##### 



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 June 30, 2007
 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 þ 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERSITEM 6. EXHIBITSSIGNATURES 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)




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MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED BALANCE SHEETS
 As at June 30, 2007 and December 31, 2006
(Unaudited)
(Euros in thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    
    48,302
    
    
    
    69,367Receivables
    
    
    104,494
    
    
    
    75,022Note receivable, current portion
    
    
    5,834
    
    
    
    7,798Inventories (Note 4)
    
    
    94,891
    
    
    
    62,857Prepaid expenses and other
    
    
    5,462
    
    
    
    4,662Current assets of discontinued operations (Note 10)
    
    
    1,104
    
    
    
    2,094Total current assets
    
    
    260,087
    
    
    
    221,800Long-Term AssetsCash restricted
    
    
    45,000
    
    
    
    57,000Property, plant and equipment
    
    
    968,830
    
    
    
    972,143Investments
    
    
    88
    
    
    
    1Unrealized foreign exchange rate derivative gain
    
    
    
    
    
    
    5,933Deferred note issuance and other costs
    
    
    6,294
    
    
    
    6,984Deferred income tax
    
    
    18,670
    
    
    
    29,989Note receivable, less current portion
    
    
    4,506
    
    
    
    8,7441,043,388
    
    
    
    1,080,794Total assets
    
    
    1,303,475
    
    
    
    1,302,594LIABILITIESCurrent LiabilitiesAccounts payable and accrued expenses
    
    
    100,970
    
    
    
    84,173Debt, current portion
    
    
    33,364
    
    
    
    33,903Current liabilities of discontinued operations (Note 10)
    
    
    651
    
    
    
    1,926Total current liabilities
    
    
    134,985
    
    
    
    120,002Long-Term LiabilitiesDebt, less current portion (Note 8)
    
    
    848,990
    
    
    
    873,928Unrealized interest rate derivative loss
    
    
    17,570
    
    
    
    41,355Pension and other post-retirement benefit obligations
(Note 6)
    
    
    18,940
    
    
    
    17,954Capital leases
    
    
    6,457
    
    
    
    6,202Deferred income tax
    
    
    24,565
    
    
    
    22,911Other long-term liabilities
    
    
    3,617
    
    
    
    1,441920,139
    
    
    
    963,791Total liabilities
    
    
    1,055,124
    
    
    
    1,083,793Minority Interest
    
    
    
    
    
    
    SHAREHOLDERS EQUITYCommon shares (Note 8)
    
    
    202,626
    
    
    
    195,642Additional paid-in capital
    
    
    134
    
    
    
    154Retained earnings
    
    
    19,485
    
    
    
    15,240Accumulated other comprehensive income
    
    
    26,106
    
    
    
    7,765Total shareholders equity
    
    
    248,351
    
    
    
    218,801Total liabilities and shareholders equity
    
    
    1,303,475
    
    
    
    1,302,594
 The accompanying notes are an integral part of these interim financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 For Six Months Ended June 30, 2007 and 2006
(Unaudited)
(Euros in thousands, except for loss per share)
 2007
    
    
    2006Revenues
    
    
    346,134
    
    
    
    292,262Costs and expensesOperating costs
    
    
    277,555
    
    
    
    239,292Operating depreciation and amortization
    
    
    27,719
    
    
    
    28,32540,860
    
    
    
    24,645General and administrative expenses
    
    
    16,206
    
    
    
    16,314(Sale) purchase of emission allowances
    
    
    (766
    )
    
    
    (13,246
    )Operating income from continuing operations
    
    
    25,420
    
    
    
    21,577Other income (expense)Interest expense
    
    
    (37,709
    )
    
    
    (45,728
    )Investment income
    
    
    3,195
    
    
    
    3,003Unrealized foreign exchange gain on debt
    
    
    2,603
    
    
    
    12,173Realized gain (loss) on derivative instruments (Note 5)
    
    
    6,820
    
    
    
    (5,219
    )Unrealized gain on derivative instruments (Note 5)
    
    
    17,852
    
    
    
    90,724Total other (expense) income
    
    
    (7,239
    )
    
    
    54,953Income before income taxes and minority interest
from continuing operations
    
    
    18,181
    
    
    
    76,530Income tax provision
    
    
    (13,705
    )
    
    
    (42,920
    )Income before minority interest from continuing operations
    
    
    4,476
    
    
    
    33,610Minority interest
    
    
    (43
    )
    
    
    898Net income from continuing operations
    
    
    4,433
    
    
    
    34,508Net (loss) income from discontinued operations
    
    
    (188
    )
    
    
    501Net income
    
    
    4,245
    
    
    
    35,009Retained earnings (deficit), beginning of period
    
    
    15,240
    
    
    
    (47,970
    )Retained earnings (deficit), end of period
    
    
    19,485
    
    
    
    (12,961
    )Net income per share from continuing operations (Note 3)Basic
    
    
    0.12
    
    
    
    1.04Diluted
    
    
    0.12
    
    
    
    0.85Income per shareBasic
    
    
    0.12
    
    
    
    1.06Diluted
    
    
    0.12
    
    
    
    0.86
 The accompanying notes are an integral part of these interim financial statements.
 FORM 10-QQUARTERLY REPORT  PAGE 4




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MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 For Three Months Ended June 30, 2007 and 2006
(Unaudited)
(Euros in thousands, except for loss per share)
 2007
    
    
    2006Revenues
    
    
    176,603
    
    
    
    150,594Costs and expensesOperating costs
    
    
    142,808
    
    
    
    124,385Operating depreciation and amortization
    
    
    13,990
    
    
    
    14,63719,805
    
    
    
    11,572General and administrative expenses
    
    
    8,901
    
    
    
    8,597(Sale) purchase of emission allowances
    
    
    (39
    )
    
    
    (7,608
    )Operating income from continuing operations
    
    
    10,943
    
    
    
    10,583Other income (expense)Interest expense
    
    
    (17,641
    )
    
    
    (22,914
    )Investment income
    
    
    1,584
    
    
    
    1,263Unrealized foreign exchange gain on debt
    
    
    1,349
    
    
    
    6,060Realized loss on derivative instruments (Note 5)
    
    
    
    
    
    
    (1,657
    )Unrealized gain on derivative instruments (Note 5)
    
    
    18,100
    
    
    
    46,347Total other income
    
    
    3,392
    
    
    
    29,099Income before income taxes and minority interest
from continuing operations
    
    
    14,335
    
    
    
    39,682Income tax provision
    
    
    (9,904
    )
    
    
    (21,807
    )Income before minority interest from continuing operations
    
    
    4,431
    
    
    
    17,875Minority interest
    
    
    (1,091
    )
    
    
    449Net income from continuing operations
    
    
    3,340
    
    
    
    18,324Net (loss) income from discontinued operations
    
    
    (181
    )
    
    
    97Net income
    
    
    3,159
    
    
    
    18,421Retained earnings (deficit), beginning of period
    
    
    16,326
    
    
    
    (31,382
    )Retained earnings (deficit), end of period
    
    
    19,485
    
    
    
    (12,961
    )Net income per share from continuing operations (Note 3)Basic
    
    
    0.09
    
    
    
    0.55Diluted
    
    
    0.09
    
    
    
    0.45Income per shareBasic
    
    
    0.09
    
    
    
    0.56Diluted
    
    
    0.09
    
    
    
    0.45
 The accompanying notes are an integral part of these interim financial statements.
 FORM 10-QQUARTERLY REPORT  PAGE 5




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MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 For Six Months Ended June 30, 2007 and 2006
(Unaudited)
(Euros in thousands)
 2007
    
    
    2006Net income
    
    
    4,245
    
    
    
    35,009Other comprehensive income:Foreign currency translation adjustment
    
    
    18,254
    
    
    
    5,360Pension plan additional minimum liability
    
    
    
    
    
    
    (17
    )Unrealized gains on securitiesUnrealized holding gains arising during the period
    
    
    87
    
    
    
    690Other comprehensive income
    
    
    18,341
    
    
    
    6,033Total comprehensive income
    
    
    22,586
    
    
    
    41,042
 The accompanying notes are an integral part of these interim financial statements.
 FORM 10-QQUARTERLY REPORT  PAGE 6




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MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 For Three Months Ended June 30, 2007 and 2006
(Unaudited)
(Euros in thousands)
 2007
    
    
    2006Net income
    
    
    3,159
    
    
    
    18,421Other comprehensive income:Foreign currency translation adjustment
    
    
    16,350
    
    
    
    8,345Pension plan additional minimum liability
    
    
    
    
    
    
    2Unrealized gains on securitiesUnrealized holding gains arising during the period
    
    
    85
    
    
    
    569Other comprehensive income
    
    
    16,435
    
    
    
    8,916Total comprehensive income
    
    
    19,594
    
    
    
    27,337
 The accompanying notes are an integral part of these interim financial statements.
 FORM 10-QQUARTERLY REPORT  PAGE 7




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MERCER INTERNATIONAL INC.
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For Six Months Ended June 30, 2007 and 2006
(Unaudited)
(Euros in thousands)
 2007
    
    
    2006Cash Flows (used in) from Operating Activities:Net income
    
    
    4,245
    
    
    
    35,009Adjustments to reconcile net loss to cash flows
from operating activitiesUnrealized gains on derivatives
    
    
    (17,852
    )
    
    
    (85,505
    )Unrealized foreign exchange gain on debt
    
    
    (2,603
    )
    
    
    (12,173
    )Operating depreciation and amortization
    
    
    27,719
    
    
    
    28,944Non-operating amortization
    
    
    128
    
    
    
    138Minority interest
    
    
    43
    
    
    
    (898
    )Deferred income taxes
    
    
    12,972
    
    
    
    42,567Stock compensation expense
    
    
    196
    
    
    
    207Pension and other post-retirement expense
    
    
    955
    
    
    
    871Other
    
    
    924
    
    
    
    (979
    )Changes in current assets and liabilitiesReceivables
    
    
    (26,721
    )
    
    
    (13,486
    )Inventories
    
    
    (29,670
    )
    
    
    10,670Accounts payable and accrued expenses
    
    
    15,129
    
    
    
    (3,347
    )Other
    
    
    1,280
    
    
    
    (252
    )Net cash (used in) from operating activities
    
    
    (13,255
    )
    
    
    1,766Cash Flows from (used in) Investing Activities:Cash restricted
    
    
    12,000
    
    
    
    (40,817
    )Purchase of property, plant and equipment
    
    
    (10,537
    )
    
    
    (15,439
    )Proceeds on sale of property, plant and equipment
    
    
    527
    
    
    
    526Notes receivable
    
    
    4,731
    
    
    
    Pension and other post-retirement benefit funding
    
    
    (833
    )
    
    
    (908
    )Net cash from (used in) investing activities
    
    
    5,888
    
    
    
    (56,638
    )Cash Flows (used in) from Financing Activities:Decrease in construction costs payable
    
    
    
    
    
    
    (212
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    48,634Repayment of notes payable and debt
    
    
    (13,453
    )
    
    
    (375
    )Repayment of capital lease obligations
    
    
    (2,576
    )
    
    
    (2,431
    )Issuance of shares of common stock
    
    
    305
    
    
    
    69Net cash (used in) from financing activities
    
    
    (15,724
    )
    
    
    45,685Effect of exchange rate changes on cash and cash equivalents
    
    
    2,171
    
    
    
    (1,281
    )Net decrease in cash and cash equivalents
    
    
    (20,920
    )
    
    
    (10,468
    )Cash and cash equivalents, beginning of period(1)
    
    
    69,804
    
    
    
    83,547Cash and cash equivalents, end of period(2)
    
    
    48,884
    
    
    
    73,079Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    
    17,624
    
    
    
    42,309Income taxes
    
    
    615
    
    
    
    1,128Supplemental schedule of non-cash investing and financing
activities:Acquisition of production and other equipment under
capital lease obligations
    
    
    2,215
    
    
    
    2,123Common shares issued in satisfaction of floating rate note
    
    
    6,728
    
    
    
    
 
 (1)
    
    Includes amounts related to discontinued operations of: 2007  437, 2006  722
(Note 10)(2)
    
    Includes amounts related to discontinued operations of: 2007  582, 2006  751 (Note 10) The accompanying notes are an integral part of these interim financial statements.
 FORM 10-QQUARTERLY REPORT  PAGE 8




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 1. Basis of Presentation
 Basis of Presentation
   New Accounting Standards
  FORM 10-QQUARTERLY REPORT  PAGE 9




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 2. Stock-Based Compensation
 Share-Based
Paymen
 Stock Options
   Outstanding Options
    
    Exercisable OptionsWeighted AverageExercise
    
    
    
    
    
    Remaining
    
    Weighted Average
    
    
    
    
    
    Weighted AveragePrice Range
    
    Number
    
    Contractual Life
    
    Exercise price
    
    Number
    
    Exercise Price(In U.S. Dollars)
    
    
    
    
    
    (Years)
    
    (In U.S. Dollars)
    
    
    
    
    
    (In U.S. Dollars)$5.65  6.375
    
    
    830,000
    
    
    
    3.00
    
    
    $
    6.29
    
    
    
    830,000
    
    
    $
    6.298.50
    
    
    135,000
    
    
    
    
    
    
    
    8.50
    
    
    
    135,000
    
    
    
    8.507.30
    
    
    30,000
    
    
    
    8.00
    
    
    
    7.30
    
    
    
    20,000
    
    
    
    7.307.92
    
    
    68,334
    
    
    
    8.25
    
    
    
    7.92
    
    
    
    40,000
    
    
    
    7.92
  FORM 10-QQUARTERLY REPORT  PAGE 10




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 2. Stock-Based Compensation (contd)
 Restricted Stock
  
 
   FORM 10-QQUARTERLY REPORT  PAGE 11




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 3. Income Per Share
 Six Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income from continuing operations  basic
    
    
    4,433
    
    
    
    34,508
    
    
    
    3,341
    
    
    
    18,324Interest on convertible notes, net of tax
    
    
    
    
    
    
    2,767
    
    
    
    
    
    
    
    1,441Net income from continuing operations  diluted
    
    
    4,433
    
    
    
    37,275
    
    
    
    3,341
    
    
    
    19,765Net income from continuing operations per share:Basic
    
    
    0.12
    
    
    
    1.04
    
    
    
    0.09
    
    
    
    0.55Diluted
    
    
    0.12
    
    
    
    0.85
    
    
    
    0.09
    
    
    
    0.45Net income from continuing operations
    
    
    4,433
    
    
    
    34,508
    
    
    
    3,341
    
    
    
    18,324Net (loss) income from discontinued operations
    
    
    (188
    )
    
    
    501
    
    
    
    (181
    )
    
    
    97Net income  Basic
    
    
    4,245
    
    
    
    35,009
    
    
    
    3,160
    
    
    
    18,421Interest on convertible notes, net of tax
    
    
    
    
    
    
    2,767
    
    
    
    
    
    
    
    1,441Net income  Diluted
    
    
    4,245
    
    
    
    37,776
    
    
    
    3,160
    
    
    
    19,862Net income per share:Basic
    
    
    0.12
    
    
    
    1.06
    
    
    
    0.09
    
    
    
    0.56Diluted
    
    
    0.12
    
    
    
    0.86
    
    
    
    0.09
    
    
    
    0.45Weighted average number of common shares outstanding:Basic
    
    
    35,873,800
    
    
    
    33,169,637
    
    
    
    36,256,472
    
    
    
    33,170,129Effect of dilutive shares:Stock options and awards
    
    
    465,146
    
    
    
    274,686
    
    
    
    437,715
    
    
    
    292,002Convertible notes
    
    
    9,428,022
    
    
    
    10,645,161
    
    
    
    9,428,022
    
    
    
    10,645,161Diluted
    
    
    45,766,968
    
    
    
    44,089,484
    
    
    
    46,122,209
    
    
    
    44,107,292
  FORM 10-QQUARTERLY REPORT  PAGE 12




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MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 4. Inventories
 June 30, 2007
    
    
    December 31, 2006Raw materials
    
    
    66,886
    
    
    
    38,905Work in process and finished goods
    
    
    28,005
    
    
    
    23,952
    94,891
    
    
    
    62,857
 Note 5 . Derivatives Transactions
 Six Months Ended June 30,2007
    
    
    2006Realized net gain (loss) on derivative financial
instruments
    
    
    6,820
    
    
    
    (5,219
    )Unrealized net gain on interest rate derivatives
    
    
    23,786
    
    
    
    36,326Unrealized net (loss) gain on foreign exchange
derivatives
    
    
    (5,934
    )
    
    
    54,398Unrealized net gain on derivative financial instruments
    
    
    17,852
    
    
    
    90,724
 Three Months Ended June 30,2007
    
    
    2006Realized net loss on derivative financial instruments
    
    
    
    
    
    
    (1,657
    )Unrealized net gain on interest rate derivatives
    
    
    18,100
    
    
    
    12,820Unrealized net gain on foreign exchange derivatives
    
    
    
    
    
    
    33,527Unrealized net gain on derivative financial instruments
    
    
    18,100
    
    
    
    46,347
 FORM 10-QQUARTERLY REPORT  PAGE 13




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MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 6. Pension and Other Post-Retirement Benefit Obligations
   
 Six Months Ended June 30,2007
    
    
    2006Pension
    
    
    Post-Retirement
    
    
    Pension
    
    
    Post-RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    410
    
    
    
    230
    
    
    
    448
    
    
    
    227Interest cost
    
    
    666
    
    
    
    362
    
    
    
    706
    
    
    
    382Expected return on plan assets
    
    
    (815
    )
    
    
    
    
    
    
    (786
    )
    
    
    Recognized net loss
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    50Net periodic benefit cost
    
    
    261
    
    
    
    623
    
    
    
    368
    
    
    
    659
 Three Months Ended June 30,2007
    
    
    2006Pension
    
    
    Post-Retirement
    
    
    Pension
    
    
    Post-RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    209
    
    
    
    117
    
    
    
    222
    
    
    
    112Interest cost
    
    
    339
    
    
    
    184
    
    
    
    350
    
    
    
    190Expected return on plan assets
    
    
    (415
    )
    
    
    
    
    
    
    (389
    )
    
    
    Recognized net loss
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    25Net periodic benefit cost
    
    
    133
    
    
    
    317
    
    
    
    183
    
    
    
    327
 
 FORM 10-QQUARTERLY REPORT  PAGE 14




---



##### 



MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 7. Income Taxes
 Accounting for Uncertainty in Income Taxes 
An Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  
   
  Note
8. Common Shares
   
 FORM 10-QQUARTERLY REPORT  PAGE 15




---



##### 



MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 June 30, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiary
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    40,027
    
    
    
    8,275
    
    
    
    
    
    
    
    48,302Receivables
    
    
    50,159
    
    
    
    54,335
    
    
    
    
    
    
    
    104,494Note receivable, current portion
    
    
    617
    
    
    
    5,217
    
    
    
    
    
    
    
    5,834Inventories
    
    
    57,306
    
    
    
    37,585
    
    
    
    
    
    
    
    94,891Prepaid expenses and other
    
    
    2,445
    
    
    
    3,017
    
    
    
    
    
    
    
    5,462Current assets from discontinued operations
    
    
    1,104
    
    
    
    
    
    
    
    
    
    
    
    1,104Total current assets
    
    
    151,658
    
    
    
    108,429
    
    
    
    
    
    
    
    260,087Cash restricted
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    45,000Property, plant and equipment
    
    
    397,577
    
    
    
    571,253
    
    
    
    
    
    
    
    968,830Other
    
    
    6,382
    
    
    
    
    
    
    
    
    
    
    
    6,382Deferred income tax
    
    
    11,715
    
    
    
    6,955
    
    
    
    
    
    
    
    18,670Due from unrestricted group
    
    
    56,540
    
    
    
    
    
    
    
    (56,540
    )
    
    
    Note receivable, less current portion
    
    
    4,506
    
    
    
    
    
    
    
    
    
    
    
    4,506Total assets
    
    
    628,378
    
    
    
    731,637
    
    
    
    (56,540
    )
    
    
    1,303,475LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    52,366
    
    
    
    48,604
    
    
    
    
    
    
    
    100,970Debt, current portion
    
    
    
    
    
    
    33,364
    
    
    
    
    
    
    
    33,364Current liabilities from discontinued operations
    
    
    651
    
    
    
    
    
    
    
    
    
    
    
    651Total current liabilities
    
    
    53,017
    
    
    
    81,968
    
    
    
    
    
    
    
    134,985Debt, less current portion
    
    
    291,556
    
    
    
    557,434
    
    
    
    
    
    
    
    848,990Due to restricted group
    
    
    
    
    
    
    56,540
    
    
    
    (56,540
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    17,570
    
    
    
    
    
    
    
    17,570Capital leases
    
    
    4,520
    
    
    
    1,937
    
    
    
    
    
    
    
    6,457Deferred income tax
    
    
    4,125
    
    
    
    20,440
    
    
    
    
    
    
    
    24,565Other long-term liabilities
    
    
    22,544
    
    
    
    13
    
    
    
    
    
    
    
    22,557Total liabilities
    
    
    375,762
    
    
    
    735,902
    
    
    
    (56,540
    )
    
    
    1,055,124SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    252,616
    
    
    
    (4,265
    )
    
    
    
    
    
    
    248,351Total liabilities and shareholders equity
    
    
    628,378
    
    
    
    731,637
    
    
    
    (56,540
    )
    
    
    1,303,475
 FORM 10-QQUARTERLY REPORT  PAGE 16




---



##### 



MERCER
INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Balance Sheet
 December 31, 2006Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrentCash and cash equivalents
    
    
    39,078
    
    
    
    30,289
    
    
    
    
    
    
    
    69,367Receivables
    
    
    38,662
    
    
    
    36,360
    
    
    
    
    
    
    
    75,022Note receivable, current portion
    
    
    620
    
    
    
    7,178
    
    
    
    
    
    
    
    7,798Inventories
    
    
    41,087
    
    
    
    21,770
    
    
    
    
    
    
    
    62,857Prepaid expenses and other
    
    
    2,352
    
    
    
    2,310
    
    
    
    
    
    
    
    4,662Current assets of discontinued operations
    
    
    
    
    
    
    2,094
    
    
    
    
    
    
    
    2,094Total current assets
    
    
    121,799
    
    
    
    100,001
    
    
    
    
    
    
    
    221,800Cash restricted
    
    
    
    
    
    
    57,000
    
    
    
    
    
    
    
    57,000Property, plant and equipment
    
    
    408,957
    
    
    
    563,186
    
    
    
    
    
    
    
    972,143Other
    
    
    8,155
    
    
    
    4,763
    
    
    
    
    
    
    
    12,918Deferred income tax
    
    
    14,316
    
    
    
    15,673
    
    
    
    
    
    
    
    29,989Due from unrestricted group
    
    
    51,265
    
    
    
    
    
    
    
    (51,265
    )
    
    
    Note receivable, less current portion
    
    
    5,023
    
    
    
    3,721
    
    
    
    
    
    
    
    8,744Total assets
    
    
    609,515
    
    
    
    744,344
    
    
    
    (51,265
    )
    
    
    1,302,594LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    46,838
    
    
    
    37,335
    
    
    
    
    
    
    
    84,173Debt, current portion
    
    
    
    
    
    
    33,903
    
    
    
    
    
    
    
    33,903Current liabilities from discontinued operations
    
    
    
    
    
    
    1,926
    
    
    
    
    
    
    
    1,926Total current liabilities
    
    
    46,838
    
    
    
    73,164
    
    
    
    
    
    
    
    120,002Debt, less current portion
    
    
    293,781
    
    
    
    580,147
    
    
    
    
    
    
    
    873,928Due to restricted group
    
    
    
    
    
    
    51,265
    
    
    
    (51,265
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    41,355
    
    
    
    
    
    
    
    41,355Capital leases
    
    
    2,720
    
    
    
    3,482
    
    
    
    
    
    
    
    6,202Deferred income tax
    
    
    2,832
    
    
    
    20,079
    
    
    
    
    
    
    
    22,911Other long-term liabilities
    
    
    19,395
    
    
    
    
    
    
    
    
    
    
    
    19,395Total liabilities
    
    
    365,566
    
    
    
    769,492
    
    
    
    (51,265
    )
    
    
    1,083,793SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    243,949
    
    
    
    (25,148
    )
    
    
    
    
    
    
    218,801Total liabilities and shareholders equity
    
    
    609,515
    
    
    
    744,344
    
    
    
    (51,265
    )
    
    
    1,302,594
 FORM 10-QQUARTERLY REPORT  PAGE 17




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Six Months Ended June 30, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiary
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    204,240
    
    
    
    141,894
    
    
    
    
    
    
    
    346,134Operating costs
    
    
    161,829
    
    
    
    115,726
    
    
    
    
    
    
    
    277,555Operating depreciation and amortization
    
    
    13,661
    
    
    
    14,058
    
    
    
    
    
    
    
    27,719General and administrative expenses
    
    
    10,623
    
    
    
    5,583
    
    
    
    
    
    
    
    16,206(Sale) purchase of emission allowances
    
    
    (268
    )
    
    
    (498
    )
    
    
    
    
    
    
    (766
    )185,845
    
    
    
    134,869
    
    
    
    
    
    
    
    320,714Operating income from continuing operations
    
    
    18,395
    
    
    
    7,025
    
    
    
    
    
    
    
    25,420Other income (expense)Interest expense
    
    
    (14,418
    )
    
    
    (25,132
    )
    
    
    1,841
    
    
    
    (37,709
    )Investment income
    
    
    2,440
    
    
    
    2,596
    
    
    
    (1,841
    )
    
    
    3,195Unrealized foreign exchange gain on debt
    
    
    2,263
    
    
    
    340
    
    
    
    
    
    
    
    2,603Derivative financial instruments, net
    
    
    
    
    
    
    24,672
    
    
    
    
    
    
    
    24,672Total other (expense) income
    
    
    (9,715
    )
    
    
    2,476
    
    
    
    
    
    
    
    (7,239
    )Income before income taxes and
minority interest from continuing operations
    
    
    8,680
    
    
    
    9,501
    
    
    
    
    
    
    
    18,181Income tax provision
    
    
    (4,150
    )
    
    
    (9,555
    )
    
    
    
    
    
    
    (13,705
    )Income (loss) before minority interest from continuing
operations
    
    
    4,530
    
    
    
    (54
    )
    
    
    
    
    
    
    4,476Minority interest
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Net income (loss) from continuing operations
    
    
    4,530
    
    
    
    (97
    )
    
    
    
    
    
    
    4,433Net loss from discontinued operations
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    (188
    )Net income (loss)
    
    
    4,342
    
    
    
    (97
    )
    
    
    
    
    
    
    4,245
 Six Months Ended June 30, 2006Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    169,752
    
    
    
    122,510
    
    
    
    
    
    
    
    292,262Operating costs
    
    
    148,388
    
    
    
    90,904
    
    
    
    
    
    
    
    239,292Operating depreciation and amortization
    
    
    14,197
    
    
    
    14,128
    
    
    
    
    
    
    
    28,325General and administrative expenses
    
    
    10,375
    
    
    
    5,939
    
    
    
    
    
    
    
    16,314(Sale) purchase of emission allowances
    
    
    (3,651
    )
    
    
    (9,595
    )
    
    
    
    
    
    
    (13,246
    )169,309
    
    
    
    101,376
    
    
    
    
    
    
    
    270,685Operating income from continuing operations
    
    
    443
    
    
    
    21,134
    
    
    
    
    
    
    
    21,577Other income (expense)Interest expense
    
    
    (16,442
    )
    
    
    (31,046
    )
    
    
    1,760
    
    
    
    (45,728
    )Investment income
    
    
    2,119
    
    
    
    2,644
    
    
    
    (1,760
    )
    
    
    3,003Unrealized foreign exchange gain on debt
    
    
    12,173
    
    
    
    
    
    
    
    
    
    
    
    12,173Derivative financial instruments, net
    
    
    
    
    
    
    85,505
    
    
    
    
    
    
    
    85,505Total other income (expense)
    
    
    (2,150
    )
    
    
    57,103
    
    
    
    
    
    
    
    54,953Income (loss) before income taxes and
minority interest from continuing operations
    
    
    (1,707
    )
    
    
    78,237
    
    
    
    
    
    
    
    76,530Income tax provision
    
    
    (6,905
    )
    
    
    (36,015
    )
    
    
    
    
    
    
    (42,920
    )Income (loss) before minority interest from
continuing operations
    
    
    (8,612
    )
    
    
    42,222
    
    
    
    
    
    
    
    33,610Minority interest
    
    
    
    
    
    
    898
    
    
    
    
    
    
    
    898Net income (loss) from continuing operations
    
    
    (8,612
    )
    
    
    43,120
    
    
    
    
    
    
    
    34,508Net income from discontinued operations
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    501Net income (loss)
    
    
    (8,612
    )
    
    
    43,621
    
    
    
    
    
    
    
    35,009
 FORM 10-QQUARTERLY REPORT  PAGE 18




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Three Months Ended June 30, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiary
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    104,307
    
    
    
    72,296
    
    
    
    
    
    
    
    176,603Operating costs
    
    
    85,271
    
    
    
    57,537
    
    
    
    
    
    
    
    142,808Operating depreciation and amortization
    
    
    6,975
    
    
    
    7,015
    
    
    
    
    
    
    
    13,990General and administrative expenses
    
    
    6,264
    
    
    
    2,637
    
    
    
    
    
    
    
    8,901(Sale) purchase of emission allowances
    
    
    (4
    )
    
    
    (35
    )
    
    
    
    
    
    
    (39
    )98,506
    
    
    
    67,154
    
    
    
    
    
    
    
    165,660Operating income from continuing operations
    
    
    5,801
    
    
    
    5,142
    
    
    
    
    
    
    
    10,943Other income (expense)Interest expense
    
    
    (6,961
    )
    
    
    (11,606
    )
    
    
    926
    
    
    
    (17,641
    )Investment income
    
    
    1,136
    
    
    
    1,374
    
    
    
    (926
    )
    
    
    1,584Unrealized foreign exchange gain on debt
    
    
    1,009
    
    
    
    340
    
    
    
    
    
    
    
    1,349Derivative financial instruments, net
    
    
    
    
    
    
    18,100
    
    
    
    
    
    
    
    18,100Total other income (expense)
    
    
    (4,816
    )
    
    
    8,208
    
    
    
    
    
    
    
    3,392Income before income taxes and
minority interest from continuing operations
    
    
    985
    
    
    
    13,350
    
    
    
    
    
    
    
    14,335Income tax provision
    
    
    (1,612
    )
    
    
    (8,292
    )
    
    
    
    
    
    
    (9,904
    )Income (loss) before minority interest from continuing
operations
    
    
    (627
    )
    
    
    5,058
    
    
    
    
    
    
    
    4,431Minority interest
    
    
    
    
    
    
    (1,091
    )
    
    
    
    
    
    
    (1,091
    )Net income (loss) from continuing operations
    
    
    (627
    )
    
    
    3,967
    
    
    
    
    
    
    
    3,340Net loss from discontinued operations
    
    
    (181
    )
    
    
    
    
    
    
    
    
    
    
    (181
    )Net income (loss)
    
    
    (808
    )
    
    
    3,967
    
    
    
    
    
    
    
    3,159
 Three Months Ended June 30, 2006Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    88,741
    
    
    
    61,853
    
    
    
    
    
    
    
    150,594Operating costs
    
    
    79,249
    
    
    
    45,136
    
    
    
    
    
    
    
    124,385Operating depreciation and amortization
    
    
    7,568
    
    
    
    7,069
    
    
    
    
    
    
    
    14,637General and administrative expenses
    
    
    5,415
    
    
    
    3,182
    
    
    
    
    
    
    
    8,597(Sale) purchase of emission allowances
    
    
    (1,884
    )
    
    
    (5,724
    )
    
    
    
    
    
    
    (7,608
    )90,348
    
    
    
    49,663
    
    
    
    
    
    
    
    140,011Operating income from continuing operations
    
    
    (1,607
    )
    
    
    12,190
    
    
    
    
    
    
    
    10,583Other income (expense)Interest expense
    
    
    (7,979
    )
    
    
    (15,820
    )
    
    
    885
    
    
    
    (22,914
    )Investment income (loss)
    
    
    (142
    )
    
    
    2,290
    
    
    
    (885
    )
    
    
    1,263Unrealized foreign exchange gain on debt
    
    
    6,060
    
    
    
    
    
    
    
    
    
    
    
    6,060Derivative financial instruments, net
    
    
    79
    
    
    
    44,611
    
    
    
    
    
    
    
    44,690Total other income (expense)
    
    
    (1,982
    )
    
    
    31,081
    
    
    
    
    
    
    
    29,099Income (loss) before income taxes and
minority interest from continuing operations
    
    
    (3,589
    )
    
    
    43,271
    
    
    
    
    
    
    
    39,682Income tax provision
    
    
    (3,872
    )
    
    
    (17,935
    )
    
    
    
    
    
    
    (21,807
    )Income (loss) before minority interest from
continuing operations
    
    
    (7,461
    )
    
    
    25,336
    
    
    
    
    
    
    
    17,875Minority interest
    
    
    
    
    
    
    449
    
    
    
    
    
    
    
    449Net income (loss) from continuing operations
    
    
    (7,461
    )
    
    
    25,785
    
    
    
    
    
    
    
    18,324Net income from discontinued operations
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    97Net income (loss)
    
    
    (7,461
    )
    
    
    25,882
    
    
    
    
    
    
    
    18,421
 FORM 10-QQUARTERLY REPORT  PAGE 19




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Discontinued Operations
  
  .
  June 30, 2007
    
    December 31, 2006AssetsCash and cash equivalents
    
    
    582
    
    
    
    437Receivables
    
    
    522
    
    
    
    1,657LiabilitiesAccounts payable and accrued expenses
    
    
    651
    
    
    
    1,926
  Six Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    
    110
    
    
    
    33,507
    
    
    
    35
    
    
    
    16,111Operating (loss) income from discontinued operations
    
    
    (136
    )
    
    
    802
    
    
    
    (155
    )
    
    
    291Total other expenses
    
    
    52
    
    
    
    301
    
    
    
    26
    
    
    
    194Net (loss) income from discontinued operations
    
    
    (188
    )
    
    
    501
    
    
    
    (181
    )
    
    
    97Earnings (loss) per common share from discontinued
operations basic
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    0.01Earnings (loss) per common share from discontinued
operations diluted
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    
 FORM 10-QQUARTERLY REPORT  PAGE 20




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2007
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Discontinued Operations (contd)
  Six Months EndedJune 30,2007
    
    
    2006Cash flows from (used in) operating activities
    
    
    145
    
    
    
    (279
    )Cash flows used in investing activities
    
    
    
    
    
    
    (567
    )Cash flows from financing activities
    
    
    
    
    
    
    825Cash flows from (used in) discontinued operations
    
    
    145
    
    
    
    (21
    )
 FORM 10-QQUARTERLY REPORT  PAGE 21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
   
    
    the disposition of our paper operations in 2006. In accordance with SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets, the results of this
business have been classified as discontinued operations; and
    
    only our continuing operations except as otherwise expressly noted.
 Results of Operations
 Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
  Six Months Ended June 30,2007
    
    
    2006Pulp production (ADMTs)
    
    
    673,606
    
    
    
    626,210Pulp sales (ADMTs)
    
    
    666,151
    
    
    
    666,223Revenues (in millions)
    
    
    346.1
    
    
    
    292.3NBSK list prices in Europe ($/ADMT)
    
    $
    770
    
    
    $
    642Average pulp price realizations (/ADMT)
    
    
    515
    
    
    
    440Average Currency Exchange Rates / $(1)
    
    
    0.7522
    
    
    
    0.8131C$ / $(1)
    
    
    1.1349
    
    
    
    1.1385C$ / (2)
    
    
    1.5082
    
    
    
    1.3995
 
 (1)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(2)
    
    Average Bank of Canada noon spot rate over the reporting period. 
 FORM 10-QQUARTERLY REPORT  PAGE 22




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 
  
  
  
    
  
  
 FORM 10-QQUARTERLY REPORT  PAGE 23




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##### 



 
    
 
       
  
    FORM 10-QQUARTERLY REPORT  PAGE 24




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##### 



Six Months EndedJune 30,2007
    
    
    2006(in thousands)Net income from continuing operations
    
    
    4,433
    
    
    
    34,508Minority interest
    
    
    43
    
    
    
    (898
    )Income taxes
    
    
    13,705
    
    
    
    42,920Interest expense
    
    
    37,709
    
    
    
    45,728Investment income
    
    
    (3,195
    )
    
    
    (3,003
    )Unrealized foreign exchange gain on debt
    
    
    (24,672
    )
    
    
    (12,173
    )Derivative financial instruments, net gain
    
    
    (2,603
    )
    
    
    (85,505
    )Operating income from continuing operations
    
    
    25,420
    
    
    
    21,577Add: Depreciation and amortization
    
    
    27,847
    
    
    
    28,325Operating EBITDA
    
    
    53,267
    
    
    
    49,902
 Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
  Three Months Ended June 30,2007
    
    
    2006Pulp production (ADMTs)
    
    
    326,350
    
    
    
    307,742Pulp sales (ADMTs)
    
    
    337,016
    
    
    
    334,136Revenues (in millions)
    
    
    176.6
    
    
    
    150.6NBSK list prices in Europe ($/ADMT)
    
    $
    783
    
    
    $
    665Average pulp price realizations (/ADMT)
    
    
    518
    
    
    
    453Average Currency Exchange Rates / $(1)
    
    
    0.7416
    
    
    
    0.7957C$ / $(1)
    
    
    1.0981
    
    
    
    1.1224C$ / (2)
    
    
    1.4810
    
    
    
    1.4104
 
 (1)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(2)
    
    Average Bank of Canada noon spot rate over the reporting period.  
 FORM 10-QQUARTERLY REPORT  PAGE 25




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  
  
  
     
  
  
  
 FORM 10-QQUARTERLY REPORT  PAGE 26




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##### 



  
  
       
  
  Three Months EndedJune 30,2007
    
    
    2006(in thousands)Net income from continuing operations
    
    
    3,340
    
    
    
    18,324Minority interest
    
    
    1,091
    
    
    
    (449
    )Income taxes
    
    
    9,904
    
    
    
    21,807Interest expense
    
    
    17,641
    
    
    
    22,914Investment income
    
    
    (1,584
    )
    
    
    (1,263
    )Unrealized foreign exchange gain on debt
    
    
    (1,349
    )
    
    
    (6,060
    )Derivative financial instruments, net gain
    
    
    (18,100
    )
    
    
    (44,690
    )Operating income from continuing operations
    
    
    10,943
    
    
    
    10,583Add: Depreciation and amortization
    
    
    14,055
    
    
    
    14,637Operating EBITDA
    
    
    24,998
    
    
    
    25,220
 FORM 10-QQUARTERLY REPORT  PAGE 27




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##### 



Liquidity and Capital Resources
  As at
    
    As atJune 30,
    
    December 31,2007
    
    2006(in thousands)(unaudited)Financial PositionCash and cash equivalents
    
    
    48,302
    
    
    
    69,367Working capital(1)
    
    
    124,649
    
    
    
    101,630Property, plant and equipment
    
    
    968,830
    
    
    
    972,143Total assets(1)
    
    
    1,302,371
    
    
    
    1,300,500Long-term liabilities
    
    
    920,139
    
    
    
    963,791Shareholders equity
    
    
    248,351
    
    
    
    218,801
 
 (1)
    
    Excluding assets and liabilities of discontinued operations.  
   Operating Activities
        
  FORM 10-QQUARTERLY REPORT  PAGE 28




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##### 



Investing Activities
     
  
 Financing Activities
   
  Contractual Obligations and Commitments
  Capital Resources
  FORM 10-QQUARTERLY REPORT  PAGE 29




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##### 



Convertible Notes
  Foreign Currency
     
  Results of Operations of the Restricted Group Under Our Senior Note Indenture
   Restricted Group Results  Six Months Ended June 30, 2007 Compared to Six Months Ended June 30,
2006
    
  
 FORM 10-QQUARTERLY REPORT  PAGE 30




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##### 



 
   
    
  
  
    
  FORM 10-QQUARTERLY REPORT  PAGE 31




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##### 



Six Months EndedJune 30,2007
    
    
    2006(in thousands)Restricted GroupNet income (loss) from continuing operations(1)
    
    
    4,530
    
    
    
    (8,612
    )Income taxes
    
    
    4,150
    
    
    
    6,905Interest expense
    
    
    14,418
    
    
    
    16,442Investment and other income
    
    
    (2,440
    )
    
    
    (2,119
    )Unrealized foreign exchange gain on debt
    
    
    (2,263
    )
    
    
    (12,173
    )Operating income from continuing operations
    
    
    18,395
    
    
    
    443Add: Depreciation and amortization
    
    
    13,661
    
    
    
    14,197Operating EBITDA(1)
    
    
    32,056
    
    
    
    14,640
 
 (1)
    
    See Note 9 of the consolidated condensed financial statements included elsewhere herein for a reconciliation to our consolidated results. Restricted Group Results  Three Months Ended June 30, 2007 Compared to Three Months Ended
June 30, 2006
    
  
    
 FORM 10-QQUARTERLY REPORT  PAGE 32




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##### 



 
    
  
  
    
  FORM 10-QQUARTERLY REPORT  PAGE 33




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##### 



Three Months EndedJune 30,2007
    
    
    2006(in thousands)Restricted GroupNet loss from continuing operations(1)
    
    
    (627
    )
    
    
    (7,461
    )Income taxes
    
    
    1,612
    
    
    
    3,872Interest expense
    
    
    6,961
    
    
    
    7,979Investment and other (income) expense
    
    
    (1,136
    )
    
    
    142Unrealized foreign exchange gain on debt
    
    
    (1,009
    )
    
    
    (6,060
    )Derivative financial instruments, net loss
    
    
    
    
    
    
    (79
    )Operating income (loss) from continuing operations
    
    
    5,801
    
    
    
    (1,607
    )Add: Depreciation and amortization
    
    
    6,975
    
    
    
    7,568Operating EBITDA(1)
    
    
    12,776
    
    
    
    5,961
 
 (1)
    
    See Note 9 of the consolidated condensed financial statements included elsewhere herein for
a reconciliation to our consolidated results. Liquidity and Capital Resources of the Restricted Group
  As at
    
    As atJune 30,
    
    December 31,2007
    
    2006(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    40,027
    
    
    
    39,078Working capital(2)
    
    
    98,188
    
    
    
    74,961Property, plant and equipment
    
    
    397,577
    
    
    
    408,957Total assets(2)
    
    
    627,274
    
    
    
    609,515Long-term liabilities
    
    
    322,745
    
    
    
    318,728Shareholders equity
    
    
    252,616
    
    
    
    243,949
 
 (1)
    
    See Note 9 of the consolidated condensed financial statements included elsewhere herein for a reconciliation to our consolidated results.(2)
    
    Excluding assets and liabilities of discontinued operations.   
 
 FORM 10-QQUARTERLY REPORT  PAGE 34




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Critical Accounting Policies
    New Accounting Standard
 Accounting for Uncertainty in Income Taxes -
An Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
 FORM 10-QQUARTERLY REPORT  PAGE 35




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##### 



Cyclical Nature of Business
 Revenues
     Costs
  FORM 10-QQUARTERLY REPORT  PAGE 36




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
  
  FORM 10-QQUARTERLY REPORT  PAGE 37




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##### 



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
  Changes in Internal Controls.
 FORM 10-QQUARTERLY REPORT  PAGE 38




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##### 



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
  
 ITEM 1A. RISK FACTORS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
   Votes For
    
    Votes Withheld
    
    Abstentions and Broker Non-VotesJimmy S.H. Lee
    
    
    24,433,578
    
    
    
    271,986
    
    
    
    11,500,130Kenneth A. Shields
    
    
    24,620,397
    
    
    
    85,167
    
    
    
    11,500,130William D. McCartney
    
    
    24,617,897
    
    
    
    87,667
    
    
    
    11,500,130Graeme A. Witts
    
    
    24,621,397
    
    
    
    84,167
    
    
    
    11,500,130Eric Lauritzen
    
    
    24,621,397
    
    
    
    84,167
    
    
    
    11,500,130Guy W. Adams
    
    
    24,620,397
    
    
    
    85,167
    
    
    
    11,500,130George Malpass
    
    
    24,616,897
    
    
    
    88,667
    
    
    
    11,500,130
 
 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. FORM 10-QQUARTERLY REPORT  PAGE 39




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SIGNATURES
 Securities Exchange Act of 1934
 MERCER INTERNATIONAL INC.By:
    /s/ David M. GandossiDavid M. GandossiSecretary and Chief Financial Officer  FORM 10-QQUARTERLY REPORT  PAGE 40