MERCER INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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 (State or other jurisdiction of incorporation or organization)		91-6087550 (I.R.S. Employer Identification No.)
14900 Interurban Avenue South, Suite 282, Seattle, WA 98168 (Address of office)
(206) 674-4639 (Registrant's telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý NO o

The Registrant had 18,074,229 shares of beneficial interest outstanding as at November 8, 2004.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(Unaudited)

MERCER INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

As at September 30, 2004 and December 31, 2003
(Unaudited)
(Euros in thousands)

			September 30, 2004		December 31, 2003
ASSETS
Current Assets
	Cash and cash equivalents		€	42,643	€	51,993
	Cash restricted			29,346		15,187
	Receivables			33,003		32,285
	Unrealized foreign exchange derivative gains			899		743
	Inventories			59,225		23,909
	Prepaid expenses			4,603		4,284

		Total current assets		169,719		128,401
Long-Term Assets
	Cash restricted			47,538		44,180
	Property, plant and equipment			942,249		745,178
	Investments			878		1,644
	Equity method investments			3,993		2,309
	Deferred note issuance costs			3,908		4,213
	Unrealized foreign exchange derivative gains			14,442		—
	Deferred income tax			10,000		9,980

		Total assets	€	1,192,727	€	935,905

LIABILITIES
Current Liabilities
	Accounts payable and accrued expenses		€	64,373	€	37,414
	Construction costs payable			160,952		42,756
	Note payable			1,403		1,377
	Debt, Stendal			50,000		80,000
	Debt, current portion			15,465		15,801

		Total current liabilities		292,193		177,348
Long-Term Liabilities
	Debt, Stendal			476,301		324,238
	Debt, less current portion			234,317		255,901
	Unrealized interest rate derivative losses			58,874		43,151
	Unrealized foreign exchange derivative losses			594		—
	Capital leases and other			8,853		2,412

		Total liabilities		1,071,132		803,050
Minority Interest				—		—
SHAREHOLDERS' EQUITY
Shares of beneficial interest				79,736		78,139
Additional paid-in capital, stock options				14		223
Retained earnings				36,592		49,196
Accumulated other comprehensive income				5,253		5,297

		Total shareholders' equity		121,595		132,855

		Total liabilities and shareholders' equity	€	1,192,727	€	935,905

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands, except for earnings per share)

			2004			2003
Revenues
	Pulp and paper		€	145,084		€	134,935
	Transportation			2,134			2,850
	Other			6,650			6,351

				153,868			144,136

Cost of sales
	Pulp and paper			131,420			131,838
	Transportation			2,222			2,388

				133,642			134,226

Gross profit				20,226			9,910
General and administrative expenses				(21,182	)		(12,961	)
Settlement expenses				—			(630	)
Impairment of capital assets				(6,000	)		—
Flooding losses and expenses, less grant income				(669	)		1,162

Loss from operations				(7,625	)		(2,519	)

Other income (expense)
	Interest expense			(9,554	)		(6,887	)
	Investment income			1,679			1,055
	Derivative financial instruments
		Unrealized loss on interest rate derivatives		(15,825	)		(22,832	)
		Unrealized and realized gain on foreign exchange rate derivatives		14,748			19,228
	Other			—			20
	Impairment of available-for-sale securities			—			(5,511	)

Total other income (expense)				(8,952	)		(14,927	)

Loss before income taxes and minority interest				(16,577	)		(17,446	)
Income tax benefit (expense)				37			(226	)

Loss before minority interest				(16,540	)		(17,672	)
Minority interest				3,936			8,499

Net loss				(12,604	)		(9,173	)
Retained earnings, beginning of period				49,196			52,789

Retained earnings, end of period			€	36,592		€	43,616

Loss per share
	Basic		€	(0.73	)	€	(0.54	)

	Diluted		€	(0.73	)	€	(0.54	)

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For Three Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands, except for earnings per share)

			2004			2003
Revenues
	Pulp and paper		€	47,316		€	43,661
	Transportation			667			828
	Other			1,119			1,333

				49,102			45,822

Cost of sales
	Pulp and paper			39,752			45,366
	Transportation			753			525

				40,505			45,891

Gross profit (loss)				8,597			(69	)
General and administrative expenses				(7,348	)		(4,231	)
Settlement expenses				—			(630	)
Impairment of capital assets				(6,000	)		—
Flooding losses and expenses, less grant income				—			(214	)

Loss from operations				(4,751	)		(5,144	)

Other income (expense)
	Interest expense			(4,200	)		(2,236	)
	Investment income			215			416
	Derivative financial instruments
		Unrealized gain (loss) on interest rate derivatives		(14,110	)		5,933
		Unrealized and realized gain on foreign exchange rate derivatives		6,005			3,806
	Other			—			9

Total other income (expense)				(12,090	)		7,928

Income (loss) before income taxes and minority interest				(16,841	)		2,784
Income tax benefit (expense)				236			(28	)

Income (loss) before minority interest				(16,605	)		2,756
Minority interest				6,726			(1,880	)

Net income (loss)				(9,879	)		876
Retained earnings, beginning of period				46,471			42,740

Retained earnings, end of period			€	36,592		€	43,616

Income (loss) per share
	Basic		€	(0.57	)	€	0.05

	Diluted		€	(0.57	)	€	0.05

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

			2004			2003
Net loss			€	(12,604	)	€	(9,173	)

Other comprehensive income (loss):
	Foreign currency translation adjustments			313			1,240
	Unrealized gains (losses) on securities
		Unrealized holding gains (losses) arising during the period		(269	)		2,084
		Reclassification adjustment for other than temporary decline in value		—			5,511

	Other comprehensive income (loss)			44			8,835

Total comprehensive loss			€	(12,560	)	€	(338	)

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For Three Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

			2004			2003
Net income (loss)			€	(9,879	)	€	876

Other comprehensive income (loss):
	Foreign currency translation adjustments			(2,039	)		115
	Unrealized gains (losses) on securities
		Unrealized holding gains (losses) arising during the period		(19	)		2,345

	Other comprehensive income (loss)			(2,058	)		2,460

Total comprehensive income (loss)			€	(11,937	)	€	3,336

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

				2004			2003
Cash Flows from (used in) Operating Activities:
	Net loss			€	(12,604	)	€	(9,173	)
	Adjustments to reconcile net loss to cash flows from operating activities
		Unrealized net loss on interest rate derivatives			15,825			22,832
		Unrealized and realized net gains on foreign exchange rate derivatives			(14,748	)		(19,228	)
		Depreciation and amortization			17,217			18,135
		Impairment of capital assets			6,000			—
		Impairment of investments			—			5,511
		Minority interest			(3,936	)		(8,499	)
		Stock-based expenses			690			432
		Other			1,139			748
	Changes in current assets and liabilities
		Inventories			(35,825	)		(6,554	)
		Receivables			(2,056	)		(8,138	)
		Accounts payable and accrued expenses			26,331			11,554
		Other			782			(651	)

			Net cash from (used in) operating activities		(1,185	)		6,969

Cash Flows from (used in) Investing Activities:
	Purchase of property, plant and equipment, net of investment grants				(213,115	)		(226,240	)
	Sale of long-term investments				1,161			296
	Other				115			48

		Net cash used in investing activities			(211,839	)		(225,896	)

Cash Flows from (used in) Financing Activities:
	Cash restricted				(17,517	)		(486	)
	Increase in construction costs payable				118,196			34,362
	Proceeds from borrowings of notes payable and debt				126,000			186,859
	Repayment of notes payable and debt				(21,886	)		(15,444	)
	Repayment of capital lease obligations				(1,781	)		(38	)
	Issuance of shares of beneficial interest				582			913

		Net cash from financing activities			203,594			206,166

Effect of exchange rate changes on cash and cash equivalents					80			54

Net decrease in cash and cash equivalents					(9,350	)		(12,707	)
Cash and cash equivalents, beginning of period					51,993			30,261

Cash and cash equivalents, end of period				€	42,643		€	17,554

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

MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004

(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. and its wholly-owned and majority-owned subsidiaries (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, 2003. 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.

Note 2. Stock-Based Expenses

The Company has a stock-based employee compensation plan, which is described more fully in the Company's annual report on Form 10-K for the year ended December 31, 2003. The Company also has a 2004 Stock Incentive Plan, which is described more fully in the Form S-8 filed by the Company with the SEC on June 16, 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 income (loss) and income (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.

		Nine Months Ended September 30,
		2004			2003
		(Euros in thousands, except per share amounts)
Net Loss
	As reported	€	(12,604	)	€	(9,173	)
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects		(31	)		(13	)
	Add: Reversal of stock-based compensation expense recognized under APB Opinion No. 25		—			14

	Pro forma	€	(12,635	)	€	(9,172	)

Basic Loss Per Share
	As reported	€	(0.73	)	€	(0.54	)

	Pro forma	€	(0.73	)	€	(0.54	)

Diluted Loss Per Share
	As reported	€	(0.73	)	€	(0.54	)

	Pro forma	€	(0.73	)	€	(0.54	)

		Three Months Ended September 30,
		2004			2003
		(Euros in thousands, except per share amounts)
Net Income (Loss)
	As reported	€	(9,879	)	€	876
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects		(2	)		(5	)
	Add: Reversal of stock-based compensation expense recognized under APB Opinion No. 25		—			14

	Pro forma	€	(9,881	)	€	885

Basic Income (Loss) Per Share
	As reported	€	(0.57	)	€	0.05

	Pro forma	€	(0.57	)	€	0.05

Diluted Income (Loss) Per Share
	As reported	€	(0.57	)	€	0.05

	Pro forma	€	(0.57	)	€	0.05

In March 2004, 73,330 shares of beneficial interest were issued as a result of the cashless exercise of 150,000 stock options. This resulted in a total stock-based expense of €532, which was charged to net loss immediately.

In January 2004, 25,000 restricted shares of beneficial interest were issued to a trustee in connection with his role as Lead Trustee of the Board of Trustees. One-third of such shares vested on January 20, 2004, one-third will vest on November 11, 2004 and the remaining one-third on November 11, 2005. This resulted in a total expense of €161, one-third of which was charged to net loss immediately, while the remaining two-thirds is to be amortized over the period to November 2005 on a straight-line basis.

In June 2004, a total of 15,000 restricted shares of beneficial interest were issued to three trustees in connection with their roles as independent trustees of the Board of Trustees. These shares vest on June 18, 2005. This resulted in a total expense of €112, which will be amortized over the period to June 2005.

In June 2004, 21,000 shares of beneficial interest were issued as a result of the exercise of stock options by a former trustee.

Note 3. Earnings (Loss) Per Share

Basic earnings (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 earnings (loss) per share takes into consideration shares outstanding (computed under basic earnings per share) and potentially dilutive shares. The following table sets out the computation of basic and diluted earnings (loss) per share for the nine months and three months ended September 30, 2004 and 2003, respectively:

			Nine Months Ended September 30,						Three Months Ended September 30,
			2004			2003			2004			2003
			(Euros in thousands, except per share amounts)
Income (loss) from continuing operations — basic			€	(12,604	)	€	(9,173	)	€	(9,879	)	€	876
Interest on convertible notes, net of tax				—			—			—			—

Income (loss) from continuing operations — diluted			€	(12,604	)	€	(9,173	)	€	(9,879	)	€	876

Weighted average number of common shares outstanding:
	Basic			17,256,894			16,887,262			17,324,229			16,911,584
	Effect of dilutive shares:
		Stock options and awards		—			—			—			31,389
		Convertible notes		—			—			—			—

	Diluted			17,256,894			16,887,262			17,324,229			16,942,973

Income (loss) from continuing operations per share:
	Basic		€	(0.73	)	€	(0.54	)	€	(0.57	)	€	0.05

	Diluted		€	(0.73	)	€	(0.54	)	€	(0.57	)	€	0.05

For the nine months ended September 30, 2004 and 2003 and the three months ended September 30, 2004, warrants, options and convertible notes were not included in the computation of diluted earnings (loss) per share because they were anti-dilutive.

Note 4. Stendal Pulp Mill Project

The Stendal pulp mill was substantially complete and ready for its intended use on September 18, 2004. Effective September 18, 2004, the Company began expensing all of the costs, including interest, related to the mill and began depreciating it. A depreciation period of 25 years was established based on the expected useful life of the production assets. Depreciation was computed using the straight-line method in accordance with the Company's accounting policies.

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.

Summarized financial information concerning the segments is shown in the following table:

	Rosenthal Pulp			Stendal Pulp			Total Pulp			Paper			Corporate, Other and Eliminations			Consolidated Total
Nine Months Ended September 30, 2004
Sales to external customers	€	103,743		€	—		€	103,743		€	41,341		€	—		€	145,084
Transportation and other		8,338			600			8,938			314			(468	)		8,784
Intersegment net sales		1,822			—			1,822			—			(1,822	)		—

		113,903			600			114,503			41,655			(2,290	)		153,868
Operating costs		78,773			509			79,282			39,869			(2,210	)		116,941
Depreciation and amortization		14,166			795			14,961			1,740			—			16,701
General and administrative		7,960			6,645			14,605			3,960			2,617			21,182
Impairment of capital assets		—			—			—			6,000			—			6,000
Flooding grants, less losses and expenses		—			—			—			669			—			669

		100,899			7,949			108,848			52,238			407			161,493

Income (loss) from operations		13,004			(7,349	)		5,655			(10,583	)		(2,697	)		(7,625	)
Interest expense		(6,345	)		(1,888	)		(8,233	)		(421	)		(900	)		(9,554	)
Net loss on derivative financial instruments		(275	)		(802	)		(1,077	)		—			—			(1,077	)
Other income (expense)		2,327			(453	)		1,874			152			(347	)		1,679

Income (loss) before income taxes and minority interest	€	8,711		€	(10,492	)	€	(1,781	)	€	(10,852	)	€	(3,944	)	€	(16,577	)

Nine Months Ended September 30, 2003
Sales to external customers	€	92,418		€	—		€	92,418		€	42,517		€	—		€	134,935
Transportation and other		8,249			—			8,249			796			156			9,201
Intersegment net sales		2,178			—			2,178			—			(2,178	)		—

		102,845			—			102,845			43,313			(2,022	)		144,136
Operating costs		80,968			—			80,968			37,581			(2,179	)		116,370
Depreciation and amortization		16,311			—			16,311			1,545			—			17,856
General and administrative		5,588			1,752			7,340			3,721			1,900			12,961
Settlement expenses		—			—			—			—			630			630
Flooding grants, less losses and expenses		—			—			—			(1,162	)		—			(1,162	)

		102,867			1,752			104,619			41,685			351			146,655

Income (loss) from operations		(22	)		(1,752	)		(1,774	)		1,628			(2,373	)		(2,519	)
Interest expense		(5,961	)		(8	)		(5,969	)		(323	)		(595	)		(6,887	)
Net gain (loss) on derivative financial instruments		18,335			(21,939	)		(3,604	)		—			—			(3,604	)
Impairment of investments		(4,441	)		—			(4,441	)		(1,070	)		—			(5,511	)
Other income (expense)		1,475			50			1,525			(51	)		(399	)		1,075

Income (loss) before income taxes and minority interest	€	9,386		€	(23,649	)	€	(14,263	)	€	184		€	(3,367	)	€	(17,446	)

	Rosenthal Pulp			Stendal Pulp			Total Pulp			Paper			Corporate, Other and Eliminations			Consolidated Total
Three Months Ended September 30, 2004
Sales to external customers	€	34,517		€	—		€	34,517		€	12,799		€	—		€	47,316
Transportation and other		2,575			(327	)		2,248			(124	)		(338	)		1,786
Intersegment net sales		643			—			643			—			(643	)		—

		37,735			(327	)		37,408			12,675			(981	)		49,102
Operating costs		24,702			509			25,211			11,837			(967	)		36,081
Depreciation and amortization		3,030			795			3,825			599			—			4,424
General and administrative		3,186			1,185			4,371			1,849			1,128			7,348
Impairment of capital assets		—			—			—			6,000			—			6,000

		30,918			2,489			33,407			20,285			161			53,853

Income (loss) from operations		6,817			(2,816	)		4,001			(7,610	)		(1,142	)		(4,751	)
Interest expense		(1,953	)		(1,720	)		(3,673	)		(137	)		(390	)		(4,200	)
Net gain (loss) on derivative financial instruments		4,997			(13,102	)		(8,105	)		—			—			(8,105	)
Other income (expense)		713			(108	)		605			21			(411	)		215

Income (loss) before income taxes and minority interest	€	10,574		€	(17,746	)	€	(7,172	)	€	(7,726	)	€	(1,943	)	€	(16,841	)

Three Months Ended September 30, 2003
Sales to external customers	€	30,004		€	—		€	30,004		€	13,657		€	—		€	43,661
Transportation and other		1,993			—			1,993			236			(68	)		2,161
Intersegment net sales		633			—			633			—			(633	)		—

		32,630			—			32,630			13,893			(701	)		45,822
Operating costs		27,212			—			27,212			13,223			(634	)		39,801
Depreciation and amortization		5,534			—			5,534			556			—			6,090
General and administrative		1,611			913			2,524			951			756			4,231
Settlement expenses		—			—			—			—			630			630
Flooding grants, less losses and expenses		—			—			—			214			—			214

		34,357			913			35,270			14,944			752			50,966

Loss from operations		(1,727	)		(913	)		(2,640	)		(1,051	)		(1,453	)		(5,144	)
Interest expense		(1,978	)		—			(1,978	)		(120	)		(138	)		(2,236	)
Net gain on derivative financial instruments		3,734			6,005			9,739			—			—			9,739
Other income (expense)		698			(356	)		342			(379	)		462			425

Income (loss) before income taxes and minority interest	€	727		€	4,736		€	5,463		€	(1,550	)	€	(1,129	)	€	2,784

The total assets for the Stendal pulp mill were €838,679 and €555,966 as at September 30, 2004 and December 31, 2003, respectively.

Note 6. Inventories

		September 30, 2004		December 31, 2003
Pulp and paper
	Raw materials	€	47,099	€	16,203
	Work in process and finished goods		12,126		7,706

		€	59,225	€	23,909

Note 7. Derivatives Transactions

In addition to the derivatives reported in the Company's annual report on Form 10-K for the year ended December 31, 2003, the Company entered into certain new derivative transactions in the first nine months of 2004.

The Company's wholly-owned subsidiary, Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG ("Rosenthal"), entered into two currency swaps in the aggregate principal amount of approximately €184,500 to convert all of its long-term indebtedness under its bank loan facility into U.S. dollars. The swaps mature in September 2008 and September 2013, respectively. In addition, in the first nine months of 2004, Rosenthal entered into a currency forward in the notional amount of approximately €40,700 which matures in March 2005. A marked to market non-cash holding loss of approximately €174 and a non-cash holding gain of approximately €4,949 was recognized in respect of these derivatives in the nine months and three months ended September 30, 2004, respectively.

In the first nine months of 2004, Stendal entered into a currency swap in the principal amount of approximately €306,300 which matures in April 2011 and a currency forward in the notional amount of approximately €20,600 which matures in March 2005. A net non-cash holding gain of approximately €14,921 and €1,055 was recognized in respect of these derivatives in the nine months and three months ended September 30, 2004, respectively.

Note 8. Change in Accounting Estimate

In conjunction with establishing the depreciation period for the Stendal mill (see note 4), the Company also reviewed the useful life of the Rosenthal mill, which resulted in a change in the estimate of its useful life from an initial 15 to 25 years. The change in estimate was reflected effective July 1, 2004. As the Rosenthal mill had been depreciated for approximately 5 years as of July 1, 2004, the change in estimate reflects a remaining depreciable life of approximately 20 years. The total effect of the change in estimate resulted in a decrease of approximately €2,188 in cost of sales and net loss, and a decrease in basic and diluted net loss per share of €0.13 for the nine and three months ended September 30, 2004.

Note 9. Impairment Charge

The paper segment has reported weaker than expected returns for a period of time and certain initiatives to increase the return on the assets have been unsuccessful to date. As a result, during the quarter, the Company reviewed the paper segment for possible impairment of value. The Company has recorded an impairment of €6,000 against the Fährbrücke mill assets during the nine and three months ended September 30, 2004, respectively. Fair value of the assets was based primarily on cash flow analysis and information available from unsolicited third-party interests in these assets.

Note 10. Subsequent Event

Subsequent to September 30, 2004, 750,000 shares of beneficial interest were issued as a result of the exercise of stock options by the Company's Chief Executive Officer for total proceeds of €3,792.

Note 11. Reclassifications

Certain prior period amounts in the interim period consolidated financial statements contained herein have been reclassified to conform to the current period's presentation.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, "we", "our", "us", the "Company" or "Mercer" mean Mercer International Inc. and its subsidiaries; (ii) information is provided as of September 30, 2004, unless otherwise stated; (iii) all references to monetary amounts are to "Euros", the lawful currency adopted by most members of the European Union, unless otherwise stated; (iv) "€" refers to Euros; and (v) a "tonne" is one metric ton or 2,204.6 pounds.

The following discussion and analysis of our results of operations and financial condition for the nine and three months ended September 30, 2004 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, 2003 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

We operate in the pulp and paper business and our operations are located primarily in Germany. Our manufacturing facilities are comprised of: (a) a northern bleached softwood kraft ("NBSK") pulp mill operated by our wholly-owned subsidiary, Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG ("Rosenthal"), near Blankenstein, Germany, which has an annual production capacity of approximately 310,000 tonnes; (b) a newly constructed, state-of-the-art NBSK pulp mill, with a design production capacity of approximately 552,000 tonnes, near Stendal, Germany (the "Stendal project") built and being started up by our 63.6% owned subsidiary, Zellstoff Stendal GmbH ("Stendal"); and (c) two paper mills located at Heidenau and Fährbrücke, Germany (the "paper mills"), which produce specialty papers and printing and writing papers and, based upon their current product mix, have an aggregate annual production capacity of approximately 70,000 tonnes.

The Stendal mill was completed substantially on its planned schedule and budget in the third quarter of 2004. Total investment costs in respect of the Stendal mill were approximately €1.0 billion, the majority of which was financed under a senior project finance facility (the "Stendal Loan Facility") in the amount of €828 million and arranged with Bayerische Hypo-und Vereinsbank AG. The Stendal mill is currently in the start-up phase and is undergoing extensive testing and evaluation. Effective September 18, 2004, we commenced expensing all of the costs, including interest, related to the Stendal mill. Prior to that date, most of the costs, including interest, relating to the Stendal mill were capitalized. Our results for the nine and three months ended September 30, 2004 include operating and interest costs of €9.8 million and €4.2 million, respectively, related to the Stendal mill. During such periods, we did not report any pulp sales revenues from Stendal. Some lower quality pulp produced at the Stendal mill prior to September 18, 2004 was sold, but the revenues therefrom were capitalized against testing costs in property, plant and equipment. See " — Stendal Project Status".

Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results are influenced largely by the market price for products and raw materials, the mix of products produced and foreign currency exchange rates. Kraft pulp and paper markets are highly cyclical, with prices determined by supply and demand. Demand for kraft pulp and paper is influenced to a significant degree by global levels of economic activity and supply is driven by industry capacity and utilization rates. Our product mix is important because premium grades of kraft pulp and specialty papers generally achieve higher prices and profit margins.

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 pulplogs 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. Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average cost by spreading fixed costs over more units.

Global economic conditions, changes in production capacity and inventory levels are the primary factors affecting kraft pulp and paper prices. Historically kraft pulp and paper prices have been cyclical in nature. Kraft pulp prices declined from a high of approximately $710 per tonne in late 2000 to an average of approximately $460 per tonne in late 2001 and most of 2002 as the decline of North American and European economies caused a sharp reduction in paper demand and a build-up of producer inventories. The weakening of the U.S. dollar against the Euro and other major currencies and an increase in demand resulting from improving American and major European economies in 2003 resulted in list prices for kraft pulp in Europe increasing to approximately $560 per tonne in December 2003 despite relatively high inventory levels. List prices for kraft pulp in Europe continued to strengthen in 2004 due to the relatively weak U.S. dollar and improving world economies. List prices increased to approximately $640 per tonne in August 2004, before decreasing to approximately $605 per tonne in September 2004, primarily as a result of a build-up of producer inventories. There can be no assurance that prices will not continue to fall in ensuing months.

Our financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro exchange rate and in interest rates. Changes in currency rates affect our operating results because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is priced in U.S. dollars, even though our sales are invoiced in Euros. Therefore, a weakening of the U.S. dollar against the Euro will generally reduce the amount of Euro revenues of our pulp operations. Most of our costs, including our debt obligations, are incurred in Euros. These do not fluctuate with the U.S. dollar to Euro exchange rate. Thus, a weakening of the U.S. dollar against the Euro tends to reduce our sales revenue, gross profit and income from operations.

Changes in interest rates can impact our operating results because the indebtedness we incurred under the credit facilities for establishing the Rosenthal and Stendal pulp mills provide for floating rates of interest.

Changes in currency exchange and interest rates also impact certain foreign currency and interest rate derivatives Rosenthal and Stendal use to partially protect against the effect of such changes. Gains or losses on such derivatives are included in our earnings, either as they are settled or as they are marked to market for each reporting period. See "Quantitative and Qualitative Disclosures about Market Risk".

Stendal, as required under its project financing, entered into variable-to-fixed rate interest swaps (the "Stendal Interest Rate Swaps") in August 2002 to fix the interest rate on approximately €612.6 million of indebtedness for the full term of the Stendal Loan Facility. Rosenthal has also entered into forward interest rate and interest cap contracts (the "Rosenthal Interest Rate Contracts" and, together with the Stendal Interest Rate Swaps, the "Interest Rate Contracts") in respect of a portion of its long-term indebtedness under its bank loan facility (the "Rosenthal Loan Facility").

In the nine months ended September 30, 2004, we recorded a net non-cash holding loss of €15.8 million before minority interests on the marked to market valuation of the Interest Rate Contracts versus a net loss of €22.8 million before minority interests thereon in the prior period of 2003. In the quarter ended September 30, 2004, we recorded a net non-cash holding loss of €14.1 million before minority interests on the marked to market valuation of the Interest Rate Contracts versus a net gain of €5.9 million before minority interests thereon in the prior period of 2003.

In March 2004, to protect against a weakening U.S. dollar, Rosenthal entered into two currency swaps in the aggregate principal amount of €184.5 million to convert all of its long-term indebtedness under the Rosenthal Loan Facility into U.S. dollars and a currency forward in the notional amount of €40.7 million (the "Rosenthal Currency Derivatives"). In the same month, Stendal entered into a currency swap in the principal amount of €306.3 million to convert approximately one-half of its indebtedness under the Stendal Loan Facility into U.S. dollars and a currency forward in the notional amount of €20.6 million (the "Stendal Currency Derivatives" and, together with the Rosenthal Currency Derivatives, the "Currency Derivatives"). Primarily as a result of a weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies, in the nine and three months ended September 30, 2004, we recognized a net non-cash holding gain of approximately €14.7 million and €6.0 million, respectively, before minority interests on the Currency Derivatives. In the nine and three months ended September 30, 2003, we recognized a net gain of approximately €19.2 million and €3.8 million, respectively, before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal. See "Quantitative and Qualitative Disclosures about Market Risk".

If the U.S. dollar continues to weaken versus the Euro, we could record further marked to market non-cash holding gains on the Currency Derivatives in future periods, although our pulp sales realizations would decrease. A strengthening of the U.S. dollar versus the Euro could result in our recording marked to market non-cash holding losses on the Currency Derivatives in future periods, although we would expect to achieve higher pulp sales realizations. Improving world economies resulted in an increase in interest rates in the first half of 2004. If world economies continue to strengthen, we would expect interest rates to continue to rise from their historically low levels. Higher interest rates could result in our recording marked to market non-cash holding gains on the Interest Rate Contracts in future periods, which may be offset in part by higher interest rates payable on Rosenthal's debt obligations. However, a fall in interest rates could result in our recording non-cash holding losses on the Interest Rate Contracts in future periods when they are marked to market. See "Quantitative and Qualitative Disclosures about Market Risk".

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Selected sales data for the nine months ended September 30, 2004 and 2003 is as follows:

			Nine Months Ended September 30,
			2004		2003
			(tonnes)
Sales Volume by Product Class
Pulp(1)				229,462		221,926
Papers
	Specialty papers			28,144		30,420
	Printing papers			19,357		16,568

		Total papers		47,501		46,988

Total(1)				276,963		268,914

				(in thousands
Revenues by Product Class
Pulp(1)			€	103,743	€	92,418
Papers
	Specialty papers			28,039		30,185
	Printing papers			13,302		12,332

		Total papers		41,341		42,517

Total(1)			€	145,084	€	134,935

(1): Excluding intercompany sales volumes of 3,897 tonnes and 5,166 tonnes of pulp and intercompany net sales revenues of approximately €1.8 million and €2.2 million in the nine months ended September 30, 2004 and 2003, respectively.

Total revenues for the nine months ended September 30, 2004 increased to €153.9 million from €144.1 million in the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €145.1 million in the current period, versus €134.9 million in the comparative period of 2003.

Costs of pulp and paper sales in the nine months ended September 30, 2004 decreased to €131.4 million from €131.8 million in the comparative period of 2003, primarily as a result of lower pulp production costs at our Rosenthal mill.

In the current period, pulp sales increased to €103.7 million from €92.4 million in the same period a year ago as a result of higher prices and production from our Rosenthal mill. We did not report any revenues from the sale of pulp from the Stendal mill in the current period. List prices for NBSK pulp in Europe were approximately €519 ($635) per tonne in the third quarter of 2004, compared to approximately €444 ($550) per tonne in the third quarter of last year. The increase in NBSK pulp prices was partially offset by the weakness of the U.S. dollar versus the Euro in the current period. In the current period, pulp sales by volume were 229,462 tonnes, compared to 221,926 tonnes in the comparative period of 2003.

Pulp sales realizations were €452 per tonne on average in the current period, compared to €416 per tonne in the comparative period of 2003.

Transportation and other revenues for the pulp operations were €8.9 million in the period ended September 30, 2004, compared to €8.2 million in the comparative period of last year.

Cost of sales and general, administrative and other expenses for the pulp operations increased to €108.8 million in the nine months ended September 30, 2004 from €104.6 million in the comparative period of 2003, primarily as a result of the inclusion of €7.9 million of operating costs related to the Stendal mill.

On average, fiber costs for pulp production decreased by approximately 4.3% compared to the first nine months of last year.

Depreciation for the pulp operations was €15.0 million in the current period, versus €16.3 million in the year ago period. A change effective July 1, 2004 in our depreciation estimate in respect of our Rosenthal mill resulted in a decrease of €2.2 million in cost of sales and net loss, and a decrease in net loss per share of €0.13 for the nine months ended September 30, 2004.

For the nine months of 2004, our pulp operations generated operating income of €5.7 million, versus an operating loss of €1.8 million in the year ago period.

Paper sales in the current period were €41.3 million, compared with €42.5 million in the same period of last year. Sales of specialty papers in the nine months ended September 30, 2004 were €28.0 million versus €30.2 million in the comparative period of 2003, primarily as a result of a shift in the product mix. For the current period, total paper sales volumes were 47,501 tonnes, versus 46,988 tonnes in the nine months ended September 30, 2003. On average, prices for specialty papers realized in the current period increased slightly, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 7.7% reflecting generally weak demand.

Cost of sales and general, administrative and other expenses for the paper operations in the nine months ended September 30, 2004 increased to €52.2 million from €41.7 million in the comparative period of 2003, primarily as a result of a non-cash €6.0 impairment charge relating to our paper operations. On November 3, 2004, our management determined to record and our audit committee approved a non-cash impairment charge of €6.0 million to write-off the carrying value of our Fährbrücke paper mill assets. Based upon its current product mix, the mill has an annual production capacity of approximately 35,000 tonnes and produces primarily printing and writing paper. We determined to take the impairment charge as the Fährbrücke mill has generated weaker than expected returns over a period of time despite changes to its product mix. We do not expect the impairment charge in and of itself to result in future cash expenditures as we intend to continue to operate the Fährbrücke mill.

Depreciation for the paper operations was €1.7 million in the current period, compared to €1.5 million in the same period last year.

For the nine months ended September 30, 2004, our paper operations generated an operating loss of €10.6 million, which included the non-cash impairment charge of €6.0 million, compared to operating income of €1.6 million in the same period of last year.

For the nine months ended September 30, 2004, consolidated general and administrative expenses increased to €21.2 million from €13.0 million in the year ago period, primarily as a result of the inclusion of operating costs of €7.9 million related to the Stendal mill.

In the current period, we reported a loss from operations of €7.6 million, compared to €2.5 million in the same period last year. Interest expense (excluding capitalized interest of €27.2 million relating to the Stendal pulp mill) in the period ended September 30, 2004 increased to €9.6 million from €6.9 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003 and the inclusion of interest expense of €1.9 million relating to the Stendal project after September 18, 2004.

In the period ended September 30, 2004, we recorded a net non-cash holding loss of €15.8 million before minority interests on the marked to market valuation of the Interest Rate Contracts versus a net loss of €22.8 million before minority interests thereon in the prior period of 2003. In addition, in the nine months ended September 30, 2004, we recorded a net non-cash holding gain of approximately €14.7 million before minority interests on the valuation of the Currency Derivatives as a result of the weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies. In the prior period of 2003, we recorded a net gain of €19.2 million before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal.

In the nine months ended September 30, 2004, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was €3.9 million, compared to €8.5 million in the comparative period of 2003.

Our results for the prior period of 2003 included an adjustment of €5.5 million for the non-cash impact of other-than-temporary impairment losses on our available-for-sale securities.

We reported a net loss for the nine months ended September 30, 2004 of €12.6 million, or €0.73 per basic and diluted share, which reflected the non-cash €6.0 million impairment charge related to our paper operations, the inclusion of €9.8 million of operating and interest costs related to our Stendal mill and the net non-cash holding loss on the marked to market valuation of our derivative instruments. In the comparative period of 2003, we reported a net loss of €9.2 million, or €0.54 per basic and diluted share.

We generated "Operating EBITDA" of €15.6 million in the nine months ended September 30, 2004 and 2003, 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 €23.2 million and €18.1 million to the loss from operations of €7.6 million and €2.5 million for the nine-month periods ended September 30, 2004 and 2003, 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.

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 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: (i) Operating EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Operating EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (iii) Operating EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt. Because of these limitations, operating EBITDA 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 as calculated by other companies.

The following table provides a reconciliation of net loss to loss from operations and Operating EBITDA for the periods indicated:

		Nine Months Ended September 30,
		2004			2003
		(in thousands)
Net loss			€ (12,604	)		€ (9,173	)
Minority interest			(3,936	)		(8,499	)
Income taxes			(37	)		226
Interest expense			9,554			6,887
Investment income			(1,679	)		(1,055	)
Derivative financial instruments			1,077			3,604
Impairment of investments			—			5,511
Other			—			(20	)

Loss from operations			(7,625	)		(2,519	)
Add: Depreciation and amortization			17,217			18,135
	Impairment charge		6,000			—

Operating EBITDA		€	15,592		€	15,616

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Selected sales data for the three months ended September 30, 2004 and 2003 is as follows:

			Three Months Ended September 30,
			2004		2003
			(tonnes)
Sales Volume by Product Class
Pulp(1)				73,128		73,747
Papers
	Specialty papers			8,519		8,745
	Printing papers			6,193		7,234

		Total papers		14,712		15,979

Total(1)				87,840		89,726

				(in thousands)
Revenues by Product Class
Pulp(1)			€	34,517	€	30,004
Papers
	Specialty papers			8,597		8,610
	Printing papers			4,202		5,047

		Total papers		12,799		13,657

Total(1)			€	47,316	€	43,661

(1): Excluding intercompany sales volumes of 1,348 tonnes and 1,555 tonnes of pulp and intercompany net sales revenues of approximately €0.6 million and €0.7 million in the three months ended September 30, 2004 and 2003, respectively.

Total revenues for the three months ended September 30, 2004 increased to €49.1 million from €45.8 million in the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €47.3 million in the third quarter of 2004, versus €43.7 million in the comparative period of 2003.

Costs of pulp and paper sales in the three months ended September 30, 2004 decreased to €39.8 million from €45.4 million in the comparative period of 2003, primarily as a result of lower pulp production costs at our Rosenthal mill.

For the three months ended September 30, 2004, pulp sales increased to €34.5 million from €30.0 million in the same period a year ago, primarily as a result of higher prices. We did not report any revenues from the sale of pulp from the Stendal mill in the current period. List prices for NBSK pulp in Europe were approximately €519 ($635) per tonne in the third quarter of 2004, approximately €535 ($645) per tonne in the second quarter of 2004 and approximately €444 ($550) per tonne in the third quarter of last year. The increase in NBSK pulp prices was partially offset by the weakness of the U.S. dollar versus the Euro in the current period. In the current quarter, pulp sales by volume were 73,128 tonnes, compared to 73,747 tonnes in the comparative period of 2003.

Pulp sales realizations were €472 per tonne on average in the current quarter, compared to €471 per tonne in the second quarter of 2004 and €407 per tonne in the three months ended September 30, 2003.

Transportation and other revenues for the pulp operations were €2.2 million in the three months ended September 30, 2004, compared to €2.0 million in the three months ended September 30, 2003.

Cost of sales and general, administrative and other expenses for the pulp operations were €33.4 million in the three months ended September 30, 2004 compared to €35.3 million in the comparative period of 2003, and included €2.5 million of operating costs related to the Stendal mill.

On average, fiber costs for pulp production decreased by approximately 4.6% compared to the third quarter of last year.

Depreciation for the pulp operations was €3.8 million in the current quarter, versus €5.5 million in the year ago period. A change in our depreciation estimate in respect of our Rosenthal mill resulted in a decrease of €2.2 million in cost of sales and net loss, and a decrease in net loss per share of €0.13 for the quarter ended September 30, 2004.

For the three months ended September 30, 2004, our pulp operations generated operating income of €4.0 million, versus an operating loss of €2.6 million in the year ago period.

Paper sales in the three months ended September 30, 2004 were €12.8 million, compared to €13.7 million in the same period of last year. Sales of specialty papers in the three months ended September 30, 2004 and 2003 were €8.6 million, respectively. For the current quarter, total paper sales volumes were 14,712 tonnes, versus 15,979 tonnes in the comparative period of last year. On average, prices for specialty papers realized in the current quarter increased by 2.5%, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 2.8% reflecting generally weak demand.

Cost of sales and general, administrative and other expenses for the paper operations in the three months ended September 30, 2004 increased to €20.3 million from €14.9 million in the comparative quarter of 2003, primarily as a result of a non-cash €6.0 million impairment charge relating to our paper operations. Depreciation for the paper operations was €0.6 million in the three months ended September 30, 2004 and 2003, respectively.

For the three months ended September 30, 2004, our paper operations generated an operating loss of €7.6 million, which included the non-cash impairment charge of €6.0 million, compared to an operating loss of €1.1 million in the same period of last year.

For the three months ended September 30, 2004, consolidated general and administrative expenses increased to €7.3 million from €4.2 million in the year ago period, primarily as a result of the inclusion of operating costs of €2.5 million related to the Stendal mill.

In the three months ended September 30, 2004, we reported a loss from operations of €4.8 million, compared to a loss from operations of €5.1 million in the same period last year. Interest expense (excluding capitalized interest of €9.7 million relating to the Stendal pulp mill) in the three months ended September 30, 2004 increased to €4.2 million from €2.2 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003 and the inclusion of interest expense of €1.7 million relating to the Stendal project after September 18, 2004.

In the three months ended September 30, 2004, the marked to market valuation of the Interest Rate Contracts resulted in a net non-cash holding loss of approximately €14.1 million before minority interests, versus a net gain of €5.9 million before minority interests on such Interest Rate Contracts in the prior period of 2003. In addition, in the three months ended September 30, 2004, we recorded a net non-cash holding gain of approximately €6.0 million before minority interests on the valuation of the Currency Derivatives as a result of a weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies, versus a net gain of €3.8 million before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal in the year ago period.

In the current quarter, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was €6.7 million, compared to €(1.9) million in the comparative period of 2003.

We reported a net loss for the three months ended September 30, 2004 of €9.9 million, or €0.57 per basic and diluted share, which reflected the non-cash €6.0 million impairment charge related to our paper operations, the inclusion of €4.2 million of operating and interest costs related to the Stendal mill and the net non-cash holding loss on the marked to market valuation of our derivative instruments. In the comparative period of 2003, we reported net income of €0.9 million, or €0.05 per basic and diluted share.

We generated Operating EBITDA of €5.3 million in the current quarter, compared to Operating EBITDA of €1.1 million in the comparative period of 2003. 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 our results for the nine months ended September 30, 2004 for additional information relating to Operating EBITDA.

The following table provides a reconciliation of net (loss) income to loss from operations and Operating EBITDA for the periods indicated:

		Three Months Ended September 30,
		2004			2003
		(in thousands)
Net (loss) income			€ (9,879	)	€	876
Minority interest			(6,726	)		1,880
Income taxes			(236	)		28
Interest expense			4,200			2,236
Investment income			(215	)		(416	)
Derivative financial instruments			8,105			(9,739	)
Other			—			(9	)

Income (loss) from operations			(4,751	)		(5,144	)
Add: Depreciation and amortization			4,005			6,254
	Impairment charge		6,000			—

Operating EBITDA		€	5,254		€	1,110

Liquidity and Capital Resources

The following table is a summary of selected financial information for the periods indicated:

	As at September 30, 2004			As at December 31, 2003
	(in thousands)
Financial Position
Cash and cash equivalents	€	42,643		€	51,993
Working capital		(122,474	)⁽¹⁾		(48,947	)⁽¹⁾
Property, plant and equipment		942,249			745,178
Total assets		1,192,727			935,905
Long-term liabilities		778,939			625,702
Shareholders' equity		121,595			132,855

(1): We qualify for investment grants from the federal and state governments of Germany and had claim expenditures of €65.2 million and €82.1 million outstanding at September 30, 2004 and December 31, 2003, respectively. We expect to receive our currently outstanding claim expenditures in 2005. However, in accordance with our accounting policies, we do not record these grants until they are received.

At September 30, 2004, our cash and cash equivalents were €42.6 million, compared to €52.0 million at December 31, 2003. We also had €29.3 million of cash restricted to pay construction costs payable and €19.1 million of cash restricted in a debt service account, both related to the Stendal project. In addition, we had €28.5 million of cash restricted in a debt service account relating to the Rosenthal Loan Facility. At September 30, 2004, we had a working capital deficit of €122.5 million, primarily because we had Stendal construction costs payable of €161.0 million for which we had not yet drawn down under the Stendal Loan Facility and, under our accounting policies, we do not record certain government grants until they are received. The Stendal construction costs will be paid pursuant to the Stendal Loan Facility in the ordinary course. At September 30, 2004, we qualified for investment grants related to the Stendal mill totaling approximately €65.2 million from the federal and state governments of Germany, which we expect to receive in 2005. Approximately €61.2 million of these grants, when received, will be applied to repay the amounts drawn under the dedicated tranche of the Stendal Loan Facility. The grants are not reported in our income and reduce the cost basis of the assets purchased when they are received. We expect to qualify for additional investment grants totaling €23.3 million when such Stendal construction costs have been substantially paid.

We expect to continue to generate sufficient cash flow from operations to pay our interest and debt service expenses and meet the working and maintenance capital requirements for our current operations. We currently do not have any revolving credit facilities. From time to time, we have entered into project specific credit facilities to finance capital projects and expect to continue to do so, subject to availability. 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 line of credit for the mill, the receipt of government grants and cash flow from operations.

Operating Activities

Operating activities in the current period used cash of €1.2 million, compared to providing cash of €7.0 million in the comparative period of 2003. An increase in receivables related primarily to the start-up of the Stendal mill used cash of €2.1 million in the current period, compared to using cash of €8.1 million in the comparative period of 2003. Higher inventories due primarily to the build up of fiber and finished goods in connection with the start-up of the Stendal mill used cash of €35.8 million in the first nine months of 2004, compared to higher inventories using cash of €6.6 million in the first nine months of 2003. We expect that as the Stendal mill ramps up operations, inventory levels at the mill will decrease to more normalized levels. An increase in accounts payable and accrued expenses related primarily to the start-up of the Stendal mill provided cash of €26.3 million in the current period, compared to providing cash of €11.6 million in the comparative period of 2003.

Investing Activities

Investing activities in the nine months ended September 30, 2004 used cash of €211.8 million, primarily as a result of the acquisition of properties, net of investment grants, of which €206.9 million was attributable to the Stendal project, compared to using cash of €225.9 million in the nine months ended September 30, 2003, of which €145.9 million was attributable to the Stendal project. Sales of certain legacy available-for-sale securities provided cash of €1.2 million in the current period.

We qualify for investment grants related to the Stendal mill from the federal and state governments of Germany and had claim expenditures of €65.2 million outstanding as of September 30, 2004, which we expect to receive in 2005. We received investment grants totaling €74.7 million with respect to the Stendal project during the quarter ended September 30, 2004. In accordance with our accounting policies, we do not record these grants until they are received. These grants reduce the cost basis of the assets purchased with them.

Financing Activities

Financing activities provided cash of €203.6 million in the nine months ended September 30, 2004. A net increase in indebtedness, primarily related to the Stendal project, provided cash of €104.1 million. An increase in construction costs payable provided cash of €118.2 million in the current period. An increase in restricted cash used cash of €17.5 million in the current period. We made principal repayments of €20.1 million in connection with the Rosenthal Loan Facility in the nine months ended September 30, 2004. The balance outstanding under such facility at September 30, 2004, net of cash in a restricted debt service account, was €143.1 million. The issuance of shares in connection with the exercise of options provided cash of €0.6 million in the current period. Financing activities provided cash of €206.2 million in the first nine months of 2003, primarily as a result of an increase in construction costs payable relating to the Stendal project and an increase in indebtedness primarily in connection with the Stendal project.

Other than the agreements entered into by Stendal relating to the Stendal project, we had no material commitments to acquire assets or operating businesses at September 30, 2004. 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, borrowing against our assets, the sale of debt and/or equity securities and/or asset sales.

Stendal Project Status

The Stendal mill was completed substantially on its planned schedule and budget in the third quarter of 2004. The mill is currently in the start-up phase and is undergoing extensive testing and evaluation. The mill has all of its requisite permits in place to commence operations and has secured sufficient fiber supplies for the balance of 2004 and into the first quarter of 2005. At September 30, 2004, the mill had filled in excess of 77% of its overall staffing requirements. The balance of the hiring will occur in affiliated activities such as harvesting and transportation and will be completed through 2004 and 2005 as the mill ramps up operations.

The Stendal mill is currently being supervised by the contractor using Stendal's personnel to operate the mill. Stendal commenced the initial production of pulp in the third quarter of 2004. The initial pulp produced was off-grade pulp which was primarily sold into the recycled fiber, corrugated board and similar markets. The mill is currently producing "start-up quality" pulp. The prices realized on the sale of off-grade and start-up quality pulp are lower than the selling price for on-grade NBSK pulp. Under our current start-up plan, we expect Stendal to commence ramping up pulp production and quality so that the Stendal mill will be producing a significant proportion of saleable kraft pulp in the fourth quarter of 2004. Pursuant to our start up plan, we expect that the mill would be operating at approximately 80% of its design capacity by the end of 2004.

In conjunction with the start-up of the Stendal mill, we built up the fiber and finished goods inventory at the mill. We expect that the inventory levels at the Stendal mill will decrease to more normalized levels as the mill ramps up operations.

The mill is currently undergoing extensive testing and evaluation in connection with its mechanical completion and to also determine, following several months of start-up operations, whether certain performance requirements have been met, referred to as the "Acceptance Test". The Acceptance Test requires that the mill continuously produces pulp for a 72-hour period in compliance with specified operational, quality and environmental requirements. Following completion of such testing, if the requisite performance requirements are met, we are required to provide the contractor with an acceptance certificate. Once we deliver the acceptance certificate, we assume responsibility for the operation of the mill, subject to the contractor's warranty obligations.

Under the current start-up plan, we expect that the contractor will shut down the mill for approximately one week in the fourth quarter of 2004 for the completion of any adjustments, installations and the replacement of any equipment that may be required in order to fulfill its obligations under the construction contract. We also expect that, in the latter part of 2004, the Stendal mill will be shut down for a few days for fine tuning and cleaning so that the contractor may commence trials for the Acceptance Test.

Our planned start up of the Stendal mill is subject to risks commonly associated with the start up of large greenfield industrial projects which could result in the Stendal mill experiencing operating difficulties or delays in the start-up period and the Stendal mill may not achieve our planned production, timing, quality or cost projections. These risks include, without limitation, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment.

Foreign Currency

We hold certain assets and liabilities in U.S. dollars, Swiss francs and, to a lesser extent, 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 as shareholders' equity on the balance sheet and do not affect our net earnings.

In the nine months ended September 30, 2004, we reported a net €0.3 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation gain decreased to €5.7 million at September 30, 2004 from €6.0 million at December 31, 2003.

Based upon the exchange rate at September 30, 2004, the U.S. dollar decreased by approximately 6.2% in value against the Euro since September 30, 2003. See "Quantitative and Qualitative Disclosures about Market Risk".

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, 2003. In addition, we had a change in our depreciation estimate relating to the Rosenthal mill during the current quarter. See Note 8 to our consolidated financial statements included herein.

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 States Private 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 in our annual report on Form 10-K for the year ended December 31, 2003. 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.

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 two of the past three calendar years, list pulp prices have fallen significantly. Although pulp prices improved overall in 2003 and the first half of 2004, they fell in the third quarter of 2004. We cannot predict the impact of continued economic weakness in most 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 pulplogs 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. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates, foreign currency exchange rates, particularly the exchange rate between the U.S. dollar and the Euro, and equity prices 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.

Derivatives

Derivatives are contracts between two parties where payments between the parties are dependent upon movements in the price of an underlying asset, index or financial rate. Examples of derivatives include swaps, options and forward rate agreements. The notional amount of the derivatives is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties and the notional amount itself is not generally exchanged by the parties.

The principal derivatives we use are foreign exchange derivatives and interest rate derivatives.

Foreign exchange derivatives include currency swaps which involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Such cross-currency swaps involve the exchange of both interest and principal amounts in two different currencies. They also include foreign exchange forwards which are contractual obligations in which two counterparties agree to exchange one currency for another at a specified price for settlement at a pre-determined future date. Forward contracts are effectively tailor-made agreements that are transacted between counterparties in the over-the-counter market.

Interest rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive financial instrument on a future date at a specified price. Forward contracts are effectively tailor-made agreements that are transacted between different counterparties in the over-the-counter market. They also include interest rate swaps which are over-the-counter contracts in which two counterparties exchange interest payments based upon rates applied to a notional amount.

We use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euros to U.S. dollars. We use interest rate derivatives to fix the rate of interest on indebtedness under the Rosenthal Loan Facility and the Stendal Loan Facility.

All of the derivatives we enter into are pursuant to the Rosenthal Loan Facility and the Stendal Loan Facility, each of which provide facilities for foreign exchange derivatives, interest rate derivatives and commodities derivatives, subject to prescribed controls, including maximum notional and at-risk amounts. These credit facilities are secured by substantially all of the assets of the Rosenthal and Stendal pulp mills, respectively, and have the benefit of certain German governmental guarantees. These credit facilities do not have any separate margin requirements when derivatives are entered into pursuant to the terms and conditions thereof and are subsequently marked to market.

All of the derivatives of Rosenthal and Stendal are marked to market at the end of each reporting period, and all gains and losses (whether realized or unrealized) are recognized in earnings for a reporting period. We determine market valuations based primarily upon valuations provided by our counterparties.

In March 2004, Rosenthal entered into the Rosenthal Currency Derivatives which include two currency swaps in the aggregate principal amount of €184.5 million that mature in September 2008 and September 2013, respectively. As NBSK pulp prices are quoted in U.S. dollars and the majority of our business transactions are denominated in Euros, Rosenthal had entered into the currency swaps to reduce the effects of exchange rate fluctuations between the U.S. dollar and the Euro on notional amounts under the Rosenthal Loan Facility. Under these currency swaps, Rosenthal effectively pays the principal and interest in U.S. dollars and at U.S. dollar borrowing rates.

The Rosenthal Currency Derivatives also include a currency forward in the notional amount of €40.7 million which matures in March 2005 that was entered into by Rosenthal to reduce or limit its exposure to currency risks and to augment its potential gains or to reduce its potential losses. In addition, Rosenthal entered into the Rosenthal Interest Rate Contracts in 2002 to either fix or limit the interest rates in connection with certain of its indebtedness.

In August 2002, Stendal entered into the Stendal Interest Rate Swaps in connection with its long-term indebtedness relating to the Stendal project to fix the interest rate under the Stendal Loan Facility at the then low level, relative to its historical trend and projected variable interest rate. These contracts were entered into under a specific credit line under the Stendal Loan Facility and are subject to prescribed controls, including certain maximum amounts for notional and at-risk amounts. Under the Stendal Interest Rate Swaps, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rates payable under the Stendal Loan Facility were swapped into fixed rates based on the Eur-Euribor rate for the repayment periods of the tranches under the Stendal Loan Facility. Stendal effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty.

In March 2004, Stendal also entered into the Stendal Currency Derivatives which are comprised of a currency swap in the principal amount of €306.3 million which matures in April 2011 and a currency forward contract for the notional amount of €20.6 million maturing in March 2005 to reduce or limit its exposure to currency risks and to augment its potential gains or reduce its potential losses.

We are exposed to very modest credit-related risks in the event of non-performance by counterparties to derivative contracts. However, we do not expect that the counterparties, which are major financial institutions, will fail to meet their obligations.

As of September 30, 2004, we have not entered into any material financial derivatives outside of our project companies, Rosenthal and Stendal, under their existing lines of credit. As at September 30, 2004, no derivative contract had been executed with respect to pulp prices.

The following table sets forth the maturity date, the notional amount and the recognized gain or loss in the nine and three months ended September 30, 2004 for derivatives that were in effect during these periods:

Derivative Instrument	Maturity Date	Notional Amount		Recognized Gain (Loss) in Nine Months Ended September 30, 2004			Recognized Gain (Loss) in Three Months Ended September 30, 2004
		(unaudited) (in millions)		(unaudited) (in millions)			(unaudited) (in millions)
Interest Rate Derivatives
Rosenthal Interest Rate Cap Agreements⁽¹⁾	September 2007	$	178.3	€	(0.1	)	€	—
Stendal Interest Rate Swaps⁽²⁾	October 2017	€	1,147.5		(15.7	)		(14.1	)

				€	(15.8	)	€	(14.1	)

Foreign Exchange Rate Derivatives
Rosenthal Currency Swap⁽³⁾	September 2008	€	111.8	€	(0.4	)	€	2.3
Rosenthal Currency Swap⁽⁴⁾	September 2013	€	72.7		(0.2	)		1.8
Stendal Currency Swap⁽⁵⁾	April 2011	€	306.3		14.4			0.6
Rosenthal Currency Forward	March 2005	€	40.7		0.4			0.9
Stendal Currency Forward	March 2005	€	20.6		0.5			0.4

				€	14.7		€	6.0

(1): Rosenthal 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%.
(2): In connection with the Stendal Loan Facility, in the third quarter of 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 is to commence 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, 2003 and September 30, 2004, the notional amounts of the outstanding two contracts was (i) €464.9 million and €534.9 million, and (ii) €612.6 million and €612.6 million, respectively.
(3): For €111.8 million of the outstanding principal amount under the Rosenthal Loan Facility, all repayment installments from March 30, 2004 until September 30, 2008 were swapped into U.S. dollar amounts at a rate of U.S. 1.2398. The interest rate was swapped into the following payments: pay a fixed rate of 4.5%, pay the three-month Libor plus a spread of 0.12% and receive the three-month Euribor until September 30, 2008.
(4): For €72.7 million of the outstanding principal amount under the Rosenthal Loan Facility, all repayment installments from March 30, 2004 until September 30, 2013 were swapped into U.S. dollar amounts at a rate of U.S. 1.2398. The interest rate was swapped into the six-month Libor plus a spread of 0.12% plus a bank margin of 0.7% until September 30, 2013.
(5): For €306.3 million of the outstanding principal amount under the Stendal Loan Facility, all repayment installments from April 1, 2004 until April 1, 2011 were swapped into U.S. dollar amounts at a rate of U.S. 1.2218. The interest rate was swapped into the following payments: pay a fixed rate of 3.5% and receive the six-month Euribor.

For more information, see our annual report on Form 10-K for the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

We are spending a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to financial reporting, internal controls and procedures and public disclosure, including under the Sarbanes-Oxley Act of 2002 ("SOX"), new SEC regulations, standards adopted by the Public Company Accounting Oversight Board and Nasdaq Stock Market rules. Specifically, Section 404 of SOX requires management's annual review and evaluation of our internal controls over financial reporting and attestations of the effectiveness of these systems by our management and by our independent registered public accounting firm.

Section 404 Compliance Under the Sarbanes-Oxley Act of 2002. We have been undertaking a comprehensive effort since 2003 in preparation for compliance with Section 404 of SOX. We have substantially completed the preliminary documentation of our internal control systems and have been testing these systems. We are in the process of finalizing documentation of our internal control systems and testing and retesting these systems, where appropriate. This process along with our other Section 404 work has required us to hire additional personnel and retain outside advisors and has resulted in additional professional expenses.

We expect to validate any potential control deficiencies and to assess whether or not they rise to the level of significant deficiencies or material weaknesses. We believe that we are prepared to investigate any potential control deficiencies and to remediate them, where appropriate. We are working to complete all of our Section 404 efforts in a timely manner to permit us to identify and correct any deficiencies in our internal control systems by December 31, 2004. Although we have made this project a top priority, there can be no assurance that all control deficiencies identified and validated will be remediated by December 31, 2004, the end of our fiscal year, or that any remaining unresolved control deficiencies will not rise to the level of significant deficiencies or material weaknesses. The documentation, testing and review processes required by Section 404 of SOX are new, complex and may be subject to differing interpretations and applications. We do not have significant experience in complying with these requirements. As a result, we may encounter problems or delays in completing these processes, including delays in remediating any deficiencies that may be identified or implementing any improvements that may be required.

As a result of the completion of the Stendal mill, it has transformed from a project construction company to an operating company. We have continued to refine and implement consistent internal controls and procedures at Stendal to reflect such change and strengthen and integrate its business practices and internal controls.

While we believe that we currently have adequate internal controls over financial reporting, in the event that our Principal Executive Officer, Principal Financial Officer or independent registered public accounting firm determine that our controls over financial reporting are not effective as required by Section 404, investor perceptions of us may be adversely affected and, among other things, this could cause a decline in the market price of our securities.

Evaluation of 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 and mirror certifications provided by senior management, 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.

Changes in Internal Controls. 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.

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 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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
32.2*		Section 906 Certification of Chief Financial Officer

*: In accordance with Release 33-8212 of the Commission, these Certifications: (i) are "furnished" to the Commission and are not "filed" for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company's registration statements filed under the Securities Act of 1933, as amended for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

(b) Reports on Form 8-K

The Company filed the following reports on Form 8-K with respect to the indicated items during the third quarter of 2004:

Form 8-K dated July 21, 2004
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits

Form 8-K dated August 9, 2004
Item 12. Results of Operations and Financial Condition
Item 7. Exhibits

Form 8-K dated September 30, 2004
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities 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. Gandossi Secretary and Chief Financial Officer
Date: November 8, 2004

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES