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, 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
    
    47-0956945(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.ITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURES 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(Unaudited)




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##### 



MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Euros)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assetsCash and cash equivalents
    
    
    41,236
    
    
    
    42,452Cash, restricted
    
    
    3,531
    
    
    
    13,000Receivables
    
    
    80,943
    
    
    
    100,158Inventories (Note 4)
    
    
    89,761
    
    
    
    98,457Prepaid expenses and other
    
    
    3,085
    
    
    
    4,834Total current assets
    
    
    218,556
    
    
    
    258,901Long-term assetsProperty, plant and equipment
    
    
    879,300
    
    
    
    881,704Investments (Note 9)
    
    
    71
    
    
    
    419Deferred note issuance and other costs
    
    
    8,852
    
    
    
    4,011Deferred income tax
    
    
    3,231
    
    
    
    3,036Note receivable, less current portion
    
    
    3,531
    
    
    
    3,529894,985
    
    
    
    892,699Total assets
    
    
    1,113,541
    
    
    
    1,151,600LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    81,575
    
    
    
    87,517Pension and other post-retirement benefit obligations,
current portion
    
    
    520
    
    
    
    510Debt, current portion (Note 5)
    
    
    26,500
    
    
    
    16,500Total current liabilities
    
    
    108,595
    
    
    
    104,527Long-term liabilitiesDebt, less current portion (Note 5)
    
    
    838,556
    
    
    
    837,918Unrealized interest rate derivative losses (Note 6)
    
    
    62,125
    
    
    
    47,112Pension and other post-retirement benefit obligations (Note 7)
    
    
    12,980
    
    
    
    12,846Capital leases and other
    
    
    9,877
    
    
    
    11,267Deferred income tax
    
    
    3,023
    
    
    
    5,827926,561
    
    
    
    914,970Total liabilities
    
    
    1,035,156
    
    
    
    1,019,497EQUITYShareholders equityShare capital (Note 8)
    
    
    202,844
    
    
    
    202,844Paid-in capital
    
    
    (5,897
    )
    
    
    299Retained earnings (deficit)
    
    
    (74,396
    )
    
    
    (35,046
    )Accumulated other comprehensive loss
    
    
    (6,944
    )
    
    
    (1,872
    )Total shareholders equity
    
    
    115,607
    
    
    
    166,225Noncontrolling interest (deficit) (Note 10)
    
    
    (37,222
    )
    
    
    (34,122
    )Total equity
    
    
    78,385
    
    
    
    132,103Total liabilities and equity
    
    
    1,113,541
    
    
    
    1,151,600
  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 EndedMarch 31,2009
    
    
    2008RevenuesPulp revenue
    
    
    129,033
    
    
    
    179,101Energy revenue
    
    
    10,539
    
    
    
    7,715139,572
    
    
    
    186,816Costs and expensesOperating costs
    
    
    131,997
    
    
    
    147,156Operating depreciation and amortization
    
    
    13,401
    
    
    
    14,121(5,826
    )
    
    
    25,539Selling, general and administrative expenses
    
    
    7,145
    
    
    
    6,896(Sale) purchase of emission allowances
    
    
    (558
    )
    
    
    Operating income (loss)
    
    
    (12,413
    )
    
    
    18,643Other income (expense)Interest expense
    
    
    (16,549
    )
    
    
    (16,620
    )Investment income (loss)
    
    
    (3,202
    )
    
    
    310Foreign exchange gain (loss) on debt
    
    
    (4,416
    )
    
    
    6,031Unrealized gain (loss) on derivative instruments (Note 6)
    
    
    (15,013
    )
    
    
    (7,850
    )Total other income (expense)
    
    
    (39,180
    )
    
    
    (18,129
    )Net income (loss) before income taxes
    
    
    (51,593
    )
    
    
    514Income tax benefit (provision)  current
    
    
    (49
    )
    
    
    376 deferred
    
    
    3,031
    
    
    
    (1,204
    )Net income (loss)
    
    
    (48,611
    )
    
    
    (314
    )Less: net loss attributable to noncontrolling interest
    
    
    9,261
    
    
    
    3,183Net income (loss) attributable to common shareholders
    
    
    (39,350
    )
    
    
    2,869Retained earnings (deficit), beginning of period
    
    
    (35,046
    )
    
    
    37,419Retained earnings (deficit), end of period
    
    
    (74,396
    )
    
    
    40,288Net income (loss) per share attributable to common shareholders (Note 3):Basic
    
    
    (1.08
    )
    
    
    0.08Diluted
    
    
    (1.08
    )
    
    
    0.08
 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 EndedMarch 31,2009
    
    
    2008Net income (loss)
    
    
    (48,611
    )
    
    
    (314
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (5,386
    )
    
    
    (10,104
    )Unrealized gains (losses) on securities arising during the period
    
    
    314
    
    
    
    (25
    )Other comprehensive income (loss)
    
    
    (5,072
    )
    
    
    (10,129
    )Total comprehensive income (loss)
    
    
    (53,683
    )
    
    
    (10,443
    )Comprehensive loss attributable to noncontrolling interest
    
    
    9,261
    
    
    
    3,183Comprehensive income (loss) attributable to common shareholders
    
    
    (44,422
    )
    
    
    (7,260
    )
 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 EndedMarch 31,2009
    
    
    2008Cash flows from (used in) operating activities:Net income (loss) attributable to common shareholders
    
    
    (39,350
    )
    
    
    2,869Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows
from operating activitiesUnrealized (gain) loss on derivative instruments
    
    
    15,013
    
    
    
    7,850Foreign exchange (gain) loss on debt
    
    
    4,416
    
    
    
    (6,031
    )Loss (gain) on sale of assets
    
    
    (59
    )
    
    
    (1,022
    )Operating depreciation and amortization
    
    
    13,401
    
    
    
    14,121Non-operating amortization
    
    
    66
    
    
    
    71Noncontrolling interest
    
    
    (9,261
    )
    
    
    (3,183
    )Deferred income taxes
    
    
    (3,031
    )
    
    
    1,204Stock compensation expense
    
    
    (33
    )
    
    
    146Pension and other post-retirement expense
    
    
    331
    
    
    
    515Pension and other post-retirement benefit funding
    
    
    (347
    )
    
    
    (449
    )Inventory provisions
    
    
    4,587
    
    
    
    Other
    
    
    424
    
    
    
    (57
    )Changes in current assets and liabilitiesReceivables
    
    
    20,409
    
    
    
    (3,833
    )Inventories
    
    
    6,119
    
    
    
    706Accounts payable and accrued expenses
    
    
    (6,781
    )
    
    
    (11,380
    )Other
    
    
    (5,102
    )
    
    
    2,097Net cash from (used in) operating activities
    
    
    802
    
    
    
    3,624Cash flows from (used in) investing activities:Purchase of property, plant and equipment
    
    
    (7,706
    )
    
    
    (3,002
    )Proceeds on sale of property, plant and equipment
    
    
    129
    
    
    
    960Cash, restricted
    
    
    9,469
    
    
    
    Notes receivable
    
    
    121
    
    
    
    Net cash from (used in) investing activities
    
    
    2,013
    
    
    
    (2,042
    )Cash flows from (used in) financing activities:Repayment of notes payable and debt
    
    
    (13,800
    )
    
    
    (16,891
    )Repayment of capital lease obligations
    
    
    (682
    )
    
    
    (638
    )Proceeds from borrowings of notes payable and debt
    
    
    10,000
    
    
    
    Net cash from (used in) financing activities
    
    
    (4,482
    )
    
    
    (17,529
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    451
    
    
    
    834Net increase (decrease) in cash and cash equivalents
    
    
    (1,216
    )
    
    
    (15,113
    )Cash and cash equivalents, beginning of period
    
    
    42,452
    
    
    
    84,848Cash and cash equivalents, end of period
    
    
    41,236
    
    
    
    69,735
 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 EndedMarch 31,2009
    
    2008Supplemental disclosure of cash flow information:Cash paid (received) during the period for:Interest
    
    
    28,258
    
    
    
    26,486Income taxes
    
    
    29
    
    
    
    14Supplemental schedule of non-cash investing and financing activities:Acquisition of production and other equipment under capital lease
obligations
    
    
    36
    
    
    
    2,722Increase (decrease) in accounts payable relating to investing activities
    
    
    461
    
    
    
    
 The accompanying notes are an integral part of these interim consolidated financial statements.




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




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MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 1. The Company and Summary of Significant Accounting Policies (continued)
 Recently Implemented Accounting Standards
 Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB 51
 Business
Combinations
 Effective Date of FASB
Statement No. 157 Fair Value Measurements
 Disclosures
about Derivative Instruments and Hedging Activities




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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)
 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)
 New Accounting Standards
 The Hierarchy of
Generally Accepted Accounting Principles The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles
 Employers Disclosures about
Pensions and Other Postretirement Benefits




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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)
 Interim Disclosures about Fair Value
of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial
Reporting,
 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
  
  (2008  58),
   Stock Options
  Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months EndedMarch 31,2009
    
    
    2008Net income (loss) attributable to common shareholders  basic
    
    
    (39,350
    )
    
    
    2,869Interest on convertible notes, net of tax
    
    
    
    
    
    
    Net income (loss) attributable to common shareholders  diluted
    
    
    (39,350
    )
    
    
    2,869Net income (loss) per share attributable to common shareholders:Basic
    
    
    (1.08
    )
    
    
    0.08Diluted
    
    
    (1.08
    )
    
    
    0.08Weighted average number of common shares outstanding:Basic (1)
    
    
    36,285,027
    
    
    
    36,285,027Effect of dilutive instruments:Stock options and awards
    
    
    
    
    
    
    151,762Convertible notes
    
    
    
    
    
    
    Diluted
    
    
    36,285,027
    
    
    
    36,436,789
 
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock which
have been issued, but have not vested as at March 31, 2009.




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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
 March 31, 2009
    
    
    December 31, 2008Raw materials
    
    
    26,463
    
    
    
    38,225Finished goods
    
    
    40,857
    
    
    
    37,881Work in process and other
    
    
    22,441
    
    
    
    22,351
    89,761
    
    
    
    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)
  March 31,
    
    
    December2009
    
    
    31, 2008Note payable to bank, included in a total credit
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)
    
    
    233,786
    
    
    
    222,718Subordinated convertible notes due October 2010,
interest at 8.5% accrued and payable semi-annually
(c)
    
    
    50,720
    
    
    
    48,319Credit agreement with a lender with respect to a
revolving credit facility of C$40 million (d)
    
    
    13,166
    
    
    
    18,186Loan payable to noncontrolling shareholder of the
Stendal mill (e) (Note 10)
    
    
    34,561
    
    
    
    34,122Credit agreement with bank with respect to a
revolving credit facility of 40 million (f)
    
    
    10,000
    
    
    
    865,056
    
    
    
    854,418Less: current portion
    
    
    (26,500
    )
    
    
    (16,500
    )Debt, less current portion
    
    
    838,556
    
    
    
    837,918
  
 Matures
    
    Amount2009
    
    
    8,2502010
    
    
    87,8032011
    
    
    23,1672012
    
    
    24,5832013
    
    
    273,786Thereafter
    
    
    447,467
    865,056
 
 (a)
    
    Note payable to bank, included in a total credit facility of 827,950 to finance the
construction related to the Stendal mill, interest at rates varying from Euribor plus 0.90% to
Euribor plus 1.50% (rates on amounts of borrowing at March 31, 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 March 31, 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 balance,
subject to a debt service reserve account required to pay amounts due in the following twelve
months under the terms of the credit facility; payment of dividends is only permitted if
certain cash flow requirements are met.




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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)
      
 (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 March 31, 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.(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 March 31, 2009, this facility was
drawn by C$22.0 million and was accruing interest at a rate of approximately 2.99%. The
credit agreement matures May 19, 2010, but is subject to a one-year extension at the Companys
request.




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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)
 (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.(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. Borrowings under the credit agreement bear interest at Euribor plus 1.55%. As
at March 31, 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.
 Note 6. Derivative Transactions
    




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 6. Derivative Transactions (continued)
   Accounting for Derivative Instruments and Hedging
Activities
  Note 7. Pension and Other Post-Retirement Benefit Obligations
    
 
  Three Months Ended March 31,2009
    
    
    2008Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    14
    
    
    
    83
    
    
    
    204
    
    
    
    130Interest cost
    
    
    370
    
    
    
    199
    
    
    
    351
    
    
    
    207Expected return on plan assets
    
    
    (311
    )
    
    
    
    
    
    
    (399
    )
    
    
    Recognized net loss
    
    
    34
    
    
    
    (58
    )
    
    
    (1
    )
    
    
    21Net periodic benefit cost
    
    
    107
    
    
    
    224
    
    
    
    155
    
    
    
    358




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Share Capital
 Common shares
  Preferred shares
  Note 9. Financial Instruments
   identical
 similar




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments (continued)
     Fair value measurements at March 31, 2009 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71LiabilitiesDerivatives (b)- Interest rate
swaps
    
    
    
    
    
    
    62,125
    
    
    
    
    
    
    
    62,125
 
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (interest rates and yield curves observable at
specific intervals).




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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
 Application of new
    
    
    Revised balance as atBalance as at
    
    
    accounting standard
    
    
    December 31, 2008Description
    
    December 31, 2008
    
    
    (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 owner and operator of 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)
    
  
  Three months endedDescription
    
    March 31, 2009Net income (loss) attributable to common shareholders
    
    
    (39,350
    )Transfer (to) from the noncontrolling interest:Decrease in the Companys paid-in capital for the
acquisition of an additional 4.32% in the Stendal
mill
    
    
    (6,161
    )Change from net income (loss) attributable to common
shareholders and the transfer (to) from
noncontrolling interest
    
    
    (45,511
    )




---



##### 



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




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 March 31, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    28,682
    
    
    
    12,554
    
    
    
    
    
    
    
    41,236Cash, restricted
    
    
    
    
    
    
    3,531
    
    
    
    
    
    
    
    3,531Receivables
    
    
    42,699
    
    
    
    38,244
    
    
    
    
    
    
    
    80,943Inventories
    
    
    56,979
    
    
    
    32,782
    
    
    
    
    
    
    
    89,761Prepaid expenses and other
    
    
    2,069
    
    
    
    1,016
    
    
    
    
    
    
    
    3,085Total current assets
    
    
    130,429
    
    
    
    88,127
    
    
    
    
    
    
    
    218,556Property, plant and equipment
    
    
    354,777
    
    
    
    524,523
    
    
    
    
    
    
    
    879,300Other
    
    
    3,664
    
    
    
    5,259
    
    
    
    
    
    
    
    8,923Deferred income tax
    
    
    3,231
    
    
    
    
    
    
    
    
    
    
    
    3,231Due from unrestricted group
    
    
    67,009
    
    
    
    
    
    
    
    (67,009
    )
    
    
    Note receivable, less current portion
    
    
    3,531
    
    
    
    
    
    
    
    
    
    
    
    3,531Total assets
    
    
    562,641
    
    
    
    617,909
    
    
    
    (67,009
    )
    
    
    1,113,541LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    46,226
    
    
    
    35,349
    
    
    
    
    
    
    
    81,575Pension and other post-retirement benefit
obligations, current portion
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    520Debt, current portion
    
    
    10,000
    
    
    
    16,500
    
    
    
    
    
    
    
    26,500Total current liabilities
    
    
    56,746
    
    
    
    51,849
    
    
    
    
    
    
    
    108,595Debt, less current portion
    
    
    297,672
    
    
    
    540,884
    
    
    
    
    
    
    
    838,556Due to restricted group
    
    
    
    
    
    
    67,009
    
    
    
    (67,009
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    62,125
    
    
    
    
    
    
    
    62,125Pension and other post-retirement benefit
obligations
    
    
    12,980
    
    
    
    
    
    
    
    
    
    
    
    12,980Capital leases and other
    
    
    6,174
    
    
    
    3,703
    
    
    
    
    
    
    
    9,877Deferred income tax
    
    
    
    
    
    
    3,023
    
    
    
    
    
    
    
    3,023Total liabilities
    
    
    373,572
    
    
    
    728,593
    
    
    
    (67,009
    )
    
    
    1,035,156EQUITYTotal shareholders equity (deficit)
    
    
    189,069
    
    
    
    (73,462
    )
    
    
    
    
    
    
    115,607Noncontrolling interest (deficit)
    
    
    
    
    
    
    (37,222
    )
    
    
    
    
    
    
    (37,222
    )Total liabilities and equity
    
    
    562,641
    
    
    
    617,909
    
    
    
    (67,009
    )
    
    
    1,113,541




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 December 31, 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 12. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended March 31, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    79,032
    
    
    
    60,540
    
    
    
    
    
    
    
    139,572Operating costs
    
    
    73,316
    
    
    
    58,681
    
    
    
    
    
    
    
    131,997Operating depreciation and amortization
    
    
    6,704
    
    
    
    6,697
    
    
    
    
    
    
    
    13,401Selling, general and administrative expenses
    
    
    4,422
    
    
    
    2,165
    
    
    
    
    
    
    
    6,58784,442
    
    
    
    67,543
    
    
    
    
    
    
    
    151,985Operating income (loss)
    
    
    (5,410
    )
    
    
    (7,003
    )
    
    
    
    
    
    
    (12,413
    )Other income (expense)Interest expense
    
    
    (7,302
    )
    
    
    (10,356
    )
    
    
    1,109
    
    
    
    (16,549
    )Investment income (loss)
    
    
    916
    
    
    
    (3,009
    )
    
    
    (1,109
    )
    
    
    (3,202
    )Foreign exchange gain (loss) on debt
    
    
    (4,416
    )
    
    
    
    
    
    
    
    
    
    
    (4,416
    )Derivative instruments
    
    
    
    
    
    
    (15,013
    )
    
    
    
    
    
    
    (15,013
    )Total other income (expense)
    
    
    (10,802
    )
    
    
    (28,378
    )
    
    
    
    
    
    
    (39,180
    )Net income (loss) before income taxes
    
    
    (16,212
    )
    
    
    (35,381
    )
    
    
    
    
    
    
    (51,593
    )Income tax benefit (provision)
    
    
    208
    
    
    
    2,774
    
    
    
    
    
    
    
    2,982Net income (loss)
    
    
    (16,004
    )
    
    
    (32,607
    )
    
    
    
    
    
    
    (48,611
    )Less: net loss attributable to noncontrolling interest
    
    
    
    
    
    
    9,261
    
    
    
    
    
    
    
    9,261Net income (loss) attributable to common shareholders
    
    
    (16,004
    )
    
    
    (23,346
    )
    
    
    
    
    
    
    (39,350
    )
 Three Months Ended March 31, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    104,588
    
    
    
    82,228
    
    
    
    
    
    
    
    186,816Operating costs
    
    
    81,142
    
    
    
    66,014
    
    
    
    
    
    
    
    147,156Operating depreciation and amortization
    
    
    7,421
    
    
    
    6,700
    
    
    
    
    
    
    
    14,121Selling, general and administrative expenses
    
    
    3,744
    
    
    
    3,152
    
    
    
    
    
    
    
    6,89692,307
    
    
    
    75,866
    
    
    
    
    
    
    
    168,173Operating income (loss)
    
    
    12,281
    
    
    
    6,362
    
    
    
    
    
    
    
    18,643Other income (expense)Interest expense
    
    
    (6,712
    )
    
    
    (10,867
    )
    
    
    959
    
    
    
    (16,620
    )Investment income (loss)
    
    
    1,736
    
    
    
    (467
    )
    
    
    (959
    )
    
    
    310Foreign exchange gain (loss) on debt
    
    
    6,627
    
    
    
    (596
    )
    
    
    
    
    
    
    6,031Derivative instruments
    
    
    
    
    
    
    (7,850
    )
    
    
    
    
    
    
    (7,850
    )Total other income (expense)
    
    
    1,651
    
    
    
    (19,780
    )
    
    
    
    
    
    
    (18,129
    )Net income (loss) before income taxes
    
    
    13,932
    
    
    
    (13,418
    )
    
    
    
    
    
    
    514Income tax benefit (provision)
    
    
    (2,154
    )
    
    
    1,326
    
    
    
    
    
    
    
    (828
    )Net income (loss)
    
    
    11,778
    
    
    
    (12,092
    )
    
    
    
    
    
    
    (314
    )Less: net loss attributable to noncontrolling interest
    
    
    
    
    
    
    3,183
    
    
    
    
    
    
    
    3,183Net income (loss) attributable to common shareholders
    
    
    11,778
    
    
    
    (8,909
    )
    
    
    
    
    
    
    2,869




---



##### 



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




---



##### 



First Quarter Snapshot
  Three Months Ended March 31,2009
    
    2008Pulp Production (000 ADMTs)
    
    
    345.6
    
    
    
    360.9Scheduled Production Downtime (000 ADMTs)
    
    
    
    
    
    
    1.5Pulp Sales (000 ADMTs)
    
    
    336.7
    
    
    
    348.2Pulp Revenues (in millions)
    
    
    129.0
    
    
    
    179.1NBSK pulp list prices in Europe ($/ADMT)
    
    $
    585
    
    
    $
    880NBSK pulp list prices in Europe (/ADMT)
    
    
    449
    
    
    
    586Average pulp sales realizations (/ADMT)(1)
    
    
    377
    
    
    
    510Energy Production (000 MWh)
    
    
    356.3
    
    
    
    364.9Energy Sales (000 MWh)
    
    
    112.2
    
    
    
    114.1Energy Revenue (in millions)
    
    
    10.6
    
    
    
    7.7Average energy sales realizations (/MWh)
    
    
    94
    
    
    
    68Average Spot Currency Exchange Rates(2) / $
    
    
    0.7675
    
    
    
    0.6666C$ / $
    
    
    1.2453
    
    
    
    1.0042C$ / 
    
    
    1.6217
    
    
    
    1.5057
 
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Bank of Canada noon spot rates over the reporting period. Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
    
   
   




---



##### 



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




---



##### 



 
  
     
    




---



##### 



Three Months EndedMarch 31,2009
    
    
    2008(in thousands)Net income (loss) attributable to common shareholders
    
    
    (39,350
    )
    
    
    2,869Net loss attributable to noncontrolling interest
    
    
    (9,261
    )
    
    
    (3,183
    )Income taxes (benefits)
    
    
    (2,982
    )
    
    
    828Interest expense
    
    
    16,549
    
    
    
    16,620Investment (income) loss
    
    
    3,202
    
    
    
    (310
    )Unrealized foreign exchange loss (gain) on debt
    
    
    4,416
    
    
    
    (6,031
    )Derivative instruments
    
    
    15,013
    
    
    
    7,850Operating income (loss)
    
    
    (12,413
    )
    
    
    18,643Add: Depreciation and amortization
    
    
    13,467
    
    
    
    14,192Operating EBITDA
    
    
    1,054
    
    
    
    32,835
 Liquidity and Capital Resources
  As at
    
    As atMarch 31,
    
    December 31,2009
    
    2008(in thousands)Financial PositionCash and cash equivalents
    
    
    41,236
    
    
    
    42,452Cash, restricted
    
    
    3,531
    
    
    
    13,000Working capital
    
    
    109,961
    
    
    
    154,374Property, plant and equipment
    
    
    879,300
    
    
    
    881,704Total assets
    
    
    1,113,541
    
    
    
    1,151,600Long-term liabilities
    
    
    926,561
    
    
    
    914,970Total equity
    
    
    78,385
    
    
    
    132,103
 Sources and Uses of Funds
     
 




---



##### 



   
    
 Debt
  
 
 
 Debt Covenants




---



##### 



Cash Flow Analysis
 Cash Flows from Operating Activities.
        
  Cash Flows from Investing Activities.    
 Cash Flows from Financing Activities.  




---



##### 



Capital Resources
 
  Future Liquidity
  Contractual Obligations and Commitments
  Foreign Currency
   




---



##### 



Results of Operations of the Restricted Group under Our Senior Note Indenture
   Restricted Group Results  Three Months Ended March 31, 2009 Compared to Three Months Ended March
31, 2008
    
   
   
   




---



##### 



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




---



##### 



Three Months EndedMarch 31,2009
    
    
    2008(in thousands)Restricted GroupNet income (loss) attributable to common shareholders(1)
    
    
    (16,004
    )
    
    
    11,778Income taxes (benefits)
    
    
    (208
    )
    
    
    2,154Interest expense
    
    
    7,302
    
    
    
    6,712Investment (income) loss
    
    
    (916
    )
    
    
    (1,736
    )Unrealized foreign exchange (gain) loss on debt
    
    
    4,416
    
    
    
    (6,627
    )Operating income (loss)
    
    
    (5,410
    )
    
    
    12,281Add: Depreciation and amortization
    
    
    6,770
    
    
    
    7,492Operating EBITDA(1)
    
    
    1,360
    
    
    
    19,773
 
 (1)
    
    See Note 12 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 31,2009
    
    2008(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    28,682
    
    
    
    26,176Working capital
    
    
    73,683
    
    
    
    101,490Property, plant and equipment
    
    
    354,777
    
    
    
    351,009Total assets
    
    
    562,641
    
    
    
    564,374Long-term liabilities
    
    
    316,826
    
    
    
    309,235Equity
    
    
    189,069
    
    
    
    210,179
 
 (1)
    
    See Note 12 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
 
    
    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;




---



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
    
    capital expenditures;
    
    the economy;
    
    foreign exchange rates  particularly the U.S. dollar and Canadian dollar; and
    
    derivatives.
  Cyclical Nature of Business
 Revenues




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Costs
  Currency




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




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




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1*
    
    Section 906 Certification of Chief Executive Officer32.2*
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein.




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