##### Table of Contents



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 September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 000-51826
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
    
    47-0956945(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer þ
Non-Accelerated Filer o(Do not check if a smaller reporting company)
Smaller Reporting Company o
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
 (Unaudited)




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands of Euros)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assetsCash and cash equivalents
    
    
    51,275
    
    
    
    42,452Cash, restricted
    
    
    
    
    
    
    13,000Receivables
    
    
    73,133
    
    
    
    100,158Inventories (Note 4)
    
    
    68,459
    
    
    
    98,457Prepaid expenses and other
    
    
    5,612
    
    
    
    4,834Total current assets
    
    
    198,479
    
    
    
    258,901Long-term assetsProperty, plant and equipment
    
    
    874,830
    
    
    
    881,704Investments (Note 9)
    
    
    133
    
    
    
    419Deferred note issuance and other costs
    
    
    7,659
    
    
    
    4,011Deferred income tax
    
    
    2,232
    
    
    
    3,036Note receivable, less current portion
    
    
    2,316
    
    
    
    3,529887,170
    
    
    
    892,699Total assets
    
    
    1,085,649
    
    
    
    1,151,600LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    99,292
    
    
    
    87,517Pension and other post-retirement benefit obligations (Note 7)
    
    
    554
    
    
    
    510Debt, current portion (Note 5)
    
    
    28,470
    
    
    
    16,500Total current liabilities
    
    
    128,316
    
    
    
    104,527Long-term liabilitiesDebt, less current portion (Note 5)
    
    
    795,303
    
    
    
    837,918Unrealized interest rate derivative losses (Notes 6 and 9)
    
    
    58,001
    
    
    
    47,112Pension and other post-retirement benefit obligations (Note 7)
    
    
    14,245
    
    
    
    12,846Capital leases and other
    
    
    9,367
    
    
    
    11,267Deferred income tax
    
    
    
    
    
    
    5,827876,916
    
    
    
    914,970Total liabilities
    
    
    1,005,232
    
    
    
    1,019,497EQUITYShareholders equityShare capital (Note 8)
    
    
    202,844
    
    
    
    202,844Paid-in capital
    
    
    (5,477
    )
    
    
    299Retained earnings (deficit)
    
    
    (99,984
    )
    
    
    (35,046
    )Accumulated other comprehensive income (loss)
    
    
    22,190
    
    
    
    (1,872
    )Total shareholders equity
    
    
    119,573
    
    
    
    166,225Noncontrolling interest (deficit) (Note 10)
    
    
    (39,156
    )
    
    
    (34,122
    )Total equity
    
    
    80,417
    
    
    
    132,103Total liabilities and equity
    
    
    1,085,649
    
    
    
    1,151,600Commitments and Contingencies (Note 11)Subsequent Events (Note 12)
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands of Euros, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenuesPulp
    
    
    145,857
    
    
    
    178,603
    
    
    
    422,412
    
    
    
    528,289Energy
    
    
    10,374
    
    
    
    6,225
    
    
    
    32,275
    
    
    
    20,006156,231
    
    
    
    184,828
    
    
    
    454,687
    
    
    
    548,295Costs and expensesOperating costs
    
    
    136,566
    
    
    
    150,987
    
    
    
    417,596
    
    
    
    447,111Operating depreciation and amortization
    
    
    13,385
    
    
    
    14,033
    
    
    
    40,325
    
    
    
    41,6686,280
    
    
    
    19,808
    
    
    
    (3,234
    )
    
    
    59,516Selling, general and administrative expenses
    
    
    6,620
    
    
    
    9,954
    
    
    
    19,797
    
    
    
    24,803Purchase (sale) of emission allowances
    
    
    153
    
    
    
    
    
    
    
    (389
    )
    
    
    Operating income (loss)
    
    
    (493
    )
    
    
    9,854
    
    
    
    (22,642
    )
    
    
    34,713Other income (expense)Interest expense
    
    
    (16,085
    )
    
    
    (16,424
    )
    
    
    (48,953
    )
    
    
    (49,057
    )Investment income (loss)
    
    
    20
    
    
    
    (2,031
    )
    
    
    (3,044
    )
    
    
    (300
    )Foreign exchange gain (loss) on debt
    
    
    3,779
    
    
    
    (9,560
    )
    
    
    4,533
    
    
    
    (3,291
    )Unrealized gain (loss) on derivative instruments (Note 6)
    
    
    (3,327
    )
    
    
    (8,215
    )
    
    
    (10,889
    )
    
    
    4,515Total other income (expense)
    
    
    (15,613
    )
    
    
    (36,230
    )
    
    
    (58,353
    )
    
    
    (48,133
    )Income (loss) before income taxes
    
    
    (16,106
    )
    
    
    (26,376
    )
    
    
    (80,995
    )
    
    
    (13,420
    )Income tax benefit (provision)  current
    
    
    (13
    )
    
    
    (231
    )
    
    
    (127
    )
    
    
    (68
    ) deferred
    
    
    70
    
    
    
    6,144
    
    
    
    4,989
    
    
    
    (2,982
    )Net income (loss)
    
    
    (16,049
    )
    
    
    (20,463
    )
    
    
    (76,133
    )
    
    
    (16,470
    )Less: net loss (income) attributable to noncontrolling interest
    
    
    1,937
    
    
    
    3,290
    
    
    
    11,195
    
    
    
    3,037Net income (loss) attributable to common shareholders
    
    
    (14,112
    )
    
    
    (17,173
    )
    
    
    (64,938
    )
    
    
    (13,433
    )Retained earnings (deficit), beginning of period
    
    
    (85,872
    )
    
    
    41,159
    
    
    
    (35,046
    )
    
    
    37,419Retained earnings (deficit), end of period
    
    
    (99,984
    )
    
    
    23,986
    
    
    
    (99,984
    )
    
    
    23,986Net income (loss) per share attributable to
common shareholders (Note 3):Basic and diluted
    
    
    (0.39
    )
    
    
    (0.47
    )
    
    
    (1.79
    )
    
    
    (0.37
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    
    (16,049
    )
    
    
    (20,463
    )
    
    
    (76,133
    )
    
    
    (16,470
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    14,531
    
    
    
    (3,660
    )
    
    
    23,758
    
    
    
    (12,203
    )FAS 158 pension income (expense)
    
    
    (41
    )
    
    
    (332
    )
    
    
    (73
    )
    
    
    163Unrealized gains (losses) on
securities arising during the period
    
    
    42
    
    
    
    8
    
    
    
    377
    
    
    
    (14
    )Other comprehensive income (loss)
    
    
    14,532
    
    
    
    (3,984
    )
    
    
    24,062
    
    
    
    (12,054
    )Total comprehensive income (loss)
    
    
    (1,517
    )
    
    
    (24,447
    )
    
    
    (52,071
    )
    
    
    (28,524
    )Comprehensive (income) loss attributable
to noncontrolling interest
    
    
    1,937
    
    
    
    3,290
    
    
    
    11,195
    
    
    
    3,037Comprehensive income (loss) attributable
to common shareholders
    
    
    420
    
    
    
    (21,157
    )
    
    
    (40,876
    )
    
    
    (25,487
    )
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cash flows from (used in) operating activities:Net income (loss) attributable to common shareholders
    
    
    (14,112
    )
    
    
    (17,173
    )
    
    
    (64,938
    )
    
    
    (13,433
    )Adjustments to reconcile net income (loss) attributable
to common shareholders to cash flows from operating
activitiesUnrealized (gain) loss on derivative instruments
    
    
    3,327
    
    
    
    8,215
    
    
    
    10,889
    
    
    
    (4,515
    )Foreign exchange (gain) loss on debt
    
    
    (3,779
    )
    
    
    9,560
    
    
    
    (4,533
    )
    
    
    3,291Loss (gain) on sale of assets
    
    
    16
    
    
    
    177
    
    
    
    (9
    )
    
    
    (781
    )Operating depreciation and amortization
    
    
    13,385
    
    
    
    14,033
    
    
    
    40,325
    
    
    
    41,668Non-operating amortization
    
    
    62
    
    
    
    70
    
    
    
    193
    
    
    
    211Noncontrolling interest
    
    
    (1,937
    )
    
    
    (3,290
    )
    
    
    (11,195
    )
    
    
    (3,037
    )Deferred income taxes
    
    
    (70
    )
    
    
    (6,144
    )
    
    
    (4,989
    )
    
    
    2,982Stock compensation expense
    
    
    384
    
    
    
    213
    
    
    
    376
    
    
    
    568Pension and other post-retirement expense
    
    
    342
    
    
    
    497
    
    
    
    1,010
    
    
    
    1,502Pension and other post-retirement benefit funding
    
    
    (28
    )
    
    
    (402
    )
    
    
    (719
    )
    
    
    (1,527
    )Inventory provisions
    
    
    
    
    
    
    
    
    
    
    4,587
    
    
    
    Other
    
    
    761
    
    
    
    435
    
    
    
    2,098
    
    
    
    2,346Changes in current assets and liabilitiesReceivables
    
    
    4,455
    
    
    
    18,352
    
    
    
    29,592
    
    
    
    7,674Inventories
    
    
    2,398
    
    
    
    (19,753
    )
    
    
    29,923
    
    
    
    (27,436
    )Accounts payable and accrued expenses
    
    
    1,695
    
    
    
    (3,802
    )
    
    
    9,635
    
    
    
    38Other
    
    
    (1,598
    )
    
    
    (3,877
    )
    
    
    (1,395
    )
    
    
    (3,011
    )Net cash from (used in) operating activities
    
    
    5,301
    
    
    
    (2,889
    )
    
    
    40,850
    
    
    
    6,540Cash flows from (used in) investing activities:Purchase of property, plant and equipment
    
    
    (3,994
    )
    
    
    (9,269
    )
    
    
    (19,535
    )
    
    
    (17,130
    )Proceeds on sale of property, plant and equipment
    
    
    111
    
    
    
    271
    
    
    
    343
    
    
    
    1,884Cash, restricted
    
    
    3,531
    
    
    
    20,000
    
    
    
    13,000
    
    
    
    20,000Notes receivable
    
    
    333
    
    
    
    
    
    
    
    574
    
    
    
    5,303Net cash from (used in) investing activities
    
    
    (19
    )
    
    
    11,002
    
    
    
    (5,618
    )
    
    
    10,057Cash flows from (used in) financing activities:Repayment of notes payable and debt
    
    
    (18,249
    )
    
    
    (17,132
    )
    
    
    (32,049
    )
    
    
    (34,023
    )Repayment of capital lease obligations
    
    
    (910
    )
    
    
    300
    
    
    
    (2,128
    )
    
    
    (532
    )Proceeds from borrowings of notes payable and debt
    
    
    1,869
    
    
    
    
    
    
    
    11,869
    
    
    
    8,431Proceeds from investment grants
    
    
    546
    
    
    
    
    
    
    
    546
    
    
    
    Payment of deferred note issuance costs
    
    
    
    
    
    
    
    
    
    
    (5,253
    )
    
    
    Net cash from (used in) financing activities
    
    
    (16,744
    )
    
    
    (16,832
    )
    
    
    (27,015
    )
    
    
    (26,124
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    637
    
    
    
    1,203
    
    
    
    606
    
    
    
    458Net increase (decrease) in cash and cash equivalents
    
    
    (10,825
    )
    
    
    (7,516
    )
    
    
    8,823
    
    
    
    (9,069
    )Cash and cash equivalents, beginning of period
    
    
    62,100
    
    
    
    83,295
    
    
    
    42,452
    
    
    
    84,848Cash and cash equivalents, end of period
    
    
    51,275
    
    
    
    75,779
    
    
    
    51,275
    
    
    
    75,779
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Supplemental disclosure of cash flow information:Cash paid (received) during the period for:Interest
    
    
    15,761
    
    
    
    26,209
    
    
    
    46,971
    
    
    
    56,975Income taxes
    
    
    152
    
    
    
    59
    
    
    
    224
    
    
    
    (259
    )Supplemental schedule of non-cash investing and
financing activities:Acquisition of production and other
equipment under capital lease obligations
    
    
    153
    
    
    
    1,085
    
    
    
    269
    
    
    
    4,784Increase (decrease) in accounts payable
relating to investing activities
    
    
    2,464
    
    
    
    
    
    
    
    1,323
    
    
    
    
 The accompanying notes are an integral part of these interim consolidated financial statements.




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##### Table of Contents



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




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##### Table of Contents



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)
 New Accounting Standards
 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, Accounting for Leases,
 Measuring Liabilities
at Fair Value Measuring Liabilities under FASB Statement No.157 Fair Value
Measurements,




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##### Table of Contents



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)
 Transfers and Servicing Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140.
 Defined Benefit Plans Employers Disclosures
about Pensions and Other Postretirement Benefits
 Recently Implemented Accounting Standards
 Consolidations Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51




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##### Table of Contents



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)
 Business Combinations Business Combinations
 Fair Value Measurements and
Disclosure Effective Date of FASB Statement No. 157 Financial Instruments
 Derivatives and Hedging , Disclosures
about Derivative Instruments and Hedging Activities.
 General Intangibles Other than Goodwill Risks and
Uncertainties No. 142-3, Determination of the Useful Life of Intangible Assets




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##### Table of Contents



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)
 Debt Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Settlement
 Financial Instruments Interim Disclosures
about Fair Value of Financial Instruments Interim Financial Reporting,
 Subsequent Events Subsequent Events




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation
  Performance Stock
    
  Restricted Stock
    
  




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation (continued)
 Stock Options
  Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) attributable to common
shareholders  basic and diluted
    
    
    (14,112
    )
    
    
    (17,173
    )
    
    
    (64,938
    )
    
    
    (13,433
    )Net income (loss) per share attributable to common
shareholders:Basic and diluted
    
    
    (0.39
    )
    
    
    (0.47
    )
    
    
    (1.79
    )
    
    
    (0.37
    )Weighted average number of common shares outstanding:Basic (1)
    
    
    36,306,027
    
    
    
    36,276,693
    
    
    
    36,293,489
    
    
    
    36,276,693Effect of dilutive instruments:Performance rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options and restricted stock
    
    
    
    
    
    
    35,263
    
    
    
    
    
    
    
    85,433Diluted
    
    
    36,306,027
    
    
    
    36,311,956
    
    
    
    36,293,489
    
    
    
    36,362,126
 
 (1)
    
    The basic weighted average number of shares excludes performance and restricted stock
which have been issued, but have not vested as at September 30, 2009 and 2008.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 4. Inventories
 September 30, 2009
    
    
    December 31, 2008Raw materials
    
    
    25,243
    
    
    
    38,225Finished goods
    
    
    20,264
    
    
    
    37,881Work in process and other
    
    
    22,952
    
    
    
    22,351
    68,459
    
    
    
    98,457
 Note 5. Debt
  September 30, 2009
    
    
    December 31, 2008Note payable to bank,
included in a total loan
facility of 827,950 to
finance the construction
related to the Stendal
mill (a)
    
    
    514,574
    
    
    
    531,073Senior notes due February
2013, interest at 9.25%
accrued and payable
semi-annually, unsecured
(b)
    
    
    211,893
    
    
    
    222,718Subordinated convertible
notes due October 2010,
interest at 8.5% accrued
and payable semi-annually
(c)
    
    
    45,971
    
    
    
    48,319Credit agreement with a
lender with respect to a
revolving credit facility
of C$40 million (d)
    
    
    14,025
    
    
    
    18,186Loan payable to the
noncontrolling
shareholder of the
Stendal mill (e) (Note
10)
    
    
    35,441
    
    
    
    34,122Credit agreement with a
bank with respect to a
revolving credit facility
of 25,000 (f)
    
    
    
    
    
    
    Investment loan agreement
with a lender with
respect to the wash press
project at the Rosenthal
mill of 4,354 (g)
    
    
    1,869
    
    
    
    823,773
    
    
    
    854,418Less: current portion
    
    
    (28,470
    )
    
    
    (16,500
    )Debt, less current portion
    
    
    795,303
    
    
    
    837,918




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
  
 Matures
    
    Amount2009
    
    
    2010(1)
    
    
    74,4412011
    
    
    24,2232012
    
    
    24,8682013
    
    
    251,893Thereafter
    
    
    448,348
    823,773
 
 (1)
    
    Includes revolving credit facility principal amounts totalling 14,025. (a)
    
    Note payable to bank, included in a total loan facility of 827,950 to finance the
construction related to the Stendal mill (Stendal Loan Facility), interest at rates varying
from Euribor plus 0.90% to Euribor plus 1.50% (rates on amounts of borrowing at September 30,
2009 range from 1.92% to 2.52%), principal due in required installments beginning September
30, 2006 until September 30, 2017, collateralized by the assets of the Stendal mill, and at
September 30, 2009, restricted cash amounting to nil, with 48% and 32% guaranteed by the
Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to 484,573 of
outstanding principal, subject to a debt service reserve account required to pay amounts due
in the following twelve months under the terms of the Stendal Loan Facility; payment of
dividends is only permitted if certain cash flow requirements are met.On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan
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 the Stendal mill, 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.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 5. Debt (continued)
 (c)
    
    As at September 30, 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 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 collateralized by the
mills inventory and receivables; and are restricted by a borrowing base calculated on the
mills 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 September 30, 2009, this
facility was drawn by C$22.0 million and was accruing interest at a rate of approximately
2.66%. The credit agreement matures May 19, 2010, but is subject to a one-year extension.
 (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. The balance includes principal and accrued interest.
 (f)
    
    On August 19, 2009 the Company finalized an agreement with its lenders relating to the
working capital facility at the Rosenthal mill. The working capital facility refinancing was
completed with a new 25,000 replacement revolving facility set to mature in December 2012.
Borrowings under the credit agreement are collateralized by the mills inventory and
receivables and bear interest at Euribor plus 3.55%.
 (g)
    
    On August 19, 2009 the Company finalized an investment loan agreement with a lender
relating to the new wash press at the Rosenthal mill. The four-year amortizing investment
loan was completed with a 4,354 borrowing base bearing interest at the rate of Euribor
plus 2.75%. Borrowings under this agreement are secured by the new wash press equipment.
As at September 30, 2009, this facility was drawn by 1,869 and was accruing interest at a
rate of 3.79%.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 6. Derivative Transactions
   
     Accounting for Derivative
Instruments and Hedging Activities  




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 7. Pension and Other Post-Retirement Benefit Obligations
      
 




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 7. Pension and Other Post-Retirement Benefit Obligations (continued)
 Three Months Ended September 30,2009
    
    
    2008Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    14
    
    
    
    86
    
    
    
    197
    
    
    
    125Interest cost
    
    
    382
    
    
    
    205
    
    
    
    339
    
    
    
    200Expected return on plan assets
    
    
    (321
    )
    
    
    
    
    
    
    (385
    )
    
    
    Recognized net loss (gain)
    
    
    36
    
    
    
    (60
    )
    
    
    
    
    
    
    21Net periodic benefit cost
    
    
    111
    
    
    
    231
    
    
    
    151
    
    
    
    346
 Nine Months Ended September 30,2009
    
    
    2008Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    42
    
    
    
    253
    
    
    
    596
    
    
    
    379Interest cost
    
    
    1,129
    
    
    
    606
    
    
    
    1,025
    
    
    
    605Expected return on plan assets
    
    
    (949
    )
    
    
    
    
    
    
    (1,165
    )
    
    
    Recognized net loss (gain)
    
    
    105
    
    
    
    (176
    )
    
    
    
    
    
    
    62Net periodic benefit cost
    
    
    327
    
    
    
    683
    
    
    
    456
    
    
    
    1,046
 Note 8. Share Capital
 Common shares
  Preferred shares




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments
   September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCash and cash equivalents
    
    
    51,275
    
    
    
    51,275
    
    
    
    42,452
    
    
    
    42,452Cash, restricted
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    13,000Investments
    
    
    133
    
    
    
    133
    
    
    
    419
    
    
    
    419Receivables
    
    
    73,133
    
    
    
    73,133
    
    
    
    100,158
    
    
    
    100,158Notes receivable
    
    
    3,421
    
    
    
    3,421
    
    
    
    4,171
    
    
    
    4,171Accounts payable and accrued expenses
    
    
    99,292
    
    
    
    99,292
    
    
    
    87,517
    
    
    
    87,517Debt
    
    
    823,773
    
    
    
    683,899
    
    
    
    854,418
    
    
    
    704,901Interest rate derivative contracts  liability
    
    
    58,001
    
    
    
    58,001
    
    
    
    47,112
    
    
    
    47,112
  Fair Value
Measurements
  identical




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 9. Financial Instruments (continued)
 similar
      Fair value measurements at September 30, 2009 using:Quoted prices inactive markets for
    
    
    Significant other
    
    
    Significantidentical assets
    
    
    observable inputs
    
    
    unobservable inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments (a)
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    133LiabilitiesDerivatives (b)
- Interest rate
swaps
    
    
    
    
    
    
    58,001
    
    
    
    
    
    
    
    58,001
 
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (interest rates and yield curves observable at
specific intervals).




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Noncontrolling Interest
  Excerpt from Consolidated Balance Sheet
 Balance as at
    
    
    Application of new
    
    
    Revised balance as atDecember 31, 2008
    
    
    accounting standard
    
    
    December 31, 2008Description
    
    
    
    
    (a)
    
    
    (b)Long-term liabilitiesDebt, less current portion
    
    
    803,796
    
    
    
    34,122
    
    
    
    837,918Total liabilities
    
    
    985,375
    
    
    
    34,122
    
    
    
    1,019,497EquityShareholders equityShare capital
    
    
    202,844
    
    
    
    
    
    
    
    202,844Paid-in capital
    
    
    299
    
    
    
    
    
    
    
    299Retained earnings (deficit)
    
    
    (35,046
    )
    
    
    
    
    
    
    (35,046
    )Accumulated other
comprehensive income
    
    
    (1,872
    )
    
    
    
    
    
    
    (1,872
    )Total shareholders equity
    
    
    166,225
    
    
    
    
    
    
    
    166,225Noncontrolling interest
    
    
    
    
    
    
    (34,122
    )
    
    
    (34,122
    )Total equity
    
    
    166,225
    
    
    
    (34,122
    )
    
    
    132,103Total liabilities and equity
    
    
    1,151,600
    
    
    
    
    
    
    
    1,151,600
 
 (a)
    
    As at December 31, 2008, the cumulative net losses of the Companys 70.58% subsidiary
(the Stendal mill) which were attributable to the noncontrolling shareholder amounted to
34,122, and were applied to the loans payable to the noncontrolling shareholder. The net
obligation reported at December 31, 2008 was nil. In accordance with ASC 810-10-65, the
noncontrolling shareholders equity interest is required to be reclassified to equity in
the Consolidated Balance Sheet. As a result, the Company retrospectively applied this
presentation and disclosure requirement.(b)
    
    Revised balance as at December 31, 2008 represents the Companys Consolidated Balance
Sheet reclassified in accordance with ASC 810-10-65.




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Noncontrolling Interest (continued)
        
   
 Note 11. Commitments and Contingencies
 
  Note 12. Subsequent Events




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 September 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    25,294
    
    
    
    25,981
    
    
    
    -
    
    
    
    51,275Cash, restricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Receivables
    
    
    32,382
    
    
    
    40,751
    
    
    
    
    
    
    
    73,133Inventories
    
    
    51,395
    
    
    
    17,064
    
    
    
    
    
    
    
    68,459Prepaid expenses and other
    
    
    3,377
    
    
    
    2,235
    
    
    
    
    
    
    
    5,612Total current assets
    
    
    112,448
    
    
    
    86,031
    
    
    
    
    
    
    
    198,479Property, plant and equipment
    
    
    362,748
    
    
    
    512,082
    
    
    
    
    
    
    
    874,830Other
    
    
    2,840
    
    
    
    4,952
    
    
    
    
    
    
    
    7,792Deferred income tax
    
    
    2,232
    
    
    
    
    
    
    
    
    
    
    
    2,232Due from unrestricted group
    
    
    70,376
    
    
    
    
    
    
    
    (70,376
    )
    
    
    Note receivable, less current portion
    
    
    2,316
    
    
    
    
    
    
    
    
    
    
    
    2,316Total assets
    
    
    552,960
    
    
    
    603,065
    
    
    
    (70,376
    )
    
    
    1,085,649LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    58,995
    
    
    
    40,297
    
    
    
    -
    
    
    
    99,292Pension and other post-retirement benefit
obligations, current portion
    
    
    554
    
    
    
    
    
    
    
    
    
    
    
    554Debt, current portion
    
    
    14,553
    
    
    
    13,917
    
    
    
    
    
    
    
    28,470Total current liabilities
    
    
    74,102
    
    
    
    54,214
    
    
    
    
    
    
    
    128,316Debt, less current portion
    
    
    259,205
    
    
    
    536,098
    
    
    
    
    
    
    
    795,303Due to restricted group
    
    
    
    
    
    
    70,376
    
    
    
    (70,376
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    58,001
    
    
    
    
    
    
    
    58,001Pension and other post-retirement benefit
obligations
    
    
    14,245
    
    
    
    
    
    
    
    
    
    
    
    14,245Capital leases and other
    
    
    6,198
    
    
    
    3,169
    
    
    
    
    
    
    
    9,367Total liabilities
    
    
    353,750
    
    
    
    721,858
    
    
    
    (70,376
    )
    
    
    1,005,232EQUITYTotal shareholders equity (deficit)
    
    
    199,210
    
    
    
    (79,637
    )
    
    
    
    
    
    
    119,573Noncontrolling interest (deficit)
    
    
    
    
    
    
    (39,156
    )
    
    
    
    
    
    
    (39,156
    )Total liabilities and equity
    
    
    552,960
    
    
    
    603,065
    
    
    
    (70,376
    )
    
    
    1,085,649




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 December 31, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    26,176
    
    
    
    16,276
    
    
    
    
    
    
    
    42,452Cash, restricted
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    13,000Receivables
    
    
    57,258
    
    
    
    42,900
    
    
    
    
    
    
    
    100,158Inventories
    
    
    59,801
    
    
    
    38,656
    
    
    
    
    
    
    
    98,457Prepaid expenses and other
    
    
    3,215
    
    
    
    1,619
    
    
    
    
    
    
    
    4,834Total current assets
    
    
    146,450
    
    
    
    112,451
    
    
    
    
    
    
    
    258,901Property, plant and equipment
    
    
    351,009
    
    
    
    530,695
    
    
    
    
    
    
    
    881,704Other
    
    
    4,425
    
    
    
    5
    
    
    
    
    
    
    
    4,430Deferred income tax
    
    
    3,036
    
    
    
    
    
    
    
    
    
    
    
    3,036Due from unrestricted group
    
    
    55,925
    
    
    
    
    
    
    
    (55,925
    )
    
    
    Note receivable, less current portion
    
    
    3,529
    
    
    
    
    
    
    
    
    
    
    
    3,529Total assets
    
    
    564,374
    
    
    
    643,151
    
    
    
    (55,925
    )
    
    
    1,151,600LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    44,450
    
    
    
    43,067
    
    
    
    
    
    
    
    87,517Pension and other post-retirement benefit
obligations, current portion
    
    
    510
    
    
    
    
    
    
    
    
    
    
    
    510Debt, current portion
    
    
    
    
    
    
    16,500
    
    
    
    
    
    
    
    16,500Total current liabilities
    
    
    44,960
    
    
    
    59,567
    
    
    
    
    
    
    
    104,527Debt, less current portion
    
    
    289,222
    
    
    
    548,696
    
    
    
    
    
    
    
    837,918Due to restricted group
    
    
    
    
    
    
    55,925
    
    
    
    (55,925
    )
    
    
    Unrealized interest rate derivative losses
    
    
    
    
    
    
    47,112
    
    
    
    
    
    
    
    47,112Pension and other post-retirement benefit obligations
    
    
    12,846
    
    
    
    
    
    
    
    
    
    
    
    12,846Capital leases and other
    
    
    7,167
    
    
    
    4,100
    
    
    
    
    
    
    
    11,267Deferred income tax
    
    
    
    
    
    
    5,827
    
    
    
    
    
    
    
    5,827Total liabilities
    
    
    354,195
    
    
    
    721,227
    
    
    
    (55,925
    )
    
    
    1,019,497EQUITYTotal shareholders equity (deficit)
    
    
    210,179
    
    
    
    (43,954
    )
    
    
    
    
    
    
    166,225Noncontrolling interest (deficit)
    
    
    
    
    
    
    (34,122
    )
    
    
    
    
    
    
    (34,122
    )Total liabilities and equity
    
    
    564,374
    
    
    
    643,151
    
    
    
    (55,925
    )
    
    
    1,151,600




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    79,213
    
    
    
    66,644
    
    
    
    
    
    
    
    145,857Energy
    
    
    3,201
    
    
    
    7,173
    
    
    
    
    
    
    
    10,37482,414
    
    
    
    73,817
    
    
    
    
    
    
    
    156,231Operating costs
    
    
    78,360
    
    
    
    58,206
    
    
    
    
    
    
    
    136,566Operating depreciation and amortization
    
    
    6,816
    
    
    
    6,569
    
    
    
    
    
    
    
    13,385Selling, general and administrative expenses and other
    
    
    3,824
    
    
    
    2,949
    
    
    
    
    
    
    
    6,77389,000
    
    
    
    67,724
    
    
    
    
    
    
    
    156,724Operating income (loss)
    
    
    (6,586
    )
    
    
    6,093
    
    
    
    
    
    
    
    (493
    )Other income (expense)Interest expense
    
    
    (6,546
    )
    
    
    (10,674
    )
    
    
    1,135
    
    
    
    (16,085
    )Investment income (loss)
    
    
    1,112
    
    
    
    43
    
    
    
    (1,135
    )
    
    
    20Foreign exchange gain (loss) on debt
    
    
    3,779
    
    
    
    
    
    
    
    
    
    
    
    3,779Unrealized gain (loss) on derivative instruments
    
    
    
    
    
    
    (3,327
    )
    
    
    
    
    
    
    (3,327
    )Total other income (expense)
    
    
    (1,655
    )
    
    
    (13,958
    )
    
    
    
    
    
    
    (15,613
    )Income (loss) before income taxes
    
    
    (8,241
    )
    
    
    (7,865
    )
    
    
    
    
    
    
    (16,106
    )Income tax benefit (provision)
    
    
    108
    
    
    
    (51
    )
    
    
    
    
    
    
    57Net income (loss)
    
    
    (8,133
    )
    
    
    (7,916
    )
    
    
    
    
    
    
    (16,049
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    1,937
    
    
    
    
    
    
    
    1,937Net income (loss) attributable to common shareholders
    
    
    (8,133
    )
    
    
    (5,979
    )
    
    
    
    
    
    
    (14,112
    )
 Three Months Ended September 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    102,604
    
    
    
    75,999
    
    
    
    
    
    
    
    178,603Energy
    
    
    2,316
    
    
    
    3,909
    
    
    
    
    
    
    
    6,225104,920
    
    
    
    79,908
    
    
    
    
    
    
    
    184,828Operating costs
    
    
    91,034
    
    
    
    59,953
    
    
    
    
    
    
    
    150,987Operating depreciation and amortization
    
    
    7,333
    
    
    
    6,700
    
    
    
    
    
    
    
    14,033Selling, general and administrative expenses
    
    
    6,585
    
    
    
    3,369
    
    
    
    
    
    
    
    9,954104,952
    
    
    
    70,022
    
    
    
    
    
    
    
    174,974Operating income (loss)
    
    
    (32
    )
    
    
    9,886
    
    
    
    
    
    
    
    9,854Other income (expense)Interest expense
    
    
    (6,687
    )
    
    
    (10,719
    )
    
    
    982
    
    
    
    (16,424
    )Investment income (loss)
    
    
    1,679
    
    
    
    (2,728
    )
    
    
    (982
    )
    
    
    (2,031
    )Foreign exchange gain (loss) on debt
    
    
    (9,560
    )
    
    
    
    
    
    
    
    
    
    
    (9,560
    )Unrealized gain (loss) on derivative instruments
    
    
    
    
    
    
    (8,215
    )
    
    
    
    
    
    
    (8,215
    )Total other income (expense)
    
    
    (14,568
    )
    
    
    (21,662
    )
    
    
    
    
    
    
    (36,230
    )Income (loss) before income taxes
    
    
    (14,600
    )
    
    
    (11,776
    )
    
    
    
    
    
    
    (26,376
    )Income tax benefit (provision)
    
    
    5,173
    
    
    
    740
    
    
    
    
    
    
    
    5,913Net income (loss)
    
    
    (9,427
    )
    
    
    (11,036
    )
    
    
    
    
    
    
    (20,463
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    3,290
    
    
    
    
    
    
    
    3,290Net income (loss) attributable to common shareholders
    
    
    (9,427
    )
    
    
    (7,746
    )
    
    
    
    
    
    
    (17,173
    )




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##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 13. Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Nine Months Ended September 30, 2009Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    230,672
    
    
    
    191,740
    
    
    
    
    
    
    
    422,412Energy
    
    
    11,162
    
    
    
    21,113
    
    
    
    
    
    
    
    32,275241,834
    
    
    
    212,853
    
    
    
    
    
    
    
    454,687Operating costs
    
    
    230,489
    
    
    
    187,107
    
    
    
    
    
    
    
    417,596Operating depreciation and amortization
    
    
    20,408
    
    
    
    19,917
    
    
    
    
    
    
    
    40,325Selling, general and administrative expenses and other
    
    
    12,540
    
    
    
    6,868
    
    
    
    
    
    
    
    19,408263,437
    
    
    
    213,892
    
    
    
    
    
    
    
    477,329Operating income (loss)
    
    
    (21,603
    )
    
    
    (1,039
    )
    
    
    
    
    
    
    (22,642
    )Other income (expense)Interest expense
    
    
    (20,775
    )
    
    
    (31,543
    )
    
    
    3,365
    
    
    
    (48,953
    )Investment income (loss)
    
    
    3,262
    
    
    
    (2,941
    )
    
    
    (3,365
    )
    
    
    (3,044
    )Foreign exchange gain (loss) on debt
    
    
    4,533
    
    
    
    
    
    
    
    
    
    
    
    4,533Unrealized gain (loss) on derivative instruments
    
    
    
    
    
    
    (10,889
    )
    
    
    
    
    
    
    (10,889
    )Total other income (expense)
    
    
    (12,980
    )
    
    
    (45,373
    )
    
    
    
    
    
    
    (58,353
    )Income (loss) before income taxes
    
    
    (34,583
    )
    
    
    (46,412
    )
    
    
    
    
    
    
    (80,995
    )Income tax benefit (provision)
    
    
    (833
    )
    
    
    5,695
    
    
    
    
    
    
    
    4,862Net income (loss)
    
    
    (35,416
    )
    
    
    (40,717
    )
    
    
    
    
    
    
    (76,133
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    11,195
    
    
    
    
    
    
    
    11,195Net income (loss) attributable to common shareholders
    
    
    (35,416
    )
    
    
    (29,522
    )
    
    
    
    
    
    
    (64,938
    )
 Nine Months Ended September 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenuesPulp
    
    
    301,400
    
    
    
    226,889
    
    
    
    
    
    
    
    528,289Energy
    
    
    7,996
    
    
    
    12,010
    
    
    
    
    
    
    
    20,006309,396
    
    
    
    238,899
    
    
    
    
    
    
    
    548,295Operating costs
    
    
    262,308
    
    
    
    184,803
    
    
    
    
    
    
    
    447,111Operating depreciation and amortization
    
    
    21,528
    
    
    
    20,140
    
    
    
    
    
    
    
    41,668Selling, general and administrative expenses and other
    
    
    15,194
    
    
    
    9,609
    
    
    
    
    
    
    
    24,803299,030
    
    
    
    214,552
    
    
    
    
    
    
    
    513,582Operating income (loss)
    
    
    10,366
    
    
    
    24,347
    
    
    
    
    
    
    
    34,713Other income (expense)Interest expense
    
    
    (19,769
    )
    
    
    (32,200
    )
    
    
    2,912
    
    
    
    (49,057
    )Investment income (loss)
    
    
    4,972
    
    
    
    (2,360
    )
    
    
    (2,912
    )
    
    
    (300
    )Foreign exchange gain (loss) on debt
    
    
    (3,181
    )
    
    
    (110
    )
    
    
    
    
    
    
    (3,291
    )Unrealized gain (loss) on derivative instruments
    
    
    
    
    
    
    4,515
    
    
    
    
    
    
    
    4,515Total other income (expense)
    
    
    (17,978
    )
    
    
    (30,155
    )
    
    
    
    
    
    
    (48,133
    )Income (loss) before income taxes
    
    
    (7,612
    )
    
    
    (5,808
    )
    
    
    
    
    
    
    (13,420
    )Income tax benefit (provision)
    
    
    1,716
    
    
    
    (4,766
    )
    
    
    
    
    
    
    (3,050
    )Net income (loss)
    
    
    (5,896
    )
    
    
    (10,574
    )
    
    
    
    
    
    
    (16,470
    )Less: net (income) loss attributable to noncontrolling
interest
    
    
    
    
    
    
    3,037
    
    
    
    
    
    
    
    3,037Net income (loss) attributable to common shareholders
    
    
    (5,896
    )
    
    
    (7,537
    )
    
    
    
    
    
    
    (13,433
    )




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##### Table of Contents



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




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##### Table of Contents



Third Quarter and Nine Month Operational Snapshot
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Pulp Production (000 ADMTs)
    
    
    345.8
    
    
    
    368.4
    
    
    
    1,040.6
    
    
    
    1,086.1Scheduled Production Downtime (000 ADMTs)
    
    
    35.4
    
    
    
    9.0
    
    
    
    38.1
    
    
    
    26.0Pulp Sales (000 ADMTs)
    
    
    361.6
    
    
    
    363.8
    
    
    
    1,093.7
    
    
    
    1,059.2Pulp Revenues (in millions)
    
    
    145.9
    
    
    
    178.6
    
    
    
    422.4
    
    
    
    528.3NBSK pulp list prices in Europe ($/ADMT)
    
    $
    693
    
    
    $
    878
    
    
    $
    627
    
    
    $
    886NBSK pulp list prices in Europe (/ADMT)
    
    
    485
    
    
    
    585
    
    
    
    459
    
    
    
    582Average pulp sales realizations (/ADMT)(1)
    
    
    397
    
    
    
    484
    
    
    
    380
    
    
    
    493Energy Production (000 MWh)
    
    
    354.4
    
    
    
    377.3
    
    
    
    1,086.7
    
    
    
    1,107.8Energy Sales (000 MWh)
    
    
    121.8
    
    
    
    119.5
    
    
    
    362.6
    
    
    
    348.2Energy Revenue (in millions)
    
    
    10.4
    
    
    
    6.2
    
    
    
    32.3
    
    
    
    20.0Average energy sales realizations (/MWh)
    
    
    85
    
    
    
    52
    
    
    
    89
    
    
    
    57Average Spot Currency Exchange Rates(2) / $
    
    
    0.6990
    
    
    
    0.6658
    
    
    
    0.7323
    
    
    
    0.6572C$ / $
    
    
    1.0974
    
    
    
    1.0416
    
    
    
    1.1699
    
    
    
    1.0185C$ / 
    
    
    1.5694
    
    
    
    1.5620
    
    
    
    1.5934
    
    
    
    1.5486
 
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Bank of Canada noon spot rates over the reporting period. Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
    
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   
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##### Table of Contents



Three Months EndedSeptember 30,2009
    
    
    2008(in thousands)Net income (loss) attributable to common shareholders
    
    
    (14,112
    )
    
    
    (17,173
    )Net income (loss) attributable to noncontrolling interest
    
    
    (1,937
    )
    
    
    (3,290
    )Income taxes (benefits)
    
    
    (57
    )
    
    
    (5,913
    )Interest expense
    
    
    16,085
    
    
    
    16,424Investment (income) loss
    
    
    (20
    )
    
    
    2,031Foreign exchange (gain) loss on debt
    
    
    (3,779
    )
    
    
    9,560Unrealized (gain) loss on derivative instruments
    
    
    3,327
    
    
    
    8,215Operating income (loss)
    
    
    (493
    )
    
    
    9,854Add: Depreciation and amortization
    
    
    13,447
    
    
    
    14,103Operating EBITDA
    
    
    12,954
    
    
    
    23,957
 Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
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##### Table of Contents



 
    
  
  Nine Months EndedSeptember 30,2009
    
    
    2008(in thousands)Net income (loss) attributable to common shareholders
    
    
    (64,938
    )
    
    
    (13,433
    )Net income (loss) attributable to noncontrolling interest
    
    
    (11,195
    )
    
    
    (3,037
    )Income taxes (benefits)
    
    
    (4,862
    )
    
    
    3,050Interest expense
    
    
    48,953
    
    
    
    49,057Investment (income) loss
    
    
    3,044
    
    
    
    300Foreign exchange (gain) loss on debt
    
    
    (4,533
    )
    
    
    3,291Unrealized (gain) loss on derivative instruments
    
    
    10,889
    
    
    
    (4,515
    )Operating income (loss)
    
    
    (22,642
    )
    
    
    34,713Add: Depreciation and amortization
    
    
    40,518
    
    
    
    41,879Operating EBITDA
    
    
    17,876
    
    
    
    76,592
 Liquidity and Capital Resources
  As at
    
    As atSeptember 30,
    
    December 31,2009
    
    2008(in thousands)Financial PositionCash and cash equivalents
    
    
    51,275
    
    
    
    42,452Cash, restricted
    
    
    
    
    
    
    13,000Working capital
    
    
    70,163
    
    
    
    154,374Property, plant and equipment
    
    
    874,830
    
    
    
    881,704Total assets
    
    
    1,085,649
    
    
    
    1,151,600Long-term liabilities
    
    
    876,916
    
    
    
    914,970Total equity
    
    
    80,417
    
    
    
    132,103




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##### Table of Contents



Sources and Uses of Funds
 
           
 
  




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents




  Results of Operations of the Restricted Group under Our Senior Note Indenture
   Restricted Group Results  Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008
    
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##### Table of Contents



Three Months EndedSeptember 30,2009
    
    
    2008(in thousands)Restricted GroupNet income (loss) attributable to common shareholders(1)
    
    
    (8,133
    )
    
    
    (9,427
    )Income taxes (benefits)
    
    
    (108
    )
    
    
    (5,173
    )Interest expense
    
    
    6,546
    
    
    
    6,687Investment (income) loss
    
    
    (1,112
    )
    
    
    (1,679
    )Foreign exchange (gain) loss on debt
    
    
    (3,779
    )
    
    
    9,560Operating income (loss)
    
    
    (6,586
    )
    
    
    (32
    )Add: Depreciation and amortization
    
    
    6,878
    
    
    
    7,403Operating EBITDA(1)
    
    
    292
    
    
    
    7,371
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for
a reconciliation to our consolidated results. Restricted Group Results  Nine Months Ended September 30, 2009 Compared to Nine Months Ended
September 30, 2008
    
  
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##### Table of Contents



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   
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##### Table of Contents



Nine Months EndedSeptember 30,2009
    
    
    2008(in thousands)Restricted GroupNet income (loss) attributable to common shareholders(1)
    
    
    (35,416
    )
    
    
    (5,896
    )Income taxes (benefits)
    
    
    833
    
    
    
    (1,716
    )Interest expense
    
    
    20,775
    
    
    
    19,769Investment (income) loss
    
    
    (3,262
    )
    
    
    (4,972
    )Foreign exchange (gain) loss on debt
    
    
    (4,533
    )
    
    
    3,181Operating income (loss)
    
    
    (21,603
    )
    
    
    10,366Add: Depreciation and amortization
    
    
    20,601
    
    
    
    21,739Operating EBITDA(1)
    
    
    (1,002
    )
    
    
    32,105
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results. Liquidity and Capital Resources of the Restricted Group
  As at
    
    
    As atSeptember 30,
    
    
    December 31,2009
    
    
    2008(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    25,294
    
    
    
    26,176Working capital
    
    
    38,346
    
    
    
    101,490Property, plant and equipment
    
    
    362,748
    
    
    
    351,009Total assets
    
    
    552,960
    
    
    
    564,374Long-term liabilities
    
    
    279,648
    
    
    
    309,235Total equity
    
    
    199,210
    
    
    
    210,179
 
 (1)
    
    See Note 13 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.     
 




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##### Table of Contents



Credit Ratings
    Critical Accounting Policies




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##### Table of Contents



New Accounting Standards
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
 
    
    our markets;
    
    demand and prices for our products;
    
    our level of indebtedness;
    
    raw material costs and supply;
    
    energy prices, sales and our initiatives to enhance sales of surplus energy;
    
    capital expenditures;
    
    the economy;
    
    foreign exchange rates  particularly the U.S. dollar and Canadian dollar; and
    
    derivatives.
  Cyclical Nature of Business
 Revenues




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##### Table of Contents



Costs
  Currency




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      
 ITEM 1A. RISK FACTORS
 Availability and timing of Government funding/project financing for the Celgar Energy Project may affect its
scope, timing and completion




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##### Table of Contents



We
are obligated to repay and/or refinance
46.0 million of our Convertible Notes by October 2010.
If we fail to do so, it will have a material adverse effect on our business, operations and
outstanding securities.
 
  If our Stendal mill is not in compliance with its covenants under the Stendal Loan Facility and it
is unable to obtain a waiver or other satisfactory arrangement with its lenders, it would have a
material adverse effect on the Stendal mill and our results of operations and business.
  
 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1*
    
    Section 906 Certification of Chief Executive Officer32.2*
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein.




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##### Table of Contents



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