Mercer International Inc. Reports 2005 First Quarter Results

Share Name	Share Symbol	Market	Type
Mercer International Inc. - Shares OF Beneficial Interest (MM)	NASDAQ:MERCS	NASDAQ	Ordinary Share

Mercer (NASDAQ:MERCS)
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Mercer International Inc. Reports 2005 First Quarter Results NEW YORK, May 10 /PRNewswire-FirstCall/ -- Mercer International Inc. (NASDAQ:MERCSNASDAQ:TSX:NASDAQ:MRI.U) today reported results for the first quarter of 2005. Summary Selected Highlights Three Months Ended March 31, 2005 2004 (in thousands) (unaudited) Results of Operations Revenues euro 50,316 euro 97,893 Loss from operations (894) (1,896) Operating EBITDA(1) 10,093 4,397 Interest expense (19,263) (2,988) Derivative financial instruments, net (3,859) (22,445) Impairment of investments (1,645) - Income tax (provision) benefit (3,035) 20 Net loss (19,667) (18,966) Loss per share (basic and diluted) (0.77) (1.11) (1) For a definition of Operating EBITDA, see page 6 of this press release and for a reconciliation of net loss to Operating EBITDA, see page 5 of the financial tables included in this press release. Three Months Ended March 31, 2005 2004 (ADMTs) Other Data Production by Product Class: Pulp production by mill Rosenthal 75,872 79,067 Stendal 107,981 - Celgar 60,762 - Total pulp production 244,615 79,067 Paper production 15,958 17,068 Total production 260,573 96,135 Sales Volume by Product Class: Pulp sales volume by mill Rosenthal 78,804 81,493 Stendal 102,073 - Celgar 18,347 - Total pulp sales volume 199,224 81,493 Paper sales volume 16,638 17,406 Total sales volume 215,862 98,899 (per ADMT) Average Prices: Pulp(1) euro 490 ($642) euro 464 ($580) Paper(2) euro 970 euro 917 Mill Net Realizations: Pulp euro 409 euro 416 Paper euro 924 euro 879 (1) Average list prices for NBSK pulp in Europe. (2) Average weighted gross prices for the Company's paper products. Certain key factors affecting our 2005 first quarter results include: -- Revenues in the current quarter increased by euro 47.6 million over the prior period of 2004 to euro 97.9 million, primarily from the inclusion of production and sales from our Stendal pulp mill and, to a much lesser extent, sales from the newly acquired Celgar mill. In the current period, sales from the Celgar mill were well below customary levels as we owned the mill for only six weeks and rebuilt its finished goods inventory to normalized levels. We did not purchase any finished goods inventory when we acquired the Celgar mill in February 2005. -- Interest expense increased to euro 19.3 million in the current quarter from euro 3.0 million in the prior quarter of 2004. The completion of the Stendal mill resulted in our expensing euro 11.8 million of the associated interest in the current period versus capitalizing almost all of such interest expense in the comparative period. In the current quarter, we also had interest expense of euro 2.7 million relating to our $310 million 9.25% senior notes issued in February 2005. -- We recorded a net loss of euro 3.9 million on the marked-to-market valuation of our derivatives in the current quarter primarily due to the strengthening of the U.S. dollar versus the Euro at the end of the quarter. -- During the current quarter, we wrote down the value of certain legacy investments in the amount of euro 1.6 million which are unrelated to our operations due to the uncertainty surrounding these investments. -- We recorded a non-cash provision for income taxes of euro 3.0 million in the current quarter against our deferred income tax asset. -- Pulp markets in Europe were generally stable in the first quarter of 2005. List prices for NBSK pulp in Europe increased to $642 per ADMT, but such increase was partially offset by the continuing overall weakness of the U.S. dollar versus the Euro. As at As at March 31, December 31, 2005 2004 (in thousands) (unaudited) Financial Position Cash and cash equivalents euro 114,096 euro 49,568 Cash restricted 70,421 45,295 Receivables 64,058 54,687 Inventories 81,330 52,898 Prepaid expenses and other 5,481 4,961 Accounts payable and accrued expenses 82,778 56,542 Construction costs payable 67,737 65,436 Debt, current portion 102,269 107,090 Working capital (deficit) 82,602 (21,659) Property, plant and equipment 1,109,765 936,035 Total assets 1,531,440 1,255,649 Long-term liabilities 1,038,450(1) 863,840 Shareholders' equity 240,206 162,741 (1) Includes euro 25.5 million outstanding under the revolving credit facilities for the Rosenthal and Celgar mills. We had good liquidity at March 31, 2005. Certain key factors affecting our liquidity include: -- We had unrestricted cash and cash equivalents of euro 114.1 million. -- The current Stendal construction costs payable of euro 67.7 million will be paid from restricted cash of euro 70.4 million held for such purpose. -- We qualified for investment grants relating to the Stendal mill totaling approximately euro 65.9 million at March 31, 2005 and expect to qualify for additional grants totaling euro 22.6 million from the federal and state governments of Germany, which we expect to receive in 2005. These grants, when received, will be applied to repay the euro 100.0 million of the current portion of our debt of euro 102.3 million that has been drawn under a dedicated tranche of the Stendal loan facility. Under our accounting policies, we do not record these government grants until they are received. The balance outstanding under this dedicated tranche of the Stendal loan facility will be substantially paid from VAT credits we expect to receive in the ordinary course. -- Without giving effect to any government grants we expect to receive for the Stendal mill, we had net working capital of euro 82.6 million at March 31, 2005. Results of Operations - 2005 First Quarter Revenues for the three months ended March 31, 2005 increased to euro 97.9 million from euro 50.3 million in the comparative period of 2004, primarily because of higher pulp sales resulting from the inclusion of sales from our Stendal mill. In the three months ended March 31, 2005, the Stendal mill sold 102,073 ADMTs of NBSK pulp and had sales of euro 40.8 million. Pulp sales from the Celgar mill for the quarter were well below customary levels as we rebuilt the finished goods inventory at the mill, which we did not purchase as part of its acquisition, and we only operated the mill for six weeks. Cost of sales and general, administrative and other expenses in the first quarter of 2005 increased to euro 98.8 million from euro 52.2 million in the comparative period of 2004, primarily as a result of the inclusion of production from our Stendal mill and the operations of the Celgar mill. For the 2005 first quarter, revenues from our pulp operations increased to euro 84.1 million from euro 35.4 million in the same period a year ago, primarily as a result of the inclusion of production from our Stendal mill and higher pulp prices. List prices for NBSK pulp in Europe were approximately euro 490 ($642) per ADMT in the first quarter of 2005, approximately euro 464 ($580) per ADMT in the first quarter of last year and approximately euro 466 ($603) in the fourth quarter of 2004. The increase in NBSK pulp prices was partially offset by the overall weakness of the U.S. dollar versus the Euro. Pulp sales by volume were 199,224 ADMTs in the current quarter, 81,493 ADMTs in the comparative quarter of 2004 and 192,254 ADMTs in the fourth quarter of last year. Pulp sales realizations decreased to euro 409 per ADMT on average in the 2005 first quarter from euro 416 per ADMT in the 2004 first quarter, primarily as a result of lower price realizations of the Stendal mill during the quarter when it sold pulp at a discounted price as a result of its start up. We expect that such discount will be eliminated during the year. In the first quarter of 2005, producers generally were affected by higher discounts to pulp list prices than previously. Cost of sales and general, administrative and other expenses for the pulp operations increased to euro 82.8 million in the 2005 first quarter from euro 36.1 million in the first quarter of 2004, primarily as a result of the inclusion of euro 37.1 million of operating costs related to the Stendal mill and the operations of the Celgar mill. Depreciation for the pulp operations increased to euro 10.8 million in the current quarter, from euro 5.6 million in the first quarter of 2004, primarily as a result of the inclusion of euro 6.7 million of depreciation from the Stendal mill, partially offset by lower depreciation at the Rosenthal mill. For the first quarter of 2005, our pulp operations generated operating income of euro 1.3 million, versus an operating loss of euro 0.7 million in the first quarter of 2004, primarily as a result of lower operating, depreciation and other costs at our Rosenthal mill. Revenues from our paper operations in the current quarter were euro 15.4 million, compared with euro 15.3 million in the same period of last year. For the first quarter of 2005, total paper sales volumes were 16,638 ADMTs, versus 17,406 ADMTs in the first quarter of 2004 due to a shift in the product mix at our paper mills. Average prices realized on our paper products in the current quarter increased slightly, reflecting the shift in the product mix. Cost of sales and general, administrative and other expenses for the paper operations in the first quarter of 2005 decreased slightly to euro 15.6 million from euro 15.7 million in the comparative quarter of 2004. For the 2005 first quarter, our paper operations generated an operating loss of euro 0.3 million, compared to an operating loss of euro 0.4 million in the first quarter of 2004. In the first quarter of 2005, we had a loss from operations of euro 0.9 million, compared to euro 1.9 million in the same period last year, primarily as a result of operating losses from our Stendal mill. Interest expense in the first quarter of 2005 increased to euro 19.3 million from euro 3.0 million in the year ago period, due to the expensing of interest of euro 11.8 million relating to the Stendal mill and higher borrowings resulting primarily from our $310 million senior note issue in February 2005. In the first quarter of 2004, substantially all of the interest associated with the Stendal mill was capitalized. In the first quarter of 2005, Stendal entered into certain foreign currency derivatives to swap a portion of its long-term bank debt from Euros to U.S. dollars and certain currency forwards and we recorded a net non-cash holding loss of euro 4.1 million before minority interests upon the marked to market valuation of such derivatives due to the strengthening of the U.S. dollar versus the Euro at the end of the quarter. In the first quarter of 2004, we recorded a net non-cash holding loss of euro 5.0 million before minority interests on our then outstanding currency derivatives of Rosenthal and Stendal. In the first quarter of 2005, we also recorded a marginal net gain before minority interests on the marked to market valuation of the Stendal interest rate derivatives and settlement of the Rosenthal interest rate derivatives versus a net non-cash holding loss thereon of euro 17.5 million before minority interests in the first quarter of 2004. In the first quarter of 2005, minority interest, representing the two minority shareholders' proportionate interest in the Stendal mill, was euro 6.6 million, compared to euro 7.4 million in the first quarter of 2004. On May 6, 2005, our management determined to record, and our Audit Committee approved, an adjustment of euro 1.6 million for the non-cash impact of other-than-temporary impairment losses on our available-for-sale securities and a loan receivable that relate to an investment in a venture company, which is a legacy investment that we have held since approximately 1996. In April 2005, the venture company proposed to place itself into liquidation. As a result, management determined to record impairment charges sufficient to reduce its investment to the net amount estimated to be recovered. We do not currently expect the impairment charge to result in any future cash expenditures. We reported a net loss for the first quarter of 2005 of euro 19.7 million, or euro 0.77 per basic and diluted share, which reflected the interest expense related to our Stendal mill of euro 11.8 million, the net losses on our derivatives of euro 3.9 million and the non-cash impairment charge of euro 1.6 million relating to investments. In the first quarter of 2004, we reported a net loss of euro 19.0 million, or euro 1.11 per basic and diluted share. We generated "Operating EBITDA" of euro 10.1 million and euro 4.4 million in the three months ended March 31, 2005 and 2004, respectively. Operating EBITDA is defined as income (loss) from operations 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 (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of 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. At March 31, 2005, our cash and cash equivalents were euro 114.1 million, compared to euro 49.6 million at December 31, 2004. We also had euro 70.4 million of cash restricted to pay current Stendal construction costs payable of euro 67.7 million at March 31, 2005. We also had euro 19.1 million of cash restricted in a debt service account for the project financing for the Stendal mill. At March 31, 2005, we qualified for investment grants related to the Stendal mill totaling approximately euro 65.9 million, and expect to qualify for additional investment grants totaling euro 22.6 million, from the federal and state governments of Germany, which we expect to receive in 2005. These grants, when received, will be applied to repay the amounts drawn under the current portion of a dedicated tranche of the Stendal loan facility. Under our accounting policies, we do not record these grants until they are received. The balance outstanding under this dedicated tranche of the Stendal loan facility will be substantially paid from VAT credits we expect to receive in the ordinary course. President's Comments Mr. Jimmy S.H. Lee, President and Chairman, stated: "We are very excited about the prospects for the Celgar pulp mill which we acquired in February 2005. We believe there are a number of opportunities to enhance its performance. Sales from the Celgar mill in the first quarter were well below customary levels as we only owned it for six weeks during the period and the mill had to rebuild its finished goods inventory which we did not purchase when we acquired it." Mr. Lee also stated: "We are generally pleased with the ramp up of our Stendal mill which is proceeding substantially as planned. Although there were some minor outages and trips, they were rectified as part of the ramp up. The mill produced pulp at approximately 82% of its rated capacity in the first quarter of 2005." He added: "In the first quarter, we delivered an acceptance certificate and assumed responsibility for the operation of the Stendal mill. In connection therewith, the main contractor for the mill and certain suppliers have agreed to implement certain additional measures, which include the installation of two additional digesters and making improvements to the NCG boiler and water treatment plant. These additional measures should be completed by the end of 2005 and increase the production capacity of the Stendal mill to over 600,000 ADMTs per annum." Mr. Lee continued: "Our results for the first quarter of 2005 are reflective of generally stable pulp markets in Europe, the higher production from our Stendal mill and the partial results of the Celgar mill. Although NBSK pulp prices in Europe generally improved, such improvements were partially offset by the overall weakness of the U.S. dollar which fell by approximately 6.5% versus the Euro since the end of the first quarter of 2004." Mr. Lee continued: "Currently, European pulp prices reflect reasonable demand and the general weakness of the U.S. dollar versus the Euro. We are pleased with the customer acceptance of pulp from the Stendal mill and are focusing on building long-term customer contracts and eliminating the price discount associated with its start up." He added: "Asian pulp markets and, in particular, China, are becoming an important market for us primarily because of the acquisition of the Celgar mill. During the current quarter of 2005, pulp demand in China was generally weak with sales prices generally around the U.S.$540 per ADMT level. In particular, pulp customers in China substantially curtailed purchases at the end of the current quarter. We currently expect pulp demand in China to improve over the next six months, which may permit some price improvement. Overall, the demand growth expectation for Asia and China is generally high." Mr. Lee concluded: "This is an exciting time for the Company as we are building a world-class NBSK pulp production and sales organization. In the short term, we will be focusing on the continuing ramp up of the Stendal mill, improving its efficiency and costs, integrating our overall operations and building the depth and penetration of our NBSK marketing activities." In conjunction with this release, Mercer International Inc. will host a conference call, which will be simultaneously broadcast live over the Internet. Management will host the call, which is scheduled for Tuesday, May 10, 2005 at 10:00 AM ET. Listeners can access the conference call live and archived over the Internet through a link at the company's web site at http://www.mercerinternational.com/, or at http://phx.corporate-ir.net/playerlink.zhtml?c=62074&s=wm&e=1050591. Please allow 15 minutes prior to the call to visit the site and download and install any necessary audio software. A replay of this call will be available approximately two hours after the live call ends until May 17, 2005 at 11:59 p.m. (Eastern Time). The replay number is (800) 642-1687, and the passcode is 6170331. Mercer International Inc. is a global pulp and paper manufacturing company. To obtain further information on the company, please visit its web site at http://www.mercerinternational.com/. The preceding includes forward looking statements which involve known and unknown risks and uncertainties which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market conditions, competition and other risk factors listed from time to time in the company's SEC reports. MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 AND DECEMBER 31, 2004 (Euros in thousands) March 31, December 31, 2005 2004 ASSETS Current Assets Cash and cash equivalents euro 114,096 euro 49,568 Cash restricted 70,421 45,295 Receivables 64,058 54,687 Inventories 81,330 52,898 Prepaid expenses and other 5,481 4,961 Total current assets 335,386 207,409 Long-Term Assets Cash restricted 19,074 47,538 Property, plant and equipment 1,109,765 936,035 Investments - 983 Equity method investments 3,967 4,096 Deferred note issuance and other costs 9,459 5,069 Deferred income tax 53,789 54,519 1,196,054 1,048,240 Total assets euro 1,531,440 euro 1,255,649 LIABILITIES Current Liabilities Accounts payable and accrued expenses euro 82,778 euro 56,542 Construction costs payable 67,737 65,436 Debt, current portion 102,269 107,090 Total current liabilities 252,784 229,068 Long-Term Liabilities Debt, less current portion 928,803 777,272 Unrealized foreign exchange rate derivative loss 4,044 - Unrealized interest rate derivative losses 75,127 75,471 Pension and other post-retirement benefit obligations 16,622 - Capital leases and other 9,513 9,035 Deferred income tax 4,341 2,062 1,038,450 863,840 Total liabilities 1,291,234 1,092,908 Minority Interest - - SHAREHOLDERS' EQUITY Shares of beneficial interest 180,856 83,397 Additional paid-in capital, stock options 14 14 Retained earnings 49,509 69,176 Accumulated other comprehensive income 9,827 10,154 Total shareholders' equity 240,206 162,741 Total liabilities and shareholders' equity euro 1,531,440 euro 1,255,649 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands, except per share data) 2005 2004 Revenues euro 97,893 euro 50,316 Costs and expenses: Cost of sales 90,989 45,418 General and administrative expenses 7,798 6,541 Flooding losses and expenses, less grant income - 253 Total costs and expenses 98,787 52,212 Loss from operations (894) (1,896) Other income (expense) Interest expense (19,263) (2,988) Investment income 175 934 Derivative financial instruments, net (3,859) (22,445) Foreign exchange gain on debt 2,297 - Impairment of investments (1,645) - Total other expense (22,295) (24,499) Loss before income taxes and minority interest (23,189) (26,395) Income tax (provision) benefit (3,035) 20 Loss before minority interest (26,224) (26,375) Minority interest 6,557 7,409 Net loss euro (19,667) euro (18,966) Retained earnings, beginning of period 69,176 49,196 Retained earnings, end of period euro 49,509 euro 30,230 Loss per share Basic and diluted euro (0.77) euro (1.11) MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands, except per share data) 2005 2004 Cash Flows from (used in) Operating Activities: Net loss euro (19,667) euro (18,966) Adjustments to reconcile net loss to cash flows from operating activities Cumulative unrealized losses on derivatives 3,754 22,445 Depreciation and amortization 11,161 6,429 Unrealized foreign exchange gain on debt (2,297) - Impairment of investments 1,645 - Minority interest (6,557) (7,409) Deferred income taxes 3,009 (20) Stock compensation expense 36 596 Other 392 (30) Changes in current assets and liabilities Receivables (9,565) 4,014 Inventories (8,463) (3,014) Accounts payable and accrued expenses 24,609 6,015 Other (401) (1,609) Net cash from (used in) operating activities (2,344) 8,451 Cash Flows from (used in) Investing Activities: Purchase of property, plant and equipment, net of investment grants (4,136) (50,640) Acquisition of Celgar pulp mill (146,286) - Sale of available-for-sale securities - 614 Net cash used in investing activities (150,422) (50,026) Cash Flows from (used in) Financing Activities: Cash restricted 3,338 (14,664) Increase in construction costs payable 2,301 (29,371) Proceeds from borrowings of notes payable and debt 323,093 90,000 Repayment of notes payable and debt (178,691) (8,384) Repayment of capital lease obligations (1,147) (243) Issuance of shares of beneficial interest 66,645 308 Net cash from financing activities 215,539 37,646 Effect of exchange rate changes on cash and cash equivalents 1,755 72 Net increase (decrease) in cash and cash equivalents 64,528 (3,857) Cash and cash equivalents, beginning of period 49,568 51,993 Cash and cash equivalents, end of period euro 114,096 euro 48,136 MERCER INTERNATIONAL INC. BUSINESS SEGMENT INFORMATION For the Three Months Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands) Rosenthal Celgar(1) Stendal Total Pulp Pulp Pulp Pulp Three Months Ended March 31, 2005 Sales to external customers euro 34,096 euro 7,616 euro 40,798 euro 82,510 Intersegment net sales - - 1,554 1,554 34,096 7,616 42,352 84,064 Operating costs 25,188 5,135 37,135 67,458 Depreciation and amortization 3,268 823 6,681 10,772 General and administrative 1,901 1,675 975 4,551 30,357 7,633 44,791 82,781 Income (loss) from operations 3,739 (17) (2,439) 1,283 Interest expense Investment income Derivative financial instruments, net Foreign exchange gain on debt Impairment of investments Loss before income taxes and minority interest Segment assets euro 349,865 euro 220,739 euro 915,178 euro 1,485,782 Capital expenditures euro 594 euro 209 euro 2,460 euro 3,263 Three Months Ended March 31, 2004 Sales to external customers euro 35,009 euro - euro - euro 35,009 Intersegment net sales 429 - - 429 35,438 - - 35,438 Operating costs 25,807 - - 25,807 Depreciation and amortization 5,582 - - 5,582 General and administrative 1,988 - 2,741 4,729 Flooding grants, less losses and expenses - - - - 33,377 - 2,741 36,118 Income (loss) from operations 2,061 - (2,741) (680) Interest expense Investment income Derivative financial instruments, net Loss before income taxes and minority interest Segment assets euro 369,523 euro - euro 557,672 euro 927,195 Capital expenditures euro 622 euro - euro 67,924 euro 68,546 Corporate, Other and Consolidated Paper Eliminations Total Three Months Ended March 31, 2005 Sales to external customers euro 15,383 euro - euro 97,893 Intersegment net sales - (1,554) - 15,383 (1,554) 97,893 Operating costs 14,231 (1,687) 80,002 Depreciation and amortization 181 34 10,987 General and administrative 1,236 2,011 7,798 15,648 358 98,787 Income (loss) from operations (265) (1,912) (894) Interest expense (19,263) Investment income 175 Derivative financial instruments, net (3,859) Foreign exchange gain on debt 2,297 Impairment of investments (1,645) (22,295) Loss before income taxes and minority interest euro (23,189) Segment assets euro 24,911 euro 20,747 euro 1,531,440 Capital expenditures euro 850 euro 23 euro 4,136 Three Months Ended March 31, 2004 Sales to external customers euro 15,307 euro - euro 50,316 Intersegment net sales - (429) - 15,307 (429) 50,316 Operating costs 13,758 (440) 39,125 Depreciation and amortization 552 159 6,293 General and administrative 1,174 638 6,541 Flooding grants, less losses and expenses 253 - 253 15,737 357 52,212 Income (loss) from operations (430) (786) (1,896) Interest expense (2,988) Investment income 934 Derivative financial instruments, net (22,445) (24,499) Loss before income taxes and minority interest euro (26,395) Segment assets euro 29,444 euro 34,679 euro 991,318 Capital expenditures euro 852 euro 1 euro 69,399 (1) The results of the Celgar pulp mill are from the date of its acquisition on February 14, 2005. MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Balance Sheet As at March 31, 2005 (Unaudited) (Euros in thousands) The terms of the indenture governing our 9.25% senior unsecured notes requires that we provide the results of operations and financial condition of Mercer 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, 2005, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, and the Celgar mill from the date of its acquisition on February 14, 2005. During the three months ended March 31, 2004 and as at December 31, 2004, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, which was the only member of the Restricted Group with material operations during this period. We acquired the Celgar mill in February 2005 and, as a result, its operations for the three months ended March 31, 2004 and financial condition at December 31, 2004 are not included for such periods. The Restricted Group excludes our paper operations and the Stendal mill. March 31, 2005 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group ASSETS Current assets Cash and cash equivalents euro 67,457 euro 46,639 euro - euro 114,096 Cash restricted - 70,421 - 70,421 Receivables 30,526 33,532 - 64,058 Inventories 45,106 36,224 - 81,330 Prepaid expenses and other 2,666 2,815 - 5,481 Total current assets 145,755 189,631 - 335,386 Cash restricted - 19,074 - 19,074 Property, plant and equipment 390,492 719,273 - 1,109,765 Other 10,049 4,129 (752) 13,426 Deferred income tax 24,206 29,583 - 53,789 Due from unrestricted group 43,917 - (43,917) - Total assets euro 614,419 euro 961,690 euro (44,669) euro 1,531,440 LIABILITIES Current liabilities Accounts payable and accrued expenses euro 36,136 euro 46,642 euro - euro 82,778 Construction costs payable - 67,737 - 67,737 Debt, current portion - 102,269 - 102,269 Total current liabilities 36,136 216,648 - 252,784 Debt, less current portion 328,128 600,675 - 928,803 Due to restricted group - 43,917 (43,917) - Unrealized derivatives loss - 79,171 - 79,171 Other 19,400 6,735 - 26,135 Deferred income tax 1,773 2,568 - 4,341 Total liabilities 385,437 949,714 (43,917) 1,291,234 SHAREHOLDERS' EQUITY Total shareholders' equity 228,982 11,976 (752) 240,206 Total liabilities and shareholders' equity euro 614,419 euro 961,690 euro (44,669) euro 1,531,440 MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Balance Sheet As at December 31, 2004 (Unaudited) (Euros in thousands) December 31, 2004 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group ASSETS Current assets Cash and cash equivalents euro 45,487 euro 4,081 euro - euro 49,568 Cash restricted - 45,295 - 45,295 Receivables 21,791 33,060 (164) 54,687 Inventories 13,911 38,987 - 52,898 Prepaid expenses and other 1,995 2,966 - 4,961 Total current assets 83,184 124,389 (164) 207,409 Cash restricted 28,464 19,074 - 47,538 Property, plant and equipment 213,678 722,394 (37) 936,035 Other 5,936 4,212 - 10,148 Deferred income tax 26,592 27,927 - 54,519 Due from unrestricted group 43,467 - (43,467) - Total assets euro 401,321 euro 897,996 euro (43,668) euro 1,255,649 LIABILITIES Current liabilities Accounts payable and accrued expenses euro 19,615 euro 37,091 euro (164) euro 56,542 Construction costs payable - 65,436 - 65,436 Debt, current portion 15,089 92,001 - 107,090 Total current liabilities 34,704 194,528 (164) 229,068 Debt, less current portion 224,542 552,730 - 777,272 Due to restricted group - 43,467 (43,467) - Unrealized derivative loss - 75,471 - 75,471 Other 1,878 7,157 - 9,035 Deferred income tax 1,719 343 - 2,062 Total liabilities 262,843 873,696 (43,631) 1,092,908 SHAREHOLDERS' EQUITY Total shareholders' equity 138,478 24,300 (37) 162,741 Total liabilities and shareholders' equity euro 401,321 euro 897,996 euro (43,668) euro 1,255,649 MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Statements of Operations For the Three Months Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands) March 31, 2005 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group Revenues euro 41,712 euro 56,181 euro - euro 97,893 Operating costs 29,973 50,029 - 80,002 Operating depreciation and amortization 4,125 6,645 217 10,987 General and administrative 5,587 2,211 - 7,798 39,685 58,885 217 98,787 Income (loss) from operations 2,027 (2,704) (217) (894) Other income (expense) Interest expense (7,671) (11,986) 394 (19,263) Investment income 328 309 (462) 175 Derivative financial instruments, net (105) (3,754) - (3,859) Foreign exchange gain on debt 2,297 - - 2,297 Impairment of investments (1,178) - (467) (1,645) Total other expense (6,329) (15,431) (535) (22,295) Loss before income taxes and minority interest (4,302) (18,135) (752) (23,189) Income tax provision (3,115) 80 - (3,035) Loss before minority interest (7,417) (18,055) (752) (26,224) Minority interest - 6,557 - 6,557 Net loss euro (7,417) euro(11,498) euro (752) euro (19,667) March 31, 2004 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group Revenues euro 35,438 euro 15,307 euro (429) euro 50,316 Operating costs 25,357 13,758 10 39,125 Operating depreciation and amortization 5,582 552 159 6,293 General and administrative 3,114 3,915 (488) 6,541 Flooding grants, less losses and expenses - 253 - 253 34,053 18,478 (319) 52,212 Income (loss) from operations 1,385 (3,171) (110) (1,896) Other income (expense) Interest expense (4,076) (566) 1,654 (2,988) Investment income 1,106 150 (322) 934 Derivative financial instruments, net (4,890) (17,555) - (22,445) Total other income (expense) (7,860) (17,971) 1,332 (24,499) Income (loss) before income taxes and minority interest (6,475) (21,142) 1,222 (26,395) Income tax benefit - 20 - 20 Income (loss) before minority interest (6,475) (21,122) 1,222 (26,375) Minority interest - 7,409 - 7,409 Net income (loss) euro (6,475) euro(13,713) euro 1,222 euro (18,966) MERCER INTERNATIONAL INC. COMPUTATION OF OPERATING EBITDA For the Quarters Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands) Three Months Ended March 31, 2005 2004 (in thousands) Net loss euro (19,667) euro (18,966) Minority interest (6,557) (7,409) Income taxes (benefit) 3,035 (20) Interest expense 19,263 2,988 Investment income (175) (934) Derivative financial instruments, net 3,859 22,445 Foreign exchange gain on debt (2,297) - Impairment of investments 1,645 - Loss from operations (894) (1,896) Add: Depreciation and amortization 10,987 6,293 Operating EBITDA(1) euro 10,093 euro 4,397 (1) Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of 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. COMPUTATION OF RESTRICTED GROUP OPERATING EBITDA For the Quarters Ended March 31, 2005 and 2004 (Unaudited) (Euros in thousands) Three Months Ended March 31, 2005 2004 (in thousands) Restricted Group(1) Net loss euro (7,417) euro (6,475) Income taxes 3,115 - Interest expense 7,671 4,076 Investment and other income (328) (1,106) Derivative financial instruments, net 105 4,890 Foreign exchange gain on debt (2,297) - Impairment of investments 1,178 - Income from operations 2,027 1,385 Add: Depreciation and amortization 4,125 5,582 Operating EBITDA(2) euro 6,152 euro 6,967 (1) The results of the Celgar pulp mill are not included for the three months ended March 31, 2004. (2) Operating EBITDA does not reflect the impact of a number of items that affect net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of 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. DATASOURCE: Mercer International Inc. CONTACT: Jimmy S.H. Lee, Chairman & President, +1-604-684-1099, or David M. Gandossi, Executive Vice-President & Chief Financial Officer, +1-604-684-1099, both of Mercer International Inc.; or Investors: Eric Boyriven, or Media: Scot Hoffman, +1-212-850-5600, both of Financial Dynamics, for Mercer International Inc. Web site: http://www.mercerinternational.com/

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MERCS Mercer International Inc. - Shares OF Beneficial Interest (MM)