result of the revaluation of its assets and liabilities. The net effect of the above caused the total shareholders’ equity to move from $464
million to $570 million. 
 Detailed information on the plan of arrangement, the impact of adjustments and fresh start accounting
is available in the annual audited financial statements as at September 27, 2008. 
  

	(b)	Earnings (loss) per share 

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

									
	 	  	2010	 	  	2009	 
	 Net earnings (loss) from continuing operations
	  	$	52	  	  	$	(219	) 
	 Net earnings (loss)
	  	 	52	  	  	 	(214	) 
	 Weighted average number of common shares outstanding
	  	 	100,000,000	  	  	 	100,000,000	  
	 Dilutive effect of employees stock options and warrants
	  	 	—  	  	  	 	—  	  
	 Weighted average number of diluted common shares outstanding
	  	 	100,000,000	  	  	 	100,000,000	  
	 Basic and diluted earnings (loss) per share from continuing operations
	  	$	0.52	  	  	$	(2.19	) 
	 Basic and diluted earnings (loss) per share
	  	$	0.52	  	  	$	(2.14	) 

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

  

			
		  	17











			
	Notes to Consolidated Financial Statements	  	

  


	11.	SHARE CAPITAL (CONTINUED) 

  

	(c)	Stock-based compensation 

 Under
the former 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. No options have been granted since 2006. No compensation expense was recorded for the years ended September 26, 2009 and
September 25, 2010. 
 The following table summarizes the changes in options outstanding and the impact on weighted average
per share exercise price during the year: 
  

																	
	 	  	2010	 	  	2009	 
	 	  	Shares	 	 	Weighted
average
exercise
price	 	  	Shares	 	 	Weighted
average
exercise
price	 
	 Balance, beginning of year
	  	 	185,031	  	 	 	105.17	  	  	 	201,456	  	 	 	107.41	  
	 Options cancelled
	  	 	(23,908	) 	 	 	214.07	  	  	 	(16,425	) 	 	 	132.70	  
		  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Balance, end of year
	  	 	161,123	  	 	 	89.01	  	  	 	185,031	  	 	 	105.17	  
		  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 
	 Exercisable, end of year
	  	 	151,470	  	 	 	92.83	  	  	 	149,103	  	 	 	117.54	  
		  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 

 Of the total 23,908 (2009 - 16,425) options cancelled, 17,495 (2009 - 12,653) expired and 6,413 (2009 -
3,772) were 
 forfeited. 
 The following table summarizes the weighted average per share exercise price and the weighted remaining contractual life of the options outstanding as at September 25, 2010: 

 

																					
	 	  	Outstanding optionst	 	  	Exercisable options	 
	 Year granted
	  	Number of
options	 	  	Weighted
remaining
contractual
life	 	  	Weighted
average
exercise
price	 	  	Number of
options	 	  	Weighted
average
exercise
price	 
	 2001
	  	 	4,001	  	  	 	0.30	  	  	 	195.58	  	  	 	4,001	  	  	 	195.58	  
	 2002
	  	 	11,795	  	  	 	1.12	  	  	 	185.24	  	  	 	11,795	  	  	 	185.24	  
	 2003
	  	 	8,741	  	  	 	2.20	  	  	 	176.31	  	  	 	8,741	  	  	 	176.31	  
	 2004
	  	 	13,659	  	  	 	3.16	  	  	 	139.36	  	  	 	13,659	  	  	 	139.36	  
	 2005
	  	 	74,665	  	  	 	4.43	  	  	 	87.41	  	  	 	74,665	  	  	 	87.41	  
	 2006
	  	 	48,262	  	  	 	5.14	  	  	 	29.05	  	  	 	38,609	  	  	 	29.05	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	 	161,123	  	  	 	4.07	  	  	$	89.01	  	  	 	151,470	  	  	$	92.83	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	11.	SHARE CAPITAL (CONTINUED) 

  

	(d)	Other stock-based compensation 


During fiscal 2006, the Predecessor of the Company established a performance share units (PSUs) plan for designated senior executives.
Under the terms of this plan, senior executives may be eligible to an annual incentive remuneration paid to them in the form of PSUs. Each PSU is equivalent in value to a common share of the Company and is notionally credited with dividends when
shareholders receive dividends from the Company. A PSU is paid to an executive following a three-year vesting period and is payable in the form of either cash or common shares of the Company, which are purchased on the open market. As at
September 25, 2010, 40,523 PSUs (2009 – 93,485) were outstanding of which 9,568 PSUs had vested. No significant expense was recorded in 2010 and 2009 for this plan. 

During fiscal 2009, the Company replaced the PSU plan with a PCRSU plan for designated senior executives. Vesting of the PCRSUs is based
on the attainment of performance objectives over a three-year period. The following table summarizes the grant of PCRSUs that has occurred over the past two years: 
  

									
	 	  	2010	 	 	2009	 
	 Opening balance
	  	 	1,116,000	  	 	 	—  	  
	 Grants
	  	 	536,000	  	 	 	1,731,000	  
	 Forfeitures
	  	 	(89,000	) 	 	 	(57,000	) 
	 Expired
	  	 	—  	  	 	 	(558,000	) 
		  	 	 	 	 	 	 	 
	 Ending balance
	  	 	1,563,000	  	 	 	1,116,000	  
		  	 	 	 	 	 	 	 

 In fiscal 2009, a total of 558,000 PCRSUs expired as a result of non-attainment of the performance
conditions. During fiscal 2010, a compensation expense of $1 million (2009 – nil) was recorded. 
 Directors of the
Company are given the option to receive part of their annual retainer, meeting fees and awards under the Directors’ Share Award Plan in the form of DSUs. A DSU is paid to a director upon termination of Board service and is payable in the form
of cash. As at September 25, 2010 and September 26, 2009, 411,222 DSUs were outstanding and a compensation expense of $1 million (2009 – nil) was recorded under this plan. 

  

			
		  	19











			
	Notes to Consolidated Financial Statements	  	

  


	12.	GUARANTEES, COMMITMENTS AND CONTINGENCIES 


GUARANTEES 
 The Company and certain of
its subsidiaries have granted irrevocable letters of credit, issued by high rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. The Company has not recorded any
additional liability with respect to these guarantees, as the Company does not expect to make any payments in excess of what is recorded in the Company’s financial statements. The letters of credit mature at various dates in fiscal 2011.

 LUMBER DUTIES AND EXPORT TAXES 
 Effective October 12, 2006, the governments of Canada and the United States implemented an agreement for the settlement of the softwood lumber dispute. The Softwood Lumber Agreement (SLA) requires
that an export tax be collected by the Government of Canada, which is based on the price and volume of lumber shipped. The SLA had an effective date of October 1 2, 2006, at which time the U.S. Department of Commerce (USDOC) revoked all
existing countervailing and antidumping duty orders on softwood lumber shipped to the U.S. from Canada. 
 COMMITMENTS 

The Company has entered into operating leases for property, plant and equipment for expected cash outflows of $16 million. Outflows for the five years
following September 25, 2010, are as follows: 
  

					
	 2011
	  	 	$ 4	  
	 2012
	  	 	4	  
	 2013
	  	 	2	  
	 2014
	  	 	2	  
	 2015
	  	 	1	  

 CONTINGENCIES 

The Company is party to claims and lawsuits, which are being contested. Management believes that the outcome of these claims and lawsuits will not have a
material adverse effect on the Company’s financial condition, earnings or liquidity. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	13.	OTHER ITEMS 

 2010 

During the September 2010 quarter, the Company incurred a net charge of $7 million relating to the permanent closure of its newsprint mill located in Pine
Falls, Manitoba. The write-down of assets for $13 million and the accrual for severances and other for $10 million were partially offset by the recognition of a curtailment gain in employee future benefits totalling $16 million (note 1 6).

 On May 7, 2010, the Company finalized the sale of the kraft pulp mills located in Tarascon and Saint-Gaudens, France to Paper Excellence
B.V. and recorded a gain of $12 million. Proceeds amounted to 66 million euros ($88 million) for the shares. Total proceeds of $88 million were reduced by $2 million for cash balance left in the two mills. Approximately 4 million euros ($6
million) of this amount will be held in escrow with the Company’s counsel until May 2011 to secure certain undertakings made by the Company. Paper Excellence B.V. also assumed 31 million euros ($41 million) of debt. 

The following table provides information related to Balance Sheet items of the two pulp mills at the time of sale: 

 

					
	 Current assets
	  	$	 107	  
	 Long-term assets
	  	 	92	  
	 Current liabilities
	  	 	(61	) 
	 External debt obligations
	  	 	(41	) 
	 Income taxes
	  	 	(12	) 
	 Employee future benefits and other
	  	 	(11	) 
		  	 	 	 
		  	$	74	  
		  	 	 	 

 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 September, June and March 2010 quarters amounted to $2 million, $2 million and $3 million, respectively. 

In April 2009, the Company sold the St. Francisville, Louisiana, coated paper mill facility and related equipment to West Feliciana Acquisition, LLC
(WFA). The paper mill had been idle since July 2007. A portion of the consideration received by the Company included two US $5 million interest bearing notes. Principal payments on the notes were due on various dates beginning in March 2011 and
ending in March 2016. On January 17, 2010, WFA filed for relief under Chapter 11 of the U.S. Bankruptcy Code. It is unlikely that the Company will recover any portion of the interest-bearing notes and, as a result, a charge of $12 million
relating to these notes has been recorded. 
 During the March 2010 quarter, the Company completed the sale of a number of land properties and
recorded a gain of $1 million. 
 During the December 2009 quarter, the Company completed the sale of a number of land properties and recorded a
gain of $1 million. 

  

			
		  	21











			
	Notes to Consolidated Financial Statements	  	

  


	13.	OTHER ITEMS (CONTINUED) 

 2009

 During fiscal 2009, the Company recognized an impairment charge of $2 million related to the newsprint facility in Pine Falls, Manitoba.
These assets are included in the Paper segment. 
 During the September 2009 quarter, the Company recorded a net gain of $5 million on the sale
of its 50% equity interest in Temrex Forest Products LP (Temrex). The Temrex operation included two sawmills in the Gaspe, Quebec region. 
 On
February 1 3, 2009, Marathon Pulp Inc. (MPI) filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act. As a result of these filings, the Company concluded that, based on Canadian GAAP, it had lost joint control
over MPI and ceased to apply the proportionate consolidation method to account for its 50% interest in MPI. As of the most recent reporting date of January 31, 2009, the Company’s proportionate share of net liabilities exceeded the net
assets by $8 million, resulting in a gain from the change in accounting for this investment. The Company absorbed a charge of $4 million relating to trade amounts owing from MPI. The net effect overall was a $4 million gain. 

During the March 2009 quarter, the Company announced the permanent closure of the Mattawa, Ontario, sawmill. The facility had been idled since July 2008.
The Company recorded a charge of $2 million relating to severance and other relating items. 
 Also during the March 2009 quarter, the Company
announced the reduction of a number of staff positions and recorded a charge of $2 million for related severance costs. The Company also settled certain product liabilities claims relating to a U.S. chemical subsidiary. Costs associated with this
claim, net of insurance proceeds, are estimated at $1 million. Finally, the Company recorded a net gain of $1 million on the sale of a previously written-off paper machine. 
 The following table provides an analysis of the other items by business segment of the Company: 
  

																									
	 	  	2010	 
	 	  	Forest
Products	 	  	Pulp	 	 	Paper	 	  	Chemicals	 	  	Corporate
and other	 	  	Consolidated	 
	 Gain on sales - other
	  	$	(2)	  	  	$	(12	) 	 	$	—  	  	  	$	—  	  	  	$	 12	  	  	$	(2)	  
	 Other
	  	 	—  	  	  	 	—  	  	 	 	11	  	  	 	—  	  	  	 	7	  	  	 	18	  
	 Severance, other labour-related and idling costs
	  	 	—  	  	  	 	—  	  	 	 	(4)	  	  	 	—  	  	  	 	—  	  	  	 	(4)	  
		  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	(2)	  	  	$	(12)	  	 	$	7	  	  	$	—  	  	  	$	19	  	  	$	12	  
		  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	13.	OTHER ITEMS (CONTINUED) 

  

																									
	 	  	2009	 
	 	  	Forest
Products	 	 	Pulp	 	 	Paper	 	  	Chemicals	 	  	Corporate
and other	 	 	Consolidated	 
	 Gain on sales - other
	  	$	(5	) 	 	$	—  	  	 	$	—  	  	  	$	—  	  	  	$	(1	) 	 	$	(6	) 
	 Other
	  	 	—  	  	 	 	(4	) 	 	 	2	  	  	 	1	  	  	 	—  	  	 	 	(1	) 
	 Severance, other labour-related and idling costs
	  	 	2	  	 	 	—  	  	 	 	—  	  	  	 	—  	  	  	 	2	  	 	 	4	  
		  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 
		  	$	(3	) 	 	$	(4	) 	 	$	2	  	  	$	1	  	  	$	1	  	 	$	(3	) 
		  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 

  

	14.	INTEREST, FOREIGN EXCHANGE AND OTHER 


									
	 	  	2010	 	 	2009	 
	 Interest on long-term debt
	  	$	27	  	 	$	33	  
	 Interest on short-term debt
	  	 	3	  	 	 	4	  
		  	 	 	 	 	 	 	 
		  	 	30	  	 	 	37	  
		  	 	 	 	 	 	 	 
	 Derivative financial instruments gain
	  	 	—  	  	 	 	(2	) 
	 Exchange gain on conversion of integrated foreign subsidiaries
	  	 	(1	) 	 	 	(5	) 
	 Other foreign exchange items
	  	 	15	  	 	 	(11	) 
	 Term loan prepayment premium
	  	 	6	  	 	 	—  	  
	 Bank charges and other
	  	 	2	  	 	 	3	  
		  	 	 	 	 	 	 	 
		  	 	22	  	 	 	(15	) 
		  	 	 	 	 	 	 	 
		  	$	52	  	 	$	22	  
		  	 	 	 	 	 	 	 

 Foreign exchange items included in the financial
statements are as follows: 
  

									
	 	  	2010	 	 	2009	 
	 Exchange loss (gain) on long-term debt
	  	$	(27	) 	 	$	21	  
	 Exchange gain on conversion of integrated foreign subsidiaries
	  	 	(1	) 	 	 	(5	) 
	 Other foreign exchange items
	  	 	15	  	 	 	(11	) 
		  	 	 	 	 	 	 	 
		  	$	(13	) 	 	$	5	  
		  	 	 	 	 	 	 	 


  

			
		  	23











			
	Notes to Consolidated Financial Statements	  	

  


	15.	INCOME TAXES 

 The tax effects of the
significant components of temporary differences that give rise to future income tax assets and liabilities are as follows: 
  

									
	 	  	2010	 	 	2009	 
	 Future income tax assets:
	  				 			
	 Non-capital loss carry-forwards and pool of deductible scientific research and development expenditures
	  	$	386	  	 	$	394	  
	 Fixed assets
	  	 	34	  	 	 	23	  
	 Employee future benefits
	  	 	49	  	 	 	63	  
	 Capital loss carry-forwards
	  	 	7	  	 	 	—  	  
	 Financing charges
	  	 	7	  	 	 	12	  
	 Other
	  	 	18	  	 	 	14	  
	 Valuation allowance
	  	 	(472	) 	 	 	(490	) 
		  	 	 	 	 	 	 	 
		  	 	29	  	 	 	16	  
	 Future income tax liabilities:
	  				 			
	 Other
	  	 	(2	) 	 	 	(16	) 
		  	 	 	 	 	 	 	 
	 Net future income tax assets
	  	$	27	  	 	$	—  	  
		  	 	 	 	 	 	 	 

 Certain subsidiaries have accumulated the following losses and deductions for income tax purposes, which may be carried
forward to reduce taxable income and taxes payable in future years: 
  

									
	 	  	Amounts	 	  	Expiring dates	 
	 Non-capital loss carried forward for:
	  				  			
	 Canadian subsidiaries
	  	$	995	  	  	 	2014 to 2030	  
	 U.S. subsidiaries
	  	 	19	  	  	 	2028 to 2030	  
	 French subsidiaries
	  	 	66	  	  	 	Unlimited	  
	 Pool of deductible scientific research and experimental development
	  	 	364	  	  	 	Unlimited	  


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	15.	INCOME TAXES (CONTINUED) 

 The
reconciliation of income taxes calculated at the statutory rate to the actual tax provision is as follows: 
  

									
	 	  	2010	 	 	2009	 
	 Earnings (loss) from continuing operations before income taxes and non-controlling interest
	  	$	39	  	 	$	(221	) 
		  	 	 	 	 	 	 	 
	 Income tax expense (recovery) based on combined federal and provincial income tax rates of 29.8% (2009 - 30.9%)
	  	$	12	  	 	$	(68	) 
		  	 	 	 	 	 	 	 
	 Increase (decrease) resulting from:
	  				 			
	 Future income tax adjustment due to rate enactments
	  	 	2	  	 	 	—  	  
	 Change in valuation allowance
	  	 	(20	) 	 	 	62	  
	 Difference in statutory income tax rate
	  	 	4	  	 	 	—  	  
	 Permanent differences:
	  				 			
	 Non-taxable portion of exchange loss (gain) on long-term debt
	  	 	(3	) 	 	 	2	  
	 Non-deductible (non-taxable) exchange loss (gain) on conversion of integrated foreign subsidiaries
	  	 	(10	) 	 	 	3	  
	 Other permanent differences
	  	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 
		  	 	(27	) 	 	 	67	  
		  	 	 	 	 	 	 	 
	 Income tax recovery
	  	$	(15	) 	 	$	(1	) 
		  	 	 	 	 	 	 	 
	 Income taxes
	  				 			
	 Current
	  	 	—  	  	 	 	—  	  
	 Future
	  	 	(15	) 	 	 	(1	) 
		  	 	 	 	 	 	 	 
	 Income tax recovery
	  	$	(15	) 	 	$	(1	) 
		  	 	 	 	 	 	 	 

 During the year, the Company benefited from a $19 million favourable adjustment relating to the recognition of future
tax assets of the Company’s remaining operations in France as it has been determined that the future realization of these assets is more likely than not to occur. 

  

			
		  	25











			
	Notes to Consolidated Financial Statements	  	

  


	16.	EMPLOYEE FUTURE BENEFITS 

 DEFINED
CONTRIBUTION PENSION PLANS 
 The Company contributes to defined contribution pension plans, provincial and labour sponsored pension plans,
group registered retirement savings plans, deferred profit sharing plans, and 401(k) plans. The pension expense under these plans is equal to the Company’s contribution. The 2010 pension expense was $9 million (2009 - $8 million).

 DEFINED BENEFIT PENSION PLANS 

The Company has several defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 2000, participate in
defined contribution pension plans. Some of the defined benefit pension plans are contributory. The pension expense and the obligation related to the defined benefit pension plans are actuarially determined using management’s most probable
assumptions. 
 OTHER EMPLOYEE FUTURE DEFINED BENEFIT PLANS 
 The Company offers post-retirement life insurance, healthcare and dental care plans to some of its retirees. The Company offers post-employment healthcare and dental care plans to disabled employees. The
Company also assumes post-employment life insurance coverage of some of its disabled employees. 
 The post-retirement and post-employment
benefit expenses and the obligations related to the defined benefit plans are actuarially determined using management’s most probable assumptions. 
 Actuarial valuations of these plans for accounting purposes are conducted on a triennial basis unless there are significant changes affecting the plans. The latest actuarial valuations were conducted as
at January 1, 2010 or May 1, 2009. 
 The post-retirement and post-employment benefit plans are unfunded.  

COMPANY CONTRIBUTIONS 
 Total cash
payments for employee future benefits for 2010, consisted of cash contributed by the Company to its funded pension plans, cash payments directly to beneficiaries for its unfunded benefit plans and cash contributed to its defined contribution plans
including multi-employer pension plans, were $44 million (2009 - $45 million). 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


DESCRIPTION OF FUND ASSETS 
 The assets
of the registered defined benefit pension plans are held by an independent trustee and accounted for separately in the Company’s pension funds. Based on the fair value of assets held at June 30, 2010, the defined benefit pension plan
assets were comprised of 1% (1% in 2009) in cash and short-term investments, 5% (5% in 2009) in real estate, 45% (44% in 2009) in bonds and 49% (50% in 2009) in Canadian, U.S. and foreign equity. 

FUNDING POLICY 
 The Company’s
funding policy for registered defined benefit pension plans is to contribute annually the amount required to provide for benefits earned in the year and to fund past service obligations over periods not exceeding those permitted by the applicable
regulatory authorities. Actuarial valuations for funding purposes are conducted on a triennial basis, unless required earlier by pension legislation or as deemed appropriate by management from time to time. The latest funding actuarial valuations
were conducted for seven plans on December 31, 2009, three plans on December 31, 2008, and five plans on December 31, 2007. The two pension plans related to discontinued operations were last valued on January 1, 2010. 

INVESTMENT POLICY 
 The Company follows a
disciplined investment strategy, which provides diversification of investments by asset class, foreign currency, sector or company. The Corporate Governance and Human Resources Committee of the Board of Directors has approved an investment policy
that establishes long-term asset mix targets based on a review of historical returns achieved by world-wide investment markets. Investment managers may deviate from these targets to the extent permitted by the investment policy. Their performance is
evaluated in relation to the market performance on the target mix. 
 INFORMATION ABOUT THE COMPANY’S DEFINED BENEFIT PLANS IN AGGREGATE

 The Company measures its accrued benefit obligation and the fair value of plan assets for accounting purposes as at June 30 of each
year. 
 During the year, significant lump sum payments to employees were paid from the Pine Falls pension plans having for effect of reducing
benefit obligations (obligations being settled) by $18 million (2009 - $12 million) and benefit plan assets (settlement payments) by $15 million (2009 - $15 million). Benefit obligations were also reduced by $45 million relating to the
purchase of annuities for a partial windup group. As a result, benefit plan assets reduced by $42 million. 

  

			
		  	27











			
	Notes to Consolidated Financial Statements	  	

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


INFORMATION ABOUT THE COMPANY’S DEFINED BENEFIT PLANS IN AGGREGATE (CONTINUED) 
 The following tables present the change in the accrued benefit obligation for the defined benefit plans as calculated by independent actuaries and the change in the fair value of plan assets: 

Change in accrued benefit obligations for defined benefit plans: 
  

																	
	 	  	Pension plans	 	 	Other benefit plans	 
	 	  	2010	 	 	2009	 	 	2010	 	 	2009	 
	 Accrued benefit obligation, at beginning of year
	  	$	828	  	 	$	907	  	 	$	55	  	 	$	59	  
	 Current service cost
	  	 	11	  	 	 	15	  	 	 	1	  	 	 	1	  
	 Interest cost
	  	 	46	  	 	 	49	  	 	 	3	  	 	 	3	  
	 Employee contributions
	  	 	2	  	 	 	3	  	 	 	—  	  	 	 	—  	  
	 Benefits paid
	  	 	(48	) 	 	 	(56	) 	 	 	(3	) 	 	 	(3	) 
	 Divestitures
	  	 	(9	) 	 	 	(44	) 	 	 	(1	) 	 	 	(3	) 
	 Plan amendments
	  	 	1	  	 	 	—  	  	 	 	—  	  	 	 	(4	) 
	 Actuarial loss (gain)
	  	 	54	  	 	 	(41	) 	 	 	(3	) 	 	 	—  	  
	 Foreign exchange rate changes and other adjustments
	  	 	(9	) 	 	 	7	  	 	 	—  	  	 	 	—  	  
	 Decrease in obligation due to curtailment
	  	 	(24	) 	 	 	—  	  	 	 	(3	) 	 	 	—  	  
	 Obligations being settled
	  	 	(66	) 	 	 	(12	) 	 	 	—  	  	 	 	—  	  
	 Post-employment and other
	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	2	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Accrued benefit obligation, at end of year
	  	$	786	  	 	$	828	  	 	$	49	  	 	$	55	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 Change in fair value of plan assets for defined benefit plans 

 

																	
	 	  	Pension plans	 	 	Other benefit plans	 
	 	  	2010	 	 	2009	 	 	2010	 	 	2009	 
	 Fair value of defined benefit plan assets, at beginning of year
	  	$	606	  	 	$	736	  	 	$	—  	  	 	$	—  	  
	 Actual return on plan assets
	  	 	57	  	 	 	(71	) 	 	 	—  	  	 	 	—  	  
	 Employer contributions
	  	 	28	  	 	 	38	  	 	 	3	  	 	 	3	  
	 Employee contributions
	  	 	2	  	 	 	3	  	 	 	—  	  	 	 	—  	  
	 Benefits paid
	  	 	(48	) 	 	 	(56	) 	 	 	(3	) 	 	 	(3	) 
	 Divestitures
	  	 	—  	  	 	 	(36	) 	 	 	—  	  	 	 	—  	  
	 Foreign exchange rate changes and other adjustments
	  	 	(5	) 	 	 	7	  	 	 	—  	  	 	 	—  	  
	 Settlement payments
	  	 	(60	) 	 	 	(15	) 	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Fair value of defined benefit plan assets, at end of year
	  	$	580	  	 	$	606	  	 	$	—  	  	 	$	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


FUNDED STATUS 
 The following table
presents the difference between the fair value of plan assets and the actuarially determined accrued benefit obligation as at June 30, 2010 and June 30, 2009, for defined benefit plans. This difference is also referred to as either the
deficit or surplus, as the case may be, or the funded status of the plans. 
 The table further reconciles the amount of the surplus or deficit
(funded status) to the net amount recognized in the consolidated balance sheets. The difference between the funded status and the net amount recognized in the consolidated balance sheets, in accordance with Canadian GAAP, represents the portion of
the surplus or deficit not yet recognized for accounting purposes. This approach allows for a gradual recognition of changes in accrued benefit obligations and plan performance as described in Note 1. 

Reconciliation of funded status for defined benefit plans: 
  

																	
	 	  	Pension plans	 	 	Other benefit plans	 
	 	  	2010	 	 	2009	 	 	2010	 	 	2009	 
	 Fair value of plan assets
	  	$	580	  	 	$	606	  	 	$	—  	  	 	$	—  	  
	 Accrued benefit obligation
	  	 	(786	) 	 	 	(828	) 	 	 	(49	) 	 	 	(55	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Plan deficit
	  	 	(206	) 	 	 	(222	) 	 	 	(49	) 	 	 	(55	) 
	 Employer contribution after measurement date (June 30)
	  	 	8	  	 	 	5	  	 	 	1	  	 	 	1	  
	 Unamortized past service costs
	  	 	1	  	 	 	—  	  	 	 	3	  	 	 	3	  
	 Unamortized net actuarial loss (gain)
	  	 	73	  	 	 	50	  	 	 	(12	) 	 	 	(8	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Accrued benefit liability
	  	$	(124	) 	 	$	(167	) 	 	$	(57	) 	 	$	(59	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 Amounts recognized in the consolidated balance sheets for defined benefit plans: 

 

																	
	 	  	Pension plans	 	 	Other benefit plans	 
	 	  	2010	 	 	2009	 	 	2010	 	 	2009	 
	 Deferred pension costs
	  	$	6	  	 	$	2	  	 	$	—  	  	 	$	—  	  
	 Accrued benefit liability
	  	 	(130	) 	 	 	(169	) 	 	 	(57	) 	 	 	(59	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Accrued benefit liability
	  	$	(124	) 	 	$	(167	) 	 	$	(57	) 	 	$	(59	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  

			
		  	29











			
	Notes to Consolidated Financial Statements	  	

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


FUNDED STATUS (CONTINUED) 
 The accrued
benefit obligations in excess of fair value of plan assets at year-end with respect to defined benefit plans that are not fully funded are as follows: 
  

																	
	 	  	Pension plans	 	 	Other benefit plans	 
	 	  	2010	 	 	2009	 	 	2010	 	 	2009	 
	 Fair value of plan assets
	  	$	579	  	 	$	605	  	 	$	—  	  	 	$	—  	  
	 Accrued benefit obligation
	  	 	(785	) 	 	 	(827	) 	 	 	(49	) 	 	 	(55	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Plan deficit
	  	$	(206	) 	 	$	(222	) 	 	$	(49	) 	 	$	(55	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 COMPONENTS OF NET PERIODIC COST FOR DEFINED BENEFIT PLANS 
 Components of net periodic benefit cost for defined benefit pension plans: 
  

									
	 	  	2010	 	 	2009	 
	 Current service cost
	  	$	11	  	 	$	15	  
	 Interest cost
	  	 	46	  	 	 	49	  
	 Actual return on plan assets
	  	 	(57	) 	 	 	71	  
	 Actuarial loss (gain)
	  	 	54	  	 	 	(41	) 
	 Curtailment gain (note 13)
	  	 	(15	) 	 	 	—  	  
	 Settlement loss (gain)
	  	 	(2	) 	 	 	3	  
	 Plan amendments and other
	  	 	1	  	 	 	—  	  
		  	 	 	 	 	 	 	 
	 Net expense before adjustments to recognize the long-term nature of the plans
	  	 	38	  	 	 	97	  
	 Difference between expected and actual return on plan assets
	  	 	17	  	 	 	(119	) 
	 Difference between net actuarial loss (gain) and actuarial loss (gain)
	  	 	(54	) 	 	 	41	  
	 Difference between amortization of past service costs for the year and actual plan amendments for the year
	  	 	(1	) 	 	 	—  	  
		  	 	 	 	 	 	 	 
	 Net periodic benefit cost
	  	$	  —  	  	 	$	19	  
		  	 	 	 	 	 	 	 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


COMPONENTS OF NET PERIODIC COST FOR DEFINED BENEFIT PLANS (CONTINUED) 
 Components of net periodic benefit cost for other defined benefit plans: 
  

									
	 	  	2010	 	 	2009	 
	 Current service cost
	  	$	1	  	 	$	1	  
	 Interest cost
	  	 	3	  	 	 	3	  
	 Curtailment gain (note 13)
	  	 	(1	) 	 	 	—  	  
	 Post-employment
	  	 	—  	  	 	 	2	  
	 Plan amendments and other
	  	 	—  	  	 	 	(4	) 
	 Actuarial gain
	  	 	(3	) 	 	 	—  	  
		  	 	 	 	 	 	 	 
	 Net expense (income) before adjustments to recognize the long-term nature of the plans
	  	 	—  	  	 	 	2	  
	 Difference between amortization of past service costs for the year and actual plan amendments for the year
	  	 	1	  	 	 	4	  
	 Difference between net actuarial loss (gain) and actuarial loss (gain)
	  	 	2	  	 	 	(1	) 
		  	 	 	 	 	 	 	 
	 Net periodic benefit cost
	  	$	3	  	 	$	5	  
		  	 	 	 	 	 	 	 

 ASSUMPTIONS 
 Weighted average significant assumptions for defined benefit pension plans: 
  

									
	 	  	2010	 	  	2009	 
	 Accrued benefit obligation at end of year:
	  				  			
	 Discount rate
	  	 	5.12%	  	  	 	5.73%	  
	 Rate of compensation increase
	  	 	2.50%	  	  	 	2.61%	  
	 Net periodic benefit cost for the year:
	  				  			
	 Discount rate
	  	 	5.73%	  	  	 	5.56%	  
	 Rate of compensation increase
	  	 	2.61%	  	  	 	3.03%	  
	 Expected long-term return on assets
	  	 	6.88%	  	  	 	6.77%	  


  

			
		  	31











			
	Notes to Consolidated Financial Statements	  	

  


	16.	EMPLOYEE FUTURE BENEFITS (CONTINUED) 


ASSUMPTIONS (CONTINUED) 
 Weighted average
significant assumptions for other defined benefit plans: 
  

									
	 	  	2010	 	 	2009	 
	 Accrued benefit obligation at end of year:
	  				 			
	 Discount rate
	  	 	5.12	% 	 	 	5.48	% 
	 Rate of compensation increase
	  	 	2.50	% 	 	 	2.50	% 
	 Net periodic benefit cost for the year:
	  				 			
	 Discount rate
	  	 	5.48	% 	 	 	5.56	% 
	 Rate of compensation increase
	  	 	2.50	% 	 	 	3.00	% 
	 Assumed healthcare cost trend rate at end of year:
	  				 			
	 Initial healthcare cost trend
	  	 	8.00	% 	 	 	8.39	% 
	 Annual rate of decline in trend rate
	  	 	0.50	% 	 	 	0.50	% 
	 Ultimate healthcare cost trend rate
	  	 	5.00	% 	 	 	5.00	% 
	 Effect of change in healthcare cost trend rate (1% increase):
	  				 			
	 Total of service cost and interest cost
	  	$	—  	  	 	$	—  	  
	 Accrued benefit obligation
	  	$	3	  	 	$	4	  
	 Effect of change in healthcare cost trend rate (1% decrease):
	  				 			
	 Total of service cost and interest cost
	  	$	—  	  	 	$	—  	  
	 Accrued benefit obligation
	  	$	(3	) 	 	$	(3	) 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	17.	FINANCIAL INSTRUMENTS 

 FAIR VALUE

 The carrying amount of cash and cash equivalents, derivative financial instruments, 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 are as follows: 
  

									
	 	  	2010	 	  	2009	 
	 Carrying value
	  	$	288	  	  	$	402	  
	 Fair value
	  	 	301	  	  	 	402	  

 Cash and cash equivalents and the
derivative financial instruments have been valued in accordance with Level 1 of the fair value hierarchy which is based on unadjusted quoted prices in an active market. 
 FINANCIAL RISK MANAGEMENT 
 OVERVIEW 

The Company has exposure to the following risks from its use of financial instruments: 

 

	 	•	 	 Credit risk 


  

	 	•	 	 Liquidity risk 


  

	 	•	 	 Market risk 


  

	 	•	 	 Foreign currency rate risk 


  

	 	•	 	 Interest rate risk 


  

	 	•	 	 Commodity price and operational risk 


 The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management policy. The policy defines the method by which the Company manages its risk
through properly and prudently administering the Company’s financial assets, liabilities and derivatives. Internal Audit measures the adequacy of the business control systems through the execution of an Internal Audit Plan approved by the Audit
Committee. 

  

			
		  	33











			
	Notes to Consolidated Financial Statements	  	

  


	17.	FINANCIAL INSTRUMENTS (CONTINUED) 


CREDIT RISK MANAGEMENT 
 Credit risk
arises from the possibility that entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. The Company does not have a significant exposure to any individual customer or
counterparty. As required in the Risk Management Policy, the Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. All credit limits are subject
to evaluation and revision at any time based on changes in levels of creditworthiness and must be reviewed at least once per year. Sales orders cannot be processed unless a credit limit has been properly approved. The Company may require payment
guarantees, such as letters of credit, or obtain credit insurance coverage. Bad debt write-offs have been insignificant in the past. The allowance for doubtful accounts for the Company, as at September 25, 2010, was $1 million (2009 - $2
million). 
 EXPOSURE TO CREDIT RISK 
 The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: 

 

									
	 	  	2010	 	  	2009	 
	 Loans and receivables
	  	$	236	  	  	$	300	  
	 Cash, cash equivalents and cash held in trust
	  	 	74	  	  	 	105	  

 The maximum exposure to credit risk
for trade accounts receivable as at September 25,2010 and September 26, 2009, by geographical region was as follows: 
  

									
	 	  	2010	 	 	2009	 
	 Canada
	  	$	23	  	 	$	23	  
	 United States
	  	 	65	  	 	 	54	  
	 Pacific Rim and India
	  	 	27	  	 	 	31	  
	 United Kingdom, Europe and other
	  	 	48	  	 	 	97	  
		  	 	 	 	 	 	 	 
		  	 	163	  	 	 	205	  
	 Allowance for doubtful accounts
	  	 	(1	) 	 	 	(2	) 
		  	 	 	 	 	 	 	 
	 Trade receivables net
	  	 	162	  	 	 	203	  
	 Loan receivable - Temlam (notes 7 and 14)
	  	 	—  	  	 	 	23	  
	 Other receivables including input tax credits
	  	 	47	  	 	 	57	  
		  	 	 	 	 	 	 	 
	 Accounts receivable
	  	$	209	  	 	$	283	  
		  	 	 	 	 	 	 	 


  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	17.	FINANCIAL INSTRUMENTS (CONTINUED) 


EXPOSURE TO CREDIT RISK (CONTINUED) 
 The
aging of trade accounts receivable was as follows: 
  

																	
	 	  	2010	 	  	2009	 
	 	  	Gross	 	  	Allowance	 	  	Gross	 	  	Allowance	 
	 Not past due
	  	$	150	  	  	$	—  	  	  	$	179	  	  	$	—  	  
	 Past due 0-30 days
	  	 	8	  	  	 	—  	  	  	 	20	  	  	 	—  	  
	 Past due 31-60 days
	  	 	—  	  	  	 	—  	  	  	 	4	  	  	 	—  	  
	 Past due 61-90 days
	  	 	3	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 More than 90 days
	  	 	2	  	  	 	1	  	  	 	2	  	  	 	2	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	163	  	  	$	1	  	  	$	205	  	  	$	2	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 

 The movement in the allowance for doubtful accounts receivable in respect to trade accounts receivable was as follows:

  

									
	 	  	2010	 	 	2009	 
	 Opening balance
	  	$	2	  	 	$	4	  
	 Bad debt recognized (written off)
	  	 	(1	) 	 	 	(2	) 
		  	 	 	 	 	 	 	 
	 Ending balance
	  	$	1	  	 	$	2	  
		  	 	 	 	 	 	 	 

 LIQUIDITY RISK MANAGEMENT 
 Liquidity risk arises from the possibility that the Company will not be able to meet its financial obligations as they fall due. The Company has an objective of maintaining liquidity equal to 12 months of
capital expenditures, interest and principal repayments and seasonal working capital requirements, which would require approximately $150 million to $200 million of liquidity. 

  

			
		  	35











			
	Notes to Consolidated Financial Statements	  	

  


	17.	FINANCIAL INSTRUMENTS (CONTINUED) 


EXPOSURE TO 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 as at September 25, 2010, totalled $174 million (2009 - $170 million).
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 non-derivative financial liabilities, including interest payments and excluding the impact of netting agreements: 
  

																													
	 	  	2010	 
	 	  	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
	  	$	269	  	  	$	516	  	  	$	15	  	  	$	15	  	  	$	32	  	  	$	94	  	  	$	360	  
	 Unsecured loans
	  	 	32	  	  	 	36	  	  	 	4	  	  	 	5	  	  	 	9	  	  	 	13	  	  	 	5	  
	 Operating bank loans
	  	 	1	  	  	 	1	  	  	 	1	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Trade and others
	  	 	241	  	  	 	241	  	  	 	241	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	543	  	  	$	794	  	  	$	261	  	  	$	20	  	  	$	41	  	  	$	107	  	  	$	365	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 

 The Company had no derivative financial liabilities at September 25, 2010. It is not expected that the cash flows
included in the maturity analysis could occur significantly earlier, or at significantly different amounts. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	17.	FINANCIAL INSTRUMENTS (CONTINUED) 


FOREIGN CURRENCY RATE RISK MANAGEMENT 

The Company is exposed to currency risk on sales, purchases and long-term debt that are denominated in a currency other than the respective functional
currencies of foreign and domestic operations, primarily the Canadian dollar and euro. The currencies in which these transactions are primarily denominated are Canadian dollar, US dollar and euro. 

The Company’s revenues for most of its products are affected by fluctuations in the relative exchange rates of the Canadian dollar, the US dollar
and the euro. The prices for many products, including those sold in Canada and Europe, are generally driven by US $ reference prices of similar products. The Company generates approximately $1.3 billion of US $ denominated sales annually from its
Canadian and European operations. As a result, any decrease in the value of the US dollar relative to the Canadian dollar and the euro reduces the amount of revenues realized on sales in local currency. In addition, since business units purchase the
majority of their production inputs in local currency, fluctuations in foreign exchange can significantly affect the unit’s relative cost position when compared to competing manufacturing sites in other currency jurisdictions. This could result
in the unit’s inability to maintain its operations during period of low prices and/or demand. 
 SENSITIVITY ANALYSIS 

Based on 2011 planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US dollar versus the
Canadian dollar and the euro. For illustrative purposes, an increase of 1% in the value of the US dollar is assumed. A decrease would have the opposite effects of those shown below: 

 

					
	 Sales increase
	  	$	13	  
	 Cost of sales increase
	  	 	3	  
		  	 	 	 
	 Gross margin
	  	 	10	  
	 Loss on US dollar debt translation
	  	 	3	  
		  	 	 	 
	 Pre-tax earnings increase
	  	$	7	  
		  	 	 	 

 Direct US $ purchases of raw materials, supplies and services provided a partial offset to the impact on sales. This does
not include the potential indirect impact of currency on the cost of items purchased in the local currency. 
 Interest expense on the
Company’s US $ denominated debt provides a small offset to its US $ exposure. To further reduce the impact of fluctuations in the value of the US dollar, the Company has adopted a policy which allows for hedging up to 50% of its anticipated US
$ receipts for up to 36 months in duration. The Company does not currently hold any significant foreign exchange contracts. 

  

			
		  	37











			
	Notes to Consolidated Financial Statements	  	

  


	17.	FINANCIAL INSTRUMENTS (CONTINUED) 


INTEREST RATE RISK MANAGEMENT 
 Interest
rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. 
 SENSITIVITY ANALYSIS 
 Fluctuations of market interest rates have little impact on the
Company’s financial results since the majority of the Company’s debts are fixed rate debts. 
 COMMODITY PRICE AND OPERATIONAL RISK
MANAGEMENT 
 The Company’s financial performance is dependent on the selling prices of its products. The markets for most lumber, pulp
and paper products are cyclical and are influenced by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory
de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial declines in profitability and possibly net losses. The Company may
periodically purchase lumber, pulp and newsprint price hedges to mitigate the impact of price volatility. The Company did not hold any significant product price hedges at September 25, 2010 and September 26, 2009. 

The manufacturing activities conducted by the Company’s operations are subject to a number of risks, including availability and price of fibre and
competitive prices for purchased energy and raw materials. To mitigate the impact of price fluctuations, the Company may periodically purchase hedges. The Company does not currently hold any significant hedges. 

  

			
		  	











			
		  	TEMBEC Consolidated Financial Statements 2010

  


	18.	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 and cash equivalents. Total capitalization includes net debt plus future income taxes, other long-term liabilities, shareholders’ equity, deferred credits and other. 

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 September 25, 2010 and September 26, 2009, was 27% and 42%, respectively. 

 

	19.	COMPARATIVE FIGURES 

 Certain 2009
comparative figures have been reclassified to conform with the financial statement presentation adopted for 2010. 
  

	20.	CHANGE IN COMPOSITION OF REPORTABLE SEGMENTS 

 In December 2010, 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 Note 1. The following provides segment
disclosures for the years ended September 25, 2010 and September 26, 2009, under the new internal reporting structure. 
  

																									
	 	  	2010	 
	 	  	Forest
Products	 	 	Dissolving &
Chemical Pulp	 	 	High-Yield
Pulp	 	 	Paper	 	 	Corporate
and other	 	 	Consolidated	 
	 Sales:
	  				 				 				 				 				 			
	 External
	  	$	346	  	 	$	816	  	 	$	367	  	 	$	348	  	 	$	—  	  	 	$	1,877	  
	 Internal
	  	 	88	  	 	 	39	  	 	 	28	  	 	 	—  	  	 	 	5	  	 	 	160	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	434	  	 	 	855	  	 	 	395	  	 	 	348	  	 	 	5	  	 	 	2,037	  
							
	 Earnings (loss) before the following:
	  	 	(10	) 	 	 	120	  	 	 	47	  	 	 	(2	) 	 	 	(23	) 	 	 	132	  
	 Depreciation and amortization
	  	 	16	  	 	 	27	  	 	 	10	  	 	 	3	  	 	 	—  	  	 	 	56	  
	 Other items (note 13)
	  	 	(2	) 	 	 	(12	) 	 	 	—  	  	 	 	7	  	 	 	19	  	 	 	12	  
	 Operating earnings (loss) from continuing operations
	  	 	(24	) 	 	 	105	  	 	 	37	  	 	 	(12	) 	 	 	(42	) 	 	 	64	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	7	  	 	 	12	  	 	 	3	  	 	 	3	  	 	 	—  	  	 	 	25	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Identifiable assets – excluding cash and cash equivalents
	  	 	241	  	 	 	444	  	 	 	213	  	 	 	123	  	 	 	15	  	 	 	1,036	  
	 Cash and cash equivalents
	  				 				 				 				 				 	 	68	  
		  				 				 				 				 				 	 	 	 
	 Total assets
	  				 				 				 				 				 	$	1,104	  
		  				 				 				 				 				 	 	 	 
		  				 				 				 				 				 			
	 	  	2009	 
	 	  	Forest
Products	 	 	Dissolving &
Chemical Pulp	 	 	High-Yield
Pulp	 	 	Paper	 	 	Corporate
and other	 	 	Consolidated	 
	 Sales:
	  				 				 				 				 				 			
	 External
	  	$	304	  	 	$	800	  	 	$	230	  	 	$	452	  	 	$	—  	  	 	$	1,786	  
	 Internal
	  	 	103	  	 	 	50	  	 	 	28	  	 	 	—  	  	 	 	4	  	 	 	185	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	407	  	 	 	850	  	 	 	258	  	 	 	452	  	 	 	4	  	 	 	1,971	  
							
	 Earnings (loss) before the following:
	  	 	(67	) 	 	 	(33	) 	 	 	(18	) 	 	 	27	  	 	 	(17	) 	 	 	(108	) 
	 Depreciation and amortization
	  	 	24	  	 	 	36	  	 	 	10	  	 	 	3	  	 	 	—  	  	 	 	73	  
	 Other items (note 13)
	  	 	(3	) 	 	 	(3	) 	 	 	—  	  	 	 	2	  	 	 	1	  	 	 	(3	) 
	 Operating earnings (loss) from continuing operations
	  	 	(88	) 	 	 	(66	) 	 	 	(28	) 	 	 	22	  	 	 	(18	) 	 	 	(178	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net fixed asset additions
	  	 	6	  	 	 	29	  	 	 	3	  	 	 	4	  	 	 	—  	  	 	 	42	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Identifiable assets – excluding cash and cash equivalents
	  	 	252	  	 	 	656	  	 	 	210	  	 	 	127	  	 	 	16	  	 	 	1,261	  
	 Cash and cash equivalents
	  				 				 				 				 				 	 	105	  
		  				 				 				 				 				 	 	 	 
	 Total assets
	  				 				 				 				 				 	$	1,366	  
		  				 				 				 				 				 	 	 	 

  

  

			
		  	39











			
	Notes to Consolidated Financial Statements	  	

  


	20.	CHANGE IN COMPOSITION OF REPORTABLE SEGMENTS (CONTINUED) 

  

																					
	 	  	2010	 
	 	  	Forest
Products	 	  	Dissolving &
Chemical Pulp	 	  	High-Yield
Pulp	 	  	Paper	 	  	Consolidated	 
	 Sales (by final destination):
	  				  				  				  				  			
	 Canada
	  	$	212	  	  	$	81	  	  	$	4	  	  	$	70	  	  	$	367	  
	 United States
	  	 	126	  	  	 	193	  	  	 	4	  	  	 	259	  	  	 	582	  
	 Pacific Rim and Asia
	  	 	6	  	  	 	176	  	  	 	295	  	  	 	—  	  	  	 	477	  
	 Europe and other
	  	 	2	  	  	 	366	  	  	 	64	  	  	 	19	  	  	 	451	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	346	  	  	$	816	  	  	$	367	  	  	$	348	  	  	$	1,877	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
	 	  	 	 
	 	  	2009	 
	 	  	Forest
Products	 	  	Dissolving &
Chemical Pulp	 	  	High-Yield
Pulp	 	  	Paper	 	  	Consolidated	 
	 Sales (by final destination):
	  				  				  				  				  			
	 Canada
	  	$	190	  	  	$	61	  	  	$	—  	  	  	$	75	  	  	$	326	  
	 United States
	  	 	110	  	  	 	203	  	  	 	5	  	  	 	349	  	  	 	667	  
	 Pacific Rim and Asia
	  	 	4	  	  	 	102	  	  	 	178	  	  	 	4	  	  	 	288	  
	 Europe and other
	  	 	—  	  	  	 	434	  	  	 	47	  	  	 	24	  	  	 	505	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
		  	$	304	  	  	$	800	  	  	$	230	  	  	$	452	  	  	$	1,786	  
		  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 
						
	 	  	 	 	  	 	 	  	 	 	  	2010	 	  	2009	 
	 Fixed assets:
	  				  				  				  				  			
	 Canada
	  				  				  				  	$	419	  	  	$	449	  
	 France
	  				  				  				  	 	76	  	  	 	175	  
	 Other
	  				  				  				  	 	3	  	  	 	2	  
		  				  				  				  	 	 	 	  	 	 	 
		  				  				  				  	$	498	  	  	$	626	  
		  				  				  				  	 	 	 	  	 	 	 


  

			
		  	40