<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                           --------------------------

                                   FORM 10-K
                                   ----------

<TABLE>
<S>  <C>
/X/      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                  For the fiscal year ended December 31, 2000
                                       OR

<TABLE>
<S>  <C>
/ /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934
</TABLE>

      For the transition period from ________________ to ________________

                          COMMISSION FILE NO.: 0-9409

                           MERCER INTERNATIONAL INC.

              EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER

<TABLE>
<S>                                     <C>
           WASHINGTON                                91-6087550
 STATE OR OTHER JURISDICTION OF           IRS EMPLOYER IDENTIFICATION NO.
 INCORPORATION OR ORGANIZATION
</TABLE>

                GIESSHUBELSTRASSE 15, ZURICH, SWITZERLAND, 8045
               ADDRESS OF PRINCIPAL EXECUTIVE OFFICE    ZIP CODE

       Registrant's telephone number including area code: 41(1) 201 7710

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:

                           --------------------------

                 SHARES OF BENEFICIAL INTEREST, $1.00 PAR VALUE
                        PREFERRED STOCK PURCHASE RIGHTS
                                 TITLE OF CLASS

                         ------------------------------

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the SECURITIES EXCHANGE ACT OF
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to
Rule 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

    The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 27, 2001 was approximately
$61,557,480. The last reported sale price of the common shares of beneficial
interest on the NASDAQ Stock Market's National Market on March 27, 2001 was
$7.19 per share.

    As of March 27, 2001, the Registrant had 16,794,899 common shares of
beneficial interest, $1.00 par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    The Proxy Statement for the Annual Meeting of Shareholders to be held
July 10, 2001 is incorporated by reference in Part III hereof. Certain exhibits
in Part IV of this Form 10-K are incorporated by reference from prior filings
made by the Registrant under the SECURITIES ACT OF 1933, as amended, and the
SECURITIES EXCHANGE ACT OF 1934, as amended.

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<PAGE>
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                          --------
<S>        <C>                                                            <C>
                                PART I
Item 1.    BUSINESS....................................................          4
           The Company.................................................          4
           Products....................................................          5
           Sales, Marketing and Distribution...........................          6
           Fibre.......................................................          7
           Capital Expenditures and Government Financing...............          8
           Pulp Mill Conversion Project................................          9
           Stendal Pulp Mill Project...................................         11
           Environmental...............................................         12
           Human Resources.............................................         13
Item 2.    PROPERTIES..................................................         13
Item 3.    LEGAL PROCEEDINGS...........................................         15
Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........         15

                                PART II
Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS.......................................         16
Item 6.    SELECTED FINANCIAL DATA.....................................         17
Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATION..................................         18
           Results of Operations.......................................         18
             Year Ended December 31, 2000 Compared to the Year Ended
               December 31, 1999.......................................         19
             Year Ended December 31, 1999 Compared to the Year Ended
               December 31, 1998.......................................         20
           Liquidity and Capital Resources.............................         21
             Operating Activities......................................         21
             Investing Activities......................................         21
             Financing Activities......................................         21
           Foreign Currency............................................         22
           Cyclical Nature of Business; Competitive Position...........         22
           Stendal Pulp Mill Project Uncertainties.....................         23
           Inflation...................................................         23
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
             MARKET RISK...............................................         23
Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................         26
Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE..................................         26

                               PART III
Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........         27
Item 11.   EXECUTIVE COMPENSATION......................................         27
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND MANAGEMENT............................................         27
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............         27

                                PART IV
Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
             FORM 8-K..................................................         28
           Financial Statements........................................         30
           Supplementary Financial Information.........................         50
           SIGNATURES..................................................         51
</TABLE>

                                       2
<PAGE>
                           FORWARD-LOOKING STATEMENTS

    Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or other
business plans. Investors are cautioned that forward-looking statements are
subject to an inherent risk that actual results may vary materially from those
described herein. Factors that may result in such variance, in addition to those
accompanying the forward-looking statements, include changes in general economic
and business conditions, cyclical changes in supply and demand for pulp and
paper products, governmental regulations, the ability of management to execute
its business plan, product prices, interest rates, and other economic
conditions; actions by competitors; changing weather conditions and other
natural phenomena; actions by government authorities; uncertainties associated
with legal proceedings; technological development; future decisions by
management in response to changing conditions; and misjudgments in the course of
preparing forward-looking statements.

                                       3
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

    Mercer International Inc. is a Massachusetts trust organized under the laws
of the State of Washington in 1968. Under Washington law, shareholders of a
Massachusetts trust have the same limited liability as shareholders of
a corporation.

    In this document: (i) unless the context otherwise requires, the "Company"
or "Mercer" refers to Mercer International Inc. and its subsidiaries; (ii) a
"tonne" is one metric ton or 2,204.6 pounds; (iii) "DM" refers to deutschmarks,
the lawful currency of Germany; and (iv) foreign assets and liabilities
denominated in DM have been translated to U.S. dollars at the December 31, 2000
rate of exchange of DM 2.0821 to $1.00, and revenues and expenses denominated in
DM have been translated to U.S. dollars at the average rate of exchange
throughout 2000 of DM 2.1242 to $1.00.

    Mercer is a pulp and paper company headquartered in Zurich, Switzerland,
with operations primarily located in Germany. The Company's pulp operations are
conducted through Spezialpapierfabrik Blankenstein GmbH (formerly called
Zellstoff-und Papierfabrik Rosenthal GmbH) and its affiliates ("SPB") and its
paper operations are conducted through Dresden Papier GmbH (formerly called
Dresden Papier AG) and its affiliates ("DPAG"), all of which are wholly-owned
subsidiaries of Mercer. The Company previously also operated in the financial
services segment until June 1996, when it completed the spin-off of its
financial services business to its shareholders by use of a special dividend.

    The Company currently employs approximately 749 people. Its manufacturing
plants consist of a pulp mill (the "Pulp mill") with an annual production
capacity of approximately 280,000 tonnes that produces softwood kraft (sulphate)
pulp and two paper mills (the "Paper mills") with an aggregate annual production
capacity of approximately 85,000 tonnes that produce printing and
specialty papers.

    In 1999, the Company completed a major capital project to convert the Pulp
mill from the production of sulphite pulp to kraft pulp and increased its annual
production capacity from approximately 160,000 tonnes to approximately
280,000 tonnes (the "Conversion Project"). As a result, the Pulp mill is the
only market kraft pulp manufacturing facility in Germany. The Conversion Project
resulted in the Pulp mill taking approximately 4 1/2 months of downtime between
August and December 1999. The Pulp mill was successfully re-started in
December 1999, ramped up production in early 2000 and has operated in excess of
90% of capacity since the beginning of the second quarter of 2000. The aggregate
cost of the Conversion Project was approximately $385.7 million. See
"Business--Pulp Mill Conversion Project".

    Over the last five years, the Company has expended an aggregate of
approximately $438.6 million on capital investments on plant upgrades at its
mills to improve efficiency, reduce effluent discharges and emissions and
modernize its manufacturing plants. Approximately $108.1 million of such capital
investments were financed through non-refundable government grants.

    In late 1997, the Company embarked on a strategy to focus on its core
operations and rationalize assets that either were not part of such core
operations or did not provide the desired level of return. In accordance with
this strategy, the Company took a special charge of $48.5 million in the fourth
quarter of 1997 relating to the limited service life of various pulp assets due
to the Conversion Project, severance and related costs, the write-down of
specific capital assets to their estimated realizable value and a decrease in
the deferred income tax asset. In the fourth quarter of 1999, the Company took a
further special charge of $3.1 million relating to capital assets at the Pulp
mill which were no longer useful as a result of the Conversion Project.

    Pursuant to its focus on its core operations, in 1998, the Company completed
the sale of its packaging paper mill in Greiz and its carton paper mill in
Raschau which had been leased to another party since 1995. In the fourth quarter
of 1999, the Company took a special charge of $19.1 million relating to its
paper operations, as it intended to pursue strategic alternatives for certain of
its paper mills. Effective June 2000,

                                       4
<PAGE>
the Company sold its packaging paper mill located in Trebsen, Germany. Effective
November 2000, the Company sold its printing paper mill located in Hainsberg,
Germany. The Company used proceeds resulting from the dispositions to reduce
indebtedness and fund working capital and capital expenditures.

    The markets for pulp and paper are highly competitive and sensitive to
cyclical changes in industry capacity, the economy, interest rates and
fluctuations in foreign currency exchange rates, all of which can have a
significant influence on the Company's selling prices and overall profitability.
The Company competes with European and international pulp and paper firms
ranging from very large integrated firms to smaller specialty firms. Areas of
competition include price, innovation, quality and service. The Company's
competitive position is influenced by the availability and cost of its raw
materials, energy and labour, and its plant efficiencies and productivity in
relation to its competitors.

    The corporate strategy of the Company is to expand its asset and earnings
base both in Europe and internationally through the acquisition of interests in
companies and assets in the pulp and paper and related businesses. Effective
January 2000, the Company agreed, subject to certain conditions, to acquire a
controlling interest in a "greenfield" project to construct and operate a
550,000-tonne softwood kraft pulp mill (the "Stendal mill") to be located at
Stendal, Germany (the "Stendal Project"). The Company's participation in the
Stendal Project is subject to, among other things, completion of due diligence
and the Stendal Project itself is subject to, among other things, financing. The
Stendal Project is currently estimated to cost approximately
DM 1,600.0 million (or $768.5 million) and to be completed in 2004. See
"Business--Stendal Pulp Mill Project".

PRODUCTS

    The Company manufactures and sells softwood kraft pulp and two primary
classes of paper products. The Company's products are produced from both virgin
fibre, being wood chips and pulpwood, and recycled fibre, being waste paper. The
Company's manufacturing plants are all located in Germany in the States of
Saxony and Thuringia. The Pulp mill is situated near the town of Blankenstein
and has an annual production capacity of approximately 280,000 tonnes. The Paper
mills are located at Heidenau and Fahrbrucke and have an aggregate annual
production capacity of approximately 85,000 tonnes.

    The following table sets out the Company's primary classes of paper products
and the mills at which they are produced:

<TABLE>
<CAPTION>
PAPER PRODUCT CLASS                 MILL                      PRODUCT DESCRIPTION
-------------------                 ----                      -------------------
<S>                                 <C>                       <C>
Specialty Paper...................  Heidenau                  Coated and uncoated wallpaper.
                                    Fahrbrucke                Greaseproof paper.

Printing Paper....................  Fahrbrucke                Woodfree printing and writing paper.
</TABLE>

    Pulp is generally classified according to fibre type, the process used and
the degree to which it is bleached. In December 1999, the Company completed the
conversion of the Pulp mill to produce kraft pulp. The Pulp mill ramped up
production in early 2000 and has operated in excess of 90% of capacity since the
beginning of the second quarter of 2000. The kraft pulp now produced at the Pulp
mill is a long-fibred softwood pulp produced by a sulphate cooking process and
manufactured primarily from wood chips and pulpwood. Kraft pulp is noted for its
strength, whiteness and absorption properties and is used to produce a variety
of products, including lightweight publication grades of paper, tissues and
paper related products. A number of factors beyond economic supply and demand
have an impact on the market for chemical pulp, including requirements for pulp
bleached without any chlorine compounds or without the use of chlorine gas. The
Pulp mill has the capability of producing both "totally chlorine free" ("TCF")
and "elemental-chlorine free" ("ECF") pulp. TCF pulp is bleached to a high
brightness using oxygen and hydrogen peroxide as bleaching agents, whereas ECF
pulp is produced by substituting chlorine dioxide for chlorine gas in the
bleaching process. This substitution virtually eliminates complex chloro-organic
compounds from mill effluent.

                                       5
<PAGE>
SALES, MARKETING AND DISTRIBUTION

    The Company's paper sales and marketing operations focus primarily on
western European countries and are responsible for the majority of the Company's
paper sales. In 2000, paper sales conducted through agents were approximately
29% of total paper sales, compared to approximately 32% in 1999 and 29% in 1998.
The majority of the Company's paper products are sold to printers and wallpaper
manufacturers.

    Most of the Company's kraft pulp sales in Western Europe are handled through
a sales agency agreement with Oy Metsa Botnia Ab, a member of the Metsa Group of
Finland. Such sales comprised approximately 42% of the Company's total pulp
sales in 2000 and are currently expected to comprise approximately 45-60% over
the next two years. Sales and marketing in other countries are conducted by the
Company's own sales staff through other independent agents. The Company's kraft
pulp is sold principally to tissue and paper mills.

    Pulp and paper sales are made on terms customary to the industry. At
December 31, 2000, there were no material payment delinquencies. The Company's
products are delivered to market by truck, rail and ship.

    The distribution of the Company's sales by volume, product class and
geographic area is set out in the following table for the periods indicated:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                           --------------------------------------
                                                             2000           1999           1998
                                                           --------       --------       --------
                                                                          (TONNES)
<S>                                                        <C>            <C>            <C>
SALES BY VOLUME
Papers
  Packaging Papers.......................................    29,111(1)      68,615         91,157(2)
  Specialty Papers.......................................    41,422         36,518         36,001
  Printing Papers........................................    53,552(3)      57,714         56,866
                                                           --------       --------       --------
    Total Papers.........................................   124,085        162,847        184,024
                                                           --------       --------       --------
Pulp.....................................................   239,552         94,523(4)     145,451
                                                           --------       --------       --------
Total(5).................................................   363,637        257,370        329,475
                                                           ========       ========       ========

                                                                       (IN THOUSANDS)
SALES BY PRODUCT CLASS
Papers
  Packaging Papers.......................................  $  8,758(1)    $ 17,822       $ 24,722(2)
  Specialty Papers.......................................    33,112         29,658         30,401
  Printing Papers........................................    36,708(3)      38,010         41,192
                                                           --------       --------       --------
    Total Papers.........................................    78,578         85,490         96,315
                                                           --------       --------       --------
Pulp.....................................................   147,048         40,080(4)      69,918
                                                           --------       --------       --------
Total(5).................................................  $225,626       $125,570       $166,233
                                                           ========       ========       ========
SALES BY GEOGRAPHIC AREA
Germany..................................................  $ 95,376       $ 72,129       $ 89,829
European Union(6)........................................    76,827         47,498         65,806
Eastern Europe and Other.................................    53,423          5,943         10,598
                                                           --------       --------       --------
Total(5).................................................  $225,626       $125,570       $166,233
                                                           ========       ========       ========
</TABLE>

------------------------

(1) The Company sold its packaging paper mill in Trebsen effective June 2000.
    Paper sales from the Trebsen mill prior to its sale are included in the
    Company's results of operations for 2000. The

                                       6
<PAGE>
    Trebsen mill sold approximately 29,111 tonnes of packaging paper for
    approximately $8.8 million in 2000.

(2) The Company sold its packaging paper mill in Greiz effective July 1998.
    Paper sales from the Greiz mill prior to its sale are included in the
    Company's results of operations for 1998. The Greiz mill sold approximately
    25,490 tonnes of packaging paper for approximately $7.2 million in 1998.

(3) The Company sold its printing paper mill in Hainsberg effective
    November 2000. Paper sales from the Hainsberg mill prior to its sale are
    included in the Company's results of operations for 2000. The Hainsberg mill
    sold approximately 24,964 tonnes of printing paper for approximately
    $15.5 million in 2000.

(4) The Company converted its Pulp mill from the production of sulphite pulp to
    the production of kraft pulp in 1999 and took approximately 4 1/2 months
    of downtime.

(5) Excluding intercompany sales of 1,893, 201 and 1,072 tonnes of pulp in 2000,
    1999 and 1998, respectively.

(6) Not including Germany.

    The following charts illustrate the geographic distribution of the Company's
sales for the periods indicated:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Year Ended December 31, 2000

<TABLE>
<S>                       <C>
Germany                   42.3%
Eastern Europe and Other  23.7%
European(1) Union         34.0%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Year Ended December 31, 1999

<TABLE>
<S>                       <C>
Germany                   57.5%
Eastern Europe and Other   4.7%
European(1) Union         37.8%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Year Ended December 31, 1998

<TABLE>
<S>                       <C>
Germany                   54.0%
Eastern Europe and Other   6.4%
European(1) Union         39.6%
</TABLE>

------------------------

(1) Not including Germany.

    In 2000, one customer as a group accounted for approximately 27% of the
Company's pulp and paper sales, while in 1999 and 1998, no single customer
accounted for more than 10% of the Company's pulp and paper sales. The Company's
sales are not dependent upon a single customer or upon a concentrated group of
major customers. The loss of any one customer would not have a material adverse
effect on the Company.

FIBRE

    The fibre used by the Paper mills consists of waste paper (recycled paper)
and pulp, which are cyclical in both price and supply. The cost of such fibre is
primarily affected by the supply and demand for paper and pulp. Approximately
25% of the fibre used in the Company's paper operations consists of waste paper.
Germany has extensive waste paper recycling and collection laws which result in
a readily available supply. The cost of lower grade waste paper is currently
relatively low in comparison to virgin pulp fibre. The remaining 75% of the
fibre is made up of market pulps and chemical additives, both of which are
available

                                       7
<PAGE>
at market prices from various suppliers throughout Europe. In 2000, the Paper
mills consumed approximately 70,505 tonnes of waste paper.

    The fibre used by the Pulp mill consists of wood chips produced by local
sawmills and pulpwood, which are cyclical in both price and supply. Wood chips
are small pieces of wood used to make pulp and are a product of either wood
waste from sawmills or pulpwood processed especially for this purpose. Pulpwood
consists of lower quality logs not used in the production of lumber. The costs
of wood chips and pulpwood are primarily affected by the supply and demand for
lumber. The Pulp mill is situated in a region which offers a stable fibre
supply. The wood chips are procured from approximately 60 sawmills located in
the States of Bavaria and Thuringia within a 150 kilometre radius of the Pulp
mill. Within this radius, the Pulp mill is by far the largest consumer of wood
chips. Wood chips are normally procured from sawmills pursuant to one year
supply contracts, which provide for quarterly price adjustments. Pulpwood is
partly procured from the state forest agency in Thuringia on a contract basis
and partly from private holders. The Pulp mill's fibre requirements are handled
and procured primarily by SCA Holz (formerly PWA Holz), which is the largest
wood procurement company in Germany and handles a total volume of approximately
five million cubic metres per year. In 2000, the Pulp mill consumed
approximately 1,367,987 cubic metres of fibre comprised of approximately
925,937 cubic metres of wood chips and 442,050 cubic metres of pulpwood.

    The Conversion Project increased the annual production capacity of the Pulp
mill from approximately 160,000 tonnes to approximately 280,000 tonnes. The
additional fibre necessary for the increase in production has been met primarily
from the Company's existing fibre sources. In late 1998, the Company entered
into a fixed price contract to secure approximately 35% of the Pulp mill's
requirements for wood chips to the end of 2002. While fibre costs and supply are
subject to cyclical changes, the Company expects that it will be able to obtain
an adequate supply of fibre on reasonably satisfactory terms due to the location
of the Pulp mill and its long-term relationships with suppliers.

CAPITAL EXPENDITURES AND GOVERNMENT FINANCING

    In 2000, the Company continued with its capital investment programs designed
to improve efficiency, reduce effluent discharges and emissions and increase
production capacity at its manufacturing plants. Such capital investments were
partially financed through non-refundable grants made available by German
federal and state governments and were used to offset certain wastewater fees.

    Under legislation adopted by the federal and certain state governments of
Germany, non-refundable grants are provided to qualifying businesses operating
in eastern Germany to finance capital investments. The grants are made to
encourage investment and job creation. Pursuant to the current terms of such
grants, federal and state governments will provide funding for up to 35% of the
cost of qualified investments. These grants are not recorded in the income of
the Company, but instead reduce the cost basis of the assets purchased by the
proceeds thereof.

    Loan guarantees are also available from German federal and state governments
for up to 80% of the loan for qualifying investments. These guarantees are
provided by such federal and state governments to assist qualifying businesses
with financing capital investments. The guarantees permit such businesses to
obtain term loans at below market interest rates. In addition, subsidized
interest rate loans are also available from public financial institutions in
Germany, which provide loans at below market interest rates for
qualified investments.

    The capital investments made by the Company to reduce effluent discharges
have been applied to offset wastewater fees that would otherwise be payable. At
December 31, 2000, the aggregate wastewater fees saved by the Company over the
last five years as a result of environmental capital expenditures were
approximately $18.7 million. See "Business--Environmental".

                                       8
<PAGE>
    The following table sets out the Company's capital expenditures and
non-refundable grants recorded for the periods indicated:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                           ----------------------------------------------------------------
                              TOTAL          2000          1999          1998          1997          1996
                             --------      --------      --------      --------      --------      --------
                                                             (IN THOUSANDS)
<S>                          <C>           <C>           <C>           <C>           <C>           <C>
Capital expenditures.......  $438,604(1)   $24,884(2)    $289,110(4)   $85,954(6)    $14,791(8)    $23,865
                             ========      =======       ========      =======       =======       =======
Non-refundable grants......  $108,070      $50,967(3)    $ 33,927(5)   $16,125(7)    $ 1,723       $ 5,328
                             ========      =======       ========      =======       =======       =======
</TABLE>

------------------------

(1) Over the last five years, aggregate wastewater fees saved by the Company as
    a result of environmental capital expenditures were approximately
    $18.7 million.

(2) $16.1 million was related to the Conversion Project.

(3) $50.4 million was related to the Conversion Project.

(4) $281.6 million was related to the Conversion Project.

(5) $32.7 million was related to the Conversion Project.

(6) $82.2 million was related to the Conversion Project.

(7) $16.0 million was related to the Conversion Project.

(8) $5.9 million was related to the Conversion Project.

    Capital investments in 2000 included a variety of smaller projects, the
largest of which was the installation of a new paper machine drive at the
Fahrbrucke mill at a cost of approximately $1.3 million. The Company anticipates
that capital investments at its Paper mills for maintenance and environmental
projects will total approximately $2.3 million in 2001. The Company is reviewing
a number of strategic initiatives designed to upgrade the product mix at the
Paper mills and enhance returns.

    Pursuant to the terms of their acquisition from Bundesanstalt fur
Vereinigungsbedingte Sonderaufgaben ("BVS"), the privatization agency of the
German government, the Company's pulp and paper operations were obligated to
make a predetermined amount of capital investments, maintain certain employment
levels for specified periods and, in the event of the sale of certain assets or
businesses prior to certain periods, pay a portion of the proceeds to BVS. The
obligations in respect of the Company's pulp operations expired on December 31,
1998. The obligations in respect of the Company's paper operations expired on
December 31, 1996, except that in 1998 the Company agreed with BVS to make
further capital investments of at least $7.2 million on or before April 30,
2000. The Company completed these obligations in 2000.

PULP MILL CONVERSION PROJECT

    In December 1999, the Company completed the Conversion Project to convert
the Pulp mill to the production of kraft pulp and increase its annual production
capacity to approximately 280,000 tonnes. The Conversion Project has also
substantially reduced effluent and sulphur dioxide emissions and reduced energy
costs. In connection with the Conversion Project, the Pulp mill took
approximately 4 1/2 months of downtime commencing in August 1999 and operations
were successfully re-started in December 1999. The Pulp mill ramped up
production in early 2000 and has operated in excess of 90% of capacity since the
beginning of the second quarter of 2000.

    The Pulp mill is the only producer of market kraft pulp in Germany. Kraft
pulp is primarily used in the production of paper, tissues and paper related
products. Kraft pulp is the main type of pulp imported and sold in the European
market and Germany is the most significant pulp market in Europe. As a result,

                                       9
<PAGE>
the majority of the Company's kraft pulp production is sold in the European
market, with Germany comprising a significant portion of sales.

    The aggregate costs of the Conversion Project, including project financing,
capitalized interest of approximately $15.2 million and related costs and an
amount for contingencies, were approximately $385.7 million. The Conversion
Project was financed through a combination of a project loan, non-refundable
governmental grants, governmental assistance and guarantees for long-term
project financing and an equity investment by the Company.

    In 1998, SPB entered into a project loan agreement, as amended (the "Project
Loan Agreement") having a 15 year term with a German bank (the "Bank") and other
syndicated lenders (the "Lenders"), in the aggregate amount of
DM 508.0 million ($244.0 million) (the "Loan Facility"), to finance the
Conversion Project. The following summary of the material provisions of the
Project Loan Agreement is not complete and such provisions, including
definitions of certain terms, are qualified by reference to the Project Loan
Agreement and the applicable amendment agreements.

    The Loan Facility of DM 508.0 million ($244.0 million) included a main
facility of DM 453.0 million ($217.6 million) for costs and expenses associated
with the project (the "General Tranche"), a working capital facility (the
"Working Capital Tranche") of DM 28.0 million ($13.4 million) which could also
be utilized by SPB for project costs, and a cost overrun facility (the "Cost
Overrun Tranche") of DM 27.0 million ($13.0 million). The Cost Overrun Tranche
was never utilized by SPB. As a result of the Conversion Project being
completed, SPB agreed in December 2000 in amendment agreement No. 4 (the
"Amendment Agreement") to the Project Loan Agreement not to draw down the Cost
Overrun Tranche.

    Pursuant to the Project Loan Agreement, SPB deposited DM 25 million into a
restricted account (the "Overrun Account") with the Lenders in 1998 to fund cost
overruns, if any, for the project. Pursuant to the Amendment Agreement, the
Lenders agreed to release SPB from its fixed-term deposit, if and to the extent
that SPB makes available this amount for the purposes of financing a portion of
the required balance on the debt service reserve account (the "Debt Service
Reserve Account") pledged in favour of the Lenders under the Project Loan
Agreement. SPB's obligation to provide further equity of up to DM 25.0 million
($12.0 million) when needed to prevent the occurrence of bankruptcy or similar
proceedings will remain unaffected.

    The parties to the Amendment Agreement agreed that the amount of the
required balance on the Debt Service Reserve Account will be increased, as from
March 31, 2002, by an additional reserve amount of up to DM 10.0 million
($4.8 million). This amount is to be comprised of annual transfers to the Debt
Service Reserve Account of 15% of the balance of all amounts distributable to
SPB which are credited at any repayment date to the proceeds account (the
"Proceeds Account") pledged by SPB in favour of the Lenders under the Project
Loan Agreement.

    The parties to the Amendment Agreement also agreed that all amounts credited
to the Proceeds Account and the Debt Service Reserve Account may be invested by
SPB in short-term debt instruments that have been given a short-term rating of
A1 or a long-term rating of A- or higher by Standard & Poor's Corporation, or a
corresponding rating by another recognized rating agency.

    The Bank agreed in the Amendment Agreement to grant to SPB a facility by way
of bank guarantee in the amount of up to DM 5.0 million ($2.4 million).

    The German federal government and the state government of Thuringia provided
a guarantee (the "Governmental Guarantee") for 80% of the Loan Facility and the
Loan Facility is also secured by liens on substantially all of the assets of
SPB. In addition to the Governmental Guarantee, the state government of
Thuringia agreed to provide governmental grants of DM 144.0 million in respect
of the project. These grants are non-repayable provided that SPB maintains
certain employment levels for a period of five years after the completion of the
project. In addition, the German federal government agreed to provide, under
existing programs, non-repayable investment subsidies and grants totalling
DM 53.0 million in respect of

                                       10
<PAGE>
the project. To December 31, 2000, SPB had received government grants totalling
approximately $99.1 million. Such grants are applied to reduce the costs of the
assets acquired with the same.

    As provided for in the Loan Facility, an aggregate of DM 290.0 million
($139.3 million) was drawn as at December 31, 2000 by SPB pursuant to special
credit programs (the "Special Credits") established by certain German public
banks for projects which enhance environmental performance. The amounts drawn as
Special Credits are part of the overall Loan Facility and repayment structure.
The rates of interest for the Special Credits are fixed for the first 10 years
at an annual amount equal to the Lenders' costs of such funds. The rate of
interest will be adjusted and reset after 10 years for the balance of the term.
These Special Credits permit qualifying borrowers to borrow money at favourable
rates of interest.

    The rate of interest for the Loan Facility (other than for amounts drawn as
Special Credits) is an amount equal to the three or six month LIBOR rates for DM
plus a margin of between 60 and 75 basis points. In connection with the Loan
Facility, SPB paid to the Lenders a 1% up front commitment/loan fee, and has
been paying a quarterly standby fee of 0.375% on the undrawn portions of the
Loan Facility less the amount of Special Credits and certain annual
administration fees during the term of the Loan Facility.

    The Loan Facility was available for drawdown by SPB until the earlier of the
official completion of the Conversion Project (as determined under the Project
Loan Agreement) or February 28, 2001. Pursuant to the Amendment Agreement, the
parties agreed that the completion date for the Conversion Project was June 30,
2000. Repayment of the General Tranche commences on March 31, 2001 with
semi-annual payments on each of March 31 and September 30 thereafter until final
maturity on September 30, 2013. The actual amounts of repayments will be based
upon a percentage of SPB's overall debt service profile. The Working Capital
Tranche will mature on the seventh anniversary of its initial drawdown and is to
be repaid in four equal annual installments commencing on September 30 of the
fourth calendar year after the first drawdown thereunder. As at December 31,
2000, DM 481.0 million ($231.0 million) had been drawn under the Loan Facility
in respect of the Conversion Project.

    The Project Loan Agreement contains representations, warranties and
covenants customary to term project/construction loans of this nature,
including, without limitation, covenants to maintain an Annual Debt Service
Cover Ratio (as defined therein) of 1.1:1 and restrictions on encumbrances,
distributions, dispositions of material assets and further indebtedness for
borrowed money. The Project Loan Agreement contains various events of default
customary for term project/construction loans of this type which, after expiry
of any applicable curative periods, permit the Lenders to accelerate the Loan
Facility, including failure to make required payments, failure to comply with
the covenants in the Project Loan Agreement, failure to comply with certain
other obligations and the Company ceasing, without the prior consent of the
Lenders, not to be unreasonably withheld, to own directly or indirectly 51% or
more of the outstanding voting securities of SPB, unless a new third party owns
at least 51% of the voting securities of SPB and assumes all of the Company's
obligations to the Lenders.

    The Amendment Agreement is subject to the final approval of the guarantors
under the Loan Agreement and the execution of the agreements referred to in
annexes 1, 3, 5 and 6 of the Amendment Agreement. Such approval and execution is
expected to be completed in the first half of 2001.

STENDAL PULP MILL PROJECT

    Effective January 2000, the Company entered into a subscription agreement
with Zellstoff Stendal GmbH ("ZSG") and its three founding shareholders to
acquire an initial 25% interest in ZSG, which will be increased to a 50.1%
interest subject to certain conditions. ZSG is a project company formed to
construct an approximately DM 1,600.0 million ($768.5 million) "greenfield"
550,000-tonne softwood kraft pulp mill near the town of Stendal, in the German
State of Sachsen-Anhalt. The other shareholders of ZSG are Altmark-Industrie AG,
Thyssen Rheinstahl Technik GmbH, a subsidiary of ThyssenKrupp AG of Germany, and
Tessag Industrie-Anlagen GmbH, a subsidiary of RWE, a leading German
power company.

                                       11
<PAGE>
    Under the terms of the subscription agreement, the Company has initially
subscribed for a 25% interest in ZSG for a nominal sum, with the intention to
increase this to a 50.1% ownership position with an additional contribution of
approximately DM 80.2 million ($38.5 million). The increase in ownership is
subject to certain conditions, including the entering into of a formal
shareholders' agreement and the completion of the Company's due diligence. ZSG
has already received the necessary permits for the construction of the Stendal
mill, as well as commitments for German federal and state grants and subsidies.
The implementation of the Stendal Project is expected to commence at the end of
2001 and be completed in 2004.

    The Stendal mill will be located approximately 350 kilometres from the
Company's Pulp mill. As a result, the Company believes it will be able to
realize significant operating synergies between the two operations, particularly
in the area of raw material costs, production engineering and marketing.

    When completed, the Stendal mill is anticipated to be the largest pulp
facility in Germany and only the second market kraft pulp mill in Germany, both
of which will be owned by the Company. Furthermore, the Company anticipates that
the addition of production from the Stendal mill will allow the Company to
expand its customer base, as its two pulp mills will produce slightly different
grades of softwood kraft pulp. Germany is the largest importer of market pulp
in Europe.

    Financing for the Stendal mill is expected to come from three sources:
government financing, project financing and outside capital. Government
financing includes investment grants and subsidies already committed to the
Stendal Project, as well as a deficiency payment bond to be granted by German
federal and state authorities to ZSG. Project financing will be sought from
banks or other lenders to complete the Stendal Project and finance the start-up
and ongoing operations of the Stendal mill. Outside capital will be sought by
ZSG from financial investors and/or engineering or supply partners to be
advanced as quasi equity and/or a subordinated loan. The Company expects the
proportionate financing contributions from the shareholders of ZSG, including
the Company, the government financing, the project financing and the outside
capital to be approximately 10%, 19%, 66% and 5%, respectively.

    Although the project to construct and operate the Stendal mill has received
favourable support from German governmental and regulatory bodies to date, there
can be no assurance that current governmental assistance programs will not be
amended in the future or that financial assistance will be provided to ZSG on
terms satisfactory to it or its shareholders, if at all, or that all necessary
environmental permits will be received on satisfactory terms upon completion, if
at all, or in time to permit ZSG and other investors in ZSG, including the
Company, to proceed with and complete the project as currently planned. In
addition, the Stendal Project is subject to customary risks and uncertainties
inherent for large capital projects which include, among other things, risks
that sufficient financing will not be available when needed or, if available, on
terms satisfactory to the Company, that the construction of the Stendal mill
will not occur on schedule or without cost over-runs, and that the Stendal mill
will not experience operating difficulties or delays during the start-up or
ramp-up period.

ENVIRONMENTAL

    The Company's operations are subject to a broad range of German federal,
state and local environmental laws and regulations, dealing primarily with
water, air and land pollution control. In recent years, the Company has devoted
significant financial and management resources to comply with all applicable
environmental laws and regulations. The Company's total capital expenditures on
environmental projects, excluding those incurred in connection with the
Conversion Project, were approximately $0.8 million in 2000 and are expected to
be approximately $2.4 million in 2001.

    The Company believes its operations are currently in substantial compliance
with the requirements of all applicable environmental legislation and
regulations and its respective operating permits.

                                       12
<PAGE>
    In January 2000, the Company completed construction of a wastewater
treatment plan on land owned by the Company at the Heidenau mill, at a cost of
approximately $1.9 million.

    The Pulp mill has a relatively modern biological wastewater treatment and
oxygen bleaching facility. The Company has reduced its levels of AOX (Adsorbable
Organic Halogen) discharge to 0.02 kilograms per tonne of pulp produced, which
is in compliance with State regulations with respect to effluent discharges.
Effective January 1, 2001, the Pulp mill is required to maintain levels of COD
(Chemical Oxygen Demand) discharge at the Pulp mill below 25 kilograms per
tonne. The Pulp mill is currently in compliance with these levels of COD
discharge. The Company will continue to modify its wastewater and bleaching
facilities at the Pulp mill to meet or exceed prescribed regulations, which have
been further enhanced as a result of the Conversion Project.

    Under German state environmental rules relating to effluent discharges,
industrial users are required to pay wastewater fees based upon the amount of
their effluent discharge. These rules also provide that an industrial user which
undertakes environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of such expenditures
against the wastewater fees that would otherwise be payable. As a result, at
December 31, 2000, the aggregate wastewater fees saved by the Company as a
result of environmental capital expenditures made at the manufacturing plants
were approximately $4.1 million. The Company expects that its capital investment
programs for its manufacturing plants will offset the full amount of wastewater
fees that may be payable in respect of 2000 and 2001 and will ensure that its
operations continue in substantial compliance with prescribed standards.

    The Company periodically performs environmental audits of operational sites
and procedures both with Company personnel and outside consultants.

HUMAN RESOURCES

    The Company currently employs approximately 749 people, of which
approximately 222 are engaged in paper operations and approximately 524 in pulp
operations, including the Company's transportation subsidiary. In connection
with the Conversion Project, the Company has agreed with State government
authorities to maintain at least 504 jobs at its pulp operations until June 30,
2005. The Company also established a transportation subsidiary to deliver raw
materials for the production of pulp to the Pulp mill and deliver pulp products
to its customers.

    The majority of the Company's employees are represented by the
Industriegewerkschaft Bergbau-Chemie-Energie (the "IG-BCE"), a national union
which represents pulp and paper workers in Germany. In 1998, the labour
agreement for workers at the Company's Paper mills was renewed until the end of
1999, upon terms which provided for wage increases of 1.2% in October 1998, 1.3%
in July 1999 and 1.3% in December 1999. A new agreement was reached in 1999 upon
terms which provide for wage increases of 1.5% in July 2000 and January 2001.
The new agreement will expire April 30, 2001 and the Company expects
negotiations on a new agreement to take place in May 2001.

    In 1997, the Company entered into a new five year labour agreement with its
pulp workers which provides for, among other things, wage increases of 1.5% in
September 1997, 2.0% in January 1998, 1.5% in August 1998, and 2.5% in
January 1999 and 2000, respectively; a profit sharing plan; and the Company to
maintain its existing employment levels until December 31, 2002. The labour
agreement established a wage rate that will be approximately 95% of the union
wage rate in 2001 for pulp workers in western Germany and at par with such rate
by 2002.

ITEM 2.  PROPERTIES

    The Company's corporate head office is located in Zurich, Switzerland and is
leased. The Company also maintains offices in Germany which are owned.

                                       13
<PAGE>
    The Company's Paper mills and the Pulp mill are located in Germany in the
States of Saxony and Thuringia. All of the mills are situated on property owned
by the Company. Both of the Paper mills operate their own power plants to
produce electricity and steam.

    The Heidenau paper mill serves as headquarters for the Company's pulp and
paper operations. It produces specialty papers and has an annual production
capacity of 45,000 tonnes. The Fahrbrucke mill produces both specialty and
printing papers and has an annual production capacity of 40,000 tonnes. The
Fahrbrucke mill uses virgin fibre in producing various grades of
printing papers.

    The Pulp mill has an annual production capacity of 280,000 tonnes and is
situated on a 220 acre site in close proximity to the Saale River and the town
of Blankenstein in the State of Thuringia. The Pulp mill was constructed between
1973 and 1977 and has been upgraded in several stages. Its facilities include a
complete wood fibre processing line with an oxygen bleaching plant, chemical
recovery systems, power plant, a biological wastewater treatment facility and a
waste disposal site. In December 1999, the Company completed the Conversion
Project. See "Business--Pulp Mill Conversion Project".

    The following table sets out, by primary product class, the production
capacity and actual production of the Company for the periods indicated:

<TABLE>
<CAPTION>
                                                                                  PRODUCTION
                                                                    --------------------------------------
                                                                           YEARS ENDED DECEMBER 31,
                                            ANNUAL PRODUCTION       --------------------------------------
PRODUCT CLASS                                  CAPACITY(1)            2000           1999           1998
-------------                               -----------------       --------       --------       --------
                                                                       (TONNES)
<S>                                         <C>                     <C>            <C>            <C>
Papers
  Packaging Papers........................            --(2)          28,762(3)      67,301         96,614(4)
  Specialty Papers........................        45,000             41,881         35,650         37,372
  Printing Papers.........................        40,000(5)          53,601(6)      56,983         57,274
                                                 -------            -------        -------        -------
    Total Papers..........................        85,000            124,244        159,934        191,260
                                                 -------            -------        -------        -------
Pulp......................................       280,000            251,743         88,675(7)     150,381
                                                 -------            -------        -------        -------
Total.....................................       365,000            375,987        248,609        341,641
                                                 =======            =======        =======        =======
</TABLE>

------------------------

(1) Capacity is stated upon the rated capacity of the plants as at December 31,
    2000, which is based upon production for 365 days a year. Actual production
    is generally based upon 340 days per year for the Paper mills and 353 days
    per year for the Pulp mill.

(2) The Company sold its packaging paper mill located in Trebsen, Germany
    effective June 2000.

(3) Includes production of approximately 28,762 tonnes from the Trebsen mill
    prior to its sale effective June 2000.

(4) Includes production of approximately 24,612 tonnes from the Greiz mill prior
    to its sale effective July 1998.

(5) The Company sold its printing paper mill located in Hainsberg, Germany
    effective November 2000.

(6) Includes production of approximately 25,463 tonnes from the Hainsberg mill
    prior to its sale effective November 2000.

(7) The Company converted its Pulp mill from the production of sulphite pulp to
    the production of kraft pulp in 1999 and took approximately 4 1/2 months
    of downtime.

    The Company owns a substantial amount of real estate adjacent to its Paper
mills, which is excess to its production requirements and may be divested.

                                       14
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

    The Company is subject to routine litigation incidental to its business. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.

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

    Not applicable.

                                       15
<PAGE>
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    (a) MARKET INFORMATION.  The Company's shares of beneficial interest trade
on the NASDAQ Stock Market's National Market under the symbol "MERCS" and on
EASDAQ under the symbol "MERC". The following table sets forth the quarterly
high and low closing prices on NASDAQ for the two years ended December 31, 1999
and 2000, and for the period ended March 27, 2001:

<TABLE>
<CAPTION>
FISCAL QUARTER ENDED                                            HIGH       LOW
--------------------                                          --------   --------
<S>                                                           <C>        <C>
1999
March 31....................................................   $ 7.75     $6.03
June 30.....................................................   $ 7.25     $5.47
September 30................................................   $ 5.78     $3.72
December 31.................................................   $ 5.06     $3.72

2000
March 31....................................................   $ 9.00     $4.50
June 30.....................................................   $ 9.75     $7.50
September 30................................................   $11.06     $7.56
December 31.................................................   $ 8.00     $5.75

2001
Period ended March 27.......................................   $ 9.00     $6.29
</TABLE>

    (b) SHAREHOLDER INFORMATION.  As of March 27, 2001, there were approximately
602 holders of record of the Company's shares and a total of 16,794,899 shares
were outstanding.

    (c) DIVIDEND INFORMATION.  In 1997, the Company resolved, subject to, among
other things, the availability of earnings and its anticipated cash
requirements, to pay regular dividends on its shares of beneficial interest. The
first dividend in the amount of $0.03 per share was paid on May 9, 1997 to
shareholders of record as of April 30, 1997. In 1998, the Company paid a cash
dividend of $0.04 per share to shareholders of record as of April 30, 1998. In
1999, the Company paid a dividend of $0.05 per share to shareholders of record
as of April 30, 1999. The Company did not pay a dividend on its shares of
beneficial interest in 2000. The actual timing, payment and amount of future
dividends paid by the Company will be determined by the board of trustees of the
Company from time to time based upon, among other things, the cash flow, results
of operations and financial condition of the Company, the need for funds to
finance ongoing operations and such other business considerations as the board
of trustees of the Company considers relevant.

                                       16
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

    The following table sets forth selected financial information for the
Company for each of the last five years. The Company's previous interest in its
financial services segment was spun-off to shareholders of beneficial interest
on June 3, 1996 and was classified separately within the Company's financial
statements for the year ended December 31, 1996 as "spun-off operations" and
excluded from the amounts of revenues, expenses, assets and liabilities of the
Company's continuing operations. The following financial information has been
reclassified to conform with the current year's presentation.

    The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the more detailed financial statements and
related notes contained elsewhere herein.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                              ------------------------------------------------------------------------
                                2000           1999           1998             1997             1996
                              --------       --------       --------         --------         --------
                                            (IN THOUSANDS, OTHER THAN PER SHARE AMOUNTS)
<S>                           <C>            <C>            <C>              <C>              <C>
Revenues....................  $236,202       $127,867       $174,896         $184,107         $186,729(1)
Net income (loss) from
  continuing operations.....  $ 29,474       $(38,109)(2)   $  9,012         $(32,623)(3)     $ 15,557
Net income (loss) from
  continuing operations, per
  common share,
  Basic.....................  $   1.76       $  (2.33)(2)   $   0.59         $  (2.18)(3)     $   1.12
  Diluted...................  $   1.72       $  (2.33)(2)   $   0.59         $  (2.18)(3)     $   1.12
Weighted average common
  shares outstanding,
  Basic.....................    16,779         16,390         15,352           14,995           13,829
  Diluted...................    17,144         16,390         15,384           14,995           13,957
Current assets..............  $ 92,881       $ 69,116       $121,716         $100,384         $132,651
Current liabilities.........  $ 66,216       $116,156       $ 56,695         $ 57,753         $ 71,129
Working capital.............  $ 26,665       $(47,040)      $ 65,021         $ 42,631         $ 61,522
Total assets................  $403,659       $455,845       $333,284         $210,294         $296,980(1)
Long-term liabilities.......  $212,036       $236,669       $123,570         $ 17,066         $ 31,312
Shareholders' equity........  $125,407       $103,020       $153,019         $135,475         $194,539(1)(4)
Cash dividends..............  $     --       $    834       $    610         $    450         $     --
Cash dividends per share....  $     --       $   0.05       $   0.04         $   0.03         $     --
</TABLE>

------------------------

(1) Excludes spun-off operations.

(2) Net loss from continuing operations before the special charge was
    $16.0 million, or $0.97 per share.

(3) Net income from continuing operations before the special charge was
    $15.8 million, or $1.06 per share.

(4) After stock dividend.

                                       17
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION

    The following discussion and analysis of the financial condition and results
of operations of the Company for the three years ended December 31, 2000 should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this annual report. Certain amounts in the Company's
financial statements and related notes have been restated to conform to the
current presentation. The following management discussion and analysis of
financial condition and results of operations are based upon the restated
financial statements for all prior years as aforesaid.

RESULTS OF OPERATIONS

    Selected sales data for the Company for each of the last three years is as
follows:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                           --------------------------------------
                                                             2000           1999           1998
                                                           --------       --------       --------
                                                                       (IN THOUSANDS)
<S>                                                        <C>            <C>            <C>
SALES BY PRODUCT CLASS
Papers
  Packaging Papers.......................................  $  8,758(1)    $ 17,822       $ 24,722(2)
  Specialty Papers.......................................    33,112         29,658         30,401
  Printing Papers........................................    36,708(3)      38,010         41,192
                                                           --------       --------       --------
    Total Papers.........................................    78,578         85,490         96,315
                                                           --------       --------       --------
Pulp.....................................................   147,048         40,080         69,918
                                                           --------       --------       --------
Total....................................................  $225,626       $125,570       $166,233
                                                           ========       ========       ========
<S>                                                        <C>            <C>            <C>
<CAPTION>
SALES BY VOLUME                                                           (TONNES)
Papers
<S>                                                        <C>            <C>            <C>
  Packaging Papers.......................................    29,111(1)      68,615         91,157(2)
  Specialty Papers.......................................    41,422         36,518         36,001
  Printing Papers........................................    53,552(3)      57,714         56,866
                                                           --------       --------       --------
    Total Papers.........................................   124,085        162,847        184,024
                                                           --------       --------       --------
Pulp.....................................................   239,552         94,523        145,451
                                                           --------       --------       --------
Total(4).................................................   363,637        257,370        329,475
                                                           ========       ========       ========
</TABLE>

------------------------

(1) The Company sold its packaging paper mill in Trebsen effective June 2000.
    Paper sales from Trebsen mill prior to its sale are included in the
    Company's results of operations for 2000. The Trebsen mill sold
    approximately 29,111 tonnes of packaging paper for approximately
    $8.8 million in 2000.

(2) The Company sold its packaging paper mill in Greiz effective July 1998.
    Paper sales from the Greiz mill prior to its sale are included in the
    Company's results of operations for 1998. The Greiz mill sold approximately
    25,490 tonnes of packaging paper for approximately $7.2 million in 1998.

(3) The Company sold its printing paper mill in Hainsberg effective
    November 2000. Paper sales from the Hainsberg mill prior to its sale are
    included in the Company's results of operations for 2000. The Hainsberg mill
    sold approximately 24,964 tonnes of printing paper for approximately
    $15.5 million in 2000.

(4) Excluding intercompany sales of 1,893, 201 and 1,072 tonnes of pulp in 2000,
    1999 and 1998, respectively.

                                       18
<PAGE>
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

    In 2000, revenues increased by $108.3 million to $236.2 million from
$127.9 million in 1999, primarily as a result of higher pulp sales. The Company
completed the Conversion Project in late 1999 to convert the Pulp mill's
production to kraft pulp and increase its annual production capacity. The Pulp
mill ramped up production in early 2000 and operated in excess of 90% of
capacity after the first quarter of 2000. As the Company's products are
principally sold in DM, the depreciation of the DM against the U.S. dollar by
approximately 13.6% on average in 2000, compared to the same period in 1999,
resulted in lower prices in U.S. dollar terms for the Company's products.

    Costs and expenses were $206.6 million in 2000, compared to $164.9 million
in 1999. Cost of sales increased to $178.4 million in 2000 from $117.3 million
in 1999, primarily as a result of higher pulp sales volumes. General and
administrative expenses decreased to $14.3 million in 2000, from $22.4 million
in 1999. Interest expense in 2000 increased to $14.0 million from $3.0 million
in 1999. In 1999, interest expense of $9.9 million in respect of the Conversion
Project was capitalized.

    The Company sold its printing paper mill located in Hainsberg, Germany
effective November 2000 for approximately $4.6 million plus an amount equal to
the net working capital associated with the Hainsberg mill from the sale. The
Company also sold its packaging paper mill located in Trebsen, Germany effective
June 2000 for approximately $8.7 million plus an amount equal to the net working
capital associated with the Trebsen mill from the sale.

    In 2000, the Company reported net income of $29.5 million, or $1.76 per
share on a basic basis and $1.72 per share on a diluted basis, compared to a net
loss of $38.1 million, or $2.33 per share on a basic and diluted basis,
in 1999.

    In 2000, the Company's pulp and paper sales increased by approximately 79.7%
to $225.6 million from $125.6 million in 1999 on a 266.9% increase in pulp
revenues and an 8.1% decrease in paper sales. In 2000, pulp sales were
significantly higher than in 1999 as a result of the completion of the
Conversion Project in late 1999, and the subsequent ramping-up of production of
kraft pulp in 2000. Overall, in 2000, paper markets were generally stable with
prices increasing marginally.

    On average, pulp prices realized by the Company in 2000 increased by
approximately 44.8% compared to 1999. Pulp sales increased to $147.0 million in
2000 from $40.1 million in 1999, primarily as a result of a sales volume
increase of 153.4%. Pulp sales were strong in 2000 as a result of increased
demand and low producer inventories. List prices for kraft pulp in Europe
increased from approximately $600 per tonne at the end of 1999 to approximately
$630 per tonne during the first quarter of 2000, approximately $670 per tonne
during the second quarter of 2000 and approximately $710 per tonne during the
last six months of 2000. Kraft pulp prices started to weaken at the end of 2000
as a result of high product inventories and such weakening of prices continued
in the early part of 2001. The Company undertook a planned nine-day maintenance
and modification shutdown at its Pulp mill in late-September 2000. The shutdown
extended for an additional two days into October 2000.

    Paper prices realized by the Company on average increased by approximately
20.6% in 2000, compared to 1999, primarily as a result of rising costs of
materials. Paper sales in 2000 decreased to $78.6 million from $85.5 million in
1999, on a volume decrease of 23.8%. In 2000, sales volumes for packaging and
printing papers decreased by approximately 57.6% and 7.2%, respectively,
primarily due to the sale of the packaging paper mill in Trebsen effective
June 2000 and the printing paper mill in Hainsberg effective November 2000.
Sales volumes for specialty papers increased by 13.4% compared to 1999.

    On average, the Company's per tonne fibre costs for pulp production in 2000
increased by approximately 14.5%, compared to 1999, and remained among the
lowest in Europe. While prices for waste paper, which comprises approximately
25% of the fibre for the Paper mills, increased by

                                       19
<PAGE>
approximately 147.6% in 2000 compared to 1999, they remained relatively low
compared to the cost of virgin fibre.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

    In 1999, revenues decreased to $127.9 million from $174.9 million in 1998,
primarily as a result of the Conversion Project which resulted in approximately
4 1/2 months of downtime at the Pulp mill in the latter part of 1999 and
adversely affected production levels throughout the earlier part of the year. As
the Company's products are principally sold in DM, the depreciation of the DM
against the U.S. dollar by approximately 4.2% on average in 1999, compared to
the same period in 1998, resulted in lower prices in U.S. dollar terms for the
Company's products.

    Costs and expenses were $164.9 million in 1999, compared to $165.6 million
in 1998. Cost of sales decreased to $117.3 million in 1999 from $138.7 million
in 1998, primarily as a result of lower sales volumes. General and
administrative expenses were $22.4 million in 1999, compared to $23.5 million in
1998. Interest expense in 1999 decreased to $3.0 million from $3.4 million in
1998. Interest expense of $9.9 million in 1999 and $5.3 million in 1998 in
respect of the Conversion Project was capitalized.

    The Company took a special charge in the fourth quarter of 1999 of
$22.2 million, or $1.35 per share, of which $19.1 million related to its paper
operations. The Company pursued strategic alternatives for its paper operations,
and used proceeds from such sales to decrease its indebtedness and fund capital
expenditures and investments. The Company also wrote down its pulp assets by
$3.1 million relating to certain capital assets which were no longer useful as a
result of the Conversion Project.

    In 1999, the Company reported a net loss of $38.1 million, or $2.33 per
share, compared to net income of $9.0 million, or $0.59 per share, in 1998.

    In 1999, the Company's pulp and paper sales decreased by approximately 24.5%
to $125.6 million from $166.2 million in 1998 on a 42.7% decrease in pulp sales
and an 11.2% decrease in paper sales. In 1999, pulp sales were materially lower
than in 1998 as a result of production downtime required to complete the
Conversion Project, the adverse effect of the Conversion Project on production
throughout 1999 and generally weak pulp markets. Overall, in 1999, paper markets
were generally weak, with prices declining in each category.

    On average, pulp prices realized by the Company in 1999 decreased by
approximately 11.8% compared to 1998. Pulp sales declined to $40.1 million in
1999 from $69.9 million in 1998, primarily as a result of a sales volume
decrease of 35.0%. Continuing economic weakness in the Asian markets in the
first half of 1999 and the shifting of production by Asian and other pulp
producers to other markets, including Europe, prevented any real recovery in
pulp prices. Kraft pulp prices began to recover in the fourth quarter of 1999 as
a result of low producer inventories. List prices for kraft pulp in Europe
increased to approximately $600 per tonne at the end of 1999 from approximately
$500 per tonne at mid-1999. Low producer inventories resulted in list prices for
kraft pulp increasing a further $30 per tonne to $630 per tonne in
January 2000.

    Despite a decrease in paper prices across all grades, paper prices realized
by the Company on average increased by approximately 0.3% in 1999, compared to
1998, primarily as a result of a change in product mix. Paper sales in 1999
decreased to $85.5 million from $96.3 million in 1998, on a volume decrease of
11.5%. In 1999, sales volumes for packaging papers decreased by 24.7%, primarily
due to the sale of the packaging paper mill in Greiz effective July 1998, and
sales volumes for specialty papers and printing papers increased by 1.4% and
1.5%, respectively, compared to 1998.

    On average, the Company's per tonne fibre costs for pulp production in 1999
decreased by approximately 1.0%, compared to 1998, and remained among the lowest
in Europe. While prices for waste paper, which comprises approximately 80% of
the fibre for the Paper mills, increased by approximately 56.8% in 1999 compared
to 1998, they remained relatively low compared to the cost of virgin fibre.

                                       20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

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

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  2000            1999
                                                              -------------   -------------
                                                                     (IN THOUSANDS)
<S>                                                           <C>             <C>
FINANCIAL POSITION
Working capital.............................................    $ 26,665        $(47,040)
Property, plant and equipment (net).........................     265,607         351,828
Total assets................................................     403,659         455,845
Long-term government debt...................................          --           5,490
Long-term debt--other.......................................     208,315         227,673
Shareholders' equity........................................     125,407         103,020
</TABLE>

    At December 31, 2000, the Company's cash and cash equivalents totalled
$18.5 million, a net increase of $16.8 million from $1.7 million at the end of
1999. At December 31, 2000, the Company had short-term trading securities
totalling $5.3 million, compared to $5.4 million at December 31, 1999.

OPERATING ACTIVITIES

    Operating activities in 2000 provided cash of $40.0 million, compared to
using cash of $8.6 million in 1999. Net changes in trading securities used cash
of $0.8 million in 2000, compared to providing cash of $8.5 million in 1999. An
increase in receivables and inventories used cash of $7.2 million and
$3.4 million, respectively, in the current period, compared to $12.5 million and
$1.0 million, respectively, in 1999. An increase in accounts payable and accrued
liabilities provided cash of $0.3 million in 2000, compared to $7.7 million in
1999. The Company expects to generate sufficient cash flow from operations to
meet its working capital requirements for its pulp and paper operations.

INVESTING ACTIVITIES

    Investing activities in 2000 provided cash of $38.3 million, consisting
primarily of funds from the sale of properties and the collection of investment
grants, net of capital expenditures on properties, compared to using cash of
$245.4 million in 1999. The use of cash in 1999 related primarily to capital
expenditures for the Conversion Project and other upgrades to the Company's
Paper mills.

    The Company expects aggregate capital expenditures in 2001 to be
approximately $11.1 million, which will be funded from cash, cash flow from
operations and borrowings. In 2000, aggregate capital expenditures, excluding
costs in respect of the Conversion Project, were approximately $8.8 million,
compared to approximately $7.5 million in the same period of 1999.

    The Company completed the Conversion Project in the fourth quarter of 1999.
The Company's aggregate capital expenditures in respect of the Conversion
Project to December 31, 2000 were approximately $385.7 million. The Conversion
Project was financed by a combination of borrowings under the Project Loan
Agreement, non-refundable governmental grants, governmental assistance and
guarantees for long-term project financing and an equity investment by the
Company. See "Business--Pulp Mill Conversion Project".

FINANCING ACTIVITIES

    In 2000, financing activities used cash of $61.5 million, primarily as a
result of the repayment of $50.3 million of amounts due in connection with the
Conversion Project, and an increase of $12.3 million in cash restricted pursuant
to the Amendment Agreement. In 1999, cash provided by financing activities

                                       21
<PAGE>
was $207.2 million, primarily as a result of borrowings of $162.9 million under
the Project Loan Agreement and an increase in amounts payable of $47.7 million
in connection with the Conversion Project.

    The Company's pulp and paper operations had net operating tax losses of
approximately $174.0 million at December 31, 2000, which under former German tax
laws could be carried forward indefinitely. However, the German government has
amended its tax laws to restrict the use of tax losses to offset future taxable
income in taxation years completed after 1996. The Company provided a valuation
reserve for much of these losses.

    Other than the agreement relating to the Stendal Project, the Company had no
material commitments to acquire assets or operating businesses. The Company
anticipates that there will be acquisitions of businesses or commitments to
projects in the future. To achieve its long-term goals of expanding the asset
and earnings base by mergers and acquisitions, the Company will require
substantial capital resources. The required necessary resources will be
generated from cash flow from operations, cash on hand, borrowing against its
assets and/or the sale of assets.

FOREIGN CURRENCY

    Substantially all of the Company's operations are conducted in international
markets and its consolidated financial results are subject to foreign currency
exchange rate fluctuations, in particular, those in Germany. The Company's pulp
and paper products are principally sold in DM and approximately 99% of the
Company's revenues are denominated in DM.

    The Company translates foreign assets and liabilities into U.S. dollars at
the rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the period.
Unrealized gains or losses from these translations are recorded as shareholders'
equity on the balance sheet and do not affect the net earnings of the Company.

    Since substantially all of the Company's revenues are received in DM, the
financial position of the Company for any given period, when reported in
U.S. dollars, can be significantly affected by the exchange rate for DM
prevailing during that period. In the year ended December 31, 2000, the Company
reported a net $6.4 million foreign exchange translation loss and, as a result,
the cumulative foreign exchange translation loss increased to $56.3 million at
December 31, 2000 from $49.9 million at December 31, 1999.

    The average and period ending exchange rates for the DM to the U.S. dollar
for the periods indicated are as follows:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                      ---------------------------------------------------------
                                    2001                         2000                          1999
                         --------------------------   ---------------------------   ---------------------------
                                     PERIOD AVERAGE
                         MARCH 27,    TO MARCH 27,    PERIOD END   PERIOD AVERAGE   PERIOD END   PERIOD AVERAGE
                         ---------   --------------   ----------   --------------   ----------   --------------
<S>                      <C>         <C>              <C>          <C>              <C>          <C>
RATES OF EXCHANGE
Deutschmark............   2.1948         2.1231         2.0821         2.1242         1.9433         1.8359
</TABLE>

    Based upon the period average exchange rate in 2000, the U.S. dollar
increased by approximately 9.4% in value against the DM since December 31, 1999.

CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITION

    The pulp and paper business is cyclical in nature and markets for the
Company's principal products are characterized by periods of supply and demand
imbalance, which in turn affects product prices. The markets for pulp and paper
are highly competitive and sensitive to cyclical changes in industry capacity
and in the economy, both of which can have a significant influence on selling
prices and the earnings of the Company. Demand for pulp and paper products has
historically been determined by the level of economic

                                       22
<PAGE>
growth and has been closely tied to overall business activity. During the past
three years, pulp prices have both risen and fallen at rates faster than
previously experienced by the industry. The competitive position of the Company
is influenced by the availability and quality of raw materials (fibre) and its
experience in relation to other producers with respect to inflation, energy,
transportation, labour costs and productivity.

STENDAL PULP MILL PROJECT UNCERTAINTIES

    The Company's participation in the Stendal Project is subject to certain
conditions, including completion of its due diligence and entering into a
shareholders' agreement. In addition, the Stendal Project itself is subject to
various risks and uncertainties customary to large "greenfield" projects of this
nature which may result in the Stendal Project not proceeding as currently
planned, or at all, such as availability and cost of materials and labour,
construction delays, cost overruns, weather conditions, governmental
regulations, availability of adequate financing, increases in long-term interest
rates and increases in taxes and other governmental fees. The Stendal Project
will also be subject to extensive and complex regulations and environmental
compliance which may result in delays, in ZSG and/or its shareholders, including
the Company, incurring substantial costs in relation thereto or in the Stendal
Project being amended or not proceeding at all.

    The implementation of the Stendal Project is currently expected to commence
at the end of 2001 and be completed in 2004. However, there can be no assurance
that the Stendal Project will proceed as currently planned, or at all. See
"Business--Stendal Pulp Mill Project".

INFLATION

    The Company does not believe that inflation has had a material impact on
revenues or income during 2000.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company is exposed to market risks from changes in interest rates,
foreign currency exchange rates and equity prices which may affect its results
of operations and financial condition. The Company manages these risks through
internal risk management policies which are administered by management
committees. In addition, the Company has agreed on a hedging strategy with
respect to interest rate, currency and pulp price risks.

    Pursuant to this strategy, approximately Euro 148.3 million of the principal
amount of the fixed interest credits portion of SPB's indebtedness as at
December 29, 2000 has been converted into approximately $124.7 million at a
forward rate of $0.841225 to Euro 1.00. The $124.7 million debt portion bears a
fixed interest rate of 5.83% per annum, payable quarterly in U.S. dollars. The
underlying term of the foreign currency forward rate swap covers the period from
December 29, 2000 to September 30, 2008, on which date the interest rate on the
fixed interest credits portion of SPB's indebtedness will be readjusted.

    In addition, approximately Euro 75.0 million of the principal amount of the
commercial debt portion of SPB's indebtedness as at March 31, 2001 will be
converted into approximately $63.3 million at a forward rate of $0.844525 to
Euro 1.00. The $63.3 million debt portion bears a fixed interest rate of 6.80%
per annum, payable semi-annually in U.S. dollars, not including the bank margin
of 0.6-0.7% per annum which remains payable in DM on the underlying DM principal
amount. The underlying term of the foreign currency forward rate swap covers the
period from March 31, 2001 to September 30, 2013, the maturity date of the
aggregate principal amount due under the Project Loan Agreement.

    Beginning in 2001, up to 30% of the quantity of pulp which represents
one-twelfth of the annual sales revenues of SPB may be hedged monthly to ensure
that a price of at least Euro 520.00 is hedged per tonne of pulp. The percentage
amount may be increased to a maximum of 70%.

                                       23
<PAGE>
    SPB agreed to grant to the Lenders a security interest by way of a pledge on
its claims against the Bank under all hedging agreements. Furthermore, the
parties to the Amendment Agreement agreed that the Bank's claims against SPB
under any hedging agreement is secured pari passu by all security interests
granted by SPB to the Lenders under the Project Loan Agreement (except the "C&L
Ausfallburgschaft", as defined in the Project Loan Agreement). To this effect,
certain amendment agreements to the security interest agreements and the
security pooling agreement under the Project Loan Agreement were executed by
the parties.

INTEREST RATE RISK

    Fluctuations in interest rates may affect the fair value of financial
instruments sensitive to interest rates. An increase in interest rates may
decrease the fair value of financial instrument assets and increase the fair
value of financial instrument liabilities. A decrease in interest rates may
increase the fair value of financial instrument assets and decrease the fair
value of financial instrument liabilities. The Company's financial instruments
which may be sensitive to interest rate fluctuations are investments, cash
restricted, notes receivable and debt obligations. The following tables provide
information about the Company's exposure to interest rate fluctuations for the
carrying amount of financial instruments that may be sensitive to such
fluctuations as at December 31, 2000 and 1999, respectively, and expected cash
flows from these instruments:

                            AS AT DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2001       2002       2003       2004       2005     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $  4,164   $  4,164   $ 4,164    $    --    $    --    $    --    $    --     $    --
Cash restricted..........    25,150     25,150    25,150         --         --         --         --          --
Notes receivable.........     4,296      4,296        --         --      4,296         --         --          --
Debt obligations(2)......   143,417    143,417     5,203     10,406     14,541     10,406     10,406      92,455
</TABLE>

--------------------------

(1) Investments consist of debt securities.

(2) Debt obligations consist of the Company's notes and loan payable.

                            AS AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2000       2001       2002       2003       2004     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $  4,899   $  4,899   $ 4,296    $    --    $    --    $    --    $    --     $   603
Notes receivable.........     4,869      4,869        --         --         --      4,869         --          --
Debt obligations(2)......   149,080    148,958       171      6,433     12,020     16,155     16,996      97,305
</TABLE>

--------------------------

(1) Investments consist of debt securities.

(2) Debt obligations consist of the Company's notes and loan payable.

FOREIGN CURRENCY EXCHANGE RATE RISK

    The reporting currency of the Company is the U.S. dollar. The Company holds
financial instruments primarily denominated in DM and, to a lesser extent, in
Canadian dollars. A depreciation of such currencies against the U.S. dollar will
decrease the fair value of financial instrument assets and financial instrument
liabilities. An appreciation of such currencies against the U.S. dollar will
increase the fair value of financial instrument assets and financial instrument
liabilities. The Company's financial instruments

                                       24
<PAGE>
which may be sensitive to foreign currency exchange rate fluctuations are
investments, cash restricted and debt obligations. The following tables provide
information about the Company's exposure to foreign currency exchange rate
fluctuations for the carrying amount of financial instruments that may be
sensitive to such fluctuations as at December 31, 2000 and 1999, respectively,
and expected cash flows from these instruments:

                            AS AT DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2001       2002       2003       2004       2005     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $  2,833   $  2,833   $ 1,710    $    --    $    --    $    --    $    --     $  1,123
Cash restricted..........    25,150     25,150    25,150         --         --         --         --           --
Debt obligations(2)......   231,353    231,353    27,173     11,749     12,401     13,380     14,251      152,399
</TABLE>

--------------------------

(1) Investments consist of debt and equity securities. Debt securities are
    denominated in DM. Equity securities are denominated primarily in DM, and to
    a lesser extent, in Canadian dollars.

(2) Debt obligations consist of the Company's notes and loan payable,
    denominated in DM.

                            AS AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2000       2001       2002       2003       2004     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $  4,510   $  4,510   $ 2,757    $    --    $    --    $    --    $    --     $  1,753
Cash Restricted..........    12,865     12,865        --     12,865         --         --         --           --
Debt obligations(2)......   248,149    248,027    19,121     13,007      8,037     17,006     18,896      172,082
</TABLE>

--------------------------

(1) Investments consist of debt and equity securities. Debt securities are
    denominated in DM. Equity securities are denominated primarily in DM, and to
    a lesser extent, in Canadian dollars.

(2) Debt obligations consist of the Company's notes and loan payable,
    denominated in DM.

EQUITY PRICE RISK

    Changes in trading prices of equity securities may affect the fair value of
equity securities or the fair value of other securities convertible into equity
securities. An increase in trading prices will increase the fair value and a
decrease in trading prices will decrease the fair value of equity securities or
instruments convertible into equity securities. The Company's financial
instruments which may be sensitive to fluctuations in equity prices are
investments. The following tables provide information about the Company's
exposure to fluctuations in equity prices for the carrying amount of financial
instruments sensitive to such fluctuations as at December 31, 2000 and 1999,
respectively, and expected cash flows from these instruments:

                            AS AT DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2001       2002       2003       2004       2005     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $ 10,566   $ 10,566   $ 5,320    $    --    $    --    $    --    $    --     $ 5,246
</TABLE>

--------------------------

(1) Investments consist of equity securities and debt securities convertible
    into equity securities.

                                       25
<PAGE>
                            AS AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                     EXPECTED FUTURE CASH FLOW
                           CARRYING     FAIR     -----------------------------------------------------------------
                            VALUE      VALUE       2000       2001       2002       2003       2004     THEREAFTER
                           --------   --------   --------   --------   --------   --------   --------   ----------
                                                                 (THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Investments(1)...........  $  8,027   $  8,027   $ 1,102    $    --    $    --    $    --    $    --     $ 6,925
</TABLE>

--------------------------

(1) Investments consist of equity securities and debt securities convertible
    into equity securities.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial statements and supplementary data required with
respect to this Item 8, and as listed in Item 14 of this annual report, are
included in this annual report commencing on page 30.

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

    Not applicable.

                                       26
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    As a Massachusetts trust, the Company is managed by "trustees", who have
comparable duties and responsibilities as directors of corporations.

    J.S.H. LEE, age 43, has been a Trustee since May 1985 and President and
Chief Executive Officer since 1992. Previously, Mr. Lee served with MFC
Bancorp Ltd. as a director from 1986, Chairman from 1987 and President from 1988
to December 1996, respectively.

    C.S. MOON, age 53, has been a Trustee since June 1994. Mr. Moon is an
independent consultant. He was formerly the Executive Director of Shin Ho Group
of Korea, an international paper manufacturer headquartered in Korea until 1998.
Mr. Moon joined Shin Ho Group in 1990 and previously served in managerial
positions with Moo Kim Paper Manufacturing Co., Ltd. and Sam Yung
Pulp Co., Ltd.

    M. ARNULPHY, age 66, has been a Trustee since June 1995. Mr. Arnulphy has
been the Managing Director of Electro Orient Ltd., a merchandise trading company
located in Hong Kong, since 1998. From 1975 to 1998, Mr. Arnulphy was the
Managing Director of J. Mortenson & Co., Ltd. in Hong Kong, a water treatment
equipment manufacturing company.

    M. REIDEL, age 37, has been a Trustee since December 1996. Mr. Reidel has
been the Chief Financial Officer of Ision Internet AG since August 1999.
Mr. Reidel was a Managing Director of SPB from 1994 to 1999 and the Chairman of
the Management Board of DPAG from 1995 to 1998. Previously, he was a member of
the Supervisory Board of DPAG from 1992 to 1994, a member of BVS responsible for
portfolios of service industry and wood and paper industry companies from 1992
to 1994, and an accountant with Arthur Andersen & Co. from 1987 to 1992.

    R.I. RIGG, age 57, has been a Trustee since July 1999 and Chief Financial
Officer since October 1999. Mr. Rigg has been Chief Financial Officer and a
director of Advanced Projects Ltd. since 1996 and of Terrawest Industries, Inc.
since 1989. He is also a director of Carlin Resources Corp. and a nominee
director and officer of Bank Gospodarki of Poland. Mr. Rigg is a chartered
accountant in Canada.

    DR. R. AURELL, age 65, has been a Managing Director of Zellstoff-und
Papierfabrik Rosenthal GmbH & Co. KG, a subsidiary of Spezialpapierfabrik
Blankenstein GmbH, since November 1994. From November 1991 to 1994, Dr. Aurell
served as an independent consultant advising clients, including the Company, on
the pulp and paper industry. Previously, he held managerial positions with North
British Newsprint Ltd., Jaakko Poyry OY, MoDo-Chemetics AG and Stora
Forest Industries.

ITEM 11.  EXECUTIVE COMPENSATION

    Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.

                                       27
<PAGE>
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

                                     INDEX

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                      --------
<C>     <S>                                                           <C>
(a)(1)  FINANCIAL STATEMENTS

        Independent Auditors' Report................................        30
        Consolidated Balance Sheets.................................        31
        Consolidated Statements of Operations.......................        32
        Consolidated Statements of Comprehensive Income.............        33
        Consolidated Statements of Changes in Shareholders'
          Equity....................................................        34
        Consolidated Statements of Cash Flows.......................        35
        Notes to the Consolidated Financial Statements..............        36
</TABLE>

                                       28
<PAGE>

<TABLE>
<C>     <C>     <C>    <S>
   (2)                                                          LIST OF EXHIBITS

         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           Shareholder Rights Plan. Incorporated by reference from
                         Form 8-A dated August 17, 1993.
        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*          1994 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
                         DM 508,000,000 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           Amended and Restated Employment Agreement between Mercer
                         International Inc. and Jimmy S.H. Lee dated
                         November 20, 2000.
        10.8           Trustee's Indemnity Agreement between Mercer
                         International Inc. and Jimmy S.H. Lee dated
                         November 20, 2000.
        21             List of Subsidiaries of Registrant.
        23             Independent Auditors Consent.
</TABLE>

     -----------------------------

      *  Filed in Form 10-K for prior years.

<TABLE>
<C>     <S>
   (b)  The Registrant filed the following reports on Form 8-K with
        respect to the indicated items during the fourth quarter of
        the fiscal year:

        Form 8-K dated November 17, 2000:
        Item 5. Other Events

        Form 8-K dated October 9, 2000:
        Item 5. Other Events
        Item 7. Financial Statements and Exhibits
</TABLE>

                                       29
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Shareholders
Mercer International Inc.

    We have audited the accompanying consolidated balance sheets of Mercer
International Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 2000, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mercer
International Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2000, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.

                                                  /s/ PETERSON SULLIVAN P.L.L.C.

March 16, 2001
Seattle, Washington

                                       30
<PAGE>
                           MERCER INTERNATIONAL INC.

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2000 AND 1999
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current Assets
  Cash and cash equivalents.................................  $ 18,496   $  1,722
  Investments...............................................     5,320      5,392
  Receivables...............................................    46,088     41,448
  Inventories...............................................    19,977     17,697
  Prepaid and other.........................................     3,000      2,857
                                                              --------   --------
    Total current assets....................................    92,881     69,116

Long-Term Assets
  Cash restricted...........................................    25,150     12,865
  Properties................................................   265,607    351,828
  Investments...............................................     6,101      6,925
  Notes receivable..........................................     4,296      4,869
  Deferred income tax.......................................     9,624     10,242
                                                              --------   --------
                                                               310,778    386,729
                                                              --------   --------
                                                              $403,659   $455,845
                                                              ========   ========
                                   LIABILITIES
Current Liabilities
  Accounts payable and accrued expenses.....................  $ 37,058   $ 40,287
  Pulp mill renovation costs payable........................     1,146     56,195
  Note payable..............................................       839        553
  Debt......................................................    27,173     19,121
                                                              --------   --------
    Total current liabilities...............................    66,216    116,156

Long-Term Liabilities
  Debt......................................................   208,315    233,163
  Other.....................................................     3,721      3,506
                                                              --------   --------
                                                               212,036    236,669
                                                              --------   --------
    Total liabilities.......................................   278,252    352,825

                              SHAREHOLDERS' EQUITY
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, $1 par value: unlimited
    authorized, 16,794,899 and 16,635,399 issued and
    outstanding at December 31, 2000 and 1999...............    99,995     99,038
Retained earnings...........................................    88,698     59,224
Accumulated other comprehensive loss........................   (63,286)   (55,242)
                                                              --------   --------
                                                               125,407    103,020
                                                              --------   --------
                                                              $403,659   $455,845
                                                              ========   ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       31
<PAGE>
                           MERCER INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues
  Sales.....................................................  $225,626   $125,570   $166,233
  Other.....................................................    10,576      2,297      8,663
                                                              --------   --------   --------
                                                               236,202    127,867    174,896

Expenses
  Cost of sales.............................................   178,343    117,314    138,702
  Special charges...........................................        --     22,155         --
  General, administrative and other.........................    14,284     22,420     23,490
  Interest expense..........................................    13,993      2,995      3,384
                                                              --------   --------   --------
                                                               206,620    164,884    165,576
                                                              --------   --------   --------
Income (loss) before income taxes...........................    29,582    (37,017)     9,320
Income tax provision........................................      (108)    (1,092)      (308)
                                                              --------   --------   --------
    Net income (loss).......................................  $ 29,474   $(38,109)  $  9,012
                                                              ========   ========   ========
Earnings (loss) per share
    Basic...................................................  $   1.76   $  (2.33)  $   0.59
                                                              ========   ========   ========
    Diluted.................................................  $   1.72   $  (2.33)  $   0.59
                                                              ========   ========   ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       32
<PAGE>
                           MERCER INTERNATIONAL INC.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net income (loss)...........................................  $29,474    $(38,109)  $ 9,012
Other comprehensive income, net of tax
  Foreign currency translation adjustment...................   (6,400)    (21,266)   12,713
  Unrealized gains (losses) on securities
    Unrealized holding gains (losses) arising during the
      period................................................   (1,729)      1,745    (7,679)
    Reclassification adjustment for losses included in net
      income (loss).........................................       85       1,340       798
                                                              -------    --------   -------
                                                               (1,644)      3,085    (6,881)
                                                              -------    --------   -------
Other comprehensive income (loss)...........................   (8,044)    (18,181)    5,832
                                                              -------    --------   -------
Comprehensive income (loss).................................  $21,430    $(56,290)  $14,844
                                                              =======    ========   =======
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       33
<PAGE>
                           MERCER INTERNATIONAL INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                           (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
                                                                                                ACCUMULATED OTHER
                                       SHARES OF BENEFICIAL INTEREST                          COMPREHENSIVE INCOME
                                    -----------------------------------              ---------------------------------------
                                                               AMOUNT                  FOREIGN
                                                              PAID IN                 CURRENCY       UNREALIZED
                                      NUMBER                 EXCESS OF    RETAINED   TRANSLATION   GAINS (LOSSES)
                                    OF SHARES    PAR VALUE   PAR VALUE    EARNINGS   ADJUSTMENTS   ON SECURITIES     TOTAL
                                    ----------   ---------   ----------   --------   -----------   --------------   --------
<S>                                 <C>          <C>         <C>          <C>        <C>           <C>              <C>
Balance at December 31, 1997......  15,033,722    $15,034     $73,569     $89,765     $(41,376)       $(1,517)      $(42,893)

Shares issued for exercise of
  options.........................     365,000        365       2,701          --           --             --             --
Shares issued for exercise of
  warrants........................      67,000         67         335          --           --             --             --
Repurchase of shares..............     (25,600)       (26)       (132)         --           --             --             --
Payment of dividends..............          --         --          --        (610)          --             --             --
Net income........................          --         --          --       9,012           --             --             --
Other comprehensive
  income (loss)...................          --         --          --          --       12,713         (6,881)         5,832
                                    ----------    -------     -------     --------    --------        -------       --------
Balance at December 31, 1998......  15,440,122     15,440      76,473      98,167      (28,663)        (8,398)       (37,061)

Shares issued for exercise of
  warrants........................   1,245,277      1,245       6,097          --           --             --             --
Repurchase of shares..............     (50,000)       (50)       (167)         --           --             --             --
Payment of dividends..............          --         --          --        (834)          --             --             --
Net loss..........................          --         --          --     (38,109)          --             --             --
Other comprehensive
  income (loss)...................          --         --          --          --      (21,266)         3,085        (18,181)
                                    ----------    -------     -------     --------    --------        -------       --------
Balance at December 31, 1999......  16,635,399     16,635      82,403      59,224      (49,929)        (5,313)       (55,242)

Shares issued for exercise of
  options.........................     159,500        160         797          --           --             --             --
Net income........................          --         --          --      29,474           --             --             --
Other comprehensive
  income (loss)...................          --         --          --          --       (6,400)        (1,644)        (8,044)
                                    ----------    -------     -------     --------    --------        -------       --------
Balance at December 31, 2000......  16,794,899    $16,795     $83,200     $88,698     $(56,329)       $(6,957)      $(63,286)
                                    ==========    =======     =======     ========    ========        =======       ========

<CAPTION>

                                    SHAREHOLDERS'
                                       EQUITY
                                    -------------
<S>                                 <C>
Balance at December 31, 1997......    $135,475
Shares issued for exercise of
  options.........................       3,066
Shares issued for exercise of
  warrants........................         402
Repurchase of shares..............        (158)
Payment of dividends..............        (610)
Net income........................       9,012
Other comprehensive
  income (loss)...................       5,832
                                      --------
Balance at December 31, 1998......     153,019
Shares issued for exercise of
  warrants........................       7,342
Repurchase of shares..............        (217)
Payment of dividends..............        (834)
Net loss..........................     (38,109)
Other comprehensive
  income (loss)...................     (18,181)
                                      --------
Balance at December 31, 1999......     103,020
Shares issued for exercise of
  options.........................         957
Net income........................      29,474
Other comprehensive
  income (loss)...................      (8,044)
                                      --------
Balance at December 31, 2000......    $125,407
                                      ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       34
<PAGE>
                           MERCER INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                2000       1999        1998
                                                              --------   ---------   --------
<S>                                                           <C>        <C>         <C>
Cash Flows from Operating Activities
  Net income (loss).........................................  $ 29,474   $ (38,109)  $  9,012
  Adjustments to reconcile net income (loss) to cash flows
    from operating activities
    Special charges.........................................        --      22,155         --
    Depreciation............................................    22,139       7,018     11,218
    Gain on sale of property................................        --          --     (5,345)
    Other...................................................        --          --        124
  Changes in current assets and liabilities
    Investment in trading securities........................      (806)      8,478     23,266
    Inventories.............................................    (3,391)       (996)    (2,354)
    Receivables.............................................    (7,227)    (12,489)   (15,851)
    Accounts payable and accrued expenses...................       267       7,718     (9,609)
    Prepaid and other.......................................      (504)     (2,411)      (453)
                                                              --------   ---------   --------
      Net cash provided by (used in) operating activities...    39,952      (8,636)    10,008

Cash Flows from Investing Activities
  Proceeds from the sales of available-for-sale
    securities..............................................       189       6,867      2,216
  Purchases of available-for-sale securities................    (1,918)     (1,264)        --
  Sale of properties........................................    13,346          --     10,615
  Acquisition of properties, net of investment grants.......    26,073    (255,186)   (69,829)
  Change in notes receivable................................       585       4,178     (2,967)
                                                              --------   ---------   --------
      Net cash provided by (used in) investing activities...    38,275    (245,405)   (59,965)

Cash Flows from Financing Activities
  Cash restricted...........................................   (12,285)         --    (15,000)
  Increase (decrease) in pulp mill renovation costs
    payable.................................................   (50,286)     47,701      8,494
  Increase in debts.........................................     5,649     162,863    107,719
  Decrease in debts.........................................    (5,582)     (2,299)    (7,823)
  Shares of beneficial interest issued for cash.............       957          --      3,066
  Repurchase shares of beneficial interest..................        --        (217)      (158)
  Dividends.................................................        --        (834)      (610)
  Other.....................................................        --           3       (157)
                                                              --------   ---------   --------
      Net cash provided by (used in) financing activities...   (61,547)    207,217     95,531

Effect of exchange rate changes on cash and cash
  equivalents...............................................        94      (4,704)     3,262
                                                              --------   ---------   --------
Net increase (decrease) in cash and cash equivalents........    16,774     (51,528)    48,836

Cash and Cash Equivalents, beginning of year................     1,722      53,250      4,414
                                                              --------   ---------   --------
Cash and Cash Equivalents, end of year......................  $ 18,496   $   1,722   $ 53,250
                                                              ========   =========   ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       35
<PAGE>
                           MERCER INTERNATIONAL INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  THE COMPANY AND SUMMARY OF SIGNIFICANT
       ACCOUNTING POLICIES

    Mercer International Inc. ("the Company") is a business trust organized
under the laws of the State of Washington, USA. Under Washington law,
shareholders of a business trust have the same limited liability as shareholders
of a corporation. The amounts in the notes are rounded to the nearest thousand
except for the per share amounts.

BASIS OF PRESENTATION

    The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.

CASH AND CASH EQUIVALENTS

    Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and are recorded at cost which approximates
market. The Company maintains cash balances in foreign financial institutions in
excess of insured limits.

INVESTMENTS

    The Company's available-for-sale and trading securities are stated at their
fair values. Any unrealized holding gains or losses of available-for-sale
securities are reported as a separate component of comprehensive income until
realized and, for trading securities, any unrealized gains or losses are
included in the results of operations. If a loss in value in available-for-sale
securities is considered to be other than temporary, it is recognized in the
determination of net income. Cost is based on the specific identification method
to determine realized gains or losses.

    The Company incurs liabilities for securities acquisitions where the
security transfer is to occur at a future date. However, the liability amount is
subject to the ultimate market price of the security.

INVENTORIES

    Inventories of pulp are stated at the lower of cost (average-cost method) or
market. Paper products are stated at the lower of cost (first-in, first-out
method) or market.

PROPERTIES

    Depreciable properties are stated at cost unless the estimated future
undiscounted cash flows expected to result from either the use of an asset or
its eventual disposition is less than its carrying amount in which case an
impairment loss is recognized based on the fair value of the asset.

    Depreciation of buildings and production equipment is based on the estimated
useful lives of the assets and is computed using the straight-line method.
Buildings are depreciated over a 10 to 50 year life and production equipment
over 8 to 20 years.

FOREIGN CURRENCY TRANSLATION

    The Company translates foreign assets and liabilities of its subsidiaries at
the rate of exchange at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange throughout the year. Unrealized gains
or losses from these translations are reported as a separate component of

                                       36
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.  THE COMPANY AND SUMMARY OF SIGNIFICANT
       ACCOUNTING POLICIES (CONTINUED)
comprehensive income. Realized gains or losses are included in general and
administrative expenses in the consolidated statements of operations. The
translation adjustments do not recognize the effect of income tax because the
Company expects to reinvest the amounts indefinitely in operations.

ENVIRONMENTAL CONSERVATION

    Liabilities for environmental conservation are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably estimated.
Any potential recoveries of such liabilities are recorded when there is an
agreement with the reimbursing entity.

STOCK-BASED COMPENSATION

    Compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant over the
amount an employee is required to pay for the stock. There was no stock-based
compensation included in these consolidated financial statements.

TAXES ON INCOME

    The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.

EARNINGS PER SHARE

    Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares.

ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING STANDARD

    Statement of Financial Accounting Standard No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" defers the effective date of FASB No. 133 (as amended by
Financial Accounting Standard No. 138). Management has not determined the effect
this standard will have on future financial statements.

                                       37
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.  THE COMPANY AND SUMMARY OF SIGNIFICANT
       ACCOUNTING POLICIES (CONTINUED)
    Statement of Financial Accounting Standard No. 140 is generally effective on
a prospective basis for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Management has
not determined the effect this standard may have on future
financial statements.

    FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" was generally effective July 1, 2000, on a prospective
basis. This interpretation clarifies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" under which the Company accounts for stock-based
compensation. This interpretation does not have an effect on these consolidated
financial statements.

NOTE 2.  INVESTMENTS

    Trading securities are classified as current investments and are summarized
as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                              ---------------
                                                               2000     1999
                                                              ------   ------
<S>                                                           <C>      <C>
Bonds.......................................................  $4,164   $4,296
Equity securities...........................................   1,156    1,096
                                                              ------   ------
                                                              $5,320   $5,392
                                                              ======   ======
</TABLE>

    Included within trading securities is an investment in a bond and common
shares of a company that represents 39% and 18%, respectively, of the total
value of trading securities at December 31, 2000. Included within trading
securities was an investment in a bond that represented 37% of the total value
of trading securities at December 31, 1999. The change in net unrealized holding
gains (losses) on trading securities which has been included in earnings was
$(171), $2,411 and $(4,407) during 2000, 1999 and 1998, respectively.

    Available-for-sale securities consist of bonds and equity securities and
have been classified as long-term investments. At December 31, 2000, equity
securities of two companies represented 91% of the total available-for-sale
securities. At December 31, 1999, equity securities of three companies
represented 94% of the total available-for-sale securities. The proceeds from
sales of these securities amounted to $189, $6,867 and $2,216 which resulted in
realized losses of $(77), $(1,340) and $(798) during 2000, 1999 and 1998,
respectively. The fair value of available-for-sale securities included on the
balance sheets at December 31, 2000, 1999 and 1998, was $5,247, $6,925 and
$11,170, respectively. The cost of these securities was $12,204, $12,238 and
$19,568 which resulted in unrealized losses being recorded in comprehensive
income of $(6,957), $(5,313) and $(8,398) at December 31, 2000, 1999 and 1998,
respectively. Also, included in long-term investments were equity securities
stated at cost of $854 at December 31, 2000, which did not have a readily
determinable fair value. However, management believes that the estimated market
value is greater than the carrying value.

                                       38
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3.  RECEIVABLES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Sale of paper and pulp products...........................  $14,869    $ 3,571
Securities trading........................................   17,645     23,505
Sales of properties.......................................    6,147         --
Value added tax...........................................      892      7,485
Other.....................................................    6,535      6,887
                                                            -------    -------
                                                            $46,088    $41,448
                                                            =======    =======
</TABLE>

    At December 31, 2000 and 1999, the Company pledged $17,645 and $23,505,
respectively, in securities trading receivables as collateral for amounts
payable for securities.

NOTE 4.  INVENTORIES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Pulp and paper
  Raw materials...........................................  $10,862    $12,770
  Work in process and finished goods......................    9,115      4,927
                                                            -------    -------
                                                            $19,977    $17,697
                                                            =======    =======
</TABLE>

NOTE 5.  PROPERTIES

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          -------------------
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Land....................................................  $  7,425   $ 14,918
Buildings...............................................    16,346     19,362
Production and other equipment..........................   290,789    379,398
                                                          --------   --------
                                                           314,560    413,678
Less: Accumulated depreciation..........................    48,953     61,850
                                                          --------   --------
                                                          $265,607   $351,828
                                                          ========   ========
</TABLE>

    The Company completed a renovation of its pulp mill in December 1999. The
renovation converted the mill to the production of kraft pulp rather than
sulphite pulp which had accounted for a significant amount of pulp production in
the past. Total expenditures of $385,702 have been incurred in renovation costs,
including capitalized interest of none, $9,904 and $5,332 during 2000, 1999, and
1998, respectively. The renovation costs are net of German government grants
received of $50,435 in 2000 and $30,875 in 1999.

    During 1999, management determined some of the Company's paper mills were
impaired. These mills were written down to their estimated fair values based on
existing market conditions. This impairment loss,

                                       39
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5.  PROPERTIES (CONTINUED)
amounting to $19,064, is reflected as special charges in the Company's
consolidated statement of operations for the year ended December 31, 1999. Also,
included in special charges in 1999, is a loss of $3,091 on equipment abandoned
during 1999 in the renovation of the pulp mill.

NOTE 6.  NOTE PAYABLE AND DEBT

    The Company has a note payable to a bank amounting to $839 and $553 at
December 31, 2000 and 1999, respectively. The note is payable monthly with 7.25%
interest, callable with four weeks notice and secured by inventory.

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          -------------------
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Note payable to bank, interest at rates varying from
  4.5% to 5.83% at December 31, 2000, principal of
  $231,017 due in semi-annual installments based on
  percentage of final loan amount beginning at 2.4% to
  5.1% at September 30, 2001, after an initial payment
  of $21,300 on March 31, 2001, until September 30, 2013
  (final payment date), collateralized by receivables,
  inventory and the renovated pulp mill assets with 48%
  and 32% principal plus interest guaranteed by the
  Federal Republic of Germany and the State of
  Thuringia, respectively; cash restricted amounted to
  $25,150 and $12,865 at December 31, 2000 and 1999 in
  connection with this borrowing........................  $231,017   $241,342

Debenture payable, 8% interest payable semi-annually,
  due 2003, unsecured, with attached warrants which
  allow a debenture holder to acquire common shares of
  the Company at the higher of $6 per share or the
  average price of the stock for the ten days prior to
  conversion............................................     4,135      4,135

Loan from governmental agency, 7% interest payable
  annually, due 2004, collateralized by fixed assets....        --      4,461

Loan from governmental agency, non-interest bearing,
  unsecured.............................................        --      1,544

Other...................................................       336        802
                                                          --------   --------
                                                           235,488    252,284
Less: Current portion...................................   (27,173)   (19,121)
                                                          --------   --------
                                                          $208,315   $233,163
                                                          ========   ========
</TABLE>

    On December 29, 2000, the Company entered into a foreign currency forward
swap agreement in the notational amount of $124,700 with respect to the note
payable to bank. The agreement is with the same bank which holds the note
payable. The contract was entered into by the Company for its own account

                                       40
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.  NOTE PAYABLE AND DEBT (CONTINUED)
consistent with its policy to manage foreign currency exchange risks. The
agreement covers the period December 29, 2000, to September 30, 2008. The
discount related to this transaction amounts to $14,550 which is amortized over
the term of the agreement. While the Company may be exposed to credit risk with
respect to this agreement, it does not anticipate nonperformance by the bank.

    As part of the financing to renovate the pulp mill, the Company was awarded
grants from German federal and state governments. The cost of renovation was
reduced as grant monies were received. The State of Thuringia, Germany agreed to
provide grants in the total amount of $86,281, of which $26,231 and $30,875 was
received during 2000 and 1999, respectively. The Company also received $24,204
in grants from The Federal Republic of Germany in 2000. Paid invoices for the
renovation are to be submitted to receive the grant monies and required
employment levels are to be maintained for a five-year period beginning
December 31, 2000.

    As of December 31, 2000, the principal maturities of long-term debt are as
follows:

<TABLE>
<CAPTION>
MATURES                                                        AMOUNT
-------                                                       --------
<S>                                                           <C>
2001........................................................  $ 27,173
2002........................................................    11,749
2003........................................................    16,536
2004........................................................    13,380
2005........................................................    14,251
Thereafter..................................................   152,399
                                                              --------
                                                              $235,488
                                                              ========
</TABLE>

    Interest paid amounted to $11,465 in 2000, $12,100 in 1999 and $8,108
in 1998.

NOTE 7.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Trade payables............................................  $14,926    $13,404
Accounts payable and accrued expenses.....................   15,211     11,334
Payable for securities....................................    6,921     15,549
                                                            -------    -------
                                                            $37,058    $40,287
                                                            =======    =======
</TABLE>

                                       41
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8.  INCOME TAXES

    The provision for income taxes is current and consists of the following:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                           ------------------------------------
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
U.S......................................    $  --       $    --       $  --
Non U.S..................................     (108)       (1,092)       (308)
                                             -----       -------       -----
Provision for income taxes...............    $(108)      $(1,092)      $(308)
                                             =====       =======       =====
</TABLE>

    Differences between the U.S. Federal Statutory and the Company's effective
rates are as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                           ------------------------------------
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
U.S. Federal statutory rates on income
  from operations........................   $(10,058)    $12,585      $(3,169)
Tax differential on foreign income
  (loss).................................       (800)      8,182        2,458
Valuation allowance......................     10,750     (20,748)       2,967
Other....................................         --      (1,111)      (2,564)
                                            --------     -------      -------
                                            $   (108)    $(1,092)     $  (308)
                                            ========     =======      =======
</TABLE>

    Deferred tax assets are composed of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       -----------------------
                                                          2000         1999
                                                       ----------   ----------
<S>                                                    <C>          <C>
German tax loss carryforwards........................   $ 63,853     $ 73,105
Difference in German tax basis of depreciable
  assets.............................................        744        2,397
U.S. tax loss carryforward...........................      4,272        3,135
Foreign tax credits..................................         --        1,600
                                                        --------     --------
                                                          68,869       80,237
Valuation allowance..................................    (59,245)     (69,995)
                                                        --------     --------
  Net deferred tax asset.............................   $  9,624     $ 10,242
                                                        ========     ========
</TABLE>

    Because of potential restrictions on the use of German preacquisition tax
loss carryforwards by successor entities, the Company provided a valuation
reserve for much of these losses. Management believes that the difference in
German tax basis of depreciable assets and U.S. tax loss carryforwards are
likely not to be utilized under current circumstances and has fully reserved any
resulting potential tax benefit. Management believes that, while realization of
the net deferred tax asset is not assured, it is more likely than not that it
will be realized.

    The Company's U.S. net operating losses amount to approximately $12,500 at
December 31, 2000. Losses of $1,200, $1,200, $3,700, $2,800 and $3,600 will
expire in 2020, 2019, 2018, 2012 and 2011, respectively, if not used. The
remaining German tax losses of approximately $174,000 at December 31,

                                       42
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8.  INCOME TAXES (CONTINUED)
2000, may be carried forward indefinitely. However, the Company is the subject
of income tax audits on a continuing basis in Germany which may result in a
change in the German tax loss amount.

    Income (loss) from foreign source operations amounted to $30,152, $(34,903)
and $11,381 for the years ended December 31, 2000, 1999 and 1998, respectively.
These amounts are intended to be indefinitely reinvested in operations. Since
available-for-sale securities are primarily securities held by foreign
subsidiaries and the proceeds are expected to be reinvested, no tax has been
provided in the determination of other comprehensive income for the years ended
December 31, 2000, 1999 and 1998.

NOTE 9.  SHAREHOLDERS' EQUITY

    In a prior year, the Company issued one attached preferred share purchase
right for each outstanding share of beneficial interest. A total of 11,958,993
rights were issued which allow the holder to acquire from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
price of $75 per one one-hundredth of a preferred share. The rights will expire
on December 31, 2003. The Company has the right to repurchase the rights for
$.01 each.

    The Company has reserved 110,000 Series A Junior Participating Preferred
Shares in connection with the rights. The preferred shares are entitled to
quarterly dividends of $10 per share and have 100 votes per share. However, the
preferred shares will be entitled to an aggregate dividend of 100 times any
dividends declared on shares of beneficial interest and an aggregate of 100
times any payment to shares of beneficial interest on merger or liquidation.

    Also, during a prior year the Company authorized the issuance of
3.5 million shares of Cumulative Retractable Convertible Preferred Shares,
Series B at a price of $20 per share. These shares have a cumulative dividend
rate of up to 4%, a liquidation preference of $20 per share plus unpaid
dividends, a redemption right beginning January 1, 2004, at $20 per share plus
unpaid dividends, and may convert up to 10% of the issued and outstanding shares
into shares of beneficial interest based on dividing the issue price plus unpaid
dividends by $20 per share.

NOTE 10.  STOCK-BASED COMPENSATION

    The Company has a non-qualified stock option plan which provides for options
to be granted to officers and employees to acquire a maximum of 3,600,000 shares
of beneficial interest including options for 130,000 shares to directors who are
not officers or employees.

    During 2000, options to acquire 1,600,000 shares of beneficial interest at
$6.375 per share were granted to officers and employees of the Company which
vest one-third at grant date and one-third each for the next two years. These
options expire in ten years. The weighted fair value of these options was
$3.60 each.

    During 1998, options to acquire 329,500 shares of beneficial interest at $6
per share were granted to officers and employees of the Company which vest
one-third at grant date and one-third each for the next two years. These options
expire in ten years. The weighted fair value of these options was $1.89 each.

                                       43
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10.  STOCK-BASED COMPENSATION (CONTINUED)
    Following is a summary of the status of the plan during 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                     NUMBER OF   WEIGHTED AVERAGE
                                                      SHARES      EXERCISE PRICE
                                                     ---------   ----------------
<S>                                                  <C>         <C>
Outstanding at January 1, 1998.....................    801,000        $11.01
Granted............................................    329,500          6.00
Exercised..........................................   (365,000)         8.40
                                                     ---------
Outstanding at December 31, 1999 and 1998..........    765,500         10.03
Granted............................................  1,600,000         6.375
Exercised..........................................   (159,500)         6.00
                                                     ---------
Outstanding at December 31, 2000...................  2,206,000        $ 7.67
                                                     =========        ======
</TABLE>

    Following is a summary of the status of options outstanding at December 31,
2000:

<TABLE>
<CAPTION>
                         OUTSTANDING OPTIONS                                 EXERCISABLE OPTIONS
----------------------------------------------------------------------   ---------------------------
                                   WEIGHTED AVERAGE
                                      REMAINING       WEIGHTED AVERAGE              WEIGHTED AVERAGE
EXERCISE PRICE RANGE    NUMBER     CONTRACTUAL LIFE    EXERCISE PRICE     NUMBER     EXERCISE PRICE
--------------------   ---------   ----------------   ----------------   --------   ----------------
<S>                    <C>         <C>                <C>                <C>        <C>
$ 6.00-6.38..........  1,770,000         9.0               $ 6.34        703,333         $ 6.28
$ 8.50-11.66.........    231,500         6.1               $ 9.19        231,500         $ 9.19
$16.89-18.47.........    204,500         4.9               $17.50        204,500         $17.50
</TABLE>

COMPENSATION

    Proforma information with respect to fair value accounting for the Company's
stock option plan is as follows:

<TABLE>
<CAPTION>
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Net Income (Loss)
  As reported............................   $29,474      $(38,109)     $9,012
                                            =======      ========      ======
  Proforma...............................   $26,598      $(38,421)     $7,839
                                            =======      ========      ======
Basic Earnings (Loss) Per Share
  As reported............................   $  1.76      $  (2.33)     $ 0.59
                                            =======      ========      ======
  Proforma...............................   $  1.59      $  (2.34)     $ 0.51
                                            =======      ========      ======
Diluted Earnings (Loss) Per Share
  As reported............................   $  1.72      $  (2.33)     $ 0.59
                                            =======      ========      ======
  Proforma...............................   $  1.55      $  (2.34)     $ 0.51
                                            =======      ========      ======
</TABLE>

                                       44
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10.  STOCK-BASED COMPENSATION (CONTINUED)
    The fair value of each option granted is estimated on the grant date using
the Black Scholes Model. The assumptions used in calculating fair value are as
follows:

<TABLE>
<CAPTION>
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Risk-free interest rate..................    8.5%         6.0%         6.0%
Expected life of the options.............  2 years      2 years      2 years
Expected volatility......................   78.4%        60.0%        49.8%
Expected dividend yield..................    0.0%         0.0%         0.0%
</TABLE>

NOTE 11.  EARNINGS PER SHARE

    Earnings per share data for years ended December 31 is summarized as
follows:

<TABLE>
<CAPTION>
                                                    NET INCOME (LOSS)
                                           ------------------------------------
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Net income (loss) available to
  shareholders of beneficial interest....   $29,474      $(38,109)     $9,012
                                            =======      ========      ======
</TABLE>

<TABLE>
<CAPTION>
                                                          SHARES
                                           ------------------------------------
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Weighted average number of shares
  outstanding--basic.....................  16,778,962   16,389,944   15,352,275
Effect of dilutive securities:
  Warrants...............................          --           --        4,931
  Options................................     365,528           --       26,601
                                           ----------   ----------   ----------
Weighted average number of shares
  outstanding--diluted...................  17,144,490   16,389,944   15,383,807
                                           ==========   ==========   ==========
</TABLE>

    For 1999, warrants and options were not included in the computation of
diluted EPS because they were anti-dilutive.

NOTE 12.  SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS

    There were no significant noncash transactions in 2000.

    Significant noncash transactions in 1999 include:

    - The Company issued shares of beneficial interest amounting to $7,342 upon
      the conversion of outstanding debentures.

    - The Company surrendered preferred shares in an entity valued at $2,621 in
      a settlement.

                                       45
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12.  SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS
          (CONTINUED)
    Significant noncash transactions in 1998 include:

    - The Company extinguished a note payable amounting to $4,474 in exchange
      for a receivable to another party for the same amount.

    - Shares of beneficial interest were issued upon the conversion of
      debentures valued at $402.

NOTE 13.  BUSINESS SEGMENT INFORMATION

    The Company operates in two reportable business segments: pulp and paper.
The segments are managed separately because each business requires different
production and marketing strategies.

    The pulp segment consists of a single mill located in Germany which
currently produces and markets kraft pulp. The paper segment consists of two
mills located in Germany.

    Both segments operate in industries which are cyclical in nature and their
markets are affected by fluctuations in supply and demand in each cycle. These
fluctuations have significant effect on the cost of materials and the eventual
sales prices of products.

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

<TABLE>
<CAPTION>
                                              PULP        PAPER        TOTAL
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
2000
Sales to external customers..............   $147,048     $ 78,578     $225,626
Intersegment net sales...................      1,269           --        1,269
Segment income (loss)....................     31,929         (278)      31,651
Segment assets...........................    378,362       43,290      421,652
Capital expenditures.....................     21,881        3,003       24,884

RECONCILIATIONS
Loss:
  Total income for reportable segments...                             $ 31,651
  Elimination of intersegment profits....                                1,377
  Unallocated amounts, other corporate
    expenses.............................                               (3,446)
                                                                      --------
    Consolidated income before income
      taxes..............................                             $ 29,582
                                                                      ========

Assets:
  Total assets for reportable segments...                             $421,652
  Intersegment receivable................                              (22,661)
  Other unallocated amounts..............                                4,668
                                                                      --------
    Consolidated total assets............                             $403,659
                                                                      ========
</TABLE>

                                       46
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13.  BUSINESS SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                              PULP        PAPER        TOTAL
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
1999
Sales to external customers..............   $ 40,080     $ 85,490     $125,570
Intersegment net sales...................         86           --           86
Segment loss.............................     (4,200)     (25,885)     (30,085)
Segment assets...........................    411,541       40,592      452,133
Capital expenditures.....................    282,920        6,190      289,110

RECONCILIATIONS
Loss:
  Total loss for reportable segments.....                             $(30,085)
  Elimination of intersegment profits....                                2,704
  Unallocated amounts, other corporate
    expenses.............................                               (9,636)
                                                                      --------
    Consolidated loss before income
      taxes..............................                             $(37,017)
                                                                      ========

Assets:
  Total assets for reportable segments...                             $452,133
  Intersegment receivable................                                 (357)
  Other unallocated amounts..............                                4,069
                                                                      --------
    Consolidated total assets............                             $455,845
                                                                      ========
</TABLE>

<TABLE>
<CAPTION>
                                              PULP        PAPER        TOTAL
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
1998
Sales to external customers..............   $ 69,918     $ 96,315     $166,233
Intersegment net sales...................        461           --          461
Segment profit...........................      2,178       13,455       15,633
Segment assets...........................    254,038       64,158      318,196
Capital expenditures.....................     82,159        3,795       85,954

RECONCILIATIONS
Profit:
  Total profit for reportable segments...                               15,633
  Elimination of intersegment profits....                                 (255)
  Unallocated amounts, other corporate
    expenses.............................                               (6,058)
                                                                      --------
    Consolidated earnings before income
      taxes..............................                             $  9,320
                                                                      ========

Assets:
  Total assets for reportable segments...                             $318,196
  Intersegment receivable................                                 (593)
  Other unallocated amounts..............                               15,681
                                                                      --------
    Consolidated total assets............                             $333,284
                                                                      ========
</TABLE>

                                       47
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13.  BUSINESS SEGMENT INFORMATION (CONTINUED)
    The following table presents net sales to external customers by geographic
area based on location of the customer.

<TABLE>
<CAPTION>
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Germany..................................   $ 95,376     $ 72,129     $ 89,829
Other European Union.....................     76,827       47,498       65,806
Eastern European and other...............     53,423        5,943       10,598
                                            --------     --------     --------
                                            $225,626     $125,570     $166,233
                                            ========     ========     ========
</TABLE>

    The following table presents total assets by geographic area based on
location of the asset.

<TABLE>
<CAPTION>
                                              2000         1999         1998
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Germany..................................   $398,991     $451,776     $317,603
Other....................................      4,668        4,069       15,681
                                            --------     --------     --------
                                            $403,659     $455,845     $333,284
                                            ========     ========     ========
</TABLE>

    The pulp mill has fiber supply contracts with two companies which expire in
2002 and 2003 at prices agreed to periodically. The Company also has labor
agreements which expire in 2001 and 2002. Pulp sales to one customer amounted to
27% of pulp sales in 2000.

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

    The fair value of other financial instruments at December 31 is summarized
as follows:

<TABLE>
<CAPTION>
                                             2000                  1999
                                      -------------------   -------------------
                                      CARRYING     FAIR     CARRYING     FAIR
                                       AMOUNT     VALUE      AMOUNT     VALUE
                                      --------   --------   --------   --------
<S>                                   <C>        <C>        <C>        <C>
Cash and cash equivalents...........  $ 18,496   $ 18,496   $  1,722   $  1,722
Cash restricted.....................    25,150     25,150     12,865     12,865
Notes receivable....................     4,296      4,296      4,869      4,869
Notes payable.......................       839        839        553        553
Long-term debt......................   235,488    235,488    252,284    252,162
</TABLE>

    The fair value of cash and cash equivalents is based on reported market
value. The fair value of cash restricted was equal to its carrying amount
because it is in an account which bears a market rate of interest. The value of
the notes receivable is based on the value of similar long-term receivables. The
fair value of notes payable was based on the value of similar debt incurred in
the pulp industry. The fair value of long-term debt was determined using
discounted cash flows at prevailing market rates. The other long-term
liabilities which have a carrying value of $3,721 and $3,506 at December 31,
2000 and 1999, respectively, are primarily an accrued environmental liability at
the pulp mill. This liability may be partially reimbursable. Further, the
Company cannot estimate at this time when these amounts will be paid. Therefore,
the fair value of other long-term liabilities cannot be determined. The carrying
amount of the

                                       48
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Company's foreign currency forward swap agreement approximates fair value
because the transaction occurred at year-end.

NOTE 15.  COMMITMENTS AND CONTINGENCIES

    At December 31, 2000 and 1999, the Company recorded a liability for
environmental conservation expenditures of $1,921 and $1,544, respectively.
Management believes the liability amount recorded is sufficient, however, future
regulations in Germany may result in additional liability.

    The Company is required to pay certain charges based on water pollution
levels at its mills. Unpaid charges can be reduced by investing in qualifying
equipment that results in less water pollution. The Company believes that
equipment investments already made will offset most of these charges, but it has
not received final determination from the appropriate authorities. Accordingly,
a liability for these water charges has only been recognized to the extent that
equipment investments have not been made.

    The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the estimated outcome
of such issues will not have a material effect on the Company's financial
statements.

                                       49
<PAGE>
                           MERCER INTERNATIONAL INC.

                SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

                            QUARTERLY FINANCIAL DATA
                     (THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                       QUARTER ENDED
                                                    ---------------------------------------------------
                                                    MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                                    ---------   --------   -------------   ------------
<S>                                                 <C>         <C>        <C>             <C>
2000
Net Sales.........................................   $55,760    $63,715       $61,694        $ 55,033
Gross profit......................................     6,868     15,531        15,899          19,561
Income before extraordinary items and cumulative
  effect of a change in accounting................     1,071      8,976         9,094          10,333
Income before extraordinary items and cumulative
  effect of a change in accounting, per share*....      0.06       0.52          0.52            0.61
Net income........................................     1,071      8,976         9,094          10,333

1999
Net Sales.........................................   $41,079    $35,000       $30,516        $ 21,272
Gross profit......................................     5,648      2,710          (428)          2,623
Income before extraordinary items and cumulative
  effect of a change in accounting................       132     (2,843)       (7,062)        (28,336)
Income before extraordinary items and cumulative
  effect of a change in accounting, per share*....      0.01      (0.17)        (0.42)          (1.70)
Net income........................................       132     (2,843)       (7,062)        (28,336)
</TABLE>

------------------------

*  on a diluted basis

                                       50
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the SECURITIES
EXCHANGE ACT OF 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                                                    <C>  <C>
                                                       MERCER INTERNATIONAL INC.

Dated: March 29, 2001                                  By:              /s/ JIMMY S.H. LEE
                                                            -----------------------------------------
                                                                          Jimmy S.H. Lee
                                                                             CHAIRMAN
</TABLE>

    Pursuant to the requirements of the SECURITIES EXCHANGE ACT OF 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                                                 <C>
/s/ JIMMY S.H. LEE                                                  Date: March 29, 2001
------------------------------------------------
Jimmy S.H. Lee
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND TRUSTEE

/s/ MICHEL ARNULPHY                                                 Date: March 29, 2001
------------------------------------------------
Michel Arnulphy
TRUSTEE

/s/ C.S. MOON                                                       Date: March 29, 2001
------------------------------------------------
C.S. Moon
TRUSTEE

/s/ MAARTEN REIDEL                                                  Date: March 29, 2001
------------------------------------------------
Maarten Reidel
TRUSTEE

/s/ R. IAN RIGG                                                     Date: March 29, 2001
------------------------------------------------
R. Ian Rigg
CHIEF FINANCIAL OFFICER AND TRUSTEE
</TABLE>

                                       51
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      EXHIBIT NO.        DESCRIPTION OF EXHIBIT
 ---------------------   ----------------------
 <C>                     <C>    <S>
          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                   Shareholder Rights Plan. Incorporated by reference from
                                  Form 8-A dated August 17, 1993.

         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*                  1994 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
                                  DM 508,000,000 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 an 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/A
                                  dated January 23, 2001.

         10.8                   Amended and Restated Employment Agreement between Mercer
                                  International Inc. and Jimmy S.H. Lee dated
                                  November 20, 2000.

         10.9                   Trustee's Indemnity Agreement between Mercer
                                  International Inc. and Jimmy S.H. Lee dated
                                  November 20, 2000.

         21                     List of Subsidiaries of Registrant.

         23                     Independent Auditors Consent.
</TABLE>

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*   Filed in Form 10-K for prior years.

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