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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

MERCER INTERNATIONAL INC.

Washington		47-0956945
(State or other jurisdiction		(I.R.S. Employer
of 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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

The Registrant had 36,422,487 shares of common stock outstanding as at April 30, 2009.

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(Unaudited)

QUARTERLY REPORT — PAGE 2

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Euros)

		March 31,				December 31,
		2009				2008
ASSETS
Current assets
Cash and cash equivalents		€	41,236			€	42,452
Cash, restricted			3,531				13,000
Receivables			80,943				100,158
Inventories (Note 4)			89,761				98,457
Prepaid expenses and other			3,085				4,834
Total current assets			218,556				258,901
Long-term assets
Property, plant and equipment			879,300				881,704
Investments (Note 9)			71				419
Deferred note issuance and other costs			8,852				4,011
Deferred income tax			3,231				3,036
Note receivable, less current portion			3,531				3,529
			894,985				892,699
Total assets		€	1,113,541			€	1,151,600
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	81,575			€	87,517
Pension and other post-retirement benefit obligations, current portion			520				510
Debt, current portion (Note 5)			26,500				16,500
Total current liabilities			108,595				104,527
Long-term liabilities
Debt, less current portion (Note 5)			838,556				837,918
Unrealized interest rate derivative losses (Note 6)			62,125				47,112
Pension and other post-retirement benefit obligations (Note 7)			12,980				12,846
Capital leases and other			9,877				11,267
Deferred income tax			3,023				5,827
			926,561				914,970
Total liabilities			1,035,156				1,019,497
EQUITY
Shareholders’ equity
Share capital (Note 8)			202,844				202,844
Paid-in capital			(5,897	)			299
Retained earnings (deficit)			(74,396	)			(35,046	)
Accumulated other comprehensive loss			(6,944	)			(1,872	)
Total shareholders’ equity			115,607				166,225
Noncontrolling interest (deficit) (Note 10)			(37,222	)			(34,122	)
Total equity			78,385				132,103
Total liabilities and equity		€	1,113,541			€	1,151,600

Commitments and Contingencies (Note 11)

The accompanying notes are an integral part of these interim consolidated financial statements.

QUARTERLY REPORT — PAGE 3

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of Euros, except per share data)

		Three Months Ended
		March 31,
		2009				2008
Revenues
Pulp revenue		€	129,033			€	179,101
Energy revenue			10,539				7,715
			139,572				186,816
Costs and expenses
Operating costs			131,997				147,156
Operating depreciation and amortization			13,401				14,121
			(5,826	)			25,539
Selling, general and administrative expenses			7,145				6,896
(Sale) purchase of emission allowances			(558	)			—
Operating income (loss)			(12,413	)			18,643
Other income (expense)
Interest expense			(16,549	)			(16,620	)
Investment income (loss)			(3,202	)			310
Foreign exchange gain (loss) on debt			(4,416	)			6,031
Unrealized 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	)			514
Income 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				3,183
Net income (loss) attributable to common shareholders			(39,350	)			2,869
Retained earnings (deficit), beginning of period			(35,046	)			37,419
Retained earnings (deficit), end of period		€	(74,396	)		€	40,288
Net income (loss) per share attributable to common shareholders (Note 3):
Basic		€	(1.08	)		€	0.08
Diluted		€	(1.08	)		€	0.08

The accompanying notes are an integral part of these interim consolidated financial statements.

QUARTERLY REPORT — PAGE 4

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of Euros)

		Three Months Ended
		March 31,
		2009				2008
Net 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				3,183
Comprehensive income (loss) attributable to common shareholders		€	(44,422	)		€	(7,260	)

The accompanying notes are an integral part of these interim consolidated financial statements.

QUARTERLY REPORT — PAGE 5

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of Euros)

		Three Months Ended
		March 31,
		2009				2008
Cash flows from (used in) operating activities:
Net income (loss) attributable to common shareholders		€	(39,350	)		€	2,869
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities
Unrealized (gain) loss on derivative instruments			15,013				7,850
Foreign exchange (gain) loss on debt			4,416				(6,031	)
Loss (gain) on sale of assets			(59	)			(1,022	)
Operating depreciation and amortization			13,401				14,121
Non-operating amortization			66				71
Noncontrolling interest			(9,261	)			(3,183	)
Deferred income taxes			(3,031	)			1,204
Stock compensation expense			(33	)			146
Pension and other post-retirement expense			331				515
Pension and other post-retirement benefit funding			(347	)			(449	)
Inventory provisions			4,587				—
Other			424				(57	)
Changes in current assets and liabilities
Receivables			20,409				(3,833	)
Inventories			6,119				706
Accounts payable and accrued expenses			(6,781	)			(11,380	)
Other			(5,102	)			2,097
Net cash from (used in) operating activities			802				3,624
Cash 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				960
Cash, 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				834
Net increase (decrease) in cash and cash equivalents			(1,216	)			(15,113	)
Cash and cash equivalents, beginning of period			42,452				84,848
Cash and cash equivalents, end of period		€	41,236			€	69,735

The accompanying notes are an integral part of these interim consolidated financial statements.

QUARTERLY REPORT — PAGE 6

MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(In thousands of Euros)

		Three Months Ended
		March 31,
		2009				2008
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest		€	28,258			€	26,486
Income taxes			29				14
Supplemental schedule of non-cash investing and financing activities:
Acquisition of production and other equipment under capital lease obligations		€	36			€	2,722
Increase (decrease) in accounts payable relating to investing activities			461				—

The accompanying notes are an integral part of these interim consolidated financial statements.

QUARTERLY REPORT — PAGE 7

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

The interim consolidated financial statements contained herein include the accounts of Mercer International Inc. (“Mercer Inc.”) and its wholly-owned and majority-owned subsidiaries collectively (the “Company”). The Company’s shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange, respectively.

The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The year-end consolidated balance sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States (“GAAP”). The interim consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company’s latest annual report on Form 10-K for the fiscal year ended December 31, 2008. In the opinion of the Company, the unaudited interim consolidated financial statements contained herein contain all adjustments necessary to fairly present the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

The Company has three operating pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly the results presented are those of the reportable business segment.

Certain prior year amounts in the unaudited interim consolidated financial statements have been reclassified to conform to the current year presentation.

In these interim consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.

Use of Estimates

Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, the accounting for doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ from these estimates, and changes in these estimates are recorded when known.

QUARTERLY REPORT — PAGE 8

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

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51 (“FAS 160”). FAS 160 establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Additionally, FAS 160 states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of FAS 160 are effective for fiscal years beginning on or after December 15, 2008. The Company adopted FAS 160 on January 1, 2009 and amended its presentation and disclosure accordingly. See Note 10 — Noncontrolling Interest.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“FAS 141(R)”). FAS 141(R) establishes how an entity accounts for identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and determines what disclosures are required as part of a business combination. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted FAS 141(R) on January 1, 2009, and the adoption had no impact on the Company’s financial statements or disclosures.

In February 2008, the FASB Staff issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which defers the effective date of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”), for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008, for items within the scope of FSP 157-2. The Company adopted FSP 157-2 on January, 2009. The adoption of FSP 157-2 did not have a material impact on the Company’s financial statement disclosures.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted FAS 161 effective January 1, 2009, see Note 6 — Derivative Transactions.

QUARTERLY REPORT — PAGE 9

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)

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP 142-3 on January 1, 2009, the impact of which was not material.

In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement) (“FSP 14-1”). FSP 14-1 states that convertible debt instruments that are within its scope are required to be separated into both a debt component and an equity component. In addition, any debt discount is to be accreted to interest expense over the expected life of the debt. The provisions of FSP 14-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and implementation is generally required to be retrospective. The adoption of FSP 14-1 on January 1, 2009 had no impact on the Company’s financial statements or disclosures.

New Accounting Standards

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 defines the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The provisions of FAS 162 are effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is in the process of determining the impact, if any, the adoption of FAS 162 will have on its financial statements and disclosures.

In December 2008, the FASB issued FASB Staff Position No. 132 (R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits (“FSP 132(R)-1”). FSP 132(R)-1 provides guidance on an employer’s (sponsor’s) disclosures about plan assets of a defined benefit pension or other postretirement plan and requires disclosures about fair value measurements of plan assets. FSP 132(R)-1 is effective for financial statements issued for fiscal years ending after December 15, 2009, and implementation is required to be prospective. Earlier application of the provisions in FSP 132(R)-1 is permitted. The Company is in the process of determining the impact, if any, the adoption of FSP 132(R)-1 will have on its financial statements and disclosures.

QUARTERLY REPORT — PAGE 10

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)

In April 2009, the FASB issued FASB Staff Position No. 107-1, Interim Disclosures about Fair Value of Financial Instruments (“FAS FSP 107-1”). FAS FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FAS FSP 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods. The provisions of FAS FSP 107-1 are effective for interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is in the process of determining the impact, if any, the adoption of FAS FSP 107-1 will have on the disclosures in the financial statements.

Note 2. Stock-Based Compensation

The Company had a non-qualified stock option plan which provides for options to be granted to officers and employees to acquire a maximum of 3,600,000 common shares including options for 130,000 shares to directors who are not officers or employees. This plan expired in 2008 but unexercised options that were previously granted under this plan remain outstanding. The Company also has a stock incentive plan which provides for options, stock appreciation rights and restricted shares to be awarded to employees and outside directors to a maximum of 1,000,000 common shares. During the first quarter of 2008, the Company implemented a new form of stock-based compensation called performance stock under its existing stock incentive plan.

Performance Stock

Grants of performance stock comprise rights to receive stock at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the three months ended March 31, 2009, potential stock based performance awards totaled 530,623 shares, which vest on December 31, 2010. Expense for the three month periods ended March 31, 2009 and 2008 was €(59) and €nil, respectively.

The fair value of performance stock is determined based upon the number of shares awarded and the quoted price of the Company’s stock. Performance stock generally cliff vest three years from the award date. As of March 31, 2009, no performance stock had vested. During the three month period ended March 31, 2009, 39,991 performance stock was cancelled due to a departure of an employee.

QUARTERLY REPORT — PAGE 11

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

The fair value of restricted stock is determined based upon the number of shares granted and the quoted price of the Company’s stock on the date of grant. Restricted stock generally vests over two years. Expense is recognized on a straight-line basis over the vesting period. Expense recognized for the three months ended March 31, 2009 and 2008 were €26 and €49, respectively.

As at March 31, 2009, the total remaining unrecognized compensation cost related to restricted stock amounted to approximately €20 (2008 – €58), which will be amortized over their remaining vesting period.

During the three month period ended March 31, 2009, no restricted stock awards were granted (2008 – nil). There were nil restricted stock awards cancelled during the three month period ended March 31, 2009 (2008 – nil).

As at March 31, 2009, the total number of restricted stock awards outstanding was 232,685, of which 21,000 had not vested.

Stock Options

During the three month periods ended March 31, 2009 and 2008, no options were exercised, cancelled or expired.

Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders

		Three Months Ended
		March 31,
		2009				2008
Net income (loss) attributable to common shareholders — basic		€	(39,350	)		€	2,869
Interest on convertible notes, net of tax		€	—			€	—
Net income (loss) attributable to common shareholders — diluted		€	(39,350	)		€	2,869
Net income (loss) per share attributable to common shareholders:
Basic		€	(1.08	)		€	0.08
Diluted		€	(1.08	)		€	0.08
Weighted average number of common shares outstanding:
Basic (1)			36,285,027				36,285,027
Effect of dilutive instruments:
Stock options and awards			—				151,762
Convertible notes			—				—
Diluted			36,285,027				36,436,789

QUARTERLY REPORT — PAGE 12

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)

The calculation of diluted income (loss) per share attributable to common shareholders does not assume the exercise of stock options and awards or the conversion of convertible notes that would have an anti-dilutive effect on earnings per share.

Stock options and awards excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 928,334 and 68,334 for the three month periods ended March 31, 2009 and 2008, respectively.

Convertible notes excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 8,678,065 for the three month periods ended March 31, 2009 and 2008.

Performance and restricted stock excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 369,648 shares (2008 – nil).

Note 4. Inventories

		March 31, 2009				December 31, 2008
Raw materials		€	26,463			€	38,225
Finished goods			40,857				37,881
Work in process and other			22,441				22,351
		€	89,761			€	98,457

Note 5. Debt

Certain of the Company’s debt agreements were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to other important qualifications and exceptions. As at March 31, 2009, the Company was in compliance with the terms of the indenture.

QUARTERLY REPORT — PAGE 13

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

Note 5. Debt (continued)

Debt consists of the following:

		March 31,				December
		2009				31, 2008
Note payable to bank, included in a total credit facility of €827,950 to finance the construction related to the Stendal mill (a)		€	522,823			€	531,073
Senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured (b)			233,786				222,718
Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (c)			50,720				48,319
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (d)			13,166				18,186
Loan payable to noncontrolling shareholder of the Stendal mill (e) (Note 10)			34,561				34,122
Credit agreement with bank with respect to a revolving credit facility of €40 million (f)			10,000				—
			865,056				854,418
Less: current portion			(26,500	)			(16,500	)
Debt, less current portion		€	838,556			€	837,918

The Company made scheduled principal repayments under these facilities of €34,023 in 2008, and €13,800 during the three months ended March 31, 2009. As of March 31, 2009, the principal maturities of debt are as follows:

Matures		Amount
2009		€	8,250
2010			87,803
2011			23,167
2012			24,583
2013			273,786
Thereafter			447,467
		€	865,056

QUARTERLY REPORT — PAGE 14

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 5. Debt (continued)

On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal credit facility. The amendment defers approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017, including approximately €20,000, €26,000, €21,000 of scheduled principal payments in 2009, 2010, and 2011, respectively. Additionally, the Company made a €10,000 capital contribution to Stendal, and incurred amendment fees totaling approximately €5,800. See Note 10 — Noncontrolling Interest.

(b)		In February 2005, the Company issued $310 million of senior notes due February 2013, which bear interest at 9.25% accrued, are payable semi-annually, and are unsecured. On or after February 15, 2009, the Company may redeem all or a part of the notes at redemption prices (expressed as a percentage of principal amount) equal to 104.63% for the twelve month period beginning on February 15, 2009, 102.31% for the twelve month period beginning on February 15, 2010, and 100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid interest.
(c)		As at 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.

QUARTERLY REPORT — PAGE 15

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

The Company adopted FAS 161 effective January 1, 2009. The adoption of FAS 161 resulted in no impact on the Company’s consolidated financial position or results from operations.

The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk management policies as well from time to time the use of derivatives. Currently, the primary risk managed using derivative instruments is interest rate risk.

During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal Loan Facility with respect to an aggregate maximum amount of approximately €612,600 of the principal amount of the indebtedness under the Stendal Loan Facility. Under the interest rate swaps, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Currently, the aggregate notional amount of these contracts is €523,100 at a fixed interest rate of 5.28% and they mature October 2017 (matching the maturity of the Stendal Loan Facility). The Company effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty.

QUARTERLY REPORT — PAGE 16

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 6. Derivative Transactions (continued)

The Company recognized an unrealized loss of €15,013 and €7,850, with respect to these interest rate swaps for the three months ended March 31, 2009 and 2008, respectively, in “Unrealized gain (loss) on derivative instruments” in the Consolidated Statement of Operations. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize all derivative instruments at their fair value in the consolidated balance sheet. Accordingly, the fair value of the interest rate swap is presented in “Unrealized interest rate derivative losses” within the long-term liabilities section in the Consolidated Balance Sheet.

The interest rate derivative contracts are with the same banks that hold the Stendal Loan Facility and the Company does not anticipate non-performance by the banks.

Note 7. Pension and Other Post-Retirement Benefit Obligations

Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and German mills.

The largest component of this obligation is with respect to the Celgar mill which maintains defined benefit pension and post-retirement benefit plans for certain employees (“Celgar Plans”).

Pension benefits are based on employees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions for the three month period ended March 31, 2009 and March 31, 2008 totaled €347 and €449, respectively.

The Company anticipates based on actuarial estimates that it will make contributions to the defined benefit pension plan of approximately €858 in 2009.

Effective December 31, 2008, the defined benefit plan was closed to new members. In addition, the defined benefit service accrual ceased on December 31, 2008, and members began to accrue benefits under a new defined contribution plan effective January 1, 2009.

		Three Months Ended March 31,
		2009								2008
						Post-								Post-
		Pension				Retirement				Pension				Retirement
		Benefits				Benefits				Benefits				Benefits
Service cost		€	14			€	83			€	204			€	130
Interest cost			370				199				351				207
Expected return on plan assets			(311	)			—				(399	)			—
Recognized net loss			34				(58	)			(1	)			21
Net periodic benefit cost		€	107			€	224			€	155			€	358

QUARTERLY REPORT — PAGE 17

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 8. Share Capital

Common shares

The Company has authorized 200,000,000 common shares (2008 — 200,000,000) with a par value of $1 per share. As at March 31, 2009, the Company had 36,422,487 (2008 — 36,422,487) common shares issued and outstanding.

Preferred shares

The Company has authorized 50,000,000 preferred shares (2008 — 50,000,000) with $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at March 31, 2009, no preferred shares had been issued by the Company.

Note 9. Financial Instruments

The Company adopted FAS 157 effective January 1, 2008. The adoption of FAS 157 resulted in no impact on the Company’s consolidated financial position or results from operations.

The fair value methodologies and, as a result, the fair value of the Company’s investments and derivative instruments are determined based on the fair value hierarchy provided in FAS 157. The fair value hierarchy per FAS 157 is as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities.

Level 2 — Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.

Level 3 — Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.

QUARTERLY REPORT — PAGE 18

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 9. Financial Instruments (continued)

The Company classified its investments within Level 1 of the valuation hierarchy where quoted prices are available in an active market. Level 1 investments include exchange-traded equities.

The Company’s derivatives are classified within Level 2 of the valuation hierarchy, as they are traded on the over-the-counter market and are valued using internal models that use as their basis readily observable market inputs, such as forward interest rates.

The valuation techniques used by the Company are based upon observable inputs. Observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Company’s own credit risk, in determining the fair value of the derivative instruments. The counterparty to our interest rate swap derivative is a multi-national financial institution. The fair value of the interest rate swaps represents the Company’s exposure on the derivative contracts.

The following table presents a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in FAS 157:

		Fair value measurements at March 31, 2009 using:
		Quoted prices in
		active markets for				Significant other				Significant
		identical assets				observable inputs				unobservable inputs
Description		(Level 1)				(Level 2)				(Level 3)				Total
Assets
Investments (a)		€	71			€	—			€	—			€	71
Liabilities
Derivatives (b)
- Interest rate swaps		€	—			€	62,125			€	—			€	62,125

QUARTERLY REPORT — PAGE 19

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 10. Noncontrolling Interest

The Company adopted FAS 160 on January 1, 2009. The adoption of this standard resulted in retrospective presentation and disclosure changes to the December 31, 2008 Consolidated Balance Sheet. These changes are denoted in the table below:

Excerpt from Consolidated Balance Sheet

						Application of new				Revised balance as at
		Balance as at				accounting standard				December 31, 2008
Description		December 31, 2008				(a)				(b)
Long-term liabilities
Debt, less current portion		€	803,796			€	34,122			€	837,918
Total liabilities			985,375				34,122				1,019,497
Equity
Shareholders’ equity
Share capital			202,844				—				202,844
Paid-in capital			299				—				299
Retained earnings (deficit)			(35,046	)			—				(35,046	)
Accumulated other comprehensive income			(1,872	)			—				(1,872	)
Total shareholders’ equity			166,225				—				166,225
Noncontrolling interest			—				(34,122	)			(34,122	)
Total equity			166,225				(34,222	)			132,103
Total liabilities and equity		€	1,151,600			€	—			€	1,151,600

Commencing January 1, 2009, the Company followed the guidance in FAS 160, and applied any accounting changes on a prospective basis. Pursuant to FAS 160, the noncontrolling shareholder will be attributed its share of losses even if that attribution results in a net deficit balance.

QUARTERLY REPORT — PAGE 20

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 10. Noncontrolling Interest (continued)

Previously, Stendal mill losses in excess of the noncontrolling shareholder’s equity interest were attributable to the Company. The resulting impact of this change in accounting is the recognition of approximately €8,822 of losses by the noncontrolling shareholder for the three month period ended March 31, 2009. The Company’s net loss attributable to common shareholders for the three month period ended March 31, 2009 would have increased by €8,822, to a net loss of €48,172 had the Company not adopted FAS 160, resulting in an increase in the net loss per share attributable to the common shareholders of €0.24 per share.

On March 13, 2009, the Stendal mill increased its stated capital by €2,582 which diluted the interest held by the noncontrolling shareholder and resulted in a 4.32% increase in the Company’s equity ownership in the Stendal mill from 70.58% to 74.9%. Pursuant to FAS 160, the increase in equity ownership was accounted for as an equity transaction. The carrying amount of the Company’s shareholders’ equity was adjusted to reflect the 4.32% increase of ownership interest in Stendal. As a result, the noncontrolling deficit and the Company’s Additional Paid-in Capital were reduced by €6,161.

The following table highlights the effects of changes in Mercer Inc’s ownership interest in the Stendal mill on the Company’s equity:

		Three months ended
Description		March 31, 2009
Net 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	)

QUARTERLY REPORT — PAGE 21

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 11. Commitments and Contingencies

During the year, as part of the new Green Energy project for the Celgar mill, the Company entered into a number of contracts for the purchase of a new 48 megawatt condensing turbine-generator set, as well as other related equipment commitments. As at March 31, 2009, the value of the contracts committed was approximately €13,100 (C$21.9 million).

The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

QUARTERLY REPORT — PAGE 22

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure

The terms of the indenture governing our 9.25% senior unsecured notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the three months ended March 31, 2009 and 2008, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.

Combined Condensed Balance Sheet

		March 31, 2009
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	28,682			€	12,554			€	—			€	41,236
Cash, restricted			—				3,531				—				3,531
Receivables			42,699				38,244				—				80,943
Inventories			56,979				32,782				—				89,761
Prepaid expenses and other			2,069				1,016				—				3,085
Total current assets			130,429				88,127				—				218,556
Property, plant and equipment			354,777				524,523				—				879,300
Other			3,664				5,259				—				8,923
Deferred income tax			3,231				—				—				3,231
Due from unrestricted group			67,009				—				(67,009	)			—
Note receivable, less current portion			3,531				—				—				3,531
Total assets		€	562,641			€	617,909			€	(67,009	)		€	1,113,541
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	46,226			€	35,349			€	—			€	81,575
Pension and other post-retirement benefit obligations, current portion			520				—				—				520
Debt, current portion			10,000				16,500				—				26,500
Total current liabilities			56,746				51,849				—				108,595
Debt, less current portion			297,672				540,884				—				838,556
Due to restricted group			—				67,009				(67,009	)			—
Unrealized interest rate derivative losses			—				62,125				—				62,125
Pension and other post-retirement benefit obligations			12,980				—				—				12,980
Capital leases and other			6,174				3,703				—				9,877
Deferred income tax			—				3,023				—				3,023
Total liabilities			373,572				728,593				(67,009	)			1,035,156
EQUITY
Total shareholders’ equity (deficit)			189,069				(73,462	)			—				115,607
Noncontrolling interest (deficit)			—				(37,222	)			—				(37,222	)
Total liabilities and equity		€	562,641			€	617,909			€	(67,009	)		€	1,113,541

QUARTERLY REPORT — PAGE 23

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, 2008
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	26,176			€	16,276			€	—			€	42,452
Cash, restricted			—				13,000				—				13,000
Receivables			57,258				42,900				—				100,158
Inventories			59,801				38,656				—				98,457
Prepaid expenses and other			3,215				1,619				—				4,834
Total current assets			146,450				112,451				—				258,901
Property, plant and equipment			351,009				530,695				—				881,704
Other			4,425				5				—				4,430
Deferred income tax			3,036				—				—				3,036
Due from unrestricted group			55,925				—				(55,925	)			—
Note receivable, less current portion			3,529				—				—				3,529
Total assets		€	564,374			€	643,151			€	(55,925	)		€	1,151,600
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	44,450			€	43,067			€	—			€	87,517
Pension and other post-retirement benefit obligations, current portion			510				—				—				510
Debt, current portion			—				16,500				—				16,500
Total current liabilities			44,960				59,567				—				104,527
Debt, less current portion			289,222				548,696				—				837,918
Due to restricted group			—				55,925				(55,925	)			—
Unrealized interest rate derivative losses			—				47,112				—				47,112
Pension and other post-retirement benefit obligations			12,846				—				—				12,846
Capital leases and other			7,167				4,100				—				11,267
Deferred income tax			—				5,827				—				5,827
Total liabilities			354,195				721,227				(55,925	)			1,019,497
EQUITY
Total shareholders’ equity (deficit)			210,179				(43,954	)			—				166,225
Noncontrolling interest (deficit)			—				(34,122	)			—				(34,122	)
Total liabilities and equity		€	564,374			€	643,151			€	(55,925	)		€	1,151,600

QUARTERLY REPORT — PAGE 24

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, 2009
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
Revenues		€	79,032			€	60,540			€	—			€	139,572
Operating costs			73,316				58,681				—				131,997
Operating depreciation and amortization			6,704				6,697				—				13,401
Selling, general and administrative expenses			4,422				2,165				—				6,587
			84,442				67,543				—				151,985
Operating 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				—				2,982
Net income (loss)			(16,004	)			(32,607	)			—				(48,611	)
Less: net loss attributable to noncontrolling interest			—				9,261				—				9,261
Net income (loss) attributable to common shareholders		€	(16,004	)		€	(23,346	)		€	—			€	(39,350	)

		Three Months Ended March 31, 2008
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
Revenues		€	104,588			€	82,228			€	—			€	186,816
Operating costs			81,142				66,014				—				147,156
Operating depreciation and amortization			7,421				6,700				—				14,121
Selling, general and administrative expenses			3,744				3,152				—				6,896
			92,307				75,866				—				168,173
Operating income (loss)			12,281				6,362				—				18,643
Other income (expense)
Interest expense			(6,712	)			(10,867	)			959				(16,620	)
Investment income (loss)			1,736				(467	)			(959	)			310
Foreign exchange gain (loss) on debt			6,627				(596	)			—				6,031
Derivative 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	)			—				514
Income 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				—				3,183
Net income (loss) attributable to common shareholders		€	11,778			€	(8,909	)		€	—			€	2,869

QUARTERLY REPORT — PAGE 25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2009, unless otherwise stated; (iv) all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; (v) “€” refers to Euros, “$” refers to U.S. dollars and C$ refers to Canadian dollars; and (vi) “ADMTs” refers to air-dried metric tonnes.

Results of Operations

General

We operate three NBSK pulp mills through our wholly owned subsidiaries, Rosenthal and Celgar, and our 74.9% owned subsidiary, Stendal, which have a consolidated annual production capacity of approximately 1.5 million ADMTs.

The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2009 should be read in conjunction with our interim consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC.

Current Market Environment

As global economies continue to experience unprecedented volatility and disruption, we faced a very difficult operating environment throughout the first quarter of 2009. During the current quarter we experienced further declines in pulp prices and sustained depressed demand for our product. As we progress into the second quarter of 2009, pulp industry conditions remain challenging. These conditions are beyond our ability to control and may have a significant impact on our business, results of operations, cash flows, ability to meet our debt service obligations and financial position.

QUARTERLY REPORT — PAGE 26

First Quarter Snapshot

Selected production, sales and exchange rate data for the three months ended March 31, 2009 and 2008 is as follows:

		Three Months Ended March 31,
		2009				2008
Pulp Production (‘000 ADMTs)			345.6				360.9
Scheduled Production Downtime (‘000 ADMTs)			—				1.5
Pulp Sales (‘000 ADMTs)			336.7				348.2
Pulp Revenues (in millions)		€	129.0			€	179.1
NBSK pulp list prices in Europe ($/ADMT)		$	585			$	880
NBSK pulp list prices in Europe (€/ADMT)		€	449			€	586
Average pulp sales realizations (€/ADMT)(1)		€	377			€	510
Energy Production (‘000 MWh)			356.3				364.9
Energy Sales (‘000 MWh)			112.2				114.1
Energy Revenue (in millions)		€	10.6			€	7.7
Average energy sales realizations (€/MWh)		€	94			€	68
Average Spot Currency Exchange Rates(2)
€ / $			0.7675				0.6666
C$ / $			1.2453				1.0042
C$ / €			1.6217				1.5057

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Pulp revenues for the three months ended March 31, 2009 decreased by approximately 28.0% to €129.0 million from €179.1 million in the comparative quarter of 2008 primarily due to the ongoing global economic crisis and its effect on world pulp markets. Revenues from the sale of excess energy increased by approximately 36.6% in the first quarter to €10.6 million from €7.7 million in the same quarter last year due to the higher biomass energy tariffs now in effect under Germany’s Renewable Energy Resources Act.

Pulp sales volume decreased to 336,659 ADMTs in the current quarter compared to 348,176 ADMTs in the comparative period of 2008 primarily due to weaker demand and the effect of credit restrictions on certain of our customers. In the first quarter of 2009, average pulp sales realizations decreased by approximately 26.1% and 13.5% to €377 per ADMT from €510 per ADMT in the same period last year and €436 per ADMT in the fourth quarter of 2008, respectively.

Pulp prices decreased in the first quarter of 2009 as a result of the global recession. List prices for NBSK pulp in Europe were approximately €449 ($585) per ADMT in the current quarter compared to approximately €586 ($880) in the first quarter of 2008 and €456 ($635) at the end of 2008. Partially offsetting the declines in pulp prices has been the stronger U.S. dollar versus the Euro and the Canadian dollar. A stronger U.S. dollar is beneficial to us because, although NBSK pulp is primarily quoted in U.S. dollars, our production costs are principally incurred in Euros and Canadian dollars.

QUARTERLY REPORT — PAGE 27

Pulp production decreased to 345,620 ADMTs in the current quarter from 360,881 ADMTs in the same period of 2008 primarily due to seven days of unscheduled production downtime at our Celgar mill as a result of a temporary railway shutdown due to weather conditions. We took no scheduled maintenance downtime at our mills in the first three months of 2009, compared to one day in the same period last year.

Costs and expenses in the first quarter of 2009 decreased to €152.0 million from €168.2 million in the comparative quarter of 2008.

In the first three months of 2009, operating depreciation and amortization decreased slightly to €13.4 million from €14.1 million in the comparative quarter of 2008.

As a result of continuing weak NBSK markets in the current quarter, we recorded additional non-cash provisions of €3.4 million and €1.2 million against our finished goods and fiber inventories, respectively.

During the first quarter of 2009 certain U.S. pulp producers took advantage of an excise tax credit under the U.S. Internal Revenue Code intended to subsidize companies that sell or use alternative fuel mixtures. The manner in which this alternative fuel tax credit has been applied by U.S. pulp producers is viewed by many as contrary to the legislation’s intent and acts as a subsidy to the U.S. pulp industry.  As a result, the tax credit has the potential to significantly lower the operating costs of otherwise unprofitable producers and complaints have been brought by a number of non-U.S. producers and their respective governments on the basis that the credit provides an uncompetitive advantage to U.S. pulp producers. While the tax credit does not impact us directly, it has the potential of deferring increases in pulp prices that might otherwise be implemented. 

On average, and including the effect of the non-cash inventory provision on our fiber inventories, our fiber costs decreased by approximately 10.4% in the first quarter of 2009 from the same period in 2008 due to lower demand. We currently expect fiber prices to level off in the near term due to the effect of the ongoing sawmilling curtailments and harvesting reductions.

We recorded €0.6 million from the sale of emission allowances for the three months ended March 31, 2009, compared to €nil in the comparative quarter of 2008.

For the first quarter of 2009, we recorded an operating loss of €12.4 million compared to operating income of €18.6 million in the comparative quarter of 2008, primarily due to lower price realizations and sales volume resulting from deteriorating market conditions.

Interest expense in the first quarter of 2009 decreased very marginally to €16.5 million from €16.6 million in the comparative quarter of 2008.

In the first three months of 2009 we recorded a loss of €3.2 million on the final disposition of certain investments previously owned by our Stendal mill. Such investments were held in an independently-managed fund created for purposes of investing the debt service reserve account funds under the mill’s project loan facility.

Our Stendal mill recorded an unrealized loss of €15.0 million on our interest rate derivatives during the first quarter of 2009 compared to an unrealized loss of €7.9 million in the same period last year in large part due to the significant decrease in European interest rates.

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A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In the first quarter of 2009, we recorded an unrealized loss of €4.4 million on our foreign currency denominated debt compared to an unrealized gain of €6.0 million in the same period of 2008.

In the first quarter of 2009, the noncontrolling shareholder’s interest in the Stendal mill’s loss for the period was €9.3 million, compared to €3.2 million in the same quarter last year.

We reported a net loss attributable to common shareholders for the first quarter of 2009 of €39.4 million, or €1.08 per basic and diluted share, which included an aggregate unrealized non-cash loss of €19.4 million of Stendal’s interest rate derivates and foreign exchange losses on our debt. In the first quarter of 2008, we reported net income attributable to common shareholders of €2.9 million, or €0.08 per basic and diluted share.

Operating EBITDA in the first quarter of 2009 was €1.1 million compared to €32.8 million in the three months ended March 31, 2008 and an Operating EBITDA loss of €7.5 million in the fourth quarter of 2008. EBITDA in the current quarter includes non-cash inventory provisions of €4.6 million. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America (“GAAP”), and should not be considered as an alternative to net income (loss) attributable to common shareholders or income from operations as a measure of operational performance, nor as an alternative to net cash from operating activities as a measure of liquidity.

Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) non-controlling interests on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental operational performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our interim consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA

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as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our operational performance and relying primarily on our GAAP financial statements.

The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the periods indicated:

		Three Months Ended
		March 31,
		2009				2008
		(in thousands)
Net income (loss) attributable to common shareholders		€	(39,350	)		€	2,869
Net loss attributable to noncontrolling interest			(9,261	)			(3,183	)
Income taxes (benefits)			(2,982	)			828
Interest expense			16,549				16,620
Investment (income) loss			3,202				(310	)
Unrealized foreign exchange loss (gain) on debt			4,416				(6,031	)
Derivative instruments			15,013				7,850
Operating income (loss)			(12,413	)			18,643
Add: Depreciation and amortization			13,467				14,192
Operating EBITDA		€	1,054			€	32,835

Liquidity and Capital Resources

The following table is a summary of selected financial information for the periods indicated:

		As at				As at
		March 31,				December 31,
		2009				2008
		(in thousands)
Financial Position
Cash and cash equivalents		€	41,236			€	42,452
Cash, restricted			3,531				13,000
Working capital			109,961				154,374
Property, plant and equipment			879,300				881,704
Total assets			1,113,541				1,151,600
Long-term liabilities			926,561				914,970
Total equity			78,385				132,103

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations, cash on hand, the revolving working capital loan facility for our Celgar mill, or “Celgar Loan Facility”, and the revolving working capital loan facility for our Rosenthal mill, or “Rosenthal Loan Facility”. Our principal uses of funds consist of operating and capital expenditures, payments of principal and interest on the project loan facility relating to our Stendal mill, or “Stendal Loan Facility”, and interest payments on our outstanding senior notes and convertible notes.

As at March 31, 2009, our cash and cash equivalents were €41.2 million, compared to €42.5 million at the end of 2008. We also had €3.5 million of restricted cash in the debt service reserve account under the Stendal Loan Facility and approximately €31.5 million in available undrawn lines of credit.

In the first quarter of 2009, we completed an amendment to the Stendal Loan Facility which has increased Stendal’s liquidity by deferring approximately €164.0 million of principal payments until maturity on September 30, 2017. The deferred amount includes approximately

QUARTERLY REPORT — PAGE 30

€20.0 million, €26.0 million and €21.0 million of scheduled principal payments in 2009, 2010 and 2011, respectively. As part of the amendment we made a capital contribution of €10.0 million to Stendal in the first quarter of 2009.

In the current quarter we also extended the maturity of the Celgar Loan Facility from May 2009 to May 2010 and are currently seeking to extend the maturity of the Rosenthal Loan Facility which is set to mature in February 2010.

The Stendal Loan Facility is provided by a syndicate of eleven financial institutions and the Celgar Loan Facility and Rosenthal Loan Facility are each provided by one financial institution. We have not to date experienced any reductions in credit availability with respect to these loan facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected.

In the first quarter of 2009, we continued our efforts to obtain term financing for the “green” energy project at our Celgar mill and are in continuing negotiations with lenders with respect to such financing. While we expect to finalize such financing in the second quarter of 2009, given the current market environment there can be no assurance that we will be able to do so or on terms favorable to us. In the first three months of 2009, capital expenditures related to the Celgar energy project were €4.4 million and we expect project costs to be approximately €24.7 million in the remainder of 2009.

Debt

As at March 31, 2009, the amount outstanding under the Stendal Loan Facility was €522.8 million. We also had approximately C$22.0 million outstanding under the C$40.0 million Celgar Loan Facility and had drawn approximately €10.0 million under the Rosenthal Loan Facility.

Additionally, we have $310.0 million (€233.8 million) in principal amount of our 9.25% senior notes outstanding which mature in February 2013 and for which we pay interest at the rate of 9.25% on February 15 and August 15 of each year. The indenture governing the senior notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity.

We also have $67.3 million (€50.7 million) in principal amount of our 8.5% convertible senior subordinated notes which mature in October 2010 for which we pay interest semi-annually on April 15 and October 15 of each year at the rate of 8.5%. The convertible notes also are not subject to any financial maintenance covenants.

Debt Covenants

Our long-term obligations contain various financial tests and covenants customary to these types of arrangements.

The Stendal Loan Facility contains an annual debt service cover ratio which must not fall below 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x for the period after January 1, 2014 until maturity on September 30, 2017. The Stendal Loan Facility also contains a permitted leverage ratio of total debt to EBITDA which is effective beginning December 31, 2009. This ratio is set to decline over time from

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13.0x on its effective date to 4.5x on June 30, 2017. Failure to comply with either ratio constitutes an event of default, but may be cured by the shareholders of Stendal with a once-per-fiscal-year ratio deficiency cure by way of a capital contribution or subordinated loan in the amount necessary to cure such deficiency.

Under the Rosenthal Loan Facility, the ratio of net debt to EBITDA must not exceed 3:1 in any 12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.4:1 for each six month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1.

The Celgar Loan Facility includes a covenant that, for so long as the excess amount under the facility is less than C$8.0 million, then until it becomes equal to or greater than such amount, the Celgar mill must maintain a fixed charge coverage ratio of not less than 1.1:1.0 for each 12-month period.

As at March 31, 2009, we were in full compliance with all of the covenants of our indebtedness.

Cash Flow Analysis

     Cash Flows from Operating Activities. We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals and debt service.

     Operating activities in the first three months of 2009 provided cash of €0.8 million, compared to providing cash of €3.6 million in the same period last year. A decrease in receivables provided cash of €20.4 million in the first quarter of 2009, compared to an increase in receivables using cash of €3.8 million in the first quarter of 2008. A decrease in inventories before non-cash provisions provided cash of €6.1 million in the current quarter, compared to a decrease in inventories that provided cash of €0.7 million in the first quarter of 2008. A decrease in accounts payable and accrued expenses used cash of €6.8 million in the first three months of 2009, compared to a decrease in accounts payable and accrued expenses using cash of €11.4 million in the first three months of 2008.