##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 000-51826
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
(State or other jurisdiction 
of incorporation or organization)
    
    47-0956945(I.R.S. Employer
Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer þ(Do not check if a smaller reporting company)
Smaller Reporting Company o o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 (Unaudited)




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands of Euros)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assetsCash and cash equivalents
    
    
    85,126
    
    
    
    51,291Receivables
    
    
    101,920
    
    
    
    71,143Inventories (Note 4)
    
    
    112,385
    
    
    
    72,629Prepaid expenses and other
    
    
    11,986
    
    
    
    5,871Total current assets
    
    
    311,417
    
    
    
    200,934Long-term assetsProperty, plant and equipment
    
    
    851,736
    
    
    
    868,558Deferred note issuance and other
    
    
    6,941
    
    
    
    8,186Deferred income tax
    
    
    12,990
    
    
    
    3,426Note receivable
    
    
    1,723
    
    
    
    2,727873,390
    
    
    
    882,897Total assets
    
    
    1,184,807
    
    
    
    1,083,831LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    108,130
    
    
    
    85,185Pension and other post-retirement benefit obligations (Note 7)
    
    
    608
    
    
    
    567Debt (Note 5)
    
    
    25,928
    
    
    
    16,032Total current liabilities
    
    
    134,666
    
    
    
    101,784Long-term liabilitiesDebt (Note 5)
    
    
    790,750
    
    
    
    813,142Unrealized interest rate derivative losses (Notes 6 and 9)
    
    
    63,396
    
    
    
    52,873Pension and other post-retirement benefit obligations (Note 7)
    
    
    19,581
    
    
    
    17,902Capital leases and other
    
    
    10,558
    
    
    
    12,157884,285
    
    
    
    896,074Total liabilities
    
    
    1,018,951
    
    
    
    997,858EQUITYShareholders equityShare capital (Note 8)
    
    
    216,791
    
    
    
    202,844Paid-in capital
    
    
    (4,929
    )
    
    
    (6,082
    )Retained earnings (deficit)
    
    
    (46,245
    )
    
    
    (97,235
    )Accumulated other comprehensive income (loss)
    
    
    26,211
    
    
    
    23,695Total shareholders equity
    
    
    191,828
    
    
    
    123,222Noncontrolling interest (deficit) (Note 10)
    
    
    (25,972
    )
    
    
    (37,249
    )Total equity
    
    
    165,856
    
    
    
    85,973Total liabilities and equity
    
    
    1,184,807
    
    
    
    1,083,831
 
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands of Euros, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009RevenuesPulp
    
    
    224,697
    
    
    
    145,857
    
    
    
    624,111
    
    
    
    422,412Energy
    
    
    9,721
    
    
    
    10,374
    
    
    
    30,783
    
    
    
    32,275234,418
    
    
    
    156,231
    
    
    
    654,894
    
    
    
    454,687Costs and expensesOperating costs
    
    
    162,293
    
    
    
    136,566
    
    
    
    470,977
    
    
    
    417,596Operating depreciation and amortization
    
    
    13,987
    
    
    
    13,385
    
    
    
    41,817
    
    
    
    40,32558,138
    
    
    
    6,280
    
    
    
    142,100
    
    
    
    (3,234
    )Selling, general and administrative expenses
    
    
    6,894
    
    
    
    6,620
    
    
    
    24,944
    
    
    
    19,797Purchase (sale) of emission allowances
    
    
    (167
    )
    
    
    153
    
    
    
    (167
    )
    
    
    (389
    )Operating income (loss)
    
    
    51,411
    
    
    
    (493
    )
    
    
    117,323
    
    
    
    (22,642
    )Other income (expense)Interest expense
    
    
    (17,820
    )
    
    
    (16,085
    )
    
    
    (51,141
    )
    
    
    (48,953
    )Investment income (loss)
    
    
    93
    
    
    
    20
    
    
    
    304
    
    
    
    (3,044
    )Foreign exchange gain (loss) on debt
    
    
    9,927
    
    
    
    3,779
    
    
    
    (4,675
    )
    
    
    4,533Gain (loss) on extinguishment of convertible notes (Note 5)
    
    
    
    
    
    
    
    
    
    
    (929
    )
    
    
    Gain (loss) on derivative instruments (Note 6)
    
    
    485
    
    
    
    (3,327
    )
    
    
    (10,523
    )
    
    
    (10,889
    )Total other income (expense)
    
    
    (7,315
    )
    
    
    (15,613
    )
    
    
    (66,964
    )
    
    
    (58,353
    )Income (loss) before income taxes
    
    
    44,096
    
    
    
    (16,106
    )
    
    
    50,359
    
    
    
    (80,995
    )Income tax benefit (provision)  current
    
    
    (2,227
    )
    
    
    (13
    )
    
    
    (3,750
    )
    
    
    (127
    ) deferred
    
    
    9,382
    
    
    
    70
    
    
    
    9,382
    
    
    
    4,989Net income (loss)
    
    
    51,251
    
    
    
    (16,049
    )
    
    
    55,991
    
    
    
    (76,133
    )Less: net loss (income) attributable to noncontrolling interest
    
    
    (5,116
    )
    
    
    1,937
    
    
    
    (5,001
    )
    
    
    11,195Net income (loss) attributable to common shareholders
    
    
    46,135
    
    
    
    (14,112
    )
    
    
    50,990
    
    
    
    (64,938
    )Net income (loss) per share attributable to common
shareholders (Note 3)Basic
    
    
    1.17
    
    
    
    (0.39
    )
    
    
    1.36
    
    
    
    (1.79
    )Diluted
    
    
    0.82
    
    
    
    (0.39
    )
    
    
    0.93
    
    
    
    (1.79
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss) attributable to common shareholders
    
    
    46,135
    
    
    
    (14,112
    )
    
    
    50,990
    
    
    
    (64,938
    )Retained earnings (deficit), beginning of period
    
    
    (92,380
    )
    
    
    (85,872
    )
    
    
    (97,235
    )
    
    
    (35,046
    )Retained earnings (deficit), end of period
    
    
    (46,245
    )
    
    
    (99,984
    )
    
    
    (46,245
    )
    
    
    (99,984
    )
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    
    51,251
    
    
    
    (16,049
    )
    
    
    55,991
    
    
    
    (76,133
    )Other comprehensive income (loss)Foreign currency translation adjustment
    
    
    (134
    )
    
    
    14,531
    
    
    
    2,809
    
    
    
    23,758Pension income (expense)
    
    
    317
    
    
    
    (41
    )
    
    
    (282
    )
    
    
    (73
    )Unrealized gains (losses) on
securities arising during the period
    
    
    (29
    )
    
    
    42
    
    
    
    (11
    )
    
    
    377Other comprehensive income (loss)
    
    
    154
    
    
    
    14,532
    
    
    
    2,516
    
    
    
    24,062Total comprehensive income (loss)
    
    
    51,405
    
    
    
    (1,517
    )
    
    
    58,507
    
    
    
    (52,071
    )Comprehensive loss (income) attributable
to noncontrolling interest
    
    
    (5,116
    )
    
    
    1,937
    
    
    
    (5,001
    )
    
    
    11,195Comprehensive income (loss) attributable
to common shareholders
    
    
    46,289
    
    
    
    420
    
    
    
    53,506
    
    
    
    (40,876
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    46,135
    
    
    
    (14,112
    )
    
    
    50,990
    
    
    
    (64,938
    )Adjustments to reconcile net income (loss) attributable
to common shareholders to cash flows from operating
activitiesLoss (gain) on derivative instruments
    
    
    (485
    )
    
    
    3,327
    
    
    
    10,523
    
    
    
    10,889Foreign exchange (gain) loss on debt
    
    
    (9,927
    )
    
    
    (3,779
    )
    
    
    4,675
    
    
    
    (4,533
    )Loss (gain) on extinguishment of convertible notes
    
    
    
    
    
    
    
    
    
    
    929
    
    
    
    Depreciation and amortization
    
    
    14,055
    
    
    
    13,447
    
    
    
    42,052
    
    
    
    40,518Accretion expense (income)
    
    
    1,111
    
    
    
    
    
    
    
    2,056
    
    
    
    Noncontrolling interest
    
    
    5,116
    
    
    
    (1,937
    )
    
    
    5,001
    
    
    
    (11,195
    )Deferred income taxes
    
    
    (9,382
    )
    
    
    (70
    )
    
    
    (9,382
    )
    
    
    (4,989
    )Stock compensation expense
    
    
    540
    
    
    
    383
    
    
    
    1,273
    
    
    
    376Pension and other post-retirement expense, net of
funding
    
    
    96
    
    
    
    314
    
    
    
    428
    
    
    
    291Inventory provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,587Other
    
    
    989
    
    
    
    777
    
    
    
    2,836
    
    
    
    (1,198
    )Changes in current assets and liabilitiesReceivables
    
    
    19,591
    
    
    
    4,455
    
    
    
    (26,351
    )
    
    
    29,163Inventories
    
    
    (26,005
    )
    
    
    2,398
    
    
    
    (36,988
    )
    
    
    29,923Accounts payable and accrued expenses
    
    
    1,814
    
    
    
    1,695
    
    
    
    15,146
    
    
    
    9,635Other
    
    
    (4,883
    )
    
    
    (1,597
    )
    
    
    (5,477
    )
    
    
    (963
    )Net cash from (used in) operating activities
    
    
    38,765
    
    
    
    5,301
    
    
    
    57,711
    
    
    
    37,566Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (8,484
    )
    
    
    (3,994
    )
    
    
    (28,876
    )
    
    
    (19,535
    )Proceeds on sale of property, plant and equipment
    
    
    28
    
    
    
    111
    
    
    
    577
    
    
    
    343Cash, restricted
    
    
    
    
    
    
    3,531
    
    
    
    
    
    
    
    13,000Notes receivable
    
    
    216
    
    
    
    333
    
    
    
    711
    
    
    
    574Net cash from (used in) investing activities
    
    
    (8,240
    )
    
    
    (19
    )
    
    
    (27,588
    )
    
    
    (5,618
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (6,211
    )
    
    
    (18,249
    )
    
    
    (14,477
    )
    
    
    (26,499
    )Repayment of capital lease obligations
    
    
    (638
    )
    
    
    (910
    )
    
    
    (2,245
    )
    
    
    (2,128
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    1,869
    
    
    
    856
    
    
    
    11,869Proceeds from (repayment of) credit facilities, net
    
    
    (4,057
    )
    
    
    
    
    
    
    1,493
    
    
    
    (5,550
    )Proceeds from government grants
    
    
    6,778
    
    
    
    546
    
    
    
    17,337
    
    
    
    546Payment of deferred note issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,969
    )Net cash from (used in) financing activities
    
    
    (4,128
    )
    
    
    (16,744
    )
    
    
    2,964
    
    
    
    (23,731
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (3,416
    )
    
    
    637
    
    
    
    748
    
    
    
    606Net increase (decrease) in cash and cash equivalents
    
    
    22,981
    
    
    
    (10,825
    )
    
    
    33,835
    
    
    
    8,823Cash and cash equivalents, beginning of period
    
    
    62,145
    
    
    
    62,100
    
    
    
    51,291
    
    
    
    42,452Cash and cash equivalents, end of period
    
    
    85,126
    
    
    
    51,275
    
    
    
    85,126
    
    
    
    51,275
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Supplemental disclosure of cash flow informationCash paid (received) during the period forInterest
    
    
    17,402
    
    
    
    15,761
    
    
    
    46,435
    
    
    
    46,971Income taxes
    
    
    412
    
    
    
    152
    
    
    
    441
    
    
    
    224Schedule of non-cash investing and financing activitiesAcquisition of production and other equipment
under capital lease obligations
    
    
    429
    
    
    
    153
    
    
    
    959
    
    
    
    269Decrease (increase) in accounts payable relating
to investing activities
    
    
    7,000
    
    
    
    2,464
    
    
    
    1,283
    
    
    
    1,323
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 1. The Company and Summary of Significant Accounting Policies
 Basis of Presentation
      Use of Estimates




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MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 1. The Company and Summary of Significant Accounting Policies (continued)
 Recently Implemented Accounting Standards
  Fair Value Measurements and Disclosures.
 Note 2. Stock-Based Compensation
  Performance Stock




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MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation (continued)
  Restricted Stock
    Stock Options




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss) attributable to common shareholders  basic
    
    
    46,135
    
    
    
    (14,112
    )
    
    
    50,990
    
    
    
    (64,938
    )Interest on convertible notes, net of tax
    
    
    571
    
    
    
    
    
    
    
    2,011
    
    
    
    Net income (loss) attributable to common shareholders 
diluted
    
    
    46,706
    
    
    
    (14,112
    )
    
    
    53,001
    
    
    
    (64,938
    )Net income (loss) per share attributable to common
shareholdersBasic
    
    
    1.17
    
    
    
    (0.39
    )
    
    
    1.36
    
    
    
    (1.79
    )Diluted
    
    
    0.82
    
    
    
    (0.39
    )
    
    
    0.93
    
    
    
    (1.79
    )Weighted average number of common shares outstandingBasic(1)
    
    
    39,446,447
    
    
    
    36,306,027
    
    
    
    37,383,444
    
    
    
    36,293,489Effect of dilutive instrumentsPerformance rights
    
    
    455,609
    
    
    
    
    
    
    
    453,780
    
    
    
    Restricted stock
    
    
    7,220
    
    
    
    
    
    
    
    15,232
    
    
    
    Stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes
    
    
    17,113,010
    
    
    
    
    
    
    
    19,167,690
    
    
    
    Diluted
    
    
    57,022,286
    
    
    
    36,306,027
    
    
    
    57,020,146
    
    
    
    36,293,489
 
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock which
have been issued, but have not vested as at September 30, 2010 and 2009.




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 4. Inventories
 September 30,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    
    48,313
    
    
    
    24,888Finished goods
    
    
    37,629
    
    
    
    24,198Work in process and other
    
    
    26,443
    
    
    
    23,543
    112,385
    
    
    
    72,629
 Note 5. Debt
  September 30,
    
    
    December 31,2010
    
    
    2009Note payable to bank,
included in a total loan
credit facility of
827,950 to finance the
construction related to
the Stendal mill (a)
    
    
    500,657
    
    
    
    514,574Senior notes due February
2013, interest at 9.25%
accrued and payable
semi-annually, unsecured
(b)
    
    
    227,924
    
    
    
    216,299Subordinated convertible
notes due October 2010,
interest at 8.5% accrued
and payable semi-annually
(c)
    
    
    1,673
    
    
    
    16,749Subordinated convertible
notes due January 2012,
interest at 8.5% accrued
and payable semi-annually
(d)
    
    
    33,129
    
    
    
    26,160Credit agreement with a
lender with respect to a
revolving credit facility
of C$40 million (e)
    
    
    18,563
    
    
    
    16,000Loan payable to the
noncontrolling
shareholder of the
Stendal mill (f)
    
    
    30,925
    
    
    
    35,881Credit agreement with a
bank with respect to a
revolving credit facility
of 25,000 (g)
    
    
    
    
    
    
    Investment loan agreement
with a lender with
respect to the wash press
project at the Rosenthal
mill of 4,351 (h)
    
    
    3,807
    
    
    
    3,511Credit agreement with a
bank with respect to a
revolving credit facility
of 3,500 (i)
    
    
    
    
    
    
    816,678
    
    
    
    829,174Less: current portion
    
    
    (25,928
    )
    
    
    (16,032
    )Debt, less current portion
    
    
    790,750
    
    
    
    813,142
  Matures
    
    Amount2010
    
    
    1,6732011
    
    
    24,2552012
    
    
    58,8002013(1)
    
    
    287,5752014
    
    
    40,543Thereafter
    
    
    403,832
    816,678
 
 (1)
    
    Includes revolving credit facility principal amounts totalling 18,563.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
  (a)
    
    Note payable to bank, included in a total loan facility of 827,950 to finance the
construction related to the Stendal mill (Stendal Loan Facility), interest at rates varying
from Euribor plus 0.90% to Euribor plus 1.50% (rates on amounts of borrowing at September 30,
2010 range from 2.04% to 2.72%), principal due in required installments beginning September
30, 2006 until September 30, 2017, collateralized by the assets of the Stendal mill, with 48%
and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt,
respectively, of up to 455,657 of outstanding principal, subject to a debt service reserve
account required to pay amounts due in the following twelve months under the terms of the
Stendal Loan Facility; payment of dividends is only permitted if certain cash flow
requirements are met.On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan
Facility. The amendment deferred approximately 164,000 of scheduled principal payments until
the maturity date, September 30, 2017, including approximately 20,000, 26,000, 21,000 of
scheduled principal payments that were originally due in 2009, 2010, and 2011, respectively.
The amendment also provided for a 100% cash sweep, referred to as the Cash Sweep, of any cash,
in excess of a 15,000 working capital reserve, held by Stendal which will be used first to fund
the debt service reserve account to a level sufficient to service the amounts due and payable
under the Stendal Loan Facility during the then following 12 months, or Fully Funded, and
second to prepay the deferred principal amounts. As at September 30, 2010, the debt service
reserve balance was approximately 6,968.
 (b)
    
    In February 2005, the Company issued $310 million of senior notes due February 2013, which
bear interest at 9.25% accrued and payable semi-annually, and are unsecured. The Company may
redeem all or a part of the notes at redemption prices (expressed as a percentage of principal
amount) equal to 102.31% for the twelve month period beginning on February 15, 2010, and
100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid
interest.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 (c)
    
    As at September 30, 2010, the Subordinated Convertible Notes due October 2010 had
approximately $2.3 million of principal outstanding. The Subordinated Convertible Notes due
October 2010, bear interest at 8.50% accrued and payable semi-annually, are convertible at any
time by the holder into common shares of the Company at $7.75 per share and are unsecured. The
Company may redeem for cash all or a portion of these notes at any time at 100% of the
principal amount of the notes plus accrued and unpaid interest up to the redemption date. See
Note 5(d) and Note 12  Subsequent Events.
 (d)
    
    On December 10, 2009, the Company exchanged approximately $43.3 million of Subordinated
Convertible Notes due October 2010 through private exchange agreements with the holders
thereof for approximately $43.8 million of Subordinated Convertible Notes due January 2012. On
January 22, 2010, through an exchange offer, the Company exchanged a further $21.7 million of
Subordinated Convertible Notes due October 2010 for approximately $22.0 million of the
Companys Subordinated Convertible Notes due January 2012. The Company recognized both
exchange transactions of the Subordinated Convertible Notes as extinguishments of debt in
accordance with ASC Topic 470, Debt,because the fair value of the embedded conversion option
changed by more than 10% in both transactions. As a result, for the year ended December 31,
2009, the Company accounted for the December 10, 2009 exchange as a debt extinguishment and
recognized a gain of 4,447 in the Consolidated Statement of Operations. For the nine months
ended September 30, 2010, the Company recognized a loss of 929 as a result of the January 22,
2010 exchange. The gain and loss, which were determined using fair market values prevailing at
the time of the transactions, will both be accreted to income through to January 2012 through
interest expense yielding an effective interest rate of approximately 13% on the December 10,
2009 exchange and 3% on the January 22, 2010 exchange.The Subordinated Convertible Notes due January 2012 bear interest at 8.50%, accrued and payable
semi-annually, are convertible at anytime by the holder into common shares of the Company at
$3.30 per share and are unsecured. The Company may redeem for cash all or a portion of the notes
on or after July 15, 2011 at 100% of the principal amount of the notes plus accrued interest up
to the redemption date. During the three and nine months ended September 30, 2010, approximately
$18.1 million and $18.2 million of Subordinated Convertible Notes due January 2012 were
converted into 5,478,335 and 5,529,553 shares, respectively. The Company recorded a debt
conversion expense of approximately $0.8 million during the three months ended September 30,
2010 as a result of the conversions, which is included within interest expense in the Interim
Consolidated Statements of Operations.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 (e)
    
    Credit agreement with respect to a revolving credit facility of C$40.0 million for the Celgar
mill. The credit agreement matures May 2013. Borrowings under the credit agreement are
collateralized by the mills inventory and receivables and are restricted by a borrowing base
calculated on the mills inventory and receivables. Canadian dollar denominated amounts bear
interest at bankers acceptance plus 3.75% or Canadian prime plus 2.00%. U.S. dollar
denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. As at
September 30, 2010, this facility was accruing interest at a rate of approximately 4.95% and
the undrawn amount was approximately C$10.0 million.
 (f)
    
    Loans payable to the noncontrolling shareholder of the Stendal mill bear interest at 7.00%,
which is accrued semi-annually. The loan payable is unsecured, subordinated to all
liabilities of the Stendal mill, and is due in 2017. The balance includes principal and
accrued interest. See Note 10  Noncontrolling Interest.
 (g)
    
    A 25,000 working capital facility at the Rosenthal mill that matures in December 2012.
Borrowings under the facility are collateralized by the mills inventory and receivables and
bear interest at approximately Euribor plus 3.50%. As at September 30, 2010, approximately
2,100 of this facility was supporting bank guarantees leaving approximately 22,900 undrawn.
 (h)
    
    On August 19, 2009 the Company finalized an investment loan agreement with a lender relating
to the new wash press at the Rosenthal mill. The four-year amortizing investment loan was
completed with a total facility of 4,351 bearing interest at the rate of Euribor plus 2.75%.
Borrowings under this agreement are secured by the new wash press equipment. As at September
30, 2010, this facility was drawn by 3,807 and was accruing interest at a rate of 3.90%.
 (i)
    
    On February 8, 2010 the Rosenthal mill finalized a credit agreement with a lender for a
3,500 facility maturing in December 2012. Borrowings under the facility will bear interest at
the rate of the 3-month Euribor plus 3.50% and are secured by certain land at our Rosenthal
mill. As at September 30, 2010, this facility was undrawn.
 Note 6. Derivative Transactions




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 6. Derivative Transactions (continued)
    Note 7. Pension and Other Post-Retirement Benefit Obligations




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 7. Pension and Other Post-Retirement Benefit Obligations (continued)
  Three Months Ended September 30,2010
    
    
    2009Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    21
    
    
    
    100
    
    
    
    14
    
    
    
    86Interest cost
    
    
    425
    
    
    
    196
    
    
    
    382
    
    
    
    205Expected return on plan assets
    
    
    (398
    )
    
    
    
    
    
    
    (321
    )
    
    
    Recognized net loss (gain)
    
    
    111
    
    
    
    (79
    )
    
    
    36
    
    
    
    (60
    )Net periodic benefit cost
    
    
    159
    
    
    
    217
    
    
    
    111
    
    
    
    231
 Nine Months Ended September 30,2010
    
    
    2009Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    61
    
    
    
    294
    
    
    
    42
    
    
    
    253Interest cost
    
    
    1,257
    
    
    
    580
    
    
    
    1,129
    
    
    
    606Expected return on plan assets
    
    
    (1,175
    )
    
    
    
    
    
    
    (949
    )
    
    
    Recognized net loss (gain)
    
    
    329
    
    
    
    (233
    )
    
    
    105
    
    
    
    (176
    )Net periodic benefit cost
    
    
    472
    
    
    
    641
    
    
    
    327
    
    
    
    683
 Note 8. Share Capital
 Common shares




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Share Capital (continued)
 Preferred shares
  Note 9. Financial Instruments
  September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCash and cash equivalents
    
    
    85,126
    
    
    
    85,126
    
    
    
    51,291
    
    
    
    51,291Investments
    
    
    123
    
    
    
    123
    
    
    
    135
    
    
    
    135Receivables
    
    
    101,920
    
    
    
    101,920
    
    
    
    71,143
    
    
    
    71,143Notes receivable
    
    
    3,332
    
    
    
    3,332
    
    
    
    3,819
    
    
    
    3,819Accounts payable and accrued expenses
    
    
    108,130
    
    
    
    108,130
    
    
    
    85,185
    
    
    
    85,185Debt
    
    
    816,678
    
    
    
    820,294
    
    
    
    829,174
    
    
    
    769,207Interest rate derivative contracts  liability
    
    
    63,396
    
    
    
    63,396
    
    
    
    52,873
    
    
    
    52,873




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments (continued)
  identical
 similar
      Fair value measurements at September 30, 2010 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    123LiabilitiesDerivatives (b)- Interest rate swaps
    
    
    
    
    
    
    63,396
    
    
    
    
    
    
    
    63,396
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (yield curves observable at specific intervals).




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Noncontrolling Interest
  Note 11. Commitments and Contingencies
   Note 12. Subsequent Events




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheets
 September 30, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    48,411
    
    
    
    36,715
    
    
    
    
    
    
    
    85,126Receivables
    
    
    51,792
    
    
    
    50,128
    
    
    
    
    
    
    
    101,920Inventories
    
    
    68,257
    
    
    
    44,128
    
    
    
    
    
    
    
    112,385Prepaid expenses and other
    
    
    6,479
    
    
    
    5,507
    
    
    
    
    
    
    
    11,986Total current assets
    
    
    174,939
    
    
    
    136,478
    
    
    
    
    
    
    
    311,417Property, plant and equipment
    
    
    363,758
    
    
    
    487,978
    
    
    
    
    
    
    
    851,736Deferred note issuance and other
    
    
    2,608
    
    
    
    4,333
    
    
    
    
    
    
    
    6,941Deferred income tax
    
    
    12,990
    
    
    
    
    
    
    
    
    
    
    
    12,990Due from unrestricted group
    
    
    78,177
    
    
    
    
    
    
    
    (78,177
    )
    
    
    Note receivable
    
    
    1,723
    
    
    
    
    
    
    
    
    
    
    
    1,723Total assets
    
    
    634,195
    
    
    
    628,789
    
    
    
    (78,177
    )
    
    
    1,184,807LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    64,669
    
    
    
    43,461
    
    
    
    
    
    
    
    108,130Pension and other post-retirement benefit
obligations
    
    
    608
    
    
    
    
    
    
    
    
    
    
    
    608Debt
    
    
    2,761
    
    
    
    23,167
    
    
    
    
    
    
    
    25,928Total current liabilities
    
    
    68,038
    
    
    
    66,628
    
    
    
    
    
    
    
    134,666Debt
    
    
    282,335
    
    
    
    508,415
    
    
    
    
    
    
    
    790,750Due to restricted group
    
    
    
    
    
    
    78,177
    
    
    
    (78,177
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    63,396
    
    
    
    
    
    
    
    63,396Pension and other post-retirement benefit obligations
    
    
    19,581
    
    
    
    
    
    
    
    
    
    
    
    19,581Capital leases and other
    
    
    6,616
    
    
    
    3,942
    
    
    
    
    
    
    
    10,558Total liabilities
    
    
    376,570
    
    
    
    720,558
    
    
    
    (78,177
    )
    
    
    1,018,951EQUITYTotal shareholders equity (deficit)
    
    
    257,625
    
    
    
    (65,797
    )
    
    
    
    
    
    
    191,828Noncontrolling interest (deficit)
    
    
    
    
    
    
    (25,972
    )
    
    
    
    
    
    
    (25,972
    )Total liabilities and equity
    
    
    634,195
    
    
    
    628,789
    
    
    
    (78,177
    )
    
    
    1,184,807




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheets
 December 31, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    20,635
    
    
    
    30,656
    
    
    
    
    
    
    
    51,291Receivables
    
    
    34,588
    
    
    
    36,555
    
    
    
    
    
    
    
    71,143Inventories
    
    
    52,897
    
    
    
    19,732
    
    
    
    
    
    
    
    72,629Prepaid expenses and other
    
    
    3,452
    
    
    
    2,419
    
    
    
    
    
    
    
    5,871Total current assets
    
    
    111,572
    
    
    
    89,362
    
    
    
    
    
    
    
    200,934Property, plant and equipment
    
    
    362,311
    
    
    
    506,247
    
    
    
    
    
    
    
    868,558Deferred note issuance and other
    
    
    3,388
    
    
    
    4,798
    
    
    
    
    
    
    
    8,186Deferred income tax
    
    
    3,426
    
    
    
    
    
    
    
    
    
    
    
    3,426Due from unrestricted group
    
    
    72,553
    
    
    
    
    
    
    
    (72,553
    )
    
    
    Note receivable
    
    
    2,727
    
    
    
    
    
    
    
    
    
    
    
    2,727Total assets
    
    
    555,977
    
    
    
    600,407
    
    
    
    (72,553
    )
    
    
    1,083,831LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    51,875
    
    
    
    33,310
    
    
    
    
    
    
    
    85,185Pension and other post-retirement benefit
obligations
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    567Debt
    
    
    2,115
    
    
    
    13,917
    
    
    
    
    
    
    
    16,032Total current liabilities
    
    
    54,557
    
    
    
    47,227
    
    
    
    
    
    
    
    101,784Debt
    
    
    276,604
    
    
    
    536,538
    
    
    
    
    
    
    
    813,142Due to restricted group
    
    
    
    
    
    
    72,553
    
    
    
    (72,553
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    52,873
    
    
    
    
    
    
    
    52,873Pension and other post-retirement benefit obligations
    
    
    17,902
    
    
    
    
    
    
    
    
    
    
    
    17,902Capital leases and other
    
    
    6,667
    
    
    
    5,490
    
    
    
    
    
    
    
    12,157Total liabilities
    
    
    355,730
    
    
    
    714,681
    
    
    
    (72,553
    )
    
    
    997,858EQUITYTotal shareholders equity (deficit)
    
    
    200,247
    
    
    
    (77,025
    )
    
    
    
    
    
    
    123,222Noncontrolling interest (deficit)
    
    
    
    
    
    
    (37,249
    )
    
    
    
    
    
    
    (37,249
    )Total liabilities and equity
    
    
    555,977
    
    
    
    600,407
    
    
    
    (72,553
    )
    
    
    1,083,831




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended September 30, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    123,518
    
    
    
    101,179
    
    
    
    
    
    
    
    224,697Energy
    
    
    1,535
    
    
    
    8,186
    
    
    
    
    
    
    
    9,721125,053
    
    
    
    109,365
    
    
    
    
    
    
    
    234,418Operating costs
    
    
    91,528
    
    
    
    70,765
    
    
    
    
    
    
    
    162,293Operating depreciation and amortization
    
    
    7,514
    
    
    
    6,473
    
    
    
    
    
    
    
    13,987Selling, general and administrative expenses and other
    
    
    3,221
    
    
    
    3,506
    
    
    
    
    
    
    
    6,727102,263
    
    
    
    80,744
    
    
    
    
    
    
    
    183,007Operating income (loss)
    
    
    22,790
    
    
    
    28,621
    
    
    
    
    
    
    
    51,411Other income (expense)Interest expense
    
    
    (8,796
    )
    
    
    (10,213
    )
    
    
    1,189
    
    
    
    (17,820
    )Investment income (loss)
    
    
    1,246
    
    
    
    36
    
    
    
    (1,189
    )
    
    
    93Foreign exchange gain (loss) on debt
    
    
    9,927
    
    
    
    
    
    
    
    
    
    
    
    9,927Gain (loss) on derivative instruments
    
    
    
    
    
    
    485
    
    
    
    
    
    
    
    485Total other income (expense)
    
    
    2,377
    
    
    
    (9,692
    )
    
    
    
    
    
    
    (7,315
    )Income (loss) before income taxes
    
    
    25,167
    
    
    
    18,929
    
    
    
    
    
    
    
    44,096Income tax benefit (provision)
    
    
    8,849
    
    
    
    (1,694
    )
    
    
    
    
    
    
    7,155Net income (loss)
    
    
    34,016
    
    
    
    17,235
    
    
    
    
    
    
    
    51,251Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (5,116
    )
    
    
    
    
    
    
    (5,116
    )Net income (loss) attributable to common shareholders
    
    
    34,016
    
    
    
    12,119
    
    
    
    
    
    
    
    46,135
 Three Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    79,213
    
    
    
    66,644
    
    
    
    
    
    
    
    145,857Energy
    
    
    3,201
    
    
    
    7,173
    
    
    
    
    
    
    
    10,37482,414
    
    
    
    73,817
    
    
    
    
    
    
    
    156,231Operating costs
    
    
    78,136
    
    
    
    58,430
    
    
    
    
    
    
    
    136,566Operating depreciation and amortization
    
    
    6,816
    
    
    
    6,569
    
    
    
    
    
    
    
    13,385Selling, general and administrative expenses and other
    
    
    4,048
    
    
    
    2,725
    
    
    
    
    
    
    
    6,77389,000
    
    
    
    67,724
    
    
    
    
    
    
    
    156,724Operating income (loss)
    
    
    (6,586
    )
    
    
    6,093
    
    
    
    
    
    
    
    (493
    )Other income (expense)Interest expense
    
    
    (6,546
    )
    
    
    (10,674
    )
    
    
    1,135
    
    
    
    (16,085
    )Investment income (loss)
    
    
    1,112
    
    
    
    43
    
    
    
    (1,135
    )
    
    
    20Foreign exchange gain (loss) on debt
    
    
    3,779
    
    
    
    
    
    
    
    
    
    
    
    3,779Gain (loss) on derivative instruments
    
    
    
    
    
    
    (3,327
    )
    
    
    
    
    
    
    (3,327
    )Total other income (expense)
    
    
    (1,655
    )
    
    
    (13,958
    )
    
    
    
    
    
    
    (15,613
    )Income (loss) before income taxes
    
    
    (8,241
    )
    
    
    (7,865
    )
    
    
    
    
    
    
    (16,106
    )Income tax benefit (provision)
    
    
    108
    
    
    
    (51
    )
    
    
    
    
    
    
    57Net income (loss)
    
    
    (8,133
    )
    
    
    (7,916
    )
    
    
    
    
    
    
    (16,049
    )Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    1,937
    
    
    
    
    
    
    
    1,937Net income (loss) attributable to common shareholders
    
    
    (8,133
    )
    
    
    (5,979
    )
    
    
    
    
    
    
    (14,112
    )




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Nine Months Ended September 30, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    354,775
    
    
    
    269,336
    
    
    
    
    
    
    
    624,111Energy
    
    
    8,750
    
    
    
    22,033
    
    
    
    
    
    
    
    30,783363,525
    
    
    
    291,369
    
    
    
    
    
    
    
    654,894Operating costs
    
    
    269,063
    
    
    
    201,914
    
    
    
    
    
    
    
    470,977Operating depreciation and amortization
    
    
    22,355
    
    
    
    19,462
    
    
    
    
    
    
    
    41,817Selling, general and administrative expenses and other
    
    
    14,792
    
    
    
    9,985
    
    
    
    
    
    
    
    24,777306,210
    
    
    
    231,361
    
    
    
    
    
    
    
    537,571Operating income (loss)
    
    
    57,315
    
    
    
    60,008
    
    
    
    
    
    
    
    117,323Other income (expense)Interest expense
    
    
    (24,073
    )
    
    
    (30,593
    )
    
    
    3,525
    
    
    
    (51,141
    )Investment income (loss)
    
    
    3,770
    
    
    
    59
    
    
    
    (3,525
    )
    
    
    304Foreign exchange gain (loss) on debt
    
    
    (4,675
    )
    
    
    
    
    
    
    
    
    
    
    (4,675
    )Gain (loss) on extinguishment of convertible notes
    
    
    (929
    )
    
    
    
    
    
    
    
    
    
    
    (929
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    (10,523
    )
    
    
    
    
    
    
    (10,523
    )Total other income (expense)
    
    
    (25,907
    )
    
    
    (41,057
    )
    
    
    
    
    
    
    (66,964
    )Income (loss) before income taxes
    
    
    31,408
    
    
    
    18,951
    
    
    
    
    
    
    
    50,359Income tax benefit (provision)
    
    
    8,354
    
    
    
    (2,722
    )
    
    
    
    
    
    
    5,632Net income (loss)
    
    
    39,762
    
    
    
    16,229
    
    
    
    
    
    
    
    55,991Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (5,001
    )
    
    
    
    
    
    
    (5,001
    )Net income (loss) attributable to common shareholders.
    
    
    39,762
    
    
    
    11,228
    
    
    
    
    
    
    
    50,990
 Nine Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    230,672
    
    
    
    191,740
    
    
    
    
    
    
    
    422,412Energy
    
    
    11,162
    
    
    
    21,113
    
    
    
    
    
    
    
    32,275241,834
    
    
    
    212,853
    
    
    
    
    
    
    
    454,687Operating costs
    
    
    232,364
    
    
    
    185,232
    
    
    
    
    
    
    
    417,596Operating depreciation and amortization
    
    
    20,408
    
    
    
    19,917
    
    
    
    
    
    
    
    40,325Selling, general and administrative expenses and other
    
    
    10,665
    
    
    
    8,743
    
    
    
    
    
    
    
    19,408263,437
    
    
    
    213,892
    
    
    
    
    
    
    
    477,329Operating income (loss)
    
    
    (21,603
    )
    
    
    (1,039
    )
    
    
    
    
    
    
    (22,642
    )Other income (expense)Interest expense
    
    
    (20,775
    )
    
    
    (31,543
    )
    
    
    3,365
    
    
    
    (48,953
    )Investment income (loss)
    
    
    3,262
    
    
    
    (2,941
    )
    
    
    (3,365
    )
    
    
    (3,044
    )Foreign exchange gain (loss) on debt
    
    
    4,533
    
    
    
    
    
    
    
    
    
    
    
    4,533Gain (loss) on derivative instruments
    
    
    
    
    
    
    (10,889
    )
    
    
    
    
    
    
    (10,889
    )Total other income (expense)
    
    
    (12,980
    )
    
    
    (45,373
    )
    
    
    
    
    
    
    (58,353
    )Income (loss) before income taxes
    
    
    (34,583
    )
    
    
    (46,412
    )
    
    
    
    
    
    
    (80,995
    )Income tax benefit (provision)
    
    
    (833
    )
    
    
    5,695
    
    
    
    
    
    
    
    4,862Net income (loss)
    
    
    (35,416
    )
    
    
    (40,717
    )
    
    
    
    
    
    
    (76,133
    )Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    11,195
    
    
    
    
    
    
    
    11,195Net income (loss) attributable to common shareholders.
    
    
    (35,416
    )
    
    
    (29,522
    )
    
    
    
    
    
    
    (64,938
    )




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Three Months Ended September 30, 2010Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    34,016
    
    
    
    12,119
    
    
    
    46,135Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    (485
    )
    
    
    (485
    )Foreign exchange loss (gain) on debt
    
    
    (9,927
    )
    
    
    
    
    
    
    (9,927
    )Depreciation and amortization
    
    
    7,582
    
    
    
    6,473
    
    
    
    14,055Accretion expense (income)
    
    
    1,111
    
    
    
    
    
    
    
    1,111Noncontrolling interest
    
    
    
    
    
    
    5,116
    
    
    
    5,116Deferred income taxes
    
    
    (9,382
    )
    
    
    
    
    
    
    (9,382
    )Stock compensation expense
    
    
    540
    
    
    
    
    
    
    
    540Pension and other post-retirement expense, net of funding
    
    
    96
    
    
    
    
    
    
    
    96Other
    
    
    286
    
    
    
    703
    
    
    
    989Changes in current assets and liabilitiesReceivables
    
    
    13,790
    
    
    
    5,801
    
    
    
    19,591Inventories
    
    
    (13,209
    )
    
    
    (12,796
    )
    
    
    (26,005
    )Accounts payable and accrued expenses
    
    
    (2,127
    )
    
    
    3,941
    
    
    
    1,814Other(1)
    
    
    (4,242
    )
    
    
    (641
    )
    
    
    (4,883
    )Net cash from (used in) operating activities
    
    
    18,534
    
    
    
    20,231
    
    
    
    38,765Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (8,392
    )
    
    
    (92
    )
    
    
    (8,484
    )Proceeds on sale of property, plant and equipment
    
    
    27
    
    
    
    1
    
    
    
    28Notes receivable
    
    
    216
    
    
    
    
    
    
    
    216Net cash from (used in) investing activities
    
    
    (8,149
    )
    
    
    (91
    )
    
    
    (8,240
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (544
    )
    
    
    (5,667
    )
    
    
    (6,211
    )Repayment of capital lease obligations
    
    
    (220
    )
    
    
    (418
    )
    
    
    (638
    )Proceeds from (repayment of) credit facilities, net
    
    
    (4,057
    )
    
    
    
    
    
    
    (4,057
    )Proceeds from government grants
    
    
    6,778
    
    
    
    
    
    
    
    6,778Net cash from (used in) financing activities
    
    
    1,957
    
    
    
    (6,085
    )
    
    
    (4,128
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (3,416
    )
    
    
    
    
    
    
    (3,416
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,926
    
    
    
    14,055
    
    
    
    22,981Cash and cash equivalents, beginning of period
    
    
    39,485
    
    
    
    22,660
    
    
    
    62,145Cash and cash equivalents, end of period
    
    
    48,411
    
    
    
    36,715
    
    
    
    85,126
 
 (1)
    
    Includes intercompany working capital related transactions.




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Three Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    (8,133
    )
    
    
    (5,979
    )
    
    
    (14,112
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    3,327
    
    
    
    3,327Foreign exchange loss (gain) on debt
    
    
    (3,779
    )
    
    
    
    
    
    
    (3,779
    )Depreciation and amortization
    
    
    6,878
    
    
    
    6,569
    
    
    
    13,447Noncontrolling interest
    
    
    
    
    
    
    (1,937
    )
    
    
    (1,937
    )Deferred income taxes
    
    
    (71
    )
    
    
    1
    
    
    
    (70
    )Stock compensation expense
    
    
    383
    
    
    
    
    
    
    
    383Pension and other post-retirement expense, net of funding
    
    
    314
    
    
    
    
    
    
    
    314Other
    
    
    158
    
    
    
    619
    
    
    
    777Changes in current assets and liabilitiesReceivables
    
    
    5,229
    
    
    
    (774
    )
    
    
    4,455Inventories
    
    
    (1,630
    )
    
    
    4,028
    
    
    
    2,398Accounts payable and accrued expenses
    
    
    5,437
    
    
    
    (3,742
    )
    
    
    1,695Other(1)
    
    
    (2,764
    )
    
    
    1,167
    
    
    
    (1,597
    )Net cash from (used in) operating activities
    
    
    2,022
    
    
    
    3,279
    
    
    
    5,301Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (3,785
    )
    
    
    (209
    )
    
    
    (3,994
    )Proceeds on sale of property, plant and equipment
    
    
    9
    
    
    
    102
    
    
    
    111Cash, restricted
    
    
    
    
    
    
    3,531
    
    
    
    3,531Note receivable
    
    
    333
    
    
    
    
    
    
    
    333Net cash from (used in) investing activities
    
    
    (3,443
    )
    
    
    3,424
    
    
    
    (19
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (10,000
    )
    
    
    (8,249
    )
    
    
    (18,249
    )Repayment of capital lease obligations
    
    
    (179
    )
    
    
    (731
    )
    
    
    (910
    )Proceeds from borrowing of notes payable and debt
    
    
    1,869
    
    
    
    
    
    
    
    1,869Proceeds from government grants
    
    
    546
    
    
    
    
    
    
    
    546Net cash from (used in) financing activities
    
    
    (7,764
    )
    
    
    (8,980
    )
    
    
    (16,744
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    637
    
    
    
    
    
    
    
    637Net increase (decrease) in cash and cash equivalents
    
    
    (8,548
    )
    
    
    (2,277
    )
    
    
    (10,825
    )Cash and cash equivalents, beginning of period
    
    
    33,842
    
    
    
    28,258
    
    
    
    62,100Cash and cash equivalents, end of period
    
    
    25,294
    
    
    
    25,981
    
    
    
    51,275
 
 (1)
    
    Includes intercompany working capital related transactions.




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Nine Months Ended September 30, 2010Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    39,762
    
    
    
    11,228
    
    
    
    50,990Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    10,523
    
    
    
    10,523Foreign exchange loss (gain) on debt
    
    
    4,675
    
    
    
    
    
    
    
    4,675Gain (loss) on extinguishment of convertible notes
    
    
    929
    
    
    
    
    
    
    
    929Depreciation and amortization
    
    
    22,590
    
    
    
    19,462
    
    
    
    42,052Accretion (income) expense
    
    
    2,056
    
    
    
    
    
    
    
    2,056Noncontrolling interest
    
    
    
    
    
    
    5,001
    
    
    
    5,001Deferred income taxes
    
    
    (9,382
    )
    
    
    
    
    
    
    (9,382
    )Stock compensation expense
    
    
    1,273
    
    
    
    
    
    
    
    1,273Pension and other post-retirement expense, net of funding
    
    
    428
    
    
    
    
    
    
    
    428Other
    
    
    856
    
    
    
    1,980
    
    
    
    2,836Changes in current assets and liabilitiesReceivables
    
    
    (12,778
    )
    
    
    (13,573
    )
    
    
    (26,351
    )Inventories
    
    
    (12,592
    )
    
    
    (24,396
    )
    
    
    (36,988
    )Accounts payable and accrued expenses
    
    
    5,595
    
    
    
    9,551
    
    
    
    15,146Other(1)
    
    
    (8,040
    )
    
    
    2,563
    
    
    
    (5,477
    )Net cash from (used in) operating activities
    
    
    35,372
    
    
    
    22,339
    
    
    
    57,711Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (27,467
    )
    
    
    (1,409
    )
    
    
    (28,876
    )Proceeds on sale of property, plant and equipment
    
    
    90
    
    
    
    487
    
    
    
    577Cash, restricted
    
    
    
    
    
    
    
    
    
    
    Note receivable
    
    
    711
    
    
    
    
    
    
    
    711Net cash from (used in) investing activities
    
    
    (26,666
    )
    
    
    (922
    )
    
    
    (27,588
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (560
    )
    
    
    (13,917
    )
    
    
    (14,477
    )Repayment of capital lease obligations
    
    
    (804
    )
    
    
    (1,441
    )
    
    
    (2,245
    )Proceeds from borrowings of notes payable and debt
    
    
    856
    
    
    
    
    
    
    
    856Proceeds from (repayment of) credit facilities, net
    
    
    1,493
    
    
    
    
    
    
    
    1,493Proceeds from government grants
    
    
    17,337
    
    
    
    
    
    
    
    17,337Net cash from (used in) financing activities
    
    
    18,322
    
    
    
    (15,358
    )
    
    
    2,964Effect of exchange rate changes on cash and cash equivalents
    
    
    748
    
    
    
    
    
    
    
    748Net increase (decrease) in cash and cash equivalents
    
    
    27,776
    
    
    
    6,059
    
    
    
    33,835Cash and cash equivalents, beginning of period
    
    
    20,635
    
    
    
    30,656
    
    
    
    51,291Cash and cash equivalents, end of period
    
    
    48,411
    
    
    
    36,715
    
    
    
    85,126
 
 (1)
    
    Includes intercompany working capital related transactions.




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Cash Flows
 Nine Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    (35,416
    )
    
    
    (29,522
    )
    
    
    (64,938
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    10,889
    
    
    
    10,889Foreign exchange loss (gain) on debt
    
    
    (4,533
    )
    
    
    
    
    
    
    (4,533
    )Depreciation and amortization
    
    
    20,601
    
    
    
    19,917
    
    
    
    40,518Noncontrolling interest
    
    
    
    
    
    
    (11,195
    )
    
    
    (11,195
    )Deferred income taxes
    
    
    838
    
    
    
    (5,827
    )
    
    
    (4,989
    )Stock compensation expense
    
    
    376
    
    
    
    
    
    
    
    376Pension and other post-retirement expense, net of funding
    
    
    291
    
    
    
    
    
    
    
    291Inventory provisions
    
    
    3,233
    
    
    
    1,354
    
    
    
    4,587Other
    
    
    507
    
    
    
    (1,705
    )
    
    
    (1,198
    )Changes in current assets and liabilitiesReceivables
    
    
    27,444
    
    
    
    1,719
    
    
    
    29,163Inventories
    
    
    9,684
    
    
    
    20,239
    
    
    
    29,923Accounts payable and accrued expenses
    
    
    11,960
    
    
    
    (2,325
    )
    
    
    9,635Other(1)
    
    
    (15,227
    )
    
    
    14,264
    
    
    
    (963
    )Net cash from (used in) operating activities
    
    
    19,758
    
    
    
    17,808
    
    
    
    37,566Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (18,312
    )
    
    
    (1,223
    )
    
    
    (19,535
    )Proceeds on sale of property, plant and equipment
    
    
    107
    
    
    
    236
    
    
    
    343Cash, restricted
    
    
    
    
    
    
    13,000
    
    
    
    13,000Note receivable
    
    
    574
    
    
    
    
    
    
    
    574Net cash from (used in) investing activities
    
    
    (17,631
    )
    
    
    12,013
    
    
    
    (5,618
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (10,000
    )
    
    
    (16,499
    )
    
    
    (26,499
    )Repayment of capital lease obligations
    
    
    (480
    )
    
    
    (1,648
    )
    
    
    (2,128
    )Proceeds form borrowings of notes payables and debt
    
    
    11,869
    
    
    
    
    
    
    
    11,869Proceeds from (repayment of) credit facilities, net
    
    
    (5,550
    )
    
    
    
    
    
    
    (5,550
    )Proceeds from government grants
    
    
    546
    
    
    
    
    
    
    
    546Payment of deferred note issuance costs
    
    
    
    
    
    
    (1,969
    )
    
    
    (1,969
    )Net cash from (used in) financing activities
    
    
    (3,615
    )
    
    
    (20,116
    )
    
    
    (23,731
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    606
    
    
    
    
    
    
    
    606Net increase (decrease) in cash and cash equivalents
    
    
    (882
    )
    
    
    9,705
    
    
    
    8,823Cash and cash equivalents, beginning of period
    
    
    26,176
    
    
    
    16,276
    
    
    
    42,452Cash and cash equivalents, end of period
    
    
    25,294
    
    
    
    25,981
    
    
    
    51,275
 
 (1)
    
    Includes intercompany working capital related transactions.




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Results of Operations
 General
   Market Environment




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Third Quarter and Nine Months Operational Snapshot
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Pulp Production (000 ADMTs)
    
    
    380.9
    
    
    
    345.8
    
    
    
    1,070.0
    
    
    
    1,040.6Scheduled Production Downtime (000 ADMTs)
    
    
    8.3
    
    
    
    35.4
    
    
    
    43.5
    
    
    
    38.1Pulp Sales (000 ADMTs)
    
    
    344.8
    
    
    
    361.6
    
    
    
    1,042.6
    
    
    
    1,093.7Pulp Revenues (in millions)
    
    
    224.7
    
    
    
    145.9
    
    
    
    624.1
    
    
    
    422.4NBSK pulp list prices in Europe ($/ADMT)
    
    $
    980
    
    
    $
    693
    
    
    $
    932
    
    
    $
    627NBSK pulp list prices in Europe (/ADMT)
    
    
    758
    
    
    
    485
    
    
    
    708
    
    
    
    459Average pulp sales realizations (/ADMT)(1)
    
    
    642
    
    
    
    397
    
    
    
    590
    
    
    
    380Energy Production (000 MWh)
    
    
    330.8
    
    
    
    354.4
    
    
    
    1,051.1
    
    
    
    1,086.7Energy Sales (000 MWh)
    
    
    119.1
    
    
    
    121.8
    
    
    
    370.3
    
    
    
    362.6Energy Revenue (in millions)
    
    
    9.7
    
    
    
    10.4
    
    
    
    30.8
    
    
    
    32.3Average energy sales realizations (/MWh)
    
    
    82
    
    
    
    85
    
    
    
    83
    
    
    
    89Average Spot Currency Exchange Rates / $(2)
    
    
    0.7729
    
    
    
    0.6989
    
    
    
    0.7608
    
    
    
    0.7337C$ / $(2)
    
    
    1.0385
    
    
    
    1.0972
    
    
    
    1.0358
    
    
    
    1.1700C$ / (3)
    
    
    1.3438
    
    
    
    1.5694
    
    
    
    1.3639
    
    
    
    1.5934
 
 (1)
    
    Sales realizations after discounts. Incorporates the effect of pulp price variations
occurring between the order and shipment dates.(2)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(3)
    
    Average Bank of Canada noon spot rates over the reporting period. Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009




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Three Months EndedSeptember 30,2010
    
    
    2009(in thousands)Net income (loss) attributable to common shareholders
    
    
    46,135
    
    
    
    (14,112
    )Net income (loss) attributable to noncontrolling interest
    
    
    5,116
    
    
    
    (1,937
    )Income taxes (benefits)
    
    
    (7,155
    )
    
    
    (57
    )Interest expense
    
    
    17,820
    
    
    
    16,085Investment (income) loss
    
    
    (93
    )
    
    
    (20
    )Foreign exchange (gain) loss on debt
    
    
    (9,927
    )
    
    
    (3,779
    )Loss (gain) on derivative instruments
    
    
    (485
    )
    
    
    3,327Operating income (loss)
    
    
    51,411
    
    
    
    (493
    )Add: Depreciation and amortization
    
    
    14,055
    
    
    
    13,447Operating EBITDA
    
    
    65,466
    
    
    
    12,954
 Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009




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Nine Months EndedSeptember 30,2010
    
    
    2009(in thousands)Net income (loss) attributable to common shareholders
    
    
    50,990
    
    
    
    (64,938
    )Net income (loss) attributable to noncontrolling interest
    
    
    5,001
    
    
    
    (11,195
    )Income taxes (benefits)
    
    
    (5,632
    )
    
    
    (4,862
    )Interest expense
    
    
    51,141
    
    
    
    48,953Investment (income) loss
    
    
    (304
    )
    
    
    3,044Foreign exchange loss (gain) on debt
    
    
    4,675
    
    
    
    (4,533
    )Loss (gain) on extinguishment of convertible notes
    
    
    929
    
    
    
    Loss (gain) on derivative instruments
    
    
    10,523
    
    
    
    10,889Operating income (loss)
    
    
    117,323
    
    
    
    (22,642
    )Add: Depreciation and amortization
    
    
    42,052
    
    
    
    40,518Operating EBITDA
    
    
    159,375
    
    
    
    17,876
 Liquidity and Capital Resources
  September 30,
    
    
    December 31,2010
    
    
    2009(in thousands)Financial PositionCash and cash equivalents
    
    
    85,126
    
    
    
    51,291Receivables
    
    
    101,920
    
    
    
    71,143Inventories
    
    
    112,385
    
    
    
    72,629Prepaid expenses and other
    
    
    11,986
    
    
    
    5,871Total current assets
    
    
    311,417
    
    
    
    200,934Total current liabilities
    
    
    134,666
    
    
    
    101,784Working capital
    
    
    176,751
    
    
    
    99,150Property, plant and equipment
    
    
    851,736
    
    
    
    868,558Total assets
    
    
    1,184,807
    
    
    
    1,083,831Long-term liabilities
    
    
    884,285
    
    
    
    896,074Total equity
    
    
    165,856
    
    
    
    85,973
  Sources and Uses of Funds




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Debt Covenants
  Cash Flow Analysis
 Cash Flows from Operating Activities.
   Cash Flows from Investing Activities.
 Cash Flows from Financing Activities.




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Capital Resources
  Future Liquidity
  Contractual Obligations and Commitments
  Foreign Currency
     Results of Operations of the Restricted Group under our Senior Note Indenture




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Restricted Group Results  Three Months Ended September 30, 2010 Compared to Three Months Ended
September 30, 2009




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Three Months EndedSeptember 30,2010
    
    
    2009(in thousands)Restricted Group(1)Net income (loss)
    
    
    34,016
    
    
    
    (8,133
    )Income taxes (benefits)
    
    
    (8,849
    )
    
    
    (108
    )Interest expense
    
    
    8,796
    
    
    
    6,546Investment (income) loss
    
    
    (1,246
    )
    
    
    (1,112
    )Foreign exchange loss (gain) on debt
    
    
    (9,927
    )
    
    
    (3,779
    )Operating income (loss)
    
    
    22,790
    
    
    
    (6,586
    )Add: Depreciation and amortization.
    
    
    7,582
    
    
    
    6,878Operating EBITDA
    
    
    30,372
    
    
    
    292
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.




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Restricted Group Results  Nine Months Ended September 30, 2010 Compared to Nine Months Ended
September 30, 2009




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Nine Months EndedSeptember 30,2010
    
    
    2009(in thousands)Restricted Group(1)Net income (loss)
    
    
    39,762
    
    
    
    (35,416
    )Income taxes (benefits)
    
    
    (8,354
    )
    
    
    833Interest expense
    
    
    24,073
    
    
    
    20,775Investment (income) loss
    
    
    (3,770
    )
    
    
    (3,262
    )Foreign exchange (gain) loss on debt
    
    
    4,675
    
    
    
    (4,533
    )Loss (gain) on extinguishment of convertible notes
    
    
    929
    
    
    
    Operating income (loss)
    
    
    57,315
    
    
    
    (21,603
    )Add: Depreciation and amortization
    
    
    22,590
    
    
    
    20,601Operating EBITDA
    
    
    79,905
    
    
    
    (1,002
    )
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.




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Liquidity and Capital Resources of the Restricted Group
  September 30,
    
    
    December 31,2010
    
    
    2009(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    48,411
    
    
    
    20,635Receivables
    
    
    51,792
    
    
    
    34,588Inventories
    
    
    68,257
    
    
    
    52,897Prepaid expenses and other
    
    
    6,479
    
    
    
    3,452Total current assets
    
    
    174,939
    
    
    
    111,572Total current liabilities
    
    
    68,038
    
    
    
    54,557Working capital
    
    
    106,901
    
    
    
    57,015Property, plant and equipment
    
    
    363,758
    
    
    
    362,311Total assets
    
    
    634,195
    
    
    
    555,977Long-term liabilities
    
    
    308,532
    
    
    
    301,173Total equity
    
    
    257,625
    
    
    
    200,247
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.   Credit Ratings




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Critical Accounting Policies
     New Accounting Standards
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
 
    
    our markets;
    
    demand and prices for our products;
    
    our level of indebtedness;
    
    raw material costs and supply;
    
    energy prices, sales and our initiatives to enhance sales of surplus energy;
    
    capital expenditures;
    
    the economy;
    
    foreign exchange rates  particularly the U.S. dollar and Canadian dollar; and
    
    derivatives.




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Cyclical Nature of Business
 Revenues




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Costs
  Currency




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures. Securities Exchange Act of 1934
  Changes in Internal Controls.




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  Comprehensive
Environmental Response, Compensation and Liability Act
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION




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##### Table of Contents



ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1*
    
    Section 906 Certification of Chief Executive Officer32.2*
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein.




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SIGNATURES
 Securities Exchange Act of 1934
 MERCER INTERNATIONAL INC.By:
    /s/ David M. GandossiDavid M. GandossiSecretary and Chief Financial Officer