##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 000-51826
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
    
    47-0956945(State or other jurisdiction 
of incorporation or organization)
    
    (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
  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




---



##### 



PART I. FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2008
 (Unaudited)




---



##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands of Euros)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent AssetsCash and cash equivalents
    
    
    69,735
    
    
    
    84,848Receivables
    
    
    91,241
    
    
    
    89,890Note receivable, current portion
    
    
    5,167
    
    
    
    5,896Inventories (Note 4)
    
    
    97,181
    
    
    
    103,610Prepaid expenses and other
    
    
    5,019
    
    
    
    6,015Total current assets
    
    
    268,343
    
    
    
    290,259Long-Term AssetsCash, restricted
    
    
    33,000
    
    
    
    33,000Property, plant and equipment
    
    
    903,402
    
    
    
    933,258Investments
    
    
    72
    
    
    
    96Deferred note issuance and other costs
    
    
    4,955
    
    
    
    5,303Deferred income tax
    
    
    18,746
    
    
    
    17,624Note receivable, less current portion
    
    
    3,536
    
    
    
    3,977963,711
    
    
    
    993,258Total assets
    
    
    1,232,054
    
    
    
    1,283,517LIABILITIESCurrent LiabilitiesAccounts payable and accrued expenses
    
    
    74,331
    
    
    
    87,000Pension and
other post-retirement benefit obligations, current portion
    
    
    438
    
    
    
    493Debt, current portion
    
    
    35,042
    
    
    
    34,023Total current liabilities
    
    
    109,811
    
    
    
    121,516Long-Term LiabilitiesDebt, less current portion
    
    
    773,972
    
    
    
    815,832Unrealized interest rate derivative losses
    
    
    29,735
    
    
    
    21,885Pension and other post-retirement benefit obligations (Note 6)
    
    
    17,310
    
    
    
    19,983Capital leases and other
    
    
    10,754
    
    
    
    8,999Deferred income tax
    
    
    20,971
    
    
    
    18,640852,742
    
    
    
    885,339Total liabilities
    
    
    962,553
    
    
    
    1,006,855SHAREHOLDERS EQUITYShare capital (Note 7)
    
    
    202,844
    
    
    
    202,844Additional paid-in capital
    
    
    233
    
    
    
    134Retained earnings
    
    
    40,288
    
    
    
    37,419Accumulated other comprehensive income
    
    
    26,136
    
    
    
    36,265Total shareholders equity
    
    
    269,501
    
    
    
    276,662Total liabilities and shareholders equity
    
    
    1,232,054
    
    
    
    1,283,517
  The accompanying notes are an integral part of these interim consolidated financial statements.




---



##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands of Euros, except per share data)
 Three Months EndedMarch 31,2008
    
    
    2007Revenues
    
    
    179,101
    
    
    
    169,531Costs and expensesOperating costs
    
    
    139,441
    
    
    
    133,846Operating depreciation and amortization
    
    
    14,121
    
    
    
    13,72925,539
    
    
    
    21,956Selling, general and administrative expenses
    
    
    6,896
    
    
    
    8,206(Sale) purchase of emission allowances
    
    
    
    
    
    
    (727
    )Operating income from continuing operations
    
    
    18,643
    
    
    
    14,477Other income (expense)Interest expense
    
    
    (16,620
    )
    
    
    (20,068
    )Investment income
    
    
    310
    
    
    
    1,611Foreign exchange gain on debt
    
    
    6,031
    
    
    
    1,254Realized gain on derivative instruments (Note 5)
    
    
    
    
    
    
    6,820Unrealized loss on derivative instruments (Note 5)
    
    
    (7,850
    )
    
    
    (248
    )Total other expense
    
    
    (18,129
    )
    
    
    (10,631
    )Income before income taxes and minority interest
from continuing operations
    
    
    514
    
    
    
    3,846Income tax benefit (provision)  current
    
    
    376
    
    
    
    (349
    ) deferred
    
    
    (1,204
    )
    
    
    (3,452
    )(Loss) income before minority interest from continuing operations
    
    
    (314
    )
    
    
    45Minority interest
    
    
    3,183
    
    
    
    1,048Net income from continuing operations
    
    
    2,869
    
    
    
    1,093Net loss from discontinued operations
    
    
    
    
    
    
    (7
    )Net income
    
    
    2,869
    
    
    
    1,086Retained earnings, beginning of period
    
    
    37,419
    
    
    
    14,440Retained earnings, end of period
    
    
    40,288
    
    
    
    15,526Net income from continuing operations per share (Note 3):Basic and diluted
    
    
    0.08
    
    
    
    0.03Net income per share:Basic and diluted
    
    
    0.08
    
    
    
    0.03
 The accompanying notes are an integral part of these interim consolidated financial statements.




---



##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2008
    
    
    2007Net income
    
    
    2,869
    
    
    
    1,086Other comprehensive income:Foreign currency translation adjustment
    
    
    (10,104
    )
    
    
    1,904Unrealized (losses) gains on securities
arising during the period
    
    
    (25
    )
    
    
    2Other comprehensive (loss) income
    
    
    (10,129
    )
    
    
    1,906Total comprehensive (loss) income
    
    
    (7,260
    )
    
    
    2,992
 The accompanying notes are an integral part of these interim consolidated financial statements.




---



##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows from (used in) operating activities:Net income
    
    
    2,869
    
    
    
    1,086Adjustments to reconcile net income to cash flows
from operating activitiesUnrealized loss on derivatives
    
    
    7,850
    
    
    
    248Unrealized foreign exchange gain on debt
    
    
    (6,031
    )
    
    
    (1,254
    )Gain on sale of assets
    
    
    (1,022
    )
    
    
    (92
    )Operating depreciation and amortization
    
    
    14,121
    
    
    
    13,729Non-operating amortization
    
    
    71
    
    
    
    63Minority interest
    
    
    (3,183
    )
    
    
    (1,048
    )Deferred income taxes
    
    
    1,204
    
    
    
    3,252Stock compensation expense
    
    
    146
    
    
    
    233Pension and other post-retirement expense
    
    
    515
    
    
    
    450Pension and other post-retirement benefit funding
    
    
    (449
    )
    
    
    (390
    )Other
    
    
    (57
    )
    
    
    500Changes in current assets and liabilitiesReceivables
    
    
    (3,833
    )
    
    
    (21,732
    )Inventories
    
    
    706
    
    
    
    (19,950
    )Accounts payable and accrued expenses
    
    
    (11,380
    )
    
    
    6,171Other
    
    
    2,097
    
    
    
    1,133Net cash from (used in) operating activities
    
    
    3,624
    
    
    
    (17,601
    )Cash flows (used in) from investing activities:Purchase of property, plant and equipment
    
    
    (3,002
    )
    
    
    (6,025
    )Proceeds on sale of property, plant and equipment
    
    
    960
    
    
    
    110Cash restricted
    
    
    
    
    
    
    12,000Notes receivable
    
    
    
    
    
    
    268Net cash (used in) from investing activities
    
    
    (2,042
    )
    
    
    6,353Cash flows used in financing activities:Repayment of notes payable and debt
    
    
    (16,891
    )
    
    
    (17,431
    )Repayment of capital lease obligations
    
    
    (638
    )
    
    
    (1,184
    )Decrease in construction costs payable
    
    
    
    
    
    
    (907
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    5,210Issuance of common shares
    
    
    
    
    
    
    246Net cash used in financing activities
    
    
    (17,529
    )
    
    
    (14,066
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    834
    
    
    
    965Net decrease in cash and cash equivalents
    
    
    (15,113
    )
    
    
    (24,349
    )Cash and cash equivalents, beginning of period(1)
    
    
    84,848
    
    
    
    69,804Cash and cash equivalents, end of period(2)
    
    
    69,735
    
    
    
    45,455
 
 (1)
    
    Includes amounts related to discontinued operations of: 2008   nil (2007  437)(2)
    
    Includes amounts related to discontinued operations of: 2008   nil (2007  485) The accompanying notes are an integral part of these interim consolidated financial statements.




---



##### 



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
(In thousands of Euros)
 Three Months EndedMarch 31,2008
    
    2007Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    
    26,486
    
    
    
    29,048Income taxes
    
    
    14
    
    
    
    Supplemental schedule of non-cash investing and financing activities:Acquisition of production and other equipment under capital lease obligations
    
    
    2,722
    
    
    
    2,019Common shares issued in satisfaction of floating rate note
    
    
    
    
    
    
    6,728
 The accompanying notes are an integral part of these interim consolidated financial statements.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 1. Basis of Presentation
 Basis of Presentation
    New Accounting Standards
 The Fair Value Option for Financial Assets and Financial Liabilities
 Disclosures
about Derivative Instruments and Hedging Activities




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation
  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
    
    
    
    2.25
    
    
    $
    6.29
    
    
    
    830,000
    
    
    $
    6.297.30
    
    
    
    
    
    30,000
    
    
    
    7.25
    
    
    
    7.30
    
    
    
    30,000
    
    
    
    7.307.92
    
    
    
    
    
    68,334
    
    
    
    7.50
    
    
    
    7.92
    
    
    
    68,334
    
    
    
    7.92




---



##### 



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
  
 
   Performance Stock
 
 




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 3. Income Per Share
 Three Months EndedMarch 31,2008
    
    
    2007Net income from continuing operations  basic and diluted
    
    
    2,869
    
    
    
    1,093Net income from continuing operations per share:Basic and diluted
    
    
    0.08
    
    
    
    0.03Net income from continuing operations
    
    
    2,869
    
    
    
    1,093Net loss from discontinued operations
    
    
    
    
    
    
    (7
    )Net income  basic and diluted
    
    
    2,869
    
    
    
    1,086Net income per share:Basic and diluted
    
    
    0.08
    
    
    
    0.03Weighted average number of common shares outstanding:Basic
    
    
    36,285,027
    
    
    
    35,486,904Effect of dilutive instruments:Stock options and awards
    
    
    150,235
    
    
    
    492,578Diluted
    
    
    36,435,262
    
    
    
    35,979,482




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 4. Inventories
 March 31, 2008
    
    
    December 31, 2007Raw materials
    
    
    29,033
    
    
    
    38,045Work in process and finished goods
    
    
    68,148
    
    
    
    65,565
    97,181
    
    
    
    103,610
 Note 5 . Derivatives Transactions
 Three Months Ended March 31,2008
    
    
    2007Realized net gain on foreign exchange derivatives
    
    
    
    
    
    
    6,820Unrealized net (loss) gain on interest rate derivatives
    
    
    (7,850
    )
    
    
    5,685Unrealized net loss on foreign exchange derivatives
    
    
    
    
    
    
    (5,933
    )Unrealized net loss on derivative financial instruments
    
    
    (7,850
    )
    
    
    (248
    )




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 6. Pension and Other Post-Retirement Benefit Obligations
   
 
 Three Months Ended March 31,2008
    
    
    2007Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    205
    
    
    
    130
    
    
    
    201
    
    
    
    113Interest cost
    
    
    351
    
    
    
    207
    
    
    
    327
    
    
    
    178Expected return on plan assets
    
    
    (399
    )
    
    
    
    
    
    
    (400
    )
    
    
    Recognized net loss
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    15Net periodic benefit cost
    
    
    157
    
    
    
    358
    
    
    
    128
    
    
    
    306
 Note 7. Share Capital
 Authorized
    Issued and Outstanding




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 March 31, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrentCash and cash equivalents
    
    
    53,371
    
    
    
    16,364
    
    
    
    
    
    
    
    69,735Receivables
    
    
    46,791
    
    
    
    44,450
    
    
    
    
    
    
    
    91,241Note receivable, current portion
    
    
    549
    
    
    
    4,618
    
    
    
    
    
    
    
    5,167Inventories
    
    
    64,619
    
    
    
    32,562
    
    
    
    
    
    
    
    97,181Prepaid expenses and other
    
    
    3,800
    
    
    
    1,219
    
    
    
    
    
    
    
    5,019Total current assets
    
    
    169,130
    
    
    
    99,213
    
    
    
    
    
    
    
    268,343Cash, restricted
    
    
    
    
    
    
    33,000
    
    
    
    
    
    
    
    33,000Property, plant and equipment
    
    
    359,497
    
    
    
    543,905
    
    
    
    
    
    
    
    903,402Other
    
    
    5,024
    
    
    
    3
    
    
    
    
    
    
    
    5,027Deferred income tax
    
    
    10,072
    
    
    
    8,674
    
    
    
    
    
    
    
    18,746Due from unrestricted group
    
    
    58,942
    
    
    
    
    
    
    
    (58,942
    )
    
    
    Note receivable, less current portion
    
    
    3,536
    
    
    
    
    
    
    
    
    
    
    
    3,536Total assets
    
    
    606,201
    
    
    
    684,795
    
    
    
    (58,942
    )
    
    
    1,232,054LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    42,487
    
    
    
    31,844
    
    
    
    
    
    
    
    74,331Pension and other post-retirement
benefit obligations, current portion
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    438Debt, current portion
    
    
    
    
    
    
    35,042
    
    
    
    
    
    
    
    35,042Total current liabilities
    
    
    42,925
    
    
    
    66,885
    
    
    
    
    
    
    
    109,811Debt, less current portion
    
    
    252,236
    
    
    
    521,736
    
    
    
    
    
    
    
    773,972Due to restricted group
    
    
    
    
    
    
    58,942
    
    
    
    (58,942
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    29,735
    
    
    
    
    
    
    
    29,735Pension and other post-retirement
benefit obligations
    
    
    17,310
    
    
    
    
    
    
    
    
    
    
    
    17,310Capital leases and other
    
    
    7,078
    
    
    
    3,676
    
    
    
    
    
    
    
    10,754Deferred income tax
    
    
    6,120
    
    
    
    14,851
    
    
    
    
    
    
    
    20,971Total liabilities
    
    
    325,669
    
    
    
    695,826
    
    
    
    (58,942
    )
    
    
    962,553SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    280,532
    
    
    
    (11,031
    )
    
    
    
    
    
    
    269,501Total liabilities and shareholders equity
    
    
    606,201
    
    
    
    684,795
    
    
    
    (58,942
    )
    
    
    1,232,054




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 December 31, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrentCash and cash equivalents
    
    
    59,371
    
    
    
    25,477
    
    
    
    
    
    
    
    84,848Receivables
    
    
    37,482
    
    
    
    52,408
    
    
    
    
    
    
    
    89,890Note receivable, current portion
    
    
    589
    
    
    
    5,307
    
    
    
    
    
    
    
    5,896Inventories
    
    
    63,444
    
    
    
    40,166
    
    
    
    
    
    
    
    103,610Prepaid expenses and other
    
    
    3,714
    
    
    
    2,301
    
    
    
    
    
    
    
    6,015Total current assets
    
    
    164,600
    
    
    
    125,659
    
    
    
    
    
    
    
    290,259Cash, restricted
    
    
    
    
    
    
    33,000
    
    
    
    
    
    
    
    33,000Property, plant and equipment
    
    
    385,569
    
    
    
    547,689
    
    
    
    
    
    
    
    933,258Other
    
    
    5,399
    
    
    
    
    
    
    
    
    
    
    
    5,399Deferred income tax
    
    
    10,852
    
    
    
    6,772
    
    
    
    
    
    
    
    17,624Due from unrestricted group
    
    
    57,457
    
    
    
    
    
    
    
    (57,457
    )
    
    
    Note receivable, less current portion
    
    
    3,977
    
    
    
    
    
    
    
    
    
    
    
    3,977Total assets
    
    
    627,854
    
    
    
    713,120
    
    
    
    (57,457
    )
    
    
    1,283,517LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    43,621
    
    
    
    43,379
    
    
    
    
    
    
    
    87,000Pension and other post-retirement
benefit obligations, current portion
    
    
    493
    
    
    
    
    
    
    
    
    
    
    
    493Debt, current portion
    
    
    
    
    
    
    34,023
    
    
    
    
    
    
    
    34,023Total current liabilities
    
    
    44,114
    
    
    
    77,402
    
    
    
    
    
    
    
    121,516Debt, less current portion
    
    
    273,589
    
    
    
    542,243
    
    
    
    
    
    
    
    815,832Due to restricted group
    
    
    
    
    
    
    57,457
    
    
    
    (57,457
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    21,885
    
    
    
    
    
    
    
    21,885Pension and other post-retirement
benefit obligations
    
    
    19,983
    
    
    
    
    
    
    
    
    
    
    
    19,983Capital leases and other
    
    
    7,033
    
    
    
    1,966
    
    
    
    
    
    
    
    8,999Deferred income tax
    
    
    4,553
    
    
    
    14,087
    
    
    
    
    
    
    
    18,640Total liabilities
    
    
    349,272
    
    
    
    715,040
    
    
    
    (57,457
    )
    
    
    1,006,855SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    278,582
    
    
    
    (1,920
    )
    
    
    
    
    
    
    276,662Total liabilities and shareholders equity
    
    
    627,854
    
    
    
    713,120
    
    
    
    (57,457
    )
    
    
    1,283,517




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended March 31, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    101,102
    
    
    
    77,999
    
    
    
    
    
    
    
    179,101Operating costs
    
    
    77,656
    
    
    
    61,785
    
    
    
    
    
    
    
    139,441Operating depreciation and amortization
    
    
    7,421
    
    
    
    6,700
    
    
    
    
    
    
    
    14,121Selling, general and administrative expenses
    
    
    3,744
    
    
    
    3,152
    
    
    
    
    
    
    
    6,89688,821
    
    
    
    71,637
    
    
    
    
    
    
    
    160,458Operating income from continuing operations
    
    
    12,281
    
    
    
    6,362
    
    
    
    
    
    
    
    18,643Other income (expense)Interest expense
    
    
    (6,712
    )
    
    
    (10,867
    )
    
    
    959
    
    
    
    (16,620
    )Investment income (expense)
    
    
    1,736
    
    
    
    (467
    )
    
    
    (959
    )
    
    
    310Foreign exchange gain (loss) on debt
    
    
    6,627
    
    
    
    (596
    )
    
    
    
    
    
    
    6,031Derivative financial instruments
    
    
    
    
    
    
    (7,850
    )
    
    
    
    
    
    
    (7,850
    )Total other income (expense)
    
    
    1,651
    
    
    
    (19,780
    )
    
    
    
    
    
    
    (18,129
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    13,932
    
    
    
    (13,418
    )
    
    
    
    
    
    
    514Income tax benefit (provision)
    
    
    (2,154
    )
    
    
    1,326
    
    
    
    
    
    
    
    (828
    )Income (loss) before minority interest from
continuing operations
    
    
    11,778
    
    
    
    (12,092
    )
    
    
    
    
    
    
    (314
    )Minority interest
    
    
    
    
    
    
    3,183
    
    
    
    
    
    
    
    3,183Net income (loss)
    
    
    11,778
    
    
    
    (8,909
    )
    
    
    
    
    
    
    2,869
 Three Months Ended March 31, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    99,933
    
    
    
    69,598
    
    
    
    
    
    
    
    169,531Operating costs
    
    
    76,930
    
    
    
    56,916
    
    
    
    
    
    
    
    133,846Operating depreciation and amortization
    
    
    6,686
    
    
    
    7,043
    
    
    
    
    
    
    
    13,729Selling, general and administrative expenses
    
    
    4,545
    
    
    
    3,661
    
    
    
    
    
    
    
    8,206(Sale) purchase of emission allowances
    
    
    (264
    )
    
    
    (463
    )
    
    
    
    
    
    
    (727
    )87,897
    
    
    
    67,157
    
    
    
    
    
    
    
    155,054Operating income from continuing operations
    
    
    12,036
    
    
    
    2,441
    
    
    
    
    
    
    
    14,477Other income (expense)Interest expense
    
    
    (7,458
    )
    
    
    (13,525
    )
    
    
    915
    
    
    
    (20,068
    )Investment income
    
    
    1,305
    
    
    
    1,221
    
    
    
    (915
    )
    
    
    1,611Foreign exchange gain on debt
    
    
    1,254
    
    
    
    
    
    
    
    
    
    
    
    1,254Derivative financial instruments, net
    
    
    
    
    
    
    6,572
    
    
    
    
    
    
    
    6,572Total other expense
    
    
    (4,899
    )
    
    
    (5,732
    )
    
    
    
    
    
    
    (10,631
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    7,137
    
    
    
    (3,291
    )
    
    
    
    
    
    
    3,846Income tax provision
    
    
    (2,738
    )
    
    
    (1,063
    )
    
    
    
    
    
    
    (3,801
    )Income (loss) before minority interest from
continuing operations
    
    
    4,399
    
    
    
    (4,354
    )
    
    
    
    
    
    
    45Minority interest
    
    
    
    
    
    
    1,048
    
    
    
    
    
    
    
    1,048Net income (loss) from continuing operations
    
    
    4,399
    
    
    
    (3,306
    )
    
    
    
    
    
    
    1,093Net loss from discontinued operations
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Net income (loss)
    
    
    4,399
    
    
    
    (3,313
    )
    
    
    
    
    
    
    1,086




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Subsequent Event
  




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
   Results of Operations
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
  Three Months Ended March 31,2008
    
    
    2007Pulp Production (000 ADMTs)
    
    
    360.9
    
    
    
    347.3Scheduled Production Downtime (000 ADMTs)
    
    
    1.5
    
    
    nilPulp Sales (000 ADMTs)
    
    
    348.2
    
    
    
    329.1Revenues (in millions)
    
    
    179.1
    
    
    
    169.5NBSK pulp list prices in Europe ($/ADMT)
    
    $
    880
    
    
    $
    757NBSK pulp list prices in Europe (/ADMT)
    
    
    586
    
    
    
    578Average pulp sales realizations (/ADMT)(1)
    
    
    510
    
    
    
    512Average Spot Currency Exchange Rates / $(2)
    
    
    0.6666
    
    
    
    0.7630C$ / $(2)
    
    
    1.0015
    
    
    
    1.1716C$ / (3)
    
    
    1.5060
    
    
    
    1.5354
 
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(3)
    
    Average Bank of Canada noon spot rate over the reporting period.   
  




---



##### 




    
   
  
  
  




---



##### 



 
   
  
  
      
  




---



##### 



Three Months EndedMarch 31,2008
    
    
    2007(in thousands)Net income from continuing operations
    
    
    2,869
    
    
    
    1,093Minority interest
    
    
    (3,183
    )
    
    
    (1,048
    )Income taxes
    
    
    828
    
    
    
    3,801Interest expense
    
    
    16,620
    
    
    
    20,068Investment income
    
    
    (310
    )
    
    
    (1,611
    )Unrealized foreign exchange gain on debt
    
    
    (6,031
    )
    
    
    (1,254
    )Derivative financial instruments, net
    
    
    7,850
    
    
    
    (6,572
    )Operating income from continuing operations
    
    
    18,643
    
    
    
    14,477Add: Depreciation and amortization
    
    
    14,192
    
    
    
    13,792Operating EBITDA
    
    
    32,835
    
    
    
    28,269
 Liquidity and Capital Resources
  As at
    
    As atMarch 31,
    
    December 31,2008
    
    2007(in thousands)Financial PositionCash and cash equivalents
    
    
    69,735
    
    
    
    84,848Working capital
    
    
    158,532
    
    
    
    168,743Property, plant and equipment
    
    
    903,402
    
    
    
    933,258Total assets
    
    
    1,232,054
    
    
    
    1,283,517Long-term liabilities
    
    
    852,742
    
    
    
    885,339Shareholders equity
    
    
    269,501
    
    
    
    276,662
     




---



##### 



Operating Activities
    
  
  Investing Activities
  
  
  
 Financing Activities
  




---



##### 




  Contractual Obligations and Commitments
  Capital Resources
  Foreign Currency
   




---



##### 



Results of Operations of the Restricted Group Under Our Senior Note Indenture
   Restricted Group Results  Three Months Ended March 31, 2008 Compared to Three Months Ended March
31, 2007
  
   
    
   




---



##### 




  
  
  
  
   
  




---



##### 



Three Months EndedMarch 31,2008
    
    
    2007(in thousands)Restricted GroupNet income from continuing operations(1)
    
    
    11,778
    
    
    
    4,399Income taxes
    
    
    2,154
    
    
    
    2,738Interest expense
    
    
    6,712
    
    
    
    7,458Investment income
    
    
    (1,736
    )
    
    
    (1,305
    )Unrealized foreign exchange gain on debt
    
    
    (6,627
    )
    
    
    (1,254
    )Operating income from continuing operations
    
    
    12,281
    
    
    
    12,036Add: Depreciation and amortization
    
    
    7,492
    
    
    
    6,749Operating EBITDA(1)
    
    
    19,773
    
    
    
    18,785
 
 (1)
    
    See Note 8 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 atMarch 31,
    
    December 31,2008
    
    2007(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    53,371
    
    
    
    59,371Working capital
    
    
    126,205
    
    
    
    120,486Property, plant and equipment
    
    
    359,497
    
    
    
    385,569Total assets
    
    
    606,201
    
    
    
    627,854Long-term liabilities
    
    
    282,744
    
    
    
    305,158Shareholders equity
    
    
    280,532
    
    
    
    278,582
 
 (1)
    
    See Note 8 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.   
 
   




---



##### 



Critical Accounting Policies
    New Accounting Standards
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
 Cyclical Nature of Business
 Revenues




---



##### 



Costs




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     




---



##### 



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




---



##### 



PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
   ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description10.1
    
    Employment Agreement (Leonhard Nossol)31.1
    
    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.




---



##### 



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