MERCER INTERNATIONAL INC. - Quarter Report: 2009 September (Form 10-Q)

 

 

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

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

Commission File No.: 000-51826

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

Washington		47-0956945
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8
(Address of office)

(604) 684-1099
(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer o

Accelerated Filer þ

Non-Accelerated Filer o (Do not check if a smaller reporting company)

Smaller Reporting Company o

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

The Registrant had 36,443,487 shares of common stock outstanding as at November 5, 2009.

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(Unaudited)

FORM 10-Q
QUARTERLY REPORT — PAGE 2

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of Euros)

		September 30,				December 31,
		2009				2008
ASSETS
Current assets
Cash and cash equivalents		€	51,275			€	42,452
Cash, restricted			—				13,000
Receivables			73,133				100,158
Inventories (Note 4)			68,459				98,457
Prepaid expenses and other			5,612				4,834
Total current assets			198,479				258,901
Long-term assets
Property, plant and equipment			874,830				881,704
Investments (Note 9)			133				419
Deferred note issuance and other costs			7,659				4,011
Deferred income tax			2,232				3,036
Note receivable, less current portion			2,316				3,529
			887,170				892,699
Total assets		€	1,085,649			€	1,151,600
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	99,292			€	87,517
Pension and other post-retirement benefit obligations (Note 7)			554				510
Debt, current portion (Note 5)			28,470				16,500
Total current liabilities			128,316				104,527
Long-term liabilities
Debt, less current portion (Note 5)			795,303				837,918
Unrealized interest rate derivative losses (Notes 6 and 9)			58,001				47,112
Pension and other post-retirement benefit obligations (Note 7)			14,245				12,846
Capital leases and other			9,367				11,267
Deferred income tax			—				5,827
			876,916				914,970
Total liabilities			1,005,232				1,019,497
EQUITY
Shareholders’ equity
Share capital (Note 8)			202,844				202,844
Paid-in capital			(5,477	)			299
Retained earnings (deficit)			(99,984	)			(35,046	)
Accumulated other comprehensive income (loss)			22,190				(1,872	)
Total shareholders’ equity			119,573				166,225
Noncontrolling interest (deficit) (Note 10)			(39,156	)			(34,122	)
Total equity			80,417				132,103
Total liabilities and equity		€	1,085,649			€	1,151,600
Commitments and Contingencies (Note 11)
Subsequent Events (Note 12)

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

FORM 10-Q
QUARTERLY REPORT — PAGE 3

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands of Euros, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues
Pulp		€	145,857			€	178,603			€	422,412			€	528,289
Energy			10,374				6,225				32,275				20,006
			156,231				184,828				454,687				548,295
Costs and expenses
Operating costs			136,566				150,987				417,596				447,111
Operating depreciation and amortization			13,385				14,033				40,325				41,668
			6,280				19,808				(3,234	)			59,516
Selling, general and administrative expenses			6,620				9,954				19,797				24,803
Purchase (sale) of emission allowances			153				—				(389	)			—
Operating income (loss)			(493	)			9,854				(22,642	)			34,713
Other income (expense)
Interest expense			(16,085	)			(16,424	)			(48,953	)			(49,057	)
Investment income (loss)			20				(2,031	)			(3,044	)			(300	)
Foreign exchange gain (loss) on debt			3,779				(9,560	)			4,533				(3,291	)
Unrealized gain (loss) on derivative instruments (Note 6)			(3,327	)			(8,215	)			(10,889	)			4,515
Total other income (expense)			(15,613	)			(36,230	)			(58,353	)			(48,133	)
Income (loss) before income taxes			(16,106	)			(26,376	)			(80,995	)			(13,420	)
Income tax benefit (provision) — current			(13	)			(231	)			(127	)			(68	)
— deferred			70				6,144				4,989				(2,982	)
Net income (loss)			(16,049	)			(20,463	)			(76,133	)			(16,470	)
Less: net loss (income) attributable to noncontrolling interest			1,937				3,290				11,195				3,037
Net income (loss) attributable to common shareholders			(14,112	)			(17,173	)			(64,938	)			(13,433	)
Retained earnings (deficit), beginning of period			(85,872	)			41,159				(35,046	)			37,419
Retained earnings (deficit), end of period		€	(99,984	)		€	23,986			€	(99,984	)		€	23,986
Net income (loss) per share attributable to common shareholders (Note 3):
Basic and diluted		€	(0.39	)		€	(0.47	)		€	(1.79	)		€	(0.37	)

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

FORM 10-Q
QUARTERLY REPORT — PAGE 4

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)
(In thousands of Euros)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income (loss)		€	(16,049	)		€	(20,463	)		€	(76,133	)		€	(16,470	)
Other comprehensive income (loss):
Foreign currency translation adjustment			14,531				(3,660	)			23,758				(12,203	)
FAS 158 pension income (expense)			(41	)			(332	)			(73	)			163
Unrealized gains (losses) on securities arising during the period			42				8				377				(14	)
Other comprehensive income (loss)			14,532				(3,984	)			24,062				(12,054	)
Total comprehensive income (loss)			(1,517	)			(24,447	)			(52,071	)			(28,524	)
Comprehensive (income) loss attributable to noncontrolling interest			1,937				3,290				11,195				3,037
Comprehensive income (loss) attributable to common shareholders		€	420			€	(21,157	)		€	(40,876	)		€	(25,487	)

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

FORM 10-Q
QUARTERLY REPORT — PAGE 5

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands of Euros)

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

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

FORM 10-Q
QUARTERLY REPORT — PAGE 6

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)
(In thousands of Euros)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest		€	15,761			€	26,209			€	46,971			€	56,975
Income taxes			152				59				224				(259	)
Supplemental schedule of non-cash investing and financing activities:
Acquisition of production and other equipment under capital lease obligations		€	153			€	1,085			€	269			€	4,784
Increase (decrease) in accounts payable relating to investing activities			2,464				—				1,323				—

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

FORM 10-Q
QUARTERLY REPORT — PAGE 7

MERCER INTERNATIONAL INC.

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

Note 1. The Company and Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

Use of Estimates

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

FORM 10-Q
QUARTERLY REPORT — PAGE 8

MERCER INTERNATIONAL INC.

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

Note 1. The Company and Summary of Significant Accounting Policies (continued)

New Accounting Standards

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially released the Accounting Standards Codification (the “Codification” or “ASC”). Pursuant to FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, the Codification is effective for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP, but it is a major restructuring of how accounting and reporting standards that constitute GAAP are organized. That is, the Codification is the single source of authoritative nongovernmental GAAP. The organizational changes are expected to make GAAP easier to research by simplifying user access to all authoritative guidance. As a result, content resides in new locations within the Codification which means referencing to specific guidance has changed. For example, the pre-Codification guidance for leases is primarily found in Financial Accounting Standard No. 13, Accounting for Leases, as well as a number of other guidance such as Emerging Issue Task Force abstracts while the Codification guidance for leases is found in ASC 840. To assist in the transition, where a reference to the new Codification “topic” reference number is defined, the pre-Codification standard has also been noted.

On August 28, 2009, the FASB issued Accounting Standards Update No 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”), previously exposed for comments as proposed Financial Statement Position FASB No. 157-f, Measuring Liabilities under FASB Statement No.157, Fair Value Measurements, to provide guidance on measuring the fair value of liabilities under ASC 820. This ASU clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more of the valuation techniques as described in the guidance. This ASU is effective for the first interim or annual reporting period beginning after August 28, 2009. The Company is in the process of determining the impact, if any, the adoption of this guidance will have on its financial statements and disclosures.

FORM 10-Q
QUARTERLY REPORT — PAGE 9

MERCER INTERNATIONAL INC.

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

Note 1. The Company and Summary of Significant Accounting Policies (continued)

In June 2009, the FASB issued guidance as outlined in the Transfers and Servicing Topic ASC 860 (“ASC 860”), originally released as Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. FASB issued this guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. This guidance must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This guidance must be applied to transfers occurring on or after the effective date. The Company is in the process of determining the impact, if any, the adoption of this guidance will have on its financial statements and disclosures.

In December 2008, the FASB issued guidance as outlined in the Defined Benefit Plans Topic ASC 715 (“ASC 715-20”), originally released as FASB Staff Position No. 132 (R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits. This topic provides guidance with respect to an employer’s (sponsor’s) disclosures about plan assets of a defined benefit pension or other postretirement plan and also requires disclosures about fair value measurements of plan assets. This guidance is effective for financial statements issued for fiscal years ending after December 15, 2009, and implementation is required to be prospective. Earlier application of the provisions is permitted. The Company is in the process of determining the impact, if any, the adoption of this guidance will have on its financial statements and disclosures.

Recently Implemented Accounting Standards

In December 2007, the FASB issued guidance as outlined in the Consolidations Topic ASC 810 (“ASC 810-10-65”), originally released as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“FAS 160”). This guidance establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Additionally, the guidance states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of this guidance are effective for fiscal years beginning on or after December 15, 2008. The Company adopted this guidance on January 1, 2009 and amended its presentation and disclosure accordingly. See Note 10 — Noncontrolling Interest.

FORM 10-Q
QUARTERLY REPORT — PAGE 10

MERCER INTERNATIONAL INC.

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

Note 1. The Company and Summary of Significant Accounting Policies (continued)

In December 2007, the FASB issued guidance as outlined in the revised Business Combinations Topic ASC 805 (“ASC 805”), originally released as FASB Statement No. 141(R), Business Combinations. This guidance establishes how an entity accounts for identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and determines what disclosures are required as part of a business combination. The guidance is applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this guidance on January 1, 2009, and the adoption had no impact on the Company’s financial statements or disclosures.

In February 2008, the FASB issued guidance as outlined in the Fair Value Measurements and Disclosure Topic ASC 820 (“ASC 820-10-65-1”), originally released FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”). This guidance defers the effective date of the Financial Instruments Topic, for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. This guidance defers the effective date to fiscal years beginning after November 15, 2008, for items within the scope of ASC 820-10-65-1. The Company adopted this guidance on January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statement disclosures.

In March 2008, the FASB issued guidance as outlined in the Derivatives and Hedging Topic ASC 815 (“ASC 815-10-50” and “ASC 815-10-65-1”), originally released as FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new guidance requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The provisions within this guidance are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this guidance effective January 1, 2009, and it had no impact on the Consolidated Balance Sheet or Consolidated Statement of Operations, see Note 6 — Derivative Transactions.

In April 2008, the FASB issued guidance as outlined in General Intangibles Other than Goodwill Topic ASC 350, (“ASC 350”) and the Risks and Uncertainties Topic ASC 275 (“ASC 275”), originally released as FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2009, the impact of which was not material.

FORM 10-Q
QUARTERLY REPORT — PAGE 11

MERCER INTERNATIONAL INC.

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

Note 1. The Company and Summary of Significant Accounting Policies (continued)

In May 2008, the FASB issued guidance as outlined in the Debt Topic ASC 470 (“ASC 470-20”), originally released as FASB Staff Position 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement). This new guidance states that convertible debt instruments that are within its scope are required to be separated into both a debt component and an equity component. In addition, any debt discount is to be accreted to interest expense over the expected life of the debt. The new provisions within this guidance are effective for financial statements issued for fiscal years beginning after December 15, 2008, and implementation is generally required to be retrospective. The adoption of this guidance on January 1, 2009 had no impact on the Company’s financial statements or disclosure.

In April 2009, the FASB issued new guidance as outlined in the Financial Instruments Topic ASC 825 (“ASC 825-10-50” and “ASC 825-10-65-1”), originally released as FSP FAS 107-1, Interim Disclosures about Fair Value of Financial Instruments. The new guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10-65-1 also amends the guidance previously released as APB Opinion No. 28, Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods. The provisions of the new guidance are effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance on April 1, 2009, the impact of which was not material. See Note 9 — Financial Instruments.

In May 2009 the FASB issued guidance as outlined in the Subsequent Events Topic ASC 855 (“ASC 855-10”), originally released as FAS No. 165, Subsequent Events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (subsequent event). Specifically, the new guidance defines the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure, the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date, and the disclosures required. The Company adopted this guidance effective June 30, 2009. The adoption of this guidance has not resulted in any significant changes in how the Company recognizes or discloses subsequent events.

FORM 10-Q
QUARTERLY REPORT — PAGE 12

MERCER INTERNATIONAL INC.

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

Note 2. Stock-Based Compensation

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

Performance Stock

Grants of performance stock comprise rights to receive stock at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the three and nine months ended September 30, 2009, potential stock based performance awards totaled 565,165, which vest on December 31, 2010. Expense for the three and nine month periods ended September 30, 2009 was €388 and €327, respectively (2008 — €175 and €429).

The fair value of performance stock is determined based upon the number of shares awarded and the quoted price of the Company’s stock. Performance stock generally cliff vest three years from the award date. As of September 30, 2009, no performance stock had vested. During the three month period ended September 30, 2009, nil performance stock was cancelled. During the nine month period ended September 30, 2009, 39,991 performance stock were forfeited due to the departure of an employee. On April 28, 2009, 34,542 performance stock were awarded to two employees.

Restricted Stock

The fair value of restricted stock is determined based upon the number of shares granted and the quoted price of the Company’s stock on the date of grant. Restricted stock generally vests over one year. Expense is recognized on a straight-line basis over the vesting period. Expense recognized for the three and nine months ended September 30, 2009 was €2 and €49, respectively (2008 — €38 and €139).

As at September 30, 2009, the total remaining unrecognized compensation cost related to restricted stock amounted to approximately €9 (2008 — €82), which will be amortized over their remaining vesting period.

During the three and nine month periods ended September 30, 2009, 21,000 restricted stock awards were granted (2008 — nil and 21,000). There were nil restricted stock awards cancelled during the three and nine month periods ended September 30, 2009 (2008 — nil).

FORM 10-Q
QUARTERLY REPORT — PAGE 13

MERCER INTERNATIONAL INC.

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

Note 2. Stock-Based Compensation (continued)

Stock Options

During the three and nine month periods ended September 30, 2009 and 2008, no options were exercised, cancelled, expired or granted.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income (loss) attributable to common shareholders — basic and diluted		€	(14,112	)		€	(17,173	)		€	(64,938	)		€	(13,433	)
Net income (loss) per share attributable to common shareholders:
Basic and diluted		€	(0.39	)		€	(0.47	)		€	(1.79	)		€	(0.37	)
Weighted average number of common shares outstanding:
Basic (1)			36,306,027				36,276,693				36,293,489				36,276,693
Effect of dilutive instruments:
Performance rights			—				—				—				—
Stock options and restricted stock			—				35,263				—				85,433
Diluted			36,306,027				36,311,956				36,293,489				36,362,126

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

Stock options excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented 928,334 for the three month period ended September 30, 2009 (2008 — 828,334) and 928,334 for the nine month period ended September 30, 2009 (2008 — 98,334). Restricted stock excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented 21,000 shares for the three month period ended September 30, 2009 (2008 — 24,470) and 21,000 shares for the nine month period ended September 30, 2009 (2008 — 38,288).

Shares associated with the convertible notes excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented 8,678,065 for the three and nine month periods ended September 30, 2009 (2008 — 8,678,065).

Performance stock excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented 369,924 shares for the three and nine month periods ended September 30, 2009 (2008 — 372,642).

FORM 10-Q
QUARTERLY REPORT — PAGE 14

MERCER INTERNATIONAL INC.

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

Note 4. Inventories

		September 30, 2009				December 31, 2008
Raw materials		€	25,243			€	38,225
Finished goods			20,264				37,881
Work in process and other			22,952				22,351
		€	68,459			€	98,457

Note 5. Debt

Debt consists of the following:

		September 30, 2009				December 31, 2008
Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (a)		€	514,574			€	531,073
Senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured (b)			211,893				222,718
Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (c)			45,971				48,319
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (d)			14,025				18,186
Loan payable to the noncontrolling shareholder of the Stendal mill (e) (Note 10)			35,441				34,122
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (f)			—				—
Investment loan agreement with a lender with respect to the wash press project at the Rosenthal mill of €4,354 (g)			1,869				—
			823,773				854,418
Less: current portion			(28,470	)			(16,500	)
Debt, less current portion		€	795,303			€	837,918

Certain of the Company’s debt agreements were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to other important qualifications and exceptions. As at September 30, 2009, the Company was in compliance with the terms of the indenture.

FORM 10-Q
QUARTERLY REPORT — PAGE 15

MERCER INTERNATIONAL INC.

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

Note 5. Debt (continued)

The Company made scheduled principal repayments under these facilities of €34,023 in 2008, and €32,049 during the nine months ended September 30, 2009. As of September 30, 2009, the principal maturities of debt are as follows:

Matures		Amount
2009		€	—
2010(1)			74,441
2011			24,223
2012			24,868
2013			251,893
Thereafter			448,348
		€	823,773

(a)		Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus 1.50% (rates on amounts of borrowing at September 30, 2009 range from 1.92% to 2.52%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the assets of the Stendal mill, and at September 30, 2009, restricted cash amounting to €nil, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to €484,573 of outstanding principal, subject to a debt service reserve account required to pay amounts due in the following twelve months under the terms of the Stendal Loan Facility; payment of dividends is only permitted if certain cash flow requirements are met.
		On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment defers approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017, including approximately €20,000, €26,000, €21,000 of scheduled principal payments in 2009, 2010, and 2011, respectively. Additionally, the Company made a €10,000 capital contribution to the Stendal mill, and incurred amendment fees totaling approximately €5,800. See Note 10 — Noncontrolling Interest.
(b)		In February 2005, the Company issued $310 million of senior notes due February 2013, which bear interest at 9.25% accrued, are payable semi-annually, and are unsecured. On or after February 15, 2009, the Company may redeem all or a part of the notes at redemption prices (expressed as a percentage of principal amount) equal to 104.63% for the twelve month period beginning on February 15, 2009, 102.31% for the twelve month period beginning on February 15, 2010, and 100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid interest.

FORM 10-Q
QUARTERLY REPORT — PAGE 16

MERCER INTERNATIONAL INC.

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

Note 5. Debt (continued)

(c)

As at September 30, 2009, the subordinated convertible notes had approximately $67.3 million of principal outstanding. The subordinated convertible notes are due October 2010, bear interest at 8.5% accrued and payable semi-annually, are convertible at any time by the holder into common shares of the Company at $7.75 per share and are unsecured. The Company may redeem for cash all or a portion of these notes at any time at 100% of the principal amount of the notes plus accrued and unpaid interest up to the redemption date. The holders of the convertible notes will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal.

(d)

Credit agreement with respect to a revolving credit facility of C$40 million for the Celgar mill, on a three year term. Borrowings under the credit agreement are collateralized by the mill’s inventory and receivables; and are restricted by a borrowing base calculated on the mill’s inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 2.25% or Canadian prime plus 0.50%. U.S. dollar denominated amounts bear interest at LIBOR plus 2.25% or U.S. base plus 0.50%. As at September 30, 2009, this facility was drawn by C$22.0 million and was accruing interest at a rate of approximately 2.66%. The credit agreement matures May 19, 2010, but is subject to a one-year extension.

(e)

Loan payable to the noncontrolling shareholder of the Stendal mill bears interest at 7%, and is accrued semi-annually. The loan payable is unsecured, subordinated to all liabilities of the Stendal mill, and is due in 2017. The balance includes principal and accrued interest.

(f)

On August 19, 2009 the Company finalized an agreement with its lenders relating to the working capital facility at the Rosenthal mill. The working capital facility refinancing was completed with a new €25,000 replacement revolving facility set to mature in December 2012. Borrowings under the credit agreement are collateralized by the mill’s inventory and receivables and bear interest at Euribor plus 3.55%.

(g)

On August 19, 2009 the Company finalized an investment loan agreement with a lender relating to the new wash press at the Rosenthal mill. The four-year amortizing investment loan was completed with a €4,354 borrowing base bearing interest at the rate of Euribor plus 2.75%. Borrowings under this agreement are secured by the new wash press equipment. As at September 30, 2009, this facility was drawn by €1,869 and was accruing interest at a rate of 3.79%.

FORM 10-Q
QUARTERLY REPORT — PAGE 17

MERCER INTERNATIONAL INC.

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

Note 6. Derivative Transactions

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

During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal Loan Facility with respect to an aggregate maximum principal amount of approximately €612,600 of the total indebtedness under the Stendal Loan Facility. Under the interest rate swaps, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Currently, the aggregate notional amount of these contracts is €505,430 at a fixed interest rate of 5.28% and they mature October 2017 (matching the maturity of the Stendal Loan Facility). The Company substantially converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty.

The Company recognized an unrealized loss of €3,327 and €10,889, with respect to these interest rate swaps for the three and nine months ended September 30, 2009, respectively (2008 — Unrealized loss of €8,215 and an unrealized gain of €4,515), in “Unrealized gain (loss) on derivative instruments” in the Interim Consolidated Statement of Operations. The guidance outlined in ASC 815, originally released as FAS 133, Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize all derivative instruments at their fair value in the consolidated balance sheet. Accordingly, the fair value of the interest rate swap is presented in “Unrealized interest rate derivative losses” within the long-term liabilities section in the Interim Consolidated Balance Sheets, which currently amounts to a cumulative unrealized loss of €58,001 (2008 — €47,112).

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

FORM 10-Q
QUARTERLY REPORT — PAGE 18

MERCER INTERNATIONAL INC.

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

Note 7. Pension and Other Post-Retirement Benefit Obligations

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

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

Pension benefits are based on employees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions for the three and nine month periods ended September 30, 2009 totaled €107 and €693, respectively (2008 — €402 and €1,527).

The Company anticipates based on actuarial estimates that it will make contributions to the defined benefit pension plan of approximately €914 in 2009.

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

FORM 10-Q
QUARTERLY REPORT — PAGE 19

MERCER INTERNATIONAL INC.

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

Note 7. Pension and Other Post-Retirement Benefit Obligations (continued)

		Three Months Ended September 30,
		2009								2008
						Post-								Post-
		Pension				Retirement				Pension				Retirement
		Benefits				Benefits				Benefits				Benefits
Service cost		€	14			€	86			€	197			€	125
Interest cost			382				205				339				200
Expected return on plan assets			(321	)			—				(385	)			—
Recognized net loss (gain)			36				(60	)			—				21
Net periodic benefit cost		€	111			€	231			€	151			€	346

		Nine Months Ended September 30,
		2009								2008
						Post-								Post-
		Pension				Retirement				Pension				Retirement
		Benefits				Benefits				Benefits				Benefits
Service cost		€	42			€	253			€	596			€	379
Interest cost			1,129				606				1,025				605
Expected return on plan assets			(949	)			—				(1,165	)			—
Recognized net loss (gain)			105				(176	)			—				62
Net periodic benefit cost		€	327			€	683			€	456			€	1,046

Note 8. Share Capital

Common shares

The Company has authorized 200,000,000 common shares (2008 — 200,000,000) with a par value of $1 per share. As at September 30, 2009, the Company had 36,443,487 (2008 — 36,422,487) common shares issued and outstanding.

Preferred shares

The Company has authorized 50,000,000 preferred shares (2008 — 50,000,000) with $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at September 30, 2009, no preferred shares had been issued by the Company.

FORM 10-Q
QUARTERLY REPORT — PAGE 20

MERCER INTERNATIONAL INC.

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

Note 9. Financial Instruments

The Company adopted the guidance outlined in ASC 820-10-65-1, originally released as FSP FAS 157-2, effective April 1, 2009. The adoption of this guidance resulted in additional disclosure of fair value information for all interim reporting periods. The additional fair value information includes the fair value and the carrying amount of financial instruments, and the methods and significant assumptions used to estimate the fair value of financial instruments.

The fair value of financial instruments at September 30, 2009 and December 31, 2008 is summarized as follows:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Cash and cash equivalents		€	51,275			€	51,275			€	42,452			€	42,452
Cash, restricted			—				—				13,000				13,000
Investments			133				133				419				419
Receivables			73,133				73,133				100,158				100,158
Notes receivable			3,421				3,421				4,171				4,171
Accounts payable and accrued expenses			99,292				99,292				87,517				87,517
Debt			823,773				683,899				854,418				704,901
Interest rate derivative contracts — liability			58,001				58,001				47,112				47,112

The carrying value of cash and cash equivalents, restricted cash and accounts payable and accrued expenses approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. The fair value of notes receivable was estimated using discounted cash flows at prevailing market rates. The fair value of debt reflects recent market transactions and discounted cash flow estimates. The fair value of the interest rate derivatives is based on current interest rates. These values represent the estimated amount the Company would receive or pay to terminate agreements taking into consideration current interest rates and the creditworthiness of the counterparties.

The Company adopted the guidance outlined in ASC 820, originally released as FAS 157, Fair Value Measurements, effective January 1, 2008. The adoption of this guidance resulted in no impact on the Company’s Consolidated Balance Sheet or the Consolidated Statement of Operations.

The fair value methodologies and, as a result, the fair value of the Company’s investments and derivative instruments are determined based on the fair value hierarchy provided in ASC 820. The fair value hierarchy per ASC 820 is as follows:

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

FORM 10-Q
QUARTERLY REPORT — PAGE 21

MERCER INTERNATIONAL INC.

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

Note 9. Financial Instruments (continued)

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

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

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

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

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

The following table presents a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in ASC 820:

		Fair value measurements at September 30, 2009 using:
		Quoted prices in
		active markets for				Significant other				Significant
		identical assets				observable inputs				unobservable inputs
Description		(Level 1)				(Level 2)				(Level 3)				Total
Assets
Investments (a)		€	133			€	—			€	—			€	133
Liabilities
Derivatives (b) - Interest rate swaps		€	—			€	58,001			€	—			€	58,001

FORM 10-Q
QUARTERLY REPORT — PAGE 22

MERCER INTERNATIONAL INC.

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

Note 10. Noncontrolling Interest

The Company adopted the guidance outlined in ASC 810-10-65, originally released as FAS 160, on January 1, 2009. The adoption of this guidance resulted in retrospective presentation and disclosure changes to the December 31, 2008 Consolidated Balance Sheet. These changes are denoted in the table below:

Excerpt from Consolidated Balance Sheet

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

Commencing January 1, 2009, the Company followed the guidance in ASC 810-10-65, and applied any accounting changes on a prospective basis. Pursuant to the new guidance, the noncontrolling shareholder will be attributed its share of losses even if that attribution results in a net deficit balance.

FORM 10-Q
QUARTERLY REPORT — PAGE 23

MERCER INTERNATIONAL INC.

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

Note 10. Noncontrolling Interest (continued)

Previously, Stendal mill losses in excess of the noncontrolling shareholder’s equity interest were attributable to the Company. The resulting impact of this change in accounting is the recognition of approximately €790 and €10,835 loss by the noncontrolling shareholder for the three and nine month periods ended September 30, 2009, respectively. The Company’s net loss attributable to common shareholders for the three and nine month periods ended September 30, 2009 would have increased by €790 and €10,835, to a net loss of €14,902 and €75,773 had the Company not adopted the new guidance, resulting in an increase in the net loss per share attributable to the common shareholders of €0.02 and €0.30 per share, respectively.

On March 13, 2009, the Company made a €10,000 capital contribution to the Stendal mill, of which €2,582 related to an increase in the Stendal mill’s stated capital, diluting the interest held by the noncontrolling shareholder and resulting in a 4.32% increase in the Company’s equity ownership in the Stendal mill from 70.58% to 74.90%. Pursuant to ASC 810-10-65, the increase in equity ownership was accounted for as an equity transaction. The carrying amount of the Company’s shareholders’ equity was adjusted to reflect the 4.32% increase of ownership interest in the Stendal mill. As a result, the noncontrolling deficit and the Company’s Additional Paid-in Capital were reduced by €6,161.

Note 11. Commitments and Contingencies

During the year, as part of the new Green Energy project for the Celgar mill, the Company entered into a number of contracts for the purchase of a new 48 megawatt condensing turbine-generator set, as well as other related equipment commitments. As at September 30, 2009, the value of the contracts committed was approximately €6,900 (C$11.0 million).

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

Note 12. Subsequent Events

The Company has evaluated subsequent events up to November 6, 2009, the date the financial statements were issued.

FORM 10-Q
QUARTERLY REPORT — PAGE 24

MERCER INTERNATIONAL INC.

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

Note 13. Restricted Group Supplemental Disclosure

The terms of the indenture governing our 9.25% senior unsecured notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the three and nine months ended September 30, 2009 and 2008, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.

Combined Condensed Balance Sheet

		September 30, 2009
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	25,294			€	25,981			€	-			€	51,275
Cash, restricted			—				—				—				—
Receivables			32,382				40,751				—				73,133
Inventories			51,395				17,064				—				68,459
Prepaid expenses and other			3,377				2,235				—				5,612
Total current assets			112,448				86,031				—				198,479
Property, plant and equipment			362,748				512,082				—				874,830
Other			2,840				4,952				—				7,792
Deferred income tax			2,232				—				—				2,232
Due from unrestricted group			70,376				—				(70,376	)			—
Note receivable, less current portion			2,316				—				—				2,316
Total assets		€	552,960			€	603,065			€	(70,376	)		€	1,085,649
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	58,995			€	40,297			€	-			€	99,292
Pension and other post-retirement benefit obligations, current portion			554				—				—				554
Debt, current portion			14,553				13,917				—				28,470
Total current liabilities			74,102				54,214				—				128,316
Debt, less current portion			259,205				536,098				—				795,303
Due to restricted group			—				70,376				(70,376	)			—
Unrealized interest rate derivative losses			—				58,001				—				58,001
Pension and other post-retirement benefit obligations			14,245				—				—				14,245
Capital leases and other			6,198				3,169				—				9,367
Total liabilities			353,750				721,858				(70,376	)			1,005,232
EQUITY
Total shareholders’ equity (deficit)			199,210				(79,637	)			—				119,573
Noncontrolling interest (deficit)			—				(39,156	)			—				(39,156	)
Total liabilities and equity		€	552,960			€	603,065			€	(70,376	)		€	1,085,649

FORM 10-Q
QUARTERLY REPORT — PAGE 25

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 13. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Balance Sheet

		December 31, 2008
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	26,176			€	16,276			€	—			€	42,452
Cash, restricted			—				13,000				—				13,000
Receivables			57,258				42,900				—				100,158
Inventories			59,801				38,656				—				98,457
Prepaid expenses and other			3,215				1,619				—				4,834
Total current assets			146,450				112,451				—				258,901
Property, plant and equipment			351,009				530,695				—				881,704
Other			4,425				5				—				4,430
Deferred income tax			3,036				—				—				3,036
Due from unrestricted group			55,925				—				(55,925	)			—
Note receivable, less current portion			3,529				—				—				3,529
Total assets		€	564,374			€	643,151			€	(55,925	)		€	1,151,600
LIABILITIES
Current liabilities
Accounts payable and accrued expenses		€	44,450			€	43,067			€	—			€	87,517
Pension and other post-retirement benefit obligations, current portion			510				—				—				510
Debt, current portion			—				16,500				—				16,500
Total current liabilities			44,960				59,567				—				104,527
Debt, less current portion			289,222				548,696				—				837,918
Due to restricted group			—				55,925				(55,925	)			—
Unrealized interest rate derivative losses			—				47,112				—				47,112
Pension and other post-retirement benefit obligations			12,846				—				—				12,846
Capital leases and other			7,167				4,100				—				11,267
Deferred income tax			—				5,827				—				5,827
Total liabilities			354,195				721,227				(55,925	)			1,019,497
EQUITY
Total shareholders’ equity (deficit)			210,179				(43,954	)			—				166,225
Noncontrolling interest (deficit)			—				(34,122	)			—				(34,122	)
Total liabilities and equity		€	564,374			€	643,151			€	(55,925	)		€	1,151,600

FORM 10-Q
QUARTERLY REPORT — PAGE 26

MERCER INTERNATIONAL INC.

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

Note 13. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Operations

		Three Months Ended September 30, 2009
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
Revenues
Pulp		€	79,213			€	66,644			€	—			€	145,857
Energy			3,201				7,173				—				10,374
			82,414				73,817				—				156,231
Operating costs			78,360				58,206				—				136,566
Operating depreciation and amortization			6,816				6,569				—				13,385
Selling, general and administrative expenses and other			3,824				2,949				—				6,773
			89,000				67,724				—				156,724
Operating income (loss)			(6,586	)			6,093				—				(493	)
Other income (expense)
Interest expense			(6,546	)			(10,674	)			1,135				(16,085	)
Investment income (loss)			1,112				43				(1,135	)			20
Foreign exchange gain (loss) on debt			3,779				—				—				3,779
Unrealized gain (loss) on derivative instruments			—				(3,327	)			—				(3,327	)
Total other income (expense)			(1,655	)			(13,958	)			—				(15,613	)
Income (loss) before income taxes			(8,241	)			(7,865	)			—				(16,106	)
Income tax benefit (provision)			108				(51	)			—				57
Net income (loss)			(8,133	)			(7,916	)			—				(16,049	)
Less: net (income) loss attributable to noncontrolling interest			—				1,937				—				1,937
Net income (loss) attributable to common shareholders		€	(8,133	)		€	(5,979	)		€	—			€	(14,112	)