##### 









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For
    the fiscal year ended December 31, 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.: 0-9409





MERCER INTERNATIONAL INC.


Exact name of Registrant as specified in its charter


|                                                                 |  |                                    
|---------------------------------------------------------------- |  | -----------------------------------
|Washington                                                       |  | 91-6087550                         
|State or other jurisdiction
    of incorporation or organization |  | IRS Employer
    Identification No.

14900 Interurban Avenue South, Suite 282, Seattle,
Washington, 98168


Address of Office


(206) 674-4639


None







Shares of beneficial interest, $1.00 par value


Preferred Stock Purchase Rights


Title of Class





Securities Exchange Act of 1934 þ o


þ


þ o






DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










TABLE OF CONTENTS


|        |  |                                                                                           |  |                                                                                   |                                                                                                              |  |    |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  | -- | -- | 
|        |  |                                                                                           |  | Page                                                                              |                                                                                                             
|        |  |                                                                                           |  |                                                                                   |                                                                                                             
|PART I 
|Item 1. |  | BUSINESS                                                                                  |  |                                                                                   | 5                                                                                                            | 
|        |  |                                                                                           |  | The Company                                                                       |                                                                                                              |  | 5  |   
|        |  |                                                                                           |  | The Financings                                                                    |                                                                                                              |  | 9  |   
|        |  |                                                                                           |  | Corporate Strategy                                                                |                                                                                                              |  | 10 |   
|        |  |                                                                                           |  | The Pulp Industry                                                                 |                                                                                                              |  | 10 |   
|        |  |                                                                                           |  | The Paper Industry                                                                |                                                                                                              |  | 14 |   
|        |  |                                                                                           |  | Raw Materials                                                                     |                                                                                                              |  | 14 |   
|        |  |                                                                                           |  | Pulp Cash Production Costs                                                        |                                                                                                              |  | 17 |   
|        |  |                                                                                           |  | Our Products                                                                      |                                                                                                              |  | 17 |   
|        |  |                                                                                           |  | Sales, Marketing and Distribution                                                 |                                                                                                              |  | 19 |   
|        |  |                                                                                           |  | Capital Expenditures                                                              |                                                                                                              |  | 21 |   
|        |  |                                                                                           |  | Government Financing                                                              |                                                                                                              |  | 22 |   
|        |  |                                                                                           |  | Stendal Pulp Mill Project and Financing                                           |                                                                                                              |  | 24 |   
|        |  |                                                                                           |  | Description of Certain Indebtedness                                               |                                                                                                              |  | 28 |   
|        |  |                                                                                           |  | Environmental                                                                     |                                                                                                              |  | 32 |   
|        |  |                                                                                           |  | Human Resources                                                                   |                                                                                                              |  | 34 |   
|        |  |                                                                                           |  | Additional Information                                                            |                                                                                                              |  | 35 |   
|Item 2. |  | PROPERTIES                                                                                |  |                                                                                   | 35                                                                                                           | 
|Item 3. |  | LEGAL PROCEEDINGS                                                                         |  |                                                                                   | 38                                                                                                           | 
|Item 4. |  | SUBMISSION OF MATTERS TO A VOTE OF
    SECURITY HOLDERS                                   |  |                                                                                   | 38                                                                                                           | 
|       
|PART II
|Item 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS                 |  |                                                                                   | 39                                                                                                           | 
|Item 6. |  | SELECTED FINANCIAL DATA                                                                   |  |                                                                                   | 41                                                                                                           | 
|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |                                                                                   | 42                                                                                                           | 
|        |  |                                                                                           |  | Results of Operations                                                             |                                                                                                              |  | 42 |   
|        |  |                                                                                           |  |                                                                                   | Year Ended December 31, 2004 Compared
    to the Year Ended December 31, 2003                                |  |    | 44 | 
|        |  |                                                                                           |  |                                                                                   | Year Ended December 31, 2003 Compared
    to the Year Ended December 31, 2002                                |  |    | 47 | 
|        |  |                                                                                           |  | Liquidity and Capital Resources                                                   |                                                                                                              |  | 50 |   
|        |  |                                                                                           |  |                                                                                   | Operating Activities                                                                                         |  |    | 51 | 
|        |  |                                                                                           |  |                                                                                   | Investing Activities                                                                                         |  |    | 51 | 
|        |  |                                                                                           |  |                                                                                   | Financing Activities                                                                                         |  |    | 51 | 
|        |  |                                                                                           |  |                                                                                   | Contractual Obligations and Commitments                                                                      |  |    | 52 | 
|        |  |                                                                                           |  |                                                                                   | Capital Resources                                                                                            |  |    | 53 | 
|        |  |                                                                                           |  |                                                                                   | Sensitivity Analysis                                                                                         |  |    | 53 | 
|        |  |                                                                                           |  | Foreign Currency                                                                  |                                                                                                              |  | 54 |   
|        |  |                                                                                           |  | Results of Operations of the
    Restricted Group Under Our Senior Note Indenture |                                                                                                              |  | 54 |   
|        |  |                                                                                           |  |                                                                                   | Restricted Group Results  Year
    Ended December 31, 2004 Compared to the Year Ended
    December 31, 2003 |  |    | 54 | 
|        |  |                                                                                           |  |                                                                                   | Restricted Group Results  Year
    Ended December 31, 2003 Compared to the Year Ended
    December 31, 2002 |  |    | 56 | 
|        |  |                                                                                           |  | Liquidity and Capital Resources of the
    Restricted Group                       |                                                                                                              |  | 57 |   
|        |  |                                                                                           |  | Critical Accounting Policies                                                      |                                                                                                              |  | 57 |   
|        |  |                                                                                           |  | New Accounting Standards                                                          |                                                                                                              |  | 59 |   
|        |  |                                                                                           |  | Cautionary Statement Regarding
    Forward-Looking Information                    |                                                                                                              |  | 59 |   
|        |  |                                                                                           |  | Inflation                                                                         |                                                                                                              |  | 67 |   

2



---



##### 



|         |  |                                                                                          |  |                                     |    |  |     | 
|-------- |  | ---------------------------------------------------------------------------------------- |  | ----------------------------------- | -- |  | --- | 
|         |  |                                                                                          |  | Page                                |   
|         |  |                                                                                          |  |                                     |   
|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                           |  |                                     | 67 | 
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA                                          |  |                                     | 71 | 
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |  |                                     | 72 | 
|Item 9A. |  | CONTROLS AND PROCEDURES                                                                  |  |                                     | 72 | 
|Item 9B. |  | OTHER INFORMATION                                                                        |  |                                     | 74 | 
|        
|PART III
|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF
    THE REGISTRANT                                   |  |                                     | 75 | 
|Item 11. |  | EXECUTIVE COMPENSATION                                                                   |  |                                     | 78 | 
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT                       |  |                                     | 78 | 
|Item 13. |  | CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                                       |  |                                     | 78 | 
|Item 14. |  | PRINCIPAL ACCOUNTING FEES
    AND SERVICES                                               |  |                                     | 78 | 
|        
|PART IV 
|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
    AND REPORTS ON FORM 8-K                     |  |                                     | 79 | 
|         |  |                                                                                          |  | Financial Statements                |    |  | 82  | 
|         |  |                                                                                          |  | Supplementary Financial Information |    |  | 117 | 
|         |  |                                                                                          |  | SIGNATURES                          |    |  | 118 | 



3



---



##### 



EXCHANGE RATES






|                   |  |                          |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        | 
|------------------ |  | ------------------------ | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | ------ |  |  |  | ------ | 
|                   |  | Years Ended December 31, |       
|                   |  |                          |       
|                   |  | 2004                     |        |  | 2003 |  |        | 2002 |  |  | 2001   |  |  | 2000 |       
|                   |  |                          |        |  |      |  |        |      |  |  |        |  |  |      |       
|                   |  | (/$)                    |       
|End of period      |  |                          | 0.7942 |  |      |  | 0.7938 |      |  |  | 0.9536 |  |  |      | 1.1227 |  |  |  | 1.0646 | 
|High for period    |  |                          | 0.8473 |  |      |  | 0.9652 |      |  |  | 1.1638 |  |  |      | 1.1945 |  |  |  | 1.2087 | 
|Low for period     |  |                          | 0.7339 |  |      |  | 0.7938 |      |  |  | 0.9536 |  |  |      | 1.0487 |  |  |  | 0.9697 | 
|Average for period |  |                          | 0.8040 |  |      |  | 0.8838 |      |  |  | 1.0660 |  |  |      | 1.1219 |  |  |  | 1.0901 | 

|                   |  |        |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|------------------ |  | ------ | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                   |  | (C$/$) |       
|End of period      |  |        | 1.2034 |  |  |  | 1.2923 |  |  |  | 1.5800 |  |  |  | 1.5926 |  |  |  | 1.4995 | 
|High for period    |  |        | 1.1775 |  |  |  | 1.2923 |  |  |  | 1.5108 |  |  |  | 1.4932 |  |  |  | 1.4349 | 
|Low for period     |  |        | 1.3970 |  |  |  | 1.5751 |  |  |  | 1.6129 |  |  |  | 1.6023 |  |  |  | 1.5600 | 
|Average for period |  |        | 1.3017 |  |  |  | 1.3916 |  |  |  | 1.5704 |  |  |  | 1.5518 |  |  |  | 1.4870 | 






|                   |  |                          |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        | 
|------------------ |  | ------------------------ | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | ------ |  |  |  | ------ | 
|                   |  | Years Ended December 31, |       
|                   |  |                          |       
|                   |  | 2004                     |        |  | 2003 |  |        | 2002 |  |  | 2001   |  |  | 2000 |       
|                   |  |                          |        |  |      |  |        |      |  |  |        |  |  |      |       
|                   |  | (C$/)                   |       
|End of period      |  |                          | 1.6292 |  |      |  | 1.6280 |      |  |  | 1.6564 |  |  |      | 1.4185 |  |  |  | 1.4092 | 
|High for period    |  |                          | 1.5431 |  |      |  | 1.4967 |      |  |  | 1.3682 |  |  |      | 1.2640 |  |  |  | 1.2538 | 
|Low for period     |  |                          | 1.6915 |  |      |  | 1.6643 |      |  |  | 1.6564 |  |  |      | 1.4641 |  |  |  | 1.5047 | 
|Average for period |  |                          | 1.6169 |  |      |  | 1.5826 |      |  |  | 1.4832 |  |  |      | 1.3868 |  |  |  | 1.3707 | 



4



---



##### 






PART I





ITEM 1.  BUSINESS






| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | references to we, our, us,
    the Company or Mercer mean Mercer
    International Inc. and its subsidiaries, unless the context
    clearly suggests otherwise; and references to Mercer
    Inc. mean Mercer International Inc. excluding its
    subsidiaries;             
|
| |  | unless otherwise indicated, all statistical and financial
    information provided herein relating to Mercer excludes the
    Celgar NBSK pulp mill, which our wholly-owned subsidiary,
    Zellstoff Celgar Limited (formerly known as 0706906 B.C.
    Ltd.), acquired in February 2005;
|
| |  | references to ADMTs mean air-dried metric tonnes;                                                                                                                                                                                                                                       
|
| |  | information is provided as of December 31, 2004, unless
    otherwise stated or the context clearly suggests otherwise;                                                                                                                                                                   
|
| |  | all references to monetary amounts are to Euros, the
    lawful currency adopted by most members of the European Union,
    unless otherwise stated; and                                                                                                                                
|
| |  | 
    refers to Euros; $ refers to U.S. dollars; and
    C$ refers to Canadian dollars.                                                                                                                                                                                             




The Company


General








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rosenthal mill. Our wholly-owned subsidiary,
    Rosenthal, owns and operates a modern, efficient ISO 9002
    certified NBSK pulp mill that has an annual production capacity
    of approximately 310,000 ADMTs. Located near the town of
    Blankenstein, Germany, the Rosenthal mill is currently one of
    only two producers of market NBSK pulp in Germany, the other
    being our Stendal mill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Stendal mill. Our 63.6% owned subsidiary, Stendal,
    completed construction of a new, state-of-the-art, single-line
    NBSK pulp mill in September 2004, which is designed to have an
    annual production capacity of approximately 552,000 ADMTs. Once
    operating at capacity, we believe the Stendal mill will be one
    of the largest NBSK pulp mills in Europe. The aggregate cost of
    the Stendal mill is approximately
    1.0 billion.
    The Stendal project was financed through a combination of
    government grants totaling approximately
    274.5 million,
    low-cost, long-term project debt which is largely severally
    guaranteed by the federal government of Germany and the state
    government of Sachsen-Anhalt, and equity contributions. The
    Stendal mill is situated near the town of Stendal, Germany,
    approximately 300 kilometers north of the Rosenthal mill.
|
| |  | Celgar mill. In February 2005, we acquired,
    through a wholly-owned subsidiary, Zellstoff Celgar Limited, a
    modern, efficient ISO 9001 certified NBSK pulp mill that
    has an annual production capacity of approximately 430,000
    ADMTs. The Celgar mill was completely rebuilt in the early 1990s
    through an C$850 million modernization and expansion
    project, which transformed it into a low-cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

5



---



##### 



| |  |                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | producer. The Celgar mill is located near the city of Castlegar,
    British Columbia, Canada, approximately 600 kilometers east
    of the port city of Vancouver, British Columbia.



History and Development of Business




 


 









6



---



##### 



Organizational Chart












|    |                                                                                
|--- | -------------------------------------------------------------------------------
|(1) | Our wholly-owned subsidiary that acquired the Celgar mill in
    February 2005.

Acquisition of Celgar Pulp Mill


Overview












7



---



##### 















Acquisition Rationale






| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhancing Our Position as a Leading Market NBSK Pulp
    Producer.The Acquisition makes us one of the largest
    producers of market NBSK pulp in the world. We now have a
    consolidated annual production capacity of approximately
    1.3 million ADMTs of high quality NBSK pulp from three
    modern NBSK pulp mills located in Europe and North America. We
    believe this will improve our

8



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | service to those larger paper and tissue producing customers who
    wish to develop purchasing arrangements with pulp suppliers that
    can service them on a worldwide basis.                                                                                                                                                                                                                                                               
|
| |  | Creating Value Through Active Management.We
    believe we can leverage our management focus and turnaround
    experience to enhance the Celgar mills operating
    performance by improving price realizations, increasing
    production and reducing production costs.                                                                                                                                                                    
|
| |  | Diversifying Our Revenue and Cost Base.In 2004,
    substantially all of Mercers revenues resulted from sales
    in Europe. Approximately 71% of the Celgar mills sales in
    2004 were in Asia, which is currently the fastest growing market
    for NBSK pulp imports. The Celgar mills costs are largely
    in Canadian dollars, which should reduce our relative exposure
    to the exchange rate between the U.S. dollar and Euro.



Acquisition Opportunities






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Improving Price Realizations.We understand that,
    in 2003, the Celgar mills pulp price realizations were
    approximately C$38 per ADMT below the average for NBSK pulp
    mills in British Columbia, Canada. We believe this resulted from
    the mills current sales arrangements which rely solely on
    third party agents, its product classification and a history of
    inconsistent production. We intend to have our existing sales
    force take over responsibility for supervising and managing
    agent sales and perform some of its sales functions directly on
    a coordinated global basis with our Rosenthal and Stendal mills
    over time. We also intend to reduce the amount of pulp sold at a
    discount in the spot market by adding to the number of grades of
    pulp marketed by the mill and more effectively matching it with
    customer requirements and improving the mills pulp
    brightness consistency through a planned strategic capital
    project. We plan to eliminate the price realization discount
    incurred by the Celgar mill in comparison to other NBSK pulp
    mills in British Columbia, Canada, over time.
|
| |  | Increasing Production.We, in conjunction with our
    consulting engineers, have identified certain high return
    capital projects that we believe can increase the production of
    the Celgar mill, along with lowering its operating costs and
    improving the mills reliability. Through these identified
    strategic capital projects, along with other enhancements and
    debottlenecking initiatives, we plan to increase the Celgar
    mills production capacity to approximately
    470,000 ADMTs over time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Lowering Production Costs.We believe that we can
    reduce the Celgar mills production costs by improving its
    operating consistency and reliability. We plan to achieve these
    improvements through certain strategic capital projects, as well
    as revising the mills approach to maintenance management
    through a greater focus on preventative maintenance, such as we
    conduct at our Rosenthal mill. We believe these initiatives will
    reduce costs, including chemical and energy costs, at the
    Celgar mill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         






The Financings




9



---



##### 











Corporate Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focusing on NBSK Market Pulp.We focus on NBSK
    pulp because it is a premium grade kraft pulp known for its
    strength and generally obtains the highest price relative to
    other kraft pulps. Although demand is cyclical, worldwide demand
    for kraft market pulp has grown at an average of approximately
    3% per annum over the last ten years with higher growth rates in
    certain markets such as eastern Europe and Asia. We do not
    believe there are any significant new NBSK pulp production
    capacity increases coming online in the next several years due
    in part to fiber supply constraints and high capital costs.                                                                                                                                                                                                                                                                      
|
| |  | Operating Modern, World-Class NBSK Pulp Production
    Facilities.In order to keep our operating costs as low
    as possible, with a goal of operating profitably in all market
    conditions, we only plan to operate large, modern NBSK pulp
    production facilities. We believe such production facilities
    provide the best platform to be an efficient, low cost producer
    of high quality NBSK pulp without the need for significant
    sustaining capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Improving Efficiency and Reducing Operating Costs.We focus on increasing the productivity and operating
    efficiency of our production facilities through cost reduction
    initiatives, including targeted capital investments. We seek to
    make high return capital investments that increase the
    production and operating efficiency at our production
    facilities, reduce costs and improve product quality. We also
    seek to reduce operating costs by better managing certain
    operating activities at our facilities such as fiber
    procurement, sales and marketing activities, and we intend to
    further coordinate these activities at our pulp facilities to
    realize on potential synergies among them. In particular, we
    believe there are a number of opportunities to reduce the
    operating costs, increase production and improve the financial
    results of the Celgar mill.
|
| |  | Enhancing Customer Relationships.We focus on
    continually improving our marketing and distribution
    capabilities to enhance our customer relationships and
    capitalize on our geographic diversification. We seek to
    differentiate ourselves from our competitors by consistently
    delivering high quality products to our customers on a global
    basis. We intend to coordinate the marketing and distribution
    activities at our pulp mills to better service
    our customers.                                                                                                                                                                                                                                                                                                                                                                                                                          




The Pulp Industry


General




10



---



##### 











Pulp Markets












11



---



##### 







NBSK Pulp Pricing








12



---



##### 



The Manufacturing Process















13



---



##### 








The Paper Industry















Raw Materials




Rosenthal mill




14



---



##### 









Stendal mill








15



---



##### 





Celgar mill










Paper mills




16



---



##### 








Pulp Cash Production Costs




|                               |  |              |     |   |      |   |     |      |  |   |     | 
|------------------------------ |  | ------------ | --- | - | ---- | - | --- | ---- |  | - | --- | 
|                               |  | Year Ended   |    
|                               |  | December 31, |    
|                               |  |              |    
|Costs                          |  | 2004         |     |   | 2003 |   |     | 2002 | 
|                               |  |              |     |   |      |   |     |      | 
|                               |  | (per ADMT)   |    
|Fiber                          |  |             | 171 |   |      |  | 178 |      |  |  | 178 | 
|Labor                          |  |              | 52  |   |      |   | 51  |      |  |   | 54  | 
|Chemicals                      |  |              | 43  |   |      |   | 46  |      |  |   | 38  | 
|Energy(1)                      |  |              | (1  | ) |      |   | 4   |      |  |   | 9   | 
|Other                          |  |              | 33  |   |      |   | 28  |      |  |   | 33  | 
|                               |  |              |     |   |      |   |     |      | 
|Total cash production costs(2) |  |             | 298 |   |      |  | 307 |      |  |  | 312 | 
|                               |  |              |     |   |      |   |     |      | 






|    |                                                             
|--- | ------------------------------------------------------------
|(1) | Net of energy revenues.                                     
|   
|(2) | Cost of production per ADMT produced excluding depreciation.





|                               |  |                         |     |  |      |    |     |      |  |    |     | 
|------------------------------ |  | ----------------------- | --- |  | ---- | -- | --- | ---- |  | -- | --- | 
|                               |  | Year Ended December 31, |    
|                               |  |                         |    
|Costs(1)                       |  | 2004                    |     |  | 2003 |    |     | 2002 | 
|                               |  |                         |     |  |      |    |     |      | 
|                               |  | (per ADMT)              |    
|Fiber                          |  | C$                      | 231 |  |      | C$ | 208 |      |  | C$ | 204 | 
|Labor                          |  |                         | 94  |  |      |    | 96  |      |  |    | 89  | 
|Chemicals                      |  |                         | 75  |  |      |    | 75  |      |  |    | 72  | 
|Energy(2)                      |  |                         | 34  |  |      |    | 38  |      |  |    | 43  | 
|Other                          |  |                         | 79  |  |      |    | 82  |      |  |    | 83  | 
|                               |  |                         |     |  |      |    |     |      | 
|Total cash production costs(3) |  | C$                      | 513 |  |      | C$ | 499 |      |  | C$ | 491 | 
|                               |  |                         |     |  |      |    |     |      | 






|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These amounts are based on results from the Celgar mill, which
    we acquired in February 2005. We did not own or operate the
    Celgar mill during the periods presented in this table and this
    table is provided for illustrative purposes only.
|   
|(2) | Net of energy revenues.                                                                                                                                                                                                                                 
|   
|(3) | Cost of production per ADMT produced excluding depreciation.                                                                                                                                                                                            




Our Products




Pulp




17



---



##### 















| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Celstar  approximately 55% of the pulp produced by
    the Celgar mill is a high quality bleached softwood kraft pulp
    made from Hemlock, Balsam Fir, Spruce, Pine and Western
    Red Cedar.                                                                                                      
|
| |  | Celect  the remaining 45% of the pulp produced by the
    Celgar mill is a unique softwood pulp made from a specifically
    segregated mixture of long-fiber wood species (Douglas Fir and
    Western Larch). Celect is preferred by papermakers looking for
    high tear and lower air resistance.



Paper






|                    |  |            |  |                                                           
|------------------- |  | ---------- |  | ----------------------------------------------------------
|Paper Product Class |  | Mill       |  | Product Description                                       
|                    |  |            |  |                                                           
|Specialty Paper     |  | Heidenau   |  | Coated and uncoated wallpaper and non-woven wallpaper base
|                    |  | Fährbrücke |  | Greaseproof paper                                         
|Printing Paper      |  | Fährbrücke |  | Printing and writing paper                                



18



---



##### 












Sales, Marketing and Distribution




|                              |                  |                            |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------- | ---------------- | -------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                              |                  | Year Ended December 31,(1) |        
|                              |                  |                            |        
|                              |                  | 2004                       |         |        | 2003   |   |         | 2002   |       
|                              |                  |                            |         |        |        |   |         |        |       
|                              |                  | (ADMTs)                    |        
|Sales Volume by Product Class |                  |                            |         |        |        |   |         |        |        |   |         |       
|Pulp(2)                       |                  |                            | 421,716 |        |        |   | 303,655 |        |        |   | 293,607 |       
|Papers                        |                  |                            |         |        |        |   |         |        |        |   |         |       
|                              | Specialty Papers |                            |         | 37,525 |        |   |         | 40,621 |        |   |         | 61,727 | (2)   
|                              | Printing Papers  |                            |         | 24,757 |        |   |         | 21,397 |        |   |         | 23,195 |       
|                              |                  |                            |         |        |        |   |         |        |       
|                              |                  | Total Papers               |         |        | 62,282 |   |         |        | 62,018 |   |         |        | 84,922 | 
|                              |                  |                            |         |        |        |   |         |        |       
|Total(2)                      |                  |                            | 483,998 |        |        |   | 365,673 |        |        |   | 378,529 |       
|                              |                  |                            |         |        |        |   |         |        |       
|Revenues by Product Class     |                  |                            |         |        |        |   |         |        |        |   |         |       
|Pulp(2)                       |                  |                           | 178,512 |        |        |  | 126,594 |        |        |  | 130,173 |       
|Papers                        |                  |                            |         |        |        |   |         |        |        |   |         |       
|                              | Specialty Papers |                            |         | 37,497 |        |   |         | 40,082 |        |   |         | 79,358 | (3)   
|                              | Printing Papers  |                            |         | 17,094 |        |   |         | 15,780 |        |   |         | 18,352 |       
|                              |                  |                            |         |        |        |   |         |        |       
|                              |                  | Total Papers               |         |        | 54,591 |   |         |        | 55,862 |   |         |        | 97,710 | 
|                              |                  |                            |         |        |        |   |         |        |       
|Total(2)                      |                  |                           | 233,103 |        |        |  | 182,456 |        |        |  | 227,883 |       
|                              |                  |                            |         |        |        |   |         |        |       
|Revenues by Geographic Area   |                  |                            |         |        |        |   |         |        |        |   |         |       
|Germany                       |                  |                           | 88,119  |        |        |  | 80,306  |        |        |  | 88,809  |       
|Italy                         |                  |                            | 54,832  |        |        |   | 46,609  |        |        |   | 46,027  |       
|European Union(4)             |                  |                            | 64,846  |        |        |   | 29,936  |        |        |   | 31,631  |       
|Eastern Europe and Other      |                  |                            | 25,306  |        |        |   | 25,605  |        |        |   | 61,416  |       
|                              |                  |                            |         |        |        |   |         |        |       
|Total(2)                      |                  |                           | 233,103 |        |        |  | 182,456 |        |        |  | 227,883 |       
|                              |                  |                            |         |        |        |   |         |        |       






|    |                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We completed construction of and started up our Stendal mill in
    the third quarter of 2004. As a result, the following data for
    2004 includes results from the Stendal mill from the time of its
    start up in mid-September 2004. The data presented does not
    include results from the Celgar mill as we acquired the mill in
    February 2005.      
|   
|(2) | Excluding intercompany sales volumes of 6,576, 5,527 and 10,768
    ADMTs of pulp and intercompany net sales revenues of
    approximately
    2.8 million,
    2.3 million
    and
    4.9 million
    in 2004, 2003 and 2002, respectively.                                                                                                                    
|   
|(3) | We acquired Landqart, which operates a specialty paper mill, in
    December 2001. As of December 31, 2002, our interest in
    Landqart is no longer consolidated and is included in our
    financial results on an equity basis. Accordingly, sales of
    approximately 18,222 ADMTs for approximately
    39.7 million
    from Landqart are included in 2002.
|   
|(4) | Not including Germany or Italy; includes new entrant countries
    to the European Union from their time of admission.                                                                                                                                                                                                                                              

19



---



##### 





|                  |  |                   |  |                  
|----------------- |  | ----------------- |  | -----------------
|Year Ended        |  | Year Ended        |  | Year Ended       
|December 31, 2004 |  | December 31, 2003 |  | December 31, 2002
|                  |  |                   |  |                  
|(PIE CHART 2004)  |  | (PIE CHART 2003)  |  | (PIE CHART 2002) 






|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Not including Germany or Italy; includes new entrant countries
    to the European Union from their time of admission.                                  
|   
|(2) | Sales from the Landqart mill, which were made predominantly in
    the Swiss market, which is not part of the European Union, are
    included for 2002.







20



---



##### 





|             |  |                            |         |  |      |  |         |      |  |  |         | 
|------------ |  | -------------------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|             |  | Year Ended December 31,(1) |        
|             |  |                            |        
|             |  | 2004                       |         |  | 2003 |  |         | 2002 | 
|             |  |                            |         |  |      |  |         |      | 
|             |  | (ADMTs)                    |        
|Sales Volume |  |                            | 433,121 |  |      |  | 427,860 |      |  |  | 400,101 | 
|             |  |                            |         |  |      |  |         |      | 

|            |  |                |         |  |  |    |         |  |  |    |         | 
|----------- |  | -------------- | ------- |  |  | -- | ------- |  |  | -- | ------- | 
|            |  | (in thousands) |        
|Revenues(2) |  | C$             | 301,317 |  |  | C$ | 271,566 |  |  | C$ | 249,366 | 
|            |  |                |         |  |  |    |         |  | 






|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These amounts are based on results from the Celgar mill, which
    we acquired in February 2005. We did not own or operate the
    Celgar mill during the periods presented in this table and this
    table is provided for illustrative purposes only.
|   
|(2) | Net of discounts.                                                                                                                                                                                                                                       
















Capital Expenditures




  


21



---



##### 



 







      








Government Financing


Grants





22



---



##### 









|                               |  |                         |       |  |      |   |        |      |  |   |        |  |  |   |        |    
|------------------------------ |  | ----------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | ---
|                               |  | Year Ended December 31, |      
|                               |  |                         |      
|                               |  | 2004                    |       |  | 2003 |   |        | 2002 |  |   | Total  | 
|                               |  |                         |       |  |      |   |        |      |  |   |        | 
|                               |  | (in thousands)          |      
|Capital expenditures, gross(1) |  |                        | 8,645 |  |      |  | 14,647 |      |  |  | 13,800 |  |  |  | 37,092 | (2)
|                               |  |                         |       |  |      |   |        |      |  |   |        | 
|Government grants(1)           |  |                        | 876   |  |      |  | 3,323  |      |  |  | 1,176  |  |  |  | 5,375  |    
|                               |  |                         |       |  |      |   |        |      |  |   |        | 






|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Not including the Stendal mill.                                                                                                                                                                                                                         
|   
|(2) | The total cost of the conversion of the Rosenthal mill to
    produce kraft pulp was approximately
    361.0 million.
    We also received government grants totaling approximately
    101.7 million
    in connection with such capital investments.

 




|                                                                            |  |                    |           |  |      |   |         |      |  |   |         | 
|--------------------------------------------------------------------------- |  | ------------------ | --------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                                                            |  | As at December 31, |          
|                                                                            |  |                    |          
|                                                                            |  | 2004               |           |  | 2003 |   |         | 2002 | 
|                                                                            |  |                    |           |  |      |   |         |      | 
|                                                                            |  | (in thousands)     |          
|Properties, net (as shown on consolidated balance sheets)                   |  |                   | 936,035   |  |      |  | 745,178 |      |  |  | 441,990 | 
|Add back: government grants less amortization, deducted from
    properties |  |                    | 259,133   |  |      |   | 163,988 |      |  |   | 85,358  | 
|                                                                            |  |                    |           |  |      |   |         |      | 
|Properties, gross amount including government grants less
    amortization  |  |                   | 1,195,168 |  |      |  | 909,166 |      |  |  | 527,348 | 
|                                                                            |  |                    |           |  |      |   |         |      | 

Loan Guarantees






23



---



##### 






Stendal Pulp Mill Project and Financing


The Project















Control and Management




24



---



##### 





EPC Contract







 






Stendal Mill Completion






25



---



##### 









Acceptance of the Stendal Mill






 






26



---



##### 







Stendal Mill Construction and Start-up Risks




Stendal Pulp Mill Financing





 


 




27



---



##### 














Description of Certain Indebtedness




Rosenthal Loan Facility


  


28



---



##### 






Stendal Loan Facility


 


 




 







29



---



##### 






   






   


 


Convertible Notes








30



---



##### 









Senior Notes




Rosenthal Working Capital Facility





31



---



##### 



Celgar Working Capital Facility




Paper Mill Loan Facilities


  


   








Environmental




32



---



##### 



 












 




3


33



---



##### 





2 2 2 2 2 2 2 2 2 2




 







Human Resources






34



---



##### 


















Additional Information


www.mercerinternational.com www.sec.gov





ITEM 2.  PROPERTIES




35



---



##### 







| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an approximately 723,000 square feet fiber storage area;                                                                                                 
|
| |  | barking and chipping facilities for pulp logs;                                                                                                           
|
| |  | a fiber line, which includes a Kamyr continuous digester and
    bleaching facilities;                                                                   
|
| |  | a pulp machine, which includes a dryer and a cutter;                                                                                                     
|
| |  | an approximately 63,000 square foot finished goods storage
    area;                                                                                     
|
| |  | a chemical recovery system, which includes a recovery boiler,
    evaporation plant and recausticizing plant;                                            
|
| |  | a fresh water plant;                                                                                                                                     
|
| |  | a wastewater treatment plant; and                                                                                                                        
|
| |  | a power station with a turbine capable of producing 45 megawatts
    of electric power from steam produced by the recovery boiler and
    a power boiler.





| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an approximately 920,000 square feet fiber storage area;                                                                                                                
|
| |  | barking and chipping facilities for pulp logs;                                                                                                                          
|
| |  | a fiber line, which includes eight Superbatch digester and
    bleaching facilities;                                                                                    
|
| |  | a pulp machine, which includes a dryer and a cutter;                                                                                                                    
|
| |  | an approximately 108,000 square foot finished goods storage
    area;                                                                                                   
|
| |  | a recovery line, which includes a recovery boiler, evaporation
    plant, recausticizing plant and lime kiln;                                                           
|
| |  | a fresh water plant;                                                                                                                                                    
|
| |  | a wastewater treatment plant; and                                                                                                                                       
|
| |  | a power station with a turbine capable of producing
    approximately 100 megawatts of electric power from steam
    produced by the recovery boiler and a power boiler.



36



---



##### 







| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fiber storage facilities consisting of four vertical silos and
    an asphalt surfaced yard with a capacity of 200,000
    m3
    of chips;                          
|
| |  | a woodroom containing debarking and chipping equipment for pulp
    logs;                                                                                            
|
| |  | a fiber line, which includes a dual vessel hydraulic digester,
    pressure knotting and screening, single stage oxygen
    delignification and bleaching facilities;
|
| |  | two pulp machines;                                                                                                                                                   
|
| |  | a chemical recovery system, which includes a recovery boiler,
    recausticizing area and effluent treatment system; and                                             
|
| |  | a turbine generator capable of producing approximately 48
    megawatts of electric power from steam produced by a recovery
    boiler and power boiler.             





| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an approximately 34,200 square feet fiber storage area;                                                                                                                                                                                                                                                           
|
| |  | an approximately 57,600 square foot paper machine building,
    which houses a PAMA paper machine with a 339 centimeter
    trim width, processing speed of 300 meters per minute and
    including, among other things, a stock preparation unit,
    approach system, press section and dryer section;          
|
| |  | a fresh water plant, which consists of 15 wells;                                                                                                                                                                                                                                                                  
|
| |  | a wastewater treatment plant; and                                                                                                                                                                                                                                                                                 
|
| |  | a power plant, which includes a gas turbine capable of producing
    approximately 4,250 kilowatts of electric power, a waste
    heat boiler capable of producing 17 tonnes per hour of
    steam generated power and an auxiliary boiler capable of
    producing five tonnes per hour of steam generated power.





| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an approximately 69,300 square feet fiber storage area;                                                                                                                                                                                                                                                                                                                   
|
| |  | an approximately 60,300 square foot paper machine building,
    which houses a Voith paper machine with a 276 centimeter
    trim width, processing speed of 600 meters per minute and
    including, among other things, a pulper unit, paper chemical
    preparation unit, refiner system, stock blending system,
    approach system, press section and dryer section;
|
| |  | a fresh water plant;                                                                                                                                                                                                                                                                                                                                                      
|
| |  | a power plant, which consists of, among other things, a gas
    turbine which can produce approximately 4,280 kilowatts of
    electric power, a waste heat boiler which can produce
    22 tonnes per hour of steam generated power and a heavy
    duty boiler which can produce 3.2 tonnes per hour of
    steam; and                                                  
|
| |  | a wastewater treatment plant is currently being constructed, the
    first stage of which was completed at the end of 2002 and
    brought on line at the beginning of 2003.                                                                                                                                                                                              

37



---



##### 





|              |                  |              |           |               |                         |     |         |        |        |  |         |        |        |  |         |        |        | 
|------------- | ---------------- | ------------ | --------- | ------------- | ----------------------- | --- | ------- | ------ | ------ |  | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|              |                  |              |           | Production(1) |                        
|              |                  |              |           |               |                        
|              |                  | Annual       |           |               | Year Ended December 31, |    
|              |                  | Production   |           |               |                         |    
|Product Class |                  | Capacity(2)  |           |               | 2004                    |     |         | 2003   |        |  | 2002    |       
|              |                  |              |           |               |                         |     |         |        |        |  |         |       
|              |                  |              |           | (ADMTs)       |                        
|Pulp          |                  |              | 1,292,000 | (3)           |                         |     | 446,710 |        |        |  | 310,244 |        |        |  | 304,854 |       
|Papers        |                  |              |           |               |                         |     |         |        |        |  |         |        |        |  |         |       
|              | Specialty Papers |              |           | 55,000        | (4)(5)                  |     |         | 37,915 |        |  |         | 40,424 |        |  |         | 62,172 | (4)   
|              | Printing Papers  |              |           | 30,000        | (5)                     |     |         | 24,842 |        |  |         | 21,488 |        |  |         | 23,195 |       
|              |                  |              |           |               |                         |     |         |        |        |  |         |       
|              |                  | Total Papers |           |               | 70,000                  | (5) |         |        | 62,757 |  |         |        | 61,912 |  |         |        | 85,367 | 
|              |                  |              |           |               |                         |     |         |        |        |  |         |       
|Total         |                  |              | 1,362,000 |               |                         |     | 509,467 |        |        |  | 372,156 |        |        |  | 390,221 |       
|              |                  |              |           |               |                         |     |         |        |        |  |         |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As the Stendal mill was started up in mid-September 2004, the
    actual production for 2004 includes production from the Stendal
    mill from the time of its start up. The actual production does
    not include production from the Celgar mill for the periods
    presented.                                                                                                                                            
|   
|(2) | Capacity is the rated capacity of the plants for the year ended
    December 31, 2004, which is based upon production for
    365 days a year. Targeted production is generally based
    upon 353 days per year for the Rosenthal and Stendal mills,
    350 days per year for the Celgar mill and 340 days per
    year for the paper mills.                                                                                 
|   
|(3) | Comprised of 310,000 ADMTs for our Rosenthal mill,
    552,000 ADMTs for our Stendal mill and 430,000 ADMTs
    for our Celgar mill.                                                                                                                                                                                                                                                                                           
|   
|(4) | As we reorganized our interest in Landqart at the end of 2002,
    we no longer have a direct interest in or consolidate the
    Landqart mill. The Landqart mill had an annual production
    capacity of approximately 20,500 ADMTs, which is not
    included in the calculation of our annual production capacity.
    Actual production of 20,422 ADMTs of specialty papers at
    the Landqart mill is included for 2002.
|   
|(5) | Based upon the current product mix at the paper mills, the
    aggregate annual production capacity of the paper mills is
    approximately 70,000 ADMTs. The rated aggregate annual
    production capacity of the paper mills is approximately
    85,000 ADMTs.                                                                                                                                                             






ITEM 3.  LEGAL PROCEEDINGS









|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



38



---



##### 






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
    STOCKHOLDER MATTERS

Market Information.


|                      |  |      |       |  |     |   |      | 
|--------------------- |  | ---- | ----- |  | --- | - | ---- | 
|Fiscal Quarter Ended  |  | High |       |  | Low |  
|                      |  |      |       |  |     |  
|2003                  |  |      |       |  |     |   |      | 
|March 31              |  | $    | 5.88  |  |     | $ | 4.40 | 
|June 30               |  |      | 5.25  |  |     |   | 4.15 | 
|September 30          |  |      | 6.55  |  |     |   | 4.60 | 
|December 31           |  |      | 6.97  |  |     |   | 5.87 | 
|                     
|2004                  |  |      |       |  |     |   |      | 
|March 31              |  |      | 9.55  |  |     |   | 6.31 | 
|June 30               |  |      | 9.78  |  |     |   | 7.40 | 
|September 30          |  |      | 10.10 |  |     |   | 8.16 | 
|December 31           |  |      | 11.35 |  |     |   | 8.29 | 
|                     
|2005                  |  |      |       |  |     |   |      | 
|Period ended March 11 |  |      | 11.40 |  |     |   | 8.60 | 

Shareholder Information.


Dividend Information.


Equity Compensation Plans.


|                               |  |                        |           |  |                     |   |      |                      |  |  |         |    
|------------------------------ |  | ---------------------- | --------- |  | ------------------- | - | ---- | -------------------- |  |  | ------- | ---
|                               |  | Number of Shares to be |           |  | Weighted-average    |   |      | Number of Shares     | 
|                               |  | Issued Upon Exercise   |           |  | Exercise Price of   |   |      | Available for Future | 
|                               |  | of Outstanding Options |           |  | Outstanding Options |   |      | Issuance Under Plan  | 
|                               |  |                        |           |  |                     |   |      |                      | 
|1992 Amended Stock Option Plan |  |                        | 1,055,000 |  |                     | $ | 6.58 |                      |  |  | 230,500 |    
|2004 Stock Incentive Plan      |  |                        |          |  |                     |   |     |                      |  |  | 960,000 | (1)






|    |                                                                              
|--- | -----------------------------------------------------------------------------
|(1) | An aggregate of 40,000 restricted shares have been issued under
    the plan.

Private Placements.




39



---



##### 









40



---



##### 






ITEM 6. SELECTED FINANCIAL DATA








|                                                    |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |         | 
|--------------------------------------------------- | ------------------------------------- | -------------------------------------------------------------- | --------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | 
|                                                    |                                       | Years Ended December 31,                                       |          
|                                                    |                                       |                                                                |          
|                                                    |                                       | 2004                                                           |           |         | 2003 |   |         | 2002(1) |   |   | 2001(1) |         |   | 2000 |        
|                                                    |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |        
|                                                    |                                       | (Euro in thousands, other than per share and per ADMT amounts) |          
|Statement of Operations Data                        |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|Revenues                                            |                                       |                                                               | 247,898   |         |      |  | 194,556 |         |   |  | 239,132 |         |   |     | 216,447 |         |   |  | 258,883 |        
|Cost of sales                                       |                                       |                                                               | 232,102   |         |      |  | 179,690 |         |   |  | 213,463 |         |   |     | 184,679 |         |   |  | 193,704 |        
|Gross profit                                        |                                       |                                                               | 15,796    |         |      |  | 14,866  |         |   |  | 25,669  |         |   |     | 31,768  |         |   |  | 65,179  |        
|Income (loss) from operations                       |                                       |                                                               | (17,972   | )       |      |  | (4,541  | )       |   |  | (1,145  | )       |   |     | 13,332  |         |   |  | 49,665  |        
|Net income (loss)                                   |                                       |                                                               | 19,980    |         |      |  | (3,593  | )       |   |  | (6,322  | )       |   |     | (2,823  | )       |   |  | 32,013  |        
|Net income (loss) per share,                        |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|                                                    | Basic                                 |                                                                |          | 1.15    |      |   |        | (0.21   | ) |   |        | (0.38   | ) |      |        | (0.17   | ) |   |        | 1.91    | 
|                                                    | Diluted                               |                                                                |          | 0.89    |      |   |        | (0.21   | ) |   |        | (0.38   | ) |      |        | (0.17   | ) |   |        | 1.87    | 
|Weighted average shares outstanding (in thousands), |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|                                                    | Basic                                 |                                                                |           | 17,426  |      |   |         | 16,941  |   |   |         | 16,775  |   |      |         | 16,875  |   |   |         | 16,779  | 
|                                                    | Diluted                               |                                                                |           | 28,525  |      |   |         | 16,941  |   |   |         | 16,775  |   |      |         | 16,875  |   |   |         | 17,144  | 
|Balance Sheet Data                                  |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|Current assets                                      |                                       |                                                               | 207,409   |         |      |  | 128,401 |         |   |  | 96,217  |         |   |     | 93,212  |         |   |  | 98,881  |        
|Current liabilities                                 |                                       |                                                               | 229,068   |         |      |  | 177,348 |         |   |  | 89,889  |         |   |     | 77,668  |         |   |  | 70,493  |        
|Working capital                                     |                                       |                                                               | (21,659   | )(2)    |      |  | (48,947 | )(2)    |   |  | 6,328   |         |   |     | 15,544  |         |   |  | 28,388  |        
|Total assets                                        |                                       |                                                               | 1,255,649 |         |      |  | 935,905 |         |   |  | 599,750 |         |   |     | 429,593 |         |   |  | 429,724 |        
|Long-term liabilities                               |                                       |                                                               | 863,840   |         |      |  | 625,702 |         |   |  | 384,892 |         |   |     | 220,312 |         |   |  | 225,734 |        
|Shareholders equity                                |                                       |                                                               | 162,741   |         |      |  | 132,855 |         |   |  | 124,969 |         |   |     | 131,613 |         |   |  | 133,497 |        
|Other Data                                          |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|Pulp Operations(3):                                 |                                       |                                                                |           |         |      |   |         |         |   |   |         |         |   |      |         |         |   |   |         |        
|                                                    | Pulp sales                            |                                                                |          | 178,512 |      |   |        | 126,594 |   |   |        | 130,173 |   |      |        | 146,245 |   |   |        | 159,713 | 
|                                                    | Sales volume (ADMTs)                  |                                                                |           | 421,716 |      |   |         | 303,655 |   |   |         | 293,607 |   |      |         | 285,654 |   |   |         | 239,552 | 
|                                                    | Productivity (ADMTs produced per day) |                                                                |           | 1,006   |      |   |         | 898     |   |   |         | 887     |   |      |         | 876     |   |   |         | 736     | 
|                                                    | Income (loss) from operations         |                                                                |          | (5,054  | )    |   |        | (1,460  | ) |   |        | 1,838   |   |      |        | 18,610  |   |   |        | 49,594  | 
|                                                    | Depreciation                          |                                                                |          | 26,773  |      |   |        | 21,881  |   |   |        | 21,567  |   |      |        | 21,422  |   |   |        | 20,481  | 
|                                                    | Average price realized (per ADMT)     |                                                                |          | 423     |      |   |        | 417     |   |   |        | 443     |   |      |        | 512     |   |   |        | 667     | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired the specialty paper mill in Landqart effective
    December 2001 and we reorganized our interest in Landqart at the
    end of 2002. Results from the Landqart mill are not included in
    our results for 2001, but are included for 2002. The Landqart
    mill sold approximately 18,222 ADMTs for approximately
    39.7 million
    in 2002. As of December 31, 2002, our interest in the
    Landqart mill is no longer consolidated and is included in our
    financial results on an equity basis in 2003.
|   
|(2) | We have applied for investment grants from the federal and state
    governments of Germany and had claim expenditures of
    approximately
    65.9 million
    outstanding at December 31, 2004, which we expect to
    receive in 2005 and approximately
    82.1 million
    outstanding at December 31, 2003, all of which was received
    in 2004. However, in accordance with our accounting policies, we
    do not record these grants until they are received.                                                      
|   
|(3) | Excluding intercompany sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

41



---



##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS








Results of Operations




 


 






42



---



##### 











      




43



---



##### 






 






|                              |                  |                         |         |        |        |  |         |        |        |  |         |        |        | 
|----------------------------- | ---------------- | ----------------------- | ------- | ------ | ------ |  | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|                              |                  | Year Ended December 31, |        
|                              |                  |                         |        
|                              |                  | 2004                    |         |        | 2003   |  |         | 2002   |       
|                              |                  |                         |         |        |        |  |         |        |       
|                              |                  | (ADMTs)                 |        
|Sales Volume by Product Class |                  |                         |         |        |        |  |         |        |        |  |         |       
|Pulp(1)                       |                  |                         | 421,716 |        |        |  | 303,655 |        |        |  | 293,607 |       
|Papers                        |                  |                         |         |        |        |  |         |        |        |  |         |       
|                              | Specialty papers |                         |         | 37,525 |        |  |         | 40,621 |        |  |         | 61,727 | (2)   
|                              | Printing papers  |                         |         | 24,757 |        |  |         | 21,397 |        |  |         | 23,195 |       
|                              |                  |                         |         |        |        |  |         |        |       
|                              |                  | Total papers            |         |        | 62,282 |  |         |        | 62,018 |  |         |        | 84,922 | 
|                              |                  |                         |         |        |        |  |         |        |       
|Total(1)                      |                  |                         | 483,998 |        |        |  | 365,673 |        |        |  | 378,529 |       
|                              |                  |                         |         |        |        |  |         |        |       
|                             

|                          |                  |                |         |        |        |   |         |        |        |   |         |        |        | 
|------------------------- | ---------------- | -------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                          |                  | (in thousands) |        
|Revenues by Product Class |                  |                |         |        |        |   |         |        |        |   |         |       
|Pulp(1)                   |                  |               | 178,512 |        |        |  | 126,594 |        |        |  | 130,173 |       
|Papers                    |                  |                |         |        |        |   |         |        |        |   |         |       
|                          | Specialty papers |                |         | 37,497 |        |   |         | 40,082 |        |   |         | 79,358 | (2)   
|                          | Printing papers  |                |         | 17,094 |        |   |         | 15,780 |        |   |         | 18,352 |       
|                          |                  |                |         |        |        |   |         |        |       
|                          |                  | Total papers   |         |        | 54,591 |   |         |        | 55,862 |   |         |        | 97,710 | 
|                          |                  |                |         |        |        |   |         |        |       
|Total(1)                  |                  |               | 233,103 |        |        |  | 182,456 |        |        |  | 227,883 |       
|                          |                  |                |         |        |        |   |         |        |       






|    |                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excluding intercompany sales volumes of 6,756, 5,527 and
    10,768 ADMTs of pulp and intercompany net sales revenues of
    approximately
    2.8 million,
    2.3 million
    and
    4.9 million
    in 2004, 2003 and 2002, respectively.                                                                                                                     
|   
|(2) | We acquired Landqart, which operates a specialty paper mill, in
    December 2001. As of December 31, 2002, our interest in
    Landqart is no longer consolidated and is included in our
    financial results on an equity basis. Accordingly, sales of
    approximately 18,222 ADMTs for approximately
    39.7 million
    from Landqart are included for 2002.




Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003


  


44



---



##### 



 


 


   


 


 


  




   


  


   


   


45



---



##### 



 


  


       


   


 








    


     






46



---



##### 







|                                    |                   |                |         |       |      |   |         |   | 
|----------------------------------- | ----------------- | -------------- | ------- | ----- | ---- | - | ------- | - | 
|                                    |                   | Year Ended     |        
|                                    |                   | December 31,   |        
|                                    |                   |                |        
|                                    |                   | 2004           |         |       | 2003 |  
|                                    |                   |                |         |       |      |  
|                                    |                   | (in thousands) |        
|Net income (loss)                   |                   |               | 19,980  |       |      |  | (3,593  | )
|Minority interest                   |                   |                | (2,454  | )     |      |   | (5,647  | )
|Income taxes (benefit)              |                   |                | (44,163 | )     |      |   | 3,172   |  
|Interest expense                    |                   |                | 23,749  |       |      |   | 11,523  |  
|Investment income                   |                   |                | (2,948  | )     |      |   | (1,653  | )
|Derivative financial instruments    |                   |                | (12,136 | )     |      |   | (16,168 | )
|Impairment of investments           |                   |                |        |       |      |   | 7,825   |  
|                                    |                   |                |         |       |      |  
|Loss from operations                |                   |                | (17,972 | )     |      |   | (4,541  | )
|Add:  Depreciation and amortization |                   |                | 29,144  |       |      |   | 24,105  |  
|                                    | Impairment charge |                |         | 6,000 |      |   |         |  | 
|                                    |                   |                |         |       |      |  
|Operating EBITDA                    |                   |               | 17,172  |       |      |  | 19,564  |  
|                                    |                   |                |         |       |      |  




Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002


   


 


        


47



---



##### 



   


 


   


   


 


 


     


  


 


 


48



---



##### 






Accounting for Certain Investments in Debt and
Equity Securities The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments Accounting for Noncurrent Marketable Equity Securities


  


   


              


     


49



---



##### 







|                                   |  |                         |         |   |      |   |         |  
|---------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                   |  | Year Ended December 31, |        
|                                   |  |                         |        
|                                   |  | 2003                    |         |   | 2002 |  
|                                   |  |                         |         |   |      |  
|                                   |  | (in thousands)          |        
|Net loss                           |  |                        | (3,593  | ) |      |  | (6,322  | )
|Minority interest                  |  |                         | (5,647  | ) |      |   | (10,965 | )
|Income taxes                       |  |                         | 3,172   |   |      |   | (264    | )
|Interest expense                   |  |                         | 11,523  |   |      |   | 13,753  |  
|Investment income                  |  |                         | (1,653  | ) |      |   | (436    | )
|Derivative financial instruments   |  |                         | (16,168 | ) |      |   | 6,679   |  
|Impairment of investments          |  |                         | 7,825   |   |      |   |        |  
|Other                              |  |                         |        |   |      |   | (3,590  | )
|                                   |  |                         |         |   |      |  
|Loss from operations               |  |                         | (4,541  | ) |      |   | (1,145  | )
|Add: Depreciation and amortization |  |                         | 24,105  |   |      |   | 25,614  |  
|                                   |  |                         |         |   |      |  
|Operating EBITDA                   |  |                        | 19,564  |   |      |  | 24,469  |  
|                                   |  |                         |         |   |      |  




Liquidity and Capital Resources




|                          |  |                         |           |      |      |   |         |     
|------------------------- |  | ----------------------- | --------- | ---- | ---- | - | ------- | ----
|                          |  | Year Ended December 31, |          
|                          |  |                         |          
|                          |  | 2004                    |           |      | 2003 |  
|                          |  |                         |           |      |      |  
|                          |  | (in thousands)          |          
|Financial Position        |  |                         |           |      |      |   |         |     
|Cash and cash equivalents |  |                        | 49,568    |      |      |  | 51,993  |     
|Working capital (deficit) |  |                         | (21,659   | )(1) |      |   | (48,947 | )(1)
|Properties, net           |  |                         | 936,035   |      |      |   | 745,178 |     
|Total assets              |  |                         | 1,255,649 |      |      |   | 935,905 |     
|Long-term liabilities     |  |                         | 863,840   |      |      |   | 625,702 |     
|Shareholders equity      |  |                         | 162,741   |      |      |   | 132,855 |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As at December 31, 2004 and 2003, we had a working capital
    deficit of
    21.7 million
    and
    48.9 million,
    respectively, primarily as a result of Stendal construction
    costs payable of
    65.4 million
    and
    42.8 million
    during the respective periods for which we had not drawn down
    under the Stendal Loan Facility. We qualify for investment
    grants from the federal and state governments of Germany and had
    claim expenditures of
    65.9 million
    and
    82.1 million
    outstanding at December 31, 2004 and 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.

       


50



---



##### 












Operating Activities


       





Investing Activities


     


 




 





Financing Activities


      


51



---



##### 



  









Contractual Obligations and Commitments




|                               |  |                        |        |  |           |   |         |           |  |   |             |  |  |       |         |  |  |   |         | 
|------------------------------ |  | ---------------------- | ------ |  | --------- | - | ------- | --------- |  | - | ----------- |  |  | ----- | ------- |  |  | - | ------- | 
|                               |  | Payments Due By Period |       
|                               |  |                        |       
|Contractual Obligations        |  | 2005                   |        |  | 2006-2007 |   |         | 2008-2009 |  |   | Beyond 2009 |  |  | Total |        
|                               |  |                        |        |  |           |   |         |           |  |   |             |  |  |       |        
|                               |  | (in thousands)         |       
|Long-term debt(1)              |  |                       | 15,696 |  |           |  | 35,093  |           |  |  | 39,591      |  |  |      | 92,864  |  |  |  | 183,244 | 
|Debt, Stendal(2)               |  |                        |       |  |           |   | 43,568  |           |  |   | 65,339      |  |  |       | 500,817 |  |  |   | 609,724 | 
|Capital lease obligations(3)   |  |                        | 3,549  |  |           |   | 7,210   |           |  |   | 1,603       |  |  |       | 41      |  |  |   | 12,403  | 
|Operating lease obligations(4) |  |                        | 1,355  |  |           |   | 1,553   |           |  |   | 268         |  |  |       | 193     |  |  |   | 3,369   | 
|Purchase obligations(5)        |  |                        | 73,091 |  |           |   | 19,029  |           |  |   | 1,610       |  |  |       | 7,718   |  |  |   | 101,448 | 
|Other long-term liabilities(6) |  |                        | 2      |  |           |   | 197     |           |  |   | 13          |  |  |       | 73      |  |  |   | 285     | 
|                               |  |                        |        |  |           |   |         |           |  |   |             |  |  |       |        
|Total                          |  |                       | 93,693 |  |           |  | 106,650 |           |  |  | 108,424     |  |  |      | 601,706 |  |  |  | 910,473 | 
|                               |  |                        |        |  |           |   |         |           |  |   |             |  |  |       |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This reflects principal only relating primarily to indebtedness
    under the Rosenthal Loan Facility, which was repaid in February
    2005, and credit facilities relating to the paper mills, but
    does not reflect indebtedness relating to the Stendal mill. See
    Business  Description of Certain
    Indebtedness, footnote 2 below and Note 9 to our
    annual financial statements included herein for a description of
    such indebtedness. Does not include amounts associated with
    derivatives entered into in connection with indebtedness
    relating to the Rosenthal mill, which we settled as part of the
    repayment of the Rosenthal Loan Facility. See Quantitative
    and Qualitative Disclosure about Market Risk for
    information about our derivatives.
|   
|(2) | This reflects principal only in connection with indebtedness
    relating to the Stendal mill, including under the Stendal Loan
    Facility and convertible notes. See Business 
    Description of Certain Indebtedness and Note 9 to our
    annual financial statements included herein for a description of
    such indebtedness. Does not include amounts associated with
    derivatives entered into in connection with the Stendal Loan
    Facility. See Quantitative and Qualitative Disclosure
    about Market Risk for information about our derivatives.                                                                                                                                                                                                                           
|   
|(3) | Capital lease obligations relate to transportation vehicles and
    production equipment. These amounts reflect principal and
    interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | Operating lease obligations relate to transportation vehicles
    and other production and office equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(5) | Purchase obligations relate primarily to take-or-pay contracts
    made in the ordinary course of business, of which purchases of
    raw materials and supplies totaled approximately
    83.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) | Other long-term liabilities relate primarily to pension
    liability. Does not include obligations under employment
    agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

52



---



##### 






Capital Resources














Sensitivity Analysis


 


|                                |                                       |                                          |   |       |                   |  |   |        |  
|------------------------------- | ------------------------------------- | ---------------------------------------- | - | ----- | ----------------- |  | - | ------ | -
|                                |                                       | Year Ended                               |   |       | Year Ended        | 
|                                |                                       | December 31, 2004                        |   |       | December 31, 2003 | 
|                                |                                       |                                          |   |       |                   | 
|                                |                                       | (in thousands, except per share amounts) |  
|NBSK Pulp  $20 per ADMT change |                                       |                                          |   |       |                   |  |   |       
|                                | Change in net income (loss)           |                                          |  | 6,788 |                   |  |  | (5,367 | )
|                                | Change in net income (loss) per share |                                          |   | 0.39  |                   |  |   | (0.32  | )



53



---



##### 






Foreign Currency






  







Results of Operations of the Restricted Group Under Our
Senior Note Indenture









Restricted Group Results  Year Ended
December 31, 2004 Compared to Year Ended December 31,
2003


   


 


 


  


54



---



##### 



   


  








 


     






|                                   |  |                |         |   |      |   |         |  
|---------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                   |  | Year Ended     |        
|                                   |  | December 31,   |        
|                                   |  |                |        
|                                   |  | 2004           |         |   | 2003 |  
|                                   |  |                |         |   |      |  
|                                   |  | (in thousands) |        
|Restricted Group(1)(2)             |  |                |         |   |      |   |         |  
|Net income                         |  |               | 35,113  |   |      |  | 11,473  |  
|Income taxes (benefit)             |  |                | (17,235 | ) |      |   | 3,182   |  
|Interest expense                   |  |                | 10,941  |   |      |   | 10,700  |  
|Investment and other income        |  |                | (3,132  | ) |      |   | (4,916  | )
|Derivative financial instruments   |  |                | (13,242 | ) |      |   | (28,467 | )
|Impairment of investments          |  |                |        |   |      |   | 6,735   |  
|                                   |  |                |         |   |      |  
|Income (loss) from operations      |  |                | 12,445  |   |      |   | (1,293  | )
|Add: Depreciation and amortization |  |                | 17,766  |   |      |   | 21,881  |  
|                                   |  |                |         |   |      |  
|Operating EBITDA                   |  |               | 30,211  |   |      |  | 20,588  |  
|                                   |  |                |         |   |      |  






|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | The results of the Celgar pulp mill are not included herein.                                                           
|   
|(2) | See Note 20 of the financial statements included elsewhere
    herein for a reconciliation to our consolidated results.

55



---



##### 






Restricted Group Results  Year Ended
December 31, 2003 Compared to Year Ended December 31,
2002


   


 


 


 


   


   





 


     




56



---



##### 





|                                   |  |                |         |   |      |   |         |  
|---------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                   |  | Year Ended     |        
|                                   |  | December 31,   |        
|                                   |  |                |        
|                                   |  | 2003           |         |   | 2002 |  
|                                   |  |                |         |   |      |  
|                                   |  | (in thousands) |        
|Restricted Group(1)(2)             |  |                |         |   |      |   |         |  
|Net income                         |  |               | 11,473  |   |      |  | 13,502  |  
|Income taxes                       |  |                | 3,182   |   |      |   | 264     |  
|Interest expense                   |  |                | 10,700  |   |      |   | 12,522  |  
|Investment and other income        |  |                | (4,916  | ) |      |   | 2,063   |  
|Derivative financial instruments   |  |                | (28,467 | ) |      |   | (23,429 | )
|Impairment of investments          |  |                | 6,735   |   |      |   |        |  
|                                   |  |                |         |   |      |  
|Income (loss) from operations      |  |                | (1,293  | ) |      |   | 4,922   |  
|Add: Depreciation and amortization |  |                | 21,881  |   |      |   | 21,567  |  
|                                   |  |                |         |   |      |  
|Operating EBITDA                   |  |               | 20,588  |   |      |  | 26,489  |  
|                                   |  |                |         |   |      |  






|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | The results of the Celgar pulp mill are not included herein.                                                           
|   
|(2) | See Note 20 of the financial statements included elsewhere
    herein for a reconciliation to our consolidated results.




Liquidity and Capital Resources of the Restricted Group




|                                          |  |                |         |  |      |   |         | 
|----------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | 
|                                          |  | Year Ended     |        
|                                          |  | December 31,   |        
|                                          |  |                |        
|                                          |  | 2004           |         |  | 2003 |  
|                                          |  |                |         |  |      |  
|                                          |  | (in thousands) |        
|Restricted Group Financial Position(1)(2) |  |                |         |  |      |   |         | 
|Cash and cash equivalents                 |  |               | 45,487  |  |      |  | 47,275  | 
|Working capital                           |  |                | 48,480  |  |      |   | 46,939  | 
|Properties, net                           |  |                | 213,678 |  |      |   | 227,957 | 
|Total assets                              |  |                | 401,321 |  |      |   | 392,798 | 
|Long-term liabilities                     |  |                | 228,139 |  |      |   | 252,409 | 
|Shareholders equity                      |  |                | 138,478 |  |      |   | 104,542 | 






|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | The financial position of the Celgar pulp mill is not included
    herein.                                             
|   
|(2) | See Note 20 of the financial statements included elsewhere
    herein for a reconciliation to our consolidated results.

   








Critical Accounting Policies




57



---



##### 







Derivative Instruments.


 


Impairment of Long-Lived Assets.


Deferred Taxes.




| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | the history of the tax loss carryforwards and their expiry dates;
|
| |  | our projected earnings; and                                      
|
| |  | tax planning opportunities.                                      

  




Environmental.


58



---



##### 














New Accounting Standards















Cautionary Statement Regarding Forward-Looking Information


Private Securities Litigation Reform Act of 1995


59



---



##### 





Our level of indebtedness could negatively impact our
financial condition and results of operations.


 




| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to obtain additional financing to fund future
    operations or meet our working capital needs or any such
    financing may not be available on terms favorable to us or
    at all;                                                  
|
| |  | a certain amount of our operating cash flow is dedicated to the
    payment of principal and interest on our indebtedness, thereby
    diminishing funds that would otherwise be available for our
    operations and for other purposes;          
|
| |  | a substantial decrease in net operating cash flows or increase
    in our expenses could make it more difficult for us to meet our
    debt service requirements, which could force us to modify our
    operations; and                           
|
| |  | our leveraged capital structure may place us at a competitive
    disadvantage by hindering our ability to adjust rapidly to
    changing market conditions or by making us vulnerable to a
    downturn in our business or the economy in general.



Our business is cyclical in nature.






60



---



##### 



Our Stendal mill is subject to risks commonly associated
with the start-up of large greenfield
industrial projects.





The operations of the Celgar mill are subject to their own
risks, which we may not be able to
manage successfully.




Any failure to successfully integrate the Celgar mill with
our business may adversely affect our results
of operations.






| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our ongoing
    business;                                                                                                                                                  
|
| |  | the expense of upgrading the Celgar mill to enhance its
    operations may be more significant than currently anticipated;                                                                                          
|
| |  | difficulty integrating the operations, including financial and
    accounting functions, sales and marketing procedures, technology
    and other corporate administrative functions of the combined
    operations;
|
| |  | difficulty in establishing financial controls and procedures
    consistent with our own;                                                                                                                           
|
| |  | difficulty in converting the Celgar mills current business
    information systems to our system;                                                                                                                  
|
| |  | difficulty maintaining relationships with present and potential
    customers, distributors and suppliers of the Celgar mill due to
    uncertainties regarding service, production quality and
    prices; and     
|
| |  | problems retaining key employees who were previously employed
    by Celgar.                                                                                                                                        



61



---



##### 







We have only limited recourse under the acquisition
agreement for losses relating to the Acquisition.




We may not be able to enhance the operating performance
and financial results or lower the costs of the Celgar mill
as planned.




Increases in our capital expenditures or maintenance costs
could have a material adverse effect on our cash flow and our
ability to satisfy our debt obligations.




Any failure by us to efficiently and effectively manage
our growth could adversely affect our business.




62



---



##### 





We are exposed to currency exchange rate and interest rate
fluctuations.






We use derivatives to manage certain risk which has caused
significant fluctuations in our operating results.




 


Fluctuations in the price and supply of our raw materials
could adversely affect our business.




63



---



##### 







We operate in highly competitive markets.




We are subject to extensive environmental regulation and
we could have environmental liabilities at
our facilities.






| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | unlawful discharges to land, air, water and sewers;                                                                     
|
| |  | waste collection, storage, transportation and disposal;                                                                 
|
| |  | hazardous waste;                                                                                                        
|
| |  | dangerous goods and hazardous materials and the collection,
    storage, transportation and disposal of such substances;
|
| |  | the clean-up of unlawful discharges;                                                                                    
|
| |  | land use planning;                                                                                                      
|
| |  | municipal zoning; and                                                                                                   
|
| |  | employee health and safety.                                                                                             



64



---



##### 







We are subject to risks related to our employees.




We rely on German federal and state government grants
and guarantees.




We are dependent on key personnel.






| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | sales and marketing;                                                     
|
| |  | reducing operating costs;                                                
|
| |  | identifying capital projects which provide a high rate of
    return; and
|
| |  | prioritizing expenditures and maintaining employee relations.            

65



---



##### 





We may experience disruptions to our production
and delivery.




We are required to assess our internal control over
financial reporting on an annual basis.










Our insurance coverage may not be adequate.




Our declaration of trust, shareholder rights plan and
Washington State law may have anti-takeover effects which will
make an acquisition of our company by another company
more difficult.




66



---



##### 










Inflation









|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Derivatives






67



---



##### 





















68



---



##### 



 











|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |         |  |  |   |         |  
|--------------------------------- |  | ------------- | -------------- | ------------- | ------ | --------------- | -------------- | ----------------- |  | ------------- | --------------- | - | -------------- | ----------------- | ------- |  |  | - | ------- | -
|                                  |  |               |                |               |        | Recognized Gain |                |                   |  |               | Recognized Gain |  
|                                  |  |               |                |               |        | (Loss) Year     |                |                   |  |               | (Loss) Year     |  
|                                  |  |               |                | Notional      |        |                 | Ended          |                   |  | Notional      |                 |   | Ended          |                  
|Derivative Instrument             |  | Maturity Date |                |               | Amount |                 |                | December 31, 2003 |  |               | Amount          |   |                | December 31, 2004 |        
|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |        
|                                  |  |               |                | (in millions) |        |                 | (in thousands) |                   |  | (in millions) |                 |   | (in thousands) |                  
|Interest Rate Derivatives         |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |         |  |  |   |         |  
|Forward Rate Agreements(1)        |  |               | Settled        |               |        |                 | $149.0         |                   |  |              | (89             | ) |                |                   |         |  |  |   |         |  
|Forward Rate Agreements(2)        |  |               | Settled        |               |        |                 | $124.8         |                   |  |               | (7              | ) |                |                   |         |  |  |   |         |  
|Forward Rate Agreement            |  |               | Settled        |               |        |                 | $126.9         |                   |  |               | (127            | ) |                |                   |         |  |  |   |         |  
|Forward Rate Agreement(3)         |  |               | Settled        |               |        |                 | $200.9         |                   |  |               | (343            | ) |                |                   |         |  |  |   |         |  
|Interest Rate Cap Agreements(4)   |  |               | September 2007 |               |        |                 | $192.6         |                   |  |               | 455             |   |                |                   | $178.3  |  |  |  | (11     | )
|Stendal Interest Rate Swaps(5)    |  |               | October 2017   |               |        |                | 1,419.3        |                   |  |               | (13,042         | ) |                |                  | 1,147.5 |  |  |  | (32,320 | )
|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |        
|                                  |  |               |                |               |        |                 |                |                   |  |              | (13,153         | ) |                |                   |         |  |  |  | (32,331 | )
|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |        
|Foreign Exchange Rate Derivatives |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |         |  |  |   |         |  
|Currency Swap(6)                  |  |               | Settled        |               |        |                | 74.5           |                   |  |               | 10,002          |   |                |                   |         |  |  |   |         |  
|Currency Swap(7)                  |  |               | Settled        |               |        |                | 124.2          |                   |  |               | 14,057          |   |                |                   |         |  |  |   |         |  
|Currency Forward                  |  |               | Settled        |               |        |                 | $20.0          |                   |  |               | 768             |   |                |                   |         |  |  |   |         |  
|Currency Forward                  |  |               | Settled        |               |        |                 | $30.0          |                   |  |               | 3,751           |   |                |                   |         |  |  |   |         |  
|Currency Forward                  |  |               | Settled        |               |        |                 | $10.0          |                   |  |               | 743             |   |                |                   |         |  |  |   |         |  
|Currency Swap(8)                  |  |               | Settled        |               |        |                 |                |                   |  |               |                 |   |                |                  | 111.8   |  |  |   | 6,157   |  
|Currency Swap(9)                  |  |               | Settled        |               |        |                 |                |                   |  |               |                 |   |                |                  | 72.7    |  |  |   | 4,027   |  
|Currency Swap(10)                 |  |               | Settled        |               |        |                 |                |                   |  |               |                 |   |                |                  | 306.3   |  |  |   | 29,394  |  
|Currency Forward                  |  |               | Settled        |               |        |                 |                |                   |  |               |                 |   |                |                  | 40.7    |  |  |   | 1,820   |  
|Currency Forward                  |  |               | Settled        |               |        |                 |                |                   |  |               |                 |   |                |                  | 20.6    |  |  |   | 3,069   |  
|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |        
|                                  |  |               |                |               |        |                 |                |                   |  |              | 29,321          |   |                |                   |         |  |  |  | 44,467  |  
|                                  |  |               |                |               |        |                 |                |                   |  |               |                 |   |                |                   |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Rosenthal entered into two forward interest rate contracts with
    notional amounts of $74.5 million and $74.5 million
    both maturing on September 30, 2003. These derivatives were
    settled in 2003.                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | The forward rate agreement was settled in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Rosenthal entered into two forward interest rate contracts with
    notional amounts of $74.0 million and $126.9 million
    both maturing on March 30, 2004. These derivatives were
    settled in 2003.                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | Rosenthal entered into two interest rate cap contracts with
    notional amounts of $106.2 million (2003:
    $118.6 million) and $72.1 million (2002:
    $74.0 million), both maturing on September 28, 2007
    with a strike rate of 6.8%. These derivatives were settled in
    February 2005.                                                                                                                                                                                                                                                                 
|   
|(5) | In connection with the Stendal Loan Facility, in the third
    quarter of 2002 Stendal entered into the Stendal Interest Rate
    Swap Agreements, 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

69



---



##### 



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 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 2004, the notional amounts of the two
    outstanding contracts was
    (i) 464.9 million
    and
    534.9 million
    and
    (ii) 612.6 million
    and
    612.6 million,
    respectively.
|    
|(6)  | The interest component of the swaps
    was required under the terms of the Rosenthal Loan Facility, and
    became effective for the period starting September 30,
    2002. For the outstanding principal amounts of
    74.5 million
    under the Rosenthal Loan Facility, all repayment installments
    from September 30, 2002 until September 30, 2013, were
    swapped into U.S. dollar amounts at a rate of
    Euro 1.0050. The interest rate was swapped into the
    six-month U.S. dollar/ Libor plus bank margin rate with a
    cap of 6.8% until September 28, 2007. These derivatives
    were settled in 2003.                                                                                                                                                                                                                                                                 
|    
|(7)  | The interest component of the swaps
    was required under the terms of the Rosenthal Loan Facility, and
    became effective for the period starting January 23, 2003.
    For the outstanding principal amounts of
    124.2 million
    under the Rosenthal Loan Facility, all repayment installments
    from January 23, 2003 until September 30, 2008, were
    swapped into U.S. dollar amounts at a rate of
    Euro 1.075. The interest rate was swapped into the three
    month U.S. dollar/ Libor plus bank margin rate with a cap
    of 6.8% until September 28, 2007. These derivatives were
    settled in 2003.                                                                                                                                                                                                                                                                   
|    
|(8)  | 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. These
    derivatives were settled in December 2004.                                                                                                                                                                                                                                                                                                                                                                          
|    
|(9)  | 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. These
    derivatives were settled in December 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(10) | 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. These derivatives were
    settled in December 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Interest Rate Risk




|                             |  |                         |         |                            |       |   |         |      |  |   |        |  |  |      |        |  |      |   |        |      |  |   |            |  |  |   |        |  |  |   |         | 
|---------------------------- |  | ----------------------- | ------- | -------------------------- | ----- | - | ------- | ---- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ---------- |  |  | - | ------ |  |  | - | ------- | 
|                             |  | As at December 31, 2004 |        
|                             |  |                         |        
|                             |  |                         |         | Expected Future Cash Flow* |      
|                             |  | Carrying                |         |                            | Fair  |   |         |      | 
|                             |  | Value                   |         |                            | Value |   |         | 2005 |  |   | 2006   |  |  | 2007 |        |  | 2008 |   |        | 2009 |  |   | Thereafter | 
|                             |  |                         |         |                            |       |   |         |      |  |   |        |  |  |      |        |  |      |   |        |      |  |   |            | 
|                             |  | (in thousands)          |        
|Cash restricted              |  |                        | 92,833  |                            |       |  | 92,833  |      |  |  | 4,397  |  |  |     | 7,907  |  |      |  | 2,323  |      |  |  | 2,465      |  |  |  | 2,498  |  |  |  | 1,387   | 
|Debt obligations(1)          |  |                         | 179,474 |                            |       |   | 179,474 |      |  |   | 22,796 |  |  |      | 23,318 |  |      |   | 23,815 |      |  |   | 24,152     |  |  |   | 24,422 |  |  |   | 100,251 | 
|Capital lease obligations(2) |  |                         | 12,299  |                            |       |   | 12,299  |      |  |   | 3,549  |  |  |      | 3,313  |  |      |   | 3,897  |      |  |   | 1,478      |  |  |   | 125    |  |  |   | 41      | 






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|*   | Including dividends and interest where applicable.                                                                        
|   
|(1) | Debt obligations consist of our debt, including the gross amount
    of loans payable to minority shareholders of Stendal.
|   
|(2) | Capital lease obligations relate to transportation vehicles and
    production equipment.                                 

70



---



##### 



|                             |  |                         |         |                            |       |   |         |      |  |   |        |  |  |      |        |  |      |   |        |      |  |   |            |  |  |   |        |  |  |   |         | 
|---------------------------- |  | ----------------------- | ------- | -------------------------- | ----- | - | ------- | ---- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ---------- |  |  | - | ------ |  |  | - | ------- | 
|                             |  | As at December 31, 2003 |        
|                             |  |                         |        
|                             |  |                         |         | Expected Future Cash Flow* |      
|                             |  | Carrying                |         |                            | Fair  |   |         |      | 
|                             |  | Value                   |         |                            | Value |   |         | 2004 |  |   | 2005   |  |  | 2006 |        |  | 2007 |   |        | 2008 |  |   | Thereafter | 
|                             |  |                         |         |                            |       |   |         |      |  |   |        |  |  |      |        |  |      |   |        |      |  |   |            | 
|                             |  | (in thousands)          |        
|Cash restricted              |  |                        | 59,367  |                            |       |  | 59,367  |      |  |  | 16,063 |  |  |     | 876    |  |      |  | 876    |      |  |  | 876        |  |  |  | 22,054 |  |  |  | 26,561  | 
|Debt obligations(1)          |  |                         | 210,664 |                            |       |   | 210,664 |      |  |   | 24,239 |  |  |      | 23,333 |  |      |   | 28,636 |      |  |   | 23,673     |  |  |   | 23,088 |  |  |   | 173,330 | 
|Capital lease obligations(2) |  |                         | 4,046   |                            |       |   | 4,046   |      |  |   | 1,932  |  |  |      | 1,510  |  |      |   | 344    |      |  |   | 214        |  |  |   | 239    |  |  |   |        | 






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|*   | Including dividends and interest where applicable.                                                                        
|   
|(1) | Debt obligations consist of our debt, including the gross amount
    of loans payable to minority shareholders of Stendal.
|   
|(2) | Capital lease obligations relate to transportation vehicles and
    production equipment.                                 

Foreign Currency Exchange Rate Risk




|                    |  |                         |        |                            |       |   |        |      |  |   |       |  |  |      |       |  |      |   |       |      |  |   |            |  |  |   |       |  |  |   |        | 
|------------------- |  | ----------------------- | ------ | -------------------------- | ----- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ---------- |  |  | - | ----- |  |  | - | ------ | 
|                    |  | As at December 31, 2004 |       
|                    |  |                         |       
|                    |  |                         |        | Expected Future Cash Flow* |      
|                    |  | Carrying                |        |                            | Fair  |   |        |      | 
|                    |  | Value                   |        |                            | Value |   |        | 2005 |  |   | 2006  |  |  | 2007 |       |  | 2008 |   |       | 2009 |  |   | Thereafter | 
|                    |  |                         |        |                            |       |   |        |      |  |   |       |  |  |      |       |  |      |   |       |      |  |   |            | 
|                    |  | (in thousands)          |       
|Investments(1)      |  |                        | 983    |                            |       |  | 983    |      |  |  |      |  |  |     |      |  |      |  |      |      |  |  |           |  |  |  |      |  |  |  | 983    | 
|Debt obligations(2) |  |                         | 60,940 |                            |       |   | 60,940 |      |  |   | 5,180 |  |  |      | 5,180 |  |      |   | 5,180 |      |  |   | 5,180      |  |  |   | 5,180 |  |  |   | 65,257 | 






|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|*   | Including dividends and interest where applicable.                                                                                             
|   
|(1) | Investments consist of equity securities, which are denominated
    primarily in U.S. dollars, and to a lesser extent, in
    Canadian dollars.
|   
|(2) | Debt obligations consist of our debt, denominated in
    U.S. dollars.                                                                         

|                    |  |                         |        |                            |       |   |        |      |  |   |       |  |  |      |       |  |      |   |       |      |  |   |            |  |  |   |       |  |  |   |        | 
|------------------- |  | ----------------------- | ------ | -------------------------- | ----- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ---------- |  |  | - | ----- |  |  | - | ------ | 
|                    |  | As at December 31, 2003 |       
|                    |  |                         |       
|                    |  |                         |        | Expected Future Cash Flow* |      
|                    |  | Carrying                |        |                            | Fair  |   |        |      | 
|                    |  | Value                   |        |                            | Value |   |        | 2004 |  |   | 2005  |  |  | 2006 |       |  | 2007 |   |       | 2008 |  |   | Thereafter | 
|                    |  |                         |        |                            |       |   |        |      |  |   |       |  |  |      |       |  |      |   |       |      |  |   |            | 
|                    |  | (in thousands)          |       
|Investments(1)      |  |                        | 1,649  |                            |       |  | 1,649  |      |  |  | 1,063 |  |  |     |      |  |      |  |      |      |  |  |           |  |  |  |      |  |  |  | 586    | 
|Debt obligations(2) |  |                         | 66,449 |                            |       |   | 66,449 |      |  |   | 6,527 |  |  |      | 5,568 |  |      |   | 5,568 |      |  |   | 5,568      |  |  |   | 5,568 |  |  |   | 75,471 | 






|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|*   | Including dividends and interest where applicable.                                                                                             
|   
|(1) | Investments consist of equity securities, which are denominated
    primarily in U.S. dollars, and to a lesser extent, in
    Canadian dollars.
|   
|(2) | Debt obligations consist of our debt, denominated in
    U.S. dollars.                                                                         






|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



71



---



##### 








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures






Managements Report on Internal Control Over Financial
Reporting








| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of Mercer;                                                                                                                                                          
|
| |  | Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures are being made only in accordance
    with authorizations of management and trustees; and
|
| |  | Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of
    assets that could have a material effect on the financial
    statements.                                                                                                                  





72



---



##### 







Report of Independent Registered Chartered Accountants
















73



---



##### 







| |                          
| | -------------------------
| | /s/ Deloitte & Touche LLP





Changes in Internal Controls







ITEM 9B.     OTHER INFORMATION




74



---



##### 






PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Jimmy S.H. Lee,


William D. McCartney,


Kenneth A. Shields,


Guy W. Adams,


Eric Lauritzen,


Graeme A. Witts,


David M. Gandossi,


75



---



##### 





Wolfram Ridder,


Leonhard Nossol,










Audit Committee






76



---



##### 





Compensation Committee




Governance and Nominating Committee




Lead Trustee




Code of Business Conduct and Ethics




Section 16(a) Beneficial Ownership Reporting
Compliance




77



---



##### 








ITEM 11.     EXECUTIVE
COMPENSATION









|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES



78



---



##### 






PART IV





ITEM 15.     EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


Financial Statements


|                                                           |  |      |    | 
|---------------------------------------------------------- |  | ---- | -- | 
|                                                           |  | Page |   
|                                                           |  |      |   
|Independent Auditors Report                               |  |      | 82 | 
|Consolidated Balance Sheets                                |  |      | 84 | 
|Consolidated Statements of Operations                      |  |      | 85 | 
|Consolidated Statements of Comprehensive Income (Loss)     |  |      | 86 | 
|Consolidated Statements of Changes in Shareholders Equity |  |      | 87 | 
|Consolidated Statements of Cash Flows                      |  |      | 88 | 
|Notes to the Consolidated Financial Statements             |  |      | 89 | 



| |                      
| | ---------------------
| | (2)  List of Exhibits

| |         |  |  |                                                                                                                                                                                                                                                                                                                     
| | ------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.1     |  |  | Underwriting Agreement dated February 8, 2005 between
    Mercer International Inc. and RBC Capital Markets
    Corporation, on behalf of itself and CIBC World Markets Corp.,
    Raymond James & Associates, Inc. and D.A.
    Davidson & Co. Incorporated by reference from
    Form 8-K dated February 10, 2005.
| | 1.2     |  |  | Underwriting Agreement dated February 8, 2005 among Mercer
    International Inc. and RBC Capital Markets Corporation and
    Credit Suisse First Boston LLC, on behalf of themselves and CIBC
    World Markets Corp. Incorporated by reference from Form 8-K
    dated February 10, 2005.                         
| | 3.1(a)* |  |  | Restated Declaration of Trust of the Company as filed with the
    Secretary of State of Washington on June 11, 1990 together
    with an Amendment to Declaration of Trust dated
    December 12, 1991.                                                                                                            
|
| | (b)*    |  |  | Amendments to Declaration of Trust dated July 8, 1993;
    August 17, 1993; and September 9, 1993.                                                                                                                                                                                                                  
|
| | 3.2*    |  |  | Trustees Regulations dated September 24, 1973.                                                                                                                                                                                                                                                                     
|
| | 4.1     |  |  | Indenture dated as of October 10, 2003 between Mercer
    International Inc. and Wells Fargo Bank Minnesota, N.A.
    Incorporated by reference from Form 8-K dated
    October 15, 2003.                                                                                                                           
|
| | 4.2     |  |  | Indenture dated as of December 10, 2004 between Mercer
    International Inc. and Wells Fargo Bank, N.A. Incorporated by
    reference from Form S-3 filed December 10, 2004.                                                                                                                                       
|
| | 4.3     |  |  | First Supplemental Indenture dated February 14, 2005 to
    Indenture dated December 10, 2004 between Mercer
    International Inc. and Wells Fargo Bank, N.A. Incorporated by
    reference from Form 8-K dated February 17, 2005.                                                                                 
|
| | 4.4     |  |  | Registration Rights Agreement dated as of October 10, 2003
    between Mercer International Inc. and RBC Dain Rauscher
    Inc. Incorporated by reference from Form 8-K dated
    October 15, 2003.                                                                                                                 
|
| | 4.5     |  |  | Registration Rights Agreement dated November 22, 2004
    between Mercer International Inc. and KPMG Inc. Incorporated by
    reference from Form 8-K dated November 23, 2004.                                                                                                                                      
|
| | 4.6     |  |  | Shareholder Rights Plan. Incorporated by reference from
    Form 8-K dated December 24, 2003.                                                                                                                                                                                                                       
|
| | 4.7     |  |  | First Amendment to Rights Agreement. Incorporated by reference
    from Form 8-K dated February 10, 2005.                                                                                                                                                                                                           
|
| | 10.1    |  |  | Acquisition Agreement among Treuhandanstalt, Dresden
    Papier AG, Dresden Papier Holding GmbH, Mercer
    International Inc., and Shin Ho Paper Mfg. Co., Ltd.
    Incorporated by reference from Form 8-K dated
    September 20, 1993.                                                                          

79



---



##### 



| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.2   |  |  | Acquisition Agreement among Treuhandanstalt, Zellstoff-und
    Papierfabrik Rosenthal GmbH, Raboisen
    Einhundertsechsundfunfzigste Vermogensverwaltungsgesellschaft
    GmbH, to be renamed ZPR Zellstoff-und Papierfabrik Rosenthal
    Holding GmbH, Mercer International Inc. and 448380 B.C. Ltd.
    dated July 3, 1994. Incorporated by reference from
    Form 8-K dated July 3, 1994.                                                                                                                                                
|
| | 10.3   |  |  | Amended and Restated 1992 Stock Option Plan. Incorporated by
    reference from Form S-8 dated March 2, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 10.4*  |  |  | 2002 Employee Incentive Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 10.5*  |  |  | Form of Separation Agreement between Mercer International Inc.
    and Arbatax International Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 10.6   |  |  | English Translation of a Loan Agreement in the amount of
    DM508,000,000 between Zellstoff-und Papierfabrik Rosenthal
    GmbH & Co. KG, Blankenstein on the one hand and
    Bayerische Hypotheken-und Wechsel-Bank Aktiengesellschaft,
    Munich and Bayerische Vereinsbank Aktiengesellschaft, Munich on
    the other hand dated July 6, 1998. Incorporated by
    reference from Form 8-K dated July 16, 1998.                                                                                                                          
|
| | 10.7*  |  |  | English Translation of Agreement on the obligations of the
    shareholders between Mercer International Inc.,
    Spezialpapierfabrik Blankenstein GmbH and Zellstoff-und
    Papierfabrik Rosenthal Verwaltungs GmbH and Bayerische Hypo-und
    Vereinsbank Aktiengesellschaft dated February 11, 1999.                                                                                                                                                                                                                                      
|
| | 10.8   |  |  | English Translation of Amendment Agreement No. 4 dated
    December 13, 2000 between Zellstoff-und Papierfabrik
    Rosenthal GmbH & Co. KG and Bayerische Hypo-und
    Vereinsbank Aktiengesellschaft to the Loan Agreement dated
    July 6, 1998. Incorporated by reference from Form 8-K
    dated January 23, 2001.                                                                                                                                                                                                                        
|
| | 10.9*  |  |  | Purchase Agreement between Sihl and Mercer International Inc.
    dated December 14, 2001 relating to the acquisition of
    Landqart AG.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 10.10  |  |  | Project Financing Facility Agreement dated August 26, 2002
    between Zellstoff Stendal GmbH and Bayerische Hypo-und
    Vereinsbank AG. Incorporated by reference from Form 8-K
    dated September 10, 2002.                                                                                                                                                                                                                                                                                                                                 
|
| | 10.11  |  |  | Shareholders Undertaking Agreement dated August 26,
    2002 among Mercer International Inc., Stendal Pulp Holdings
    GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG
    and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and
    Bayerische Hypo-und Vereinsbank AG. Incorporated by reference
    from Form 8-K dated September 10, 2002.                                                                                                                                                                                 
|
| | 10.12* |  |  | Shareholders Agreement dated August 26, 2002 among
    Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
    Industrie-Lösungen GmbH and FAHR Beteiligungen AG.                                                                                                                                                                                                                                                                                                                                                                          
|
| | 10.13* |  |  | Contract for the Engineering, Design, Procurement, Construction,
    Erection and Start-Up of a Kraft Pulp Mill between Zellstoff
    Stendal GmbH and RWE Industrie-Lösungen GmbH dated
    August 26, 2002. Certain non-public information has been
    omitted from the appendices to Exhibit 10.16 pursuant to a
    request for confidential treatment filed with the SEC. Such
    non-public information was filed with the SEC on a confidential
    basis. The SEC approved the request for confidential treatment
    in January 2004.
|
| | 10.14* |  |  | Purchase and Sale Agreement dated December 30, 2002 between
    Equitable Industries Limited Partnership and Mercer
    International Inc. relating to the sale of Landqart AG.                                                                                                                                                                                                                                                                                                                                                                 
|
| | 10.15* |  |  | Form of Trustees Indemnity Agreement between Mercer
    International Inc. and its Trustees.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 10.16* |  |  | English Translation of Agreement between Zellstoff-und
    Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d.
    Saale and Bayerische Hypo-und Vereinsbank AG dated May 27,
    2002.                                                                                                                                                                                                                                                                                                                                                     
|
| | 10.17  |  |  | Purchase Agreement dated as of October 6, 2003 between
    Mercer International Inc. and RBC Dain Rauscher Inc.
    Incorporated by reference from Form 10-Q for the period
    ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                       
|
| | 10.18  |  |  | Employment Agreement dated for reference August 7, 2003
    between Mercer International Inc. and David Gandossi.
    Incorporated by reference from Form 8-K dated
    August 11, 2003.                                                                                                                                                                                                                                                                                                                                                        

80



---



##### 



| |        |  |  |                                                                                                                                                                                                                                                                                                  
| | ------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.19  |  |  | Settlement Agreement dated as of August 5, 2003 among
    Mercer International Inc., Greenlight Capital, L.L.C. and
    Greenlight Capital, Inc. Incorporated by reference from
    Form 8-K dated August 6, 2003.                                                                               
|
| | 10.20  |  |  | English translation of Refinancing Agreement dated
    December 12, 2003 between European Investment Bank and
    Zellstoff Stendal GmbH.                                                                                                                                                        
|
| | 10.21  |  |  | Employment Agreement effective as of April 28, 2004 between
    Mercer International Inc. and Jimmy S.H. Lee. Incorporated
    by reference from Form 8-K dated April 28, 2004.                                                                                                                  
|
| | 10.22  |  |  | 2004 Stock Incentive Plan. Incorporated by reference from
    Form S-8 dated June 15, 2004.                                                                                                                                                                                                      
|
| | 10.23  |  |  | Asset Purchase Agreement by and among Mercer International Inc.,
    0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the
    assets and undertakings of Stone Venepal (Celgar) Pulp Inc.
    dated November 22, 2004. Incorporated by reference from
    Form 8-K dated November 23, 2004.
|
| | 10.24  |  |  | Revolving Credit Facility Agreement dated February 9, 2005
    among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal
    GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische
    Hypo-und Vereinsbank AG. Incorporated by reference from
    Form 8-K dated February 17, 2005.            
|
| | 10.25  |  |  | Operating Credit Agreement dated February 11, 2005 between
    0706906 B.C. Ltd. and Royal Bank of Canada. Incorporated by
    reference from Form 8-K dated February 17, 2005.                                                                                                                  
|
| | 16     |  |  | Letter regarding change in certifying accountant. Incorporated
    by reference from Form 8-K/A dated August 6, 2003.                                                                                                                                                                            
|
| | 21     |  |  | List of Subsidiaries of Registrant.                                                                                                                                                                                                                                                              
|
| | 23.1   |  |  | Independent Auditors Consent of Deloitte & Touche
    LLP.                                                                                                                                                                                                                                      
|
| | 23.2   |  |  | Independent Auditors Consent of Peterson Sullivan PLLC.                                                                                                                                                                                                                                         
|
| | 31.1   |  |  | Section 302 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                              
|
| | 31.2   |  |  | Section 302 Certificate of Chief Financial Officer.                                                                                                                                                                                                                                              
|
| | 32.1** |  |  | Section 906 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                              
|
| | 32.2** |  |  | Section 906 Certificate of Chief Financial Officer.                                                                                                                                                                                                                                              






|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Filed in Form 10-K for prior years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|** | 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.

Reports on Form 8-K




| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Registrant filed the following reports on Form 8-K with
    respect to the indicated items during the fourth quarter of the
    recently completed fiscal year:

|                                   |                                                              |  | 
|---------------------------------- | ------------------------------------------------------------ |  | 
|Form 8-K dated November 8, 2004    |                                                              | 
|                                   | Item 2.02.  Results of Operation and Financial
    Condition |  | 
|                                   | Item 9.01.  Financial Statements and Exhibits                |  | 
|Form 8-K dated November 23, 2004   |                                                              | 
|                                   | Item 1.01.  Entry into a Material Definitive
    Agreement   |  | 
|                                   | Item 3.02.  Unregistered Sales of Equity
    Securities      |  | 
|                                   | Item 7.01.  Regulation FD Disclosure                         |  | 
|                                   | Item 9.01.  Financial Statements and Exhibits                |  | 
|Form 8-K/A dated December 10, 2004 |                                                              | 
|                                   | Item 1.01.  Entry into a Material Definitive
    Agreement   |  | 
|                                   | Item 9.01.  Financial Statements and Exhibits                |  | 

81



---



##### 






REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
















|                                    |                          
|----------------------------------- | -------------------------
|Vancouver, British Columbia, Canada | /s/ Deloitte & Touche LLP



82



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














|                 |                               
|---------------- | ------------------------------
|January 31, 2003 | /s/ Peterson Sullivan P.L.L.C.



83



---



##### 



MERCER INTERNATIONAL INC.


CONSOLIDATED BALANCE SHEETS


December 31, 2004 and 2003


(In Thousands of Euros)


|                                                                                                                                                                          |                                                             |      |           |         |      |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---- | --------- | ------- | ---- | - | ------- | ------- | 
|                                                                                                                                                                          |                                                             | 2004 |           |         | 2003 |  
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|ASSETS                                                                                                                                                                    |                                                             |      |           |         |      |   |         |        
|Current Assets                                                                                                                                                            |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                          | Cash and cash equivalents (Note 2)                          |      |          | 49,568  |      |   |        | 51,993  | 
|                                                                                                                                                                          | Cash restricted (Note 2)                                    |      |           | 45,295  |      |   |         | 15,187  | 
|                                                                                                                                                                          | Receivables (Note 4)                                        |      |           | 54,687  |      |   |         | 33,028  | 
|                                                                                                                                                                          | Inventories (Note 5)                                        |      |           | 52,898  |      |   |         | 23,909  | 
|                                                                                                                                                                          | Prepaid expenses and other                                  |      |           | 4,961   |      |   |         | 4,284   | 
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total current assets                                                                                                                                                      |                                                             |      | 207,409   |         |      |   | 128,401 |        
|Long-Term Assets                                                                                                                                                          |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                          | Cash restricted (Note 2)                                    |      |           | 47,538  |      |   |         | 44,180  | 
|                                                                                                                                                                          | Property, plant and equipment (Note 6)                      |      |           | 936,035 |      |   |         | 745,178 | 
|                                                                                                                                                                          | Investments (Note 3)                                        |      |           | 983     |      |   |         | 1,644   | 
|                                                                                                                                                                          | Equity method investments (Note 3)                          |      |           | 4,096   |      |   |         | 2,309   | 
|                                                                                                                                                                          | Deferred note issuance and acquisition costs                |      |           | 5,069   |      |   |         | 4,213   | 
|                                                                                                                                                                          | Deferred income tax (Note 10)                               |      |           | 54,519  |      |   |         | 9,980   | 
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|                                                                                                                                                                          |                                                             |      | 1,048,240 |         |      |   | 807,504 |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total assets                                                                                                                                                              |                                                             |     | 1,255,649 |         |      |  | 935,905 |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|                                                                                                                                                                         
|LIABILITIES                                                                                                                                                               |                                                             |      |           |         |      |   |         |        
|Current Liabilities                                                                                                                                                       |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                          | Accounts payable and accrued expenses (Note 7)              |      |          | 56,542  |      |   |        | 37,414  | 
|                                                                                                                                                                          | Construction costs payable                                  |      |           | 65,436  |      |   |         | 42,756  | 
|                                                                                                                                                                          | Debt, current portion (Note 8)                              |      |           | 107,090 |      |   |         | 97,178  | 
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total current liabilities                                                                                                                                                 |                                                             |      | 229,068   |         |      |   | 177,348 |        
|Long-Term Liabilities                                                                                                                                                     |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                          | Debt, less current portion (Note 9)                         |      |           | 228,488 |      |   |         | 255,901 | 
|                                                                                                                                                                          | Debt, Stendal (Note 9)                                      |      |           | 548,784 |      |   |         | 324,238 | 
|                                                                                                                                                                          | Unrealized interest rate derivative loss (Note 15)          |      |           | 75,471  |      |   |         | 43,151  | 
|                                                                                                                                                                          | Capital leases and other                                    |      |           | 9,035   |      |   |         | 2,412   | 
|                                                                                                                                                                          | Deferred income tax (Note 10)                               |      |           | 2,062   |      |   |         |        | 
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|                                                                                                                                                                          |                                                             |      | 863,840   |         |      |   | 625,702 |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total liabilities                                                                                                                                                         |                                                             |      | 1,092,908 |         |      |   | 803,050 |        
|Minority Interest                                                                                                                                                         |                                                             |      |          |         |      |   |        |        
|                                                                                                                                                                         
|Commitments and Contingencies (Note 17)                                                                                                                                   |                                                             |      |           |         |      |   |         |        
|Subsequent Events (Note 19)                                                                                                                                               |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                         
|SHAREHOLDERS EQUITY                                                                                                                                                      |                                                             |      |           |         |      |   |         |        
|Preferred shares, no par value; 50,000,000 authorized and
    issuable in series                                                                                          |                                                             |      |           |         |      |   |         |        
|                                                                                                                                                                          | Series A, 500,000 authorized, none issued and outstanding   |      |           |        |      |   |         |        | 
|                                                                                                                                                                          | Series B, 3,500,000 authorized, none issued and outstanding |      |           |        |      |   |         |        | 
|Shares of beneficial interest, U.S.$1 par value; unlimited
    authorized; 18,074,229 issued and outstanding at
    December 31, 2004 and 17,099,899 at December 31, 2003 |                                                             |      | 83,397    |         |      |   | 78,139  |        
|Additional paid-in capital, stock options                                                                                                                                 |                                                             |      | 14        |         |      |   | 223     |        
|Retained earnings                                                                                                                                                         |                                                             |      | 69,176    |         |      |   | 49,196  |        
|Accumulated other comprehensive income                                                                                                                                    |                                                             |      | 10,154    |         |      |   | 5,297   |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total shareholders equity                                                                                                                                                |                                                             |      | 162,741   |         |      |   | 132,855 |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  
|Total liabilities and shareholders equity                                                                                                                                |                                                             |     | 1,255,649 |         |      |  | 935,905 |        
|                                                                                                                                                                          |                                                             |      |           |         |      |  



84



---



##### 



MERCER INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended December 31, 2004, 2003 and 2002


(In Thousands of Euros, Except Per Share Data)


|                                                |                                             |                                                |         |         |         |   |         |         |         |   |         |         |         |  
|----------------------------------------------- | ------------------------------------------- | ---------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                |                                             | 2004                                           |         |         | 2003    |   |         | 2002    |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|Revenues                                        |                                             |                                                |         |         |         |   |         |         |         |   |         |        
|                                                | Pulp and paper                              |                                                |        | 233,103 |         |   |        | 182,456 |         |   |        | 227,883 |        
|                                                | Transportation                              |                                                |         | 3,299   |         |   |         | 3,607   |         |   |         | 4,953   |        
|                                                | Other                                       |                                                |         | 11,496  |         |   |         | 8,493   |         |   |         | 6,296   |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             |                                                | 247,898 |         |         |   | 194,556 |         |         |   | 239,132 |        
|Cost of sales                                   |                                             |                                                |         |         |         |   |         |         |         |   |         |        
|                                                | Pulp and paper                              |                                                |         | 229,229 |         |   |         | 176,655 |         |   |         | 208,454 |        
|                                                | Transportation                              |                                                |         | 2,873   |         |   |         | 3,035   |         |   |         | 5,009   |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Gross profit                                   |         |         | 15,796  |   |         |         | 14,866  |   |         |         | 25,669  |  
|General and administrative expenses             |                                             |                                                | (27,099 | )       |         |   | (19,323 | )       |         |   | (24,979 | )      
|Impairment of capital assets                    |                                             |                                                | (6,000  | )       |         |   |        |         |         |   |        |        
|Flooding losses and expenses, less grant income |                                             |                                                | (669    | )       |         |   | 957     |         |         |   | (1,835  | )      
|Settlement expenses                             |                                             |                                                |        |         |         |   | (1,041  | )       |         |   |        |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Loss from operations                           |         |         | (17,972 | ) |         |         | (4,541  | ) |         |         | (1,145  | )
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                               
|Other income (expense)                          |                                             |                                                |         |         |         |   |         |         |         |   |         |        
|                                                | Interest expense                            |                                                |         | (23,749 | )       |   |         | (11,523 | )       |   |         | (13,753 | )      
|                                                | Investment income                           |                                                |         | 2,948   |         |   |         | 1,653   |         |   |         | 436     |        
|                                                | Derivative financial instruments            |                                                |         |         |         |   |         |         |         |   |         |         |        
|                                                |                                             | Unrealized loss on interest rate derivatives   |         |         | (32,331 | ) |         |         | (13,153 | ) |         |         | (32,411 | )
|                                                |                                             | Realized gain on foreign exchange derivatives  |         |         | 44,467  |   |         |         | 29,321  |   |         |         | 25,732  |  
|                                                | Impairment of equity method investments     |                                                |         |        |         |   |         | (2,255  | )       |   |         |        |        
|                                                | Impairment of available-for-sale securities |                                                |         |        |         |   |         | (5,570  | )       |   |         |        |        
|                                                | Other                                       |                                                |         |        |         |   |         |        |         |   |         | 3,590   |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Total other expense                            |         |         | (8,665  | ) |         |         | (1,527  | ) |         |         | (16,406 | )
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Loss before income taxes and minority interest |         |         | (26,637 | ) |         |         | (6,068  | ) |         |         | (17,551 | )
|Income tax (provision) benefit                  |                                             |                                                |         |         |         |   |         |         |         |   |         |        
|                                                | Current                                     |                                                |         | 1,687   |         |   |         | (3,172  | )       |   |         | 264     |        
|                                                | Deferred                                    |                                                |         | 42,476  |         |   |         |        |         |   |         |        |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Income (loss) before minority interest         |         |         | 17,526  |   |         |         | (9,240  | ) |         |         | (17,287 | )
|Minority interest                               |                                             |                                                | 2,454   |         |         |   | 5,647   |         |         |   | 10,965  |        
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                |                                             | Net income (loss)                              |         |        | 19,980  |   |         |        | (3,593  | ) |         |        | (6,322  | )
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                               
|Net income (loss) per share (Note 13)           |                                             |                                                |         |         |         |   |         |         |         |   |         |        
|                                                | Basic                                       |                                                |        | 1.15    |         |   |        | (0.21   | )       |   |        | (0.38   | )      
|                                                |                                             |                                                |         |         |         |   |         |         |        
|                                                | Diluted                                     |                                                |        | 0.89    |         |   |        | (0.21   | )       |   |        | (0.38   | )      
|                                                |                                             |                                                |         |         |         |   |         |         |        



85



---



##### 



MERCER INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


For the Years Ended December 31, 2004, 2003 and 2002


(In Thousands of Euros)


|                                  |                                         |                                                                           |        |       |      |   |        |       |       |   |        |       |        |  
|--------------------------------- | --------------------------------------- | ------------------------------------------------------------------------- | ------ | ----- | ---- | - | ------ | ----- | ----- | - | ------ | ----- | ------ | -
|                                  |                                         | 2004                                                                      |        |       | 2003 |   |        | 2002  |      
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|Net income (loss)                 |                                         |                                                                          | 19,980 |       |      |  | (3,593 | )     |       |  | (6,322 | )    
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|Other comprehensive income (loss) |                                         |                                                                           |        |       |      |   |        |       |       |   |        |      
|                                  | Foreign currency translation adjustment |                                                                           |        | 4,467 |      |   |        | 2,501 |       |   |        | 2,186 |       
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|                                  | Unrealized gains (losses) on securities |                                                                           |        |       |      |   |        |       |       |   |        |       |       
|                                  |                                         | Unrealized holding gains (losses) arising during the year                 |        |       | 390  |   |        |       | (201  | ) |        |       | (3,615 | )
|                                  |                                         | Reclassification adjustment for losses included in net loss               |        |       |     |   |        |       | 2,293 |   |        |       | 834    |  
|                                  |                                         | Reclassification adjustment for other than temporary decline
    in value |        |       |     |   |        |       | 5,519 |   |        |       |       |  
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|                                  |                                         |                                                                           | 390    |       |      |   | 7,611  |       |       |   | (2,781 | )    
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|Other comprehensive income (loss) |                                         |                                                                           | 4,857  |       |      |   | 10,112 |       |       |   | (595   | )    
|                                  |                                         |                                                                           |        |       |      |   |        |       |      
|Comprehensive income (loss)       |                                         |                                                                          | 24,837 |       |      |  | 6,519  |       |       |  | (6,917 | )    
|                                  |                                         |                                                                           |        |       |      |   |        |       |      



86



---



##### 



MERCER INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


For the Years Ended December 31, 2004, 2003 and 2002


(In Thousands of Euros)


|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |        |   |  |   |        |   |  |   |         |  
|------------------------------------------- |  | ----------------------------- | ---------- | ------- | ---------- | - | -------- | ----------------- | --------------------------- | - | ------- | -------- |  | -------- | ---------- | - | ----------- | - | ------ | ----------- |  | - | ------ |  | ------------- | ------ | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                            |  |                               |            |         |            |   |          | Accumulated Other |                             |   |        
|                                            |  | Shares of Beneficial Interest |            |         |            |   |          |                   | Comprehensive Income (Loss) |   |         |         
|                                            |  |                               |            |         | Additional |   |          |                   |                             |   |         |          | 
|                                            |  |                               |            | Amount  |            |   | Paid-in  |                   |                             |   |         | Foreign  |  |          | Unrealized |   |             |   |        |            
|                                            |  |                               |            | Paid in |            |   | Capital, |                   |                             |   |         | Currency |  |          | Gains      |   |             |   |        |            
|                                            |  | Number                        |            |         | Par        |   |          | Excess of         |                             |   | Stock   |          |  | Retained |            |   | Translation |   |        | (Losses) on |  |   |        |  | Shareholders |       
|                                            |  | of Shares                     |            |         | Value      |   |          | Par Value         |                             |   | Options |          |  | Earnings |            |   | Adjustments |   |        | Securities  |  |   | Total  |  |               | Equity |       
|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |       
|Balance at December 31, 2001                |  |                               | 16,794,899 |         |            |  | 12,781   |                   |                             |  | 63,941  |          |  |         |           |   |             |  | 59,111 |             |  |  | 1,305  |  |               |       | (5,525 | ) |  |  | (4,220 | ) |  |  | 131,613 |  
|Shares issued for cash                      |  |                               | 200,000    |         |            |   | 191      |                   |                             |   | 695     |          |  |          |           |   |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 886     |  
|Repurchase of shares                        |  |                               | (120,000   | )       |            |   | (121     | )                 |                             |   | (492    | )        |  |          |           |   |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | (613    | )
|Net loss                                    |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   | (6,322 | )           |  |   |       |  |               |        |       |   |  |   |       |   |  |   | (6,322  | )
|Other comprehensive income (loss)           |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   |       |             |  |   | 2,186  |  |               |        | (2,781 | ) |  |   | (595   | ) |  |   | (595    | )
|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |       
|Balance at December 31, 2002                |  |                               | 16,874,899 |         |            |   | 12,851   |                   |                             |   | 64,144  |          |  |          |           |   |             |   | 52,789 |             |  |   | 3,491  |  |               |        | (8,306 | ) |  |   | (4,815 | ) |  |   | 124,969 |  
|Shares issued on exercise of stock options  |  |                               | 225,000    |         |            |   | 202      |                   |                             |   | 942     |          |  |          | (231       | ) |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 913     |  
|Granting of stock options                   |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          | 454        |   |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 454     |  
|Net loss                                    |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   | (3,593 | )           |  |   |       |  |               |        |       |   |  |   |       |   |  |   | (3,593  | )
|Other comprehensive income                  |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   |       |             |  |   | 2,501  |  |               |        | 7,611  |   |  |   | 10,112 |   |  |   | 10,112  |  
|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |       
|Balance at December 31, 2003                |  |                               | 17,099,899 |         |            |   | 13,053   |                   |                             |   | 65,086  |          |  |          | 223        |   |             |   | 49,196 |             |  |   | 5,992  |  |               |        | (695   | ) |  |   | 5,297  |   |  |   | 132,855 |  
|Shares issued on exercise of stock options  |  |                               | 934,330    |         |            |   | 743      |                   |                             |   | 4,241   |          |  |          | (209       | ) |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 4,775   |  
|Shares issued on grants of restricted stock |  |                               | 40,000     |         |            |   | 40       |                   |                             |   | 234     |          |  |          |           |   |             |   |       |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 274     |  
|Net income                                  |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   | 19,980 |             |  |   |       |  |               |        |       |   |  |   |       |   |  |   | 19,980  |  
|Other comprehensive income                  |  |                               |           |         |            |   |         |                   |                             |   |        |          |  |          |           |   |             |   |       |             |  |   | 4,467  |  |               |        | 390    |   |  |   | 4,857  |   |  |   | 4,857   |  
|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |       
|Balance at December 31, 2004                |  |                               | 18,074,229 |         |            |  | 13,836   |                   |                             |  | 69,561  |          |  |         | 14         |   |             |  | 69,176 |             |  |  | 10,459 |  |               |       | (305   | ) |  |  | 10,154 |   |  |  | 162,741 |  
|                                            |  |                               |            |         |            |   |          |                   |                             |   |         |          |  |          |            |   |             |   |        |             |  |   |        |  |               |        |       



87



---



##### 



MERCER INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2004, 2003 and 2002


(In Thousands of Euros)


|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |        |          |        |          |         |          |        | 
|------------------------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------- | ---------------------------------- | ------- | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------- | -------- | ------ | 
|                                                             |                                                                               | 2004                                      |                                       |                                    | 2003    |          |        | 2002     |       
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|Cash Flows from Operating Activities                         |                                                                               |                                           |                                       |                                    |         |          |        |          |        |          |        |         
|                                                             | Net income (loss)                                                             |                                           |                                      | 19,980                             |         |          |       | (3,593   | )      |          |       | (6,322   | )      
|                                                             | Adjustments to reconcile net loss to cash flows from
    operating activities |                                           |                                       |                                    |         |          |        |          |        |          |        |          |        
|                                                             |                                                                               | Unrealized interest rate derivative loss  |                                       |                                    | 32,331  |          |        |          | 13,042 |          |        |          | 30,108  |         
|                                                             |                                                                               | Depreciation and amortization             |                                       |                                    | 29,479  |          |        |          | 24,105 |          |        |          | 25,614  |         
|                                                             |                                                                               | Impairment of assets                      |                                       |                                    | 6,000   |          |        |          |       |          |        |          |        |         
|                                                             |                                                                               | Impairment of investments                 |                                       |                                    |        |          |        |          | 7,825  |          |        |          |        |         
|                                                             |                                                                               | Minority interest                         |                                       |                                    | (2,454  | )        |        |          | (5,647 | )        |        |          | (10,965 | )       
|                                                             |                                                                               | Loss from equity investee                 |                                       |                                    | 284     |          |        |          | 1,676  |          |        |          |        |         
|                                                             |                                                                               | Deferred income taxes                     |                                       |                                    | (42,477 | )        |        |          |       |          |        |          |        |         
|                                                             |                                                                               | Stock compensation expense                |                                       |                                    | 735     |          |        |          | 454    |          |        |          |        |         
|                                                             |                                                                               | Other                                     |                                       |                                    | (307    | )        |        |          |       |          |        |          |        |         
|                                                             |                                                                               | Changes in current assets and liabilities |                                       |                                    |         |          |        |          |        |          |        |          |         |         
|                                                             |                                                                               |                                           | Receivables                           |                                    |         | (21,659  | )      |          |        | (1,650   | )      |          |         | 14,909   |       
|                                                             |                                                                               |                                           | Inventories                           |                                    |         | (28,989  | )      |          |        | (7,534   | )      |          |         | 1,717    |       
|                                                             |                                                                               |                                           | Accounts payable and accrued expenses |                                    |         | 17,320   |        |          |        | 1,082    |        |          |         | (12,661  | )     
|                                                             |                                                                               |                                           | Other                                 |                                    |         | (637     | )      |          |        | 1,680    |        |          |         | (1,954   | )     
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|                                                             |                                                                               |                                           |                                       | Net cash from operating activities |         |          | 9,606  |          |        |          | 31,440 |          |         |          | 40,446 | 
|                                                            
|Cash Flows from (used in) Investing Activities               |                                                                               |                                           |                                       |                                    |         |          |        |          |        |          |        |         
|                                                             | Purchase of property, plant and equipment, net of
    investment grants       |                                           |                                       | (218,645                           | )       |          |        | (325,257 | )      |          |        | (199,171 | )      
|                                                             | Sale of properties                                                            |                                           |                                       | 115                                |         |          |        | 48       |        |          |        | 4,394    |        
|                                                             | Purchases of available-for-sale securities                                    |                                           |                                       |                                   |         |          |        |         |        |          |        | (612     | )      
|                                                             | Sale of available-for-sale securities                                         |                                           |                                       | 1,161                              |         |          |        | 6,408    |        |          |        | 948      |        
|                                                             | Deferred acquisition costs                                                    |                                           |                                       | (770                               | )       |          |        |         |        |          |        |         |        
|                                                             | Advances to equity method investments                                         |                                           |                                       | (2,071                             | )       |          |        |         |        |          |        |         |        
|                                                             | Disposal of a subsidiary                                                      |                                           |                                       |                                   |         |          |        |         |        |          |        | (1,156   | )      
|                                                             | Other                                                                         |                                           |                                       |                                   |         |          |        | 342      |        |          |        | (56      | )      
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|                                                             |                                                                               |                                           | Net cash used in investing activities |                                    |         | (220,210 | )      |          |        | (318,459 | )      |          |         | (195,653 | )     
|                                                            
|Cash Flows from (used in) Financing Activities               |                                                                               |                                           |                                       |                                    |         |          |        |          |        |          |        |         
|                                                             | Cash restricted                                                               |                                           |                                       | (33,466                            | )       |          |        | (11,113  | )      |          |        | (14,866  | )      
|                                                             | Increase in construction costs payable                                        |                                           |                                       | 22,680                             |         |          |        | 19,347   |        |          |        | 24,885   |        
|                                                             | Proceeds from borrowings of notes payable and debt                            |                                           |                                       | 237,000                            |         |          |        | 367,588  |        |          |        | 183,017  |        
|                                                             | Repayment of notes payable and debt                                           |                                           |                                       | (21,992                            | )       |          |        | (68,581  | )      |          |        | (23,725  | )      
|                                                             | Repayment of capital lease obligations                                        |                                           |                                       | (1,970                             | )       |          |        | (1,011   | )      |          |        | (1,097   | )      
|                                                             | Issuance of shares of beneficial interest                                     |                                           |                                       | 4,241                              |         |          |        | 913      |        |          |        | 273      |        
|                                                             | Equity and loans from minority shareholders                                   |                                           |                                       |                                   |         |          |        |         |        |          |        | 6,259    |        
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|                                                             |                                                                               |                                           | Net cash from financing activities    |                                    |         | 206,493  |        |          |        | 307,143  |        |          |         | 174,746  |       
|                                                            
|Effect of exchange rate changes on cash and cash equivalents |                                                                               |                                           | 1,686                                 |                                    |         |          | 1,608  |          |        |          | (1,019 | )       
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|Net (decrease) increase in cash and cash equivalents         |                                                                               |                                           | (2,425                                | )                                  |         |          | 21,732 |          |        |          | 18,520 |         
|Cash and cash equivalents, beginning of year                 |                                                                               |                                           | 51,993                                |                                    |         |          | 30,261 |          |        |          | 11,741 |         
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       
|Cash and cash equivalents, end of year                       |                                                                               |                                          | 49,568                                |                                    |         |         | 51,993 |          |        |         | 30,261 |         
|                                                             |                                                                               |                                           |                                       |                                    |         |          |        |          |       



88



---



##### 



MERCER INTERNATIONAL INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(In Thousands of Euros, Except Per Share Data)


Note 1.     The Company and
Summary of Significant Accounting Policies




Basis of Presentation




Cash and Cash Equivalents




Investments










Inventories




Property, Plant and Equipment




89



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)








Government Grants




Deferred Note Issuance Costs




Foreign Operations and Currency Translation




  


Revenue and Related Cost Recognition




90



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Environmental Conservation




Stock-Based Compensation




|                                |                                                                                                                                                          |      |   |        |      |  |   |        |   |  |   |        |  
|------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                |                                                                                                                                                          | 2004 |   |        | 2003 |  |   | 2002   |  
|                                |                                                                                                                                                          |      |   |        |      |  |   |        |  
|Net Income (Loss)               |                                                                                                                                                          |      |   |        |      |  |   |        |   |  |   |       
|                                | As reported                                                                                                                                              |      |  | 19,980 |      |  |  | (3,593 | ) |  |  | (6,322 | )
|                                | Deduct: Total stock-based employee compensation expense
    determined under fair value based methods for all awards, net of
    any related tax effects |      |   | (42    | )    |  |   | (29    | ) |  |   | (9     | )
|                                | Add: Reversal of stock-based compensation expense recognized
    under APB Opinion No. 25                                                                |      |   |       |      |  |   | 14     |   |  |   |       |  
|                                |                                                                                                                                                          |      |   |        |      |  |   |        |  
|                                | Pro forma                                                                                                                                                |      |  | 19,938 |      |  |  | (3,608 | ) |  |  | (6,331 | )
|                                |                                                                                                                                                          |      |   |        |      |  |   |        |  
|                               
|Basic Income (Loss) Per Share   |                                                                                                                                                          |      |   |        |      |  |   |        |   |  |   |       
|                                | As reported                                                                                                                                              |      |  | 1.15   |      |  |  | (0.21  | ) |  |  | (0.38  | )
|                                | Pro forma                                                                                                                                                |      |  | 1.15   |      |  |  | (0.21  | ) |  |  | (0.38  | )
|                               
|Diluted Income (Loss) Per Share |                                                                                                                                                          |      |   |        |      |  |   |        |   |  |   |       
|                                | As reported                                                                                                                                              |      |  | 0.89   |      |  |  | (0.21  | ) |  |  | (0.38  | )
|                                | Pro forma                                                                                                                                                |      |  | 0.89   |      |  |  | (0.21  | ) |  |  | (0.38  | )



|                             |  |      |   |  |      |  |          |      |  |  |          | 
|---------------------------- |  | ---- | - |  | ---- |  | -------- | ---- |  |  | -------- | 
|                             |  | 2004 |   |  | 2003 |  |          | 2002 | 
|                             |  |      |   |  |      |  |          |      | 
|Risk-free interest rate      |  |      |  |  |      |  | 2.0%     |      |  |  | 8.03%    | 
|Expected life of the options |  |      |  |  |      |  | 3  years |      |  |  | 3  years | 
|Expected volatility          |  |      |  |  |      |  | 32.4%    |      |  |  | 34.7%    | 
|Expected dividend yield      |  |      |  |  |      |  | 0.0%     |      |  |  | 0.0%     | 



91



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Taxes on Income




Derivative Financial Instruments






Income (Loss) Per Share




Reclassifications




Estimates




New Accounting Standards


Share-Based Payments Accounting for Stock
Issued to Employees


92



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)
















93



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)






Note 2.     Cash and Restricted
Cash




|                                                         |  |      |        |  |      |   |        | 
|-------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                         |  | 2004 |        |  | 2003 |  
|                                                         |  |      |        |  |      |  
|Cash and cash equivalents                                |  |     | 49,568 |  |      |  | 51,993 | 
|Cash, restricted                                         |  |      | 45,295 |  |      |   | 15,187 | 
|                                                         |  |      |        |  |      |  
|Total current cash, cash equivalents and restricted cash |  |     | 94,863 |  |      |  | 67,180 | 
|                                                         |  |      |        |  |      |  
|                                                        
|Long-term cash restricted                                |  |     | 47,538 |  |      |  | 44,180 | 
|                                                         |  |      |        |  |      |  



Note 3.     Investments


Investments  Current


  


94



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Investments  Non-Current




|                       |                    |      |       |       |      |   |       |       |  |   |        |     | 
|---------------------- | ------------------ | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ------ | --- | 
|                       |                    | 2004 |       |       | 2003 |   |       | 2002  | 
|                       |                    |      |       |       |      |   |       |       | 
|Cost                   |                    |     | 1,288 |       |      |  | 1,716 |       |  |  | 13,033 |    
|Gross unrealized loss  |                    |      | (305  | )     |      |   | (695  | )     |  |   | (8,306 | )  
|                       |                    |      |       |       |      |   |       |       | 
|Fair value             |                    |     | 983   |       |      |  | 1,021 |       |  |  | 4,727  |    
|                       |                    |      |       |       |      |   |       |       | 
|                      
|Year ended December 31 |                    |      |       |       |      |   |       |       |  |   |        |    
|                       | Proceeds from sale |      |      | 1,161 |      |   |      | 6,408 |  |   |       | 948 | 
|                       |                    |      |       |       |      |   |       |       | 
|                       | Net realized gains |      |      | 118   |      |   |      | 682   |  |   |       | 66  | 
|                       |                    |      |       |       |      |   |       |       | 

  


Equity Method Investments







 


Note 4.     Receivables


|                                                                                              |  |             |        |  |      |   |        | 
|--------------------------------------------------------------------------------------------- |  | ----------- | ------ |  | ---- | - | ------ | 
|                                                                                              |  | December 31 |       
|                                                                                              |  |             |       
|                                                                                              |  | 2004        |        |  | 2003 |  
|                                                                                              |  |             |        |  |      |  
|Sale of pulp and paper products (net of allowance of
    247 and
    137,
    respectively) |  |            | 37,966 |  |      |  | 16,854 | 
|Value added tax                                                                               |  |             | 7,048  |  |      |   | 11,250 | 
|Other                                                                                         |  |             | 4,753  |  |      |   | 4,181  | 
|Foreign exchange derivative gains                                                             |  |             | 4,920  |  |      |   | 743    | 
|                                                                                              |  |             |        |  |      |  
|                                                                                              |  |            | 54,687 |  |      |  | 33,028 | 
|                                                                                              |  |             |        |  |      |  



95



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 5.     Inventories


|               |                                    |             |        |        |      |   |        |        | 
|-------------- | ---------------------------------- | ----------- | ------ | ------ | ---- | - | ------ | ------ | 
|               |                                    | December 31 |       
|               |                                    |             |       
|               |                                    | 2004        |        |        | 2003 |  
|               |                                    |             |        |        |      |  
|Pulp and paper |                                    |             |        |        |      |   |        |       
|               | Raw materials                      |             |       | 38,679 |      |   |       | 16,203 | 
|               | Work in process and finished goods |             |        | 14,219 |      |   |        | 7,706  | 
|               |                                    |             |        |        |      |  
|               |                                    |            | 52,898 |        |      |  | 23,909 |       
|               |                                    |             |        |        |      |  

Note 6.     Property, Plant and
Equipment


|                               |  |             |           |   |      |   |          |  
|------------------------------ |  | ----------- | --------- | - | ---- | - | -------- | -
|                               |  | December 31 |          
|                               |  |             |          
|                               |  | 2004        |           |   | 2003 |  
|                               |  |             |           |   |      |  
|Land                           |  |            | 24,899    |   |      |  | 8,034    |  
|Buildings                      |  |             | 148,062   |   |      |   | 13,504   |  
|Production and other equipment |  |             | 912,626   |   |      |   | 336,204  |  
|                               |  |             |           |   |      |  
|                               |  |             | 1,085,587 |   |      |   | 357,742  |  
|Less: Accumulated depreciation |  |             | (149,552  | ) |      |   | (115,799 | )
|                               |  |             |           |   |      |  
|                               |  |             | 936,035   |   |      |   | 241,943  |  
|Construction in progress       |  |             |          |   |      |   | 503,235  |  
|                               |  |             |           |   |      |  
|                               |  |            | 936,035   |   |      |  | 745,178  |  
|                               |  |             |           |   |      |  



  


      


96



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 7.     Accounts Payable
and Accrued Expenses


|                                |  |             |        |  |      |   |        | 
|------------------------------- |  | ----------- | ------ |  | ---- | - | ------ | 
|                                |  | December 31 |       
|                                |  |             |       
|                                |  | 2004        |        |  | 2003 |  
|                                |  |             |        |  |      |  
|Trade payables                  |  |            | 14,592 |  |      |  | 12,241 | 
|Accounts payable and other      |  |             | 9,867  |  |      |   | 10,854 | 
|Accrued expenses                |  |             | 27,367 |  |      |   | 11,320 | 
|Derivative contracts            |  |             | 1,167  |  |      |   | 1,156  | 
|Capital leases, current portion |  |             | 3,549  |  |      |   | 1,843  | 
|                                |  |             |        |  |      |  
|                                |  |            | 56,542 |  |      |  | 37,414 | 
|                                |  |             |        |  |      |  

Note 8.     Debt, Current


|                      |  |             |         |  |      |   |        | 
|--------------------- |  | ----------- | ------- |  | ---- | - | ------ | 
|                      |  | December 31 |        
|                      |  |             |        
|                      |  | 2004        |         |  | 2003 |  
|                      |  |             |         |  |      |  
|Note payable          |  |            | 1,394   |  |      |  | 1,377  | 
|Debt, Stendal         |  |             | 90,000  |  |      |   | 80,000 | 
|Debt, current portion |  |             | 15,696  |  |      |   | 15,801 | 
|                      |  |             |         |  |      |  
|Total current debt    |  |            | 107,090 |  |      |  | 97,178 | 
|                      |  |             |         |  |      |  

 


 


97



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 9.     Long-Term Debt




|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |             |         |  |      |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- |  | ---- | - | ------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | December 31 |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |             |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 2004        |         |  | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |             |         |  |      |  
|Note payable to bank, interest at rates varying from 4.5% to
    6.8% at December 31, 2004, principal due in semi-annual
    installments based on a percentage of the final loan amount
    beginning at 2.9% to 5.3%, until the note is due on
    September 30, 2013, collateralized by receivables
    (amounting to
    15,534 and
    13,716 at
    December 31, 2004 and 2003, respectively), inventory
    (amounting to
    13,727 and
    15,791 at
    December 31, 2004 and 2003, respectively) and a
    subsidiarys operating pulp mill assets with 48% and 32%
    principal plus interest guaranteed by the Federal Republic of
    Germany and the State of Thuringia, respectively; restricted
    cash amounted to
    28,464 and
    25,106 at
    December 31, 2004 and 2003, respectively, in connection
    with this borrowing; payment of dividends by the subsidiary is
    permitted if certain cash flow requirements are met. This
    borrowing was refinanced in February 2005 (see Note 19) |  |            | 171,599 |  |      |  | 191,653 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Subordinated convertible notes due October 2010, interest at
    8.5% accrued and payable semi-annually, convertible at any time
    by the holder into shares of beneficial interest of the Company
    at U.S. $7.75 per share, unsecured. The Company may redeem
    for cash all or a portion of these notes at any time on or after
    October 15, 2008 at 100% of the principal amount of the
    notes plus accrued and unpaid interest up to the redemption
    date, the holders of the convertible notes will have the option
    to require the Company to purchase for cash all or a portion of
    the notes not previously redeemed upon a specified change of
    control at a price equal to 100% of the principal amount of the
    notes, plus accrued and unpaid interest, the notes are not
    subject to any sinking fund requirements (see Note 19)                                                                                                                                                        |  |             | 60,940  |  |      |   | 65,496  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Note payable to bank, interest at Euribor plus 4.5% (rate on
    amount of borrowing at December 31, 2004, is 6.7%),
    unsecured, due in semi-annual installments beginning in March
    2004, due in 2013 (see Note 19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |             | 7,092   |  |      |   | 7,600   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Notes payable to a bank, interest at 4.15% and 4.3% at
    December 31, 2004, secured by paper mill property,
    inventory and guarantee, due in semi-annual installments
    beginning in June 2005, due in December 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |             | 1,367   |  |      |   | 3,500   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Notes payable to a bank, interest at 2.65% at December 31,
    2004, secured by paper mill property and guarantee, due in
    quarterly instalments beginning in December 2004, due in June
    2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             | 2,403   |  |      |   | 2,500   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Note payable to a company, interest at 6%, due February 26,
    2004, unsecured                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |             |        |  |      |   | 953     | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

98



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | December 31 |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 2004        |         |   | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|Note payable to a bank, interest at three month Euribor plus
    1.75% at December 31, 2004 (rate on borrowing at
    December 31, 2004 is 3.87%), secured by paper mill property
    and guarantee, due in quarterly instalments beginning in June
    2005, due in June 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |             | 783     |   |      |   |        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             | 244,184 |   |      |   | 271,702 |  
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             | (15,696 | ) |      |   | (15,801 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|Debt, other operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             | 228,488 |   |      |   | 255,901 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Note payable to bank, included in a total credit facility of
    827,950 to
    finance the construction related to the Stendal pulp mill,
    interest at rates varying from Euribor plus 0.90% to Euribor
    plus 1.85% (rates on amounts of borrowing at December 31,
    2004 range from 3.07% to 4.02%), principal due in required
    installments beginning September 30, 2006 until
    September 30, 2017, collateralized by the assets of the
    Stendal pulp mill, and at December 31, 2004, restricted
    cash amounting to
    19,074, with 48%
    and 32% guaranteed by the Federal Republic of Germany and the
    State of Sachsen-Anhalt, respectively, of up to
    586,550 of
    outstanding principal balance, subject to a debt service reserve
    account required to pay amounts due in the following twelve
    months under the terms of credit facility (none required at
    December 31, 2004); payment of dividends is permitted if
    certain cash flow requirements are met. A
    90,000 special
    purpose tranche is described in Note 8 |  |             | 541,400 |   |      |   | 314,400 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Loans payable to minority shareholders of Stendal pulp mill,
    interest at 7% payable in September 2006 then payable
    semi-annually beginning March 2007, unsecured, subordinated to
    all liabilities of the Stendal pulp mill, due in 2017,
    2,454 and
    5,647 of
    Stendals net loss was applied to these loans in 2004 and
    2003 due to a right of offset under German law                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             | 7,384   |   |      |   | 9,838   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|Debt, Stendal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |             | 548,784 |   |      |   | 324,238 |  
|Debt, other operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             | 228,488 |   |      |   | 255,901 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |            | 777,272 |   |      |  | 580,139 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             |         |   |      |  



|           |  |        |         | 
|---------- |  | ------ | ------- | 
|Matures    |  | Amount |        
|           |  |        |        
|2005       |  |       | 15,696  | 
|2006       |  |        | 35,490  | 
|2007       |  |        | 43,172  | 
|2008       |  |        | 48,572  | 
|2009       |  |        | 56,358  | 
|Thereafter |  |        | 593,680 | 
|           |  |        |        
|           |  |       | 792,968 | 
|           |  |        |        

99



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)




|                                              |  |        |         | 
|--------------------------------------------- |  | ------ | ------- | 
|                                              |  | Amount |        
|                                              |  |        |        
|Debt, Stendal                                 |  |       | 548,784 | 
|Debt, other operations before current portion |  |        | 244,184 | 
|                                              |  |        |        
|                                              |  |       | 792,968 | 
|                                              |  |        |        

  


Note 10.     Income Taxes






|                                                     |          |                         |        |        |      |   |        |        |   |   |        |     | 
|---------------------------------------------------- | -------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | --- | 
|                                                     |          | Year Ended December 31, |       
|                                                     |          |                         |       
|                                                     |          | 2004                    |        |        | 2003 |   |        | 2002   |  
|                                                     |          |                         |        |        |      |   |        |        |  
|U.S. Federal statutory rates on loss from operations |          |                        | 9,057  |        |      |  | 2,063  |        |   |  | 5,967  |    
|Tax differential on foreign income (loss)            |          |                         | 882    |        |      |   | (66    | )      |   |   | 474    |    
|Valuation allowance                                  |          |                         | 32,537 |        |      |   | (1,992 | )      |   |   | (6,356 | )  
|Recovery of (provision for) tax reassessments        |          |                         | 1,692  |        |      |   | (2,962 | )      |   |   |       |    
|Other                                                |          |                         | (5     | )      |      |   | (215   | )      |   |   | 179    |    
|                                                     |          |                         |        |        |      |   |        |        |  
|                                                     |          |                        | 44,163 |        |      |  | (3,172 | )      |   |  | 264    |    
|                                                     |          |                         |        |        |      |   |        |        |  
|Comprised of:                                        |          |                         |        |        |      |   |        |        |   |   |        |    
|                                                     | Current  |                         |       | 1,687  |      |   |       | (3,172 | ) |   |       | 264 | 
|                                                     | Deferred |                         |        | 42,476 |      |   |        |       |   |   |        |    | 
|                                                     |          |                         |        |        |      |   |        |        |  
|                                                     |          |                        | 44,163 |        |      |  | (3,172 | )      |   |  | 264    |    
|                                                     |          |                         |        |        |      |   |        |        |  



|                                                                                                           |                               |             |         |        |      |   |         |       | 
|---------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------- | ------- | ------ | ---- | - | ------- | ----- | 
|                                                                                                           |                               | December 31 |        
|                                                                                                           |                               |             |        
|                                                                                                           |                               | 2004        |         |        | 2003 |  
|                                                                                                           |                               |             |         |        |      |  
|German tax loss carryforwards                                                                              |                               |            | 29,746  |        |      |  | 62,672  |      
|Basis difference between income tax and financial reporting with
    respect to German operating pulp mill |                               |             | 25,775  |        |      |   | 1,079   |      
|Derivative financial instruments                                                                           |                               |             | 28,601  |        |      |   | 16,251  |      
|U.S. tax loss carry forwards                                                                               |                               |             | 7,000   |        |      |   | 4,481   |      
|                                                                                                           |                               |             |         |        |      |  
|                                                                                                           |                               |             | 91,122  |        |      |   | 84,483  |      
|Valuation allowance                                                                                        |                               |             | (38,665 | )      |      |   | (74,503 | )    
|                                                                                                           |                               |             |         |        |      |  
|                                                                                                           | Net deferred tax asset        |             |        | 52,457 |      |   |        | 9,980 | 
|                                                                                                           |                               |             |         |        |      |  
|Comprised of:                                                                                              |                               |             |         |        |      |   |         |      
|                                                                                                           | Deferred income tax asset     |             |        | 54,519 |      |   |        | 9,980 | 
|                                                                                                           | Deferred income tax liability |             |         | (2,062 | )    |   |         |      | 
|                                                                                                           |                               |             |         |        |      |  
|                                                                                                           |                               |            | 52,457  |        |      |  | 9,980   |      
|                                                                                                           |                               |             |         |        |      |  

100



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)









  


  


Note 11.     Shareholders
Equity








101



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 12.     Stock-Based
Compensation






|                                 |  |           |           |                   |                  |   |       | 
|-------------------------------- |  | --------- | --------- | ----------------- | ---------------- | - | ----- | 
|                                 |  | Number of |           |                   | Weighted Average |  
|                                 |  | Shares    |           |                   | Exercise Price   |  
|                                 |  |           |           |                   |                  |  
|                                 |  |           |           | (In U.S. Dollars) |                 
|Outstanding at December 31, 2001 |  |           | 2,206,000 |                   |                  | $ | 7.67  | 
|Granted                          |  |           | 18,000    |                   |                  |   | 7.46  | 
|Cancelled                        |  |           | (6,000    | )                 |                  |   | 7.46  | 
|                                 |  |           |           |                   |                  |  
|Outstanding at December 31, 2002 |  |           | 2,218,000 |                   |                  |   | 7.67  | 
|Granted                          |  |           | 200,000   |                   |                  |   | 6.01  | 
|Cancelled                        |  |           | (372,500  | )                 |                  |   | 9.83  | 
|                                 |  |           |           |                   |                  |  
|Outstanding at December 31, 2003 |  |           | 2,045,500 |                   |                  |   | 7.12  | 
|Granted                          |  |           |          |                   |                  |   |      | 
|Exercised                        |  |           | (861,000  | )                 |                  |   | 6.34  | 
|Cancelled                        |  |           | (129,500  | )                 |                  |   | 16.68 | 
|                                 |  |           |           |                   |                  |  
|Outstanding at December 31, 2004 |  |           | 1,055,000 |                   |                  | $ | 6.58  | 
|                                 |  |           |           |                   |                  |  

 




|                    |              |          |           |  |         |                  |                     |  |                |  |                   |        |      |  |                |  |         |  |  |   |      | 
|------------------- | ------------ | -------- | --------- |  | ------- | ---------------- | ------------------- |  | -------------- |  | ----------------- | ------ | ---- |  | -------------- |  | ------- |  |  | - | ---- | 
|Outstanding Options |              |          |           |  |        
|                    |              |          |          
|                    |              | Weighted |           |  |         |                  | Exercisable Options | 
|Exercise            |              |          | Average   |  |         | Weighted         |                     |  |                | 
|Price               |              |          | Remaining |  |         | Average          |                     |  |                |  | Weighted Average  |       
|Range               |              |          | Number    |  |         | Contractual Life |                     |  | Exercise Price |  |                   | Number |      |  | Exercise Price | 
|                    |              |          |           |  |         |                  |                     |  |                |  |                   |        |      |  |                | 
|(In U.S. Dollars)   |              |          |           |  |         |                  |                     |  |                |  | (In U.S. Dollars) |       
|                    | 5.65 - 6.375 |          |           |  | 920,000 |                  |                     |  | 5.5            |  |                   |        | 6.30 |  |                |  | 886,666 |  |  | $ | 6.32 | 
|                    | 8.50         |          |           |  | 135,000 |                  |                     |  | 2.5            |  |                   |        | 8.50 |  |                |  | 135,000 |  |  | $ | 8.50 | 

102



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 13.     Net Income (Loss)
Per Share


|                                                        |                            |                          |        |            |            |   |        |            |   |   |        |            |   | 
|------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ---------- | ---------- | - | ------ | ---------- | - | - | ------ | ---------- | - | 
|                                                        |                            | Year ended December 31,  |       
|                                                        |                            |                          |       
|                                                        |                            | 2004                     |        |            | 2003       |   |        | 2002       |  
|                                                        |                            |                          |        |            |            |   |        |            |  
|Net income (loss) from continuing operations  Basic    |                            |                         | 19,980 |            |            |  | (3,593 | )          |   |  | (6,322 | )         
|Interest on convertible notes, net of tax               |                            |                          | 5,395  |            |            |   |       |            |   |   |       |           
|                                                        |                            |                          |        |            |            |   |        |            |  
|Net income (loss) from continuing operations  Diluted  |                            |                         | 25,375 |            |            |  | (3,593 | )          |   |  | (6,322 | )         
|                                                        |                            |                          |        |            |            |   |        |            |  
|Weighted average number of common shares outstanding:   |                            |                          |        |            |            |   |        |            |   |   |        |           
|                                                        | Basic                      |                          |        | 17,426,351 |            |   |        | 16,940,858 |   |   |        | 16,774,515 |  
|                                                        | Effect of dilutive shares: |                          |        |            |            |   |        |            |   |   |        |            |  
|                                                        |                            | Stock options and awards |        |            | 453,839    |   |        |            |  |   |        |            |  | 
|                                                        |                            | Convertible notes        |        |            | 10,645,161 |   |        |            |  |   |        |            |  | 
|                                                        |                            |                          |        |            |            |   |        |            |  
|                                                        | Diluted                    |                          |        | 28,525,351 |            |   |        | 16,940,858 |   |   |        | 16,774,515 |  
|                                                        |                            |                          |        |            |            |   |        |            |  
|Net income (loss) from continuing operations per share: |                            |                          |        |            |            |   |        |            |   |   |        |           
|                                                        | Basic                      |                          |       | 1.15       |            |   |       | (0.21      | ) |   |       | (0.38      | )
|                                                        |                            |                          |        |            |            |   |        |            |  
|                                                        | Diluted                    |                          |       | 0.89       |            |   |       | (0.21      | ) |   |       | (0.38      | )
|                                                        |                            |                          |        |            |            |   |        |            |  

103



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 14.     Business Segment
Information










|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |   |        |   |  |   |           |  
|------------------------------------------------------- |  | ---------------------------- | ------- | ---------- | ------- | - | ------- | ----- |  | - | --------- | - | --------- | ------------ | ------- | ------------ | ----- | - | ------ | - |  | - | --------- | -
|                                                        |  | Year ended December 31, 2004 |        
|                                                        |  |                              |        
|                                                        |  |                              |         | Corporate, |         |   |        
|                                                        |  | Rosenthal                    |         |            | Stendal |   |         | Total |  |   |           |   | Other and |              |         | Consolidated |      
|                                                        |  | Pulp                         |         |            | Pulp    |   |         | Pulp  |  |   | Paper     |   |           | Eliminations |         |              | Total |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|Sales to external customers                             |  |                             | 137,287 |            |         |  | 41,225  |       |  |  | 178,512   |   |           |             | 54,591  |              |       |  |       |   |  |  | 233,103   |  
|Transportation and other                                |  |                              | 11,360  |            |         |   | 2,851   |       |  |   | 14,211    |   |           |              | 818     |              |       |   | (234   | ) |  |   | 14,795    |  
|Intersegment net sales                                  |  |                              | 1,949   |            |         |   | 885     |       |  |   | 2,834     |   |           |              |        |              |       |   | (2,834 | ) |  |   |          |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|                                                        |  |                              | 150,596 |            |         |   | 44,961  |       |  |   | 195,557   |   |           |              | 55,409  |              |       |   | (3,068 | ) |  |   | 247,898   |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|Operating costs                                         |  |                              | 106,557 |            |         |   | 47,988  |       |  |   | 154,545   |   |           |              | 51,444  |              |       |   | (3,031 | ) |  |   | 202,958   |  
|Operating depreciation and amortization                 |  |                              | 17,751  |            |         |   | 9,022   |       |  |   | 26,773    |   |           |              | 2,356   |              |       |   | 15     |   |  |   | 29,144    |  
|General and administrative                              |  |                              | 10,733  |            |         |   | 8,560   |       |  |   | 19,293    |   |           |              | 4,711   |              |       |   | 3,095  |   |  |   | 27,099    |  
|Impairment of assets                                    |  |                              |        |            |         |   |        |       |  |   |          |   |           |              | 6,000   |              |       |   |       |   |  |   | 6,000     |  
|Flooding grants, less losses and expenses               |  |                              |        |            |         |   |        |       |  |   |          |   |           |              | 669     |              |       |   |       |   |  |   | 669       |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|                                                        |  |                              | 135,041 |            |         |   | 65,570  |       |  |   | 200,611   |   |           |              | 65,180  |              |       |   | 79     |   |  |   | 265,870   |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|(Loss) income from operations                           |  |                              | 15,555  |            |         |   | (20,609 | )     |  |   | (5,054    | ) |           |              | (9,771  | )            |       |   | (3,147 | ) |  |   | (17,972   | )
|Interest expense                                        |  |                              | (8,562  | )          |         |   | (12,190 | )     |  |   | (20,752   | ) |           |              | (564    | )            |       |   | (2,433 | ) |  |   | (23,749   | )
|Unrealized loss on interest rate derivatives            |  |                              | (11     | )          |         |   | (32,320 | )     |  |   | (32,331   | ) |           |              |        |              |       |   |       |   |  |   | (32,331   | )
|Realized gain on foreign exchange derivatives           |  |                              | 13,253  |            |         |   | 31,214  |       |  |   | 44,467    |   |           |              |        |              |       |   |       |   |  |   | 44,467    |  
|Other income (expense)                                  |  |                              | 3,067   |            |         |   | (414    | )     |  |   | 2,653     |   |           |              | 176     |              |       |   | 119    |   |  |   | 2,948     |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|(Loss) income before income taxes and minority interest |  |                              | 23,302  |            |         |   | (34,319 | )     |  |   | (11,017   | ) |           |              | (10,159 | )            |       |   | (5,461 | ) |  |   | (26,637   | )
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|Segment assets                                          |  |                              | 394,569 |            |         |   | 810,267 |       |  |   | 1,204,836 |   |           |              | 22,735  |              |       |   | 28,078 |   |  |   | 1,255,649 |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  
|Capital expenditures                                    |  |                              | 3,860   |            |         |   | 396,578 |       |  |   | 400,438   |   |           |              | 4,707   |              |       |   | 78     |   |  |   | 405,223   |  
|                                                        |  |                              |         |            |         |   |         |       |  |   |           |   |           |              |         |              |       |  

104



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ---------------------------- | ------- | ---------- | ------- | - | ------- | ----- |  | - | ------- | - | --------- | ------------ | ------ | ------------ | ----- | - | ------- | - |  | - | ------- | -
|                                                          |  | Year ended December 31, 2003 |        
|                                                          |  |                              |        
|                                                          |  |                              |         | Corporate, |         |   |        
|                                                          |  | Rosenthal                    |         |            | Stendal |   |         | Total |  |   |         |   | Other and |              |        | Consolidated |      
|                                                          |  | Pulp                         |         |            | Pulp    |   |         | Pulp  |  |   | Paper   |   |           | Eliminations |        |              | Total |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|Sales to external customers                               |  |                             | 126,594 |            |         |  |        |       |  |  | 126,594 |   |           |             | 55,862 |              |       |  |        |   |  |  | 182,456 |  
|Transportation and other                                  |  |                              | 10,623  |            |         |   | 251     |       |  |   | 10,874  |   |           |              | 1,226  |              |       |   |        |   |  |   | 12,100  |  
|Intersegment net sales                                    |  |                              | 2,335   |            |         |   |        |       |  |   | 2,335   |   |           |              |       |              |       |   | (2,335  | ) |  |   |        |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|                                                          |  |                              | 139,552 |            |         |   | 251     |       |  |   | 139,803 |   |           |              | 57,088 |              |       |   | (2,335  | ) |  |   | 194,556 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|Operating costs                                           |  |                              | 107,409 |            |         |   |        |       |  |   | 107,409 |   |           |              | 50,709 |              |       |   | (2,335  | ) |  |   | 155,783 |  
|Operating depreciation and amortization                   |  |                              | 21,881  |            |         |   |        |       |  |   | 21,881  |   |           |              | 2,026  |              |       |   |        |   |  |   | 23,907  |  
|General and administrative                                |  |                              | 8,332   |            |         |   | 3,641   |       |  |   | 11,973  |   |           |              | 5,168  |              |       |   | 2,182   |   |  |   | 19,323  |  
|Settlement expenses                                       |  |                              |        |            |         |   |        |       |  |   |        |   |           |              |       |              |       |   | 1,041   |   |  |   | 1,041   |  
|Flooding grants, less losses and expenses                 |  |                              |        |            |         |   |        |       |  |   |        |   |           |              | (957   | )            |       |   |        |   |  |   | (957    | )
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|                                                          |  |                              | 137,622 |            |         |   | 3,641   |       |  |   | 141,263 |   |           |              | 56,946 |              |       |   | 888     |   |  |   | 199,097 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|(Loss) income from operations                             |  |                              | 1,930   |            |         |   | (3,390  | )     |  |   | (1,460  | ) |           |              | 142    |              |       |   | (3,223  | ) |  |   | (4,541  | )
|Interest expense                                          |  |                              | (8,445  | )          |         |   | (321    | )     |  |   | (8,766  | ) |           |              | (502   | )            |       |   | (2,255  | ) |  |   | (11,523 | )
|Realized and unrealized loss on interest rate derivatives |  |                              | (111    | )          |         |   | (13,042 | )     |  |   | (13,153 | ) |           |              |       |              |       |   |        |   |  |   | (13,153 | )
|Realized gain on foreign exchange derivatives             |  |                              | 28,578  |            |         |   | 743     |       |  |   | 29,321  |   |           |              |       |              |       |   |        |   |  |   | 29,321  |  
|Impairment of investments                                 |  |                              | (4,480  | )          |         |   |        |       |  |   | (4,480  | ) |           |              | (1,090 | )            |       |   | (2,255  | ) |  |   | (7,825  | )
|Other income (expense)                                    |  |                              | 1,431   |            |         |   | (3,307  | )     |  |   | (1,876  | ) |           |              | 44     |              |       |   | 3,485   |   |  |   | 1,653   |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|(Loss) income before income taxes and minority interest   |  |                              | 18,903  |            |         |   | (19,317 | )     |  |   | (414    | ) |           |              | (1,406 | )            |       |   | (4,248  | ) |  |   | (6,068  | )
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|Segment assets                                            |  |                              | 374,738 |            |         |   | 555,966 |       |  |   | 930,704 |   |           |              | 30,523 |              |       |   | (25,322 | ) |  |   | 935,905 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  
|Capital expenditures                                      |  |                              | 6,869   |            |         |   | 399,403 |       |  |   | 406,272 |   |           |              | 7,778  |              |       |   |        |   |  |   | 414,050 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |        |              |       |  

105



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ---------------------------- | ------- | ---------- | ------- | - | ------- | ----- |  | - | ------- | - | --------- | ------------ | ------- | ------------ | ----- | - | ------- | - |  | - | ------- | -
|                                                          |  | Year ended December 31, 2002 |        
|                                                          |  |                              |        
|                                                          |  |                              |         | Corporate, |         |   |        
|                                                          |  | Rosenthal                    |         |            | Stendal |   |         | Total |  |   |         |   | Other and |              |         | Consolidated |      
|                                                          |  | Pulp                         |         |            | Pulp    |   |         | Pulp  |  |   | Paper   |   |           | Eliminations |         |              | Total |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|Sales to external customers                               |  |                             | 130,173 |            |         |  |        |       |  |  | 130,173 |   |           |             | 97,710  |              |       |  |        |   |  |  | 227,883 |  
|Transportation and other                                  |  |                              | 10,408  |            |         |   | 240     |       |  |   | 10,648  |   |           |              | 601     |              |       |   |        |   |  |   | 11,249  |  
|Intersegment net sales                                    |  |                              | 4,878   |            |         |   |        |       |  |   | 4,878   |   |           |              |        |              |       |   | (4,878  | ) |  |   |        |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|                                                          |  |                              | 145,459 |            |         |   | 240     |       |  |   | 145,699 |   |           |              | 98,311  |              |       |   | (4,878  | ) |  |   | 239,132 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|Operating costs                                           |  |                              | 106,403 |            |         |   |        |       |  |   | 106,403 |   |           |              | 86,380  |              |       |   | (4,878  | ) |  |   | 187,905 |  
|Operating depreciation and amortization                   |  |                              | 21,567  |            |         |   |        |       |  |   | 21,567  |   |           |              | 3,991   |              |       |   |        |   |  |   | 25,558  |  
|General and administrative                                |  |                              | 14,068  |            |         |   | 1,823   |       |  |   | 15,891  |   |           |              | 10,589  |              |       |   | (1,501  | ) |  |   | 24,979  |  
|Flooding grants, less losses and expenses                 |  |                              |        |            |         |   |        |       |  |   |        |   |           |              | 1,835   |              |       |   |        |   |  |   | 1,835   |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|                                                          |  |                              | 142,038 |            |         |   | 1,823   |       |  |   | 143,861 |   |           |              | 102,795 |              |       |   | (6,379  | ) |  |   | 240,277 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|(Loss) income from operations                             |  |                              | 3,421   |            |         |   | (1,583  | )     |  |   | 1,838   |   |           |              | (4,484  | )            |       |   | 1,501   |   |  |   | (1,145  | )
|Interest expense                                          |  |                              | (11,752 | )          |         |   |        |       |  |   | (11,752 | ) |           |              | (1,231  | )            |       |   | (770    | ) |  |   | (13,753 | )
|Realized and unrealized loss on interest rate derivatives |  |                              | (2,303  | )          |         |   | (30,108 | )     |  |   | (32,411 | ) |           |              |        |              |       |   |        |   |  |   | (32,411 | )
|Realized gain on foreign exchange derivatives             |  |                              | 25,732  |            |         |   |        |       |  |   | 25,732  |   |           |              |        |              |       |   |        |   |  |   | 25,732  |  
|Other income (expense)                                    |  |                              | 1,459   |            |         |   | (1,298  | )     |  |   | 161     |   |           |              | 3,787   |              |       |   | 78      |   |  |   | 4,026   |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|(Loss) income before income taxes and minority interest   |  |                              | 16,557  |            |         |   | (32,989 | )     |  |   | (16,432 | ) |           |              | (1,928  | )            |       |   | 809     |   |  |   | (17,551 | )
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|Segment assets                                            |  |                              | 405,002 |            |         |   | 223,386 |       |  |   | 628,388 |   |           |              | 29,438  |              |       |   | (58,076 | ) |  |   | 599,750 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  
|Capital expenditures                                      |  |                              | 8,426   |            |         |   | 186,570 |       |  |   | 194,996 |   |           |              | 5,374   |              |       |   |        |   |  |   | 200,370 |  
|                                                          |  |                              |         |            |         |   |         |       |  |   |         |   |           |              |         |              |       |  



|                                     |  |      |         |  |      |   |         |      |  |   |         | 
|------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                     |  | 2004 |         |  | 2003 |   |         | 2002 | 
|                                     |  |      |         |  |      |   |         |      | 
|Germany                              |  |     | 88,119  |  |      |  | 80,306  |      |  |  | 88,809  | 
|Italy                                |  |      | 54,832  |  |      |   | 46,609  |      |  |   | 46,027  | 
|Other European Union countries       |  |      | 64,846  |  |      |   | 29,936  |      |  |   | 31,631  | 
|Eastern European and other countries |  |      | 25,306  |  |      |   | 25,605  |      |  |   | 61,416  | 
|                                     |  |      |         |  |      |   |         |      | 
|                                     |  |     | 233,103 |  |      |  | 182,456 |      |  |  | 227,883 | 
|                                     |  |      |         |  |      |   |         |      | 

106



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)




|        |  |      |           |  |      |   |         |      |  |   |         | 
|------- |  | ---- | --------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|        |  | 2004 |           |  | 2003 |   |         | 2002 | 
|        |  |      |           |  |      |   |         |      | 
|Germany |  |     | 1,227,571 |  |      |  | 918,316 |      |  |  | 590,350 | 
|Other   |  |      | 28,078    |  |      |   | 17,589  |      |  |   | 9,400   | 
|        |  |      |           |  |      |   |         |      | 
|        |  |     | 1,255,649 |  |      |  | 935,905 |      |  |  | 599,750 | 
|        |  |      |           |  |      |   |         |      | 



Note 15.     Financial
Instruments




|                                                   |  |          |         |  |            |   |          |        |  |   |            |  |  |   |         | 
|-------------------------------------------------- |  | -------- | ------- |  | ---------- | - | -------- | ------ |  | - | ---------- |  |  | - | ------- | 
|                                                   |  | 2004     |         |  | 2003       |  
|                                                   |  |          |         |  |            |  
|                                                   |  | Carrying |         |  |            |   | Carrying |        |  |  
|                                                   |  | Amount   |         |  | Fair Value |   |          | Amount |  |   | Fair Value | 
|                                                   |  |          |         |  |            |   |          |        |  |   |            | 
|Cash and cash equivalents                          |  |         | 49,568  |  |            |  | 49,568   |        |  |  | 51,993     |  |  |  | 51,993  | 
|Cash restricted                                    |  |          | 92,833  |  |            |   | 92,833   |        |  |   | 59,367     |  |  |   | 59,367  | 
|Note payable                                       |  |          | 1,394   |  |            |   | 1,394    |        |  |   | 1,377      |  |  |   | 1,377   | 
|Long-term debt and Debt, Stendal                   |  |          | 882,968 |  |            |   | 882,968  |        |  |   | 675,940    |  |  |   | 675,940 | 
|Interest rate derivative contracts  liability     |  |          | 76,638  |  |            |   | 76,638   |        |  |   | 44,307     |  |  |   | 44,307  | 
|Foreign exchange rate derivative contracts  asset |  |          | 4,920   |  |            |   | 4,920    |        |  |   | 743        |  |  |   | 743     | 









Interest Rate Derivatives


  


107



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


 


  


Foreign Exchange Derivatives


   


   


Credit Risk




Note 16.     Lease
Commitments




|                                                    |  |         |        |   |           |   |       | 
|--------------------------------------------------- |  | ------- | ------ | - | --------- | - | ----- | 
|                                                    |  | Capital |        |   | Operating |  
|                                                    |  | Leases  |        |   | Leases    |  
|                                                    |  |         |        |   |           |  
|2005                                                |  |        | 3,549  |   |           |  | 1,355 | 
|2006                                                |  |         | 3,313  |   |           |   | 1,031 | 
|2007                                                |  |         | 3,897  |   |           |   | 522   | 
|2008                                                |  |         | 1,478  |   |           |   | 179   | 
|2009                                                |  |         | 125    |   |           |   | 89    | 
|Thereafter                                          |  |         | 41     |   |           |   | 193   | 
|                                                    |  |         |        |   |           |  
|Total                                               |  |         | 12,403 |   |           |  | 3,369 | 
|                                                    |  |         |        |   |           |  
|Less imputed interest                               |  |         | (104   | ) |           |   |       | 
|                                                    |  |         |        |   |           |  
|Total present value of minimum capitalized payments |  |         | 12,299 |   |           |   |       | 
|Less current portion of capital lease obligations   |  |         | (3,549 | ) |           |   |       | 
|                                                    |  |         |        |   |           |  
|Long-term capital lease obligations                 |  |        | 8,750  |   |           |   |       | 
|                                                    |  |         |        |   |           |  

  


108



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Note 17.     Commitments and
Contingencies


 






Note 18.     Impairment
Charge





Note 19.     Subsequent
Events


   


109



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)




|                     |                                                      |   |         |         |  
|-------------------- | ---------------------------------------------------- | - | ------- | ------- | -
|Purchase price:      |                                                      |   |         |        
|                     | Cash (including deferred working capital)            |   |        | 142,739 |  
|                     | Equity  shares of beneficial interest               |   |         | 30,814  |  
|                     | Estimated acquisition costs                          |   |         | 3,852   |  
|                     |                                                      |   |        
|                     |                                                      |  | 177,405 |        
|                     |                                                      |   |        
|                    
|Net assets acquired: |                                                      |   |         |        
|                     | Receivables                                          |   |        | 34      |  
|                     | Inventories                                          |   |         | 19,671  |  
|                     | Prepaids                                             |   |         | 298     |  
|                     | Property, plant and equipment                        |   |         | 170,861 |  
|                     | Other assets                                         |   |         | 555     |  
|                     | Accrued expenses                                     |   |         | (2,732  | )
|                     | Asset retirement obligation                          |   |         | (600    | )
|                     | Pension plan and post-retirement benefits obligation |   |         | (10,682 | )
|                     |                                                      |   |        
|                     |                                                      |  | 177,405 |        
|                     |                                                      |   |        















110



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)







Note 20.     Restricted Group
Supplemental Disclosure




111



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


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, Stendal                              |                                       |                   |        |        |              |   | 548,784 |              |  |              |        |      |   |   | 548,784   |        
|Debt, less current portion                 |                                       |                   | 224,542 |        |              |   | 3,946   |              |  |              |        |      |   |   | 228,488   |        
|Due to restricted group                    |                                       |                   |        |        |              |   | 43,467  |              |  |              | (43,467 | )    |   |   |          |        
|Unrealized interest rate derivative        |                                       |                   |        |        |              |   | 75,471  |              |  |              |        |      |   |   | 75,471    |        
|Capital leases and other                   |                                       |                   | 1,878   |        |              |   | 7,157   |              |  |              |        |      |   |   | 9,035     |        
|Deferred income tax                        |                                       |                   | 1,719   |        |              |   | 343     |              |  |              |        |      |   |   | 2,062     |        
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |     
|Total liabilities                          |                                       |                   | 262,843 |        |              |   | 874,550 |              |  |              | (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 |        
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |     

112



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Combined Condensed Balance Sheet


|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |        | 
|------------------------------------------ | ------------------------------------- | ----------------- | ------- | ------ | ------------ | - | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- | ------ | 
|                                           |                                       | December 31, 2003 |        
|                                           |                                       |                   |        
|                                           |                                       | Restricted        |         |        | Unrestricted |   |         |              |  | Consolidated |        
|                                           |                                       | Group             |         |        | Subsidiaries |   |         | Eliminations |  |              | Group   |  
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|ASSETS                                     |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |       
|Current assets                             |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |       
|                                           | Cash and cash equivalents             |                   |        | 47,275 |              |   |        | 4,718        |  |              |        |  |  |   |        | 51,993 | 
|                                           | Cash restricted                       |                   |         |       |              |   |         | 15,187       |  |              |         |  |  |   |         | 15,187 | 
|                                           | Receivables                           |                   |         | 16,921 |              |   |         | 16,107       |  |              |         |  |  |   |         | 33,028 | 
|                                           | Inventories                           |                   |         | 15,829 |              |   |         | 8,080        |  |              |         |  |  |   |         | 23,909 | 
|                                           | Prepaid expenses and other            |                   |         | 2,761  |              |   |         | 1,523        |  |              |         |  |  |   |         | 4,284  | 
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|Total current assets                       |                                       |                   | 82,786  |        |              |   | 45,615  |              |  |              |        |   |  |   | 128,401 |       
|Cash restricted                            |                                       |                   | 25,106  |        |              |   | 19,074  |              |  |              |        |   |  |   | 44,180  |       
|Property, plant and equipment              |                                       |                   | 227,957 |        |              |   | 517,221 |              |  |              |        |   |  |   | 745,178 |       
|Other                                      |                                       |                   | 5,300   |        |              |   | 3,900   |              |  |              | (1,034  | ) |  |   | 8,166   |       
|Deferred income tax                        |                                       |                   | 9,980   |        |              |   |        |              |  |              |        |   |  |   | 9,980   |       
|Due from unrestricted group                |                                       |                   | 41,669  |        |              |   |        |              |  |              | (41,669 | ) |  |   |        |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|Total assets                               |                                       |                  | 392,798 |        |              |  | 585,810 |              |  |             | (42,703 | ) |  |  | 935,905 |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|                                          
|LIABILITIES                                |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |       
|Current liabilities                        |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |       
|                                           | Accounts payable and accrued expenses |                   |        | 20,142 |              |   |        | 17,272       |  |              |        |  |  |   |        | 37,414 | 
|                                           | Construction costs payable            |                   |         |       |              |   |         | 42,756       |  |              |         |  |  |   |         | 42,756 | 
|                                           | Debt, current portion                 |                   |         | 15,705 |              |   |         | 81,473       |  |              |         |  |  |   |         | 97,178 | 
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|Total current liabilities                  |                                       |                   | 35,847  |        |              |   | 141,501 |              |  |              |        |   |  |   | 177,348 |       
|Debt, Stendal                              |                                       |                   |        |        |              |   | 324,238 |              |  |              |        |   |  |   | 324,238 |       
|Debt, less current portion                 |                                       |                   | 249,997 |        |              |   | 5,904   |              |  |              |        |   |  |   | 255,901 |       
|Due to restricted group                    |                                       |                   |        |        |              |   | 41,669  |              |  |              | (41,669 | ) |  |   |        |       
|Unrealized interest rate derivative        |                                       |                   |        |        |              |   | 43,151  |              |  |              |        |   |  |   | 43,151  |       
|Capital leases and other                   |                                       |                   | 2,412   |        |              |   |        |              |  |              |        |   |  |   | 2,412   |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|Total liabilities                          |                                       |                   | 288,256 |        |              |   | 556,463 |              |  |              | (41,669 | ) |  |   | 803,050 |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|                                          
|SHAREHOLDERS EQUITY                       |                                       |                   |         |        |              |   |         |              |  |              |         |   |  |   |         |       
|Total shareholders equity                 |                                       |                   | 104,542 |        |              |   | 29,347  |              |  |              | (1,034  | ) |  |   | 132,855 |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  
|Total liabilities and shareholders equity |                                       |                  | 392,798 |        |              |  | 585,810 |              |  |             | (42,703 | ) |  |  | 935,905 |       
|                                           |                                       |                   |         |        |              |   |         |              |  |              |         |  

113



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Combined Condensed Statement of Operations


|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |        |     |   |         |         |         |  
|----------------------------------------- | -------------------------------- | ------------------------------------------------------- | ------- | ------- | ------------ | - | ------- | ------------ | ------- | ------------ | ------ | ------ | --- | - | ------- | ------- | ------- | -
|                                          |                                  | December 31, 2004                                       |        
|                                          |                                  |                                                         |        
|                                          |                                  | Restricted                                              |         |         | Unrestricted |   |         |              |         | Consolidated |       
|                                          |                                  | Group                                                   |         |         | Subsidiaries |   |         | Eliminations |         |              | Group  |       
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|Revenues                                  |                                  |                                                        | 150,596 |         |              |  | 100,370 |              |         |             | (3,068 | )      |     |  | 247,898 |        
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|Operating costs                           |                                  |                                                         | 106,557 |         |              |   | 99,432  |              |         |              | (3,031 | )      |     |   | 202,958 |        
|Operating depreciation and amortization   |                                  |                                                         | 17,766  |         |              |   | 11,378  |              |         |              |       |        |     |   | 29,144  |        
|General and administrative                |                                  |                                                         | 13,828  |         |              |   | 13,271  |              |         |              |       |        |     |   | 27,099  |        
|Impairment of capital assets              |                                  |                                                         |        |         |              |   | 6,000   |              |         |              |       |        |     |   | 6,000   |        
|Flooding grants, less losses and expenses |                                  |                                                         |        |         |              |   | 669     |              |         |              |       |        |     |   | 669     |        
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                          |                                  | Income (loss) from operations                           |         |         | 12,445       |   |         |              | (30,380 | )            |        |        | (37 | ) |         |         | (17,972 | )
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                         
|Other income (expense)                    |                                  |                                                         |         |         |              |   |         |              |         |              |        |        |     |   |         |        
|                                          | Interest expense                 |                                                         |         | (10,941 | )            |   |         | (14,298      | )       |              |        | 1,490  |     |   |         | (23,749 | )      
|                                          | Investment and other income      |                                                         |         | 3,132   |              |   |         | 1,306        |         |              |        | (1,490 | )   |   |         | 2,948   |        
|                                          | Derivative financial instruments |                                                         |         |         |              |   |         |              |         |              |        |        |     |   |         |         |        
|                                          |                                  | Unrealized loss on interest rate derivatives            |         |         | (11          | ) |         |              | (32,320 | )            |        |        |    |   |         |         | (32,331 | )
|                                          |                                  | Realized gain on foreign exchange derivatives           |         |         | 13,253       |   |         |              | 31,214  |              |        |        |    |   |         |         | 44,467  |  
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                          | Total other expense (expense)    |                                                         |         | 5,433   |              |   |         | (14,098      | )       |              |        |       |     |   |         | (8,665  | )      
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                          |                                  | Income (loss) before income taxes and minority interest |         |         | 17,878       |   |         |              | (44,478 | )            |        |        | (37 | ) |         |         | (26,637 | )
|Income tax benefit                        |                                  |                                                         | 17,235  |         |              |   | 26,928  |              |         |              |       |        |     |   | 44,163  |        
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                          |                                  | Income (loss) before minority interest                  |         |         | 35,113       |   |         |              | (17,550 | )            |        |        | (37 | ) |         |         | 17,526  |  
|Minority interest                         |                                  |                                                         |        |         |              |   | 2,454   |              |         |              |       |        |     |   | 2,454   |        
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       
|                                          |                                  | Net income (loss)                                       |         |        | 35,113       |   |         |             | (15,096 | )            |        |       | (37 | ) |         |        | 19,980  |  
|                                          |                                  |                                                         |         |         |              |   |         |              |         |              |        |       

114



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Combined Condensed Statement of Operations


|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |        |   |   |         |         |         |  
|----------------------------------------- | ------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------------ | - | ------ | ------------ | ------- | ------------ | ------ | ------ | - | - | ------- | ------- | ------- | -
|                                          |                                             | December 31, 2003                                       |        
|                                          |                                             |                                                         |        
|                                          |                                             | Restricted                                              |         |         | Unrestricted |   |        |              |         | Consolidated |       
|                                          |                                             | Group                                                   |         |         | Subsidiaries |   |        | Eliminations |         |              | Group  |       
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|Revenues                                  |                                             |                                                        | 139,552 |         |              |  | 57,339 |              |         |             | (2,335 | )      |   |  | 194,556 |        
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|Cost of sales                             |                                             |                                                         | 107,409 |         |              |   | 50,709 |              |         |              | (2,335 | )      |   |   | 155,783 |        
|Operating depreciation and amortization   |                                             |                                                         | 21,881  |         |              |   | 2,026  |              |         |              |       |        |   |   | 23,907  |        
|General and administrative                |                                             |                                                         | 10,514  |         |              |   | 8,809  |              |         |              |       |        |   |   | 19,323  |        
|Settlement expenses                       |                                             |                                                         | 1,041   |         |              |   |       |              |         |              |       |        |   |   | 1,041   |        
|Flooding grants, less losses and expenses |                                             |                                                         |        |         |              |   | (957   | )            |         |              |       |        |   |   | (957    | )      
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                          |                                             | Loss from operations                                    |         |         | (1,293       | ) |        |              | (3,248  | )            |        |        |  |   |         |         | (4,541  | )
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                         
|Other income (expense)                    |                                             |                                                         |         |         |              |   |        |              |         |              |        |        |   |   |         |        
|                                          | Interest expense                            |                                                         |         | (10,700 | )            |   |        | (4,957       | )       |              |        | 4,134  |   |   |         | (11,523 | )      
|                                          | Investment and other income                 |                                                         |         | 4,916   |              |   |        | 871          |         |              |        | (4,134 | ) |   |         | 1,653   |        
|                                          | Derivative financial instruments            |                                                         |         |         |              |   |        |              |         |              |        |        |   |   |         |         |        
|                                          |                                             | Unrealized loss on interest rate derivatives            |         |         | (111         | ) |        |              | (13,042 | )            |        |        |  |   |         |         | (13,153 | )
|                                          |                                             | Realized gain on foreign exchange derivatives           |         |         | 28,578       |   |        |              | 743     |              |        |        |  |   |         |         | 29,321  |  
|                                          | Impairment of equity method investments     |                                                         |         | (2,255  | )            |   |        |             |         |              |        |       |   |   |         | (2,255  | )      
|                                          | Impairment of available-for-sale securities |                                                         |         | (4,480  | )            |   |        | (1,090       | )       |              |        |       |   |   |         | (5,570  | )      
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                          | Total other income (expense)                |                                                         |         | 15,948  |              |   |        | (17,475      | )       |              |        |       |   |   |         | (1,527  | )      
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                          |                                             | Income (loss) before income taxes and minority interest |         |         | 14,655       |   |        |              | (20,723 | )            |        |        |  |   |         |         | (6,068  | )
|Income tax (provision) benefit            |                                             |                                                         | (3,182  | )       |              |   | 10     |              |         |              |       |        |   |   | (3,172  | )      
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                          |                                             | Income (loss) before minority interest                  |         |         | 11,473       |   |        |              | (20,713 | )            |        |        |  |   |         |         | (9,240  | )
|Minority interest                         |                                             |                                                         |        |         |              |   | 5,647  |              |         |              |       |        |   |   | 5,647   |        
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       
|                                          |                                             | Net income (loss)                                       |         |        | 11,473       |   |        |             | (15,066 | )            |        |       |  |   |         |        | (3,593  | )
|                                          |                                             |                                                         |         |         |              |   |        |              |         |              |        |       

115



---



##### 



MERCER INTERNATIONAL INC.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(In Thousands of Euros, Except Per Share Data)


Combined Condensed Statement of Operations


|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |       |       |   |         |         |         |  
|----------------------------------------- | -------------------------------- | ------------------------------------------------------- | ------- | ------- | ------------ | - | ------ | ------------ | ------- | ------------ | ------ | ----- | ----- | - | ------- | ------- | ------- | -
|                                          |                                  | December 31, 2002                                       |        
|                                          |                                  |                                                         |        
|                                          |                                  | Restricted                                              |         |         | Unrestricted |   |        |              |         | Consolidated |       
|                                          |                                  | Group                                                   |         |         | Subsidiaries |   |        | Eliminations |         |              | Group  |      
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|Revenues                                  |                                  |                                                        | 145,459 |         |              |  | 98,551 |              |         |             | (4,878 | )     |       |  | 239,132 |        
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|Cost of sales                             |                                  |                                                         | 106,403 |         |              |   | 86,380 |              |         |              | (4,878 | )     |       |   | 187,905 |        
|Operating depreciation and amortization   |                                  |                                                         | 21,567  |         |              |   | 3,991  |              |         |              |       |       |       |   | 25,558  |        
|General and administrative                |                                  |                                                         | 12,567  |         |              |   | 12,412 |              |         |              |       |       |       |   | 24,979  |        
|Flooding grants, less losses and expenses |                                  |                                                         |        |         |              |   | 1,835  |              |         |              |       |       |       |   | 1,835   |        
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                          |                                  | Income (loss) from operations                           |         |         | 4,922        |   |        |              | (6,067  | )            |        |       |      |   |         |         | (1,145  | )
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                         
|Other income (expense)                    |                                  |                                                         |         |         |              |   |        |              |         |              |        |       |       |   |         |        
|                                          | Interest expense                 |                                                         |         | (12,522 | )            |   |        | (1,231       | )       |              |        |      |       |   |         | (13,753 | )      
|                                          | Investment and other income      |                                                         |         | (2,063  | )            |   |        | 4,191        |         |              |        | 1,898 |       |   |         | 4,026   |        
|                                          | Derivative financial instruments |                                                         |         |         |              |   |        |              |         |              |        |       |       |   |         |         |        
|                                          |                                  | Unrealized loss on interest rate derivatives            |         |         | (2,303       | ) |        |              | (30,108 | )            |        |       |      |   |         |         | (32,411 | )
|                                          |                                  | Realized gain on foreign exchange derivatives           |         |         | 25,732       |   |        |              |        |              |        |       |      |   |         |         | 25,732  |  
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                          | Total other income (expense)     |                                                         |         | 8,844   |              |   |        | (27,148      | )       |              |        | 1,898 |       |   |         | (16,406 | )      
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                          |                                  | Income (loss) before income taxes and minority interest |         |         | 13,766       |   |        |              | (33,215 | )            |        |       | 1,898 |   |         |         | (17,551 | )
|Income tax (provision) benefit            |                                  |                                                         | (264    | )       |              |   | 528    |              |         |              |       |       |       |   | 264     |        
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                          |                                  | Income (loss) before minority interest                  |         |         | 13,502       |   |        |              | (32,687 | )            |        |       | 1,898 |   |         |         | (17,287 | )
|Minority interest                         |                                  |                                                         |        |         |              |   | 10,965 |              |         |              |       |       |       |   | 10,965  |        
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      
|                                          |                                  | Net income (loss)                                       |         |        | 13,502       |   |        |             | (21,722 | )            |        |      | 1,898 |   |         |        | (6,322  | )
|                                          |                                  |                                                         |         |         |              |   |        |              |         |              |        |      

116



---



##### 






SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)


Quarterly Financial Data


(Thousands, Except per Share Amounts)


|                                                                                                  |  |               |         |   |         |   |        |              |  |   |             |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                                                                  |  | Quarter Ended |        
|                                                                                                  |  |               |        
|                                                                                                  |  | March 31      |         |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                                                                  |  |               |         |   |         |   |        |              |  |   |             |  
|2004                                                                                              |  |               |         |   |         |   |        |              |  |   |             |   |  |   |        |  
|Net Sales                                                                                         |  |              | 52,922  |   |         |  | 51,844 |              |  |  | 49,102      |   |  |  | 94,030 |  
|Gross profit                                                                                      |  |               | 5,519   |   |         |   | 7,114  |              |  |   | 8,597       |   |  |   | (5,434 | )
|Income before extraordinary items and cumulative effect of a
    change in accounting             |  |               | (18,966 | ) |         |   | 16,241 |              |  |   | (9,879      | ) |  |   | 32,584 |  
|Income before extraordinary items and cumulative effect of a
    change in accounting, per share* |  |               | (1.11   | ) |         |   | 0.57   |              |  |   | (0.57       | ) |  |   | 1.14   |  
|Net income (loss)                                                                                 |  |               | (18,966 | ) |         |   | 16,241 |              |  |   | (9,879      | ) |  |   | 32,584 |  
|                                                                                                 
|2003                                                                                              |  |               |         |   |         |   |        |              |  |   |             |   |  |   |        |  
|Net Sales                                                                                         |  |              | 50,401  |   |         |  | 47,913 |              |  |  | 45,822      |   |  |  | 50,420 |  
|Gross profit                                                                                      |  |               | 4,335   |   |         |   | 5,644  |              |  |   | (69         | ) |  |   | 4,956  |  
|Income before extraordinary items and cumulative effect of a
    change in accounting             |  |               | (10,922 | ) |         |   | 873    |              |  |   | 876         |   |  |   | 5,580  |  
|Income before extraordinary items and cumulative effect of a
    change in accounting, per share* |  |               | (0.65   | ) |         |   | 0.05   |              |  |   | 0.05        |   |  |   | 0.33   |  
|Net income (loss)                                                                                 |  |               | (10,922 | ) |         |   | 873    |              |  |   | 876         |   |  |   | 5,580  |  






|  |                   
|- | ------------------
|* | on a diluted basis

117



---



##### 






SIGNATURES


Securities Exchange Act of 1934


|                      |  |                               |  |                            
|--------------------- |  | ----------------------------- |  | ---------------------------
|                      |  | Mercer International
    Inc.
|                     
|Dated: March 14, 2005 |  | By:                           |  | /s/ Jimmy S.H. Lee         
|                      |  |                               |  |                            
|                      |  |                               |  | Jimmy S.H. Lee
    Chairman

Securities Exchange Act
of 1934


|                                                                                       |  |                      |  | 
|-------------------------------------------------------------------------------------- |  | -------------------- |  | 
|                                                                                      
|/s/ Jimmy S.H. LeeJimmy
    S.H. Lee
    Chairman, Chief Executive Officer and Trustee |  | Date: March 14, 2005
|                                                                                      
|/s/ David M. GandossiDavid
    M. Gandossi
    Chief Financial Officer                 |  | Date: March 14, 2005
|                                                                                      
|/s/ Eric LauritzenEric
    Lauritzen
    Trustee                                       |  | Date: March 14, 2005
|                                                                                      
|/s/ William D.
    McCartneyWilliam
    D. McCartney
    Trustee                       |  | Date: March 14, 2005
|                                                                                      
|/s/ Graeme A. WittsGraeme
    A. Witts
    Trustee                                     |  | Date: March 14, 2005
|                                                                                      
|/s/ Kenneth A. ShieldsKenneth
    A. Shields
    Trustee                               |  | Date: March 14, 2005
|                                                                                      
|/s/ Guy W. AdamsGuy
    W. Adams
    Trustee                                           |  | Date: March 14, 2005

118



---



##### 



EXHIBIT INDEX


|            |         |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ------- |  | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         |  | Description of Exhibit
|            |         |  |                       
|            | 1.1     |  |                        | Underwriting Agreement dated February 8, 2005 between
    Mercer International Inc. and RBC Capital Markets
    Corporation, on behalf of itself and CIBC World Markets Corp.,
    Raymond James & Associates, Inc. and D.A.
    Davidson & Co. Incorporated by reference from
    Form 8-K dated February 10, 2005.                                                                                                  
|            | 1.2     |  |                        | Underwriting Agreement dated February 8, 2005 among Mercer
    International Inc. and RBC Capital Markets Corporation and
    Credit Suisse First Boston LLC, on behalf of themselves and CIBC
    World Markets Corp. Incorporated by reference from Form 8-K
    dated February 10, 2005.                                                                                                                           
|            | 3.1(a)* |  |                        | Restated Declaration of Trust of the Company as filed with the
    Secretary of State of Washington on June 11, 1990 together
    with an Amendment to Declaration of Trust dated
    December 12, 1991.                                                                                                                                                                                                              
|            | (b)*    |  |                        | Amendments to Declaration of Trust dated July 8, 1993;
    August 17, 1993; and September 9, 1993.                                                                                                                                                                                                                                                                                                                    
|            | 3.2*    |  |                        | Trustees Regulations dated September 24, 1973.                                                                                                                                                                                                                                                                                                                                                                       
|            | 4.1     |  |                        | Indenture dated as of October 10, 2003 between Mercer
    International Inc. and Wells Fargo Bank Minnesota, N.A.
    Incorporated by reference from Form 8-K dated
    October 15, 2003.                                                                                                                                                                                                                             
|            | 4.2     |  |                        | Indenture dated as of December 10, 2004 between Mercer
    International Inc. and Wells Fargo Bank, N.A. Incorporated by
    reference from Form S-3 filed December 10, 2004.                                                                                                                                                                                                                                         
|            | 4.3     |  |                        | First Supplemental Indenture dated February 14, 2005 to
    Indenture dated December 10, 2004 between Mercer
    International Inc. and Wells Fargo Bank, N.A. Incorporated by
    reference from Form 8-K dated February 17, 2005.                                                                                                                                                                                   
|            | 4.4     |  |                        | Registration Rights Agreement dated as of October 10, 2003
    between Mercer International Inc. and RBC Dain Rauscher Inc.
    Incorporated by reference from Form 8-K dated
    October 15, 2003.                                                                                                                                                                                                                   
|            | 4.5     |  |                        | Registration Rights Agreement dated November 22, 2004
    between Mercer International Inc. and KPMG Inc. Incorporated by
    reference from Form 8-K dated November 23, 2004.                                                                                                                                                                                                                                        
|            | 4.6     |  |                        | Shareholder Rights Plan. Incorporated by reference from
    Form 8-K dated December 24, 2003.                                                                                                                                                                                                                                                                                                                         
|            | 4.7     |  |                        | First Amendment to Rights Agreement. Incorporated by reference
    from Form 8-K dated February 10, 2005.                                                                                                                                                                                                                                                                                                             
|            | 10.1    |  |                        | Acquisition Agreement among Treuhandanstalt, Dresden Papier AG,
    Dresden Papier Holding GmbH, Mercer International Inc., and Shin
    Ho Paper Mfg. Co., Ltd. Incorporated by reference from
    Form 8-K dated September 20, 1993.                                                                                                                                                                                
|            | 10.2    |  |                        | Acquisition Agreement among Treuhandanstalt, Zellstoff-und
    Papierfabrik Rosenthal GmbH, Raboisen
    Einhundertsechsundfunfzigste Vermogensverwaltungsgesellschaft
    GmbH, to be renamed ZPR Zellstoff-und Papierfabrik Rosenthal
    Holding GmbH, Mercer International Inc. and 448380 B.C. Ltd.
    dated July 3, 1994. Incorporated by reference from
    Form 8-K dated July 3, 1994.                      
|            | 10.3    |  |                        | Amended and Restated 1992 Stock Option Plan. Incorporated by
    reference from Form S-8 dated March 2, 2000.                                                                                                                                                                                                                                                                                                         
|            | 10.4*   |  |                        | 2002 Employee Incentive Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10.5*   |  |                        | Form of Separation Agreement between Mercer International Inc.
    and Arbatax International Inc.                                                                                                                                                                                                                                                                                                                     
|            | 10.6    |  |                        | English Translation of a Loan Agreement in the amount of
    DM508,000,000 between Zellstoff-und Papierfabrik Rosenthal
    GmbH & Co. KG, Blankenstein on the one hand and
    Bayerische Hypotheken-und Wechsel-Bank Aktiengesellschaft,
    Munich and Bayerische Vereinsbank Aktiengesellschaft, Munich on
    the other hand dated July 6, 1998. Incorporated by
    reference from Form 8-K dated July 16, 1998.

119



---



##### 



|            |        |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ------ |  | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  | Description of Exhibit
|            |        |  |                       
|            | 10.7*  |  |                        | English Translation of Agreement on the obligations of the
    shareholders between Mercer International Inc.,
    Spezialpapierfabrik Blankenstein GmbH and Zellstoff-und
    Papierfabrik Rosenthal Verwaltungs GmbH and Bayerische Hypo-und
    Vereinsbank Aktiengesellschaft dated February 11, 1999.                                                                                                                                                                                                                                      
|            | 10.8   |  |                        | English Translation of Amendment Agreement No. 4 dated
    December 13, 2000 between Zellstoff-und Papierfabrik
    Rosenthal GmbH & Co. KG and Bayerische Hypo-und
    Vereinsbank Aktiengesellschaft to the Loan Agreement dated
    July 6, 1998. Incorporated by reference from Form 8-K
    dated January 23, 2001.                                                                                                                                                                                                                        
|            | 10.9*  |  |                        | Purchase Agreement between Sihl and Mercer International Inc.
    dated December 14, 2001 relating to the acquisition of
    Landqart AG.                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.10  |  |                        | Project Financing Facility Agreement dated August 26, 2002
    between Zellstoff Stendal GmbH and Bayerische Hypo-und
    Vereinsbank AG. Incorporated by reference from Form 8-K
    dated September 10, 2002.                                                                                                                                                                                                                                                                                                                                 
|            | 10.11  |  |                        | Shareholders Undertaking Agreement dated August 26,
    2002 among Mercer International Inc., Stendal Pulp Holdings
    GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG
    and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and
    Bayerische Hypo-und Vereinsbank AG. Incorporated by reference
    from Form 8-K dated September 10, 2002.                                                                                                                                                                                 
|            | 10.12* |  |                        | Shareholders Agreement dated August 26, 2002 among
    Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
    Industrie-Lösungen GmbH and FAHR Beteiligungen AG.                                                                                                                                                                                                                                                                                                                                                                          
|            | 10.13* |  |                        | Contract for the Engineering, Design, Procurement, Construction,
    Erection and Start-Up of a Kraft Pulp Mill between Zellstoff
    Stendal GmbH and RWE Industrie-Lösungen GmbH dated
    August 26, 2002. Certain non-public information has been
    omitted from the appendices to Exhibit 10.16 pursuant to a
    request for confidential treatment filed with the SEC. Such
    non-public information was filed with the SEC on a confidential
    basis. The SEC approved the request for confidential treatment
    in January 2004.
|            | 10.14* |  |                        | Purchase and Sale Agreement dated December 30, 2002 between
    Equitable Industries Limited Partnership and Mercer
    International Inc. relating to the sale of Landqart AG.                                                                                                                                                                                                                                                                                                                                                                 
|            | 10.15* |  |                        | Form of Trustees Indemnity Agreement between Mercer
    International Inc. and its Trustees.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10.16* |  |                        | English Translation of Agreement between Zellstoff-und
    Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d.
    Saale and Bayerische Hypo-und Vereinsbank AG dated May 27,
    2002.                                                                                                                                                                                                                                                                                                                                                     
|            | 10.17  |  |                        | Purchase Agreement dated as of October 6, 2003 between
    Mercer International Inc. and RBC Dain Rauscher Inc.
    Incorporated by reference from Form 10-Q for the period
    ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                       
|            | 10.18  |  |                        | Employment Agreement dated for reference August 7, 2003
    between Mercer International Inc. and David Gandossi.
    Incorporated by reference from Form 8-K dated
    August 11, 2003.                                                                                                                                                                                                                                                                                                                                                        
|            | 10.19  |  |                        | Settlement Agreement dated as of August 5, 2003 among
    Mercer International Inc., Greenlight Capital, L.L.C. and
    Greenlight Capital, Inc. Incorporated by reference from
    Form 8-K dated August 6, 2003.                                                                                                                                                                                                                                                                                                                              
|            | 10.20* |  |                        | English translation of Refinancing Agreement dated
    December 12, 2003 between European Investment Bank and
    Zellstoff Stendal GmbH.                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.21  |  |                        | Employment Agreement effective as of April 28, 2004 between
    Mercer International Inc. and Jimmy S.H. Lee. Incorporated by
    reference from Form 8-K dated April 28, 2004.                                                                                                                                                                                                                                                                                                                                                                 
|            | 10.22  |  |                        | 2004 Stock Incentive Plan. Incorporated by reference from
    Form S-8 dated June 15, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | 10.23  |  |                        | Asset Purchase Agreement by and among Mercer International Inc.,
    0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the
    assets and undertakings of Stone Venepal (Celgar) Pulp Inc.
    dated November 22, 2004. Incorporated by reference from
    Form 8-K dated November 23, 2004.                                                                                                                                                                                                                                               

120



---



##### 



|            |        |  |                        |                                                                                                                                                                                                                                                                                      
|----------- | ------ |  | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  | Description of Exhibit
|            |        |  |                       
|            | 10.24  |  |                        | Revolving Credit Facility Agreement dated February 9, 2005
    among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal
    GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische
    Hypo-und Vereinsbank AG. Incorporated by reference from
    Form 8-K dated February 17, 2005.
|            | 10.25  |  |                        | Operating Credit Agreement dated February 11, 2005 between
    0706906 B.C. Ltd. and Royal Bank of Canada. Incorporated by
    reference from Form 8-K dated February 17, 2005.                                                                                                      
|            | 16     |  |                        | Letter regarding change in certifying accountant. Incorporated
    by reference from Form 8-K/A dated August 6, 2003.                                                                                                                                                                
|            | 21     |  |                        | List of Subsidiaries of Registrant.                                                                                                                                                                                                                                                  
|            | 23.1   |  |                        | Independent Auditors Consent of Deloitte & Touche
    LLP.                                                                                                                                                                                                                          
|            | 23.2   |  |                        | Independent Auditors Consent of Peterson Sullivan PLLC.                                                                                                                                                                                                                             
|            | 31.1   |  |                        | Section 302 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                  
|            | 31.2   |  |                        | Section 302 Certificate of Chief Financial Officer.                                                                                                                                                                                                                                  
|            | 32.1** |  |                        | Section 906 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                  
|            | 32.2** |  |                        | Section 906 Certificate of Chief Financial Officer.                                                                                                                                                                                                                                  






|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Filed in Form 10-K for prior years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|** | 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.

121