##### 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 March 31, 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
    
    47-0956945(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    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
    
    Smaller Reporting Company o
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSINTERIM CONSOLIDATED BALANCE SHEETSINTERIM CONSOLIDATED STATEMENTS OF OPERATIONSINTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO INTERIM CONSOLIDATED 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 THREE MONTHS ENDED MARCH 31, 2010
 (Unaudited)




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##### Table of Contents



MERCER INTERNATIONAL INC.
 
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands of Euros)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assetsCash and cash equivalents (Note 11)
    
    
    48,692
    
    
    
    51,291Receivables
    
    
    90,391
    
    
    
    71,143Inventories (Note 4)
    
    
    81,730
    
    
    
    72,629Prepaid expenses and other
    
    
    7,568
    
    
    
    5,871Total current assets
    
    
    228,381
    
    
    
    200,934Long-term assetsProperty, plant and equipment
    
    
    875,897
    
    
    
    868,558Deferred note issuance and other
    
    
    7,813
    
    
    
    8,186Deferred income tax
    
    
    3,698
    
    
    
    3,426Note receivable
    
    
    2,698
    
    
    
    2,727890,106
    
    
    
    882,897Total assets
    
    
    1,118,487
    
    
    
    1,083,831LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    105,380
    
    
    
    85,185Pension and other post-retirement benefit obligations (Note 7)
    
    
    619
    
    
    
    567Debt (Note 5)
    
    
    23,020
    
    
    
    16,032Total current liabilities
    
    
    129,019
    
    
    
    101,784Long-term liabilitiesDebt (Note 5)
    
    
    810,366
    
    
    
    813,142Unrealized interest rate derivative losses (Notes 6 and 9)
    
    
    59,418
    
    
    
    52,873Pension and other post-retirement benefit obligations (Note 7)
    
    
    19,740
    
    
    
    17,902Capital leases and other
    
    
    11,087
    
    
    
    12,157900,611
    
    
    
    896,074Total liabilities
    
    
    1,029,630
    
    
    
    997,858EQUITYShareholders equityShare capital (Note 8)
    
    
    202,939
    
    
    
    202,844Paid-in capital
    
    
    (5,625
    )
    
    
    (6,082
    )Retained earnings (deficit)
    
    
    (104,781
    )
    
    
    (97,235
    )Accumulated other comprehensive income (loss)
    
    
    30,967
    
    
    
    23,695Total shareholders equity
    
    
    123,500
    
    
    
    123,222Noncontrolling interest (deficit) (Note 10)
    
    
    (34,643
    )
    
    
    (37,249
    )Total equity
    
    
    88,857
    
    
    
    85,973Total liabilities and equity
    
    
    1,118,487
    
    
    
    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 EndedMarch 31,2010
    
    
    2009RevenuesPulp
    
    
    171,121
    
    
    
    129,033Energy
    
    
    9,131
    
    
    
    10,539180,252
    
    
    
    139,572Costs and expensesOperating costs
    
    
    140,409
    
    
    
    131,997Operating depreciation and amortization
    
    
    13,724
    
    
    
    13,40126,119
    
    
    
    (5,826
    )Selling, general and administrative expenses
    
    
    8,095
    
    
    
    7,145Sale of emission allowances
    
    
    
    
    
    
    (558
    )Operating income (loss)
    
    
    18,024
    
    
    
    (12,413
    )Other income (expense)Interest expense
    
    
    (16,423
    )
    
    
    (16,549
    )Investment income (loss)
    
    
    94
    
    
    
    (3,202
    )Foreign exchange gain (loss) on debt
    
    
    (5,231
    )
    
    
    (4,416
    )Gain (loss) on extinguishment of convertible notes (Note 5)
    
    
    (929
    )
    
    
    Gain (loss) on derivative instruments (Note 6)
    
    
    (6,546
    )
    
    
    (15,013
    )Total other income (expense)
    
    
    (29,035
    )
    
    
    (39,180
    )Income (loss) before income taxes
    
    
    (11,011
    )
    
    
    (51,593
    )Income tax benefit (provision)  current
    
    
    (204
    )
    
    
    (49
    ) deferred
    
    
    
    
    
    
    3,031Net income (loss)
    
    
    (11,215
    )
    
    
    (48,611
    )Less: net loss (income) attributable to noncontrolling interest
    
    
    3,669
    
    
    
    9,261Net income (loss) attributable to common shareholders
    
    
    (7,546
    )
    
    
    (39,350
    )Retained earnings (deficit), beginning of period
    
    
    (97,235
    )
    
    
    (35,046
    )Retained earnings (deficit), end of period
    
    
    (104,781
    )
    
    
    (74,396
    )Net income (loss) per share attributable to common shareholders (Note 3):Basic
    
    
    (0.21
    )
    
    
    (1.08
    )Diluted
    
    
    (0.21
    )
    
    
    (1.08
    )
 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 COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2010
    
    
    2009Net income (loss)
    
    
    (11,215
    )
    
    
    (48,611
    )Other comprehensive income (loss)Foreign currency translation adjustment
    
    
    7,632
    
    
    
    (5,369
    )Pension income (expense)
    
    
    (366
    )
    
    
    (17
    )Unrealized gains (losses) on securities arising during the period
    
    
    6
    
    
    
    314Other comprehensive income (loss)
    
    
    7,272
    
    
    
    (5,072
    )Total comprehensive income (loss)
    
    
    (3,943
    )
    
    
    (53,683
    )Comprehensive
loss (income) attributable to noncontrolling interest
    
    
    3,669
    
    
    
    9,261Comprehensive income (loss) attributable to common shareholders
    
    
    (274
    )
    
    
    (44,422
    )
 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 CASH FLOWS
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2010
    
    
    2009Cash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    (7,546
    )
    
    
    (39,350
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    6,546
    
    
    
    15,013Foreign exchange (gain) loss on debt
    
    
    5,231
    
    
    
    4,416Loss (gain) on extinguishment of convertible notes
    
    
    929
    
    
    
    Depreciation and amortization
    
    
    13,821
    
    
    
    13,467Accretion (income) expense
    
    
    431
    
    
    
    Noncontrolling interest
    
    
    (3,669
    )
    
    
    (9,261
    )Deferred income taxes
    
    
    
    
    
    
    (3,031
    )Stock compensation expense
    
    
    506
    
    
    
    (33
    )Pension and other post-retirement expense, net of funding
    
    
    194
    
    
    
    (16
    )Inventory provisions
    
    
    
    
    
    
    4,587Other
    
    
    1,003
    
    
    
    (2,900
    )Changes in current assets and liabilitiesReceivables
    
    
    (17,144
    )
    
    
    19,981Inventories
    
    
    (5,259
    )
    
    
    6,119Accounts payable and accrued expenses
    
    
    7,955
    
    
    
    (7,221
    )Other
    
    
    (1,281
    )
    
    
    1,000Net cash from (used in) operating activities
    
    
    1,717
    
    
    
    2,771Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (5,850
    )
    
    
    (7,706
    )Proceeds on sale of property, plant and equipment
    
    
    387
    
    
    
    129Cash, restricted
    
    
    
    
    
    
    9,469Notes receivable
    
    
    (84
    )
    
    
    121Net cash from (used in) investing activities
    
    
    (5,547
    )
    
    
    2,013Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (8,250
    )
    
    
    (13,800
    )Repayment of capital lease obligations
    
    
    (1,004
    )
    
    
    (682
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    10,000Proceeds from government grants
    
    
    9,415
    
    
    
    Payment of deferred note issuance costs
    
    
    
    
    
    
    (1,969
    )Net cash from (used in) financing activities
    
    
    161
    
    
    
    (6,451
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,070
    
    
    
    451Net increase (decrease) in cash and cash equivalents
    
    
    (2,599
    )
    
    
    (1,216
    )Cash and cash equivalents, beginning of period
    
    
    51,291
    
    
    
    42,452Cash and cash equivalents, end of period
    
    
    48,692
    
    
    
    41,236
 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 CASH FLOWS (continued)
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2010
    
    
    2009Supplemental disclosure of cash flow informationCash paid (received) during the period forInterest
    
    
    14,429
    
    
    
    28,258Income taxes
    
    
    102
    
    
    
    29Supplemental schedule of non-cash investing and financing activitiesAcquisition of production and other equipment under capital lease
obligations
    
    
    212
    
    
    
    36Increase (decrease) in accounts payable relating to investing activities
    
    
    (983
    )
    
    
    461
 The accompanying notes are an integral part of these interim consolidated financial statements.




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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
 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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##### Table of Contents



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
  Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months EndedMarch 31,2010
    
    
    2009Net income (loss) attributable to common shareholders  basic and diluted
    
    
    (7,546
    )
    
    
    (39,350
    )Net income (loss) per share attributable to common shareholders:Basic and diluted
    
    
    (0.21
    )
    
    
    (1.08
    )Weighted average number of common shares outstanding:Basic (1)
    
    
    36,320,190
    
    
    
    36,285,027Effect of dilutive instruments:Performance rights
    
    
    
    
    
    
    Stock options and awards
    
    
    
    
    
    
    Convertible notes
    
    
    
    
    
    
    Diluted
    
    
    36,320,190
    
    
    
    36,285,027
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock
which have been issued, but have not vested as at March 31, 2010 and 2009.




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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 3. Net Income (Loss) Per Share Attributable to Common Shareholders (continued)
      Note 4. Inventories
 March 31, 2010
    
    
    December 31, 2009Raw materials
    
    
    31,108
    
    
    
    24,888Finished goods
    
    
    25,023
    
    
    
    24,198Work in process and other
    
    
    25,599
    
    
    
    23,543
    81,730
    
    
    
    72,629




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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
  March 31, 2010
    
    
    December 31, 2009Note payable to bank, included in a
total loan credit facility of
827,950 to finance the construction
related to the Stendal mill (a)
    
    
    506,323
    
    
    
    514,574Senior notes due February 2013,
interest at 9.25% accrued and
payable semi-annually, unsecured (b)
    
    
    229,188
    
    
    
    216,299Subordinated convertible notes due
October 2010, interest at 8.5%
accrued and payable semi-annually
(c)
    
    
    1,682
    
    
    
    16,749Subordinated convertible notes due
January 2012, interest at 8.5%
accrued and payable semi-annually
(d)
    
    
    45,166
    
    
    
    26,160Credit agreement with a lender with
respect to a revolving credit
facility of C$40 million (e)
    
    
    17,471
    
    
    
    16,000Loan payable to the noncontrolling
shareholder of the Stendal mill (f)
    
    
    30,045
    
    
    
    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)
    
    
    3,511
    
    
    
    3,511Credit agreement with a bank with
respect to a revolving credit
facility of 3,500 (i)
    
    
    
    
    
    
    833,386
    
    
    
    829,174Less: current portion
    
    
    (23,020
    )
    
    
    (16,032
    )Debt, less current portion
    
    
    810,366
    
    
    
    813,142
  
 Matures
    
    Amount2010
    
    
    7,8932011
    
    
    24,2552012
    
    
    70,8372013(1)
    
    
    287,4502014
    
    
    40,000Thereafter
    
    
    402,951
    833,386
 
 (1)
    
    Includes revolving credit facility principal amounts totalling 17,471.




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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 1.85% (rates on amounts of borrowing at March 31, 2010
range from 1.85% to 2.44%), 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 468,823 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.
     
 (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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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 March 31, 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 8.5% 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).
 (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 three months
ended March 31, 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.




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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 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 March
31, 2010, this facility was partially drawn at C$24.0 million and was accruing interest at a
rate of approximately 4.19%.
 (f)
    
    Loans payable to the noncontrolling shareholder of the Stendal mill bear interest at 7%,
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 March 31, 2010, this facility was
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 March 31,
2010, this facility was drawn by 3,511 and was accruing interest at a rate of 3.71%.
 (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 3.5% and are secured by certain land at our Rosenthal
mill. As at March 31, 2010, this facility was undrawn.
 Note 6. Derivative Transactions




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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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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 March 31,2010
    
    
    2009Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    19
    
    
    
    93
    
    
    
    14
    
    
    
    83Interest cost
    
    
    397
    
    
    
    183
    
    
    
    370
    
    
    
    199Expected return on plan assets
    
    
    (371
    )
    
    
    
    
    
    
    (311
    )
    
    
    Recognized net loss (gain)
    
    
    104
    
    
    
    (74
    )
    
    
    34
    
    
    
    (58
    )Net periodic benefit cost
    
    
    149
    
    
    
    202
    
    
    
    107
    
    
    
    224
 Note 8. Share Capital
 Common shares
    Preferred 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 9. Financial Instruments
  March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCash and cash equivalents
    
    
    48,692
    
    
    
    48,692
    
    
    
    51,291
    
    
    
    51,291Investments
    
    
    142
    
    
    
    142
    
    
    
    135
    
    
    
    135Receivables
    
    
    90,391
    
    
    
    90,391
    
    
    
    71,143
    
    
    
    71,143Notes receivable
    
    
    4,044
    
    
    
    4,044
    
    
    
    3,819
    
    
    
    3,819Accounts payable and accrued expenses
    
    
    105,380
    
    
    
    105,380
    
    
    
    85,185
    
    
    
    85,185Debt
    
    
    833,386
    
    
    
    838,190
    
    
    
    829,174
    
    
    
    769,207Interest rate derivative contracts  liability
    
    
    59,418
    
    
    
    59,418
    
    
    
    52,873
    
    
    
    52,873
   identical
 similar




---



##### 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)
    Fair value measurements at March 31, 2010 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    142LiabilitiesDerivatives (b) Interest rate
swaps
    
    
    
    
    
    
    59,418
    
    
    
    
    
    
    
    59,418
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (yield curves observable at specific intervals). Note 10. Noncontrolling Interest
 




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 11. Commitments and Contingencies
 




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 March 31, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent
assetsCash and cash equivalents
    
    
    26,083
    
    
    
    22,609
    
    
    
    
    
    
    
    48,692Receivables
    
    
    53,074
    
    
    
    37,317
    
    
    
    
    
    
    
    90,391Inventories
    
    
    56,932
    
    
    
    24,798
    
    
    
    
    
    
    
    81,730Prepaid expenses and other
    
    
    3,872
    
    
    
    3,696
    
    
    
    
    
    
    
    7,568Total current assets
    
    
    139,961
    
    
    
    88,420
    
    
    
    
    
    
    
    228,381Property, plant and equipment
    
    
    375,279
    
    
    
    500,618
    
    
    
    
    
    
    
    875,897Deferred note issuance and other
    
    
    3,170
    
    
    
    4,643
    
    
    
    
    
    
    
    7,813Deferred income tax
    
    
    3,698
    
    
    
    
    
    
    
    
    
    
    
    3,698Due from unrestricted group
    
    
    71,487
    
    
    
    
    
    
    
    (71,487
    )
    
    
    Note receivable
    
    
    2,698
    
    
    
    
    
    
    
    
    
    
    
    2,698Total assets
    
    
    596,293
    
    
    
    593,681
    
    
    
    (71,487
    )
    
    
    1,118,487LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    60,456
    
    
    
    44,924
    
    
    
    
    
    
    
    105,380Pension and other post-retirement benefit
obligations
    
    
    619
    
    
    
    
    
    
    
    
    
    
    
    619Debt
    
    
    2,770
    
    
    
    20,250
    
    
    
    
    
    
    
    23,020Total current liabilities
    
    
    63,845
    
    
    
    65,174
    
    
    
    
    
    
    
    129,019Debt
    
    
    294,248
    
    
    
    516,118
    
    
    
    
    
    
    
    810,366Due to restricted group
    
    
    
    
    
    
    71,487
    
    
    
    (71,487
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    59,418
    
    
    
    
    
    
    
    59,418Pension and other post-retirement benefit obligations
    
    
    19,740
    
    
    
    
    
    
    
    
    
    
    
    19,740Capital leases and other
    
    
    6,718
    
    
    
    4,369
    
    
    
    
    
    
    
    11,087Total liabilities
    
    
    384,551
    
    
    
    716,566
    
    
    
    (71,487
    )
    
    
    1,029,630EQUITYTotal shareholders equity (deficit)
    
    
    211,742
    
    
    
    (88,242
    )
    
    
    
    
    
    
    123,500Noncontrolling interest (deficit)
    
    
    
    
    
    
    (34,643
    )
    
    
    
    
    
    
    (34,643
    )Total liabilities and equity
    
    
    596,293
    
    
    
    593,681
    
    
    
    (71,487
    )
    
    
    1,118,487




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 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
    
    
    
    
    
    
    
    12,157Deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total 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




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended March 31, 2010Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    106,417
    
    
    
    64,704
    
    
    
    
    
    
    
    171,121Energy
    
    
    3,375
    
    
    
    5,756
    
    
    
    
    
    
    
    9,131109,792
    
    
    
    70,460
    
    
    
    
    
    
    
    180,252Operating costs
    
    
    81,665
    
    
    
    58,744
    
    
    
    
    
    
    
    140,409Operating depreciation and amortization
    
    
    7,213
    
    
    
    6,511
    
    
    
    
    
    
    
    13,724Selling, general and administrative expenses and other
    
    
    4,841
    
    
    
    3,254
    
    
    
    
    
    
    
    8,09593,719
    
    
    
    68,509
    
    
    
    
    
    
    
    162,228Operating income (loss)
    
    
    16,073
    
    
    
    1,951
    
    
    
    
    
    
    
    18,024Other income (expense)Interest expense
    
    
    (7,320
    )
    
    
    (10,264
    )
    
    
    1,161
    
    
    
    (16,423
    )Investment income (loss)
    
    
    1,239
    
    
    
    16
    
    
    
    (1,161
    )
    
    
    94Foreign exchange gain (loss) on debt
    
    
    (5,231
    )
    
    
    
    
    
    
    
    
    
    
    (5,231
    )Gain (loss) on extinguishment of convertible notes
    
    
    (929
    )
    
    
    
    
    
    
    
    
    
    
    (929
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    (6,546
    )
    
    
    
    
    
    
    (6,546
    )Total other income (expense)
    
    
    (12,241
    )
    
    
    (16,794
    )
    
    
    
    
    
    
    (29,035
    )Income (loss) before income taxes
    
    
    3,832
    
    
    
    (14,843
    )
    
    
    
    
    
    
    (11,011
    )Income tax benefit (provision)
    
    
    (161
    )
    
    
    (43
    )
    
    
    
    
    
    
    (204
    )Net income (loss)
    
    
    3,671
    
    
    
    (14,886
    )
    
    
    
    
    
    
    (11,215
    )Less: net
loss (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    3,669
    
    
    
    
    
    
    
    3,669Net income (loss) attributable to common shareholders
    
    
    3,671
    
    
    
    (11,217
    )
    
    
    
    
    
    
    (7,546
    )
 Three Months Ended March 31, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    75,016
    
    
    
    54,017
    
    
    
    
    
    
    
    129,033Energy
    
    
    4,016
    
    
    
    6,523
    
    
    
    
    
    
    
    10,53979,032
    
    
    
    60,540
    
    
    
    
    
    
    
    139,572Operating costs
    
    
    74,435
    
    
    
    57,562
    
    
    
    
    
    
    
    131,997Operating depreciation and amortization
    
    
    6,704
    
    
    
    6,697
    
    
    
    
    
    
    
    13,401Selling, general and administrative expenses and other
    
    
    3,303
    
    
    
    3,284
    
    
    
    
    
    
    
    6,58784,442
    
    
    
    67,543
    
    
    
    
    
    
    
    151,985Operating income (loss)
    
    
    (5,410
    )
    
    
    (7,003
    )
    
    
    
    
    
    
    (12,413
    )Other income (expense)Interest expense
    
    
    (7,302
    )
    
    
    (10,356
    )
    
    
    1,109
    
    
    
    (16,549
    )Investment income (loss)
    
    
    916
    
    
    
    (3,009
    )
    
    
    (1,109
    )
    
    
    (3,202
    )Foreign exchange gain (loss) on debt
    
    
    (4,416
    )
    
    
    
    
    
    
    
    
    
    
    (4,416
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    (15,013
    )
    
    
    
    
    
    
    (15,013
    )Total other income (expense)
    
    
    (10,802
    )
    
    
    (28,378
    )
    
    
    
    
    
    
    (39,180
    )Income (loss) before income taxes
    
    
    (16,212
    )
    
    
    (35,381
    )
    
    
    
    
    
    
    (51,593
    )Income tax benefit (provision)
    
    
    208
    
    
    
    2,774
    
    
    
    
    
    
    
    2,982Net income (loss)
    
    
    (16,004
    )
    
    
    (32,607
    )
    
    
    
    
    
    
    (48,611
    )Less: net
loss (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    9,261
    
    
    
    
    
    
    
    9,261Net income (loss) attributable to common shareholders
    
    
    (16,004
    )
    
    
    (23,346
    )
    
    
    
    
    
    
    (39,350
    )




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statement of Cash Flows
 Three Months Ended March 31, 2010Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    3,671
    
    
    
    (11,217
    )
    
    
    (7,546
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    6,546
    
    
    
    6,546Foreign exchange (gain) loss on debt
    
    
    5,231
    
    
    
    
    
    
    
    5,231Loss (gain) on extinguishment of convertible notes
    
    
    929
    
    
    
    
    
    
    
    929Depreciation and amortization
    
    
    7,310
    
    
    
    6,511
    
    
    
    13,821Accretion (income) expense
    
    
    431
    
    
    
    
    
    
    
    431Noncontrolling interest
    
    
    
    
    
    
    (3,669
    )
    
    
    (3,669
    )Stock compensation expense
    
    
    506
    
    
    
    
    
    
    
    506Pension and other post-retirement expense, net of funding
    
    
    194
    
    
    
    
    
    
    
    194Other
    
    
    388
    
    
    
    615
    
    
    
    1,003Changes in current assets and liabilitiesReceivables
    
    
    (16,382
    )
    
    
    (762
    )
    
    
    (17,144
    )Inventories
    
    
    (193
    )
    
    
    (5,066
    )
    
    
    (5,259
    )Accounts payable and accrued expenses
    
    
    (2,845
    )
    
    
    10,800
    
    
    
    7,955Other(1)
    
    
    1,062
    
    
    
    (2,343
    )
    
    
    (1,281
    )Net cash from (used in) operating activities
    
    
    302
    
    
    
    1,415
    
    
    
    1,717Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (4,927
    )
    
    
    (923
    )
    
    
    (5,850
    )Proceeds on sale of property, plant and equipment
    
    
    54
    
    
    
    333
    
    
    
    387Note receivable
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Net cash from (used in) investing activities
    
    
    (4,957
    )
    
    
    (590
    )
    
    
    (5,547
    )Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    
    
    
    
    (8,250
    )
    
    
    (8,250
    )Repayment of capital lease obligations
    
    
    (382
    )
    
    
    (622
    )
    
    
    (1,004
    )Proceeds from government investment grants
    
    
    9,415
    
    
    
    
    
    
    
    9,415Net cash from (used in) financing activities
    
    
    9,033
    
    
    
    (8,872
    )
    
    
    161Effect of exchange rate changes on cash and cash equivalents
    
    
    1,070
    
    
    
    
    
    
    
    1,070Net increase (decrease) in cash and cash equivalents
    
    
    5,448
    
    
    
    (8,047
    )
    
    
    (2,599
    )Cash and cash equivalents, beginning of period
    
    
    20,635
    
    
    
    30,656
    
    
    
    51,291Cash and cash equivalents, end of period
    
    
    26,083
    
    
    
    22,609
    
    
    
    48,692
 
 (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 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statement of Cash Flows
 Three Months Ended March 31, 2009Restricted
    
    
    Unrestricted
    
    
    ConsolidatedGroup
    
    
    Group
    
    
    GroupCash flows from (used in) operating activitiesNet income (loss) attributable to common shareholders
    
    
    (16,004
    )
    
    
    (23,346
    )
    
    
    (39,350
    )Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesLoss (gain) on derivative instruments
    
    
    
    
    
    
    15,013
    
    
    
    15,013Foreign exchange (gain) loss on debt
    
    
    4,416
    
    
    
    
    
    
    
    4,416Depreciation and amortization
    
    
    6,770
    
    
    
    6,697
    
    
    
    13,467Noncontrolling interest
    
    
    
    
    
    
    (9,261
    )
    
    
    (9,261
    )Deferred income taxes
    
    
    (226
    )
    
    
    (2,805
    )
    
    
    (3,031
    )Stock compensation expense
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Pension and other post-retirement expense, net of funding
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Inventory provisions
    
    
    3,233
    
    
    
    1,354
    
    
    
    4,587Other
    
    
    (21
    )
    
    
    (2,879
    )
    
    
    (2,900
    )Changes in current assets and liabilitiesReceivables
    
    
    15,753
    
    
    
    4,228
    
    
    
    19,981Inventories
    
    
    1,599
    
    
    
    4,520
    
    
    
    6,119Accounts payable and accrued expenses
    
    
    394
    
    
    
    (7,615
    )
    
    
    (7,221
    )Other(1)
    
    
    (11,115
    )
    
    
    12,115
    
    
    
    1,000Net cash from (used in) operating activities
    
    
    4,750
    
    
    
    (1,979
    )
    
    
    2,771Cash flows from (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (7,175
    )
    
    
    (531
    )
    
    
    (7,706
    )Proceeds on sale of property, plant and equipment
    
    
    52
    
    
    
    77
    
    
    
    129Cash, restricted
    
    
    
    
    
    
    9,469
    
    
    
    9,469Note receivable
    
    
    121
    
    
    
    
    
    
    
    121Net cash from (used in) investing activities
    
    
    (7,002
    )
    
    
    9,015
    
    
    
    2,013Cash flows from (used in) financing activitiesRepayment of notes payable and debt
    
    
    (5,550
    )
    
    
    (8,250
    )
    
    
    (13,800
    )Repayment of capital lease obligations
    
    
    (143
    )
    
    
    (539
    )
    
    
    (682
    )Proceeds from borrowings of notes payable and debt
    
    
    10,000
    
    
    
    
    
    
    
    10,000Payment of deferred note issuance costs
    
    
    
    
    
    
    (1,969
    )
    
    
    (1,969
    )Net cash from (used in) financing activities
    
    
    4,307
    
    
    
    (10,758
    )
    
    
    (6,451
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    451
    
    
    
    
    
    
    
    451Net increase (decrease) in cash and cash equivalents
    
    
    2,506
    
    
    
    (3,722
    )
    
    
    (1,216
    )Cash and cash equivalents, beginning of period
    
    
    26,176
    
    
    
    16,276
    
    
    
    42,452Cash and cash equivalents, end of period
    
    
    28,682
    
    
    
    12,554
    
    
    
    41,236
 
 (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
   Current Market Environment




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First Quarter Operational Snapshot
  Three Months Ended March 31,2010
    
    
    2009Pulp Production (000 ADMTs)
    
    
    329.5
    
    
    
    345.6Scheduled Production Downtime (000 ADMTs)
    
    
    18.2
    
    
    
    Pulp Sales (000 ADMTs)
    
    
    332.9
    
    
    
    336.7Pulp Revenues (in millions)
    
    
    171.1
    
    
    
    129.0NBSK pulp list prices in Europe ($/ADMT)
    
    $
    860
    
    
    $
    585NBSK pulp list prices (/ADMT)
    
    
    621
    
    
    
    449Average pulp sales realizations (/ADMT)(1)
    
    
    507
    
    
    
    377Energy Production (000 MWh)
    
    
    337.7
    
    
    
    356.3Energy Sales (000 MWh)
    
    
    107.1
    
    
    
    112.2Energy Revenue (in millions)
    
    
    9.1
    
    
    
    10.5Average energy sales realizations (/MWh)
    
    
    85
    
    
    
    94Average Spot Currency Exchange Rates / $(2)
    
    
    0.7230
    
    
    
    0.7676C$ / $(2)
    
    
    1.0413
    
    
    
    1.2448C$ / (3)
    
    
    1.4406
    
    
    
    1.6217
 
 (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 March 31, 2010 Compared to Three Months Ended March 31, 2009
    
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   
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Three Months EndedMarch 31,2010
    
    
    2009(in thousands)Net income (loss) attributable to common shareholders
    
    
    (7,546
    )
    
    
    (39,350
    )Net income (loss) attributable to noncontrolling interest
    
    
    (3,669
    )
    
    
    (9,261
    )Income taxes (benefits)
    
    
    204
    
    
    
    (2,982
    )Interest expense
    
    
    16,423
    
    
    
    16,549Investment (income) loss
    
    
    (94
    )
    
    
    3,202Foreign exchange (gain) loss on debt
    
    
    5,231
    
    
    
    4,416Loss on extinguishment of convertible notes
    
    
    929
    
    
    
    Loss (gain) on derivative instruments
    
    
    6,546
    
    
    
    15,013Operating income (loss)
    
    
    18,024
    
    
    
    (12,413
    )Add: Depreciation and amortization
    
    
    13,821
    
    
    
    13,467Operating EBITDA
    
    
    31,845
    
    
    
    1,054
 Liquidity and Capital Resources
  As at
    
    
    As atMarch 31,
    
    
    December 31,2010
    
    
    2009(in thousands)Financial PositionCash and cash equivalents
    
    
    48,692
    
    
    
    51,291Working capital
    
    
    99,362
    
    
    
    99,150Property, plant and equipment
    
    
    875,897
    
    
    
    868,558Total assets
    
    
    1,118,487
    
    
    
    1,083,831Long-term liabilities
    
    
    900,611
    
    
    
    896,074Total equity
    
    
    88,857
    
    
    
    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 March 31, 2010 Compared to Three Months Ended March
31, 2009
    
  
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 
 
  
   
  Three Months EndedMarch 31,2010
    
    
    2009(in thousands)Restricted Group(1)Net income (loss) attributable to common shareholders
    
    
    3,671
    
    
    
    (16,004
    )Income taxes (benefits)
    
    
    161
    
    
    
    (208
    )Interest expense
    
    
    7,320
    
    
    
    7,302Investment (income) loss
    
    
    (1,239
    )
    
    
    (916
    )Foreign exchange (gain) loss on debt
    
    
    5,231
    
    
    
    4,416Loss on extinguishment of convertible notes
    
    
    929
    
    
    
    Operating income (loss)
    
    
    16,073
    
    
    
    (5,410
    )Add: Depreciation and amortization
    
    
    7,310
    
    
    
    6,770Operating EBITDA(1)
    
    
    23,383
    
    
    
    1,360
 
 (1)
    
    See Note 12 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
  As at
    
    
    As atMarch 31,
    
    
    December 31,2010
    
    
    2009(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    26,083
    
    
    
    20,635Working capital
    
    
    76,116
    
    
    
    57,015Property, plant and equipment
    
    
    375,279
    
    
    
    362,311Total assets
    
    
    596,293
    
    
    
    555,977Long-term liabilities
    
    
    320,706
    
    
    
    301,173Total equity
    
    
    211,742
    
    
    
    200,247
 
 (1)
    
    See Note 12 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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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
   
 
 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
  
 
 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. Gandossi

David M. GandossiSecretary and Chief Financial Officer