##### 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, 2008
 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
(State or other jurisdiction 
of incorporation or organization)
    
    47-0956945(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
  Large accelerated filer oAccelerated filer þNon-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 6. EXHIBITSSIGNATURESSection 302 - CEO CertificationSection 302 - CFO CertificationSection 906 - CEO CertificationSection 906 - CFO Certification    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, 2008
 (Unaudited)




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##### Table of Contents



MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands of Euros)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assetsCash and cash equivalents
    
    
    75,779
    
    
    
    84,848Receivables
    
    
    81,503
    
    
    
    89,890Note receivable, current portion
    
    
    628
    
    
    
    5,896Inventories (Note 4)
    
    
    129,965
    
    
    
    103,610Prepaid expenses and other
    
    
    10,126
    
    
    
    6,015Total current assets
    
    
    298,001
    
    
    
    290,259Long-term assetsCash, restricted (Note 8)
    
    
    13,000
    
    
    
    33,000Property, plant and equipment
    
    
    904,653
    
    
    
    933,258Investments (Note 8)
    
    
    646
    
    
    
    96Deferred note issuance and other costs
    
    
    4,326
    
    
    
    5,303Deferred income tax
    
    
    25,432
    
    
    
    17,624Note receivable, less current portion
    
    
    3,650
    
    
    
    3,977951,707
    
    
    
    993,258Total assets
    
    
    1,249,708
    
    
    
    1,283,517LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    87,315
    
    
    
    87,000Pension and
other post-retirement benefit obligations, current portion
    
    
    955
    
    
    
    493Debt, current portion
    
    
    36,599
    
    
    
    34,023Total current liabilities
    
    
    124,869
    
    
    
    121,516Long-term liabilitiesDebt, less current portion
    
    
    795,445
    
    
    
    815,832Unrealized interest rate derivative losses (Note 8)
    
    
    17,370
    
    
    
    21,885Pension and other post-retirement benefit obligations (Note 6)
    
    
    18,361
    
    
    
    19,983Capital leases and other
    
    
    12,290
    
    
    
    8,999Deferred income tax
    
    
    29,277
    
    
    
    18,640872,743
    
    
    
    885,339Total liabilities
    
    
    997,612
    
    
    
    1,006,855SHAREHOLDERS EQUITYShare capital (Note 7)
    
    
    203,438
    
    
    
    202,844Additional paid-in capital
    
    
    461
    
    
    
    134Retained earnings
    
    
    23,986
    
    
    
    37,419Accumulated other comprehensive income
    
    
    24,211
    
    
    
    36,265Total shareholders equity
    
    
    252,096
    
    
    
    276,662Total liabilities and shareholders equity
    
    
    1,249,708
    
    
    
    1,283,517
  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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    
    178,603
    
    
    
    191,111
    
    
    
    528,289
    
    
    
    537,245Costs and expensesOperating costs
    
    
    144,762
    
    
    
    148,529
    
    
    
    427,105
    
    
    
    426,831Operating depreciation and amortization
    
    
    14,033
    
    
    
    14,284
    
    
    
    41,668
    
    
    
    42,00319,808
    
    
    
    28,298
    
    
    
    59,516
    
    
    
    68,411Selling, general and administrative expenses
    
    
    9,954
    
    
    
    6,841
    
    
    
    24,803
    
    
    
    22,300(Sale) purchase of emission allowances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (766
    )Operating income from continuing operations
    
    
    9,854
    
    
    
    21,457
    
    
    
    34,713
    
    
    
    46,877Other income (expense)Interest expense
    
    
    (16,424
    )
    
    
    (17,299
    )
    
    
    (49,057
    )
    
    
    (54,108
    )Investment income (loss)
    
    
    (2,031
    )
    
    
    1,491
    
    
    
    (300
    )
    
    
    3,786Foreign exchange gain (loss) on debt
    
    
    (9,560
    )
    
    
    4,626
    
    
    
    (3,291
    )
    
    
    7,229Realized gain on derivative instruments (Note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,820Unrealized gain (loss) on derivative instruments (Note 5)
    
    
    (8,215
    )
    
    
    (5,696
    )
    
    
    4,515
    
    
    
    12,156Total other income (expense)
    
    
    (36,230
    )
    
    
    (16,878
    )
    
    
    (48,133
    )
    
    
    (24,117
    )Income (loss) before income taxes and minority interest
from continuing operations
    
    
    (26,376
    )
    
    
    4,579
    
    
    
    (13,420
    )
    
    
    22,760Income tax benefit (provision)  current
    
    
    (231
    )
    
    
    (144
    )
    
    
    (68
    )
    
    
    (877
    ) deferred
    
    
    6,144
    
    
    
    7,013
    
    
    
    (2,982
    )
    
    
    (5,959
    )Income (loss) before minority interest from continuing
operations
    
    
    (20,463
    )
    
    
    11,448
    
    
    
    (16,470
    )
    
    
    15,924Minority interest
    
    
    3,290
    
    
    
    (742
    )
    
    
    3,037
    
    
    
    (785
    )Net income (loss) from continuing operations
    
    
    (17,173
    )
    
    
    10,706
    
    
    
    (13,433
    )
    
    
    15,139Net income (loss) from discontinued operations
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (198
    )Net income (loss)
    
    
    (17,173
    )
    
    
    10,696
    
    
    
    (13,433
    )
    
    
    14,941Retained earnings, beginning of period
    
    
    41,159
    
    
    
    19,485
    
    
    
    37,419
    
    
    
    15,240Retained earnings, end of period
    
    
    23,986
    
    
    
    30,181
    
    
    
    23,986
    
    
    
    30,181Net income (loss) from continuing operations per share (Note 3):Basic
    
    
    (0.47
    )
    
    
    0.30
    
    
    
    (0.37
    )
    
    
    0.42Diluted
    
    
    (0.47
    )
    
    
    0.26
    
    
    
    (0.37
    )
    
    
    0.40Net income (loss) per share:Basic
    
    
    (0.47
    )
    
    
    0.29
    
    
    
    (0.37
    )
    
    
    0.41Diluted
    
    
    (0.47
    )
    
    
    0.26
    
    
    
    (0.37
    )
    
    
    0.39
 The accompanying notes are an integral part of these interim consolidated financial statements.




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MERCER INTERNATIONAL INC.
 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
(In thousands of Euros)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    
    (17,173
    )
    
    
    10,696
    
    
    
    (13,433
    )
    
    
    14,941Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (3,992
    )
    
    
    11,665
    
    
    
    (12,040
    )
    
    
    29,919Unrealized (losses) gains on
securities arising during the period
    
    
    8
    
    
    
    (16
    )
    
    
    (14
    )
    
    
    71Other comprehensive (loss) income
    
    
    (3,984
    )
    
    
    11,649
    
    
    
    (12,054
    )
    
    
    29,990Total comprehensive (loss) income
    
    
    (21,157
    )
    
    
    22,345
    
    
    
    (25,487
    )
    
    
    44,931
 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cash flows from (used in) operating activities:Net income (loss)
    
    
    (17,173
    )
    
    
    10,696
    
    
    
    (13,433
    )
    
    
    14,941Adjustments to reconcile net income to cash flows
from operating activitiesUnrealized (gain) loss on derivatives
    
    
    8,215
    
    
    
    5,696
    
    
    
    (4,515
    )
    
    
    (12,156
    )Foreign exchange (gain) loss on debt
    
    
    9,560
    
    
    
    (4,626
    )
    
    
    3,291
    
    
    
    (7,229
    )Loss (gain) on sale of assets
    
    
    177
    
    
    
    151
    
    
    
    (781
    )
    
    
    128Operating depreciation and amortization
    
    
    14,033
    
    
    
    14,284
    
    
    
    41,668
    
    
    
    42,003Non-operating amortization
    
    
    70
    
    
    
    67
    
    
    
    211
    
    
    
    194Minority interest
    
    
    (3,290
    )
    
    
    742
    
    
    
    (3,037
    )
    
    
    785Deferred income taxes
    
    
    (6,144
    )
    
    
    (7,013
    )
    
    
    2,982
    
    
    
    5,959Stock compensation expense
    
    
    213
    
    
    
    154
    
    
    
    568
    
    
    
    350Pension and other post-retirement expense
    
    
    497
    
    
    
    411
    
    
    
    1,502
    
    
    
    1,366Pension and other post-retirement benefit funding
    
    
    (402
    )
    
    
    (367
    )
    
    
    (1,527
    )
    
    
    (1,201
    )Other
    
    
    108
    
    
    
    (37
    )
    
    
    (377
    )
    
    
    912Changes in current assets and liabilitiesReceivables
    
    
    18,352
    
    
    
    7,407
    
    
    
    7,674
    
    
    
    (19,314
    )Inventories
    
    
    (19,753
    )
    
    
    (1,479
    )
    
    
    (27,436
    )
    
    
    (31,149
    )Accounts payable and accrued expenses
    
    
    (3,806
    )
    
    
    (9,519
    )
    
    
    1,995
    
    
    
    5,610Other
    
    
    (3,546
    )
    
    
    659
    
    
    
    (2,245
    )
    
    
    1,939Net cash from (used in) operating activities
    
    
    (2,889
    )
    
    
    17,226
    
    
    
    6,540
    
    
    
    3,138Cash flows from (used in) investing activities:Purchase of property, plant and equipment(1)
    
    
    (9,269
    )
    
    
    7,833
    
    
    
    (17,130
    )
    
    
    (2,704
    )Proceeds on sale of property, plant and equipment
    
    
    271
    
    
    
    11
    
    
    
    1,884
    
    
    
    538Cash, restricted
    
    
    20,000
    
    
    
    12,000
    
    
    
    20,000
    
    
    
    24,000Notes receivable
    
    
    
    
    
    
    (11
    )
    
    
    5,303
    
    
    
    4,720Net cash from (used in) investing activities
    
    
    11,002
    
    
    
    19,833
    
    
    
    10,057
    
    
    
    26,554Cash flows from (used in) financing activities:Repayment of notes payable and debt
    
    
    (17,132
    )
    
    
    (13,412
    )
    
    
    (34,023
    )
    
    
    (26,865
    )Repayment of capital lease obligations
    
    
    300
    
    
    
    (1,646
    )
    
    
    (532
    )
    
    
    (4,222
    )Proceeds from borrowings of notes payable and debt
    
    
    
    
    
    
    
    
    
    
    8,431
    
    
    
    Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305Net cash from (used in) financing activities
    
    
    (16,832
    )
    
    
    (15,058
    )
    
    
    (26,124
    )
    
    
    (30,782
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,203
    
    
    
    (407
    )
    
    
    458
    
    
    
    1,764Net increase (decrease) in cash and cash equivalents
    
    
    (7,516
    )
    
    
    21,594
    
    
    
    (9,069
    )
    
    
    674Cash and cash equivalents, beginning of period(2)
    
    
    83,295
    
    
    
    48,884
    
    
    
    84,848
    
    
    
    69,804Cash and cash equivalents, end of period(3)
    
    
    75,779
    
    
    
    70,478
    
    
    
    75,779
    
    
    
    70,478
 
 (1)
    
    2007 includes amounts received in the third quarter of 2007, and recorded as a reduction of
property, plant and equipment (approximately 9,100) upon the settlement of the Stendal
engineering, procurement and construction (EPC) contract.(2)
    
    Includes amounts related to discontinued operations of: 2008   nil (2007  437).(3)
    
    Includes amounts related to discontinued operations of: 2008   nil (2007  1,037). 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Supplemental disclosure of cash flow information:Cash paid (received) during the period for:Interest
    
    
    26,209
    
    
    
    48,512
    
    
    
    56,975
    
    
    
    66,136Income taxes
    
    
    59
    
    
    
    (218
    )
    
    
    (259
    )
    
    
    397Supplemental schedule of non-cash investing and financing activities:Acquisition of production and other equipment under capital lease
obligations
    
    
    1,085
    
    
    
    (127
    )
    
    
    4,784
    
    
    
    2,088Common shares issued in satisfaction of floating rate note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,728
 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. Basis of Presentation
     New Accounting Standards
 The Fair Value Option for Financial Assets and Financial Liabilities




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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. Basis of Presentation (continued)
 Effective Date of
FASB Statement No. 157 Fair Value Measurements
 Disclosures
about Derivative Instruments and Hedging Activities
 The Hierarchy of
Generally Accepted Accounting Principles The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement)




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MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 2. Stock-Based Compensation
  Stock Options
  Outstanding Options
    
    Exercisable OptionsWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AveragePrice Range
    
    Number
    
    Contractual Life
    
    Exercise price
    
    Number
    
    Exercise Price(In U.S. Dollars)
    
    
    
    
    
    (Years)
    
    (In U.S. Dollars)
    
    
    
    
    
    (In U.S. Dollars)$5.65 - 6.375
    
    
    830,000
    
    
    
    1.75
    
    
    $
    6.29
    
    
    
    830,000
    
    
    $
    6.297.30
    
    
    30,000
    
    
    
    6.75
    
    
    
    7.30
    
    
    
    30,000
    
    
    
    7.307.92
    
    
    68,334
    
    
    
    7.00
    
    
    
    7.92
    
    
    
    68,334
    
    
    
    7.92




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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)
 Restricted Stock
    
  
   Performance 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 3. Income Per Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss) from continuing operations  basic
    
    
    (17,173
    )
    
    
    10,706
    
    
    
    (13,433
    )
    
    
    15,139Interest on convertible notes, net of tax
    
    
    
    
    
    
    1,050
    
    
    
    
    
    
    
    2,956Net income (loss) from continuing operations  diluted
    
    
    (17,173
    )
    
    
    11,756
    
    
    
    (13,433
    )
    
    
    18,095Net income (loss) from continuing operations per share:Basic
    
    
    (0.47
    )
    
    
    0.30
    
    
    
    (0.37
    )
    
    
    0.42Diluted
    
    
    (0.47
    )
    
    
    0.26
    
    
    
    (0.37
    )
    
    
    0.40Net income (loss) from continuing operations
    
    
    (17,173
    )
    
    
    10,706
    
    
    
    (13,433
    )
    
    
    15,139Net income (loss) from discontinued operations
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (198
    )Net income (loss)  basic
    
    
    (17,173
    )
    
    
    10,696
    
    
    
    (13,433
    )
    
    
    14,941Interest on convertible notes, net of tax
    
    
    
    
    
    
    1,050
    
    
    
    
    
    
    
    2,956Net income (loss)  diluted
    
    
    (17,173
    )
    
    
    11,746
    
    
    
    (13,433
    )
    
    
    17,897Net income (loss) per share:Basic
    
    
    (0.47
    )
    
    
    0.29
    
    
    
    (0.37
    )
    
    
    0.41Diluted
    
    
    (0.47
    )
    
    
    0.26
    
    
    
    (0.37
    )
    
    
    0.39Weighted average number of common shares outstanding:Basic
    
    
    36,422,487
    
    
    
    36,284,343
    
    
    
    36,388,666
    
    
    
    36,012,152Effect of dilutive instruments:Stock options and awards
    
    
    6,066
    
    
    
    285,684
    
    
    
    70,054
    
    
    
    405,326Convertible notes
    
    
    
    
    
    
    8,678,065
    
    
    
    
    
    
    
    8,920,022Diluted
    
    
    36,428,553
    
    
    
    45,248,092
    
    
    
    36,458,720
    
    
    
    45,337,500




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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, 2008
    
    
    December 31, 2007Raw materials
    
    
    46,981
    
    
    
    38,045Finished goods
    
    
    57,143
    
    
    
    43,127Work in process and other
    
    
    25,841
    
    
    
    22,438
    129,965
    
    
    
    103,610
 Note 5. Derivatives Transactions
 Three Months Ended September 30,2008
    
    
    2007Realized net gain on foreign exchange derivatives
    
    
    
    
    
    
    Unrealized net gain (loss) on interest rate derivatives
    
    
    (8,215
    )
    
    
    (5,696
    )Unrealized net gain (loss) on foreign exchange derivatives
    
    
    
    
    
    
    Unrealized net gain (loss) on derivative financial instruments
    
    
    (8,215
    )
    
    
    (5,696
    )
 Nine Months Ended September 30,2008
    
    
    2007Realized net gain (loss) on foreign exchange derivatives
    
    
    
    
    
    
    6,820Unrealized net gain (loss) on interest rate derivatives
    
    
    4,515
    
    
    
    18,089Unrealized net gain (loss) on foreign exchange derivatives
    
    
    
    
    
    
    (5,933
    )Unrealized net gain (loss) on derivative financial instruments
    
    
    4,515
    
    
    
    12,156




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 6. Pension and Other Post-Retirement Benefit Obligations
     
 
  Three Months Ended September 30,2008
    
    
    2007Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    197
    
    
    
    125
    
    
    
    215
    
    
    
    121Interest cost
    
    
    339
    
    
    
    200
    
    
    
    349
    
    
    
    190Expected return on plan assets
    
    
    (385
    )
    
    
    
    
    
    
    (428
    )
    
    
    Recognized net loss
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    16Net periodic benefit cost
    
    
    151
    
    
    
    346
    
    
    
    136
    
    
    
    327
 Nine Months Ended September 30,2008
    
    
    2007Post-
    
    
    
    
    
    
    Post-Pension
    
    
    Retirement
    
    
    Pension
    
    
    RetirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost
    
    
    596
    
    
    
    379
    
    
    
    623
    
    
    
    351Interest cost
    
    
    1,025
    
    
    
    605
    
    
    
    1,014
    
    
    
    551Expected return on plan assets
    
    
    (1,165
    )
    
    
    
    
    
    
    (1,241
    )
    
    
    Recognized net loss
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    46Net periodic benefit cost
    
    
    456
    
    
    
    1,046
    
    
    
    396
    
    
    
    948




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 7. Share Capital
 Authorized
    Issued and Outstanding
  Note 8. Financial Instruments
   identical
 similar




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 8. Financial Instruments (continued)
   Fair value measurements at September 30, 2008 using:
 Quoted prices in
    
    
    
    
    
    Significantactive markets
    
    
    Significant other
    
    
    unobservablefor identical assets
    
    
    observable inputs
    
    
    inputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssetsInvestments held in
restricted cash (a)
    
    
    7,974
    
    
    
    
    
    
    
    
    
    
    
    7,974Investments (a)
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    646Total assets
    
    
    8,620
    
    
    
    
    
    
    
    
    
    
    
    8,620LiabilitiesDerivatives (b)- Interest rate swaps
    
    
    
    
    
    
    17,370
    
    
    
    
    
    
    
    17,370
 
 (a)
    
    Based on observable market data.(b)
    
    Based on observable inputs for the liability (interest rates and yield curves observable at
specific intervals). Note 9. Commitments and Contingencies
    
  




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 September 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrentCash and cash equivalents
    
    
    61,689
    
    
    
    14,090
    
    
    
    
    
    
    
    75,779Receivables
    
    
    37,388
    
    
    
    44,115
    
    
    
    
    
    
    
    81,503Note receivable, current portion
    
    
    628
    
    
    
    
    
    
    
    
    
    
    
    628Inventories
    
    
    80,543
    
    
    
    49,422
    
    
    
    
    
    
    
    129,965Prepaid expenses and other
    
    
    7,341
    
    
    
    2,785
    
    
    
    
    
    
    
    10,126Total current assets
    
    
    187,589
    
    
    
    110,412
    
    
    
    
    
    
    
    298,001Cash, restricted
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    13,000Property, plant and equipment
    
    
    370,672
    
    
    
    533,981
    
    
    
    
    
    
    
    904,653Other
    
    
    4,967
    
    
    
    5
    
    
    
    
    
    
    
    4,972Deferred income tax
    
    
    20,321
    
    
    
    5,111
    
    
    
    
    
    
    
    25,432Due from unrestricted group
    
    
    54,646
    
    
    
    
    
    
    
    (54,646
    )
    
    
    Note receivable, less current portion
    
    
    3,650
    
    
    
    
    
    
    
    
    
    
    
    3,650Total assets
    
    
    641,845
    
    
    
    662,509
    
    
    
    (54,646
    )
    
    
    1,249,708LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    49,739
    
    
    
    37,576
    
    
    
    
    
    
    
    87,315Pension and other post-retirement
benefit obligations, current portion
    
    
    955
    
    
    
    
    
    
    
    
    
    
    
    955Debt, current portion
    
    
    
    
    
    
    36,599
    
    
    
    
    
    
    
    36,599Total current liabilities
    
    
    50,694
    
    
    
    74,175
    
    
    
    
    
    
    
    124,869Debt, less current portion
    
    
    291,372
    
    
    
    504,073
    
    
    
    
    
    
    
    795,445Due to restricted group
    
    
    
    
    
    
    54,646
    
    
    
    (54,646
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    17,370
    
    
    
    
    
    
    
    17,370Pension and other post-retirement
benefit obligations
    
    
    18,361
    
    
    
    
    
    
    
    
    
    
    
    18,361Capital leases and other
    
    
    7,599
    
    
    
    4,691
    
    
    
    
    
    
    
    12,290Deferred income tax
    
    
    12,065
    
    
    
    17,212
    
    
    
    
    
    
    
    29,277Total liabilities
    
    
    380,091
    
    
    
    672,167
    
    
    
    (54,646
    )
    
    
    997,612SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    261,754
    
    
    
    (9,658
    )
    
    
    
    
    
    
    252,096Total liabilities and shareholders equity
    
    
    641,845
    
    
    
    662,509
    
    
    
    (54,646
    )
    
    
    1,249,708




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10.
    
    Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Balance Sheet
 December 31, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrentCash and cash equivalents
    
    
    59,371
    
    
    
    25,477
    
    
    
    
    
    
    
    84,848Receivables
    
    
    37,482
    
    
    
    52,408
    
    
    
    
    
    
    
    89,890Note receivable, current portion
    
    
    589
    
    
    
    5,307
    
    
    
    
    
    
    
    5,896Inventories
    
    
    63,444
    
    
    
    40,166
    
    
    
    
    
    
    
    103,610Prepaid expenses and other
    
    
    3,714
    
    
    
    2,301
    
    
    
    
    
    
    
    6,015Total current assets
    
    
    164,600
    
    
    
    125,659
    
    
    
    
    
    
    
    290,259Cash, restricted
    
    
    
    
    
    
    33,000
    
    
    
    
    
    
    
    33,000Property, plant and equipment
    
    
    385,569
    
    
    
    547,689
    
    
    
    
    
    
    
    933,258Other
    
    
    5,399
    
    
    
    
    
    
    
    
    
    
    
    5,399Deferred income tax
    
    
    10,852
    
    
    
    6,772
    
    
    
    
    
    
    
    17,624Due from unrestricted group
    
    
    57,457
    
    
    
    
    
    
    
    (57,457
    )
    
    
    Note receivable, less current portion
    
    
    3,977
    
    
    
    
    
    
    
    
    
    
    
    3,977Total assets
    
    
    627,854
    
    
    
    713,120
    
    
    
    (57,457
    )
    
    
    1,283,517LIABILITIESCurrentAccounts payable and accrued expenses
    
    
    43,621
    
    
    
    43,379
    
    
    
    
    
    
    
    87,000Pension and other post-retirement
benefit obligations, current portion
    
    
    493
    
    
    
    
    
    
    
    
    
    
    
    493Debt, current portion
    
    
    
    
    
    
    34,023
    
    
    
    
    
    
    
    34,023Total current liabilities
    
    
    44,114
    
    
    
    77,402
    
    
    
    
    
    
    
    121,516Debt, less current portion
    
    
    273,589
    
    
    
    542,243
    
    
    
    
    
    
    
    815,832Due to restricted group
    
    
    
    
    
    
    57,457
    
    
    
    (57,457
    )
    
    
    Unrealized derivative loss
    
    
    
    
    
    
    21,885
    
    
    
    
    
    
    
    21,885Pension and other post-retirement
benefit obligations
    
    
    19,983
    
    
    
    
    
    
    
    
    
    
    
    19,983Capital leases and other
    
    
    7,033
    
    
    
    1,966
    
    
    
    
    
    
    
    8,999Deferred income tax
    
    
    4,553
    
    
    
    14,087
    
    
    
    
    
    
    
    18,640Total liabilities
    
    
    349,272
    
    
    
    715,040
    
    
    
    (57,457
    )
    
    
    1,006,855SHAREHOLDERS EQUITYTotal shareholders equity (deficit)
    
    
    278,582
    
    
    
    (1,920
    )
    
    
    
    
    
    
    276,662Total liabilities and shareholders equity
    
    
    627,854
    
    
    
    713,120
    
    
    
    (57,457
    )
    
    
    1,283,517




---



##### Table of Contents



MERCER INTERNATIONAL INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10.
    
    Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Three Months Ended September 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    102,604
    
    
    
    75,999
    
    
    
    
    
    
    
    178,603Operating costs
    
    
    88,718
    
    
    
    56,044
    
    
    
    
    
    
    
    144,762Operating depreciation and amortization
    
    
    7,333
    
    
    
    6,700
    
    
    
    
    
    
    
    14,033Selling, general and administrative expenses
    
    
    6,585
    
    
    
    3,369
    
    
    
    
    
    
    
    9,954102,636
    
    
    
    66,113
    
    
    
    
    
    
    
    168,749Operating income (loss) from continuing operations
    
    
    (32
    )
    
    
    9,886
    
    
    
    
    
    
    
    9,854Other income (expense)Interest expense
    
    
    (8,617
    )
    
    
    (10,719
    )
    
    
    2,912
    
    
    
    (16,424
    )Investment income (loss)
    
    
    3,609
    
    
    
    (2,728
    )
    
    
    (2,912
    )
    
    
    (2,031
    )Foreign exchange gain (loss) on debt
    
    
    (9,560
    )
    
    
    
    
    
    
    
    
    
    
    (9,560
    )Derivative financial instruments
    
    
    
    
    
    
    (8,215
    )
    
    
    
    
    
    
    (8,215
    )Total other income (expense)
    
    
    (14,568
    )
    
    
    (21,662
    )
    
    
    
    
    
    
    (36,230
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    (14,600
    )
    
    
    (11,776
    )
    
    
    
    
    
    
    (26,376
    )Income tax benefit (provision)
    
    
    5,173
    
    
    
    740
    
    
    
    
    
    
    
    5,913Income (loss) before minority interest from
continuing operations
    
    
    (9,427
    )
    
    
    (11,036
    )
    
    
    
    
    
    
    (20,463
    )Minority interest
    
    
    
    
    
    
    3,290
    
    
    
    
    
    
    
    3,290Net income (loss)
    
    
    (9,427
    )
    
    
    (7,746
    )
    
    
    
    
    
    
    (17,173
    )
 Three Months Ended September 30, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    106,530
    
    
    
    84,581
    
    
    
    
    
    
    
    191,111Operating costs
    
    
    84,545
    
    
    
    63,984
    
    
    
    
    
    
    
    148,529Operating depreciation and amortization
    
    
    7,419
    
    
    
    6,865
    
    
    
    
    
    
    
    14,284Selling, general and administrative expenses
    
    
    3,610
    
    
    
    3,231
    
    
    
    
    
    
    
    6,84195,574
    
    
    
    74,080
    
    
    
    
    
    
    
    169,654Operating income (loss) from continuing operations
    
    
    10,956
    
    
    
    10,501
    
    
    
    
    
    
    
    21,457Other income (expense)Interest expense
    
    
    (6,996
    )
    
    
    (11,240
    )
    
    
    937
    
    
    
    (17,299
    )Investment income (loss)
    
    
    1,321
    
    
    
    1,107
    
    
    
    (937
    )
    
    
    1,491Foreign exchange gain (loss) on debt
    
    
    4,545
    
    
    
    81
    
    
    
    
    
    
    
    4,626Derivative financial instruments, net
    
    
    
    
    
    
    (5,696
    )
    
    
    
    
    
    
    (5,696
    )Total other income (expense)
    
    
    (1,130
    )
    
    
    (15,748
    )
    
    
    
    
    
    
    (16,878
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    9,826
    
    
    
    (5,247
    )
    
    
    
    
    
    
    4,579Income tax benefit (provision)
    
    
    (783
    )
    
    
    (7,652
    )
    
    
    
    
    
    
    (6,869
    )Income before minority interest from continuing
operations
    
    
    9,043
    
    
    
    2,405
    
    
    
    
    
    
    
    11,448Minority interest
    
    
    
    
    
    
    (742
    )
    
    
    
    
    
    
    (742
    )Net income (loss) from continuing operations
    
    
    9,043
    
    
    
    1,663
    
    
    
    
    
    
    
    10,706Net income (loss) from discontinued operations
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )Net income (loss)
    
    
    9,033
    
    
    
    1,663
    
    
    
    
    
    
    
    10,696




---



##### Table of Contents



MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
 Note 10.
    
    Restricted Group Supplemental Disclosure (continued)
 Combined Condensed Statements of Operations
 Nine Months Ended September 30, 2008Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    301,400
    
    
    
    226,889
    
    
    
    
    
    
    
    528,289Operating costs
    
    
    254,312
    
    
    
    172,793
    
    
    
    
    
    
    
    427,105Operating depreciation and amortization
    
    
    21,528
    
    
    
    20,140
    
    
    
    
    
    
    
    41,668Selling, general and administrative expenses
    
    
    15,194
    
    
    
    9,609
    
    
    
    
    
    
    
    24,803(Sale) purchase of emission allowances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291,034
    
    
    
    202,542
    
    
    
    
    
    
    
    493,576Operating income (loss) from continuing operations
    
    
    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
    )Derivative financial instruments
    
    
    
    
    
    
    4,515
    
    
    
    
    
    
    
    4,515Total other income (expense)
    
    
    (17,978
    )
    
    
    (30,155
    )
    
    
    
    
    
    
    (48,133
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    (7,612
    )
    
    
    (5,808
    )
    
    
    
    
    
    
    (13,420
    )Income tax benefit (provision)
    
    
    1,716
    
    
    
    (4,766
    )
    
    
    
    
    
    
    (3,050
    )Income (loss) before minority interest from
continuing operations
    
    
    (5,896
    )
    
    
    (10,574
    )
    
    
    
    
    
    
    (16,470
    )Minority interest
    
    
    
    
    
    
    3,037
    
    
    
    
    
    
    
    3,037Net income (loss)
    
    
    (5,896
    )
    
    
    (7,537
    )
    
    
    
    
    
    
    (13,433
    )
 Nine Months Ended September 30, 2007Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    310,770
    
    
    
    226,475
    
    
    
    
    
    
    
    537,245Operating costs
    
    
    248,292
    
    
    
    178,539
    
    
    
    
    
    
    
    426,831Operating depreciation and amortization
    
    
    21,080
    
    
    
    20,923
    
    
    
    
    
    
    
    42,003Selling, general and administrative expenses
    
    
    12,315
    
    
    
    9,985
    
    
    
    
    
    
    
    22,300(Sale) purchase of emission allowances
    
    
    (268
    )
    
    
    (498
    )
    
    
    
    
    
    
    (766
    )281,419
    
    
    
    208,949
    
    
    
    
    
    
    
    490,368Operating income (loss) from continuing operations
    
    
    29,351
    
    
    
    17,526
    
    
    
    
    
    
    
    46,877Other income (expense)Interest expense
    
    
    (21,414
    )
    
    
    (35,472
    )
    
    
    2,778
    
    
    
    (54,108
    )Investment income (loss)
    
    
    3,761
    
    
    
    2,803
    
    
    
    (2,778
    )
    
    
    3,786Foreign exchange gain (loss) on debt
    
    
    6,808
    
    
    
    421
    
    
    
    
    
    
    
    7,229Derivative financial instruments, net
    
    
    
    
    
    
    18,976
    
    
    
    
    
    
    
    18,976Total other income (expense)
    
    
    (10,845
    )
    
    
    (13,272
    )
    
    
    
    
    
    
    (24,117
    )Income (loss) before income taxes and
minority interest from continuing operations
    
    
    18,506
    
    
    
    4,254
    
    
    
    
    
    
    
    22,760Income tax benefit (provision)
    
    
    (4,933
    )
    
    
    (1,903
    )
    
    
    
    
    
    
    (6,836
    )Income (loss) before minority interest from continuing
operations
    
    
    13,573
    
    
    
    2,351
    
    
    
    
    
    
    
    15,924Minority interest
    
    
    
    
    
    
    (785
    )
    
    
    
    
    
    
    (785
    )Net income (loss) from continuing operations
    
    
    13,573
    
    
    
    1,566
    
    
    
    
    
    
    
    15,139Net income (loss) from discontinued operations
    
    
    (198
    )
    
    
    
    
    
    
    
    
    
    
    (198
    )Net income (loss)
    
    
    13,375
    
    
    
    1,566
    
    
    
    
    
    
    
    14,941




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
   Results of Operations
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
  Three Months Ended September 30,2008
    
    
    2007Pulp Production (000 ADMTs)
    
    
    368.4
    
    
    
    361.0Scheduled Production Downtime (000 ADMTs)
    
    
    9.0
    
    
    
    8.0Pulp Sales (000 ADMTs)
    
    
    363.8
    
    
    
    363.5Revenues (in millions)
    
    
    178.6
    
    
    
    191.1NBSK pulp list prices in Europe ($/ADMT)
    
    $
    878
    
    
    $
    810NBSK pulp list prices in Europe (/ADMT)
    
    
    585
    
    
    
    589Average pulp sales realizations (/ADMT)(1)
    
    
    484
    
    
    
    520Average Spot Currency Exchange Rates / $(2)
    
    
    0.6658
    
    
    
    0.7268C$ / $(2)
    
    
    1.0416
    
    
    
    1.0446C$ / (3)
    
    
    1.5620
    
    
    
    1.4367
 
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(3)
    
    Average Bank of Canada noon spot rate over the reporting period.  
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Three Months EndedSeptember 30,2008
    
    
    2007(in thousands)Net income (loss) from continuing operations
    
    
    (17,173
    )
    
    
    10,706Minority interest
    
    
    (3,290
    )
    
    
    742Income taxes (benefits)
    
    
    (5,913
    )
    
    
    (6,869
    )Interest expense
    
    
    16,424
    
    
    
    17,299Investment (income) loss
    
    
    2,031
    
    
    
    (1,491
    )Unrealized foreign exchange loss (gain) on debt
    
    
    9,560
    
    
    
    (4,626
    )Derivative financial instruments
    
    
    8,215
    
    
    
    5,696Operating income from continuing operations
    
    
    9,854
    
    
    
    21,457Add: Depreciation and amortization
    
    
    14,103
    
    
    
    14,351Operating EBITDA
    
    
    23,957
    
    
    
    35,808
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
  Nine Months Ended September 30,2008
    
    
    2007Pulp Production (000 ADMTs)
    
    
    1,086.1
    
    
    
    1,034.6Scheduled Production Downtime (000 ADMTs)
    
    
    26.0
    
    
    
    46.0Pulp Sales (000 ADMTs)
    
    
    1,059.2
    
    
    
    1,029.7Revenues (in millions)
    
    
    528.3
    
    
    
    537.2NBSK pulp list prices in Europe ($/ADMT)
    
    $
    886
    
    
    $
    783NBSK pulp list prices in Europe (/ADMT)
    
    
    582
    
    
    
    582Average pulp sales realizations (/ADMT)(1)
    
    
    493
    
    
    
    517Average Spot Currency Exchange Rates / $(2)
    
    
    0.6572
    
    
    
    0.7435C$ / $(2)
    
    
    1.0185
    
    
    
    1.1048C$ / (3)
    
    
    1.5486
    
    
    
    1.4844
 
 (1)
    
    List price less discounts and commissions.(2)
    
    Average Federal Reserve Bank of New York noon spot rate over the reporting period.(3)
    
    Average Bank of Canada noon spot rate over the reporting period.




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  Nine Months EndedSeptember 30,2008
    
    
    2007(in thousands)Net income (loss) from continuing operations
    
    
    (13,433
    )
    
    
    15,139Minority interest
    
    
    (3,037
    )
    
    
    785Income taxes (benefits)
    
    
    3,050
    
    
    
    6,836Interest expense
    
    
    49,057
    
    
    
    54,108Investment (income) loss
    
    
    300
    
    
    
    (3,786
    )Unrealized foreign exchange (gain) loss on debt
    
    
    3,291
    
    
    
    (7,229
    )Derivative financial instruments
    
    
    (4,515
    )
    
    
    (18,976
    )Operating income from continuing operations
    
    
    34,713
    
    
    
    46,877Add: Depreciation and amortization
    
    
    41,879
    
    
    
    42,197Operating EBITDA
    
    
    76,592
    
    
    
    89,074




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Liquidity and Capital Resources
  As at
    
    As atSeptember 30,
    
    December 31,2008
    
    2007(in thousands)Financial PositionCash and cash equivalents
    
    
    75,779
    
    
    
    84,848Working capital
    
    
    173,132
    
    
    
    168,743Property, plant and equipment
    
    
    904,653
    
    
    
    933,258Total assets
    
    
    1,249,708
    
    
    
    1,283,517Long-term liabilities
    
    
    872,743
    
    
    
    885,339Shareholders equity
    
    
    252,096
    
    
    
    276,662
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  
  Operating Activities
      
  Investing Activities
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Financing Activities
   
  
 Contractual Obligations and Commitments
  Capital Resources
  Foreign Currency




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
  Results of Operations of the Restricted Group Under Our Senior Note Indenture
   Restricted Group Results  Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
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Three Months EndedSeptember 30,2008
    
    
    2007(in thousands)Restricted GroupNet income (loss) from continuing operations(1)
    
    
    (9,427
    )
    
    
    9,043Income taxes
    
    
    (5,173
    )
    
    
    783Interest expense
    
    
    8,617
    
    
    
    6,996Investment (income) loss
    
    
    (3,609
    )
    
    
    (1,321
    )Unrealized foreign exchange (gain) loss on debt
    
    
    9,560
    
    
    
    (4,545
    )Operating income (loss) from continuing operations
    
    
    (32
    )
    
    
    10,956Add: Depreciation and amortization
    
    
    7,403
    
    
    
    7,486Operating EBITDA(1)
    
    
    7,371
    
    
    
    18,442
 
 (1)
    
    See Note 10 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results. Restricted Group Results  Nine Months Ended September 30, 2008 Compared to Nine Months Ended
September 30, 2007
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Nine Months EndedSeptember 30,2008
    
    
    2007(in thousands)Restricted GroupNet income (loss) from continuing operations(1)
    
    
    (5,896
    )
    
    
    13,573Income taxes (benefits)
    
    
    (1,716
    )
    
    
    4,933Interest expense
    
    
    19,769
    
    
    
    21,414Investment (income) loss
    
    
    (4,972
    )
    
    
    (3,761
    )Unrealized foreign exchange (gain) loss on debt
    
    
    3,181
    
    
    
    (6,808
    )Operating income (loss) from continuing operations
    
    
    10,366
    
    
    
    29,351Add: Depreciation and amortization
    
    
    21,739
    
    
    
    21,274Operating EBITDA(1)
    
    
    32,105
    
    
    
    50,625
 
 (1)
    
    See Note 10 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 31,2008
    
    2007(in thousands)Restricted Group Financial Position(1)Cash and cash equivalents
    
    
    61,689
    
    
    
    59,371Working capital
    
    
    136,895
    
    
    
    120,486Property, plant and equipment
    
    
    370,672
    
    
    
    385,569Total assets
    
    
    641,845
    
    
    
    627,854Long-term liabilities
    
    
    329,397
    
    
    
    305,158Shareholders equity
    
    
    261,754
    
    
    
    278,582
 
 (1)
    
    See Note 10 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results.   




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Critical Accounting Policies
    New Accounting Standards
  Cautionary Statement Regarding Forward-Looking Information
 Private Securities
Litigation Reform Act of 1995
 Cyclical Nature of Business
 Revenues




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Costs
  Currency




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures. Securities Exchange Act of 1934
  Changes in Internal Controls.




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  The Celgar green energy project is subject to risks inherent in large capital projects
  The German Renewable Energy Resources Act is subject to governmental amendment
  Our business is subject to a number of global economic risks




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ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1*
    
    Section 906 Certification of Chief Executive Officer32.2*
    
    Section 906 Certification of Chief Financial Officer
 
 *
    
    In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission and are not filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic
incorporation by reference into any of the Companys registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder or any offering
memorandum, unless the Company specifically incorporates them by reference therein.




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