##### 



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, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from _________ to _________
 Commission File No.: 000-09409
 MERCER INTERNATIONAL INC.
 (Exact name of Registrant as specified in its charter)
 Washington
    
    91-6087550(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8  (Address of office)
 (604) 684-1099  (Registrants telephone number, including area code)
 Securities Exchange Act of 1934 þ o
 þ o
 o þ




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##### 



PART I. FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 MERCER INTERNATIONAL INC.
 CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED BALANCE SHEETS
 As at September 30, 2005 and December 31, 2004
(Unaudited)
(Euros in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    
    89,039
    
    
    
    49,568Cash restricted
    
    
    7,646
    
    
    
    45,295Receivables
    
    
    75,696
    
    
    
    54,687Inventories
    
    
    85,678
    
    
    
    52,898Prepaid expenses and other
    
    
    6,446
    
    
    
    4,961Total current assets
    
    
    264,505
    
    
    
    207,409Long-Term AssetsCash restricted
    
    
    24,537
    
    
    
    47,538Property, plant and equipment
    
    
    1,031,879
    
    
    
    936,035Investments
    
    
    4,664
    
    
    
    5,079Deferred note issuance and other costs
    
    
    8,903
    
    
    
    5,069Deferred income tax
    
    
    74,749
    
    
    
    54,5191,144,732
    
    
    
    1,048,240Total assets
    
    
    1,409,237
    
    
    
    1,255,649LIABILITIESCurrent LiabilitiesAccounts payable and accrued expenses
    
    
    94,702
    
    
    
    56,542Construction costs payable
    
    
    1,088
    
    
    
    65,436Debt, current portion
    
    
    37,135
    
    
    
    107,090Total current liabilities
    
    
    132,925
    
    
    
    229,068Long-Term LiabilitiesDebt, less current portion
    
    
    923,144
    
    
    
    777,272Unrealized foreign exchange rate derivative losses
    
    
    49,346
    
    
    
    Unrealized interest rate derivative losses
    
    
    90,637
    
    
    
    75,471Pension and other post-retirement benefit obligations
    
    
    17,008
    
    
    
    Capital leases and other
    
    
    9,562
    
    
    
    9,035Deferred income tax
    
    
    7,650
    
    
    
    2,0621,097,347
    
    
    
    863,840Total liabilities
    
    
    1,230,272
    
    
    
    1,092,908Minority Interest
    
    
    
    
    
    
    SHAREHOLDERS EQUITYShares of beneficial interest
    
    
    181,600
    
    
    
    83,397Additional paid-in capital, stock options
    
    
    14
    
    
    
    14Retained earnings (deficit)
    
    
    (18,197
    )
    
    
    69,176Accumulated other comprehensive income
    
    
    15,548
    
    
    
    10,154Total shareholders equity
    
    
    178,965
    
    
    
    162,741Total liabilities and shareholders equity
    
    
    1,409,237
    
    
    
    1,255,649
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
 2005
    
    
    2004Revenues
    
    
    376,430
    
    
    
    148,011Costs and expenses:Cost of sales
    
    
    350,185
    
    
    
    127,859General and administrative expenses
    
    
    22,399
    
    
    
    21,108Gain on sale of emission credits
    
    
    (12,353
    )
    
    
    Impairment of capital assets
    
    
    
    
    
    
    6,000Flooding losses and expenses, less grant income
    
    
    
    
    
    
    669Total costs and expenses
    
    
    360,231
    
    
    
    155,636Income (loss) from operations
    
    
    16,199
    
    
    
    (7,625
    )Other income (expense):Interest expense
    
    
    (63,320
    )
    
    
    (9,554
    )Investment income
    
    
    1,594
    
    
    
    1,679Realized loss on derivative financial instruments
    
    
    (2,455
    )
    
    
    Unrealized loss on derivative financial instruments
    
    
    (67,804
    )
    
    
    (1,077
    )Unrealized foreign exchange loss on debt
    
    
    (1,591
    )
    
    
    Impairment of investments
    
    
    (1,699
    )
    
    
    Total other income (expense)
    
    
    (135,275
    )
    
    
    (8,952
    )Loss before income taxes and minority interest
    
    
    (119,076
    )
    
    
    (16,577
    )Income tax benefit
    
    
    14,627
    
    
    
    37Loss before minority interest
    
    
    (104,449
    )
    
    
    (16,540
    )Minority interest
    
    
    17,076
    
    
    
    3,936Net loss
    
    
    (87,373
    )
    
    
    (12,604
    )Retained earnings, beginning of period
    
    
    69,176
    
    
    
    49,196Retained earnings (deficit), end of period
    
    
    (18,197
    )
    
    
    36,592Loss per shareBasic and diluted
    
    
    (2.86
    )
    
    
    (0.73
    )
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For Three Months Ended September 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
 2005
    
    
    2004Revenues
    
    
    148,928
    
    
    
    47,360Costs and expenses:Cost of sales
    
    
    140,018
    
    
    
    39,231General and administrative expenses
    
    
    7,083
    
    
    
    6,880Gain on sale of emission credits
    
    
    (6,065
    )
    
    
    Impairment of capital assets
    
    
    
    
    
    
    6,000Total costs and expenses
    
    
    141,036
    
    
    
    52,111Income (loss) from operations
    
    
    7,892
    
    
    
    (4,751
    )Other income (expense):Interest expense
    
    
    (21,911
    )
    
    
    (4,200
    )Investment income
    
    
    613
    
    
    
    215Realized loss on derivative financial instruments
    
    
    (284
    )
    
    
    Unrealized gain (loss) on derivative financial instruments
    
    
    3,335
    
    
    
    (8,105
    )Unrealized foreign exchange gain on debt
    
    
    5,918
    
    
    
    Total other income (expense)
    
    
    (12,329
    )
    
    
    (12,090
    )Loss before income taxes and minority interest
    
    
    (4,437
    )
    
    
    (16,841
    )Income tax (provision) benefit
    
    
    (6,785
    )
    
    
    236Loss before minority interest
    
    
    (11,222
    )
    
    
    (16,605
    )Minority interest
    
    
    5,667
    
    
    
    6,726Net loss
    
    
    (5,555
    )
    
    
    (9,879
    )Retained earnings (deficit), beginning of period
    
    
    (12,642
    )
    
    
    46,471Retained earnings (deficit), end of period
    
    
    (18,197
    )
    
    
    36,592Loss per shareBasic and diluted
    
    
    (0.17
    )
    
    
    (0.57
    )
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 For Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Net loss
    
    
    (87,373
    )
    
    
    (12,604
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    4,418
    
    
    
    313Pension plan additional minimum liability
    
    
    412
    
    
    
    Unrealized gains on securitiesUnrealized holding gains (losses) arising during the period
    
    
    564
    
    
    
    (269
    )Other comprehensive income
    
    
    5,394
    
    
    
    44Total comprehensive loss
    
    
    (81,979
    )
    
    
    (12,560
    )
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 For Three Months Ended September 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Net loss
    
    
    (5,555
    )
    
    
    (9,879
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    3,300
    
    
    
    (2,039
    )Pension plan minimum additional liability
    
    
    412
    
    
    
    Unrealized gains on securitiesUnrealized holding gains (losses) arising during the period
    
    
    259
    
    
    
    (19
    )Other comprehensive income (loss)
    
    
    3,971
    
    
    
    (2,058
    )Total comprehensive loss
    
    
    (1,584
    )
    
    
    (11,937
    )
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
 2005
    
    
    2004Cash Flows from (used in) Operating Activities:Net loss
    
    
    (87,373
    )
    
    
    (12,604
    )Adjustments to reconcile net loss to cash flows
from operating activitiesUnrealized losses on derivatives
    
    
    67,804
    
    
    
    1,077Depreciation and amortization
    
    
    39,599
    
    
    
    17,217Unrealized foreign exchange loss on debt
    
    
    1,591
    
    
    
    Impairment of capital assets
    
    
    
    
    
    
    6,000Impairment of investments and securities
    
    
    1,699
    
    
    
    Minority interest
    
    
    (17,076
    )
    
    
    (3,936
    )Deferred income taxes
    
    
    (14,642
    )
    
    
    Stock compensation expense
    
    
    330
    
    
    
    690Other
    
    
    144
    
    
    
    1,139Changes in current assets and liabilitiesReceivables
    
    
    (20,428
    )
    
    
    (2,056
    )Inventories
    
    
    (9,581
    )
    
    
    (35,825
    )Accounts payable and accrued expenses
    
    
    33,765
    
    
    
    26,331Other
    
    
    (1,435
    )
    
    
    782Net cash used in operating activities
    
    
    (5,603
    )
    
    
    (1,185
    )Cash Flows from (used in) Investing Activities:Cash restricted
    
    
    60,650
    
    
    
    (17,517
    )Purchase of property, plant and equipment
    
    
    (18,646
    )
    
    
    (241,825
    )Acquisition of Celgar pulp mill
    
    
    (146,608
    )
    
    
    Sale of available-for-sale securities
    
    
    
    
    
    
    1,161Other
    
    
    
    
    
    
    115Net cash used in investing activities
    
    
    (104,604
    )
    
    
    (258,066
    )Cash Flows from (used in) Financing Activities:Increase (decrease) in construction costs payable
    
    
    (64,348
    )
    
    
    118,196Proceeds from borrowings of notes payable and debt
    
    
    311,792
    
    
    
    126,000Repayment of notes payable and debt
    
    
    (261,691
    )
    
    
    (21,886
    )Proceeds from investment grants
    
    
    78,595
    
    
    
    28,710Repayment of capital lease obligations
    
    
    (2,930
    )
    
    
    (1,781
    )Issuance of shares of beneficial interest
    
    
    67,329
    
    
    
    582Net cash from financing activities
    
    
    128,747
    
    
    
    249,821Effect of exchange rate changes on cash and cash equivalents
    
    
    20,931
    
    
    
    80Net increase (decrease) in cash and cash equivalents
    
    
    39,471
    
    
    
    (9,350
    )Cash and cash equivalents, beginning of period
    
    
    49,568
    
    
    
    51,993Cash and cash equivalents, end of period
    
    
    89,039
    
    
    
    42,643
 The accompanying notes are an integral part of these financial statements.




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 1. Basis of Presentation




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 2. Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation
 Nine Months Ended September 30,2005
    
    
    2004Net LossAs reported
    
    
    (87,373
    )
    
    
    (12,604
    )Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of any
related tax effects
    
    
    (51
    )
    
    
    (31
    )Pro forma
    
    
    (87,424
    )
    
    
    (12,635
    )Basic and Diluted Loss Per ShareAs reported
    
    
    (2.86
    )
    
    
    (0.73
    )Pro forma
    
    
    (2.86
    )
    
    
    (0.73
    )
 Three Months Ended September 30,2005
    
    
    2004Net LossAs reported
    
    
    (5,555
    )
    
    
    (9,879
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of any related tax
effects
    
    
    (30
    )
    
    
    (2
    )Pro forma
    
    
    (5,585
    )
    
    
    (9,881
    )Basic and Diluted Loss Per ShareAs reported
    
    
    (0.17
    )
    
    
    (0.57
    )Pro forma
    
    
    (0.17
    )
    
    
    (0.57
    )
 
  




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 3. Income (Loss) Per Share
  Nine Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Loss from continuing operations  basic
    
    
    (87,373
    )
    
    
    (12,604
    )
    
    
    (5,555
    )
    
    
    (9,879
    )Interest on convertible notes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from continuing operations  diluted
    
    
    (87,373
    )
    
    
    (12,604
    )
    
    
    (5,555
    )
    
    
    (9,879
    )Weighted average number of common shares
outstanding:Basic
    
    
    30,557,409
    
    
    
    17,256,894
    
    
    
    33,092,853
    
    
    
    17,324,229Effect of dilutive shares:Stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    30,557,409
    
    
    
    17,256,894
    
    
    
    33,092,835
    
    
    
    17,324,229Loss from continuing operations per share:Basic
    
    
    (2.86
    )
    
    
    (0.73
    )
    
    
    (0.17
    )
    
    
    (0.57
    )Diluted
    
    
    (2.86
    )
    
    
    (0.73
    )
    
    
    (0.17
    )
    
    
    (0.57
    )




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##### 



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




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 4. Acquisition of the Celgar Mill and Related Financings (contd)
 Financings
    
 Pro Forma Financial Summary (Unaudited)
  Nine Months EndedSeptember 30,2005
    
    
    2004Total revenues
    
    
    398,153
    
    
    
    279,972Net income (loss)
    
    
    (96,192
    )
    
    
    (15,784
    )Income (loss) from continuing operations per share:Basic and diluted
    
    
    (2.91
    )
    
    
    (0.49
    )
 Note 5. Business Segment Information




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##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 5. Business Segment Information (contd)
  Corporate,Rosenthal
    
    

Celgar(1)
    
    
    Stendal
    
    
    Total
    
    
    
    
    
    
    Other and
    
    
    ConsolidatedPulp
    
    
    Pulp
    
    
    Pulp
    
    
    Pulp
    
    
    Paper
    
    
    Eliminations
    
    
    TotalNine Months Ended September 30, 2005Sales to external customers
    
    
    103,058
    
    
    
    97,458
    
    
    
    128,919
    
    
    
    329,435
    
    
    
    46,995
    
    
    
    
    
    
    
    376,430Intersegment net sales
    
    
    
    
    
    
    
    
    
    
    4,679
    
    
    
    4,679
    
    
    
    
    
    
    
    (4,679
    )
    
    
    103,058
    
    
    
    97,458
    
    
    
    133,598
    
    
    
    334,114
    
    
    
    46,995
    
    
    
    (4,679
    )
    
    
    376,430Operating costs
    
    
    73,146
    
    
    
    86,438
    
    
    
    112,739
    
    
    
    272,323
    
    
    
    44,879
    
    
    
    (5,879
    )
    
    
    311,323Depreciation and amortization
    
    
    10,173
    
    
    
    7,083
    
    
    
    20,179
    
    
    
    37,435
    
    
    
    592
    
    
    
    835
    
    
    
    38,862General and administrative
    
    
    5,441
    
    
    
    5,285
    
    
    
    3,120
    
    
    
    13,846
    
    
    
    3,720
    
    
    
    4,833
    
    
    
    22,399Emission credits
    
    
    (4,402
    )
    
    
    
    
    
    
    (7,951
    )
    
    
    (12,353
    )
    
    
    
    
    
    
    
    
    
    
    (12,353
    )84,358
    
    
    
    98,806
    
    
    
    128,087
    
    
    
    311,251
    
    
    
    49,191
    
    
    
    (211
    )
    
    
    360,231Income (loss) from operations
    
    
    18,700
    
    
    
    (1,348
    )
    
    
    5,511
    
    
    
    22,863
    
    
    
    (2,196
    )
    
    
    (4,468
    )
    
    
    16,199Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63,320
    )Investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,594Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,259
    )Foreign exchange loss on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,591
    )Impairment of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,699
    )(135,275
    )Loss before income taxes and minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119,076
    )Segment assets
    
    
    341,732
    
    
    
    251,918
    
    
    
    787,388
    
    
    
    1,381,038
    
    
    
    22,783
    
    
    
    5,416
    
    
    
    1,409,237Nine Months Ended September 30, 2004Sales to external customers
    
    
    106,013
    
    
    
    
    
    
    
    600
    
    
    
    106,613
    
    
    
    41,398
    
    
    
    
    
    
    
    148,011Intersegment net sales
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    1,822
    
    
    
    
    
    
    
    (1,822
    )
    
    
    107,835
    
    
    
    
    
    
    
    600
    
    
    
    108,435
    
    
    
    41,398
    
    
    
    (1,822
    )
    
    
    148,011Operating costs
    
    
    72,705
    
    
    
    
    
    
    
    509
    
    
    
    73,214
    
    
    
    39,686
    
    
    
    (1,742
    )
    
    
    111,158Depreciation and amortization
    
    
    14,166
    
    
    
    
    
    
    
    795
    
    
    
    14,961
    
    
    
    1,740
    
    
    
    
    
    
    
    16,701General and administrative
    
    
    7,960
    
    
    
    
    
    
    
    6,645
    
    
    
    14,605
    
    
    
    3,886
    
    
    
    2,617
    
    
    
    21,108Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Flooding grants, less losses and expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    66994,831
    
    
    
    
    
    
    
    7,949
    
    
    
    102,780
    
    
    
    51,981
    
    
    
    875
    
    
    
    155,636Income (loss) from operations
    
    
    13,004
    
    
    
    
    
    
    
    (7,349
    )
    
    
    5,655
    
    
    
    (10,583
    )
    
    
    (2,697
    )
    
    
    (7,625
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,554
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,679Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077
    )Loss before income taxes and minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,577
    )Segment assets
    
    
    384,764
    
    
    
    
    
    
    
    773,081
    
    
    
    1,157,845
    
    
    
    31,699
    
    
    
    3,183
    
    
    
    1,192,727
 
 (1)
    
    The results of the Celgar pulp mill are from the date of its acquisition on February 14, 2005.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 5. Business Segment Information (contd)
 Corporate,Rosenthal
    
    
    Celgar(1)
    
    
    Stendal
    
    
    Total
    
    
    
    
    
    
    Other and
    
    
    ConsolidatedPulp
    
    
    Pulp
    
    
    Pulp
    
    
    Pulp
    
    
    Paper
    
    
    Eliminations
    
    
    TotalThree Months Ended September 30, 2005Sales to external customers
    
    
    37,122
    
    
    
    48,978
    
    
    
    47,313
    
    
    
    133,413
    
    
    
    15,532
    
    
    
    
    
    
    
    148,928Intersegment net sales
    
    
    
    
    
    
    
    
    
    
    1,339
    
    
    
    1,339
    
    
    
    
    
    
    
    (1,339
    )
    
    
    37,122
    
    
    
    48,978
    
    
    
    48,652
    
    
    
    134,752
    
    
    
    15,515
    
    
    
    (1,339
    )
    
    
    148,928Operating costs
    
    
    25,741
    
    
    
    45,884
    
    
    
    41,193
    
    
    
    112,818
    
    
    
    15,278
    
    
    
    (2,057
    )
    
    
    126,039Depreciation and amortization
    
    
    3,543
    
    
    
    2,986
    
    
    
    6,725
    
    
    
    13,254
    
    
    
    213
    
    
    
    512
    
    
    
    13,979General and administrative
    
    
    1,631
    
    
    
    2,448
    
    
    
    1,443
    
    
    
    5,522
    
    
    
    1,158
    
    
    
    403
    
    
    
    7,083Emission credits
    
    
    (2,267
    )
    
    
    
    
    
    
    (3,798
    )
    
    
    (6,065
    )
    
    
    
    
    
    
    
    
    
    
    (6,065
    )28,648
    
    
    
    51,318
    
    
    
    45,563
    
    
    
    125,529
    
    
    
    16,649
    
    
    
    (1,142
    )
    
    
    141,036Income (loss) from operations
    
    
    8,474
    
    
    
    (2,340
    )
    
    
    3,089
    
    
    
    9,223
    
    
    
    (1,134
    )
    
    
    (197
    )
    
    
    7,892Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,911
    )Investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,051Foreign exchange gain on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,918(12,329
    )Loss before income taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,437
    )Three Months Ended September 30, 2004Sales to external customers
    
    
    34,982
    
    
    
    
    
    
    
    (327
    )
    
    
    34,655
    
    
    
    12,705
    
    
    
    
    
    
    
    47,360Intersegment net sales
    
    
    643
    
    
    
    
    
    
    
    
    
    
    
    643
    
    
    
    
    
    
    
    (643
    )
    
    
    35,625
    
    
    
    
    
    
    
    (327
    )
    
    
    35,298
    
    
    
    12,705
    
    
    
    (643
    )
    
    
    47,360Operating costs
    
    
    23,580
    
    
    
    
    
    
    
    509
    
    
    
    24,089
    
    
    
    12,473
    
    
    
    (1,425
    )
    
    
    35,137Depreciation and amortization
    
    
    3,030
    
    
    
    
    
    
    
    783
    
    
    
    3,813
    
    
    
    599
    
    
    
    (318
    )
    
    
    4,094General and administrative
    
    
    3,324
    
    
    
    
    
    
    
    1,197
    
    
    
    4,521
    
    
    
    1,243
    
    
    
    1,116
    
    
    
    6,880Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Flooding grants, less losses and expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,934
    
    
    
    
    
    
    
    2,489
    
    
    
    32,423
    
    
    
    20,315
    
    
    
    (627
    )
    
    
    52,111Income (loss) from operations
    
    
    5,691
    
    
    
    
    
    
    
    (2,816
    )
    
    
    2,875
    
    
    
    (7,610
    )
    
    
    (16
    )
    
    
    (4,751
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,200
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215Derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,105
    )(12,090
    )Loss before income taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,841
    )
 
 (1)
    
    The results of the Celgar pulp mill are from the date of its acquisition on February 14, 2005.




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 6. Inventories
 September 30, 2005
    
    
    December 31, 2004Raw materials
    
    
    50,716
    
    
    
    38,679Work in process and finished goods
    
    
    34,962
    
    
    
    14,219
    85,678
    
    
    
    52,898
 Note 7. Pension and Other Post-Retirement Plans
  
 Nine Months Ended September 30, 2005Pension Benefits
    
    
    Post-Retirement BenefitsService cost
    
    
    420
    
    
    
    183Interest cost
    
    
    826
    
    
    
    402Expected return on plan assets
    
    
    (808
    )
    
    
    Net periodic benefit cost
    
    
    438
    
    
    
    585
 Three Months Ended September 30, 2005Pension Benefits
    
    
    Post-Retirement BenefitsService cost
    
    
    175
    
    
    
    76Interest cost
    
    
    345
    
    
    
    168Expected return on plan assets
    
    
    (337
    )
    
    
    Net periodic benefit cost
    
    
    183
    
    
    
    244




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 8. Derivatives Transactions
 Nine Months Ended September 30,2005
    
    
    2004Realized loss on derivative financial instruments
    
    
    (2,455
    )
    
    
    Unrealized net loss on interest rate derivatives
    
    
    (15,165
    )
    
    
    (15,825
    )Unrealized net gain (loss) on foreign exchange
derivatives
    
    
    (52,440
    )
    
    
    14,748Unrealized loss on natural gas forward supply contract
    
    
    (199
    )
    
    
    Unrealized gain (loss) on derivative financial
instruments
    
    
    (67,804
    )
    
    
    (1,077
    )
 Three Months Ended September 30,2005
    
    
    2004Realized loss on derivative financial instruments
    
    
    (284
    )
    
    
    Unrealized net gain (loss) on interest rate derivatives
    
    
    5,310
    
    
    
    (14,110
    )Unrealized net gain (loss) on foreign exchange
derivatives
    
    
    (1,944
    )
    
    
    6,005Unrealized loss on natural gas forward supply contract
    
    
    (31
    )
    
    
    Unrealized gain (loss) on derivative financial
instruments
    
    
    (3,335
    )
    
    
    (8,105
    )
        




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 9. European Union Emissions Trading Scheme
  




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure
  Combined Condensed Balance Sheet
 September 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupASSETSCurrent assetsCash and cash equivalents
    
    
    52,566
    
    
    
    36,473
    
    
    
    
    
    
    
    89,039Cash restricted
    
    
    
    
    
    
    7,646
    
    
    
    
    
    
    
    7,646Receivables
    
    
    40,758
    
    
    
    35,113
    
    
    
    (175
    )
    
    
    75,696Inventories
    
    
    50,875
    
    
    
    34,803
    
    
    
    
    
    
    
    85,678Prepaid expenses and other
    
    
    3,968
    
    
    
    2,478
    
    
    
    
    
    
    
    6,446Total current assets
    
    
    148,167
    
    
    
    116,513
    
    
    
    (175
    )
    
    
    264,505Cash restricted
    
    
    
    
    
    
    24,537
    
    
    
    
    
    
    
    24,537Property, plant and equipment
    
    
    397,071
    
    
    
    635,468
    
    
    
    (660
    )
    
    
    1,031,879Other
    
    
    9,483
    
    
    
    4,084
    
    
    
    
    
    
    
    13,567Deferred income tax
    
    
    21,516
    
    
    
    53,233
    
    
    
    
    
    
    
    74,749Due from unrestricted group
    
    
    45,473
    
    
    
    
    
    
    
    (45,473
    )
    
    
    Total assets
    
    
    621,710
    
    
    
    833,835
    
    
    
    (46,308
    )
    
    
    1,409,237LIABILITIESCurrent liabilitiesAccounts payable and accrued expenses
    
    
    36,128
    
    
    
    58,749
    
    
    
    (175
    )
    
    
    94,702Construction costs payable
    
    
    
    
    
    
    1,088
    
    
    
    
    
    
    
    1,088Debt, current portion
    
    
    
    
    
    
    37,135
    
    
    
    
    
    
    
    37,135Total current liabilities
    
    
    36,128
    
    
    
    96,972
    
    
    
    (175
    )
    
    
    132,925Debt, less current portion
    
    
    342,221
    
    
    
    580,923
    
    
    
    
    
    
    
    923,144Due to restricted group
    
    
    
    
    
    
    45,473
    
    
    
    (45,473
    )
    
    
    Unrealized derivatives loss
    
    
    
    
    
    
    139,983
    
    
    
    
    
    
    
    139,983Other
    
    
    20,152
    
    
    
    6,418
    
    
    
    
    
    
    
    26,570Deferred income tax
    
    
    3,845
    
    
    
    3,805
    
    
    
    
    
    
    
    7,650Total liabilities
    
    
    402,346
    
    
    
    873,574
    
    
    
    (45,648
    )
    
    
    1,230,272SHAREHOLDERS EQUITYTotal shareholders equity
    
    
    219,364
    
    
    
    (39,739
    )(1)
    
    
    (660
    )
    
    
    178,965Total liabilities and shareholders equity
    
    
    621,710
    
    
    
    833,835
    
    
    
    (46,308
    )
    
    
    1,409,237
 
 (1)
    
    Shareholders equity does not include government grants received or receivable related to the
Stendal mill. Shareholders equity is impacted by the unrealized non-cash marked to market
valuation losses on derivative financial instruments.




---



##### 



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




---



##### 



MERCER INTERNATIONAL INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Nine Months Ended September 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    200,516
    
    
    
    175,914
    
    
    
    
    
    
    
    376,430Operating costs
    
    
    158,384
    
    
    
    152,939
    
    
    
    
    
    
    
    311,323Operating depreciation and amortization
    
    
    17,431
    
    
    
    20,771
    
    
    
    660
    
    
    
    38,862General and administrative
    
    
    15,559
    
    
    
    6,840
    
    
    
    
    
    
    
    22,399Gain on sale of emission credits
    
    
    (4,402
    )
    
    
    (7,951
    )
    
    
    
    
    
    
    (12,353
    )186,972
    
    
    
    172,599
    
    
    
    660
    
    
    
    360,231Income (loss) from operations
    
    
    13,544
    
    
    
    3,315
    
    
    
    (660
    )
    
    
    16,199Other income (expense)Interest expense
    
    
    (23,918
    )
    
    
    (41,351
    )
    
    
    1,949
    
    
    
    (63,320
    )Investment income
    
    
    2,313
    
    
    
    1,230
    
    
    
    (1,949
    )
    
    
    1,594Derivative financial instruments, net
    
    
    (494
    )
    
    
    (69,765
    )
    
    
    
    
    
    
    (70,259
    )Unrealized foreign exchange loss on debt
    
    
    (1,591
    )
    
    
    
    
    
    
    
    
    
    
    (1,591
    )Impairment of investments
    
    
    (1,699
    )
    
    
    
    
    
    
    
    
    
    
    (1,699
    )Total other expense
    
    
    (25,389
    )
    
    
    (109,886
    )
    
    
    
    
    
    
    (135,275
    )Loss before income taxes and
minority interest
    
    
    (11,845
    )
    
    
    (106,571
    )
    
    
    (660
    )
    
    
    (119,076
    )Income tax (provision) benefit
    
    
    (7,867
    )
    
    
    22,494
    
    
    
    
    
    
    
    14,627Loss before minority interest
    
    
    (19,712
    )
    
    
    (84,077
    )
    
    
    (660
    )
    
    
    (104,449
    )Minority interest
    
    
    
    
    
    
    17,076
    
    
    
    
    
    
    
    17,076Net loss
    
    
    (19,712
    )
    
    
    (67,001
    )
    
    
    (660
    )
    
    
    (87,373
    )
 Nine Months Ended September 30, 2004Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    107,835
    
    
    
    41,998
    
    
    
    (1,822
    )
    
    
    148,011Operating costs
    
    
    72,255
    
    
    
    40,195
    
    
    
    (1,292
    )
    
    
    111,158Operating depreciation and amortization
    
    
    14,166
    
    
    
    2,535
    
    
    
    
    
    
    
    16,701General and administrative
    
    
    11,027
    
    
    
    10,531
    
    
    
    (450
    )
    
    
    21,108Impairment of assets
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000Flooding grants, less losses and expenses
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    66997,448
    
    
    
    59,930
    
    
    
    (1,742
    )
    
    
    155,636Income (loss) from operations
    
    
    10,387
    
    
    
    (17,932
    )
    
    
    (80
    )
    
    
    (7,625
    )Other income (expense)Interest expense
    
    
    (11,174
    )
    
    
    (2,309
    )
    
    
    3,929
    
    
    
    (9,554
    )Investment income
    
    
    2,534
    
    
    
    (301
    )
    
    
    (554
    )
    
    
    1,679Derivative financial instruments, net
    
    
    (102
    )
    
    
    (15,723
    )
    
    
    
    
    
    
    (15,825
    )Unrealized foreign exchange loss on debt
    
    
    (173
    )
    
    
    14,921
    
    
    
    
    
    
    
    14,748Total other expense
    
    
    (8,915
    )
    
    
    (3,412
    )
    
    
    3,375
    
    
    
    (8,952
    )Loss before income taxes and
minority interest
    
    
    1,472
    
    
    
    (21,344
    )
    
    
    3,295
    
    
    
    (16,577
    )Income tax (provision) benefit
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Loss before minority interest
    
    
    1,509
    
    
    
    (21,344
    )
    
    
    3,295
    
    
    
    (16,540
    )Minority interest
    
    
    
    
    
    
    3,936
    
    
    
    
    
    
    
    3,936Net income (loss)
    
    
    1,509
    
    
    
    (17,408
    )
    
    
    3,295
    
    
    
    (12,604
    )




---



##### 



MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
(Euros in thousands, except for shares and per share data)
 Note 10. Restricted Group Supplemental Disclosure (contd)
 Combined Condensed Statement of Operations
 Three Months Ended September 30, 2005Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    86,100
    
    
    
    62,828
    
    
    
    
    
    
    
    148,928Operating costs
    
    
    71,124
    
    
    
    54,915
    
    
    
    
    
    
    
    126,039Operating depreciation and amortization
    
    
    6,602
    
    
    
    7,155
    
    
    
    222
    
    
    
    13,979General and administrative
    
    
    4,482
    
    
    
    2,601
    
    
    
    
    
    
    
    7,083Gain on sale of emission credits
    
    
    (2,267
    )
    
    
    (3,798
    )
    
    
    
    
    
    
    (6,065
    )79,941
    
    
    
    60,873
    
    
    
    222
    
    
    
    141,036Income (loss) from operations
    
    
    6,159
    
    
    
    1,955
    
    
    
    (222
    )
    
    
    7,892Other income (expense)Interest expense
    
    
    (7,987
    )
    
    
    (14,780
    )
    
    
    856
    
    
    
    (21,911
    )Investment income
    
    
    1,016
    
    
    
    453
    
    
    
    (856
    )
    
    
    613Derivative financial instruments, net
    
    
    (31
    )
    
    
    3,082
    
    
    
    
    
    
    
    3,051Unrealized foreign exchange gain on debt
    
    
    5,918
    
    
    
    
    
    
    
    
    
    
    
    5,918Total other income (expense)
    
    
    (1,084
    )
    
    
    (11,245
    )
    
    
    
    
    
    
    (12,329
    )Income (loss) before income taxes and
minority interest
    
    
    5,075
    
    
    
    (9,290
    )
    
    
    (222
    )
    
    
    (4,437
    )Income tax (provision) benefit
    
    
    (3,091
    )
    
    
    (3,694
    )
    
    
    
    
    
    
    (6,785
    )Income (loss) before minority interest
    
    
    1,984
    
    
    
    (12,984
    )
    
    
    (222
    )
    
    
    (11,222
    )Minority interest
    
    
    
    
    
    
    5,667
    
    
    
    
    
    
    
    5,667Net income (loss)
    
    
    1,984
    
    
    
    (7,317
    )
    
    
    (222
    )
    
    
    (5,555
    )
 Three Months Ended September 30, 2004Restricted
    
    
    Unrestricted
    
    
    
    
    
    
    ConsolidatedGroup
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    GroupRevenues
    
    
    35,625
    
    
    
    12,378
    
    
    
    (643
    )
    
    
    47,360Operating costs
    
    
    23,580
    
    
    
    12,982
    
    
    
    (1,425
    )
    
    
    35,137Operating depreciation and amortization
    
    
    3,030
    
    
    
    1,382
    
    
    
    (318
    )
    
    
    4,094General and administrative
    
    
    4,732
    
    
    
    2,440
    
    
    
    (292
    )
    
    
    6,880Impairment of assets
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    6,00031,342
    
    
    
    22,804
    
    
    
    (2,035
    )
    
    
    52,111Income (loss) from operations
    
    
    4,283
    
    
    
    (10,426
    )
    
    
    1,392
    
    
    
    (4,751
    )Other income (expense)Interest expense
    
    
    (5,151
    )
    
    
    (1,857
    )
    
    
    2,808
    
    
    
    (4,200
    )Investment income
    
    
    789
    
    
    
    (87
    )
    
    
    (487
    )
    
    
    215Derivative financial instruments, net
    
    
    4,712
    
    
    
    (14,157
    )
    
    
    
    
    
    
    (9,445
    )Unrealized foreign exchange gain on debt
    
    
    285
    
    
    
    1,055
    
    
    
    
    
    
    
    1,340Total other income (expense)
    
    
    635
    
    
    
    (15,046
    )
    
    
    2,321
    
    
    
    (12,090
    )Income (loss) before income taxes and
minority interest
    
    
    4,918
    
    
    
    (25,472
    )
    
    
    3,713
    
    
    
    (16,841
    )Income tax (provision) benefit
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    236Income (loss) before minority interest
    
    
    5,154
    
    
    
    (25,472
    )
    
    
    3,713
    
    
    
    (16,605
    )Minority interest
    
    
    
    
    
    
    6,726
    
    
    
    
    
    
    
    6,726Net income (loss)
    
    
    5,154
    
    
    
    (18,746
    )
    
    
    3,713
    
    
    
    (9,879
    )




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  Results of Operations
  Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
  Nine Months Ended September 30,2005
    
    
    2004(ADMTs)Sales Volume by Product ClassPulp sales volume by mill:Rosenthal
    
    
    241,572
    
    
    
    229,462Celgar
    
    
    325,419
    
    
    
    Stendal
    
    
    243,267
    
    
    
    Total pulp sales volume(1)
    
    
    810,258
    
    
    
    229,462Paper sales volume
    
    
    51,406
    
    
    
    47,501Total sales volume(1)
    
    
    861,664
    
    
    
    276,963




---



##### 



Nine Months Ended September 30,2005
    
    
    2004(in thousands)Revenues by Product ClassPulp revenues by mill:Rosenthal
    
    
    103,058
    
    
    
    106,013Celgar
    
    
    97,458
    
    
    
    Stendal
    
    
    128,919
    
    
    
    600Total pulp revenues(1)
    
    
    329,435
    
    
    
    106,613Paper revenues
    
    
    46,995
    
    
    
    41,398Total revenues(1)
    
    
    376,430
    
    
    
    148,011
 
 (1)
    
    Excluding intercompany sales volumes of 10,651 and 3,897 ADMTs of pulp and intercompany net
sales revenues of approximately 4.8 million and 1.8 million in the nine months ended
September 30, 2005 and 2004, respectively.  Nine Months Ended September 30,2005
    
    
    2004(ADMTs)Production by Product ClassPulp production by mill:Rosenthal
    
    
    240,665
    
    
    
    231,231Celgar
    
    
    289,868
    
    
    
    Stendal
    
    
    357,814
    
    
    
    Total pulp production
    
    
    888,347
    
    
    
    231,231Paper production
    
    
    50,001
    
    
    
    47,761Total production
    
    
    938,348
    
    
    
    278,992
   
  
     




---



##### 



 
    
 
   
  
  
  
  
  
   
  




---



##### 



    
  
 
         
      




---



##### 



Nine Months EndedSeptember 30,2005
    
    
    2004(in thousands)(unaudited)Net loss
    
    
    (87,373
    )
    
    
    (12,604
    )Minority interest
    
    
    (17,076
    )
    
    
    (3,936
    )Income taxes (benefit)
    
    
    (14,627
    )
    
    
    (37
    )Interest expense
    
    
    63,320
    
    
    
    9,554Investment income
    
    
    (1,594
    )
    
    
    (1,679
    )Derivative financial instruments, net
    
    
    70,259
    
    
    
    1,077Foreign exchange loss on debt
    
    
    1,591
    
    
    
    Impairment of investments
    
    
    1,699
    
    
    
    Income (loss) from operations
    
    
    16,199
    
    
    
    (7,625
    )Add: Depreciation and amortization
    
    
    38,862
    
    
    
    17,217Impairment charge
    
    
    
    
    
    
    6,000Operating EBITDA
    
    
    55,061
    
    
    
    15,592




---



##### 



Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
  Three Months Ended September 30,2005
    
    
    2004(ADMTs)Sales Volume by Product ClassPulp sales volume by mill:Rosenthal
    
    
    86,772
    
    
    
    73,128Celgar
    
    
    125,079
    
    
    
    Stendal
    
    
    120,431
    
    
    
    Total pulp sales volume(1)
    
    
    332,282
    
    
    
    73,128Paper sales volume
    
    
    16,928
    
    
    
    14,712Total sales volume(1)
    
    
    349,210
    
    
    
    87,840(in thousands)Revenues by Product ClassPulp revenues by mill:Rosenthal
    
    
    37,122
    
    
    
    34,982Celgar
    
    
    48,978
    
    
    
    Stendal
    
    
    47,313
    
    
    
    (327
    )Total pulp revenues(1)
    
    
    133,413
    
    
    
    34,655Paper revenues
    
    
    15,515
    
    
    
    12,705Total revenues(1)
    
    
    148,928
    
    
    
    47,360
 
 (1)
    
    Excluding intercompany sales volumes of 3,057 and 1,348 ADMTs of pulp and intercompany net
sales revenues of approximately 1.3 million and 0.6 million in the three months ended
September 30, 2005 and 2004, respectively.  Three Months Ended September 30,2005
    
    2004(ADMTs)Production by Product ClassPulp production by mill:Rosenthal
    
    
    83,350
    
    
    
    71,847Celgar
    
    
    118,035
    
    
    
    Stendal
    
    
    126,202
    
    
    
    Total pulp production
    
    
    327,587
    
    
    
    71,847Paper production
    
    
    16,064
    
    
    
    15,354Total production
    
    
    343,651
    
    
    
    87,201
   
  




---



##### 



   
  
    
   
  
  
  
  
  
   




---



##### 



     
  
       
      




---



##### 



Three Months EndedSeptember 30,2005
    
    
    2004(in thousands)(unaudited)Net loss
    
    
    (5,555
    )
    
    
    (9,879
    )Minority interest
    
    
    (5,667
    )
    
    
    (6,726
    )Income taxes (benefit)
    
    
    6,785
    
    
    
    (236
    )Interest expense
    
    
    21,911
    
    
    
    4,200Investment income
    
    
    (613
    )
    
    
    (215
    )Derivative financial instruments, net
    
    
    (3,051
    )
    
    
    8,105Foreign exchange gain on debt
    
    
    (5,918
    )
    
    
    Income (loss) from operations
    
    
    7,892
    
    
    
    (4,751
    )Add: Depreciation and amortization
    
    
    13,979
    
    
    
    4,005Impairment charge
    
    
    
    
    
    
    6,000Operating EBITDA
    
    
    21,871
    
    
    
    5,254
 Liquidity and Capital Resources
  As at
    
    
    As atSeptember 30,
    
    
    December 31,2005
    
    
    2004(in thousands)(unaudited)Financial PositionCash and cash equivalents
    
    
    89,039
    
    
    
    49,568Working capital (deficit)
    
    
    131,580
    
    
    
    (21,659
    )Property, plant and equipment
    
    
    1,031,879
    
    
    
    936,035Total assets
    
    
    1,409,237
    
    
    
    1,255,649Long-term liabilities
    
    
    1,097,347
    (1)
    
    
    863,840Shareholders equity
    
    
    178,965
    
    
    
    162,741
 
 (1)
    
    Includes 16.7 million outstanding under the revolving credit facilities for the Rosenthal
and Celgar mills.      




---



##### 



Operating Activities
        
 Investing Activities
     
 Financing Activities
      
    




---



##### 




   Capital Resources




---



##### 



Foreign Currency
     
  Results of Operations of the Restricted Group Under Our Senior Note Indenture




---



##### 



Restricted Group Results Nine Months Ended September 30, 2005 Compared to Nine Months Ended
September 30, 2004
    
  
  
    
 
   
   
  




---



##### 



   
   Nine Months EndedSeptember 30,2005
    
    
    2004(in thousands)(unaudited)Restricted Group(1)(2)Net income (loss)
    
    
    (19,712
    )
    
    
    1,509Income taxes
    
    
    7,867
    
    
    
    (37
    )Interest expense
    
    
    23,918
    
    
    
    11,174Investment and other income
    
    
    (2,313
    )
    
    
    (2,534
    )Derivative financial instruments, net
    
    
    494
    
    
    
    102Foreign exchange (gain) loss on debt
    
    
    1,591
    
    
    
    173Impairment of investments
    
    
    1,699
    
    
    
    Income from operations
    
    
    13,544
    
    
    
    10,387Add: Depreciation and amortization
    
    
    17,431
    
    
    
    14,166Operating EBITDA
    
    
    30,975
    
    
    
    24,553
 
 (1)
    
    The results of the Celgar pulp mill are not included for the nine months ended September
30, 2004.(2)
    
    See Note 10 of the financial statements included elsewhere herein for a reconciliation to our
consolidated results. Restricted Group Results  Three Months Ended September 30, 2005 Compared to Three Months
Ended September 30, 2004
    
  




---



##### 



 
    
 
  
      




---



##### 



Three Months EndedSeptember 30,2005
    
    
    2004(in thousands)(unaudited)Restricted Group(1)(2)Net income
    
    
    1,984
    
    
    
    5,154Income taxes
    
    
    3,091
    
    
    
    (236
    )Interest expense
    
    
    7,987
    
    
    
    5,151Investment and other income
    
    
    (1,016
    )
    
    
    (789
    )Derivative financial instruments, net
    
    
    31
    
    
    
    (4,712
    )Foreign exchange gain on debt
    
    
    (5,918
    )
    
    
    (285
    )Income from operations
    
    
    6,159
    
    
    
    4,283Add: Depreciation and amortization
    
    
    6,602
    
    
    
    3,030Operating EBITDA
    
    
    12,761
    
    
    
    7,313
 
 (1)
    
    The results of the Celgar pulp mill are not included for the three months ended September
30, 2004.(2)
    
    See Note 10 of the 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 31,2005
    
    
    2004(in thousands)(unaudited)Restricted Group Financial Position(1)(2)Cash and cash equivalents
    
    
    52,566
    
    
    
    45,487Working capital
    
    
    112,039
    
    
    
    48,480Property, plant and equipment
    
    
    397,071
    
    
    
    213,678Total assets
    
    
    621,710
    
    
    
    401,321Long-term liabilities
    
    
    366,218
    
    
    
    228,139Shareholders equity
    
    
    219,364
    
    
    
    138,478
 
 (1)
    
    The financial position of the Celgar pulp mill is not included as at December 31, 2004.(2)
    
    See Note 10 of the financial statements included elsewhere herein for a reconciliation to our
consolidated results.   




---



##### 



Critical Accounting Policies
    Cautionary Statement Regarding Forward-Looking Information
 Private Securities Litigation Reform Act of
1995




---



##### 



Cyclical Nature of Business




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




---



##### 



Recognized Gain
    
    
    Recognized Gain(Loss) in Nine
    
    
    (Loss) inMonths Ended
    
    
    Three Months EndedDerivative Instrument
    
    Maturity Date
    
    
    Notional Amount
    
    
    September 30, 2005
    
    
    September 30, 2005(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)(in millions)
    
    
    (in thousands)
    
    
    (in thousands)Interest Rate DerivativesRosenthal Interest Rate Cap Agreements(1)
    
    Settled
    
    $
    178.3
    
    
    
    (295
    )
    
    
    Stendal Interest Rate Swaps(2)
    
    October 2017
    
    
    1,147.5
    
    
    
    (15,165
    )
    
    
    5,310
    (15,460
    )
    
    
    5,310Foreign Exchange Rate DerivativesStendal Currency Swap(3)
    
    October 2017
    
    
    306.3
    
    
    
    (25,408
    )
    
    
    (837
    )Stendal Currency Swap(4)
    
    October 2017
    
    
    153.2
    
    
    
    (13,192
    )
    
    
    (414
    )Stendal Currency Swap(5)
    
    October 2017
    
    
    153.2
    
    
    
    (10,746
    )
    
    
    (410
    )Stendal Currency Forward
    
    Settled
    
    $
    25.0
    
    
    
    (521
    )
    
    
    (142
    )Stendal Currency Forward
    
    Settled
    
    $
    25.0
    
    
    
    (1,639
    )
    
    
    (142
    )Stendal Currency Forward
    
    October 2005
    
    $
    13.9
    
    
    
    8
    
    
    
    8Stendal Currency Forward
    
    February 2006
    
    $
    50.0
    
    
    
    (3,102
    )
    
    
    (291
    )
    (54,600
    )
    
    
    (2,228
    )
 
 (1)
    
    Rosenthal had entered into two forward interest rate contracts with notional amounts of
$106.2 million (2003: $118.6 million) and $72.1 million (2003: $74.0 million), both maturing
on September 28, 2007 with a strike rate of 6.8%. These derivatives were settled in February
2005.(2)
    
    In connection with the Stendal Loan Facility, in 2002 Stendal entered into the Stendal
Interest Rate Swaps, which are variable-to-fixed interest rate swaps, for the term of the
Stendal Loan Facility, with respect to an aggregate maximum amount of approximately 612.6
million of the principal amount of the long-term indebtedness under the Stendal Loan Facility.
The swaps took effect on October 1, 2002 and are comprised of three contracts. The first
contract commenced in October 2002 for a notional amount of 4.1 million, gradually
increasing to 464.9 million, with an interest rate of 3.795%, and matured in May 2004. The
second contract commenced in May 2004 for a notional amount of 464.9 million, gradually
increasing to 612.6 million, with an interest rate of 5.28%, and matures in April 2005.
The third contract commenced in April 2005 for a notional amount of 612.6 million, with an
interest rate of 5.28%, and the notional amount gradually decreases and the contract
terminates upon the maturity of the Stendal Loan Facility in October 2017. As at December 31,
2004 and September 30, 2005, the notional amounts of the outstanding two contracts was
612.6 million and 612.6 million, respectively.(3)
    
    For 306.3 million of the outstanding principal amount under the Stendal Loan Facility,
all repayment installments from February 7, 2005 until October 2, 2017 were swapped into U.S.
dollar amounts at a rate of U.S. 1.2960. The interest rate was swapped into the following
payments: pay six-month U.S. dollar to LIBOR rate plus 12 basis points and receive the
six-month Euribor.(4)
    
    For 153.2 million of the outstanding principal amount under the Stendal Loan Facility,
all repayment installments from April 1, 2005 until October 2, 2017 were swapped into U.S.
dollar amounts at a rate of U.S. 1.2990. The interest rate was swapped into the following
payments: pay six-month U.S. dollar to LIBOR rate plus 13 basis points and receive the
six-month Euribor.(5)
    
    For 153.2 million of the outstanding principal amount under the Stendal Loan Facility,
all repayment installments from April 18, 2005 until October 2, 2017 were swapped into U.S.
dollar amounts at a rate of U.S. 1.2799. The interest rate was swapped into the following
payments: pay six-month U.S. dollar to LIBOR rate plus 13 basis points and receive the
six-month Euribor.




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##### 



ITEM 4. CONTROLS AND PROCEDURES
   Disclosure Controls and Procedures.
  Changes in Internal Controls.




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##### 



PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    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 OfficerDate:
November 8, 2005