UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
(Amendment No. 1)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 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. Employer
of 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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934during 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. YESþ NOo
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YESþ NOo
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ
The Registrant had 33,074,14033,169,140 shares of beneficial interest outstanding as at August 9,November 8, 2005.
 
 

Explanatory Note
This Quarterly Report on Form 10-Q/A amends the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 to make adjustments identified by the registrant to reported fixed asset additions in its consolidated statement of cash flows for the nine month period ended September 30, 2005 and to reclassify a fixed asset allocation in the registrant’s Restricted Group balance sheet as at September 30, 2005 relating to the registrant’s recently acquired Celgar pulp mill, to conform to the registrant’s prior quarterly filings for 2005 as follows:
(a)the registrant’s consolidated statement of cash flows for the nine months ended September 30, 2005 has been amended:
(i)under Cash Flows from (used in) Investing Activities to reduce the “Purchase of property, plant and equipment” to€(11,275) from€(18,646);
(ii)under Cash Flows from (used in) Investing Activities to reduce “Net cash used in investing activities” to€(97,233) from
€(104,604); and
(iii)to reduce the “Effect of exchange rate changes on cash and cash equivalents” to€13,560 from€20,931; and
(b)the registrant’s Restricted Group balance sheet as at September 30, 2005 has been amended to:
(i)increase “Property, plant and equipment” for the Restricted Group to€401,311 from€397,071 and to correspondingly decrease the same for the Unrestricted Subsidiaries to€631,228 from€635,468;
(ii)increase “Total assets” for the Restricted Group to€625,950 from€621,710 and to correspondingly decrease the same for the Unrestricted Subsidiaries to€829,595 from€833,835;
(iii)increase “Total shareholders’ equity” for the Restricted Group to€223,604 from€219,364 and to correspondingly decrease the same for the Unrestricted Subsidiaries to€(43,979) from€(39,739); and
(iv)increase “Total liabilities and shareholders’ equity” for the Restricted Group to€625,950 from€621,710 and to correspondingly decrease the same for the Unrestricted Subsidiaries to€829,595 from€833,835.
Corresponding changes have been made in the registrant’s MD&A in the paragraph under “Liquidity and Capital Resources — Investing Activities” on page 33 of this Form 10-Q/A and in the table under “Liquidity and Capital Resources of the Restricted Group” on page 39 of this Form 10-Q/A. The registrant has also added Note 11 in the notes to the consolidated financial statements included herein relating to the amendments.
All other financial and other information in the originally filed Form 10-Q for the reported periods, including the consolidated balance sheets, the consolidated statements of operations, revenues, costs and expenses, income (loss) from operations, Operating EBITDA, net loss, net loss per share, retained earnings (deficit) and shareholders equity, remain unchanged.
This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q, or modify or update the disclosure therein in any way other than as required to reflect the amendments set forth herein. Pursuant to SEC rules, included as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A are currently dated certifications of the Company’s Chief Executive Officer and Chief Financial Officer.

 

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

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 2

 

MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at JuneSeptember 30, 2005 and December 31, 2004
(Unaudited)
(Euros in thousands)
                
 June 30, December 31,  September 30, December 31, 
 2005 2004  2005 2004 
ASSETS
  
Current Assets  
Cash and cash equivalents €105,874 €49,568  €89,039 €49,568 
Cash restricted 37,951 45,295  7,646 45,295 
Receivables 75,344 54,687  75,696 54,687 
Inventories 92,037 52,898  85,678 52,898 
Prepaid expenses and other 7,057 4,961  6,446 4,961 
          
Total current assets 318,263 207,409  264,505 207,409 
 
Long-Term Assets  
Cash restricted 19,074 47,538  24,537 47,538 
Property, plant and equipment 1,109,394 936,035  1,031,879 936,035 
Investments 4,728 5,079  4,664 5,079 
Deferred note issuance and other costs 9,132 5,069  8,903 5,069 
Deferred income tax 78,238 54,519  74,749 54,519 
          
 1,220,566 1,048,240  1,144,732 1,048,240 
          
Total assets €1,538,829 €1,255,649  €1,409,237 €1,255,649 
          
LIABILITIES
  
Current Liabilities  
Accounts payable and accrued expenses €101,399 €56,542  €94,702 €56,542 
Construction costs payable 34,090 65,436  1,088 65,436 
Debt, current portion 97,618 107,090  37,135 107,090 
          
Total current liabilities 233,107 229,068  132,925 229,068 
 
Long-Term Liabilities  
Debt, less current portion 952,555 777,272  923,144 777,272 
Unrealized foreign exchange rate derivative losses 47,685 —  49,346 — 
Unrealized interest rate derivative losses 95,946 75,471  90,637 75,471 
Pension and other post-retirement benefit obligations 15,728 —  17,008 — 
Capital leases and other 9,800 9,035  9,562 9,035 
Deferred income tax 4,143 2,062  7,650 2,062 
          
 1,125,857 863,840  1,097,347 863,840 
          
Total liabilities 1,358,964 1,092,908  1,230,272 1,092,908 
Minority Interest — —  — — 
SHAREHOLDERS’ EQUITY
  
Shares of beneficial interest 180,916 83,397  181,600 83,397 
Additional paid-in capital, stock options 14 14  14 14 
Retained earnings (deficit)  (12,642) 69,176   (18,197) 69,176 
Accumulated other comprehensive income 11,577 10,154  15,548 10,154 
          
Total shareholders’ equity 179,865 162,741  178,965 162,741 
          
 
Total liabilities and shareholders’ equity €1,538,829 €1,255,649  €1,409,237 €1,255,649 
          
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 3

 

MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For SixNine Months Ended JuneSeptember 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
        
 2005 2004         
  2005 2004 
Revenues €227,502 €100,651  €376,430 €148,011 
          
  
Costs and expenses:  
Cost of sales 210,167 88,628  350,185 127,859 
General and administrative expenses 15,316 14,228  22,399 21,108 
Gain on sale of emission credits  (6,288) —   (12,353) — 
Impairment of capital assets — 6,000 
Flooding losses and expenses, less grant income — 669  — 669 
          
Total costs and expenses 219,195 103,525  360,231 155,636 
          
Income (loss) from operations 8,307  (2,874) 16,199  (7,625)
          
  
Other income (expense):  
Interest expense  (41,463)  (5,354)  (63,320)  (9,554)
Investment income 981 1,464  1,594 1,679 
Realized loss on derivative financial instruments  (295) —   (2,455) — 
Unrealized gain (loss) on derivative financial instruments  (73,015) 7,028 
Unrealized loss on derivative financial instruments  (67,804)  (1,077)
Unrealized foreign exchange loss on debt  (7,509) —   (1,591) — 
Impairment of investments  (1,645) —   (1,699) — 
          
Total other (income) expense  (122,946) 3,138 
Total other income (expense)  (135,275)  (8,952)
          
  
Income (loss) before income taxes and minority interest  (114,639) 264 
Income tax (provision) benefit 21,412  (199)
Loss before income taxes and minority interest  (119,076)  (16,577)
Income tax benefit 14,627 37 
          
Income (loss) before minority interest  (93,227) 65 
Loss before minority interest  (104,449)  (16,540)
Minority interest 11,409  (2,790) 17,076 3,936 
          
Net loss  (81,818)  (2,725)  (87,373)  (12,604)
  
Retained earnings, beginning of period 69,176 49,196  69,176 49,196 
          
Retained earnings (deficit), end of period €(12,642) €46,471  €(18,197) €36,592 
          
  
Loss per share  
Basic and diluted €(2.80) €(0.16) €(2.86) €(0.73)
          
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 4

 

MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months Ended JuneSeptember 30, 2005 and 2004
(Unaudited)
(Euros in thousands, except for loss per share)
        
 2005 2004         
  2005 2004 
Revenues €129,609 €50,335  €148,928 €47,360 
          
  
Costs and expenses:  
Cost of sales 119,178 43,210  140,018 39,231 
General and administrative expenses 7,518 7,687  7,083 6,880 
Gain on sale of emission credits  (6,288) —   (6,065) — 
Flooding losses and expenses, less grant income — 416 
Impairment of capital assets — 6,000 
          
Total costs and expenses 120,408 51,313  141,036 52,111 
          
Income (loss) from operations 9,201  (978) 7,892  (4,751)
          
 
Other income (expense):  
Interest expense  (22,200)  (2,366)  (21,911)  (4,200)
Investment income 806 530  613 215 
Realized loss on derivative financial instruments  (284) — 
Unrealized gain (loss) on derivative financial instruments  (69,451) 29,473  3,335  (8,105)
Unrealized foreign exchange loss on debt  (9,806) — 
Unrealized foreign exchange gain on debt 5,918 — 
          
Total other income (expense)  (100,651) 27,637   (12,329)  (12,090)
          
  
Income (loss) before income taxes and minority interest  (91,450) 26,659 
Loss before income taxes and minority interest  (4,437)  (16,841)
Income tax (provision) benefit 24,447  (219)  (6,785) 236 
          
Income (loss) before minority interest  (67,003) 26,440 
Loss before minority interest  (11,222)  (16,605)
Minority interest 4,852  (10,199) 5,667 6,726 
          
Net income (loss)  (62,151) 16,241 
Net loss  (5,555)  (9,879)
  
Retained earnings, beginning of period 49,509 30,230 
Retained earnings (deficit), beginning of period  (12,642) 46,471 
          
Retained earnings (deficit), end of period €(12,642) €46,471  €(18,197) €36,592 
          
  
Income (loss) per share 
Basic €(1.88) €0.94 
Loss per share 
Basic and diluted €(0.17) €(0.57)
          
Diluted €(1.88) €0.57 
     
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 5

 

MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For SixNine Months Ended JuneSeptember 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
        
 2005 2004         
  2005 2004 
Net loss €(81,818) €(2,725) €(87,373) €(12,604)
          
  
Other comprehensive income (loss):  
Foreign currency translation adjustments 1,118 2,352  4,418 313 
Pension plan additional minimum liability 412 — 
Unrealized gains on securities       
Unrealized holding gains (losses) arising during the period 305  (250) 564  (269)
          
  
Other comprehensive income 1,423 2,102  5,394 44 
          
  
Total comprehensive loss €(80,395) €(623) €(81,979) €(12,560)
          
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 6

 

MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For Three Months Ended JuneSeptember 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
                
 2005 2004  2005 2004 
 
Net income (loss) €(62,151) €16,241 
Net loss €(5,555) €(9,879)
          
  
Other comprehensive income (loss):  
Foreign currency translation adjustments 1,750 696  3,300  (2,039)
Pension plan minimum additional liability 412 — 
Unrealized gains on securities      
Unrealized holding gains (losses) arising during the period — 257  259  (19)
          
  
Other comprehensive income 1,750 953 
Other comprehensive income (loss) 3,971  (2,058)
          
  
Total comprehensive income (loss) €(60,401) €17,194 
Total comprehensive loss €(1,584) €(11,937)
          
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 7

 

MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For SixNine Months Ended JuneSeptember 30, 2005 and 2004
(Unaudited)
(Euros in thousands)
        
         2005 2004 
 2005 2004  (As restated —
see Note 11)		   
Cash Flows from (used in) Operating Activities:  
Net loss €(81,818) €(2,725) €(87,373) €(12,604)
Adjustments to reconcile net loss to cash flows from operating activities  
Cumulative unrealized losses (gains) on derivatives 73,015  (7,028)
Unrealized losses on derivatives 67,804 1,077 
Depreciation and amortization 25,299 12,607  39,599 17,217 
Unrealized foreign exchange loss on debt 7,509 —  1,591 — 
Impairment of capital assets — 6,000 
Impairment of investments and securities 1,645 —  1,699 — 
Minority interest  (11,409) 2,790   (17,076)  (3,936)
Deferred income taxes  (21,638) —   (14,642) — 
Stock compensation expense 72 616  330 690 
Other 125 204  144 1,139 
  
Changes in current assets and liabilities  
Receivables  (20,742)  (2,489)  (20,428)  (2,056)
Inventories  (16,757)  (17,995)  (9,581)  (35,825)
Accounts payable and accrued expenses 41,319 12,166  33,765 26,331 
Other  (1,853)  (1,224)  (1,435) 782 
          
Net cash used in operating activities  (5,233)  (3,078)  (5,603)  (1,185)
  
Cash Flows from (used in) Investing Activities:  
Cash restricted 60,650  (17,517)
Purchase of property, plant and equipment  (8,493)  (117,327)  (11,275)  (241,825)
Acquisition of Celgar pulp mill  (146,608) —   (146,608) — 
Sale of available-for-sale securities — 1,161  — 1,161 
Other — 115  — 115 
          
Net cash used in investing activities  (155,101)  (116,051)  (97,233)  (258,066)
  
Cash Flows from (used in) Financing Activities:  
Cash restricted 35,808  (7,468)
Decrease in construction costs payable  (31,346)  (22,974)
Increase (decrease) in construction costs payable  (64,348) 118,196 
Proceeds from borrowings of notes payable and debt 325,195 126,000  311,792 126,000 
Repayment of notes payable and debt  (183,691)  (14,782)  (261,691)  (21,886)
Proceeds from investment grants 342 28,710  78,595 28,710 
Repayment of capital lease obligations  (1,907)  (633)  (2,930)  (1,781)
Issuance of shares of beneficial interest 66,645 582  67,329 582 
          
Net cash from financing activities 211,046 109,435  128,747 249,821 
  
Effect of exchange rate changes on cash and cash equivalents 5,594  (63) 13,560 80 
          
Net increase (decrease) in cash and cash equivalents 56,306  (9,757) 39,471  (9,350)
Cash and cash equivalents, beginning of period 49,568 51,993  49,568 51,993 
          
Cash and cash equivalents, end of period €105,874 €42,236  €89,039 €42,643 
          
The accompanying notes are an integral part of these financial statements.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 8

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 1. Basis of Presentation
The interim period 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 interim period 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”). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. The interim period 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, 2004. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. The results for the periods presented herein may not be indicative of the results for the entire year.
In June 2005, the FASB ratified EITF Issue No. 05-5 (“EITF 05-5”), “Accounting for Early Retirement or Postemployment Programs with Specific Features (such as Terms Specified in Altersteilzeit Early Retirement Arrangements)”. Under an Altersteilzeit (ATZ) Early Retirement Program (Type I and Type II) or an arrangement with the same terms, salary payments should be recognized ratably over the portion of the ATZ period when the employee is providing active services (the “active service period”). Accruals for the termination benefit under Type II should be accrued ratably from the date the employee signs the ATZ contract to the end of the active service period. EITF 05-5 will become effective for reporting periods beginning after December 15, 2005. Management is analyzing the requirements of EITF 05-5 and believes that its adoption will not have any significant impact on the Company’s financial position, results of operations or cash flows.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 9

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 2. Stock-Based Compensation
The Company has stock-based compensation plans, which are described more fully in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. The following tables illustrate the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation.
                
 Six Months Ended June 30,  Nine Months Ended September 30, 
 2005 2004  2005 2004 
Net Loss
  
As reported €(81,818) €(2,725) €(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  (21)  (29)  (51)  (31)
          
Pro forma €(81,839) €(2,754) €(87,424) €(12,635)
          
 
Basic and Diluted Loss Per Share
  
As reported €(2.80) €(0.16) €(2.86) €(0.73)
          
Pro forma €(2.80) €(0.16) €(2.86) €(0.73)
          
                
 Three Months Ended June 30,  Three Months Ended September 30, 
 2005 2004  2005 2004 
Net Income (Loss)
 
Net Loss
 
As reported €(62,151) €16,241  €(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  (11)  (14)  (30)  (2)
          
Pro forma €(62,162) €16,227  €(5,585) €(9,881)
          
 
Basic and Diluted Income (Loss) Per Share
 
Basic and Diluted Loss Per Share
 
As reported €(1.88) €0.94  €(0.17) €(0.57)
          
Pro forma €(1.88) €0.57  €(0.17) €(0.57)
          

Pursuant to the Company’s 2004 Stock Incentive Plan, in June 2005, an aggregate of 10,000 restricted shares of beneficial interest were issued to four independent trustees of the Company, which vest in June 2006. This resulted in a total expense of€60, which will be amortized over the period to June 2006.
In the third quarter of 2005, an aggregate of 105,685 restricted shares of beneficial interest were issued to a trustee and certain officers of the Company. These shares generally vest between July 2005 and September 2007. This resulted in a total expense of€671, of which€222 was charged to net loss immediately and the remaining amount will be amortized over the period to September 2007.
FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 10

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 3. Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during a period. Diluted income (loss) per share takes into consideration shares outstanding (computed under basic earnings (loss) per share) and potentially dilutive shares. The following table sets out the computation of basic income (loss)loss per share for the sixnine and three months ended JuneSeptember 30, 2005 and 2004, respectively:
                                
 Six Months Ended June 30, Three Months Ended June 30,  Nine Months Ended Three Months Ended 
 2005 2004 2005 2004  September 30, September 30, 
Income (loss) from continuing operations – basic €(81,818) €(2,725) €(62,151) €16,241 
 2005 2004 2005 2004 
Loss from continuing operations — basic €(87,373) €(12,604) €(5,555) €(9,879)
Interest on convertible notes, net of tax — — — 69  — — — — 
                  
Income (loss) from continuing operations – diluted €(81,818) €(2,725) €(62,151) €16,310 
Loss from continuing operations — diluted €(87,373) €(12,604) €(5,555) €(9,879)
         
          
Weighted average number of common shares outstanding:  
Basic 29,270,388 17,290,504 33,055,103 17,290,504  30,557,409 17,256,894 33,092,853 17,324,229 
Effect of dilutive shares:  
Stock options and awards — — — 457,385  — — — — 
Convertible notes — — — 10,645,161  — — — — 
                  
Diluted 29,270,388 17,290,504 33,055,103 28,393,050  30,557,409 17,256,894 33,092,835 17,324,229 
                  
Income (loss) from continuing operations per share: 
Loss from continuing operations per share: 
Basic €(2.80) €(0.16) €(1.88) €0.94  €(2.86) €(0.73) €(0.17) €(0.57)
                  
Diluted €(2.80) €(0.16) €(1.88) €0.57  €(2.86) €(0.73) €(0.17) €(0.57)
                  
For the sixnine and three months ended JuneSeptember 30, 2005 and 2004, and the three months ended June 30, 2005,respectively, options and convertible notes were not included in the computation of diluted loss per share because they were anti-dilutive.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 11

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 4. Acquisition of the Celgar Mill and Related Financings
Acquisition
On February 14, 2005, the Company completed its acquisition of the Celgar NBSK pulp mill. The aggregate consideration for the acquisition was€177,422, which included€142,940 in cash, acquisition related expenditures of€3,668 and€30,814 was paid in shares of beneficial interest of the Company as more fully described below. The results of the Celgar mill are included in the consolidated statement of operations since the acquisition date.
The preliminary estimated allocation of the purchase price is summarized below and may be adjusted when additional information on asset and liability valuations becomes available.
     
Purchase price:    
Cash (including defined working capital) €142,940 
Equity –— shares of beneficial interest  30,814 
Estimated acquisition costs  3,668 
    
  €177,422 
    
     
Net assets acquired:    
Receivables €32 
Inventories  19,969 
Prepaids and other assets  616 
Property, plant and equipment  175,096 
Accrued expenses and other liabilities  (4,103)
Pension plan and post-retirement benefits obligation  (14,188)
    
  €177,422 
    
In October 2005, our wholly owned subsidiary, Zellstoff Celgar Limited, received a re-assessment for real property transfer tax payable in British Columbia, Canada, in the amount of approximately€3.5 million in connection with the transfer of the land where the Celgar mill is situated. The Company is contesting the assessment and the amount, if any, that may be payable in connection therewith is not yet determinable. Any additional amount paid in connection with the re-assessment will increase the cost basis of the assets acquired and will not affect earnings.
FORM 10-Q/A
QUARTERLY REPORT — PAGE 12

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
In connection with the acquisition, in February 2005, the Company issued an aggregate of 4,210,526 shares of beneficial interest by way of private placement at a price of US$9.50 per share as part of the consideration for the acquisition of the Celgar mill. In addition, in February 2005, the Company issued US$310,000 of 9.25% senior unsecured notes due 2013 and an aggregate of 10,768,700 shares of beneficial interest at a price of US$8.50 per share by way of separate public offerings. The Company used the net proceeds from such public offerings to pay the cash portion of the purchase price for the Celgar pulp mill, to repay all of the bank indebtedness of its Rosenthal pulp mill and for working capital.
In February 2005, the Company also entered into a€23,132 (US$30,000) revolving working capital facility for the Celgar pulp mill and a€40,000 revolving term credit facility for its Rosenthal pulp mill. As at JuneSeptember 30, 2005, the Company had drawn a total of€28,59216.7 million against these facilities.

FORM 10-Q
QUARTERLY REPORT — PAGE 12

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 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)
Pro Forma Financial Summary (Unaudited)
The following pro forma financial summary is presented as if the acquisition of the Celgar pulp mill was completed as of January 1, 2004. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on those dates, or of the future operations of the combined entities.
                
 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
 2005 2004  2005 2004 
Total revenues €249,225 €197,875  €398,153 €279,972 
Net income (loss) €(90,637) €6,347  €(96,192) €(15,784)
Income (loss) from continuing operations per share:  
Basic and diluted €(2.74) €0.20  €(2.91) €(0.49)
Note 5. Business Segment Information
The Company operates in two reportable business segments: pulp and paper. The segments are managed separately because each business requires different production and marketing strategies. The results of the Celgar mill presented below are from the date of its acquisition on February 14, 2005.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 13

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 5. Business Segment Information (cont’d)
Summarized financial information concerning the segments is shown in the following table:
                                                    
 Corporate,    Corporate,   
 Rosenthal Celgar(1) Stendal Total Other and Consolidated  Rosenthal Celgar(1) Stendal Total Other and Consolidated 
 Pulp Pulp Pulp Pulp Paper Eliminations Total  Pulp Pulp Pulp Pulp Paper Eliminations Total 
Six Months Ended June 30, 2005
 
Nine Months Ended September 30, 2005
 
Sales to external customers €65,936 €48,480 €81,606 €196,022 €31,480 €— €227,502  €103,058 €97,458 €128,919 €329,435 €46,995 €— €376,430 
Intersegment net sales — — 3,340 3,340 —  (3,340) —  — — 4,679 4,679 —  (4,679) — 
                              
 65,936 48,480 84,946 199,362 31,480  (3,340) 227,502  103,058 97,458 133,598 334,114 46,995  (4,679) 376,430 
                              
Operating costs 47,405 40,554 71,546 159,505 29,601  (3,822) 185,284  73,146 86,438 112,739 272,323 44,879  (5,879) 311,323 
Depreciation and amortization 6,630 4,097 13,454 24,181 379 323 24,883  10,173 7,083 20,179 37,435 592 835 38,862 
General and administrative 3,810 2,837 1,677 8,324 2,562 4,430 15,316  5,441 5,285 3,120 13,846 3,720 4,833 22,399 
Emission credits  (2,135) —  (4,153)  (6,288) — —  (6,288)  (4,402) —  (7,951)  (12,353) — —  (12,353)
                              
 55,710 47,488 82,524 185,722 32,542 931 219,195  84,358 98,806 128,087 311,251 49,191  (211) 360,231 
                              
Income (loss) from operations 10,226 992 2,422 13,640  (1,062)  (4,271) 8,307  18,700  (1,348) 5,511 22,863  (2,196)  (4,468) 16,199 
Interest expense  (41,463)  (63,320)
Investment income 981  1,594 
Derivative financial instruments, net  (73,310)  (70,259)
Foreign exchange gain on debt  (7,509)
Foreign exchange loss on debt  (1,591)
Impairment of investments  (1,645)  (1,699)
      
  (122,946)  (135,275)
      
Loss before income taxes and minority interest €(114,639) €(119,076)
      
  
Segment assets €347,935 €244,361 €906,244 €1,498,540 €24,294 €15,995 €1,538,829  €341,732 €251,918 €787,388 €1,381,038 €22,783 €5,416 €1,409,237 
                              
  
Six Months Ended June 30, 2004
 
Nine Months Ended September 30, 2004
 
Sales to external customers €71,031 €— €927 €71,958 €28,693 €— €100,651  €106,013 €— €600 €106,613 €41,398 €— €148,011 
Intersegment net sales 1,179 — — 1,179 —  (1,179) —  1,822 — — 1,822 —  (1,822) — 
                              
 72,210 — 927 73,137 28,693  (1,179) 100,651  107,835 — 600 108,435 41,398  (1,822) 148,011 
                              
Operating costs 49,125 — — 49,125 27,213  (317) 76,021  72,705 — 509 73,214 39,686  (1,742) 111,158 
Depreciation and amortization 11,136 — 12 11,148 1,141 318 12,607  14,166 — 795 14,961 1,740 — 16,701 
General and administrative 4,636 — 5,448 10,084 2,643 1,501 14,228  7,960 — 6,645 14,605 3,886 2,617 21,108 
Impairment of assets — — — — 6,000 — 6,000 
Flooding grants, less losses and expenses — — — — 669 — 669  — — — — 669 — 669 
                              
 64,897 — 5,460 70,357 31,666 1,502 103,525  94,831 — 7,949 102,780 51,981 875 155,636 
                              
Income (loss) from operations 7,313 —  (4,533) 2,780  (2,973)  (2,681)  (2,874) 13,004 —  (7,349) 5,655  (10,583)  (2,697)  (7,625)
Interest expense  (5,354)  (9,554)
Investment and other income 1,464  1,679 
Derivative financial instruments, net 7,028   (1,077)
      
 3,138 
   
Income before income taxes and minority interest €264 
   
Loss before income taxes and minority interest €(16,577)
    
Segment assets €365,342 €— €663,193 €1,028,535 €28,320 €(10,899) €1,045,956  €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.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 14

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 5. Business Segment Information (cont’d)
                                                   
 Corporate,    Corporate,   
 Rosenthal Celgar(1) Stendal Total Other and Consolidated  Rosenthal Celgar(1) Stendal Total Other and Consolidated 
 Pulp Pulp Pulp Pulp Paper Eliminations Total  Pulp Pulp Pulp Pulp Paper Eliminations Total 
Three Months Ended June 30, 2005
 
Three Months Ended September 30, 2005
 
Sales to external customers €31,840 €40,864 €40,808 €113,512 €16,097 €— €129,609  €37,122 €48,978 €47,313 €133,413 €15,532 €— €148,928 
Intersegment net sales — — 1,786 1,786 —  (1,786) —  — — 1,339 1,339 —  (1,339) — 
                              
 31,840 40,864 42,594 115,298 16,097  (1,786) 129,609  37,122 48,978 48,652 134,752 15,515  (1,339) 148,928 
                              
Operating costs 22,217 35,419 34,411 92,047 15,370  (2,135) 105,282  25,741 45,884 41,193 112,818 15,278  (2,057) 126,039 
Depreciation and amortization 3,362 3,274 6,773 13,409 198 289 13,896  3,543 2,986 6,725 13,254 213 512 13,979 
General and administrative 1,909 1,162 702 3,773 1,326 2,419 7,518  1,631 2,448 1,443 5,522 1,158 403 7,083 
Emission credits  (2,135) —  (4,153)  (6,288) — —  (6,288)  (2,267) —  (3,798)  (6,065) — —  (6,065)
                              
 25,353 39,855 37,733 102,941 16,894 573 120,408  28,648 51,318 45,563 125,529 16,649  (1,142) 141,036 
                              
Income (loss) from operations 6,487 1,009 4,861 12,357  (797)  (2,359) 9,201  8,474  (2,340) 3,089 9,223  (1,134)  (197) 7,892 
  
Interest expense  (22,200)  (21,911)
Investment income 806  613 
Derivative financial instruments, net  (69,451) 3,051 
Foreign exchange(loss) on debt  (9,806)
Impairment of investments — 
Foreign exchange gain on debt 5,918 
   
     (12,329)
  (100,651)   
    
Loss before income taxes and minority interest €(91,450) €(4,437)
      
  
Three Months Ended June 30, 2004
 
Three Months Ended September 30, 2004
 
Sales to external customers €36,022 €— €927 €36,949 €13,386 €— €50,335  €34,982 €— €(327) €34,655 €12,705 €— €47,360 
Intersegment net sales 750 — — 750 —  (750) —  643 — — 643 —  (643) — 
                              
 36,772 — 927 37,699 13,386  (750) 50,335  35,625 —  (327) 35,298 12,705  (643) 47,360 
                              
Operating costs 23,318 — — 23,318 13,455 123 36,896  23,580 — 509 24,089 12,473  (1,425) 35,137 
Depreciation and amortization 5,554 — 12 5,566 589 159 6,314  3,030 — 783 3,813 599  (318) 4,094 
General and administrative 2,648 — 2,707 5,355 1,469 863 7,687  3,324 — 1,197 4,521 1,243 1,116 6,880 
Impairment of assets — — — — 6,000 — 6,000 
Flooding grants, less losses and expenses — — — — 416 — 416  — — — — — — — 
                              
 31,520 — 2,719 34,239 15,929 1,145 51,313  29,934 — 2,489 32,423 20,315  (627) 52,111 
                              
Income (loss) from operations 5,252 —  (1,792) 3,460  (2,543)  (1,895)  (978) 5,691 —  (2,816) 2,875  (7,610)  (16)  (4,751)
Interest expense  (2,366)  (4,200)
Investment and other income 530  215 
Derivative financial instruments, net 29,473   (8,105)
      
 27,637   (12,090)
      
  
Income before income taxes and minority interest €26,659 
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.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 15

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 6. Inventories
                
 June 30, 2005 December 31, 2004  September 30, 2005 December 31, 2004 
Raw materials €53,217 €38,679  €50,716 €38,679 
Work in process and finished goods 38,820 14,219  34,962 14,219 
          
 €92,037 €52,898  €85,678 €52,898 
          
Note 7. Pension and Other Post-Retirement Plans
The newly acquired Celgar pulp mill (see Note 4) maintains defined benefit pension plans and post-retirement benefit plans for certain employees. Pension expense is based on estimates from the Company’s actuary. Pension contributions for the period from acquisition to JuneSeptember 30, 2005 and for the 2005 secondthird quarter totaled€369994 and€210,502, respectively. As the mill was acquired in 2005, there are no comparative amounts included in the quarter ended JuneSeptember 30, 2004.
        
 Six Months Ended June 30, 2005         
 Pension Benefits Post-Retirement Benefits  Nine Months Ended September 30, 2005 
  Pension Benefits Post-Retirement Benefits 
Service cost��€245 €107  €420 €183 
Interest cost 481 234  826 402 
Expected return on plan assets  (471) —   (808) — 
          
Net periodic benefit cost €255 €341  €438 €585 
          
        
 Three Months Ended June 30, 2005         
 Pension Benefits Post-Retirement Benefits  Three Months Ended September 30, 2005 
  Pension Benefits Post-Retirement Benefits 
Service cost €161 €58  €175 €76 
Interest cost 323 146  345 168 
Expected return on plan assets  (321) —   (337) — 
          
Net periodic benefit cost €163 €204  €183 €244 
          
FORM 10-Q/A
QUARTERLY REPORT — PAGE 16

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
         
  Six Months Ended June 30, 
  2005  2004 
         
Realized loss on derivative financial instruments €(295) €— 
       
Unrealized net loss on interest rate derivatives €(20,475) €(1,716)
Unrealized net gain (loss) on foreign exchange derivatives  (52,372)  8,744 
Unrealized loss on natural gas forward supply contract  (168)  — 
       
Unrealized gain (loss) on derivative financial instruments €(73,015) €7,028 
       

FORM 10-Q
QUARTERLY REPORT — PAGE 16

MERCER INTERNATIONAL INC.
         
  Nine Months Ended September 30, 
  2005  2004 
Realized 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)  14,748 
Unrealized loss on natural gas forward supply contract  (199)  — 
       
Unrealized gain (loss) on derivative financial instruments €(67,804) €(1,077)
       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 8. Derivatives Transactions (cont’d)
                
 Three Months Ended June 30,  Three Months Ended September 30, 
 2005 2004  2005 2004 
Realized loss on derivative financial instruments €(284) €— 
      
Unrealized net gain (loss) on interest rate derivatives €(20,819) €15,751  €5,310 €(14,110)
Unrealized net gain (loss) on foreign exchange derivatives  (48,274) 13,722   (1,944) 6,005 
Unrealized loss on natural gas forward supply contract  (358) —   (31) — 
          
Unrealized gain (loss) on derivative financial instruments €(69,451) €29,473  €(3,335) €(8,105)
          
In addition to the derivatives reported in the Company’s annual report on Form 10-K for the year ended December 31, 2004, the Company entered into certain new derivative transactions in the first sixnine months of 2005.
In the first quarter of 2005, Stendal entered into foreign currency derivatives in order to swap approximately three-quarters of the long-term indebtedness outstanding under the Stendal mill’s project loan facility into U.S. dollars as follows: (i) approximately€306,300 was swapped into U.S. dollars at a rate of 1.2960 with a maturity in October 2017; and (ii) approximately€153,155 was swapped into U.S. dollars at a rate of 1.2990 with a maturity in October 2017. In the second quarter of 2005, Stendal entered into foreign currency derivatives in order to swap the balance of the long-term indebtedness under the Stendal mill’s project loan facility, being approximately€153,155, into U.S. dollars at a rate of 1.2799 with a maturity in October 2017. During the first quarter of 2005, Stendal entered into a $50,000 currency forward contract at a rate of 1.3108 with a maturity in February 2006 and a $25,000 currency forward at a rate of 1.3080 with a maturitywhich matured in September 2005. During the second quarter of 2005, Stendal also entered into a $25,000 currency forward contract at a rate of 1.2357 which also matured in September 2005. In the third quarter of 2005, Stendal entered into a $13,900 currency forward at a rate of 1.2048 with a maturity in SeptemberOctober 2005. A net unrealized loss of€52,37252,440 and€48,2741,944 before minority interests was recorded in respect of these derivatives inthat were outstanding at the sixend of the nine and three months ended JuneSeptember 30, 2005, respectively. A net loss of€2,160 and€284 before minority interests was recorded in respect of such derivatives that matured in the nine and three months ended September 30, 2005, respectively.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 17

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 9. European Union Emissions Trading Scheme
Beginning in 2005, the Company’s German operations are subject to the European Union Emissions Trading Scheme pursuant to which the Company’s German mills have been granted carbon emission certificates. The German mills estimate that they will have excess carbon emission credits in the current year. As a result, in the second quarter ofnine and three months ended September 30, 2005, the Company’s German pulp mills sold some of their emissions certificates for a gain of€6,288,12.4 million and€6.1 million, respectively, which contributed to income from operations. Emission credits are recorded at historical cost. If additional credits were required in excess of the amount held by the Company, then a liability would be accrued.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 18

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
(Unaudited)
(Euros in thousands, except for shares and per share data)
Note 10. Restricted Group Supplemental Disclosure
The terms of the indenture governing our 9.25% senior unsecured notes requires that we provide the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the sixnine and three months ended JuneSeptember 30, 2005, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, and the Celgar mill from the date of its acquisition on February 14, 2005. During the sixnine and three months ended JuneSeptember 30, 2004 and as at December 31, 2004, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, which was the only member of the Restricted Group with material operations during this period. We acquired the Celgar mill in February 2005 and, as a result, its operations for the sixnine and three months ended JuneSeptember 30, 2004 and financial condition at December 31, 2004 are not included for such periods. The Restricted Group excludes our paper operations and the Stendal mill.
Combined Condensed Balance Sheet
                
                 September 30, 2005 
 June 30, 2005  Restricted Unrestricted Consolidated 
 Restricted Unrestricted Consolidated  Group Subsidiaries Eliminations Group 
 Group Subsidiaries Eliminations Group  (As restated —
see Note 11)		 (As restated —
see Note 11)		 
ASSETS
  
Current assets  
Cash and cash equivalents €62,792 €43,082 €— €105,874  €52,566 €36,473 €— €89,039 
Cash restricted — 37,951 — 37,951  — 7,646 — 7,646 
Receivables 42,748 32,665  (69) 75,344  40,758 35,113  (175) 75,696 
Inventories 54,127 37,910 — 92,037  50,875 34,803 — 85,678 
Prepaid expenses and other 3,631 3,426 — 7,057  3,968 2,478 — 6,446 
                  
Total current assets 163,298 155,034  (69) 318,263  148,167 116,513  (175) 264,505 
Cash restricted — 19,074 — 19,074  — 24,537 — 24,537 
Property, plant and equipment 393,047 716,785  (438) 1,109,394  401,311 631,228  (660) 1,031,879 
Other 9,741 4,119 — 13,860  9,483 4,084 — 13,567 
Deferred income tax 22,855 55,383 — 78,238  21,516 53,233 — 74,749 
Due from unrestricted group 44,621 —  (44,621) —  45,473 —  (45,473) — 
                  
Total assets €633,562 €950,395 €(45,128) €1,538,829  €625,950 €829,595 €(46,308) €1,409,237 
                  
  
LIABILITIES
  
Current liabilities  
Accounts payable and accrued expenses €43,780 €57,688 €(69) €101,399  €36,128 €58,749 €(175) €94,702 
Construction costs payable — 34,090 — 34,090  — 1,088 — 1,088 
Debt, current portion — 97,618 — 97,618  — 37,135 — 37,135 
                  
Total current liabilities 43,780 189,396  (69) 233,107  36,128 96,972  (175) 132,925 
 
Debt, less current portion 353,033 599,522 — 952,555  342,221 580,923 — 923,144 
Due to restricted group — 44,621  (44,621) —  — 45,473  (45,473) — 
Unrealized derivatives loss — 143,631 — 143,631  — 139,983 — 139,983 
Other 18,555 6,973 — 25,528  20,152 6,418 — 26,570 
Deferred income tax 1,883 2,260 — 4,143  3,845 3,805 — 7,650 
                  
Total liabilities 417,251 986,403  (44,690) 1,358,964  402,346 873,574  (45,648) 1,230,272 
                  
  
SHAREHOLDERS’ EQUITY
  
Total shareholders’ equity 216,311  (36,008)(1)  (438) 179,865  223,604  (43,979) (1)  (660) 178,965 
                  
Total liabilities and shareholders’ equity €633,562 €950,395 €(45,128) €1,538,829  €625,950 €829,595 €(46,308) €1,409,237 
                  
 
(1) Shareholders'Shareholders’ equity does not include government grants received or receivable related to the Stendal mill. Shareholders'Shareholders’ equity is impacted by the unrealized non-cash marked to market valuation losses on derivative financial instruments.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 19

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 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, 2004 
  Restricted  Unrestricted      Consolidated 
  Group  Subsidiaries  Eliminations  Group 
ASSETS
                
Current assets                
Cash and cash equivalents €45,487  €4,081  €—  €49,568 
Cash restricted  —   45,295   —   45,295 
Receivables  21,791   33,060   (164)  54,687 
Inventories  13,911   38,987   —   52,898 
Prepaid expenses and other  1,995   2,966   —   4,961 
             
Total current assets  83,184   124,389   (164)  207,409 
Cash restricted  28,464   19,074   —   47,538 
Property, plant and equipment  213,678   722,394   (37)  936,035 
Other  5,936   4,212   —   10,148 
Deferred income tax  26,592   27,927   —   54,519 
Due from unrestricted group  43,467   —   (43,467)  — 
             
Total assets €401,321  €897,996  €(43,668) €1,255,649 
             
                 
LIABILITIES
                
Current liabilities                
Accounts payable and accrued expenses €19,615  €37,091  €(164) €56,542 
Construction costs payable  —   65,436   —   65,436 
Debt, current portion  15,089   92,001   —   107,090 
             
Total current liabilities  34,704   194,528   (164)  229,068 
Debt, less current portion  224,542   552,730   —   777,272 
Due to restricted group  —   43,467   (43,467)  — 
Unrealized interest rate derivative  —   75,471   —   75,471 
Other  1,878   7,157   —   9,035 
Deferred income tax  1,719   343   —   2,062 
             
Total liabilities  262,843   873,696   (43,631)  1,092,908 
             
                 
SHAREHOLDERS’ EQUITY
                
Total shareholders’ equity  138,478   24,300   (37)  162,741 
             
Total liabilities and shareholders’ equity €401,321  €897,996  €(43,668) €1,255,649 
             

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 20

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 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
                                
 Six Months Ended June 30, 2005  Nine Months Ended September 30, 2005 
 Restricted Unrestricted Consolidated  Restricted Unrestricted Consolidated 
 Group Subsidiaries Eliminations Group  Group Subsidiaries Eliminations Group 
Revenues €114,416 €113,086 €— €227,502  €200,516 €175,914 €— €376,430 
                  
 
Operating costs 87,260 98,024 — 185,284  158,384 152,939 — 311,323 
Operating depreciation and amortization 10,829 13,616 438 24,883  17,431 20,771 660 38,862 
General and administrative 11,077 4,239 — 15,316  15,559 6,840 — 22,399 
Gain on sale of emission credits  (2,135)  (4,153) —  (6,288)  (4,402)  (7,951) —  (12,353)
                  
 107,031 111,726 438 219,195  186,972 172,599 660 360,231 
                  
Income (loss) from operations 7,385 1,360  (438) 8,307  13,544 3,315  (660) 16,199 
                  
Other income (expense)               
Interest expense  (15,985)  (26,571) 1,093  (41,463)  (23,918)  (41,351) 1,949  (63,320)
Investment income 1,297 777  (1,093) 981  2,313 1,230  (1,949) 1,594 
Derivative financial instruments, net  (463)  (72,847) —  (73,310)  (494)  (69,765) —  (70,259)
Unrealized foreign exchange loss on debt  (7,509) — —  (7,509)  (1,591) — —  (1,591)
Impairment of investments  (1,645) — —  (1,645)  (1,699) — —  (1,699)
                  
Total other expense  (24,305)  (98,641) —  (122,946)  (25,389)  (109,886) —  (135,275)
                  
Loss before income taxes and minority interest  (16,920)  (97,281)  (438)  (114,639)  (11,845)  (106,571)  (660)  (119,076)
Income tax (provision) benefit  (4,776) 26,188 — 21,412   (7,867) 22,494 — 14,627 
                  
Loss before minority interest  (21,696)  (71,093)  (438)  (93,227)  (19,712)  (84,077)  (660)  (104,449)
Minority interest — 11,409 — 11,409  — 17,076 — 17,076 
                  
Net loss €(21,696) €(59,684) €(438) €(81,818) €(19,712) €(67,001) €(660) €(87,373)
                  
                                
 Six Months Ended June 30, 2004  Nine Months Ended September 30, 2004 
 Restricted Unrestricted Consolidated  Restricted Unrestricted Consolidated 
 Group Subsidiaries Eliminations Group  Group Subsidiaries Eliminations Group 
Revenues €72,210 €29,620 €(1,179) €100,651  €107,835 €41,998 €(1,822) €148,011 
                  
 
Operating costs 48,675 27,213 133 76,021  72,255 40,195  (1,292) 111,158 
Operating depreciation and amortization 11,136 1,153 318 12,607  14,166 2,535 — 16,701 
General and administrative 6,295 8,091  (158) 14,228  11,027 10,531  (450) 21,108 
Impairment of assets — 6,000 — 6,000 
Flooding grants, less losses and expenses — 669 — 669  — 669 — 669 
                  
 66,106 37,126 293 103,525  97,448 59,930  (1,742) 155,636 
                  
Income (loss) from operations 6,104  (7,506)  (1,472)  (2,874) 10,387  (17,932)  (80)  (7,625)
                  
Other income (expense)               
Interest expense  (6,023)  (452) 1,121  (5,354)  (11,174)  (2,309) 3,929  (9,554)
Investment and other income (expense) 1,745  (214)  (67) 1,464 
Investment income 2,534  (301)  (554) 1,679 
Derivative financial instruments, net  (5,272) 12,300 — 7,028   (102)  (15,723) —  (15,825)
Unrealized foreign exchange loss on debt  (173) 14,921 — 14,748 
                  
Total other expense  (9,550) 11,634 1,054 3,138   (8,915)  (3,412) 3,375  (8,952)
                  
Income (loss) before income taxes and minority interest  (3,446) 4,128  (418) 264 
Income tax provision  (199) — —  (199)
Loss before income taxes and minority interest 1,472  (21,344) 3,295  (16,577)
Income tax (provision) benefit 37 — — 37 
                  
Income (loss) before minority interest  (3,645) 4,128  (418) 65 
Loss before minority interest 1,509  (21,344) 3,295  (16,540)
Minority interest —  (2,790) —  (2,790) — 3,936 — 3,936 
                  
Net income (loss) €(3,645) €1,338 €(418) €(2,725) €1,509 €(17,408) €3,295 €(12,604)
                  

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 21

 

MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIXNINE MONTHS ENDED JUNESEPTEMBER 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 June 30, 2005  Three Months Ended September 30, 2005 
 Restricted Unrestricted Consolidated  Restricted Unrestricted Consolidated 
 Group Subsidiaries Eliminations Group  Group Subsidiaries Eliminations Group 
Revenues €72,704 €56,905 €— €129,609  €86,100 €62,828 €— €148,928 
                  
 
Operating costs 57,287 47,995 — 105,282  71,124 54,915 — 126,039 
Operating depreciation and amortization 6,704 6,971 221 13,896  6,602 7,155 222 13,979 
General and administrative 5,490 2,028 — 7,518  4,482 2,601 — 7,083 
Gain on sale of emission credits  (2,135)  (4,153) —  (6,288)  (2,267)  (3,798) —  (6,065)
                  
 67,346 52,841 221 120,408  79,941 60,873 222 141,036 
                  
Income (loss) from operations 5,358 4,064  (221) 9,201  6,159 1,955  (222) 7,892 
                  
Other income (expense)               
Interest expense  (8,314)  (14,585) 699  (22,200)  (7,987)  (14,780) 856  (21,911)
Investment income 970 467  (631) 806  1,016 453  (856) 613 
Derivative financial instruments, net  (358)  (69,093) —  (69,451)  (31) 3,082 — 3,051 
Unrealized foreign exchange loss on debt  (9,806) — —  (9,806)
Impairment of investments  (467) — 467 — 
Unrealized foreign exchange gain on debt 5,918 — — 5,918 
                  
Total other income (expense)  (17,975)  (83,211) 535  (100,651)  (1,084)  (11,245) —  (12,329)
                  
Income (loss) before income taxes and minority interest  (12,617)  (79,147) 314  (91,450) 5,075  (9,290)  (222)  (4,437)
Income tax (provision) benefit  (1,661) 26,108 — 24,447   (3,091)  (3,694) —  (6,785)
                  
Income (loss) before minority interest  (14,278)  (53,039) 314  (67,003) 1,984  (12,984)  (222)  (11,222)
Minority interest — 4,852 — 4,852  — 5,667 — 5,667 
                  
Net income (loss) €(14,278) €(48,187) €314 €(62,151) €1,984 €(7,317) €(222) €(5,555)
                  
                                
 Three Months Ended June 30, 2004  Three Months Ended September 30, 2004 
 Restricted Unrestricted Consolidated  Restricted Unrestricted Consolidated 
 Group Subsidiaries Eliminations Group  Group Subsidiaries Eliminations Group 
Revenues €36,772 €14,313 €(750) €50,335  €35,625 €12,378 €(643) €47,360 
                  
 
Operating costs 23,318 13,455 123 36,896  23,580 12,982  (1,425) 35,137 
Operating depreciation and amortization 5,554 601 159 6,314  3,030 1,382  (318) 4,094 
General and administrative 3,181 4,176 330 7,687  4,732 2,440  (292) 6,880 
Flooding grants, less losses and expenses. — 416 — 416 
Impairment of assets — 6,000 — 6,000 
                  
 32,053 18,648 612 51,313  31,342 22,804  (2,035) 52,111 
                  
Income (loss) from operations 4,719  (4,335)  (1,362)  (978) 4,283  (10,426) 1,392  (4,751)
                  
Other income (expense)               
Interest expense  (1,947) 114  (533)  (2,366)  (5,151)  (1,857) 2,808  (4,200)
Investment income 789  (87)  (487) 215 
Derivative financial instruments, net  (382) 29,855 — 29,473  4,712  (14,157) —  (9,445)
Investment and other income (expense) 639  (364) 255 530 
Unrealized foreign exchange gain on debt 285 1,055 — 1,340 
                  
Total other income (expense)  (1,690) 29,605  (278) 27,637  635  (15,046) 2,321  (12,090)
                  
Income (loss) before income taxes and minority interest 3,029 25,270  (1,640) 26,659  4,918  (25,472) 3,713  (16,841)
Income tax provision  (199)  (20) —  (219)
Income tax (provision) benefit 236 — — 236 
                  
Income (loss) before minority interest 2,830 25,250  (1,640) 26,440  5,154  (25,472) 3,713  (16,605)
Minority interest —  (10,199) —  (10,199) — 6,726 — 6,726 
                  
Net income (loss) €2,830 €15,051 €(1,640) €16,241  €5,154 €(18,746) €3,713 €(9,879)
                  

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 22

 

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 11. Restatement
Subsequent to the issuance of the Company’s unaudited interim consolidated financial statements as at September 30, 2005, management identified the need for an adjustment to reported fixed asset additions and an offsetting adjustment to the effect of exchange rate changes on cash and cash equivalents in the Company’s unaudited interim consolidated statement of cash flows for the nine month period ended September 30, 2005. In addition, there was a reclassification of a fixed asset allocation in the Company’s Restricted Group balance sheet as at September 30, 2005 relating to the Company’s recently acquired Celgar pulp mill. The Company has accordingly amended its consolidated statement of cash flows for the nine months ended September 30, 2005 and the Restricted Group balance sheet as at September 30, 2005 to conform to the Company’s prior quarterly filings for 2005.
The following table presents the effect of the amendments to the Company’s consolidated statement of cash flows for the nine months ended September 30, 2005:
         
  For the Nine Months Ended 
  September 30, 2005 
  As Previously    
  Reported  As adjusted 
Cash Flows from (used in) Investing Activities:        
Purchase of property, plant and equipment €(18,646) €(11,275)
Net cash used in investing activities  (104,604)  (97,233)
Effect of exchange rate changes on cash and cash equivalents  20,931   13,560 
The following table presents the effect of the amendments to the Company’s Restricted Group balance sheet as at September 30, 2005:
                 
  As at September 30, 2005 
  Restricted Group  Unrestricted Subsidiaries 
  As Previously      As Previously    
  Reported  As Adjusted  Reported  As Adjusted 
ASSETS
                
Property, plant and equipment €397,071  €401,311  €635,468  €631,228 
Total assets  621,710   625,950   833,835   829,595 
                 
SHAREHOLDERS’ EQUITY
                
Total shareholders’ equity €219,364  €223,604  €(39,739) €(43,979)
Total liabilities and shareholders’ equity  621,710   625,950   833,835   829,595 
FORM 10-Q/A
QUARTERLY REPORT — PAGE 23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of JuneSeptember 30, 2005, unless otherwise stated; (iv) all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; (v) “€” refers to Euros and C$ refers to Canadian dollars; and (vi) “ADMTs” refers to air-dried metric tonnes.
The following discussion and analysis of our results of operations and financial condition for the sixnine and three months ended JuneSeptember 30, 2005 should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission (the “SEC”). Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation.
Results of Operations
On February 14, 2005, we completed the acquisition, referred to as the “Acquisition”, of the Celgar NBSK pulp mill and its results are included from the date of the Acquisition. In conjunction with the Acquisition, we publicly sold $310 million in principal amount of 9.25% senior notes maturing in 2013 and an aggregate of approximately $91 million of our shares of beneficial interest (including those issued upon the exercise of the underwriters’ over-allotment option) and refinanced all of the bank indebtedness of our Rosenthal mill. Effective upon the completion of the Acquisition, we also established two new revolving credit facilities for the Rosenthal and Celgar mills.
SixNine Months Ended JuneSeptember 30, 2005 Compared to SixNine Months Ended JuneSeptember 30, 2004
Selected sales data for the sixnine months ended JuneSeptember 30, 2005 and 2004 is as follows:
                
 Six Months Ended June 30,  Nine Months Ended September 30, 
 2005 2004  2005 2004 
 (ADMTs)  (ADMTs) 
Sales Volume by Product Class
  
Pulp sales volume by mill:  
Rosenthal 154,800 156,334  241,572 229,462 
Celgar 118,188 —  325,419 — 
Stendal 204,988 —  243,267 — 
          
Total pulp sales volume(1)
 477,976 156,334  810,258 229,462 
Paper sales volume 34,478 32,789  51,406 47,501 
          
Total sales volume(1)
 512,454 189,123  861,664 276,963 
          

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 2324

 

                
 Six Months Ended June 30,  Nine Months Ended September 30, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
Revenues by Product Class
  
Pulp revenues by mill:  
Rosenthal €65,936 €71,031  €103,058 €106,013 
Celgar 48,480 —  97,458 — 
Stendal 81,606 927  128,919 600 
          
Total pulp revenues(1)
 196,022 71,958  329,435 106,613 
Paper revenues 31,480 28,693  46,995 41,398 
          
Total revenues(1)
 €227,502 €100,651  €376,430 €148,011 
          
 
(1) Excluding intercompany sales volumes of 7,59410,651 and 2,5493,897 ADMTs of pulp and intercompany net sales revenues of approximately€3.34.8 million and€1.11.8 million in the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively.
Selected production data for the sixnine months ended JuneSeptember 30, 2005 and 2004 is as follows:
                
 Six Months Ended June 30,  Nine Months Ended September 30, 
 2005 2004  2005 2004 
 (ADMTs)  (ADMTs) 
Production by Product Class
  
Pulp production by mill:  
Rosenthal 157,315 159,384  240,665 231,231 
Celgar 171,833 —  289,868 — 
Stendal 231,719 —  357,814 — 
          
Total pulp production 560,867 159,384  888,347 231,231 
Paper production 33,937 32,407  50,001 47,761 
          
Total production 594,804 191,791  938,348 278,992 
          
Revenues for the sixnine months ended JuneSeptember 30, 2005 increased to€227.5376.4 million from€100.7148.0 million in the comparative period of 2004, primarily because of higher pulp sales resulting from the inclusion of sales from our Stendal and Celgar mills. Pulp sales by volume were 477,976810,258 ADMTs in the first halfnine months of 2005, compared to 156,334229,462 ADMTs in the comparative period of 2004. In the sixnine months ended JuneSeptember 30, 2005, the Stendal and Celgar mills sold 323,176568,686 ADMTs of NBSK pulp and had sales of€130.1226.4 million.
Cost of sales and general, administrative and other expenses in the first halfnine months of 2005 increased to€219.2360.2 million from€103.5155.6 million in the comparative period of 2004, primarily as a result of the inclusion of production from our Stendal and Celgar mills. We commenced expensing all of the costs, including interest, relating to the Stendal mill effective September 2004, prior to which most of the costs, including interest, relating to the Stendal mill were capitalized during its construction.
For the first nine months of 2005, revenues from our pulp operations increased to€329.4 million from€106.6 million in the same period a year ago, primarily as a result of the inclusion of sales from our Stendal and Celgar mills. List prices for NBSK pulp in Europe were approximately€484 ($611) per ADMT in the first nine months of 2005, approximately€503 ($617) per ADMT in the first nine months of last year and approximately€487 ($613) in the second quarter of
FORM 10-Q/A
QUARTERLY REPORT — PAGE 25

2005. The decrease in NBSK pulp prices was partially offset by the strengthening of the U.S. dollar versus the Euro during the current period.
Pulp sales realizations decreased to€402 per ADMT on average in the first nine months of 2005 from€452 per ADMT in the first nine months of 2004, primarily as a result of lower price realizations of the Stendal and Celgar mills. The Stendal mill sold pulp at a discounted price as a result of its start up and the Celgar mill sells a large portion of its production in Asian markets which had lower prices than European markets.
Cost of sales and general, administrative and other expenses for the pulp operations increased to€311.3 million in the first nine months of 2005 from€102.8 million in the first nine months of 2004, primarily as a result of the inclusion of€226.9 million of operating costs related to the Stendal and Celgar mill.mills. In the first nine months of 2005, we recorded a contribution to income from operations of€12.4 million resulting from the sale of excess carbon emission credits by our German pulp mills.
Beginning in 2005, our German operations are subject to the European Union Emissions Trading Scheme pursuant to which our German mills have been granted carbon emission certificates. The German mills estimate that they will have excess carbon emission credits in the current year. As a result, in the second quarterfirst nine months of 2005, our German pulp mills sold some of their emissions certificates for a gain of€6.312.4 million, in the six months ended June 30, 2005, which contributed to income from operations.
For the first half of 2005, revenues from our pulp operations increased to€196.0 million from€72.0 million in the same period a year ago, primarily as a result of the inclusion of production from our Stendal and Celgar mills. List prices for NBSK pulp in Europe were approximately€488 ($628) per ADMT in the first half of 2005, approximately€500 ($613) per ADMT in the first half of last year and approximately€490 ($642) in the first quarter of 2005. The decrease in NBSK pulp prices was partially offset by the strengthening of the U.S. dollar versus the Euro during the current period.

FORM 10-Q
QUARTERLY REPORT — PAGE 24

Pulp sales realizations decreased to€411 per ADMT on average in the first half of 2005 from€443 per ADMT in the first half of 2004, primarily as a result of lower price realizations of the Stendal and Celgar mills. The Stendal mill sold pulp at a discounted price as a result of its start up, which we expect will be eliminated during the year, and the Celgar mill sells a large portion of its production in Asian markets which had lower prices than European markets.
Cost of sales and general, administrative and other expensesDepreciation for the pulp operations increased to€185.737.4 million in the current period, from€15.0 million in the first half of 2005 from€70.4 million in the first halfnine months of 2004, primarily as a result of the inclusion of€130.0 million of operating costs related to the Stendal and Celgar mills. In the first half of 2005, we recorded a contribution to income from operations of€6.3 million resulting from the sale of excess carbon emission credits by our German pulp mills.
Depreciation for the pulp operations increased to€24.2 million in the current period, from€11.1 million in the first half of 2004, primarily as a result of the inclusion of€17.627.3 million of depreciation from the Stendal and Celgar mills, partially offset by lower depreciation at the Rosenthal mill.
For the first halfnine months of 2005, our pulp operations generated operating income of€13.622.9 million, versus operating income of€2.85.7 million in the first halfnine months of 2004, primarily as a result of the inclusion of the results of the Stendal and Celgar mills, the sale of excess carbon emission credits by our German pulp mills and lower costs and expenses at our Rosenthal mill.
Revenues from our paper operations in the current period wereincreased to€31.547.0 million compared withfrom€28.741.4 million in the same period of last year. Foryear as a result of higher sales volumes.
Cost of sales and general, administrative and other expenses for the first half of 2005, total paper sales volumes were 34,478 ADMTs, versus 32,789 ADMTsoperations in the first halfnine months of 2005 decreased to€49.2 million from€52.0 million in the comparative period of 2004, primarily as a result of a shift in the product mix at our paper mills. Average prices realized on our paper products in the current quarter increased slightly, reflecting the shift in the product mix.
Cost of sales and general, administrative and other expenses for the paper operations in the first half of 2005 increased to€32.5 million from€31.7 million in the comparative period of 2004, primarily as a result of the shift in the product mix.
For the first halfnine months of 2005, our paper operations generated an operating loss of€1.12.2 million, compared to an operating loss of€3.010.6 million in the first halfnine months of 2004.
In the first halfnine months of 2005, we had income from operations of€8.316.2 million, compared to a loss from operations of€2.97.6 million in the same period last year.
Interest expense in the first halfnine months of 2005 increased to€41.563.3 million from€5.49.6 million in the year ago period, due to interest expense of€26.341.0 million relating to the Stendal mill and higher borrowings resulting primarily from our $310 million senior note issue in February 2005. In the first halfnine months of 2004, almost allmost of the interest associated with the Stendal mill was capitalized during its construction.capitalized.
In the first halfnine months of 2005, Stendal entered into certain foreign currency derivatives to swap all of its long-term bank indebtedness from Euros to U.S. dollars and certain currency forwards and weforwards. We recorded a net unrealized non-cash holding loss of€52.4 million before minority interests upon the marked to market valuation of such derivatives that were outstanding at the end of the period and a net loss of€2.2 million before minority interests in respect of such derivatives that
FORM 10-Q/A
QUARTERLY REPORT — PAGE 26

matured during the period, due to the strengthening of the U.S. dollar versus the Euro at the end of the period.Euro. In the comparative period of 2004, we recorded a net unrealized non-cash holding gain of€8.714.7 million before minority interests on the then

FORM 10-Q
QUARTERLY REPORT — PAGE 25

outstanding currency derivatives of Rosenthal and Stendal. In the first halfnine months of 2005, as a result of a decrease in long-term European interest rates, we also recorded a netnon-cash holding loss of€20.815.2 million before minority interests on the marked to market valuation of the Stendal interest rate derivatives and a net loss of€0.3 million before minority interests upon the settlement of the Rosenthal interest rate derivatives versus a net unrealized non-cash holding loss thereon of€1.715.8 million before minority interests in the comparative period of 2004. See “Quantitative and Qualitative Disclosures About Market Risk” for more information about our derivatives. We also recorded an unrealized non-cash foreign exchange loss on our long-term debt of€1.6 million in the current period due to the weakening of the Canadian dollar versus the U.S. dollar.
In the first halfnine months of 2005, minority interest, representing the two minority shareholders’ proportionate interest in the Stendal mill, was€11.417.1 million, compared to€(2.8)3.9 million in the first halfnine months of 2004.
On May 6, 2005, our management determined to record, and our Audit Committee approved, an adjustment of€1.61.7 million for the non-cash impact of other-than-temporary impairment losses on our available-for-sale securities and a loan receivable that relate to an investment in a venture company, which is a legacy investment that we have held since approximately 1996. In April 2005, the venture company proposed to place itself into liquidation. As a result, management determined to record impairment charges sufficient to reduce its investment to the net amount estimated to be recovered. We do not currently expect the impairment charge to result in any future cash expenditures.
We reported a net loss for the first halfnine months of 2005 of€81.887.4 million, or€2.802.86 per basic and diluted share, which reflected interest expense related to our Stendal mill of€41.0 million, the netrealized and unrealized non-cash holdingnet losses on our currency and interest rate derivatives of€73.270.1 million, and the unrealized non-cash foreign exchange loss on our long-term debt of€7.5 million, partially offset by the non-cash benefit for income taxes of€21.4 million, and interest expense related to our Stendal mill of€26.31.6 million, and the non-cash impairment charge of€1.61.7 million relating to investments.investments, partially offset by a non-cash benefit for income taxes of€14.6 million. In the first halfnine months of 2004, we reported a net loss of€2.712.6 million, or€0.160.73 per basic and diluted share.
We generated “Operating EBITDA” of€33.255.1 million and€9.715.6 million in the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively. Operating EBITDA is defined as income (loss) from operations plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA is calculated by adding depreciation and amortization and non-recurring capital asset impairment charges of€24.938.9 million and€12.623.2 million to the income from operations of€8.316.2 million and loss from operations of€2.97.6 million for the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively.
Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
FORM 10-Q/A
QUARTERLY REPORT — PAGE 27

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an

FORM 10-Q
QUARTERLY REPORT — PAGE 26

alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) minority interests on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and relying primarily on our GAAP financial statements.
The following table provides a reconciliation of net loss to lossincome (loss) from operations and Operating EBITDA for the periods indicated:
                
 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Net loss €(81,818) €(2,725) €(87,373) €(12,604)
 
Minority interest  (11,409) 2,790   (17,076)  (3,936)
Income taxes (benefit)  (21,412) 199   (14,627)  (37)
Interest expense 41,463 5,354  63,320 9,554 
Investment income  (981)  (1,464)  (1,594)  (1,679)
Derivative financial instruments, net 73,310  (7,028) 70,259 1,077 
Foreign exchange loss on debt 7,509 —  1,591 — 
Impairment of investments 1,645 —  1,699 — 
          
Income (loss) from operations 8,307  (2,874) 16,199  (7,625)
Add: Depreciation and amortization 24,883 12,607  38,862 17,217 
Impairment charge — 6,000 
          
Operating EBITDA €33,190 €9,733  €55,061 €15,592 
          

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 2728

 

Three Months Ended JuneSeptember 30, 2005 Compared to Three Months Ended JuneSeptember 30, 2004
Selected sales data for the three months ended JuneSeptember 30, 2005 and 2004 is as follows:
         
  Three Months Ended June 30, 
  2005  2004 
  (ADMTs) 
Sales Volume by Product Class
        
Pulp sales volume by mill:        
Rosenthal  75,996   74,841 
Celgar  99,841   — 
Stendal  102,915   — 
       
Total pulp sales volume(1)
  278,752   74,841 
Paper sales volume  17,840   15,383 
       
Total sales volume(1)
  296,592   90,224 
       
        
 Three Months Ended September 30, 
 2005 2004 
 (ADMTs) 
Sales Volume by Product Class
 
Pulp sales volume by mill: 
Rosenthal 86,772 73,128 
Celgar 125,079 — 
Stendal 120,431 — 
     
Total pulp sales volume(1)
 332,282 73,128 
Paper sales volume 16,928 14,712 
     
Total sales volume(1)
 349,210 87,840 
     
        
 (in thousands)  (in thousands) 
Revenues by Product Class
  
Pulp revenues by mill:  
Rosenthal €31,840 €36,022  €37,122 €34,982 
Celgar 40,864 —  48,978 — 
Stendal 40,808 927  47,313  (327)
          
Total pulp revenues(1)
 113,512 36,949  133,413 34,655 
Paper revenues 16,097 13,386  15,515 12,705 
          
Total revenues(1)
 €129,609 €50,335  €148,928 €47,360 
          
 
(1) Excluding intercompany sales volumes of 4,1053,057 and 1,5401,348 ADMTs of pulp and intercompany net sales revenues of approximately€1.81.3 million and€0.80.6 million in the three months ended JuneSeptember 30, 2005 and 2004, respectively.
Selected production data for the three months ended JuneSeptember 30, 2005 and 2004 is as follows:
                
 Three Months Ended June 30,  Three Months Ended September 30,
 2005 2004  2005 2004
 (ADMTs)  (ADMTs)
Production by Product Class
  
Pulp production by mill:  
Rosenthal 81,443 80,317  83,350 71,847 
Celgar 118,035 — 
Stendal 123,738 —  126,202 — 
Celgar 111,071 — 
          
Total pulp production 316,252 80,317  327,587 71,847 
Paper production 17,979 15,339  16,064 15,354 
          
Total production 334,231 95,656  343,651 87,201 
          
Revenues for the three months ended JuneSeptember 30, 2005 increased to€129.6148.9 million from€50.347.4 million in the comparative period of 2004, primarily because of higher pulp sales resulting from the inclusion of sales from our Stendal and Celgar mills. Pulp sales by volume were 278,752332,282 ADMTs in the secondthird quarter of 2005, compared to 74,84173,128 ADMTs in the comparative period of 2004. In the three months ended JuneSeptember 30, 2005, the Stendal and Celgar mills sold 202,756245,510 ADMTs of NBSK pulp and had sales of€81.796.3 million.
Cost of sales and general, administrative and other expenses in the secondthird quarter of 2005 increased to€120.4141.0 million from€51.352.1 million in the comparative period of 2004, primarily as a result of the inclusion of production from our Stendal mill and the operationsCelgar mills. We commenced expensing all of the Celgar mill. Incosts relating to the second quarterStendal mill effective September 2004, prior to which most of 2005, we realized a gain of€6.3 million from the sale of excess carbon emission credits by our German mills, which contributedcosts relating to income from operations.the mill were capitalized during its construction.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 2829

 

For the secondthird quarter of 2005, revenues from our pulp operations increased to€113.5133.4 million from€36.934.7 million in the same period a year ago, primarily as a result of the inclusion of productionsales from our Stendal and Celgar mills. List prices for NBSK pulp in Europe were approximately€487476 ($613)580) per ADMT in the secondthird quarter of 2005, compared to approximately€535519 ($645)635) per ADMT in the comparative period of last year. The decrease in NBSK pulp prices was partially offset by the strengthening of the U.S. dollar versus the Euro during the current period.
Pulp sales realizations decreased to€408398 per ADMT on average in the secondthird quarter of 2005 from€471472 per ADMT in the secondthird quarter of 2004, primarily as a result of lower price realizations of the Stendal and Celgar mills. The Stendal mill sold pulp at a discounted price as a result of its start up which we expect will be eliminated during the year, and the Celgar mill sells a large portion of its production in Asian markets which had lower sales prices than European markets.
Cost of sales and general, administrative and other expenses for the pulp operations increased to€102.9125.5 million in the secondthird quarter of 2005 from€34.232.4 million in the comparative period of 2004, primarily as a result of the inclusion of€77.696.9 million of operating costs related to the Stendal and Celgar mills. In the secondthird quarter of 2005, we recorded a contribution to income from operations of€6.36.1 million resulting from the sale of excess carbon emission credits by our German pulp mills.
Depreciation for the pulp operations increased to€13.413.3 million in the current quarter, from€5.63.8 million in the secondthird quarter of 2004, primarily as a result of the inclusion of€10.09.7 million of depreciation from the Stendal and Celgar mills, partially offset by lower depreciation at the Rosenthal mill.mills.
For the secondthird quarter of 2005, our pulp operations generated operating income of€12.49.2 million, versus operating income of€3.52.9 million in the comparative quarter of 2004, primarily as a result of the inclusion of the results of the Stendal and Celgar mills, the sale of excess carbon emission credits by our German pulp mills and lower costs and expenses at our Rosenthal mill.
Revenues from our paper operations in the current quarter wereincreased to€16.115.5 million compared withfrom€13.412.7 million in the same quarter of last year. Foryear as a result of higher sales volumes.
Cost of sales and general, administrative and other expenses for the secondpaper operations in the third quarter of 2005 total paper sales volumes were 17,840 ADMTs, versus 15,383 ADMTsdecreased to€16.6 million from€20.3 million in the comparative quarter of 2004, primarily as a result of a shift in the product mix at our paper mills. Average prices realized on our paper products in the current quarter increased slightly, reflecting the shift in the product mix.
Cost of sales and general, administrative and other expenses for the paper operations in the second quarter of 2005 increased to€16.9 million from€15.9 million in the comparative quarter of 2004, primarily as a result of the shift in the product mix.
For the secondthird quarter of 2005, our paper operations generated an operating loss of€0.81.1 million, compared to an operating loss of€2.57.6 million in the secondthird quarter of 2004.
In the secondthird quarter of 2005, we had income from operations of€9.27.9 million, compared to a loss from operations of€1.04.8 million in the same quarter last year.

FORM 10-Q
QUARTERLY REPORT — PAGE 29

Interest expense in the secondthird quarter of 2005 increased to€22.221.9 million from€2.44.2 million in the year ago period, due to interest expense of€14.514.7 million relating to the Stendal mill and higher borrowings resulting primarily from our $310 million senior note issue in February 2005. In the secondthird quarter of 2004, almost allmost of the interest associated with the Stendal mill was capitalized during its construction.capitalized.
FORM 10-Q/A
QUARTERLY REPORT — PAGE 30

Stendal had entered into certain foreign currency derivatives to swap a portionall of its long-term bank indebtedness from Euros to U.S. dollars and certain currency forwards in the first quarter of 2005. In the second quarter of 2005, Stendal entered into foreign currency derivatives to swap the balance of its long-term indebtedness from Euros to U.S. dollars and a currency forward. We recorded a net unrealized non-cash holding loss of€48.31.9 million before minority interests upon the marked to market valuation of such currency derivatives that were outstanding at the end of the quarter and a net loss of€0.3 million before minority interests in respect of such derivatives that matured in the quarter, due to the strengthening of the U.S. dollar versus the Euro at the end of the quarter.Euro. In the comparative quarter of 2004, we recorded a net unrealized non-cash holding gain of€13.76.0 million before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal. In the secondthird quarter of 2005, as a result of a decreasean increase in long-term European interest rates, we also recorded a net unrealized non-cash holding lossgain of€20.85.3 million before minority interests on the marked to market valuation of the Stendal interest rate derivatives versus a net unrealized non-cash holding gainloss of€15.814.1 million before minority interests on the interest rate derivatives of Stendal and Rosenthal in the comparative quarter of 2004. See “Quantitative and Qualitative Disclosures About Market Risk” for more information about our derivatives. We also recorded an unrealized non-cash foreign exchange gain on our long-term debt of€5.9 million in the current period due to the strengthening of the Canadian dollar versus the U.S. dollar.
In the secondthird quarter of 2005, minority interest, representing the two minority shareholders’ proportionate interest in the Stendal mill, was€4.95.7 million, compared to€(10.2)6.7 million in the secondthird quarter of 2004.
We reported a net loss for the secondthird quarter of 2005 of€62.25.6 million, or€1.880.17 per basic and diluted share, which reflected the net unrealized non-cash holding losses on our currency and interest rate derivativesinclusion of€69.1 million and the unrealized non-cash foreign exchange loss on our long-term debt of€9.8 million, partially offset by the non-cash benefit for income taxes of€24.4 million, and interest expense related to our Stendal mill of€14.514.7 million and the net realized and unrealized gain of€3.1 million on our interest rate and currency derivatives and the unrealized non-cash foreign exchange gain on our long-term debt of€5.9 million. In the secondthird quarter of 2004, we reported a net incomeloss of€16.29.9 million, or€0.940.57 per basic share and€0.57 per diluted share.
We generated Operating EBITDA of€23.121.9 million and€5.3 million in the three months ended JuneSeptember 30, 2005 and 2004, respectively, calculated by adding depreciation and amortization and non-recurring capital asset impairment charges of€13.914.0 million and€6.310.0 million to the income from operations of€9.27.9 million and a loss from operations of€1.04.8 million for the three months ended JuneSeptember 30, 2005 and 2004, respectively. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for our results as reported under GAAP. See the discussion of our results for the first halfnine months of 2005 for additional information relating to Operating EBITDA.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 3031

 

The following table provides a reconciliation of net income (loss)loss to income (loss) from operations and Operating EBITDA for the periods indicated:
                
 Three Months Ended  Three Months Ended 
 June 30,  September 30, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Net income (loss) €(62,151) €16,241 
Net loss €(5,555) €(9,879)
Minority interest  (4,852) 10,199   (5,667)  (6,726)
Income taxes (benefit)  (24,447) 219  6,785  (236)
Interest expense 22,200 2,366  21,911 4,200 
Investment income  (806)  (530)  (613)  (215)
Derivative financial instruments, net 69,451  (29,473)  (3,051) 8,105 
Foreign exchange loss on debt 9,806 — 
Foreign exchange gain on debt  (5,918) — 
          
Income (loss) from operations 9,201  (978) 7,892  (4,751)
Add: Depreciation and amortization 13,896 6,314  13,979 4,005 
Impairment charge — 6,000 
          
Operating EBITDA €23,097 €5,336  €21,871 €5,254 
          
Liquidity and Capital Resources
The following table is a summary of selected financial information for the periods indicated:
                
 As at As at  As at As at 
 June 30, December 31,  September 30, December 31, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Financial Position
  
Cash and cash equivalents €105,874 €49,568  €89,039 €49,568 
Working capital (deficit) 85,156  (21,659) 131,580  (21,659)
Property, plant and equipment 1,109,394 936,035  1,031,879 936,035 
Total assets 1,538,829 1,255,649  1,409,237 1,255,649 
Long-term liabilities  1,125,857(1) 863,840   1,097,347(1) 863,840 
Shareholders’ equity 179,865 162,741  178,965 162,741 
 
(1) Includes€28.616.7 million outstanding under the revolving credit facilities for the Rosenthal and Celgar mills.
At JuneSeptember 30, 2005, our cash and cash equivalents were€105.989.0 million, compared to€49.6 million at December 31, 2004. We also had€38.07.6 million of cash restricted to pay current Stendal construction costs payable of€34.11.1 million at JuneSeptember 30, 2005. We also had€19.124.5 million of cash restricted in a debt service account for the project financing for the Stendal mill. At JuneSeptember 30, 2005, we qualified for investment grants related to the Stendal mill totaling approximately€88.510.6 million from the federal and state governments of Germany, which we expect to receive in 2005. These grants, when received, will be applied to repay the amounts drawn under the current portion of a dedicated tranche of the project loan facility relating to the Stendal mill, or the “Stendal Loan Facility”. Under our accounting policies, we do not record these grants until they are received. The grants are not reported in our income and reduce the cost basis of the assets purchased when they are received. The balance outstanding under such dedicated tranche of the Stendal Loan Facility will be substantially paid from VAT credits we expect to receive in the ordinary course.
We expect to meet our interest and debt service expenses and the working and maintenance capital requirements for our operations (other than at Stendal) from cash flow from operations, cash on hand and the two new credit facilities for the Rosenthal and Celgar mills established in February 2005. We also recently approved an approximately C$28.5 million strategic capital

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QUARTERLY REPORT — PAGE 3132

 

February 2005. We also recently approved and are preparing to implement an approximately C$28.5 million strategic capital plan for our Celgar mill that we expect will increase the mill’s production capacity, reduce operating costs and improve pulp quality and the mill’s reliability. We expect to meet the costs of such plan from cash on hand, cash flow from operations and our existing credit facility relating to the Celgar mill. We expect to meet the capital requirements for the Stendal mill, including working capital and potential losses during start-up, through shareholder advances already made to Stendal, the Stendal Loan Facility (which includes a revolving working capital tranche), the receipt of government grants, cash on hand and cash flow from operations.
Operating Activities
Operating activities in the first halfnine months of 2005 used cash of€5.25.6 million, compared to€3.11.2 million in the comparative period of 2004. An increase in receivables due primarily to higher sales used cash of€20.720.4 million in the first halfnine months of 2005, compared to€2.52.1 million in the comparative period of 2004. An increase in inventories due primarily to the build up of finished goods at the Celgar mill and higher fiber levels at the Stendal mill related to its start up used cash of€16.89.6 million in the first halfnine months of 2005, compared to€18.035.8 million in the first halfnine months of 2004. An increase in accounts payable and accrued expenses provided cash of€41.333.8 million in the first halfnine months of 2005, compared to€12.226.3 million in the comparative period of 2004, primarily due to higher production.
Investing Activities
Investing activities in the sixnine months ended JuneSeptember 30, 2005 used cash of€155.1 million, of which€146.6 million related to the97.2 million. The acquisition of the Celgar pulp mill.mill used cash of€146.6 million and a decrease in restricted cash in connection with such Acquisition provided cash of€60.7 million in the current period. The acquisition of properties used cash of€8.511.3 million in the first halfnine months of 2005. Investing activities used cash of€116.1258.1 million in the sixnine months ended JuneSeptember 30, 2004, primarily relating to the Stendal mill.
Financing Activities
Financing activities provided cash of€211.0128.7 million in the sixnine months ended JuneSeptember 30, 2005. In connection with the acquisition of the Celgar pulp mill, a net increase in indebtedness provided cash of€141.550.1 million and the issuance of shares of beneficial interest provided cash of€66.6 million and a decrease in restricted cash provided cash of€35.867.3 million in the current period. We fully repaid the project loan facility relating to the Rosenthal mill, or the “Rosenthal Loan Facility”, and indebtedness relating to the landfill at the Rosenthal mill in February 2005 from the proceeds of the share and senior note offerings in connection with the Acquisition. A decrease in construction costs payable related to the Stendal mill used cash of€31.364.3 million and proceeds from investment grants related to the Stendal mill provided cash of€78.6 million in the current period. Financing activities provided cash of€109.4249.8 million in the sixnine months ended JuneSeptember 30, 2004, primarily related to the Stendal mill.
As at JuneSeptember 30, 2005, we had utilized the entire€4.7 million available under the five credit facilities relating to the paper operations. In addition, at JuneSeptember 30, 2005, we had drawn down approximately€12.02.0 million of the€40.0 million available under the new revolving term credit facility relating to the Rosenthal mill and€16.614.7 million of the $30 million available under the new revolving credit facility relating to the Celgar mill.
FORM 10-Q/A
QUARTERLY REPORT — PAGE 33

We qualify for investment grants from the federal and state governments of Germany and had claim expenditures of€88.510.6 million outstanding as of JuneSeptember 30, 2005. We expect to receive our currently outstanding claim expenditures in 2005. In accordance with our accounting policies, we

FORM 10-Q
QUARTERLY REPORT — PAGE 32

do not record these grants until they are received. These grants reduce the cost basis of the assets purchased with them.
We have no material commitments to acquire assets or operating businesses. We anticipate that there will be acquisitions of businesses or commitments to projects in the future. To achieve our long-term goals of expanding our asset and earnings base through the acquisition of interests in companies and assets in the pulp and paper and related businesses, and organically through high return capital expenditures at our operating facilities, we will require substantial capital resources. The required necessary resources for such long-term goals will be generated from cash flow from operations, cash on hand, the sale of securities and/or assets, and borrowing against our assets.
In addition, we have amounts available under a revolving tranche of the Stendal Loan Facility, and the two new revolving credit facilities established for the Rosenthal and Celgar mills in February 2005.
Capital Resources
In addition to our new revolving credit facilities for the Rosenthal and Celgar mills and the revolving working capital tranche of the Stendal Loan Facility, respectively, we may seek to raise future funding in the debt markets if our indenture relating to our 9.25% senior notes permits, subject to compliance with the indenture. The indenture governing the senior notes contains various restrictive covenants, including several that are based on a formulation of the financial measure EBITDA, which is net income (loss) adjusted to exclude interest, taxes, depreciation and amortization, certain non-cash charges and extraordinary or otherwise unusual gains or losses, and certain other items. We refer to this formulation of EBITDA as “Indenture EBITDA” which is defined in the senior note indenture as Consolidated EBITDA.
The indenture governing the senior notes provides that, in order for Mercer Inc. and its restricted subsidiaries (as defined in the indenture and which excludes the Stendal mill and our paper operations) to enter into certain types of transactions, including the incurrence of additional indebtedness, the making of restricted payments and the completion of mergers and consolidations (other than, in each case, those specifically permitted by our senior note indenture), we must meet a minimum ratio of Indenture EBITDA to Fixed Charges as defined in the senior note indenture of 2.0 to 1.0 on a pro forma basis for the most recently ended four full fiscal quarters. This ratio is referred to and defined as the Fixed Charge Coverage Ratio in the senior note indenture.
Our Acquisition of the Celgar mill in February 2005 was a significant transaction for us that has materially impacted our results of operations and financial condition. The Acquisition will impact the ability of Mercer Inc. and its restricted subsidiaries under the indenture governing the senior notes to make distributions and incur additional indebtedness in the future beyond our revolving credit facilities and certain permitted borrowings under the indenture, and, in that regard, we and our restricted subsidiaries will be required to meet the Fixed Charge Coverage Ratio. As at JuneSeptember 30, 2005, Mercer Inc. and our restricted subsidiaries under the indenture governing the senior notes did not meet the Fixed Charge Coverage Ratio of 2.0 to 1.0 as set out in the senior note indenture. As a result, as at JuneSeptember 30, 2005, Mercer Inc. and its restricted
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subsidiaries were not able to make certain distributions and incur additional indebtedness beyond our revolving credit facilities except as permitted under the indenture.

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Foreign Currency
Effective January 1, 2002, we changed our reporting currency from the U.S. dollar to the Euro as a significant majority of our business transactions are originally denominated in Euros. By adopting the Euro, most cumulative foreign currency translation losses were eliminated. However, we hold certain assets and liabilities in U.S. dollars, Swiss francs and in Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.
We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Unrealized gains or losses from these translations are recorded in our consolidated statement of comprehensive income and impact on shareholders’ equity on the balance sheet but do not affect our net earnings.
In the sixnine months ended JuneSeptember 30, 2005, we reported a net€1.24.4 million foreign exchange translation gain and, as a result, the cumulative foreign exchange translation gain increased to€11.614.8 million at JuneSeptember 30, 2005 from€10.4 million at December 31, 2004.
Based upon the exchange rate at JuneSeptember 30, 2005, the U.S. dollar increased by approximately 1%2.9% in value against the Euro since JuneSeptember 30, 2004. See “Quantitative and Qualitative Disclosures about Market Risk”.
Results of Operations of the Restricted Group Under Our Senior Note Indenture
The indenture governing our 9.25% senior notes requires that we also provide a discussion in annual and quarterly reports we file with the SEC under Management’s Discussion and Analysis of Financial Condition and Results of Operations of the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, referred to as the “Restricted Group”. As at and during the sixnine and three months ended JuneSeptember 30, 2005, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, and the Celgar mill from February 14, 2005, the date of the Acquisition of the mill. During the sixnine and three months ended JuneSeptember 30, 2004 and as at December��December 31, 2004, the Restricted Group was comprised of Mercer Inc., certain holding subsidiaries and Rosenthal, which was the only member of the Restricted Group with material operations during such period. As we acquired the Celgar pulp mill in February 2005, its results of operations and financial condition are not included in the discussion relating to our Restricted Group for the sixnine and three months ended JuneSeptember 30, 2004 and as at December 31, 2004. The Restricted Group excludes our paper operations and our Stendal mill.
The following is a discussion of the results of operations and financial condition of the Restricted Group. For further information regarding the operating results of the Rosenthal and Celgar mills, see Note 5 of our quarterly financial statements included herein. For further information regarding the Restricted Group including, without limitation, a reconciliation to our consolidated results of operations, see Note 10 of our quarterly financial statements included herein.
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Restricted Group Results — Six—Nine Months Ended JuneSeptember 30, 2005 Compared to SixNine Months Ended JuneSeptember 30, 2004
Total revenues for the Restricted Group for the sixnine months ended JuneSeptember 30, 2005 increased to€114.4200.5 million from€72.2107.8 million in the comparative period of 2004, primarily because of the

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inclusion of the pulp sales from the Celgar mill. Pulp sales realizations for the Restricted Group decreased to€427409 per ADMT on average in the sixnine months ended JuneSeptember 30, 2005 from€443452 per ADMT in the comparative period of 2004, primarily as a result of lower sales prices realized by the Celgar mill, which sells a large portion of its production in Asian markets which had lower sales prices than European markets. The decrease in NBSK pulp prices was partially offset by the strengthening of the U.S. dollar versus the Euro during the current period.
Costs of sales and general, administrative and other expenses for the Restricted Group in the sixnine months ended JuneSeptember 30, 2005 increased to€107.0187.0 million from€66.197.4 million in the comparative period of 2004, primarily as a result of the inclusion of the results of the Celgar mill, partially offset by lower production costs at the Rosenthal mill.
Depreciation for the Restricted Group decreasedincreased to€10.817.4 million in the first halfnine months of 2005 from€11.114.2 million in the comparative period of 2004, primarily as a result of a change in our depreciation estimate in respect of the Rosenthal mill effective July 1, 2004, which resulted in a decrease in cost of sales for the Restricted Group for the six months ended June 30, 2005, partially offset by the inclusion of depreciation of the Celgar mill, partially offset by lower depreciation at our Rosenthal mill.
In the first halfnine months of 2005, the Restricted Group reported income from operations of€7.413.5 million, compared to€6.110.4 million in the first halfnine months of 2004. Interest expense for the Restricted Group in the sixnine months ended JuneSeptember 30, 2005 increased to€16.023.9 million from€6.011.2 million in the year ago period, primarily due to higher borrowings resulting from our $310 million senior note offering in February 2005.
On May 6, 2005, our management determined to record, and our Audit Committee approved, a non-cash impairment charge of€1.61.7 million related to an investment in a venture company, which is the last of a legacy investment that we have held since approximately 1996. The venture company has proposed to place itself into liquidation and, as a result, management determined to record impairment charges sufficient to reduce its investment to the net amount expected to be recovered. We do not currently expect to incur any future cash expenditures related thereto.
In the sixnine months ended JuneSeptember 30, 2005, the Restricted Group recorded a net loss of€0.3 million on the settlement of the Rosenthal interest rate derivatives, versus a net unrealized non-cash holding loss of€4.80.1 million on the marked to market valuation thereon in the comparative period of 2004. In the sixnine months ended JuneSeptember 30, 2004, the Restricted Group recorded a net unrealized non-cash holding loss of€0.50.2 million upon the marked to market valuation of the then outstanding currency derivatives relating to the Rosenthal mill. The Restricted Group did not have any currency derivatives outstanding during the first halfnine months of 2005 that materially affected its results.
The Restricted Group reported a net loss for the sixnine months ended JuneSeptember 30, 2005 of€21.719.7 million, which reflected higher interest expense of€16.023.9 million. In the first halfnine months of 2004, the Restricted Group reported a net lossincome of€3.61.5 million.
The Restricted Group generated “Operating EBITDA” of€18.231.0 million and€17.224.6 million in the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively. Operating EBITDA is defined as
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income (loss) from operations plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA for the Restricted Group is calculated by adding depreciation and amortization and non-recurring capital asset impairment charges of€10.8

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17.4 million and€11.114.2 million to the income from operations of€7.413.5 million and€6.110.4 million for the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of Mercer’s results for the sixnine months ended JuneSeptember 30, 2005 for additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net lossincome (loss) to income from operations and Operating EBITDA for the Restricted Group for the periods indicated:
                
 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Restricted Group(1)(2)
  
Net loss €(21,696) €(3,645)
Net income (loss) €(19,712) €1,509 
Income taxes 4,776 199  7,867  (37)
Interest expense 15,985 6,023  23,918 11,174 
Investment and other income  (1,297)  (1,745)  (2,313)  (2,534)
Derivative financial instruments, net 463 5,272  494 102 
Foreign exchange loss on debt 7,509 — 
Foreign exchange (gain) loss on debt 1,591 173 
Impairment of investments 1,645 —  1,699 — 
          
Income from operations 7,385 6,104  13,544 10,387 
Add: Depreciation and amortization 10,829 11,136  17,431 14,166 
          
Operating EBITDA €18,214 €17,240  €30,975 €24,553 
          
 
(1) The results of the Celgar pulp mill are not included for the sixnine months ended JuneSeptember 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 JuneSeptember 30, 2005 Compared to Three Months Ended JuneSeptember 30, 2004
Total revenues for the Restricted Group for the three months ended JuneSeptember 30, 2005 increased to€72.786.1 million from€36.835.6 million in the comparative period of 2004, primarily because of the inclusion of the pulp sales from the Celgar mill. Pulp sales realizations for the Restricted Group decreased to€430403 per ADMT on average in the three months ended JuneSeptember 30, 2005 from€471472 per ADMT in the comparative period of 2004, primarily as a result of lower sales prices realized by the Celgar mill, which sells a large portion of its production in Asian markets which had lower sales prices than European markets. The decrease in NBSK pulp prices was partially offset by the strengthening of the U.S. dollar versus the Euro during the current period.
Costs of sales and general, administrative and other expenses for the Restricted Group in the three months ended JuneSeptember 30, 2005 increased to€67.379.9 million from€32.131.3 million in the comparative period of 2004, primarily as a result of the inclusion of the results of the Celgar mill, partially offset by lower production costs at the Rosenthal mill.
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Depreciation for the Restricted Group decreasedincreased to€6.76.6 million in the secondthird quarter of 2005 from€5.63.0 million in the comparative period of 2004, primarily as a result of a change in our depreciation estimate in respect of the Rosenthal mill effective July 1, 2004, which resulted in a decrease in cost of sales for the Restricted Group for the three months ended June 30, 2005, partially offset by the inclusion of depreciation at the Celgar mill.

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In the secondthird quarter of 2005, the Restricted Group reported income from operations of€5.46.2 million, compared to€4.74.3 million in the comparative quarter of 2004. Interest expense for the Restricted Group in the three months ended JuneSeptember 30, 2005 increased to€8.38.0 million from€1.95.2 million in the year ago period, primarily due to higher borrowings resulting from our $310 million senior note offering in February 2005.
The Restricted Group did not have any interest rate or currency derivatives outstanding during the secondthird quarter of 2005 that materially affected its results. In the three months ended JuneSeptember 30, 2004, the Restricted Group recordeddid not record a net unrealized non-cash holdinggain or loss of€4.7 million on the marked to market valuation of the Rosenthal interest rate derivatives, which were settled in the first quarter of 2005, and recorded a net unrealized non-cash holding gain of€4.45.0 million upon the marked to market valuation of the then outstanding currency derivatives relating to the Rosenthal mill.
The Restricted Group reported a net lossincome for the three months ended JuneSeptember 30, 2005 of€14.32.0 million, which reflected higher interest expensethe inclusion of€8.3 million. the results of the Celgar mill. In the comparative quarter of 2004, the Restricted Group reported net income of€2.85.2 million.
The Restricted Group generated Operating EBITDA of€12.112.8 million and€10.37.3 million in the three months ended JuneSeptember 30, 2005 and 2004, respectively. Operating EBITDA for the Restricted Group is calculated by adding depreciation and amortization and non-recurring capital asset impairment charges of€6.76.6 million and€5.63.0 million to the income from operations of€5.46.2 million and€4.74.3 million for the three months ended JuneSeptember 30, 2005 and 2004, respectively.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of Mercer’s results for the sixnine months ended JuneSeptember 30, 2005 for additional information relating to such limitations and Operating EBITDA.
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The following table provides a reconciliation of net income (loss) to income from operations and Operating EBITDA for the Restricted Group for the periods indicated:
                
 Three Months Ended  Three Months Ended 
 June 30,  September 30, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Restricted Group(1)(2)
  
Net income (loss) €(14,278) €2,830 
Net income €1,984 €5,154 
Income taxes 1,661 199  3,091  (236)
Interest expense 8,314 1,947  7,987 5,151 
Investment and other income  (970)  (639)  (1,016)  (789)
Derivative financial instruments, net 358 382  31  (4,712)
Foreign exchange loss on debt 9,806 — 
Impairment of investments 467 — 
Foreign exchange gain on debt  (5,918)  (285)
          
Income from operations 5,358 4,719  6,159 4,283 
Add: Depreciation and amortization 6,704 5,554  6,602 3,030 
          
Operating EBITDA €12,063 €10,273  €12,761 €7,313 
          
 
(1) The results of the Celgar pulp mill are not included for the three months ended JuneSeptember 30, 2004.2004.
 
(2) See Note 10 of the financial statements included elsewhere herein for a reconciliation to our consolidated results.

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Liquidity and Capital Resources of the Restricted Group
The following table is a summary of selected financial information for the Restricted Group for the periods indicated:
                
 As at As at  As at As at 
 June 30, December 31,  September 30, December 31, 
 2005 2004  2005 2004 
 (in thousands)  (in thousands) 
 (unaudited)  (unaudited) 
Restricted Group Financial Position(1)(2)
  
Cash and cash equivalents €62,792 €45,487  €52,566 €45,487 
Working capital 119,518 48,480  112,039 48,480 
Property, plant and equipment 393,047 213,678  401,311 213,678 
Total assets 633,562 401,321  625,950 401,321 
Long-term liabilities 373,471 228,139  366,218 228,139 
Shareholders’ equity 216,311 138,478  223,604 138,478 
 
(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.
At JuneSeptember 30, 2005, the Restricted Group had cash and cash equivalents of€62.852.6 million, compared to€45.5 million at December 31, 2004. At JuneSeptember 30, 2005, the Restricted Group had working capital of€119.9112.0 million.
We expect the Restricted Group to meet its interest and debt service expenses and meet the working and maintenance capital requirements for its current operations from cash flow from operations, cash on hand and two new credit facilities for the Rosenthal and Celgar mills put into effect in February 2005.
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Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for doubtful accounts, depreciation and amortization, asset impairments, income taxes, and contingencies. Actual results could differ from these estimates.
Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.
For information about our significant accounting policies, see our annual report on Form 10-K for the year ended December 31, 2004.

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Cautionary Statement Regarding Forward-Looking Information
The statements in this report that are not based on historical facts are called “forward-looking statements” within the meaning of the United StatesPrivate Securities Litigation Reform Act of 1995. These statements appear in a number of different places in this report and can be identified by words such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks and assumptions include those set forth in reports and other documents we have filed with or furnished to the SEC, including, without limitation, in our annual report on Form 10-K for the year ended December 31, 2004.2004 and subsequent filings. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.
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Cyclical Nature of Business
The pulp and paper business is cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and are sensitive to cyclical changes in industry capacity and in the global economy, all of which can have a significant influence on selling prices and our earnings. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. During 2001 and 2002, pulp list prices fell significantly. Although pulp prices have improved overall since then, we cannot predict the impact of continued economic weakness in certain world markets or the impact of war, terrorist activity or other events on our markets.
Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips and pulp logs for pulp production, and waste paper and pulp for paper production. Fiber costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical in nature and can vary significantly by location. Production costs also depend on the total volume of production. Lower operating rates and production efficiencies during periods of cyclically low demand result in higher average production costs and lower margins.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rate between the U.S. dollar and the Euro, which may affect our results of operations and financial condition and, consequently, our fair value. We manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the future use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We also use derivatives to reduce our potential losses or to augment our potential gains, depending on our management’s perception of future economic events and developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in proportion to notional amounts.
Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be fully effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize are not effective, we may incur losses.
All of our derivatives are marked to market at the end of each reporting period, and all unrealized gains and losses are recognized in earnings for a reporting period. We determine market valuations based primarily upon valuations provided by our counterparties.
In the first quarter of 2005, Stendal entered into currency swaps to convert a portion of its long-term indebtedness under the Stendal Loan Facility from Euros into U.S. dollars and certain currency forwards. InCertain of these currency forwards matured during the secondthird quarter of 2005, Stendal entered into a currency swap to convert the balance of its long-term indebtedness under the Stendal Loan Facility from Euros into U.S. dollars and a currency forward.2005.
In addition, Stendal had entered into certain interest rate swaps in connection with its long-term indebtedness relating to the Stendal mill to fix the interest rate under the Stendal Loan Facility. Rosenthal had also entered into certain interest rate contracts to either fix or limit the interest rates in connection with certain of its indebtedness. In February 2005, we settled the Rosenthal interest rate contracts in connection with the repayment of the Rosenthal Loan Facility.

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The following table sets forth the maturity date, the notional amount and the recognized gain or loss in the sixnine and three months ended JuneSeptember 30, 2005 for derivatives related to the Rosenthal and Stendal mills that were in effect during these periods that affected our results:
                                
 Recognized Gain Recognized Gain  Recognized Gain Recognized Gain 
 (Loss) in (Loss) in  (Loss) in Nine (Loss) in 
 Six Months Ended Three Months Ended  Months Ended Three Months Ended 
Derivative Instrument Maturity Date Notional Amount June 30, 2005 June 30, 2005  Maturity Date Notional Amount September 30, 2005 September 30, 2005 
 (unaudited) (unaudited) (unaudited)  (unaudited) (unaudited) (unaudited) 
 (in millions) (in thousands) (in thousands)  (in millions) (in thousands) (in thousands) 
Interest Rate Derivatives
  
Rosenthal Interest Rate Cap Agreements(1)
 Settled $178.3 €(295) €-  Settled $178.3 €(295) €— 
Stendal Interest Rate Swaps(2)
 October 2017 €1,147.5  (20,475)  (20,819) October 2017 €1,147.5  (15,165) 5,310 
          
 €(20,770) €(20,819) €(15,460) €5,310 
          
 
Foreign Exchange Rate Derivatives
  
Stendal Currency Swap(3)
 October 2017 €306.3 €(24,571) €(22,278)
Stendal Currency Swap(4)(3)
 October 2017 €153.2  (12,778)  (11,027) October 2017 €306.3 €(25,408) €(837)
Stendal Currency Swap(5)(4)
 October 2017 €153.2  (10,336)  (10,336) 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 September 2005 $25.0  (379)  (393) Settled $25.0  (1,639)  (142)
Stendal Currency Forward September 2005 $25.0  (1,497)  (1,497) October 2005 $13.9 8 8 
Stendal Currency Forward February 2006 $50.0  (2,811)  (2,743) February 2006 $50.0  (3,102)  (291)
          
 €(52,372) €(48,274) €(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 JuneSeptember 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.
For more information, see our annual report on Form 10-K for the year ended December 31, 2004.

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ITEM 4. CONTROLS AND PROCEDURES
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.Based on a recent evaluation, our management, including our Principal Executive Officer and Principal Financial Officer, have concluded that, solely with respect to the matter described below under “Internal Control Over Financial Reporting”, our disclosure controls and procedures did not operate effectively as at the end of the September 30, 2005 reporting period in identifying in a timely manner material information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”). A personnel change during that period altered the quality of review of specific clerical aspects of our consolidation procedures. Management, including our Principal Executive Officer and Principal Financial Officer, believes that, as a result of the changes in internal controls described below, the material weakness in our disclosure controls and procedures no longer exists and that, as of the date hereof, our disclosure controls and procedures are effective. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Pursuant to the Acquisition of the Celgar NBSK pulp mill in February 2005, we have instituted certain disclosure controls and procedures and internal control over financial reporting at the Celgar mill. While we believe such disclosure controls and procedures are effective and that we have adequate internal control over financial reporting at the Celgar mill, we are continuing to refine and implement consistent procedures and controls at the mill and strengthen and integrate the mill’sits business practices and internal controls with our overall practices and internal controls.
As a result, we may in the future identify deficiencies in the mill’s procedures and controls that we may need to remediate or we may need to implement improvements to the procedures and controls at the mill. In the event our Principal Executive Officer, Principal Financial Officer or independent auditors determine that the procedures and controls at the mill are not effective or adequate, investor perception of us may be materially adversely affected and, among other things, this could cause a decline in the market price of our securities.
Disclosure Controls and Procedures.Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.
ChangesInternal Control Over Financial Reporting.Subsequent to the issuance of our report on Form 10-Q for the quarterly period ended September 30, 2005, management determined that our consolidated interim financial statements for the nine months ended September 30, 2005 should be revised to correct the amounts reported as purchase of property, plant and equipment in Internal Controls.our consolidated statement of cash flows for the nine months ended September 30, 2005, and the allocation of property, plant and equipment in our Restricted Group balance sheet as at September 30, 2005 to conform to our prior quarterly filings. The revisions are described in the Explanatory Note at the beginning of this report and Note 11 to our consolidated financial statements included herein. No financial statement line items in our consolidated statements of operations, consolidated balance sheets, shareholders’ equity, Restricted Group balance sheet as at December 31, 2004 or Restricted Group statement of operations were impacted.
The revisions resulted from a material weakness in the execution of our internal controls as described above under “Disclosure Controls and Procedures”. We have also now implemented additional procedures to more formally review our classification and consolidating entries, and consolidated statements of cash flows, during periods of personnel change. Management believes that, as a result of these changes, as of the date hereof, the material weakness that resulted in the amendments included in this report no longer exists. Management will continue to monitor vigorously the effect of our processes, controls and procedures and will make any further changes determined to be appropriate.
Except as noted herein, there have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 4244

 

PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
We held our annual meeting of shareholders on June 14, 2005. At the meeting, two Class II trustees were elected to our board of trustees and the selection of Deloitte & Touche LLP as our independent auditors was ratified.
The votes cast by shareholders at the meeting as to the election of trustees were as follows:
             
  Votes For Votes Withheld Abstentions and Broker Non-Votes
Jimmy S.H. Lee  26,502,486   77,690   — 
William D. McCartney  26,503,186   76,990   — 
Kenneth A. Shields, Graeme A. Witts, Eric Lauritzen and Guy W. Adams continued their respective terms as trustees.
In connection with the ratification of the selection of Deloitte & Touche LLP as our independent auditors, shareholders cast 26,502,118 votes in favour of and 70,836 votes against such ratification and there were 7,222 shares withheld from voting with no abstentions and broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
   
Exhibit  
No. Description
4.1*Amendment to Registration Rights Agreement dated May 30, 2005 between Mercer International Inc. and KPMG Inc.
4.2*Registration Rights Agreement dated February 10, 2005 between Mercer International Inc. and Royal Bank of Canada.
4.3*Amendment to Registration Rights Agreement dated May 30, 2005 between Mercer International Inc. and Royal Bank of Canada.
31.1 Section 302 Certification of Chief Executive Officer
   
31.2 Section 302 Certification of Chief Financial Officer
   
32.1** Section 906 Certification of Chief Executive Officer

FORM 10-Q
QUARTERLY REPORT — PAGE 43

Exhibit
No.Description
   
32.2** Section 906 Certification of Chief Financial Officer
 
*Incorporated by reference to Form 8-K filed on November 23, 2004, as amended on June 3, 2005.
** 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.

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 4445

 

SIGNATURES
Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 MERCER INTERNATIONAL INC.
 		 
 By: /s/ David M. Gandossi  
  David M. GandossiMERCER INTERNATIONAL INC.  
  
By:     /s/ David M. Gandossi
     David M. Gandossi
Secretary and Chief Financial Officer  
 
Date: November 25, 2005
Date: August 9, 2005

FORM 10-Q10-Q/A
QUARTERLY REPORT — PAGE 4546