##### 



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, 2005
 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.: 000-09409
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
    
    91-6087550(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
 þ o




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##### 



PART I. FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
 FORM 10-Q QUARTERLY REPORT  PAGE 2




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED BALANCE SHEETS
 As at June 30, 2005 and December 31, 2004
(Unaudited)
(Euros in thousands)
 June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    
    105,874
    
    
    
    49,568Cash restricted
    
    
    37,951
    
    
    
    45,295Receivables
    
    
    75,344
    
    
    
    54,687Inventories
    
    
    92,037
    
    
    
    52,898Prepaid expenses and other
    
    
    7,057
    
    
    
    4,961Total current assets
    
    
    318,263
    
    
    
    207,409Long-Term AssetsCash restricted
    
    
    19,074
    
    
    
    47,538Property, plant and equipment
    
    
    1,109,394
    
    
    
    936,035Investments
    
    
    4,728
    
    
    
    5,079Deferred note issuance and other costs
    
    
    9,132
    
    
    
    5,069Deferred income tax
    
    
    78,238
    
    
    
    54,5191,220,566
    
    
    
    1,048,240Total assets
    
    
    1,538,829
    
    
    
    1,255,649LIABILITIESCurrent LiabilitiesAccounts payable and accrued expenses
    
    
    101,399
    
    
    
    56,542Construction costs payable
    
    
    34,090
    
    
    
    65,436Debt, current portion
    
    
    97,618
    
    
    
    107,090Total current liabilities
    
    
    233,107
    
    
    
    229,068Long-Term LiabilitiesDebt, less current portion
    
    
    952,555
    
    
    
    777,272Unrealized foreign exchange rate derivative losses
    
    
    47,685
    
    
    
    Unrealized interest rate derivative losses
    
    
    95,946
    
    
    
    75,471Pension and other post-retirement benefit obligations
    
    
    15,728
    
    
    
    Capital leases and other
    
    
    9,800
    
    
    
    9,035Deferred income tax
    
    
    4,143
    
    
    
    2,0621,125,857
    
    
    
    863,840Total liabilities
    
    
    1,358,964
    
    
    
    1,092,908Minority Interest
    
    
    
    
    
    
    SHAREHOLDERS EQUITYShares of beneficial interest
    
    
    180,916
    
    
    
    83,397Additional paid-in capital, stock options
    
    
    14
    
    
    
    14Retained earnings (deficit)
    
    
    (12,642
    )
    
    
    69,176Accumulated other comprehensive income
    
    
    11,577
    
    
    
    10,154Total shareholders equity
    
    
    179,865
    
    
    
    162,741Total liabilities and shareholders equity
    
    
    1,538,829
    
    
    
    1,255,649
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 3




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For Six Months Ended June 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
 2005
    
    
    2004Revenues
    
    
    227,502
    
    
    
    100,651Costs and expenses:Cost of sales
    
    
    210,167
    
    
    
    88,628General and administrative expenses
    
    
    15,316
    
    
    
    14,228Gain on sale of emission credits
    
    
    (6,288
    )
    
    
    Flooding losses and expenses, less grant income
    
    
    
    
    
    
    669Total costs and expenses
    
    
    219,195
    
    
    
    103,525Income (loss) from operations
    
    
    8,307
    
    
    
    (2,874
    )Other income (expense):Interest expense
    
    
    (41,463
    )
    
    
    (5,354
    )Investment income
    
    
    981
    
    
    
    1,464Realized loss on derivative financial instruments
    
    
    (295
    )
    
    
    Unrealized gain (loss) on derivative financial instruments
    
    
    (73,015
    )
    
    
    7,028Unrealized foreign exchange loss on debt
    
    
    (7,509
    )
    
    
    Impairment of investments
    
    
    (1,645
    )
    
    
    Total other (income) expense
    
    
    (122,946
    )
    
    
    3,138Income (loss) before income taxes and minority interest
    
    
    (114,639
    )
    
    
    264Income tax (provision) benefit
    
    
    21,412
    
    
    
    (199
    )Income (loss) before minority interest
    
    
    (93,227
    )
    
    
    65Minority interest
    
    
    11,409
    
    
    
    (2,790
    )Net loss
    
    
    (81,818
    )
    
    
    (2,725
    )Retained earnings, beginning of period
    
    
    69,176
    
    
    
    49,196Retained earnings (deficit), end of period
    
    
    (12,642
    )
    
    
    46,471Loss per shareBasic and diluted
    
    
    (2.80
    )
    
    
    (0.16
    )
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 4




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For Three Months Ended June 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
 2005
    
    
    2004Revenues
    
    
    129,609
    
    
    
    50,335Costs and expenses:Cost of sales
    
    
    119,178
    
    
    
    43,210General and administrative expenses
    
    
    7,518
    
    
    
    7,687Gain on sale of emission credits
    
    
    (6,288
    )
    
    
    Flooding losses and expenses, less grant income
    
    
    
    
    
    
    416Total costs and expenses
    
    
    120,408
    
    
    
    51,313Income (loss) from operations
    
    
    9,201
    
    
    
    (978
    )Other income (expense):Interest expense
    
    
    (22,200
    )
    
    
    (2,366
    )Investment income
    
    
    806
    
    
    
    530Unrealized gain (loss) on derivative financial instruments
    
    
    (69,451
    )
    
    
    29,473Unrealized foreign exchange loss on debt
    
    
    (9,806
    )
    
    
    Total other income (expense)
    
    
    (100,651
    )
    
    
    27,637Income (loss) before income taxes and minority interest
    
    
    (91,450
    )
    
    
    26,659Income tax (provision) benefit
    
    
    24,447
    
    
    
    (219
    )Income (loss) before minority interest
    
    
    (67,003
    )
    
    
    26,440Minority interest
    
    
    4,852
    
    
    
    (10,199
    )Net income (loss)
    
    
    (62,151
    )
    
    
    16,241Retained earnings, beginning of period
    
    
    49,509
    
    
    
    30,230Retained earnings (deficit), end of period
    
    
    (12,642
    )
    
    
    46,471Income (loss) per shareBasic
    
    
    (1.88
    )
    
    
    0.94Diluted
    
    
    (1.88
    )
    
    
    0.57
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 5




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 For Six Months Ended June 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Net loss
    
    
    (81,818
    )
    
    
    (2,725
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    1,118
    
    
    
    2,352Unrealized gains on securitiesUnrealized holding gains (losses) arising during the period
    
    
    305
    
    
    
    (250
    )Other comprehensive income
    
    
    1,423
    
    
    
    2,102Total comprehensive loss
    
    
    (80,395
    )
    
    
    (623
    )
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 6




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 For Three Months Ended June 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Net income (loss)
    
    
    (62,151
    )
    
    
    16,241Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    1,750
    
    
    
    696Unrealized gains on securitiesUnrealized holding gains (losses) arising during the period
    
    
    
    
    
    
    257Other comprehensive income
    
    
    1,750
    
    
    
    953Total comprehensive income (loss)
    
    
    (60,401
    )
    
    
    17,194
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 7




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For Six Months Ended June 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Cash Flows from (used in) Operating Activities:Net loss
    
    
    (81,818
    )
    
    
    (2,725
    )Adjustments to reconcile net loss to cash flows
from operating activitiesCumulative unrealized losses (gains) on derivatives
    
    
    73,015
    
    
    
    (7,028
    )Depreciation and amortization
    
    
    25,299
    
    
    
    12,607Unrealized foreign exchange loss on debt
    
    
    7,509
    
    
    
    Impairment of investments and securities
    
    
    1,645
    
    
    
    Minority interest
    
    
    (11,409
    )
    
    
    2,790Deferred income taxes
    
    
    (21,638
    )
    
    
    Stock compensation expense
    
    
    72
    
    
    
    616Other
    
    
    125
    
    
    
    204Changes in current assets and liabilitiesReceivables
    
    
    (20,742
    )
    
    
    (2,489
    )Inventories
    
    
    (16,757
    )
    
    
    (17,995
    )Accounts payable and accrued expenses
    
    
    41,319
    
    
    
    12,166Other
    
    
    (1,853
    )
    
    
    (1,224
    )Net cash used in operating activities
    
    
    (5,233
    )
    
    
    (3,078
    )Cash Flows from (used in) Investing Activities:Purchase of property, plant and equipment
    
    
    (8,493
    )
    
    
    (117,327
    )Acquisition of Celgar pulp mill
    
    
    (146,608
    )
    
    
    Sale of available-for-sale securities
    
    
    
    
    
    
    1,161Other
    
    
    
    
    
    
    115Net cash used in investing activities
    
    
    (155,101
    )
    
    
    (116,051
    )Cash Flows from (used in) Financing Activities:Cash restricted
    
    
    35,808
    
    
    
    (7,468
    )Decrease in construction costs payable
    
    
    (31,346
    )
    
    
    (22,974
    )Proceeds from borrowings of notes payable and debt
    
    
    325,195
    
    
    
    126,000Repayment of notes payable and debt
    
    
    (183,691
    )
    
    
    (14,782
    )Proceeds from investment grants
    
    
    342
    
    
    
    28,710Repayment of capital lease obligations
    
    
    (1,907
    )
    
    
    (633
    )Issuance of shares of beneficial interest
    
    
    66,645
    
    
    
    582Net cash from financing activities
    
    
    211,046
    
    
    
    109,435Effect of exchange rate changes on cash and cash equivalents
    
    
    5,594
    
    
    
    (63
    )Net increase (decrease) in cash and cash equivalents
    
    
    56,306
    
    
    
    (9,757
    )Cash and cash equivalents, beginning of period
    
    
    49,568
    
    
    
    51,993Cash and cash equivalents, end of period
    
    
    105,874
    
    
    
    42,236
 The accompanying notes are an integral part of these financial statements.
 FORM 10-Q QUARTERLY REPORT  PAGE 8




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 1. Basis of Presentation
    FORM 10-Q QUARTERLY REPORT  PAGE 9




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 2. Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation
 Six Months Ended June 30,2005
    
    
    2004Net LossAs reported
    
    
    (81,818
    )
    
    
    (2,725
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of any
related tax effects
    
    
    (21
    )
    
    
    (29
    )Pro forma
    
    
    (81,839
    )
    
    
    (2,754
    )Basic and Diluted Loss Per ShareAs reported
    
    
    (2.80
    )
    
    
    (0.16
    )Pro forma
    
    
    (2.80
    )
    
    
    (0.16
    )
 Three Months Ended June 30,2005
    
    
    2004Net Income (Loss)As reported
    
    
    (62,151
    )
    
    
    16,241Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of any
related tax effects
    
    
    (11
    )
    
    
    (14
    )Pro forma
    
    
    (62,162
    )
    
    
    16,227Basic and Diluted Income (Loss) Per ShareAs reported
    
    
    (1.88
    )
    
    
    0.94Pro forma
    
    
    (1.88
    )
    
    
    0.57
 FORM 10-Q QUARTERLY REPORT  PAGE 10




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 3. Income (Loss) Per Share
  Six Months Ended June 30,
    
    
    Three Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income (loss) from continuing operations
 basic
    
    
    (81,818
    )
    
    
    (2,725
    )
    
    
    (62,151
    )
    
    
    16,241Interest on convertible notes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Income (loss) from continuing operations
 diluted
    
    
    (81,818
    )
    
    
    (2,725
    )
    
    
    (62,151
    )
    
    
    16,310Weighted average number of common shares
outstanding:Basic
    
    
    29,270,388
    
    
    
    17,290,504
    
    
    
    33,055,103
    
    
    
    17,290,504Effect of dilutive shares:Stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457,385Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,645,161Diluted
    
    
    29,270,388
    
    
    
    17,290,504
    
    
    
    33,055,103
    
    
    
    28,393,050Income (loss) from continuing operations
per share:Basic
    
    
    (2.80
    )
    
    
    (0.16
    )
    
    
    (1.88
    )
    
    
    0.94Diluted
    
    
    (2.80
    )
    
    
    (0.16
    )
    
    
    (1.88
    )
    
    
    0.57
  FORM 10-Q QUARTERLY REPORT  PAGE 11




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 4. Acquisition of the Celgar Mill and Related Financings
 Acquisition
    
  Purchase price:Cash (including defined working capital)
    
    
    142,940Equity  shares of beneficial interest
    
    
    30,814Estimated acquisition costs
    
    
    3,668
    177,422Net assets acquired:Receivables
    
    
    32Inventories
    
    
    19,969Prepaids and other assets
    
    
    616Property, plant and equipment
    
    
    175,096Accrued expenses and other liabilities
    
    
    (4,103
    )Pension plan and post-retirement benefits obligation
    
    
    (14,188
    )
    177,422
 Financings
    
 FORM 10-Q QUARTERLY REPORT  PAGE 12




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 4. Acquisition of the Celgar Mill and Related Financings (contd)
 Pro Forma Financial Summary (Unaudited)
  Six Months EndedJune 30,2005
    
    
    2004Total revenues
    
    
    249,225
    
    
    
    197,875Net income (loss)
    
    
    (90,637
    )
    
    
    6,347Income (loss) from continuing operations per share:Basic and diluted
    
    
    (2.74
    )
    
    
    0.20
 Note 5. Business Segment Information
  FORM 10-Q QUARTERLY REPORT  PAGE 13




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MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 5. Business Segment Information (contd)
  Corporate,Rosenthal
    
    
    Celgar(1)
    
    
    Stendal
    
    
    Total
    
    
    
    
    
    
    Other and
    
    
    ConsolidatedPulp
    
    
    Pulp
    
    
    Pulp
    
    
    Pulp
    
    
    Paper
    
    
    Eliminations
    
    
    TotalSix Months Ended June 30, 2005Sales to external customers
    
    
    65,936
    
    
    
    48,480
    
    
    
    81,606
    
    
    
    196,022
    
    
    
    31,480
    
    
    
    
    
    
    
    227,502Intersegment net sales
    
    
    
    
    
    
    
    
    
    
    3,340
    
    
    
    3,340
    
    
    
    
    
    
    
    (3,340
    )
    
    
    65,936
    
    
    
    48,480
    
    
    
    84,946
    
    
    
    199,362
    
    
    
    31,480
    
    
    
    (3,340
    )
    
    
    227,502Operating costs
    
    
    47,405
    
    
    
    40,554
    
    
    
    71,546
    
    
    
    159,505
    
    
    
    29,601
    
    
    
    (3,822
    )
    
    
    185,284Depreciation and amortization
    
    
    6,630
    
    
    
    4,097
    
    
    
    13,454
    
    
    
    24,181
    
    
    
    379
    
    
    
    323
    
    
    
    24,883General and administrative
    
    
    3,810
    
    
    
    2,837
    
    
    
    1,677
    
    
    
    8,324
    
    
    
    2,562
    
    
    
    4,430
    
    
    
    15,316Emission credits
    
    
    (2,135
    )
    
    
    
    
    
    
    (4,153
    )
    
    
    (6,288
    )
    
    
    
    
    
    
    
    
    
    
    (6,288
    )55,710
    
    
    
    47,488
    
    
    
    82,524
    
    
    
    185,722
    
    
    
    32,542
    
    
    
    931
    
    
    
    219,195Income (loss) from operations
    
    
    10,226
    
    
    
    992
    
    
    
    2,422
    
    
    
    13,640
    
    
    
    (1,062
    )
    
    
    (4,271
    )
    
    
    8,307Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,463
    )Investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    981Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73,310
    )Foreign exchange gain on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,509
    )Impairment of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,645
    )(122,946
    )Loss before income taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,639
    )Segment assets
    
    
    347,935
    
    
    
    244,361
    
    
    
    906,244
    
    
    
    1,498,540
    
    
    
    24,294
    
    
    
    15,995
    
    
    
    1,538,829Six Months Ended June 30, 2004Sales to external customers
    
    
    71,031
    
    
    
    
    
    
    
    927
    
    
    
    71,958
    
    
    
    28,693
    
    
    
    
    
    
    
    100,651Intersegment net sales
    
    
    1,179
    
    
    
    
    
    
    
    
    
    
    
    1,179
    
    
    
    
    
    
    
    (1,179
    )
    
    
    72,210
    
    
    
    
    
    
    
    927
    
    
    
    73,137
    
    
    
    28,693
    
    
    
    (1,179
    )
    
    
    100,651Operating costs
    
    
    49,125
    
    
    
    
    
    
    
    
    
    
    
    49,125
    
    
    
    27,213
    
    
    
    (317
    )
    
    
    76,021Depreciation and amortization
    
    
    11,136
    
    
    
    
    
    
    
    12
    
    
    
    11,148
    
    
    
    1,141
    
    
    
    318
    
    
    
    12,607General and administrative
    
    
    4,636
    
    
    
    
    
    
    
    5,448
    
    
    
    10,084
    
    
    
    2,643
    
    
    
    1,501
    
    
    
    14,228Flooding grants, less losses and
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    66964,897
    
    
    
    
    
    
    
    5,460
    
    
    
    70,357
    
    
    
    31,666
    
    
    
    1,502
    
    
    
    103,525Income (loss) from operations
    
    
    7,313
    
    
    
    
    
    
    
    (4,533
    )
    
    
    2,780
    
    
    
    (2,973
    )
    
    
    (2,681
    )
    
    
    (2,874
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,354
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,464Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,0283,138Income before income taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264Segment assets
    
    
    365,342
    
    
    
    
    
    
    
    663,193
    
    
    
    1,028,535
    
    
    
    28,320
    
    
    
    (10,899
    )
    
    
    1,045,956
 
 (1)
    
    The results of the Celgar pulp mill are from the date of its acquisition on February 14, 2005. FORM 10-Q QUARTERLY REPORT  PAGE 14




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 5. Business Segment Information (contd)
 Corporate,Rosenthal
    
    
    Celgar(1)
    
    
    Stendal
    
    
    Total
    
    
    
    
    
    
    Other and
    
    
    ConsolidatedPulp
    
    
    Pulp
    
    
    Pulp
    
    
    Pulp
    
    
    Paper
    
    
    Eliminations
    
    
    TotalThree Months Ended June 30, 2005Sales to external customers
    
    
    31,840
    
    
    
    40,864
    
    
    
    40,808
    
    
    
    113,512
    
    
    
    16,097
    
    
    
    
    
    
    
    129,609Intersegment net sales
    
    
    
    
    
    
    
    
    
    
    1,786
    
    
    
    1,786
    
    
    
    
    
    
    
    (1,786
    )
    
    
    31,840
    
    
    
    40,864
    
    
    
    42,594
    
    
    
    115,298
    
    
    
    16,097
    
    
    
    (1,786
    )
    
    
    129,609Operating costs
    
    
    22,217
    
    
    
    35,419
    
    
    
    34,411
    
    
    
    92,047
    
    
    
    15,370
    
    
    
    (2,135
    )
    
    
    105,282Depreciation and amortization
    
    
    3,362
    
    
    
    3,274
    
    
    
    6,773
    
    
    
    13,409
    
    
    
    198
    
    
    
    289
    
    
    
    13,896General and administrative
    
    
    1,909
    
    
    
    1,162
    
    
    
    702
    
    
    
    3,773
    
    
    
    1,326
    
    
    
    2,419
    
    
    
    7,518Emission credits
    
    
    (2,135
    )
    
    
    
    
    
    
    (4,153
    )
    
    
    (6,288
    )
    
    
    
    
    
    
    
    
    
    
    (6,288
    )25,353
    
    
    
    39,855
    
    
    
    37,733
    
    
    
    102,941
    
    
    
    16,894
    
    
    
    573
    
    
    
    120,408Income (loss) from operations
    
    
    6,487
    
    
    
    1,009
    
    
    
    4,861
    
    
    
    12,357
    
    
    
    (797
    )
    
    
    (2,359
    )
    
    
    9,201Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,200
    )Investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    806Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,451
    )Foreign exchange(loss) on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,806
    )Impairment of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,651
    )Loss before income taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91,450
    )Three Months Ended June 30, 2004Sales to external customers
    
    
    36,022
    
    
    
    
    
    
    
    927
    
    
    
    36,949
    
    
    
    13,386
    
    
    
    
    
    
    
    50,335Intersegment net sales
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    (750
    )
    
    
    36,772
    
    
    
    
    
    
    
    927
    
    
    
    37,699
    
    
    
    13,386
    
    
    
    (750
    )
    
    
    50,335Operating costs
    
    
    23,318
    
    
    
    
    
    
    
    
    
    
    
    23,318
    
    
    
    13,455
    
    
    
    123
    
    
    
    36,896Depreciation and amortization
    
    
    5,554
    
    
    
    
    
    
    
    12
    
    
    
    5,566
    
    
    
    589
    
    
    
    159
    
    
    
    6,314General and administrative
    
    
    2,648
    
    
    
    
    
    
    
    2,707
    
    
    
    5,355
    
    
    
    1,469
    
    
    
    863
    
    
    
    7,687Flooding grants, less losses and
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    41631,520
    
    
    
    
    
    
    
    2,719
    
    
    
    34,239
    
    
    
    15,929
    
    
    
    1,145
    
    
    
    51,313Income (loss) from operations
    
    
    5,252
    
    
    
    
    
    
    
    (1,792
    )
    
    
    3,460
    
    
    
    (2,543
    )
    
    
    (1,895
    )
    
    
    (978
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,366
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,47327,637Income before income taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,659
 
 (1)
    
    The results of the Celgar pulp mill are from the date of its acquisition on February 14, 2005. FORM 10-Q QUARTERLY REPORT  PAGE 15




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 6. Inventories
 June 30, 2005
    
    
    December 31, 2004Raw materials
    
    
    53,217
    
    
    
    38,679Work in process and finished goods
    
    
    38,820
    
    
    
    14,219
    92,037
    
    
    
    52,898
 Note 7. Pension and Other Post-Retirement Plans
  
 Six Months Ended June 30, 2005Pension Benefits
    
    
    Post-Retirement BenefitsService cost
    
    
    245
    
    
    
    107Interest cost
    
    
    481
    
    
    
    234Expected return on plan assets
    
    
    (471
    )
    
    
    Net periodic benefit cost
    
    
    255
    
    
    
    341
 Three Months Ended June 30, 2005Pension Benefits
    
    
    Post-Retirement BenefitsService cost
    
    
    161
    
    
    
    58Interest cost
    
    
    323
    
    
    
    146Expected return on plan assets
    
    
    (321
    )
    
    
    Net periodic benefit cost
    
    
    163
    
    
    
    204
 Note 8. Derivatives Transactions
 Six Months Ended June 30,2005
    
    
    2004Realized loss on derivative financial instruments
    
    
    (295
    )
    
    
    Unrealized net loss on interest rate derivatives
    
    
    (20,475
    )
    
    
    (1,716
    )Unrealized net gain (loss) on foreign exchange
derivatives
    
    
    (52,372
    )
    
    
    8,744Unrealized loss on natural gas forward supply contract
    
    
    (168
    )
    
    
    Unrealized gain (loss) on derivative financial instruments
    
    
    (73,015
    )
    
    
    7,028
 FORM 10-Q QUARTERLY REPORT  PAGE 16




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 8. Derivatives Transactions (contd)
 Three Months Ended June 30,2005
    
    
    2004Unrealized net gain (loss) on interest rate derivatives
    
    
    (20,819
    )
    
    
    15,751Unrealized net gain (loss) on foreign exchange
derivatives
    
    
    (48,274
    )
    
    
    13,722Unrealized loss on natural gas forward supply contract
    
    
    (358
    )
    
    
    Unrealized gain (loss) on derivative financial instruments
    
    
    (69,451
    )
    
    
    29,473
      
 FORM 10-Q QUARTERLY REPORT  PAGE 17




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. European Union Emissions Trading Scheme
 
 FORM 10-Q QUARTERLY REPORT  PAGE 18




---



##### 





MERCER INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005


(Unaudited)
(Euros in thousands, except for shares and per share data)


Note 10. Restricted Group Supplemental Disclosure




Combined Condensed Balance Sheet


June 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    62,792
    
    
    
    43,082
    
    
    
    
    
    
    
    105,874Cash restricted
    
    
    
    
    
    
    37,951
    
    
    
    
    
    
    
    37,951Receivables
    
    
    42,748
    
    
    
    32,665
    
    
    
    (69
    )
    
    
    75,344Inventories
    
    
    54,127
    
    
    
    37,910
    
    
    
    
    
    
    
    92,037Prepaid expenses and other
    
    
    3,631
    
    
    
    3,426
    
    
    
    
    
    
    
    7,057Total current assets
    
    
    163,298
    
    
    
    155,034
    
    
    
    (69
    )
    
    
    318,263Cash restricted
    
    
    
    
    
    
    19,074
    
    
    
    
    
    
    
    19,074Property, plant and equipment
    
    
    393,047
    
    
    
    716,785
    
    
    
    (438
    )
    
    
    1,109,394Other
    
    
    9,741
    
    
    
    4,119
    
    
    
    
    
    
    
    13,860Deferred income tax
    
    
    22,855
    
    
    
    55,383
    
    
    
    
    
    
    
    78,238Due from unrestricted group
    
    
    44,621
    
    
    
    
    
    
    
    (44,621
    )
    
    
    Total assets
    
    
    633,562
    
    
    
    950,395
    
    
    
    (45,128
    )
    
    
    1,538,829LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    43,780
    
    
    
    57,688
    
    
    
    (69
    )
    
    
    101,399Construction costs payable
    
    
    
    
    
    
    34,090
    
    
    
    
    
    
    
    34,090Debt, current portion
    
    
    
    
    
    
    97,618
    
    
    
    
    
    
    
    97,618Total current liabilities
    
    
    43,780
    
    
    
    189,396
    
    
    
    (69
    )
    
    
    233,107Debt, less current portion
    
    
    353,033
    
    
    
    599,522
    
    
    
    
    
    
    
    952,555Due to restricted group
    
    
    
    
    
    
    44,621
    
    
    
    (44,621
    )
    
    
    Unrealized derivatives loss
    
    
    
    
    
    
    143,631
    
    
    
    
    
    
    
    143,631Other
    
    
    18,555
    
    
    
    6,973
    
    
    
    
    
    
    
    25,528Deferred income tax
    
    
    1,883
    
    
    
    2,260
    
    
    
    
    
    
    
    4,143Total liabilities
    
    
    417,251
    
    
    
    986,403
    
    
    
    (44,690
    )
    
    
    1,358,964SHAREHOLDERS EQUITYTotal shareholders equity
    
    
    216,311
    
    
    
    (36,008
    )(1)
    
    
    (438
    )
    
    
    179,865Total liabilities and shareholders equity
    
    
    633,562
    
    
    
    950,395
    
    
    
    (45,128
    )
    
    
    1,538,829





|    |  |                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Shareholders' equity does not include government grants received or receivable related to the Stendal mill. Shareholders' equity is impacted by the unrealized non-cash marked to market valuation losses on derivative financial instruments.

FORM 10-Q QUARTERLY REPORT  PAGE 19



---



##### 



MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Balance Sheet
 December 31, 2004Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    45,487
    
    
    
    4,081
    
    
    
    
    
    
    
    49,568Cash restricted
    
    
    
    
    
    
    45,295
    
    
    
    
    
    
    
    45,295Receivables
    
    
    21,791
    
    
    
    33,060
    
    
    
    (164
    )
    
    
    54,687Inventories
    
    
    13,911
    
    
    
    38,987
    
    
    
    
    
    
    
    52,898Prepaid expenses and other
    
    
    1,995
    
    
    
    2,966
    
    
    
    
    
    
    
    4,961Total current assets
    
    
    83,184
    
    
    
    124,389
    
    
    
    (164
    )
    
    
    207,409Cash restricted
    
    
    28,464
    
    
    
    19,074
    
    
    
    
    
    
    
    47,538Property, plant and equipment
    
    
    213,678
    
    
    
    722,394
    
    
    
    (37
    )
    
    
    936,035Other
    
    
    5,936
    
    
    
    4,212
    
    
    
    
    
    
    
    10,148Deferred income tax
    
    
    26,592
    
    
    
    27,927
    
    
    
    
    
    
    
    54,519Due from unrestricted group
    
    
    43,467
    
    
    
    
    
    
    
    (43,467
    )
    
    
    Total assets
    
    
    401,321
    
    
    
    897,996
    
    
    
    (43,668
    )
    
    
    1,255,649LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    19,615
    
    
    
    37,091
    
    
    
    (164
    )
    
    
    56,542Construction costs payable
    
    
    
    
    
    
    65,436
    
    
    
    
    
    
    
    65,436Debt, current portion
    
    
    15,089
    
    
    
    92,001
    
    
    
    
    
    
    
    107,090Total current liabilities
    
    
    34,704
    
    
    
    194,528
    
    
    
    (164
    )
    
    
    229,068Debt, less current portion
    
    
    224,542
    
    
    
    552,730
    
    
    
    
    
    
    
    777,272Due to restricted group
    
    
    
    
    
    
    43,467
    
    
    
    (43,467
    )
    
    
    Unrealized interest rate derivative
    
    
    
    
    
    
    75,471
    
    
    
    
    
    
    
    75,471Other
    
    
    1,878
    
    
    
    7,157
    
    
    
    
    
    
    
    9,035Deferred income tax
    
    
    1,719
    
    
    
    343
    
    
    
    
    
    
    
    2,062Total liabilities
    
    
    262,843
    
    
    
    873,696
    
    
    
    (43,631
    )
    
    
    1,092,908SHAREHOLDERS EQUITYTotal shareholders equity
    
    
    138,478
    
    
    
    24,300
    
    
    
    (37
    )
    
    
    162,741Total liabilities and shareholders equity
    
    
    401,321
    
    
    
    897,996
    
    
    
    (43,668
    )
    
    
    1,255,649
 FORM 10-Q QUARTERLY REPORT  PAGE 20




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Six Months Ended June 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    114,416
    
    
    
    113,086
    
    
    
    
    
    
    
    227,502Operating costs
    
    
    87,260
    
    
    
    98,024
    
    
    
    
    
    
    
    185,284Operating depreciation and amortization
    
    
    10,829
    
    
    
    13,616
    
    
    
    438
    
    
    
    24,883General and administrative
    
    
    11,077
    
    
    
    4,239
    
    
    
    
    
    
    
    15,316Gain on sale of emission credits
    
    
    (2,135
    )
    
    
    (4,153
    )
    
    
    
    
    
    
    (6,288
    )107,031
    
    
    
    111,726
    
    
    
    438
    
    
    
    219,195Income (loss) from operations
    
    
    7,385
    
    
    
    1,360
    
    
    
    (438
    )
    
    
    8,307Other income (expense)Interest expense
    
    
    (15,985
    )
    
    
    (26,571
    )
    
    
    1,093
    
    
    
    (41,463
    )Investment income
    
    
    1,297
    
    
    
    777
    
    
    
    (1,093
    )
    
    
    981Derivative financial instruments, net
    
    
    (463
    )
    
    
    (72,847
    )
    
    
    
    
    
    
    (73,310
    )Unrealized foreign exchange loss on debt
    
    
    (7,509
    )
    
    
    
    
    
    
    
    
    
    
    (7,509
    )Impairment of investments
    
    
    (1,645
    )
    
    
    
    
    
    
    
    
    
    
    (1,645
    )Total other expense
    
    
    (24,305
    )
    
    
    (98,641
    )
    
    
    
    
    
    
    (122,946
    )Loss before income taxes and
minority interest
    
    
    (16,920
    )
    
    
    (97,281
    )
    
    
    (438
    )
    
    
    (114,639
    )Income tax (provision) benefit
    
    
    (4,776
    )
    
    
    26,188
    
    
    
    
    
    
    
    21,412Loss before minority interest
    
    
    (21,696
    )
    
    
    (71,093
    )
    
    
    (438
    )
    
    
    (93,227
    )Minority interest
    
    
    
    
    
    
    11,409
    
    
    
    
    
    
    
    11,409Net loss
    
    
    (21,696
    )
    
    
    (59,684
    )
    
    
    (438
    )
    
    
    (81,818
    )
 Six Months Ended June 30, 2004Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    72,210
    
    
    
    29,620
    
    
    
    (1,179
    )
    
    
    100,651Operating costs
    
    
    48,675
    
    
    
    27,213
    
    
    
    133
    
    
    
    76,021Operating depreciation and amortization
    
    
    11,136
    
    
    
    1,153
    
    
    
    318
    
    
    
    12,607General and administrative
    
    
    6,295
    
    
    
    8,091
    
    
    
    (158
    )
    
    
    14,228Flooding grants, less losses and expenses
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    66966,106
    
    
    
    37,126
    
    
    
    293
    
    
    
    103,525Income (loss) from operations
    
    
    6,104
    
    
    
    (7,506
    )
    
    
    (1,472
    )
    
    
    (2,874
    )Other income (expense)Interest expense
    
    
    (6,023
    )
    
    
    (452
    )
    
    
    1,121
    
    
    
    (5,354
    )Investment and other income (expense)
    
    
    1,745
    
    
    
    (214
    )
    
    
    (67
    )
    
    
    1,464Derivative financial instruments, net
    
    
    (5,272
    )
    
    
    12,300
    
    
    
    
    
    
    
    7,028Total other expense
    
    
    (9,550
    )
    
    
    11,634
    
    
    
    1,054
    
    
    
    3,138Income (loss) before income taxes and
minority interest
    
    
    (3,446
    )
    
    
    4,128
    
    
    
    (418
    )
    
    
    264Income tax provision
    
    
    (199
    )
    
    
    
    
    
    
    
    
    
    
    (199
    )Income (loss) before minority interest
    
    
    (3,645
    )
    
    
    4,128
    
    
    
    (418
    )
    
    
    65Minority interest
    
    
    
    
    
    
    (2,790
    )
    
    
    
    
    
    
    (2,790
    )Net income (loss)
    
    
    (3,645
    )
    
    
    1,338
    
    
    
    (418
    )
    
    
    (2,725
    )
 FORM 10-Q QUARTERLY REPORT  PAGE 21




---



##### 



MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Three Months Ended June 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    72,704
    
    
    
    56,905
    
    
    
    
    
    
    
    129,609Operating costs
    
    
    57,287
    
    
    
    47,995
    
    
    
    
    
    
    
    105,282Operating depreciation and amortization
    
    
    6,704
    
    
    
    6,971
    
    
    
    221
    
    
    
    13,896General and administrative
    
    
    5,490
    
    
    
    2,028
    
    
    
    
    
    
    
    7,518Gain on sale of emission credits
    
    
    (2,135
    )
    
    
    (4,153
    )
    
    
    
    
    
    
    (6,288
    )67,346
    
    
    
    52,841
    
    
    
    221
    
    
    
    120,408Income (loss) from operations
    
    
    5,358
    
    
    
    4,064
    
    
    
    (221
    )
    
    
    9,201Other income (expense)Interest expense
    
    
    (8,314
    )
    
    
    (14,585
    )
    
    
    699
    
    
    
    (22,200
    )Investment income
    
    
    970
    
    
    
    467
    
    
    
    (631
    )
    
    
    806Derivative financial instruments, net
    
    
    (358
    )
    
    
    (69,093
    )
    
    
    
    
    
    
    (69,451
    )Unrealized foreign exchange loss on debt
    
    
    (9,806
    )
    
    
    
    
    
    
    
    
    
    
    (9,806
    )Impairment of investments
    
    
    (467
    )
    
    
    
    
    
    
    467
    
    
    
    Total other income (expense)
    
    
    (17,975
    )
    
    
    (83,211
    )
    
    
    535
    
    
    
    (100,651
    )Income (loss) before income taxes and
minority interest
    
    
    (12,617
    )
    
    
    (79,147
    )
    
    
    314
    
    
    
    (91,450
    )Income tax (provision) benefit
    
    
    (1,661
    )
    
    
    26,108
    
    
    
    
    
    
    
    24,447Income (loss) before minority interest
    
    
    (14,278
    )
    
    
    (53,039
    )
    
    
    314
    
    
    
    (67,003
    )Minority interest
    
    
    
    
    
    
    4,852
    
    
    
    
    
    
    
    4,852Net income (loss)
    
    
    (14,278
    )
    
    
    (48,187
    )
    
    
    314
    
    
    
    (62,151
    )
 Three Months Ended June 30, 2004Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    36,772
    
    
    
    14,313
    
    
    
    (750
    )
    
    
    50,335Operating costs
    
    
    23,318
    
    
    
    13,455
    
    
    
    123
    
    
    
    36,896Operating depreciation and amortization
    
    
    5,554
    
    
    
    601
    
    
    
    159
    
    
    
    6,314General and administrative
    
    
    3,181
    
    
    
    4,176
    
    
    
    330
    
    
    
    7,687Flooding grants, less losses and expenses.
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    41632,053
    
    
    
    18,648
    
    
    
    612
    
    
    
    51,313Income (loss) from operations
    
    
    4,719
    
    
    
    (4,335
    )
    
    
    (1,362
    )
    
    
    (978
    )Other income (expense)Interest expense
    
    
    (1,947
    )
    
    
    114
    
    
    
    (533
    )
    
    
    (2,366
    )Derivative financial instruments, net
    
    
    (382
    )
    
    
    29,855
    
    
    
    
    
    
    
    29,473Investment and other income (expense)
    
    
    639
    
    
    
    (364
    )
    
    
    255
    
    
    
    530Total other income (expense)
    
    
    (1,690
    )
    
    
    29,605
    
    
    
    (278
    )
    
    
    27,637Income (loss) before income taxes and
minority interest
    
    
    3,029
    
    
    
    25,270
    
    
    
    (1,640
    )
    
    
    26,659Income tax provision
    
    
    (199
    )
    
    
    (20
    )
    
    
    
    
    
    
    (219
    )Income (loss) before minority interest
    
    
    2,830
    
    
    
    25,250
    
    
    
    (1,640
    )
    
    
    26,440Minority interest
    
    
    
    
    
    
    (10,199
    )
    
    
    
    
    
    
    (10,199
    )Net income (loss)
    
    
    2,830
    
    
    
    15,051
    
    
    
    (1,640
    )
    
    
    16,241
 FORM 10-Q QUARTERLY REPORT  PAGE 22




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  Results of Operations
  Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
  Six Months Ended June 30,2005
    
    
    2004(ADMTs)Sales Volume by Product ClassPulp sales volume by mill:Rosenthal
    
    
    154,800
    
    
    
    156,334Celgar
    
    
    118,188
    
    
    
    Stendal
    
    
    204,988
    
    
    
    Total pulp sales volume(1)
    
    
    477,976
    
    
    
    156,334Paper sales volume
    
    
    34,478
    
    
    
    32,789Total sales volume(1)
    
    
    512,454
    
    
    
    189,123
 FORM 10-Q QUARTERLY REPORT  PAGE 23




---



##### 



Six Months Ended June 30,2005
    
    
    2004(in thousands)Revenues by Product ClassPulp revenues by mill:Rosenthal
    
    
    65,936
    
    
    
    71,031Celgar
    
    
    48,480
    
    
    
    Stendal
    
    
    81,606
    
    
    
    927Total pulp revenues(1)
    
    
    196,022
    
    
    
    71,958Paper revenues
    
    
    31,480
    
    
    
    28,693Total revenues(1)
    
    
    227,502
    
    
    
    100,651
 
 (1)
    
    Excluding intercompany sales volumes of 7,594 and 2,549 ADMTs of pulp and intercompany net
sales revenues of approximately 3.3 million and 1.1 million in the six months ended June 30,
2005 and 2004, respectively.  Six Months Ended June 30,2005
    
    
    2004(ADMTs)Production by Product ClassPulp production by mill:Rosenthal
    
    
    157,315
    
    
    
    159,384Celgar
    
    
    171,833
    
    
    
    Stendal
    
    
    231,719
    
    
    
    Total pulp production
    
    
    560,867
    
    
    
    159,384Paper production
    
    
    33,937
    
    
    
    32,407Total production
    
    
    594,804
    
    
    
    191,791
   
  
 
     
 FORM 10-Q QUARTERLY REPORT  PAGE 24




---



##### 



 
    
   
  
  
  
  
  
   
  
 FORM 10-Q QUARTERLY REPORT  PAGE 25




---



##### 



 
  
 
         
      
   FORM 10-Q QUARTERLY REPORT  PAGE 26




---



##### 



Six Months EndedJune 30,2005
    
    
    2004(in thousands)(unaudited)Net loss
    
    
    (81,818
    )
    
    
    (2,725
    )Minority interest
    
    
    (11,409
    )
    
    
    2,790Income taxes (benefit)
    
    
    (21,412
    )
    
    
    199Interest expense
    
    
    41,463
    
    
    
    5,354Investment income
    
    
    (981
    )
    
    
    (1,464
    )Derivative financial instruments, net
    
    
    73,310
    
    
    
    (7,028
    )Foreign exchange loss on debt
    
    
    7,509
    
    
    
    Impairment of investments
    
    
    1,645
    
    
    
    Income (loss) from operations
    
    
    8,307
    
    
    
    (2,874
    )Add: Depreciation and amortization
    
    
    24,883
    
    
    
    12,607Operating EBITDA
    
    
    33,190
    
    
    
    9,733
 FORM 10-Q QUARTERLY REPORT  PAGE 27




---



##### 



Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
  Three Months Ended June 30,2005
    
    
    2004(ADMTs)Sales Volume by Product ClassPulp sales volume by mill:Rosenthal
    
    
    75,996
    
    
    
    74,841Celgar
    
    
    99,841
    
    
    
    Stendal
    
    
    102,915
    
    
    
    Total pulp sales volume(1)
    
    
    278,752
    
    
    
    74,841Paper sales volume
    
    
    17,840
    
    
    
    15,383Total sales volume(1)
    
    
    296,592
    
    
    
    90,224
 (in thousands)Revenues by Product ClassPulp revenues by mill:Rosenthal
    
    
    31,840
    
    
    
    36,022Celgar
    
    
    40,864
    
    
    
    Stendal
    
    
    40,808
    
    
    
    927Total pulp revenues(1)
    
    
    113,512
    
    
    
    36,949Paper revenues
    
    
    16,097
    
    
    
    13,386Total revenues(1)
    
    
    129,609
    
    
    
    50,335
 
 (1)
    
    Excluding intercompany sales volumes of 4,105 and 1,540 ADMTs of pulp and intercompany net
sales revenues of approximately 1.8 million and 0.8 million in the three months ended June
30, 2005 and 2004, respectively.  Three Months Ended June 30,2005
    
    
    2004(ADMTs)Production by Product ClassPulp production by mill:Rosenthal
    
    
    81,443
    
    
    
    80,317Stendal
    
    
    123,738
    
    
    
    Celgar
    
    
    111,071
    
    
    
    Total pulp production
    
    
    316,252
    
    
    
    80,317Paper production
    
    
    17,979
    
    
    
    15,339Total production
    
    
    334,231
    
    
    
    95,656
   
   
 FORM 10-Q QUARTERLY REPORT  PAGE 28




---



##### 



   
  
    
   
  
  
  
  
  
 FORM 10-Q QUARTERLY REPORT  PAGE 29




---



##### 



  
    
  
         
      
 FORM 10-Q QUARTERLY REPORT  PAGE 30




---



##### 



Three Months EndedJune 30,2005
    
    
    2004(in thousands)(unaudited)Net income (loss)
    
    
    (62,151
    )
    
    
    16,241Minority interest
    
    
    (4,852
    )
    
    
    10,199Income taxes (benefit)
    
    
    (24,447
    )
    
    
    219Interest expense
    
    
    22,200
    
    
    
    2,366Investment income
    
    
    (806
    )
    
    
    (530
    )Derivative financial instruments, net
    
    
    69,451
    
    
    
    (29,473
    )Foreign exchange loss on debt
    
    
    9,806
    
    
    
    Income (loss) from operations
    
    
    9,201
    
    
    
    (978
    )Add: Depreciation and amortization
    
    
    13,896
    
    
    
    6,314Operating EBITDA
    
    
    23,097
    
    
    
    5,336
 Liquidity and Capital Resources
  As at
    
    
    As atJune 30,
    
    
    December 31,2005
    
    
    2004(in thousands)(unaudited)Financial PositionCash and cash equivalents
    
    
    105,874
    
    
    
    49,568Working capital (deficit)
    
    
    85,156
    
    
    
    (21,659
    )Property, plant and equipment
    
    
    1,109,394
    
    
    
    936,035Total assets
    
    
    1,538,829
    
    
    
    1,255,649Long-term liabilities
    
    
    1,125,857
    (1)
    
    
    863,840Shareholders equity
    
    
    179,865
    
    
    
    162,741
 
 (1)
    
    Includes 28.6 million outstanding under the revolving credit facilities for the Rosenthal
and Celgar mills.      
  FORM 10-Q QUARTERLY REPORT  PAGE 31




---



##### 



Operating Activities
        
 Investing Activities
    
 Financing Activities
      
    
 
 FORM 10-Q QUARTERLY REPORT  PAGE 32




---



##### 



Capital Resources
    FORM 10-Q QUARTERLY REPORT  PAGE 33




---



##### 



Foreign Currency
     
  Results of Operations of the Restricted Group Under Our Senior Note Indenture
   Restricted Group Results  Six Months Ended June 30, 2005 Compared to Six Months Ended June 30,
2004
  
 FORM 10-Q QUARTERLY REPORT  PAGE 34




---



##### 



 
  
  
    
 
   
   
   
 FORM 10-Q QUARTERLY REPORT  PAGE 35




---



##### 



  
   Six Months EndedJune 30,2005
    
    
    2004(in thousands)(unaudited)Restricted Group(1)(2)Net loss
    
    
    (21,696
    )
    
    
    (3,645
    )Income taxes
    
    
    4,776
    
    
    
    199Interest expense
    
    
    15,985
    
    
    
    6,023Investment and other income
    
    
    (1,297
    )
    
    
    (1,745
    )Derivative financial instruments, net
    
    
    463
    
    
    
    5,272Foreign exchange loss on debt
    
    
    7,509
    
    
    
    Impairment of investments
    
    
    1,645
    
    
    
    Income from operations
    
    
    7,385
    
    
    
    6,104Add: Depreciation and amortization
    
    
    10,829
    
    
    
    11,136Operating EBITDA
    
    
    18,214
    
    
    
    17,240
 
 (1)
    
    The results of the Celgar pulp mill are not included for the six months ended June 30,
2004.(2)
    
    See Note 10 of the financial statements included elsewhere herein for a reconciliation to our
consolidated results. Restricted Group Results  Three Months Ended June 30, 2005 Compared to Three Months Ended
June 30, 2004
    
  
  
 FORM 10-Q QUARTERLY REPORT  PAGE 36




---



##### 



   
  
   
      
   Three Months EndedJune 30,2005
    
    
    2004(in thousands)(unaudited)Restricted Group(1)(2)Net income (loss)
    
    
    (14,278
    )
    
    
    2,830Income taxes
    
    
    1,661
    
    
    
    199Interest expense
    
    
    8,314
    
    
    
    1,947Investment and other income
    
    
    (970
    )
    
    
    (639
    )Derivative financial instruments, net
    
    
    358
    
    
    
    382Foreign exchange loss on debt
    
    
    9,806
    
    
    
    Impairment of investments
    
    
    467
    
    
    
    Income from operations
    
    
    5,358
    
    
    
    4,719Add: Depreciation and amortization
    
    
    6,704
    
    
    
    5,554Operating EBITDA
    
    
    12,063
    
    
    
    10,273
 
 (1)
    
    The results of the Celgar pulp mill are not included for the three months ended June 30,
2004.(2)
    
    See Note 10 of the financial statements included elsewhere herein for a reconciliation to our
consolidated results. FORM 10-Q QUARTERLY REPORT  PAGE 37




---



##### 



Liquidity and Capital Resources of the Restricted Group
  As at
    
    
    As atJune 30,
    
    
    December 31,2005
    
    
    2004(in thousands)(unaudited)Restricted Group Financial Position(1)(2)Cash and cash equivalents
    
    
    62,792
    
    
    
    45,487Working capital
    
    
    119,518
    
    
    
    48,480Property, plant and equipment
    
    
    393,047
    
    
    
    213,678Total assets
    
    
    633,562
    
    
    
    401,321Long-term liabilities
    
    
    373,471
    
    
    
    228,139Shareholders equity
    
    
    216,311
    
    
    
    138,478
 
 (1)
    
    The financial position of the Celgar pulp mill is not included as at December 31, 2004.(2)
    
    See Note 10 of the financial statements included elsewhere herein for a reconciliation to our
consolidated results.   
  Critical Accounting Policies
    FORM 10-Q QUARTERLY REPORT  PAGE 38




---



##### 



Cautionary Statement Regarding Forward-Looking Information
 Private Securities Litigation Reform Act of
1995
 Cyclical Nature of Business
   FORM 10-Q QUARTERLY REPORT  PAGE 39




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      FORM 10-Q QUARTERLY REPORT  PAGE 40




---



##### 



Recognized Gain
    
    
    Recognized Gain(Loss) in
    
    
    (Loss) inSix Months Ended
    
    
    Three Months EndedDerivative Instrument
    
    Maturity Date
    
    
    Notional Amount
    
    
    June 30, 2005
    
    
    June 30, 2005(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)(in millions)
    
    
    (in thousands)
    
    
    (in thousands)Interest Rate DerivativesRosenthal Interest Rate Cap Agreements(1)
    
    Settled
    
    $
    178.3
    
    
    
    (295
    )
    
    
    -Stendal Interest Rate Swaps(2)
    
    October 2017
    
    
    1,147.5
    
    
    
    (20,475
    )
    
    
    (20,819
    )
    (20,770
    )
    
    
    (20,819
    )Foreign Exchange Rate DerivativesStendal Currency Swap(3)
    
    October 2017
    
    
    306.3
    
    
    
    (24,571
    )
    
    
    (22,278
    )Stendal Currency Swap(4)
    
    October 2017
    
    
    153.2
    
    
    
    (12,778
    )
    
    
    (11,027
    )Stendal Currency Swap(5)
    
    October 2017
    
    
    153.2
    
    
    
    (10,336
    )
    
    
    (10,336
    )Stendal Currency Forward
    
    September 2005
    
    $
    25.0
    
    
    
    (379
    )
    
    
    (393
    )Stendal Currency Forward
    
    September 2005
    
    $
    25.0
    
    
    
    (1,497
    )
    
    
    (1,497
    )Stendal Currency Forward
    
    February 2006
    
    $
    50.0
    
    
    
    (2,811
    )
    
    
    (2,743
    )
    (52,372
    )
    
    
    (48,274
    )
 
 (1)
    
    Rosenthal had entered into two forward interest rate contracts with notional amounts of
$106.2 million (2003: $118.6 million) and $72.1 million (2003: $74.0 million), both maturing
on September 28, 2007 with a strike rate of 6.8%. These derivatives were settled in February
2005.(2)
    
    In connection with the Stendal Loan Facility, in 2002 Stendal entered into the Stendal
Interest Rate Swaps, which are variable-to-fixed interest rate swaps, for the term of the
Stendal Loan Facility, with respect to an aggregate maximum amount of approximately 612.6
million of the principal amount of the long-term indebtedness under the Stendal Loan Facility.
The swaps took effect on October 1, 2002 and are comprised of three contracts. The first
contract commenced in October 2002 for a notional amount of 4.1 million, gradually increasing
to 464.9 million, with an interest rate of 3.795%, and matured in May 2004. The second
contract commenced in May 2004 for a notional amount of 464.9 million, gradually increasing
to 612.6 million, with an interest rate of 5.28%, and matures in April 2005. The third
contract commenced in April 2005 for a notional amount of 612.6 million, with an interest
rate of 5.28%, and the notional amount gradually decreases and the contract terminates upon
the maturity of the Stendal Loan Facility in October 2017. As at December 31, 2004 and June
30, 2005, the notional amounts of the outstanding two contracts was 612.6 million and 612.6
million, respectively.(3)
    
    For 306.3 million of the outstanding principal amount under the Stendal Loan Facility, all
repayment installments from February 7, 2005 until October 2, 2017 were swapped into U.S.
dollar amounts at a rate of U.S. 1.2960. The interest rate was swapped into the following
payments: pay six-month U.S. dollar to LIBOR rate plus 12 basis points and receive the
six-month Euribor.(4)
    
    For 153.2 million of the outstanding principal amount under the Stendal Loan Facility, all
repayment installments from April 1, 2005 until October 2, 2017 were swapped into U.S. dollar
amounts at a rate of U.S. 1.2990. The interest rate was swapped into the following payments:
pay six-month U.S. dollar to LIBOR rate plus 13 basis points and receive the six-month
Euribor.(5)
    
    For 153.2 million of the outstanding principal amount under the Stendal Loan Facility, all
repayment installments from April 18, 2005 until October 2, 2017 were swapped into U.S. dollar
amounts at a rate of U.S. 1.2799. The interest rate was swapped into the following payments:
pay six-month U.S. dollar to LIBOR rate plus 13 basis points and receive the six-month
Euribor.  FORM 10-Q QUARTERLY REPORT  PAGE 41




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##### 



ITEM 4. CONTROLS AND PROCEDURES
   Disclosure Controls and Procedures.
  Changes in Internal Controls.
 FORM 10-Q QUARTERLY REPORT  PAGE 42




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##### 



PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
   Votes For
    
    Votes Withheld
    
    Abstentions and Broker Non-VotesJimmy S.H. Lee
    
    
    26,502,486
    
    
    
    77,690
    
    
    
    William D. McCartney
    
    
    26,503,186
    
    
    
    76,990
    
    
    
    
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    Exhibits
 ExhibitNo.
    
    Description4.1*
    
    Amendment to Registration Rights Agreement dated May 30, 2005
between Mercer International Inc. and KPMG Inc.4.2*
    
    Registration Rights Agreement dated February 10, 2005 between
Mercer International Inc. and Royal Bank of Canada.4.3*
    
    Amendment to Registration Rights Agreement dated May 30, 2005
between Mercer International Inc. and Royal Bank of Canada.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1**
    
    Section 906 Certification of Chief Executive Officer
 FORM 10-Q QUARTERLY REPORT  PAGE 43




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##### 



ExhibitNo.
    
    Description32.2**
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    Incorporated by reference to Form 8-K filed on November 23, 2004, as amended on June 3,
2005.**
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein. FORM 10-Q QUARTERLY REPORT  PAGE 44




---



##### 



SIGNATURES
 Securities Exchange Act of 1934
 MERCER INTERNATIONAL INC.By:
    /s/ David M. GandossiDavid M. GandossiSecretary and Chief Financial Officer  FORM 10-Q QUARTERLY REPORT  PAGE 45