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, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 000-51826
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
(State or other jurisdiction 
of incorporation or organization)
    
    47-0956945(I.R.S. Employer
Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 þ o
 o o
  Large accelerated filer o   
    Accelerated filer þ
    Non-accelerated filer o
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURES 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED JUNE 30, 2009
 (Unaudited)




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##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands of Euros)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assetsCash and cash equivalents
    
    
    62,100
    
    
    
    42,452Cash, restricted
    
    
    3,531
    
    
    
    13,000Receivables
    
    
    76,865
    
    
    
    100,158Inventories (Note 4)
    
    
    69,486
    
    
    
    98,457Prepaid expenses and other
    
    
    3,532
    
    
    
    4,834Total current assets
    
    
    215,514
    
    
    
    258,901Long-term assetsProperty, plant and equipment
    
    
    875,876
    
    
    
    881,704Investments (Note 9)
    
    
    92
    
    
    
    419Deferred note issuance and other costs
    
    
    8,219
    
    
    
    4,011Deferred income tax
    
    
    2,133
    
    
    
    3,036Note receivable, less current portion
    
    
    3,175
    
    
    
    3,529889,495
    
    
    
    892,699Total assets
    
    
    1,105,009
    
    
    
    1,151,600LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    94,731
    
    
    
    87,517Pension and
other post-retirement benefit obligations, current portion
    
    
    555
    
    
    
    510Debt, current portion (Note 5)
    
    
    39,999
    
    
    
    16,500Total current liabilities
    
    
    135,285
    
    
    
    104,527Long-term liabilitiesDebt, less current portion (Note 5)
    
    
    810,426
    
    
    
    837,918Unrealized interest rate derivative losses (Notes 6 and 9)
    
    
    54,675
    
    
    
    47,112Pension and other post-retirement benefit obligations (Note 7)
    
    
    13,385
    
    
    
    12,846Capital leases and other
    
    
    9,698
    
    
    
    11,267Deferred income tax
    
    
    
    
    
    
    5,827888,184
    
    
    
    914,970Total liabilities
    
    
    1,023,469
    
    
    
    1,019,497EQUITYShareholders equityShare capital (Note 8)
    
    
    202,844
    
    
    
    202,844Paid-in capital
    
    
    (5,871
    )
    
    
    299Retained earnings (deficit)
    
    
    (85,872
    )
    
    
    (35,046
    )Accumulated other comprehensive income (loss)
    
    
    7,658
    
    
    
    (1,872
    )Total shareholders equity
    
    
    118,759
    
    
    
    166,225Noncontrolling interest (deficit) (Note 10)
    
    
    (37,219
    )
    
    
    (34,122
    )Total equity
    
    
    81,540
    
    
    
    132,103Total liabilities and equity
    
    
    1,105,009
    
    
    
    1,151,600Commitments and Contingencies (Note 11)Subsequent Events (Note 12)
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands of Euros, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenuesPulp
    
    
    147,522
    
    
    
    170,585
    
    
    
    276,555
    
    
    
    349,686Energy
    
    
    11,362
    
    
    
    6,066
    
    
    
    21,901
    
    
    
    13,781158,884
    
    
    
    176,651
    
    
    
    298,456
    
    
    
    363,467Costs and expensesOperating costs
    
    
    149,033
    
    
    
    148,968
    
    
    
    281,030
    
    
    
    296,124Operating depreciation and amortization
    
    
    13,539
    
    
    
    13,514
    
    
    
    26,940
    
    
    
    27,635(3,688
    )
    
    
    14,169
    
    
    
    (9,514
    )
    
    
    39,708Selling, general and administrative expenses
    
    
    6,032
    
    
    
    7,953
    
    
    
    13,177
    
    
    
    14,849Purchase (sale) of emission allowances
    
    
    16
    
    
    
    
    
    
    
    (542
    )
    
    
    Operating income (loss)
    
    
    (9,736
    )
    
    
    6,216
    
    
    
    (22,149
    )
    
    
    24,859Other income (expense)Interest expense
    
    
    (16,319
    )
    
    
    (16,013
    )
    
    
    (32,868
    )
    
    
    (32,633
    )Investment income (loss)
    
    
    138
    
    
    
    1,421
    
    
    
    (3,064
    )
    
    
    1,731Foreign exchange gain (loss) on debt
    
    
    5,170
    
    
    
    238
    
    
    
    754
    
    
    
    6,269Unrealized gain (loss) on derivative instruments (Note 6)
    
    
    7,451
    
    
    
    20,580
    
    
    
    (7,562
    )
    
    
    12,730Total other income (expense)
    
    
    (3,560
    )
    
    
    6,226
    
    
    
    (42,740
    )
    
    
    (11,903
    )Income (loss) before income taxes
    
    
    (13,296
    )
    
    
    12,442
    
    
    
    (64,889
    )
    
    
    12,956Income tax benefit (provision)  current
    
    
    (65
    )
    
    
    (213
    )
    
    
    (114
    )
    
    
    163 deferred
    
    
    1,888
    
    
    
    (7,922
    )
    
    
    4,919
    
    
    
    (9,126
    )Net income (loss)
    
    
    (11,473
    )
    
    
    4,307
    
    
    
    (60,084
    )
    
    
    3,993Less: net loss (income) attributable to noncontrolling interest
    
    
    (3
    )
    
    
    (3,436
    )
    
    
    9,258
    
    
    
    (253
    )Net income (loss) attributable to common shareholders
    
    
    (11,476
    )
    
    
    871
    
    
    
    (50,826
    )
    
    
    3,740Retained earnings (deficit), beginning of period
    
    
    (74,396
    )
    
    
    40,288
    
    
    
    (35,046
    )
    
    
    37,419Retained earnings (deficit), end of period
    
    
    (85,872
    )
    
    
    41,159
    
    
    
    (85,872
    )
    
    
    41,159Net income (loss) per share attributable to common shareholders
(Note 3):Basic and diluted
    
    
    (0.32
    )
    
    
    0.02
    
    
    
    (1.40
    )
    
    
    0.10
 The
accompanying notes are an integral part of these interim consolidated financial statements.
  .




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##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    
    (11,473
    )
    
    
    4,307
    
    
    
    (60,084
    )
    
    
    3,993Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    14,581
    
    
    
    2,056
    
    
    
    9,195
    
    
    
    (8,048
    )Unrealized gains (losses) on
securities arising during the period
    
    
    21
    
    
    
    3
    
    
    
    335
    
    
    
    (22
    )Other comprehensive income (loss)
    
    
    14,602
    
    
    
    2,059
    
    
    
    9,530
    
    
    
    (8,070
    )Total comprehensive income (loss)
    
    
    3,129
    
    
    
    6,366
    
    
    
    (50,554
    )
    
    
    (4,077
    )Comprehensive (income) loss attributable
to noncontrolling interest
    
    
    (3
    )
    
    
    (3,436
    )
    
    
    9,258
    
    
    
    (253
    )Comprehensive income (loss) attributable
to common shareholders
    
    
    3,126
    
    
    
    2,930
    
    
    
    (41,296
    )
    
    
    (4,330
    )
 The
accompanying notes are an integral part of these interim consolidated financial statements.
  .




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##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cash flows from (used in) operating activities:Net income (loss) attributable to common shareholders
    
    
    (11,476
    )
    
    
    871
    
    
    
    (50,826
    )
    
    
    3,740Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activitiesUnrealized (gain) loss on derivative instruments
    
    
    (7,451
    )
    
    
    (20,580
    )
    
    
    7,562
    
    
    
    (12,730
    )Foreign exchange (gain) loss on debt
    
    
    (5,170
    )
    
    
    (238
    )
    
    
    (754
    )
    
    
    (6,269
    )Loss (gain) on sale of assets
    
    
    34
    
    
    
    64
    
    
    
    (25
    )
    
    
    (958
    )Operating depreciation and amortization
    
    
    13,539
    
    
    
    13,514
    
    
    
    26,940
    
    
    
    27,635Non-operating amortization
    
    
    65
    
    
    
    70
    
    
    
    131
    
    
    
    141Noncontrolling interest
    
    
    3
    
    
    
    3,436
    
    
    
    (9,258
    )
    
    
    253Deferred income taxes
    
    
    (1,888
    )
    
    
    7,922
    
    
    
    (4,919
    )
    
    
    9,126Stock compensation expense
    
    
    26
    
    
    
    207
    
    
    
    (8
    )
    
    
    355Pension and other post-retirement expense
    
    
    337
    
    
    
    491
    
    
    
    668
    
    
    
    1,006Pension and other post-retirement benefit funding
    
    
    (344
    )
    
    
    (676
    )
    
    
    (691
    )
    
    
    (1,125
    )Inventory provisions
    
    
    
    
    
    
    
    
    
    
    4,587
    
    
    
    Other
    
    
    893
    
    
    
    9
    
    
    
    1,337
    
    
    
    (50
    )Changes in current assets and liabilitiesReceivables
    
    
    4,728
    
    
    
    (6,845
    )
    
    
    25,137
    
    
    
    (10,678
    )Inventories
    
    
    21,406
    
    
    
    (8,389
    )
    
    
    27,525
    
    
    
    (7,683
    )Accounts payable and accrued expenses
    
    
    15,161
    
    
    
    17,181
    
    
    
    7,940
    
    
    
    5,801Other
    
    
    (369
    )
    
    
    (1,232
    )
    
    
    203
    
    
    
    865Net cash from (used in) operating activities
    
    
    29,494
    
    
    
    5,805
    
    
    
    35,549
    
    
    
    9,429Cash flows from (used in) investing activities:Purchase of property, plant and equipment
    
    
    (7,835
    )
    
    
    (4,859
    )
    
    
    (15,541
    )
    
    
    (7,861
    )Proceeds on sale of property, plant and equipment
    
    
    103
    
    
    
    653
    
    
    
    232
    
    
    
    1,613Cash, restricted
    
    
    
    
    
    
    
    
    
    
    9,469
    
    
    
    Notes receivable
    
    
    120
    
    
    
    5,303
    
    
    
    241
    
    
    
    5,303Net cash from (used in) investing activities
    
    
    (7,612
    )
    
    
    1,097
    
    
    
    (5,599
    )
    
    
    (945
    )Cash flows from (used in) financing activities:Repayment of notes payable and debt
    
    
    
    
    
    
    
    
    
    
    (13,800
    )
    
    
    (16,891
    )Repayment of capital lease obligations
    
    
    (536
    )
    
    
    (194
    )
    
    
    (1,218
    )
    
    
    (832
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    8,431
    
    
    
    10,000
    
    
    
    8,431Payment of deferred note issuance costs
    
    
    
    
    
    
    
    
    
    
    (5,253
    )
    
    
    Net cash from (used in) financing activities
    
    
    (536
    )
    
    
    8,237
    
    
    
    (10,271
    )
    
    
    (9,292
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (482
    )
    
    
    (1,579
    )
    
    
    (31
    )
    
    
    (745
    )Net increase (decrease) in cash and cash equivalents
    
    
    20,864
    
    
    
    13,560
    
    
    
    19,648
    
    
    
    (1,553
    )Cash and cash equivalents, beginning of period
    
    
    41,236
    
    
    
    69,735
    
    
    
    42,452
    
    
    
    84,848Cash and cash equivalents, end of period
    
    
    62,100
    
    
    
    83,295
    
    
    
    62,100
    
    
    
    83,295
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Supplemental disclosure of cash flow information:Cash paid (received) during the period for:Interest
    
    
    2,952
    
    
    
    4,280
    
    
    
    31,210
    
    
    
    30,766Income taxes
    
    
    43
    
    
    
    (332
    )
    
    
    72
    
    
    
    (318
    )Supplemental schedule of non-cash investing and
financing activities:Acquisition of production and other
equipment under capital lease obligations
    
    
    80
    
    
    
    977
    
    
    
    116
    
    
    
    3,699Increase (decrease) in accounts payable
relating to investing activities
    
    
    (1,602
    )
    
    
    
    
    
    
    (1,141
    )
    
    
    
 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)
 New Accounting Standards
 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles,
 Accounting for
Transfers of Financial Assets, an amendment of FASB Statement No. 140 .




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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)
 Employers Disclosures about
Pensions and Other Postretirement Benefits
 Recently Implemented Accounting Standards
 Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51
 Business
Combinations
 Effective Date of FASB
Statement No. 157 Fair Value Measurements




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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)
 Disclosures
about Derivative Instruments and Hedging Activities
 Determination of the Useful Life of
Intangible Assets Goodwill and Other Intangible Assets
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement)
 Interim Disclosures about Fair Value
of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial
Reporting,




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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)
 Subsequent
Events
 Note 2. Stock-Based Compensation
  Performance Stock
    




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation (continued)
 Restricted Stock
    
   Stock Options
  Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) attributable to common
shareholders  basic and diluted
    
    
    (11,476
    )
    
    
    871
    
    
    
    (50,826
    )
    
    
    3,740Net income (loss) per share attributable to common
shareholders:Basic and diluted
    
    
    (0.32
    )
    
    
    0.02
    
    
    
    (1.40
    )
    
    
    0.10Weighted average number of common shares outstanding:Basic (1)
    
    
    36,289,181
    
    
    
    36,252,360
    
    
    
    36,287,115
    
    
    
    36,252,360Effect of dilutive instruments:Performance rights
    
    
    
    
    
    
    61,837
    
    
    
    
    
    
    
    Stock options and awards
    
    
    
    
    
    
    149,546
    
    
    
    
    
    
    
    153,986Diluted
    
    
    36,289,181
    
    
    
    36,463,743
    
    
    
    36,287,115
    
    
    
    36,406,346
 
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock
which have been issued, but have not vested as at June 30, 2009 and 2008.




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
(continued)
     Note 4. Inventories
 June 30, 2009
    
    
    December 31, 2008Raw materials
    
    
    21,012
    
    
    
    38,225Finished goods
    
    
    26,067
    
    
    
    37,881Work in process and other
    
    
    22,407
    
    
    
    22,351
    69,486
    
    
    
    98,457
 Note 5. Debt




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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)
  June 30, 2009
    
    
    December 31, 2008Note payable to bank,
included in a total loan
facility of 827,950 to
finance the construction
related to the Stendal
mill (a)
    
    
    522,823
    
    
    
    531,073Senior notes due February
2013, interest at 9.25%
accrued and payable
semi-annually, unsecured (b)
    
    
    221,128
    
    
    
    222,718Subordinated convertible
notes due October 2010,
interest at 8.5% accrued
and payablesemi-annually
(c)
    
    
    47,974
    
    
    
    48,319Credit agreement with a
lender with respect to a
revolving credit facility
of C$40 million (d)
    
    
    13,499
    
    
    
    18,186Loan payable to the
noncontrolling
shareholder of the
Stendal mill (e) (Note
10)
    
    
    35,001
    
    
    
    34,122Credit agreement with a
bank with respect to a
revolving credit facility
of 40 million (f)
    
    
    10,000
    
    
    
    850,425
    
    
    
    854,418Less: current portion
    
    
    (39,999
    )
    
    
    (16,500
    )Debt, less current portion
    
    
    810,426
    
    
    
    837,918
  
 Matures
    
    Amount2009
    
    
    8,2502010(1)
    
    
    85,3902011
    
    
    23,1672012
    
    
    24,5832013
    
    
    261,128Thereafter
    
    
    447,907
    850,425
 (1)
    
    Includes revolving credit facility principal amounts totalling 23,499. 
 (a)
    
    Note payable to bank, included in a total loan facility of 827,950 to finance the
construction related to the Stendal mill (Stendal Loan Facility), interest at rates varying
from Euribor plus 0.90% to Euribor plus 1.50% (rates on amounts of borrowing at June 30, 2009
range from 2.59% to 3.19%), principal due in required installments beginning September 30,
2006 until September 30, 2017, collateralized by the assets of the Stendal mill, and at June
30, 2009, restricted cash amounting to 3,531, with 48% and 32% guaranteed by the Federal
Republic of Germany and the State of Saxony-Anhalt, respectively, of up to 500,323 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.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 
 On March 13, 2009, the Company finalized an agreement
with its lenders to amend its Stendal Loan Facility. The
amendment defers approximately 164,000 of scheduled
principal payments until the maturity date, September 30,
2017, including approximately 20,000, 26,000, 21,000 of
scheduled principal payments in 2009, 2010, and 2011,
respectively. Additionally, the Company made a 10,000
capital contribution to the Stendal mill, and incurred
amendment fees totaling approximately 5,800.See Note 10
- Noncontrolling Interest.(b)
    
    In February 2005, the Company issued $310 million of senior notes due February 2013, which
bear interest at 9.25% accrued, are payable semi-annually, and are unsecured. On or after
February 15, 2009, the Company may redeem all or a part of the notes at redemption prices
(expressed as a percentage of principal amount) equal to 104.63% for the twelve month period
beginning on February 15, 2009, 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.(c)
    
    As at June 30, 2009, the subordinated convertible notes had approximately $67.3 million of
principal outstanding. The subordinated convertible notes are 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 on or after October 15, 2008 at 100% of the
principal amount of the notes plus accrued and unpaid interest up to the redemption date. The
holders of the convertible notes will have the option to require the Company to purchase for
cash all or a portion of the notes not previously redeemed upon a specified change of control
at a price equal to 100% of the principal. See Note 12  Subsequent Events.(d)
    
    Credit agreement with respect to a revolving credit facility of C$40 million for the Celgar
mill, on a three year term. Borrowings under the credit agreement are secured by pulp mill
inventory and receivables. Canadian dollar denominated amounts bear interest at bankers
acceptance plus 2.25% or Canadian prime plus 0.50%. U.S. dollar denominated amounts bear
interest at LIBOR plus 2.25% or U.S. base plus 0.50%. As at June 30, 2009, this facility was
drawn by C$22.0 million and was accruing interest at a rate of approximately 2.67%. The
credit agreement matures May 19, 2010, but is subject to a one-year extension at the Companys
request.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 
 (e)
    
    Loan payable to the noncontrolling shareholder of the Stendal mill bears interest at 7%, and
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.(f)
    
    Credit agreement with respect to a revolving credit facility of 40,000 for the Rosenthal
mill. Borrowings under the credit agreement are secured by pulp mill inventory and receivables
and bear interest at Euribor plus 1.55%. As at June 30, 2009, this facility was drawn by
10,000 and was accruing interest at a rate of 3.94%. The credit agreement matures February
15, 2010. See Note 12  Subsequent Events. Note 6. Derivative Transactions
    
     Accounting for Derivative Instruments and Hedging Activities  




---



##### 



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
      
 
  Three Months Ended June 30,2009
    
    
    2008Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    14
    
    
    
    84
    
    
    
    195
    
    
    
    124Interest cost
    
    
    377
    
    
    
    203
    
    
    
    335
    
    
    
    198Expected return on plan assets
    
    
    (317
    )
    
    
    
    
    
    
    (381
    )
    
    
    Recognized net loss (gain)
    
    
    35
    
    
    
    (59
    )
    
    
    
    
    
    
    20Net periodic benefit cost
    
    
    109
    
    
    
    228
    
    
    
    149
    
    
    
    342




---



##### 



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)
 Six Months Ended June 30,2009
    
    
    2008Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    28
    
    
    
    167
    
    
    
    399
    
    
    
    254Interest cost
    
    
    747
    
    
    
    401
    
    
    
    686
    
    
    
    405Expected return on plan assets
    
    
    (628
    )
    
    
    
    
    
    
    (780
    )
    
    
    Recognized net loss (gain)
    
    
    69
    
    
    
    (116
    )
    
    
    
    
    
    
    42Net periodic benefit cost
    
    
    216
    
    
    
    452
    
    
    
    305
    
    
    
    701
 Note 8. Share Capital
 Common shares
  Preferred shares




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments
   June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueCash and cash equivalents
    
    
    62,100
    
    
    
    62,100
    
    
    
    42,452
    
    
    
    42,452Cash, restricted
    
    
    3,531
    
    
    
    3,531
    
    
    
    13,000
    
    
    
    13,000Investments
    
    
    92
    
    
    
    92
    
    
    
    419
    
    
    
    419Receivables
    
    
    76,865
    
    
    
    76,865
    
    
    
    100,158
    
    
    
    100,158Notes receivable
    
    
    3,825
    
    
    
    3,825
    
    
    
    4,171
    
    
    
    4,171Accounts payable and accrued expenses
    
    
    94,731
    
    
    
    94,731
    
    
    
    87,517
    
    
    
    87,517Debt
    
    
    850,425
    
    
    
    662,695
    
    
    
    854,418
    
    
    
    704,901Interest rate derivative contracts  liability
    
    
    54,675
    
    
    
    54,675
    
    
    
    47,112
    
    
    
    47,112
    identical
 similar




---



##### 



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 June 30, 2009 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92LiabilitiesDerivatives (b)- Interest rate
swaps
    
    
    
    
    
    
    54,675
    
    
    
    
    
    
    
    54,675
 
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (interest rates and yield curves observable at
specific intervals).




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Noncontrolling Interest
  Excerpt from Consolidated Balance Sheet
 Balance as at
    
    
    Application of new
    
    
    Revised balance as atDecember 31, 2008
    
    
    accounting standard
    
    
    December 31, 2008Description
    
    
    
    
    (a)
    
    
    (b)Long-term liabilitiesDebt, less current portion
    
    
    803,796
    
    
    
    34,122
    
    
    
    837,918Total liabilities
    
    
    985,375
    
    
    
    34,122
    
    
    
    1,019,497EquityShareholders equityShare capital
    
    
    202,844
    
    
    
    
    
    
    
    202,844Paid-in capital
    
    
    299
    
    
    
    
    
    
    
    299Retained earnings (deficit)
    
    
    (35,046
    )
    
    
    
    
    
    
    (35,046
    )Accumulated other
comprehensive income
    
    
    (1,872
    )
    
    
    
    
    
    
    (1,872
    )Total shareholders equity
    
    
    166,225
    
    
    
    
    
    
    
    166,225Noncontrolling interest
    
    
    
    
    
    
    (34,122
    )
    
    
    (34,122
    )Total equity
    
    
    166,225
    
    
    
    (34,222
    )
    
    
    132,103Total liabilities and equity
    
    
    1,151,600
    
    
    
    
    
    
    
    1,151,600
 
 (a)
    
    As at December 31, 2008, the cumulative net losses of the Companys 70.58% subsidiary
(the Stendal mill) which were attributable to the noncontrolling shareholder amounted to
34,122, and were applied to the loans payable to the noncontrolling shareholder. The net
obligation reported at December 31, 2008 was nil. In accordance with FAS 160, the
noncontrolling shareholders equity interest is required to be reclassified to equity in
the Consolidated Balance Sheet. As a result, the Company retrospectively applied this
presentation and disclosure requirement.(b)
    
    Revised balance as at December 31, 2008 represents the Companys Consolidated Balance
Sheet reclassified in accordance with FAS 160.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Noncontrolling Interest (continued)
        
   




---



##### 



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




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 June 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    33,842
    
    
    
    28,258
    
    
    
    
    
    
    
    62,100Cash, restricted
    
    
    
    
    
    
    3,531
    
    
    
    
    
    
    
    3,531Receivables
    
    
    36,888
    
    
    
    39,977
    
    
    
    
    
    
    
    76,865Inventories
    
    
    48,394
    
    
    
    21,092
    
    
    
    
    
    
    
    69,486Prepaid expenses and other
    
    
    2,041
    
    
    
    1,491
    
    
    
    
    
    
    
    3,532Total current assets
    
    
    121,165
    
    
    
    94,349
    
    
    
    
    
    
    
    215,514Property, plant and equipment
    
    
    357,462
    
    
    
    518,414
    
    
    
    
    
    
    
    875,876Other
    
    
    3,204
    
    
    
    5,107
    
    
    
    
    
    
    
    8,311Deferred income tax
    
    
    2,133
    
    
    
    
    
    
    
    
    
    
    
    2,133Due from unrestricted group
    
    
    68,465
    
    
    
    
    
    
    
    (68,465
    )
    
    
    Note receivable, less current portion
    
    
    3,175
    
    
    
    
    
    
    
    
    
    
    
    3,175Total assets
    
    
    555,604
    
    
    
    617,870
    
    
    
    (68,465
    )
    
    
    1,105,009LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    50,436
    
    
    
    44,295
    
    
    
    
    
    
    
    94,731Pension and other post-retirement benefit
obligations, current portion
    
    
    555
    
    
    
    
    
    
    
    
    
    
    
    555Debt, current portion
    
    
    23,499
    
    
    
    16,500
    
    
    
    
    
    
    
    39,999Total current liabilities
    
    
    74,490
    
    
    
    60,795
    
    
    
    
    
    
    
    135,285Debt, less current portion
    
    
    269,102
    
    
    
    541,324
    
    
    
    
    
    
    
    810,426Due to restricted group
    
    
    
    
    
    
    68,465
    
    
    
    (68,465
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    54,675
    
    
    
    
    
    
    
    54,675Pension and other post-retirement benefit
obligations
    
    
    13,385
    
    
    
    
    
    
    
    
    
    
    
    13,385Capital leases and other
    
    
    6,210
    
    
    
    3,488
    
    
    
    
    
    
    
    9,698Total liabilities
    
    
    363,187
    
    
    
    728,747
    
    
    
    (68,465
    )
    
    
    1,023,469EQUITYTotal shareholders equity (deficit)
    
    
    192,417
    
    
    
    (73,658
    )
    
    
    
    
    
    
    118,759Noncontrolling interest (deficit)
    
    
    
    
    
    
    (37,219
    )
    
    
    
    
    
    
    (37,219
    )Total liabilities and equity
    
    
    555,604
    
    
    
    617,870
    
    
    
    (68,465
    )
    
    
    1,105,009




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 December 31, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    26,176
    
    
    
    16,276
    
    
    
    
    
    
    
    42,452Cash, restricted
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    13,000Receivables
    
    
    57,258
    
    
    
    42,900
    
    
    
    
    
    
    
    100,158Inventories
    
    
    59,801
    
    
    
    38,656
    
    
    
    
    
    
    
    98,457Prepaid expenses and other
    
    
    3,215
    
    
    
    1,619
    
    
    
    
    
    
    
    4,834Total current assets
    
    
    146,450
    
    
    
    112,451
    
    
    
    
    
    
    
    258,901Property, plant and equipment
    
    
    351,009
    
    
    
    530,695
    
    
    
    
    
    
    
    881,704Other
    
    
    4,425
    
    
    
    5
    
    
    
    
    
    
    
    4,430Deferred income tax
    
    
    3,036
    
    
    
    
    
    
    
    
    
    
    
    3,036Due from unrestricted group
    
    
    55,925
    
    
    
    
    
    
    
    (55,925
    )
    
    
    Note receivable, less current portion
    
    
    3,529
    
    
    
    
    
    
    
    
    
    
    
    3,529Total assets
    
    
    564,374
    
    
    
    643,151
    
    
    
    (55,925
    )
    
    
    1,151,600LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    44,450
    
    
    
    43,067
    
    
    
    
    
    
    
    87,517Pension and other post-retirement benefit
obligations, current portion
    
    
    510
    
    
    
    
    
    
    
    
    
    
    
    510Debt, current portion
    
    
    
    
    
    
    16,500
    
    
    
    
    
    
    
    16,500Total current liabilities
    
    
    44,960
    
    
    
    59,567
    
    
    
    
    
    
    
    104,527Debt, less current portion
    
    
    289,222
    
    
    
    548,696
    
    
    
    
    
    
    
    837,918Due to restricted group
    
    
    
    
    
    
    55,925
    
    
    
    (55,925
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    47,112
    
    
    
    
    
    
    
    47,112Pension and
other post-retirement benefit obligations
    
    
    12,846
    
    
    
    
    
    
    
    
    
    
    
    12,846Capital leases and other
    
    
    7,167
    
    
    
    4,100
    
    
    
    
    
    
    
    11,267Deferred income tax
    
    
    
    
    
    
    5,827
    
    
    
    
    
    
    
    5,827Total liabilities
    
    
    354,195
    
    
    
    721,227
    
    
    
    (55,925
    )
    
    
    1,019,497EQUITYTotal shareholders equity (deficit)
    
    
    210,179
    
    
    
    (43,954
    )
    
    
    
    
    
    
    166,225Noncontrolling interest (deficit)
    
    
    
    
    
    
    (34,122
    )
    
    
    
    
    
    
    (34,122
    )Total liabilities and equity
    
    
    564,374
    
    
    
    643,151
    
    
    
    (55,925
    )
    
    
    1,151,600




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended June 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    80,388
    
    
    
    78,496
    
    
    
    
    
    
    
    158,884Operating costs
    
    
    78,813
    
    
    
    70,220
    
    
    
    
    
    
    
    149,033Operating depreciation and amortization
    
    
    6,888
    
    
    
    6,651
    
    
    
    
    
    
    
    13,539Selling, general and administrative expenses and other
    
    
    4,294
    
    
    
    1,754
    
    
    
    
    
    
    
    6,04889,995
    
    
    
    78,625
    
    
    
    
    
    
    
    168,620Operating income (loss)
    
    
    (9,607
    )
    
    
    (129
    )
    
    
    
    
    
    
    (9,736
    )Other income (expense)Interest expense
    
    
    (6,927
    )
    
    
    (10,513
    )
    
    
    1,121
    
    
    
    (16,319
    )Investment income (loss)
    
    
    1,234
    
    
    
    25
    
    
    
    (1,121
    )
    
    
    138Foreign exchange gain (loss) on debt
    
    
    5,170
    
    
    
    
    
    
    
    
    
    
    
    5,170Derivative instruments
    
    
    
    
    
    
    7,451
    
    
    
    
    
    
    
    7,451Total other income (expense)
    
    
    (523
    )
    
    
    (3,037
    )
    
    
    
    
    
    
    (3,560
    )Income (loss) before income taxes
    
    
    (10,130
    )
    
    
    (3,166
    )
    
    
    
    
    
    
    (13,296
    )Income tax benefit (provision)
    
    
    (1,149
    )
    
    
    2,972
    
    
    
    
    
    
    
    1,823Net income (loss)
    
    
    (11,279
    )
    
    
    (194
    )
    
    
    
    
    
    
    (11,473
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Net income (loss) attributable to common shareholders
    
    
    (11,279
    )
    
    
    (197
    )
    
    
    
    
    
    
    (11,476
    )
 Three Months Ended June 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    99,888
    
    
    
    76,763
    
    
    
    
    
    
    
    176,651Operating costs
    
    
    90,132
    
    
    
    58,836
    
    
    
    
    
    
    
    148,968Operating depreciation and amortization
    
    
    6,774
    
    
    
    6,740
    
    
    
    
    
    
    
    13,514Selling, general and administrative expenses and other
    
    
    4,865
    
    
    
    3,088
    
    
    
    
    
    
    
    7,953101,771
    
    
    
    68,664
    
    
    
    
    
    
    
    170,435Operating income (loss)
    
    
    (1,883
    )
    
    
    8,099
    
    
    
    
    
    
    
    6,216Other income (expense)Interest expense
    
    
    (6,370
    )
    
    
    (10,614
    )
    
    
    971
    
    
    
    (16,013
    )Investment income (loss)
    
    
    1,557
    
    
    
    835
    
    
    
    (971
    )
    
    
    1,421Foreign exchange gain (loss) on debt
    
    
    (248
    )
    
    
    486
    
    
    
    
    
    
    
    238Derivative instruments
    
    
    
    
    
    
    20,580
    
    
    
    
    
    
    
    20,580Total other income (expense)
    
    
    (5,061
    )
    
    
    11,287
    
    
    
    
    
    
    
    6,226Income (loss) before income taxes
    
    
    (6,944
    )
    
    
    19,386
    
    
    
    
    
    
    
    12,442Income tax benefit (provision)
    
    
    (1,303
    )
    
    
    (6,832
    )
    
    
    
    
    
    
    (8,135
    )Net income (loss)
    
    
    (8,247
    )
    
    
    12,554
    
    
    
    
    
    
    
    4,307Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (3,436
    )
    
    
    
    
    
    
    (3,436
    )Net income (loss) attributable to common shareholders
    
    
    (8,247
    )
    
    
    9,118
    
    
    
    
    
    
    
    871




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Six Months Ended June 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    159,420
    
    
    
    139,036
    
    
    
    
    
    
    
    298,456Operating costs
    
    
    152,129
    
    
    
    128,901
    
    
    
    
    
    
    
    281,030Operating depreciation and amortization
    
    
    13,592
    
    
    
    13,348
    
    
    
    
    
    
    
    26,940Selling, general and administrative expenses and other
    
    
    8,716
    
    
    
    3,919
    
    
    
    
    
    
    
    12,635174,437
    
    
    
    146,168
    
    
    
    
    
    
    
    320,605Operating income (loss)
    
    
    (15,017
    )
    
    
    (7,132
    )
    
    
    
    
    
    
    (22,149
    )Other income (expense)Interest expense
    
    
    (14,229
    )
    
    
    (20,869
    )
    
    
    2,230
    
    
    
    (32,868
    )Investment income (loss)
    
    
    2,150
    
    
    
    (2,984
    )
    
    
    (2,230
    )
    
    
    (3,064
    )Foreign exchange gain (loss) on debt
    
    
    754
    
    
    
    
    
    
    
    
    
    
    
    754Derivative instruments
    
    
    
    
    
    
    (7,562
    )
    
    
    
    
    
    
    (7,562
    )Total other income (expense)
    
    
    (11,325
    )
    
    
    (31,415
    )
    
    
    
    
    
    
    (42,740
    )Income (loss) before income taxes
    
    
    (26,342
    )
    
    
    (38,547
    )
    
    
    
    
    
    
    (64,889
    )Income tax benefit (provision)
    
    
    (941
    )
    
    
    5,746
    
    
    
    
    
    
    
    4,805Net income (loss)
    
    
    (27,283
    )
    
    
    (32,801
    )
    
    
    
    
    
    
    (60,084
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    9,258
    
    
    
    
    
    
    
    9,258Net income (loss) attributable to common shareholders
    
    
    (27,283
    )
    
    
    (23,543
    )
    
    
    
    
    
    
    (50,826
    )
 Six Months Ended June 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    204,476
    
    
    
    158,991
    
    
    
    
    
    
    
    363,467Operating costs
    
    
    171,274
    
    
    
    124,850
    
    
    
    
    
    
    
    296,124Operating depreciation and amortization
    
    
    14,195
    
    
    
    13,440
    
    
    
    
    
    
    
    27,635Selling, general and administrative expenses and other
    
    
    8,609
    
    
    
    6,240
    
    
    
    
    
    
    
    14,849194,078
    
    
    
    144,530
    
    
    
    
    
    
    
    338,608Operating income (loss)
    
    
    10,398
    
    
    
    14,461
    
    
    
    
    
    
    
    24,859Other income (expense)Interest expense
    
    
    (13,082
    )
    
    
    (21,481
    )
    
    
    1,930
    
    
    
    (32,633
    )Investment income (loss)
    
    
    3,293
    
    
    
    368
    
    
    
    (1,930
    )
    
    
    1,731Foreign exchange gain (loss) on debt
    
    
    6,379
    
    
    
    (110
    )
    
    
    
    
    
    
    6,269Derivative instruments
    
    
    
    
    
    
    12,730
    
    
    
    
    
    
    
    12,730Total other income (expense)
    
    
    (3,410
    )
    
    
    (8,493
    )
    
    
    
    
    
    
    (11,903
    )Income (loss) before income taxes
    
    
    6,988
    
    
    
    5,968
    
    
    
    
    
    
    
    12,956Income tax benefit (provision)
    
    
    (3,457
    )
    
    
    (5,506
    )
    
    
    
    
    
    
    (8,963
    )Net income (loss)
    
    
    3,531
    
    
    
    462
    
    
    
    
    
    
    
    3,993Less: net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (253
    )
    
    
    
    
    
    
    (253
    )Net income (loss) attributable to common
shareholders
    
    
    3,531
    
    
    
    209
    
    
    
    
    
    
    
    3,740




---



##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 Results of Operations
 General
   Current Market Environment
  QUARTERLY REPORT - PAGE 29




---



##### 



Second Quarter and Six Month Snapshot
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Pulp Production (000 ADMTs)
    
    
    349.1
    
    
    
    356.8
    
    
    
    694.7
    
    
    
    717.7Scheduled Production Downtime (000 ADMTs)
    
    
    0.6
    
    
    
    15.2
    
    
    
    0.6
    
    
    
    16.6Pulp Sales (000 ADMTs)
    
    
    395.4
    
    
    
    347.3
    
    
    
    732.0
    
    
    
    695.4Pulp Revenues (in millions)
    
    
    147.5
    
    
    
    170.6
    
    
    
    276.6
    
    
    
    349.7NBSK pulp list prices in Europe ($/ADMT)
    
    $
    602
    
    
    $
    900
    
    
    $
    593
    
    
    $
    890NBSK pulp list prices in Europe (/ADMT)
    
    
    442
    
    
    
    576
    
    
    
    445
    
    
    
    581Average pulp sales realizations (/ADMT)(1)
    
    
    367
    
    
    
    485
    
    
    
    372
    
    
    
    498Energy Production (000 MWh)
    
    
    376.0
    
    
    
    365.5
    
    
    
    732.3
    
    
    
    730.5Energy Sales (000 MWh)
    
    
    128.5
    
    
    
    114.6
    
    
    
    240.8
    
    
    
    228.7Energy Revenue (in millions)
    
    
    11.4
    
    
    
    6.1
    
    
    
    21.9
    
    
    
    13.8Average energy sales realizations (/MWh)
    
    
    88
    
    
    
    53
    
    
    
    91
    
    
    
    60Average Spot
Currency Exchange Rates(2): / $
    
    
    0.7338
    
    
    
    0.6401
    
    
    
    0.7502
    
    
    
    0.6530C$ / $
    
    
    1.1671
    
    
    
    1.0099
    
    
    
    1.2062
    
    
    
    1.0070C$ / 
    
    
    1.5890
    
    
    
    1.5783
    
    
    
    1.6054
    
    
    
    1.5420
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Bank of Canada noon spot rates over the reporting period. Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
    
  
  
  QUARTERLY REPORT - PAGE 30




---



##### 



 
 
  
  
  
  
  
 
    
 QUARTERLY REPORT - PAGE 31




---



##### 



  
   QUARTERLY REPORT - PAGE 32




---



##### 



Three Months EndedJune 30,2009
    
    
    2008(in thousands)Net income (loss) attributable to common shareholders
    
    
    (11,476
    )
    
    
    871Net income (loss) attributable to noncontrolling interest
    
    
    3
    
    
    
    3,436Income taxes (benefits)
    
    
    (1,823
    )
    
    
    8,135Interest expense
    
    
    16,319
    
    
    
    16,013Investment (income) loss
    
    
    (138
    )
    
    
    (1,421
    )Unrealized foreign exchange loss (gain) on debt
    
    
    (5,170
    )
    
    
    (238
    )Derivative financial instruments
    
    
    (7,451
    )
    
    
    (20,580
    )Operating income (loss)
    
    
    (9,736
    )
    
    
    6,216Add: Depreciation and amortization
    
    
    13,604
    
    
    
    13,584Operating EBITDA
    
    
    3,868
    
    
    
    19,800
 Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
    
  
  
   
  
  QUARTERLY REPORT - PAGE 33




---



##### 



 
  
  
  
  
    
  
  Six Months EndedJune 30,2009
    
    
    2008(in thousands)Net income (loss) attributable to common shareholders
    
    
    (50,826
    )
    
    
    3,740Net income (loss) attributable to noncontrolling interest
    
    
    (9,258
    )
    
    
    253Income taxes (benefits)
    
    
    (4,805
    )
    
    
    8,963Interest expense
    
    
    32,868
    
    
    
    32,633Investment (income) loss
    
    
    3,064
    
    
    
    (1,731
    )Unrealized foreign exchange loss (gain) on debt
    
    
    (754
    )
    
    
    (6,269
    )Derivative financial instruments
    
    
    7,562
    
    
    
    (12,730
    )Operating income (loss)
    
    
    (22,149
    )
    
    
    24,859Add: Depreciation and amortization
    
    
    27,071
    
    
    
    27,776Operating EBITDA
    
    
    4,922
    
    
    
    52,635
 QUARTERLY REPORT - PAGE 34




---



##### 



Liquidity and Capital Resources
  As at
    
    As atJune 30,
    
    December 31,2009
    
    2008(in thousands)Financial PositionCash and cash equivalents
    
    
    62,100
    
    
    
    42,452Cash, restricted
    
    
    3,531
    
    
    
    13,000Working capital
    
    
    80,229
    
    
    
    154,374Property, plant and equipment
    
    
    875,876
    
    
    
    881,704Total assets
    
    
    1,105,009
    
    
    
    1,151,600Long-term liabilities
    
    
    888,184
    
    
    
    914,970Total equity
    
    
    81,540
    
    
    
    132,103
 Sources and Uses of Funds
       
   
  QUARTERLY REPORT - PAGE 35




---



##### 



Debt Covenants
   Cash Flow Analysis
 Cash Flows from Operating Activities.
        
  Cash Flows from Investing Activities.     
 Cash Flows from Financing Activities.  
 Capital Resources
 
  QUARTERLY REPORT - PAGE 36




---



##### 



Future Liquidity
  Contractual Obligations and Commitments
  Foreign Currency
   
  Results of Operations of the Restricted Group under Our Senior Note Indenture
  QUARTERLY REPORT - PAGE 37




---



##### 



Restricted Group Results  Three Months Ended June 30, 2009 Compared to Three Months Ended June
30, 2008
    
  
  
   
 
   QUARTERLY REPORT - PAGE 38




---



##### 



 
  
  
  
   
  Three Months EndedJune 30,2009
    
    
    2008(in thousands)Restricted GroupNet income (loss) attributable to common shareholders(1)
    
    
    (11,279
    )
    
    
    (8,247
    )Income taxes (benefits)
    
    
    1,149
    
    
    
    1,303Interest expense
    
    
    6,927
    
    
    
    6,370Investment (income) loss
    
    
    (1,234
    )
    
    
    (1,557
    )Unrealized foreign exchange (gain) loss on debt
    
    
    (5,170
    )
    
    
    248Operating income (loss)
    
    
    (9,607
    )
    
    
    (1,883
    )Add: Depreciation and amortization
    
    
    6,953
    
    
    
    6,844Operating EBITDA(1)
    
    
    (2,654
    )
    
    
    4,961
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for
a reconciliation to our consolidated results. QUARTERLY REPORT - PAGE 39




---



##### 



Restricted Group Results  Six Months Ended June 30, 2009 Compared to Six Months Ended June
30, 2008
    
  
  
   
  
   
  
 QUARTERLY REPORT - PAGE 40




---



##### 



 
  
  
  Six Months EndedJune 30,2009
    
    
    2008(in thousands)Restricted GroupNet income (loss) attributable to common shareholders(1)
    
    
    (27,283
    )
    
    
    3,531Income taxes (benefits)
    
    
    941
    
    
    
    3,457Interest expense
    
    
    14,229
    
    
    
    13,082Investment (income) loss
    
    
    (2,150
    )
    
    
    (3,293
    )Unrealized foreign exchange (gain) loss on debt
    
    
    (754
    )
    
    
    (6,379
    )Operating income (loss)
    
    
    (15,017
    )
    
    
    10,398Add: Depreciation and amortization
    
    
    13,723
    
    
    
    14,336Operating EBITDA(1)
    
    
    (1,294
    )
    
    
    24,734
 (1)
    
    See Note 13 of the interim consolidated 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 31,2009
    
    
    2008(in thousands)Restricted Group Financial
Position(1)Cash and cash
equivalents
    
    
    33,842
    
    
    
    26,176Working capital
    
    
    46,675
    
    
    
    101,490Property, plant and equipment
    
    
    357,462
    
    
    
    351,009Total assets
    
    
    555,604
    
    
    
    564,374Long-term liabilities
    
    
    288,697
    
    
    
    309,235Total equity
    
    
    192,417
    
    
    
    210,179
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for
a reconciliation to our consolidated results. QUARTERLY REPORT - PAGE 41




---



##### 



   
  Credit Ratings
    Critical Accounting Policies
   QUARTERLY REPORT - PAGE 42




---



##### 



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.
  QUARTERLY REPORT - PAGE 43




---



##### 



Cyclical Nature of Business
 Revenues
     Costs
  QUARTERLY REPORT - PAGE 44




---



##### 



Currency
  QUARTERLY REPORT - PAGE 45




---



##### 



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
  QUARTERLY REPORT - PAGE 46




---



##### 



ITEM 4.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures. Securities Exchange Act of 1934
  Changes in Internal Controls.
 QUARTERLY REPORT - PAGE 47




---



##### 



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
 Availability of Government funding/project financing for the Celgar Energy Project may affect its
scope, timing and completion
   
 ITEM 2.
    
    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  QUARTERLY REPORT - PAGE 48




---



##### 



ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
   For
    
    Withheld
    
    Abstentions and Broker Non-VotesJimmy S.H. Lee
    
    
    24,074,610
    
    
    
    447,461
    
    
    
    Kenneth A. Shields
    
    
    24,120,503
    
    
    
    355,675
    
    
    
    William D. McCartney
    
    
    24,121,580
    
    
    
    353,521
    
    
    
    Graeme A. Witts
    
    
    24,120,503
    
    
    
    355,675
    
    
    
    Eric Lauritzen
    
    
    24,115,605
    
    
    
    365,471
    
    
    
    Guy W. Adams
    
    
    24,114,610
    
    
    
    367,461
    
    
    
    George Malpass
    
    
    24,116,105
    
    
    
    364,471
    
    
    
    
  For
    
    Against
    
    Abstentions and Broker Non-VotesRatification of
appointment of
PricewaterhouseCoopers
LLP
    
    
    24,099,617
    
    
    
    281,917
    
    
    
    93,062
 
 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. QUARTERLY REPORT - PAGE 49




---



##### 



SIGNATURES
 Securities Exchange Act of 1934
 MERCER INTERNATIONAL INC.By:
    /s/ David M. GandossiDavid M. GandossiSecretary and Chief Financial Officer  QUARTERLY REPORT - PAGE 50