<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       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, 1999
                                       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>

                   BURGLISTRASSE 6, ZURICH, SWITZERLAND, 8002
               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, 2000 was approximately
$75,051,503. The last reported sale price of the common shares of beneficial
interest on the NASDAQ Stock Market's National Market on March 27, 2000 was
$8.56 per share.

    As of March 27, 2000, the Registrant had 16,635,399 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
June 28, 2000 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.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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.......................................................          8
           Capital Expenditures and Government Financing...............          9
           Pulp Mill Conversion Project................................         10
           Stendal Pulp Mill Project...................................         12
           Environmental...............................................         13
           Human Resources.............................................         14
ITEM 2.    PROPERTIES..................................................         14
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, 1999 Compared to the Year Ended
             December 31, 1998.........................................         18
           Year Ended December 31, 1998 Compared to the Year Ended
             December 31, 1997.........................................         19
           Liquidity and Capital Resources.............................         21
           Operating Activities........................................         21
           Investing Activities........................................         21
           Financing Activities........................................         22
           Foreign Currency............................................         22
           Cyclical Nature of Business; Competitive Position...........         23
           Year 2000...................................................         23
           Stendal Pulp Mill Project Uncertainties.....................         23
           European Economic and Monetary Union........................         24
           Inflation...................................................         24
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
             RISK......................................................         24
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................         25
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE..................................         25

                               PART III
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........         26
ITEM 11.   EXECUTIVE COMPENSATION......................................         26
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND MANAGEMENT............................................         26
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............         26

                                PART IV
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
             ON FORM 8-K...............................................         27
           Financial Statements........................................         30
           Supplementary Financial Information.........................         49
           SIGNATURES..................................................         50
</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, 1999
rate of exchange of DM 1.9433 to $1.00, and revenues and expenses denominated in
DM have been translated to U.S. dollars at the average rate of exchange
throughout 1999 of DM 1.8359 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 way of a special dividend.

    The Company currently employs approximately 884 people and its manufacturing
plants consist of four paper mills (the "Paper mills") and a pulp mill (the
"Pulp mill") with aggregate annual production capacities of approximately
170,000 tonnes and 280,000 tonnes, respectively. The Paper mills produce three
primary classes of paper products, being packaging, printing and specialty, and
the Pulp mill produces softwood kraft (sulphate) pulp.

    In 1999, the Company completed a major capital project to convert the Pulp
mill from the production of sulphite pulp to kraft pulp and increase 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 and is
currently in the process of ramping up production. Production at the Pulp mill
is expected to increase to at or near capacity in the fourth quarter of 2000.
The aggregate cost of the Conversion Project was approximately $369.6  million.
See "Business--Pulp Mill Conversion Project".

    Over the last five years, the Company has expended approximately
$432.7 million on capital investments on plant upgrades at its mills to improve
efficiency, reduce effluent discharges and emissions and modernize its
manufacturing plants. Approximately $64.4 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.

                                       4
<PAGE>
    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 intends to pursue strategic alternatives for certain of
its Paper mills. The Company intends to use any proceeds resulting from any
disposition to reduce indebtedness and fund future 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 $823.3 million) and to be completed by the end of 2003.
See "Business--Stendal Pulp Mill Project".

PRODUCTS

    The Company manufactures and sells softwood kraft pulp and three 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 Paper mills are located at Heidenau, Hainsberg,
Fahrbrucke and Trebsen and have an aggregate annual production capacity of
approximately 170,000 tonnes. The Pulp mill is situated near the town of
Blankenstein and has an annual production capacity of approximately 280,000
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>
Packaging Paper..............  Trebsen                        Corrugated medium and testliner
                                                              used in the production of boxes
                                                              and corrugated shipping
                                                              containers.

Specialty Paper..............  Heidenau and Fahrbrucke        Greaseproof paper and coated and
                                                              uncoated wallpaper.

Printing Paper...............  Hainsberg and Fahrbrucke       Recycled and 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 and is presently ramping up
production. 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

                                       5
<PAGE>
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.

SALES, MARKETING AND DISTRIBUTION

    The Company's sales and marketing operations focus primarily on western
European countries and are responsible for the majority of the Company's paper
sales. In 1999, paper sales conducted through agents were approximately 32% of
total paper sales, compared to approximately 29% in 1998 and 34% in 1997. The
majority of the Company's paper products are sold to printers, wallpaper
manufacturers, corrugators and converters.

    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 are currently expected to comprise approximately 40-50% of
the Company's total annual pulp sales 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, 1999, there were no material payment delinquencies. The Company's
products are delivered to market by truck, rail and ship.

                                       6
<PAGE>
    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,
                                                           --------------------------------------
                                                             1999           1998           1997
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>
                                                                          (TONNES)
SALES BY VOLUME
Papers
  Packaging Papers.......................................    68,615         91,157(1)     110,428
  Specialty Papers.......................................    36,518         36,001         36,991
  Printing Papers........................................    57,714         56,866         54,538
                                                           --------       --------       --------
    Total Papers.........................................   162,847        184,024        201,957
                                                           --------       --------       --------
Pulp.....................................................    94,523(2)     145,451        160,432
                                                           --------       --------       --------
Total(3).................................................   257,370        329,475        362,389
                                                           ========       ========       ========

                                                                       (IN THOUSANDS)
SALES BY PRODUCT CLASS
Papers
  Packaging Papers.......................................  $ 17,822       $ 24,722(1)    $ 29,313
  Specialty Papers.......................................    29,658         30,401         29,244
  Printing Papers........................................    38,010         41,192         35,915
                                                           --------       --------       --------
    Total Papers.........................................    85,490         96,315         94,472
                                                           --------       --------       --------
Pulp.....................................................    40,080(2)      69,918         75,460
                                                           --------       --------       --------
Total....................................................  $125,570       $166,233       $169,932
                                                           ========       ========       ========
SALES BY GEOGRAPHIC AREA
Germany..................................................  $ 72,129       $ 89,829       $ 92,120
European Union(4)........................................    47,498         65,806         59,794
Other....................................................     5,943         10,598         18,018
                                                           --------       --------       --------
Total....................................................  $125,570       $166,233       $169,932
                                                           ========       ========       ========
</TABLE>

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

(1) 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.

(2) 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.

(3) Excluding intercompany sales of 201, 1,072 and 4,257 tonnes of pulp in 1999,
    1998 and 1997, respectively.

(4) Not including Germany.

                                       7
<PAGE>
    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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
<S>                <C>
European(1) Union  37.8%
Germany            57.5%
Other               4.7%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
<S>                <C>
European(1) Union  39.6%
Germany            54.0%
Other               6.4%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
<S>                <C>
European(1) Union  35.2%
Germany            54.2%
Other              10.6%
</TABLE>

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

(1) Not including Germany.

    In 1999, 1998 and 1997, 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
80% 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 20% of the
fibre is made up of market pulp and chemical additives, both of which are
available at market prices from various suppliers throughout Europe. In 1999,
the Paper mills consumed approximately 126,796 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
four million cubic metres per year. In 1999, the Pulp mill consumed
approximately 470,779 cubic metres of fibre comprised of approximately 321,542
cubic metres of wood chips and 149,237 cubic metres of pulpwood.

                                       8
<PAGE>
    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 will be met primarily
from the Company's existing fibre sources. In late 1998, the Company entered
into a fixed price contract to secure approximately 25% 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 1999, the Company continued its capital investment programs 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, 1999, the aggregate wastewater fees saved by the Company over the
last five years as a result of environmental capital expenditures were
approximately $23.0 million. See "Business--Environmental".

    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          1999          1998          1997          1996          1995
                                   --------      --------      --------      --------      --------      --------
<S>                                <C>           <C>           <C>           <C>           <C>           <C>
                                                                   (IN THOUSANDS)
Capital expenditures.........      $432,688(1)   $289,110(2)   $85,954(4)    $14,791(6)    $23,865       $18,968
                                   ========      ========      =======       =======       =======       =======
Non-refundable grants........      $ 64,394      $ 33,927(3)   $16,125(5)    $ 1,723       $ 5,328       $ 7,291
                                   ========      ========      =======       =======       =======       =======
</TABLE>

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

(1) Over the last five years, aggregate wastewater fees saved by the Company as
    a result of environmental capital expenditures were $23.0 million.

(2) $281.6 million was related to the Conversion Project.

(3) $32.7 million was related to the Conversion Project.

(4) $82.2 million was related to the Conversion Project.

(5) $16.0 million was related to the Conversion Project.

(6) $5.9 million was related to the Conversion Project.

                                       9
<PAGE>
    In 1998, the Company completed its initial capital investment program
initiated in 1993 to modernize and upgrade the Paper mills. The Company expended
an aggregate of approximately $67.0 million under this program. Capital
investments in 1999 included a variety of smaller projects, the largest of which
were the construction of a wastewater treatment facility at the Heidenau mill at
a cost of approximately $1.7 million, the construction of a boiler house at the
Trebsen mill at a cost of approximately $1.7 million and the installation of a
new paper machine drive at the Fahrbrucke mill at a cost of approximately
$1.1 million. The Company anticipates that capital investments at its Paper
mills for maintenance and environmental projects will total approximately
$4.0 million in 2000. The Company is reviewing a number of strategic initiatives
designed to upgrade the product mix at the Paper mills and provide a high rate
of return.

    In 1994, the Company initiated a capital investment program to reduce
effluent discharges and emissions and upgrade the Pulp mill. The program was
estimated to cost approximately $48.4 million and be completed by December 31,
1998. As at December 31, 1997, the program was substantially completed and
approximately $37.3 million had been expended thereon. The balance of this
investment program has been modified as a result of the Conversion Project.

    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, of which $2.7 million had been expended by the end of 1999.

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 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, a
significant portion, if not the majority, of the Company's kraft pulp production
will be sold on the domestic German market.

    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 $369.6 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 (the "Project Loan
Agreement") having a 15 year term with a merged German bank and other syndicated
lenders (the "Lenders"), in the aggregate amount of DM 508.0 million
($261.4 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.

                                       10
<PAGE>
    The Loan Facility of DM 508.0 million ($261.4 million) included a main
facility of DM 453.0 million ($233.1 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 ($14.4 million) which can also be
utilized by SPB for project costs, and a cost overrun facility (the "Cost
Overrun Tranche") of DM 27.0 million ($13.9 million). If SPB utilizes the Cost
Overrun Tranche, the Company is required to advance to SPB, on a one to one
basis, DM 28.3 million ($14.6 million) in the form of additional equity or
subordinated loans to fund cost overruns. The Company has deposited
DM 25 million ($12.9 million) into a restricted account (the "Overrun Account")
with the Lenders to secure its obligation to advance funds to SPB to fund cost
overruns, if any, for the project. The German federal government and the state
government of Thuringia have 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 has agreed to provide governmental
grants of DM 144.0 million ($74.1 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 will provide, under existing programs, non-repayable
investment subsidies and grants totalling DM 45.0 million ($23.2 million) in
respect of the project. To December 31, 1999, SPB had received government grants
totalling approximately $48.0 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 270.0 million
($138.9 million) was drawn as at December 31, 1999 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 of approximately
4.50%. 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 is
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 is 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. Repayment of the General Tranche and the
Cost Overrun Tranche (if utilized) 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.

    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

                                       11
<PAGE>
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.

    As at December 31, 1999, DM 469.0 million ($241.3 million) had been drawn
under the Loan Facility in respect of the Conversion Project.

    The Pulp mill is presently going through a "ramping-up" period. The Company
anticipates that production at the Pulp mill will reach approximately 80% of
capacity by mid-2000 and increase to at or near capacity in the fourth quarter
of 2000.

    As with all major capital projects of such size and scope, the Conversion
Project adversely affected and disrupted the operations and pulp production at
the Pulp mill as a result of disruptions caused by construction,
site-development work, installation and removal of equipment, employee training
and planned and unplanned downtime. The Conversion Project also resulted in the
Company taking a special charge in 1999 of $3.1 million relating to assets at
the Pulp mill which were no longer useful.

    The ramp-up of the Pulp mill to produce kraft pulp is subject to customary
risks and uncertainties inherent for large capital projects which alter the
production of a major manufacturing facility and increase its production
capacity. Such risks and uncertainties include, among other things, risks that
the ramp-up of production will not be achieved on schedule, that the employees
will not be sufficiently trained to operate all new equipment without
disruptions to quality and that the quality of the manufactured kraft pulp will
not improve to customer standards in the scheduled time frame and in time to win
market acceptance.

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 ($823.3 million) "greenfield"
550,000-tonne softwood kraft pulp mill in 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.

    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 ($41.3 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 currently expected to commence at
the end of 2000 and be completed by the end of 2003.

    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. Further, 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

                                       12
<PAGE>
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 $1.6 million in 1999 and are expected to
be approximately $0.6 million in 2000.

    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.

    The Hainsberg paper mill is currently using the municipal wastewater
treatment plant, but due to increased user charges, the Company is currently
negotiating the fees for using the municipal wastewater treatment plant. 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, which has a relatively modern biological wastewater treatment
and oxygen bleaching facility, will have to gradually satisfy more stringent
state regulations with respect to both air emissions and effluent discharges.
The Company has reduced its levels of AOX (Adsorbable Organic Halogen) discharge
to 0.6 kilograms per tonne of pulp produced, in order to comply with prescribed
effluent discharge levels. The date by which the Pulp mill must further reduce
its levels of AOX discharge to 0.35 kilograms per tonne has been deferred to
January 1, 2002. In addition, the requirement to reduce levels of COD (Chemical
Oxygen Demand) discharge at the Pulp mill to 44 kilograms per tonne has been
postponed to January 1, 2001. The Company will continue to modify its wastewater
and bleaching facilities at the Pulp mill to meet or exceed these 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, 1999, the aggregate wastewater fees saved by the Company as a
result of environmental capital expenditures made at the manufacturing plants
were approximately $23.0 million. The Company expects that its capital
investment programs for its

                                       13
<PAGE>
manufacturing plants will offset the full amount of wastewater fees that may be
payable in respect of 1999 and 2000 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 884 people, of which
approximately 408 are engaged in paper operations and approximately 473 in pulp
operations, including the Company's new transportation subsidiary. Since the end
of 1996 and 1998, respectively, there were no further contractual obligations of
the Company to BVS, to maintain prescribed employment levels at its paper
operations and pulp operations. In connection with the Conversion Project, the
Company has agreed to maintain at least 504 jobs at its pulp operations for a
period of five years. 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 Chemie-Papier-Keramik (the "ICPK"), 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 provide 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.

    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 for a period of three years. The labour
agreement establishes a wage rate that will be approximately 90% of the union
wage rate in the year 2000 for pulp workers in western Germany and will be at
par with such rate by the year 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.

    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. All of the Paper mills operate their own power plants to produce
electricity and steam, other than the Trebsen mill which has a power plant to
produce steam. The Trebsen mill previously leased a power plant to produce
electricity, which lease was terminated in 1998.

    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 35,000 tonnes. The Fahrbrucke mill produces both specialty and
printing papers and the Hainsberg mill produces printing papers, and each has an
annual production capacity of 30,000 tonnes. The de-inking plant at the
Hainsberg mill improves paper brightness and general product quality and allows
for the increased usage of lower priced waste paper. The Fahrbrucke mill uses
virgin fibre and the Hainsberg mill uses almost exclusively recycled fibre in
producing various grades of printing papers.

    The Trebsen mill produces packaging papers and has an annual production
capacity of 75,000 tonnes. The fibre supply for this mill is almost entirely
from waste paper.

    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

                                       14
<PAGE>
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)            1999           1998           1997
-------------                               -----------------       --------       --------       --------
<S>                                         <C>                     <C>            <C>            <C>
                                                                       (TONNES)
Papers
  Packaging Papers........................        70,000             67,301         96,614(2)     111,002
  Specialty Papers........................        40,000             35,650         37,372         35,654
  Printing Papers.........................        60,000             56,983         57,274         54,224
                                                 -------            -------        -------        -------
    Total Papers..........................       170,000            159,934        191,260        200,880
                                                 -------            -------        -------        -------
Pulp......................................       280,000(3)          88,675(3)     150,381        157,844
                                                 -------            -------        -------        -------
Total.....................................       450,000            248,609        341,641        358,724
                                                 =======            =======        =======        =======
</TABLE>

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

(1) Capacity is stated upon the rated capacity of the plants as at December 31,
    1999, 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) Includes production of approximately 24,612 tonnes from the Greiz mill prior
    to its sale effective July 1998.

(3) 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.

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, 1998
and 1999, and for the period ended March 27, 2000:

<TABLE>
<CAPTION>
FISCAL QUARTER ENDED                                            HIGH       LOW
--------------------                                          --------   --------
<S>                                                           <C>        <C>
1998
March 31....................................................   $10.63     $8.00
June 30.....................................................   $12.06     $9.31
September 30................................................   $10.19     $5.81
December 31.................................................   $ 7.75     $5.56

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
Period ended March 27.......................................   $ 9.34     $4.31
</TABLE>

    (b) SHAREHOLDER INFORMATION.  As of March 27, 2000, there were approximately
645 holders of record of the Company's shares and a total of 16,635,399 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 cash dividend of $0.05 per share to shareholders of
record as of April 30, 1999. 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,
                              ------------------------------------------------------------------------
                                1999           1998           1997             1996             1995
                              --------       --------       --------         --------         --------
                                            (IN THOUSANDS, OTHER THAN PER SHARE AMOUNTS)
<S>                           <C>            <C>            <C>              <C>              <C>
Revenues(1).................  $127,867       $174,896       $184,107         $186,729         $300,737
Net income (loss) from
  continuing operations.....  $(38,109)(2)   $  9,012       $(32,623)(3)     $ 15,557         $ 65,637
Net income (loss) from
  continuing operations, per
  common share,
  Basic.....................  $  (2.33)(2)   $   0.59       $  (2.18)(3)     $   1.12         $   5.24
  Diluted...................  $  (2.33)(2)   $   0.59       $  (2.18)(3)     $   1.12         $   5.13
Weighted average common
  shares outstanding,
  Basic.....................    16,390         15,352         14,995           13,829           12,526
  Diluted...................    16,390         15,384         14,995           13,957           12,787
Current assets..............  $ 69,116       $121,716       $100,384         $132,651         $140,618
Current liabilities.........  $116,156       $ 56,695       $ 57,753         $ 71,129         $ 73,977
Working capital.............  $(47,040)      $ 65,021       $ 42,631         $ 61,522         $ 66,641
Total assets................  $455,845       $333,284       $210,294         $296,980(1)      $369,953(5)
Long-term liabilities.......  $236,669       $123,570       $ 17,066         $ 31,312         $ 68,961
Shareholders' equity........  $103,020       $153,019       $135,475         $194,539(1)(4)   $227,015(5)
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.

(5) Includes net assets of spun-off operations.

                                       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, 1999 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,
                                                           --------------------------------------
                                                             1999           1998           1997
                                                           --------       --------       --------
                                                                       (IN THOUSANDS)
<S>                                                        <C>            <C>            <C>
SALES BY PRODUCT CLASS
Papers
  Packaging Papers.......................................  $ 17,822       $ 24,722(1)    $ 29,313
  Specialty Papers.......................................    29,658         30,401         29,244
  Printing Papers........................................    38,010         41,192         35,915
                                                           --------       --------       --------
    Total Papers.........................................    85,490         96,315         94,472
                                                           --------       --------       --------
Pulp.....................................................    40,080         69,918         75,460
                                                           --------       --------       --------
Total....................................................  $125,570       $166,233       $169,932
                                                           ========       ========       ========
<S>                                                        <C>            <C>            <C>
<CAPTION>
SALES BY VOLUME                                                           (TONNES)
Papers
<S>                                                        <C>            <C>            <C>
  Packaging Papers.......................................    68,615         91,157(1)     110,428
  Specialty Papers.......................................    36,518         36,001         36,991
  Printing Papers........................................    57,714         56,866         54,538
                                                           --------       --------       --------
    Total Papers.........................................   162,847        184,024        201,957
                                                           --------       --------       --------
Pulp.....................................................    94,523        145,451        160,432
                                                           --------       --------       --------
Total(2).................................................   257,370        329,475        362,389
                                                           ========       ========       ========
</TABLE>

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

(1) 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.

(2) Excluding intercompany sales of 201, 1,072 and 4,257 tonnes of pulp in 1999,
    1998 and 1997, respectively.

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.

                                       18
<PAGE>
    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 intends to pursue strategic alternatives for its paper
operations, and will use proceeds from any sale to decrease its indebtedness and
fund future capital expenditures and investments. The Company also wrote down
its pulp assets by $3.1 million relating to certain capital assets which are 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.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

    In 1998, revenues decreased to $174.9 million from $184.1 million in 1997,
as a result of a decrease in sales volumes. As the Company's products are
principally sold in DM, the depreciation of the DM against the U.S. dollar by
approximately 1.5% on average in 1998, compared to the same period in 1997,
resulted in lower prices in U.S. dollar terms for the Company's products.

    Costs and expenses decreased to $165.6 million in 1998 from $168.2 million
in 1997 before a special charge of $48.5 million (or $216.7 million after the
special charge), primarily as a result of a decrease in sales volumes. General
and administrative expenses were $23.5 million in 1998, compared to
$23.6 million

                                       19
<PAGE>
in 1997. In 1998, interest expense increased to $3.4 million from $3.0 million
in 1997 plus $5.3 million of interest was capitalized in 1998, as a result of
increased indebtedness resulting from the Conversion Project.

    In 1998, net income was $9.0 million, or $0.59 per share, compared to
$15.8 million, or $1.06 per share, before the special charge in 1997. In 1997,
the Company took a special charge of $48.5 million relating to the limited
service life of various assets due to the Conversion Project, severance and
unrelated costs, the write-down of specific assets to their estimated realizable
value and a decrease in the deferred income tax asset. In 1997, after the
special charge, the Company reported a net loss of $32.6 million, or $2.18 per
share.

    In 1998, the Company's pulp and paper revenues decreased by approximately
2.2% from 1997 on a 7.3% decrease in pulp revenues and a 2.0% increase in paper
revenues. Overall, in 1998, paper markets were generally stable and prices were
generally stronger than in 1997. In 1998, pulp markets were generally weak with
prices subject to significant fluctuations. In 1998, pulp prices on average
improved marginally over 1997, while sales volumes were lower in 1998 compared
to 1997.

    In 1998, pulp prices remained relatively low. On average, pulp prices
realized by the Company in 1998 increased marginally by approximately 2.2%
compared to 1997. Overall, pulp sales decreased by 7.3% to $69.9 million in 1998
from $75.5 million in 1997, primarily as a result of a sales volume decrease of
9.3%. Continuing economic weakness in the Asian markets and the shifting of
production by Asian and other pulp producers to other markets, including Europe,
prevented any real recovery in pulp prices or demand in 1998. Pulp prices
decreased during the first half of 1998 due to high world inventory levels,
before recovering in mid-year. Pulp prices then weakened again in the last
quarter of 1998 due to a large build-up in producer inventories and, as a
result, the Company took 28 days of market downtime at the Pulp mill for
inventory correction.

    On average, paper prices realized by the Company increased by approximately
11.9% in 1998, compared to 1997, primarily as a result of increased demand for
printing papers. Paper sales in 1998 increased $96.3 million from $94.5 million
in 1997, on a volume decrease of 8.9% and an average price increase of 11.9%. In
1998, sales volumes for packaging papers and specialty papers decreased by 17.5%
and 2.7%, respectively, and sales volumes for printing papers increased by 4.3%,
compared to 1997. Paper prices remained stable at the end of 1998, primarily as
a result of an increased demand for printing paper grades.

    Increases in product prices in 1998 were partially offset by increased fibre
costs for pulp production compared to 1997. On average, the Company's fibre
costs for pulp production in 1998 increased by approximately 9.8%, compared to
1997, but remained among the lowest in Europe. As a result, during 1998, the
Company changed its fibre input mix to use more lower-grade materials, which
partially reduced the effect of higher fibre costs. Prices for waste paper,
which comprises approximately 80% of the fibre for the Paper mills, decreased by
approximately 5.6% in 1998 compared to 1997.

                                       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,
                                                                  1999            1998
                                                              -------------   -------------
                                                                     (IN THOUSANDS)
<S>                                                           <C>             <C>
FINANCIAL POSITION
Working capital.............................................    $(47,040)       $ 65,021
Property, plant and equipment (net).........................     351,828         161,012
Total assets................................................     455,845         333,284
Long-term government debt...................................       5,490           7,003
Long-term debt--other.......................................     227,673         114,545
Shareholders' equity........................................     103,020         153,019
</TABLE>

    At December 31, 1999, the Company's cash and cash equivalents totalled
$1.7 million, a net decrease of $51.5 million from $53.3 million at the end of
1998. At December 31, 1999, the Company had short-term trading securities
totalling $5.4 million, compared to $12.9 million at December 31, 1998.

OPERATING ACTIVITIES

    Operating activities in 1999 used cash of $8.6 million, compared to
providing cash of $10.0 million in 1998. Net changes in trading securities
provided cash of $8.5 million in 1999, compared to $23.3 million in 1998. An
increase in receivables and inventories used cash of $12.5 million and
$1.0 million, respectively, in the current period, compared to $15.9 million and
$2.4 million, respectively, in 1998. An increase in accounts payable and accrued
liabilities provided cash of $7.7 million in 1999, compared to a decrease in
accounts payable and accrued liabilities using cash of $9.6 million in 1998. The
Company expects to generate sufficient cash flow from operations to meet its
working capital requirements for its paper operations. Working capital for the
Company's pulp operations will be funded from cash flow from operations and
borrowings under the Project Loan Agreement.

INVESTING ACTIVITIES

    Investing activities in 1999 used cash of $245.4 million, consisting
primarily of capital expenditures relating to the Conversion Project and other
upgrades to the Company's Paper mills, compared to $60.0 million in 1998. A
decrease in notes receivable provided cash of $4.2 million in 1999, compared to
an increase in notes receivable using cash of $3.0 million in 1998.

    The Company expects aggregate capital expenditures in 2000 to be
approximately $9.2 million, which will be funded from cash, cash flow from
operations and borrowings. In 1999, aggregate capital expenditures, excluding
costs in respect of the Conversion Project, were $7.5 million, compared to
approximately $3.8 million in the same period of 1998.

    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, 1999 were approximately $369.6 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. The Pulp mill is currently ramping-up production. See "Business--Pulp
Mill Conversion Project".

                                       21
<PAGE>
FINANCING ACTIVITIES

    In 1999, financing activities provided cash of $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. In 1998, cash provided by financing activities was $95.5 million.
Pursuant to the terms of the Project Loan Agreement, the Company has deposited
$12.9 million into the Overrun Account to fund potential cost overruns in
respect of the Conversion Project. The depreciation of the DM against the
U.S. dollar at December 31, 1999 resulted in an unrealized foreign exchange
translation loss of $4.7 million on cash and cash equivalents, which is included
as shareholders' equity in the Company's balance sheet and does not affect the
Company's net earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Foreign Currency".

    The Company's pulp and paper operations had net operating tax losses of
approximately $266.0 million at December 31, 1999, 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. As a result of these amendments,
SPB revised its prior income tax filings to maximize the benefits under the loss
carryforward provisions in effect in those years and decreased the deferred
income tax asset by $5.0 million in 1997.

    In 1999, the repurchase of shares used cash of $0.2 million, compared to the
Company receiving proceeds of $2.9 million from the issuance of shares, net of
share repurchases, in 1998. The payment of dividends used cash of $0.8 million
in 1999, compared to $0.6 million in 1998.

    Other than the agreement relating to the Stendal Project, the Company has 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 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, 1999, the Company
reported a net $21.3 million foreign exchange translation loss and, as a result,
the cumulative foreign exchange translation loss increased to $49.9 million at
December 31, 1999 from $28.7 million at December 31, 1998.

    As both the Company's principal sources of revenues and expenses are in DM,
the Company does not currently enter into any currency hedging arrangements for
exchange rate fluctuations.

                                       22
<PAGE>
    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,
                         ---------------------------------------------------------------------------------------
                                    2000                          1999                          1998
                         ---------------------------   ---------------------------   ---------------------------
                                      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............    2.0273         1.9822         1.9433         1.8359         1.6665         1.7589
</TABLE>

    Based upon the period average exchange rate in 1999, the U.S. dollar
increased by approximately 10.2% in value against the DM since December 31,
1998.

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 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.

YEAR 2000

    The Company has not experienced any difficulties associated with the
changeover to the year 2000. While management of the Company believes that it
took adequate steps to address the year 2000 issue, and the Company is not aware
of any difficulties experienced by its clients associated with the changeover to
the year 2000, there can be no assurance that difficulties associated with the
year 2000 may not arise in the future.

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 2000 and be completed by the end of 2003. However, there can be no
assurance that the Stendal Project will proceed as currently planned, or at all.
See "Business--Stendal Pulp Mill Project".

                                       23
<PAGE>
EUROPEAN ECONOMIC AND MONETARY UNION

    Effective January 1, 1999, the currencies of the majority of the member
countries of the European Economic and Monetary Union ("EMU") ceased to exist
and were replaced by a new currency, the "euro". The Company began coordinating
preparations for the euro in 1998. These preparations included modifications of
the Company's computer systems and programs for the EMU and coordination with
customers, suppliers and financial institutions to ensure a smooth transition to
the new currency. The Company was able to transact business in the euro
beginning on January 1, 1999. Costs associated with the modifications necessary
to prepare for the EMU were expensed by the Company during the period in which
they were incurred.

INFLATION

    The Company does not believe that inflation has had a material impact on
revenues or income during 1999.

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. The Company does not enter into derivative contracts for its own
account to hedge against these risks.

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 and a decrease in interest rates may increase the fair
value of such financial instruments. The Company's financial instruments which
may be sensitive to interest rate fluctuations are investments, notes receivable
and debt obligations. The following table provides 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, 1999 and expected cash flows from these instruments:

<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     $    0    $     0    $     0    $     0     $   603
Notes receivable...........     4,869      4,869         0          0          0      4,869          0           0
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 and an appreciation of such currencies against the
U.S. dollar will increase the fair value of such financial instruments. The
Company's financial instruments which may be sensitive to foreign currency
exchange rate fluctuations are investments, restricted cash and debt
obligations. The following table provides information about the Company's
exposure to foreign currency exchange rate fluctuations for the carrying amount
of financial instruments

                                       24
<PAGE>
that may be sensitive to such fluctuations as at December 31, 1999 and expected
cash flows from these instruments:

<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    $     0     $    0    $     0    $     0     $  1,753
Cash restricted...........    12,865     12,865         0     12,865          0          0          0            0
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 table provides information about the Company's
exposure to fluctuations in equity prices for the carrying amount of financial
instruments sensitive to such fluctuations and expected cash flows from these
instruments:

<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    $     0     $    0    $     0    $     0     $  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 29.

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

    Not applicable.

                                       25
<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 42, 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 52, 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 65, 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 36, 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 56, 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 64, 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.

                                       26
<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................................        29
        Consolidated Balance Sheets.................................        30
        Consolidated Statements of Operations.......................        31
        Consolidated Statements of Comprehensive Income.............        32
        Consolidated Statements of Changes in Shareholders'
          Equity....................................................        33
        Consolidated Statements of Cash Flows.......................        34
        Notes to the Consolidated Financial Statements..............        35

   (2)  FINANCIAL STATEMENT SCHEDULES

        Independent Auditors' Report................................        51

        SCHEDULE I--Condensed Financial Information of Registrant...        52
</TABLE>

    All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

                                       27
<PAGE>

<TABLE>
<C>     <C>     <C>    <S>
   (3)                                                          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.
        21             List of Subsidiaries of Registrant.
        23             Independent Auditors Consent.
        27             Article 5--Financial Data Schedule for the Year Ended
                         December 31, 1999.
</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 December 29, 1999:
        Item 5. Other Events
</TABLE>

                                       28
<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, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.

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

March 15, 2000

Seattle, Washington

                                       29
<PAGE>
                           MERCER INTERNATIONAL INC.

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1999 AND 1998
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current Assets
  Cash and cash equivalents.................................  $  1,722   $ 53,250
  Investments...............................................     5,392     12,891
  Receivables...............................................    41,448     33,828
  Inventories...............................................    17,697     19,540
  Prepaid and other.........................................     2,857      2,207
                                                              --------   --------
    Total current assets....................................    69,116    121,716

Long-Term Assets
  Cash restricted...........................................    12,865     15,000
  Properties................................................   351,828    161,012
  Investments...............................................     6,925     13,626
  Notes receivable..........................................     4,869     10,150
  Deferred income tax.......................................    10,242     11,780
                                                              --------   --------
                                                               386,729    211,568
                                                              --------   --------
                                                              $455,845   $333,284
                                                              ========   ========
                                   LIABILITIES
Current Liabilities
  Accounts payable and accrued expenses.....................  $ 40,287   $ 45,024
  Pulp mill renovation costs payable........................    56,195      8,494
  Note payable..............................................       553      1,839
  Debt......................................................    19,121      1,338
                                                              --------   --------
    Total current liabilities...............................   116,156     56,695

Long-Term Liabilities
  Debt......................................................   233,163    121,548
  Other.....................................................     3,506      2,022
                                                              --------   --------
                                                               236,669    123,570
                                                              --------   --------
    Total liabilities.......................................   352,825    180,265
                                                              --------   --------

                              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, 16,635,399 and 15,440,122 issued
      and outstanding at December 31, 1999 and 1998.........    99,038     91,913
  Retained earnings.........................................    59,224     98,167
  Accumulated other comprehensive loss......................   (55,242)   (37,061)
                                                              --------   --------
                                                               103,020    153,019
                                                              --------   --------
                                                              $455,845   $333,284
                                                              ========   ========
</TABLE>

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

                                       30
<PAGE>
                           MERCER INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues
  Sales.....................................................  $125,570   $166,233   $169,932
  Other.....................................................     2,297      8,663     14,175
                                                              --------   --------   --------
                                                               127,867    174,896    184,107

Expenses
  Cost of sales.............................................   117,314    138,702    141,559
  Special charges...........................................    22,155         --     48,452
  General, administrative and other.........................    22,420     23,490     23,600
  Interest expense..........................................     2,995      3,384      3,046
                                                              --------   --------   --------
                                                               164,884    165,576    216,657
                                                              --------   --------   --------
Income (loss) before income taxes...........................   (37,017)     9,320    (32,550)
Income tax provision........................................    (1,092)      (308)       (73)
                                                              --------   --------   --------
  Net income (loss).........................................  $(38,109)  $  9,012   $(32,623)
                                                              ========   ========   ========
Basic and diluted earnings (loss) per share.................  $  (2.33)  $   0.59   $  (2.18)
                                                              ========   ========   ========
</TABLE>

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

                                       31
<PAGE>
                           MERCER INTERNATIONAL INC.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net income (loss)...........................................  $(38,109)  $ 9,012    $(32,623)
Other comprehensive income, net of tax
  Foreign currency translation adjustment...................   (21,266)   12,713     (29,362)
  Unrealized gains (losses) on securities
    Unrealized holding gains (losses) arising during the
      period................................................     1,745    (7,679)        733
    Reclassification adjustment for losses included in
      net income (loss).....................................     1,340       798          --
                                                              --------   -------    --------
                                                                 3,085    (6,881)        733
                                                              --------   -------    --------
Other comprehensive income (loss)...........................   (18,181)    5,832     (28,629)
                                                              --------   -------    --------
Comprehensive income (loss).................................  $(56,290)  $14,844    $(61,252)
                                                              ========   =======    ========
</TABLE>

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

                                       32
<PAGE>
                           MERCER INTERNATIONAL INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                           (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, 1996......  14,750,638    $14,751     $71,214     $122,838    $(12,014)       $(2,250)      $(14,264)
Shares issued for conversion of
  debentures......................       6,731          7          62          --           --             --             --
Shares issued for exercise of
  options.........................     169,500        169       1,332          --           --             --             --
Shares issued for the settlement
  of debt.........................     100,000        100         901          --           --             --             --
Shares issued for the payment of
  debenture interest..............       4,853          5          45          --           --             --             --
Shares issued for cash............      11,000         11          89          --           --             --             --
Repurchase of shares..............      (9,000)        (9)        (74)         --           --             --             --
Payment of dividends..............          --         --          --        (450)          --             --             --
Change in other comprehensive
  income (loss)...................          --         --          --          --      (29,362)           733        (28,629)
Net loss..........................          --         --          --     (32,623)          --             --             --
                                    ----------    -------     -------     --------    --------        -------       --------
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)          --             --             --
Change in other comprehensive
  income (loss)...................          --         --          --          --       12,713         (6,881)         5,832
Net income........................          --         --          --       9,012           --             --             --
                                    ----------    -------     -------     --------    --------        -------       --------
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)          --             --             --
Change in other comprehensive
  income (loss)...................          --         --          --          --      (21,266)         3,085        (18,181)
Net loss..........................          --         --          --     (38,109)          --             --             --
                                    ----------    -------     -------     --------    --------        -------       --------
Balance at December 31, 1999......  16,635,399    $16,635     $82,403     $59,224     $(49,929)       $(5,313)      $(55,242)
                                    ==========    =======     =======     ========    ========        =======       ========

<CAPTION>

                                    SHAREHOLDERS'
                                       EQUITY
                                    -------------
<S>                                 <C>
Balance at December 31, 1996......    $194,539
Shares issued for conversion of
  debentures......................          69
Shares issued for exercise of
  options.........................       1,501
Shares issued for the settlement
  of debt.........................       1,001
Shares issued for the payment of
  debenture interest..............          50
Shares issued for cash............         100
Repurchase of shares..............         (83)
Payment of dividends..............        (450)
Change in other comprehensive
  income (loss)...................     (28,629)
Net loss..........................     (32,623)
                                      --------
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)
Change in other comprehensive
  income (loss)...................       5,832
Net income........................       9,012
                                      --------
Balance at December 31, 1998......     153,019
                                      --------
Shares issued for exercise of
  warrants........................       7,342
Repurchase of shares..............        (217)
Payment of dividends..............        (834)
Change in other comprehensive
  income (loss)...................     (18,181)
Net loss..........................     (38,109)
                                      --------
Balance at December 31, 1999......    $103,020
                                      ========
</TABLE>

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

                                       33
<PAGE>
                           MERCER INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                1999        1998        1997
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Cash Flows from Operating Activities
  Net income (loss).........................................  $ (38,109)  $   9,012   $ (32,623)
  Adjustments to reconcile net income (loss) to cash flows
    from operating activities
    Special charges.........................................     22,155          --      48,452
    Depreciation............................................      7,018      11,218      13,252
    Gain on sale of property................................         --      (5,345)       (991)
    Deferred income taxes...................................         --         308          --
    Other...................................................         --        (184)       (512)
  Changes in current assets and liabilities
    Investment in trading securities........................      8,478      23,266       9,060
    Inventories.............................................       (996)     (2,354)      1,953
    Receivables.............................................    (12,489)    (15,851)     (7,150)
    Accounts payable and accrued expenses...................      7,718      (9,609)    (15,561)
    Prepaid and other.......................................     (2,411)       (453)        100
                                                              ---------   ---------   ---------
      Net cash provided by (used in) operating activities...     (8,636)     10,008      15,980

Cash Flows from Investing Activities
  Proceeds from the sales of available-for-sale
    securities..............................................      6,867       2,216          --
  Purchases of available-for-sale securities................     (1,264)         --          --
  Sale of properties........................................         --      10,615       3,024
  Acquisition of properties, net of investment grants.......   (255,186)    (69,829)    (13,035)
  Change in notes receivable................................      4,178      (2,967)     (7,000)
                                                              ---------   ---------   ---------
      Net cash used in investing activities.................   (245,405)    (59,965)    (17,011)

Cash Flows from Financing Activities
  Cash restricted...........................................         --     (15,000)         --
  Increase in pulp mill renovation costs payable............     47,701       8,494          --
  Increase in debts.........................................    162,863     107,719       2,010
  Decrease in debts.........................................     (2,299)     (7,823)     (6,676)
  Shares of beneficial interest issued for cash.............         --       3,066       1,601
  Repurchase shares of beneficial interest..................       (217)       (158)        (83)
  Dividends.................................................       (834)       (610)       (450)
  Other.....................................................          3        (157)        (70)
                                                              ---------   ---------   ---------
      Net cash provided by (used in) financing activities...    207,217      95,531      (3,668)

Effect of exchange rate changes on cash and cash
  equivalents...............................................     (4,704)      3,262        (854)
                                                              ---------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........    (51,528)     48,836      (5,553)

Cash and Cash Equivalents, beginning of year................     53,250       4,414       9,967
                                                              ---------   ---------   ---------
Cash and Cash Equivalents, end of year......................  $   1,722   $  53,250   $   4,414
                                                              =========   =========   =========
</TABLE>

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

                                       34
<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

                                       35
<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 for either 1999, 1998 or 1997.

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 Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") will be effective for
periods beginning after June 15, 2000. FAS 133 requires that entities recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value provided certain conditions are met. The Company
does not currently have derivative instruments or engage in hedging activities
so there would be no affect on its consolidated financial statements.

                                       36
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2.  INVESTMENTS

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

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       -----------------------
                                                          1999         1998
                                                       ----------   ----------
<S>                                                    <C>          <C>
Bonds................................................   $ 4,296      $ 6,159
Equity securities....................................     1,096        6,732
                                                        -------      -------
                                                        $ 5,392      $12,891
                                                        =======      =======
</TABLE>

    Included within trading securities is an investment in a bond that
represents 37% of the total value of trading securities at December 31, 1999.
Included within trading securities are investments in a fund that represented
33% of the total value of trading securities at December 31, 1998. The change in
net unrealized holding gains (losses) on trading securities which has been
included in earnings was $2,411, $(4,407) and $1,067 during 1999, 1998 and 1997,
respectively.

    Available-for-sale securities consist of bonds and equity securities and
have been classified as long-term investments. At December 31, 1999, equity
securities of three companies represented 94% of the total available-for-sale
securities and 53% was represented by one equity investment at December 31,
1998. The proceeds from sales of these securities amounted to $6,867, $2,216 and
none which resulted in realized losses of $(1,340), $(798) and none during 1999,
1998 and 1997, respectively. The fair value of available-for-sale securities
included on the balance sheets at December 31, 1999, 1998 and 1997, was $6,925,
$11,170 and $1,488, respectively. The cost of these securities was $12,238,
$19,568 and $3,005 which resulted in unrealized losses being recorded in
comprehensive income of $(5,313), $(8,398) and $(1,517) at December 31, 1999,
1998 and 1997, respectively. Also, included in long-term investments were equity
securities stated at cost of $2,456 at December 31, 1998, which did not have a
readily determinable fair value.

NOTE 3.  RECEIVABLES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
<S>                                                         <C>        <C>
Sale of paper and pulp products...........................  $ 3,571    $12,411
Securities trading........................................   23,505     14,400
Value added tax...........................................    7,485      2,334
Other.....................................................    6,887      4,683
                                                            -------    -------
                                                            $41,448    $33,828
                                                            =======    =======
</TABLE>

    At December 31, 1999 and 1998, the Company pledged $23,505 and $14,400,
respectively, in securities trading receivables as collateral.

                                       37
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4.  INVENTORIES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
<S>                                                         <C>        <C>
Pulp and paper
  Raw materials...........................................  $12,770    $11,299
  Work in process and finished goods......................    4,927      8,241
                                                            -------    -------
                                                            $17,697    $19,540
                                                            =======    =======
</TABLE>

NOTE 5.  PROPERTIES

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          -------------------
                                                            1999       1998
                                                          --------   --------
<S>                                                       <C>        <C>
Land....................................................  $ 14,918   $ 18,928
Buildings...............................................    19,362     14,131
Production and other equipment..........................   379,398    105,262
                                                          --------   --------
                                                           413,678    138,321
Less: Accumulated depreciation..........................    61,850     51,854
                                                          --------   --------
                                                           351,828     86,467
Renovation in progress-pulp mill........................        --     74,545
                                                          --------   --------
                                                          $351,828   $161,012
                                                          ========   ========
</TABLE>

    In 1997, the Company began a renovation of its pulp mill which was completed
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 $369,639 have been incurred
in renovation costs, including capitalized interest of $9,904 and $5,332 during
1999 and 1998, respectively. The renovation costs are net of German government
grants received of $30,875 in 1999 and $16,800 in 1998.

    The amount classified as special charges in the 1997 consolidated statement
of operations included an estimated impairment loss of $26,385 relating to
certain equipment at the pulp mill based on engineering estimates and disposal
values. Also, an impairment loss of $14,901 was recorded in 1997 as a part of
special charges relating to some of the Company's paper mills. During 1999,
management determined that other 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, 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 $553 and $1,839 at
December 31, 1999 and 1998, respectively. The note is payable monthly with 6.5%
interest, callable with four weeks notice and secured by inventory.

                                       38
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.  NOTE PAYABLE AND DEBT (CONTINUED)
    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          -------------------
                                                            1999       1998
                                                          --------   --------
<S>                                                       <C>        <C>
Note payable to banks, interest at rates varying from
  3.86% to 4.5% at December 31, 1999, ultimate principal
  balance up to $261,000 of which principal plus
  interest on $247,000 due in semi-annual installments
  based on percentage of final loan amount beginning at
  2.65% to 5.3% at March 31, 2001, until September 30,
  2013 (final payment date), and principal plus interest
  on $14,000 due in four annual installments beginning
  September 30 of the fourth calendar year after the
  first borrowing under this part of the loan and each
  September 30 thereafter, 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 of
  $12,865 and $15,000 at December 31, 1999 and 1998.....  $241,342   $102,010

Debenture payable, 8% interest payable semi-annually,
  due 2003, unsecured, with attached warrants which
  allows 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     11,598

Loan from governmental agency, 7% interest payable
  annually, due 2004, collateralized by fixed assets....     4,461      5,803

Loan from governmental agency, non-interest bearing, due
  in annual installments of $556, unsecured.............     1,544      1,800

Bank loan, interest at LIBOR plus 2% (resulting in a
  rate of 7.8% at December 31, 1999) interest payable
  monthly, principal payments of $116 are due quarterly,
  collateralized by land and buildings..................       802      1,675
                                                          --------   --------
                                                           252,284    122,886
Less: Current portion...................................   (19,121)    (1,338)
                                                          --------   --------
                                                          $233,163   $121,548
                                                          ========   ========
</TABLE>

                                       39
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.  NOTE PAYABLE AND DEBT (CONTINUED)
    As part of the financing to renovate the pulp mill, the Company was awarded
three government grants. The cost of renovation was reduced as grant monies were
received. Two grants are to be received from the State of Thuringia, Germany, in
the total amount of $86,281, of which $30,875 and $16,800 was received during
1999 and 1998, respectively. The remaining grant amounts are to be received as
appropriated through 2003. The Federal Republic of Germany awarded a grant of
$22,200 which is expected to be appropriated in years through 2001. 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, 1999, the principal maturities of long-term debt are as
follows:

<TABLE>
<CAPTION>
MATURES                                                        AMOUNT
-------                                                       --------
<S>                                                           <C>
2000........................................................  $ 19,121
2001........................................................    13,007
2002........................................................    12,172
2003........................................................    17,006
2004........................................................    18,896
Thereafter..................................................   172,082
                                                              --------
                                                              $252,284
                                                              ========
</TABLE>

    Interest paid amounted to $12,100 in 1999, $8,108 in 1998 and $3,161 in
1997.

NOTE 7.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
<S>                                                         <C>        <C>
Trade payables............................................  $13,404    $15,183
Accounts payable and accrued expenses.....................   11,334     14,154
Payable for securities....................................   15,549     15,687
                                                            -------    -------
                                                            $40,287    $45,024
                                                            =======    =======
</TABLE>

                                       40
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8.  INCOME TAXES

    The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                           ------------------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
U.S......................................   $    --       $  --       $   (73)
Non U.S..................................    (1,092)       (308)       (4,992)
                                            -------       -----       -------
Provision for income taxes...............   $(1,092)      $(308)      $(5,065)
                                            =======       =====       =======
</TABLE>

    The 1997 provision includes $4,992 which was allocated to special charges.

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

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                           ------------------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
U.S. Federal statutory rates on income
  from operations........................   $(12,585)    $(3,169)     $11,091
Tax differential on foreign income
  (loss).................................     (8,182)      2,458       (5,077)
Valuation allowance......................     20,748       2,967       (8,165)
Other....................................     (1,073)     (2,564)      (2,914)
                                            --------     -------      -------
                                            $ (1,092)    $  (308)     $(5,065)
                                            ========     =======      =======
</TABLE>

    Deferred tax assets are composed of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       -----------------------
                                                          1999         1998
                                                       ----------   ----------
<S>                                                    <C>          <C>
German tax loss carryforwards........................  $ 147,961    $ 116,203
Difference in German tax basis of depreciable
  assets.............................................      2,397       14,205
U.S. tax loss carryforward...........................      3,135        2,975
Foreign tax credits..................................      1,600        2,500
                                                       ---------    ---------
                                                         155,093      135,883
Valuation allowance..................................   (144,851)    (124,103)
                                                       ---------    ---------
Net deferred tax asset...............................  $  10,242    $  11,780
                                                       =========    =========
</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, U.S. tax loss carryforwards and U.S.
foreign tax credits 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 $9,200 at
December 31, 1999. Losses of $3,700, $2,800 and $2,700 will expire in 2018, 2012
and 2011, respectively, if not used. The

                                       41
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8.  INCOME TAXES (CONTINUED)
remaining German tax losses of approximately $266,000 at December 31, 1999, may
be carried forward indefinitely.

    Income (loss) from foreign source operations amounted to $(34,903), $11,381
and $(23,503) for the years ended December 31, 1999, 1998 and 1997,
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, 1999, 1998 and 1997.

    The Company's foreign tax credits are available to be used against U.S.
income tax resulting from general limitation income in the approximate amount of
$1,600, all of which will expire in 2000 if they are not utilized.

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 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.

    During 1997, options to acquire 635,000 shares of beneficial interest at
$8.50 were granted to officers and employees of the Company which vest one-third
at grant date and one-third each year for the next two years. These options
expire in ten years. The weighted fair value of these options was $2.71 each.

                                       42
<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 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                      NUMBER     WEIGHTED AVERAGE
                                                     OF SHARES    EXERCISE PRICE
                                                     ---------   ----------------
<S>                                                  <C>         <C>
Outstanding at January 1, 1997.....................   395,500         $14.88
Granted............................................   635,000           8.50
Exercised..........................................  (169,500)          8.85
Forfeited..........................................   (60,000)         13.88
                                                     --------         ------
Outstanding at December 31, 1997...................   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
                                                     ========         ======
</TABLE>

    Following is a summary of the status of options outstanding at December 31,
1999:

<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................  329,500          8.8               $ 6.00        219,666         $ 6.00
$ 8.50-11.66..........  231,500          7.1               $ 9.19        231,500         $ 9.19
$16.89-18.47..........  204,500          5.9               $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>
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Net Income (Loss)
  As reported............................   $(38,109)     $9,012      $(32,623)
                                            ========      ======      ========
  Proforma...............................   $(38,421)     $7,839      $(33,484)
                                            ========      ======      ========
Basic and Diluted Earnings (Loss) Per
  Share
  As reported............................   $  (2.33)     $ 0.59      $  (2.18)
                                            ========      ======      ========
  Proforma...............................   $  (2.34)     $ 0.51      $  (2.23)
                                            ========      ======      ========
</TABLE>

                                       43
<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>
                                                          1998         1997
                                                       ----------   ----------
<S>                                                    <C>          <C>
Risk-free interest rate..............................    6.0%         6.0%
Expected life of the options.........................  2 years      2 years
Expected volatility..................................    60.0%       49.80%
Expected dividend yield..............................    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>
                                                      INCOME (LOSS)
                                           ------------------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Net income (loss) available to
  shareholders of beneficial interest....   $(38,109)     $9,012      $(32,623)
                                            ========      ======      ========
</TABLE>

<TABLE>
<CAPTION>
                                                          SHARES
                                           ------------------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Weighted average number of shares
  outstanding--basic.....................  16,389,944   15,352,275   14,994,826
Effect of dilutive securities:
  Warrants...............................          --        4,931           --
  Options................................          --       26,601           --
                                           ----------   ----------   ----------
Weighted average number of shares
  outstanding--diluted                     16,389,944   15,383,807   14,994,826
                                           ==========   ==========   ==========
</TABLE>

    For 1999 and 1997, warrants and options were not included in the computation
of diluted earnings per share because they were anti-dilutive.

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

    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.

    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.

                                       44
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12.  SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS
          (CONTINUED)
    - Shares of beneficial interest were issued upon the conversion of
      debentures valued at $402.

    Significant noncash transactions in 1997 include:

    - Bank debt was extinguished with 100,000 of the Company's shares of
      beneficial interest which approximated fair value.

    - Note payable of $5,226 was extinguished with trading securities with the
      same market value.

    - Shares of beneficial interest with a fair value of $50 were issued as
      payment for debenture interest.

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 primarily in western European
countries. As discussed in Note 5, the mill produced sulphite pulp prior to
being renovated. The paper segment consists of four mills located in Germany.
These mills manufacture recycled paper products which are sold primarily in
western Europe.

    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>
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>

                                       45
<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>
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>

<TABLE>
<CAPTION>
                                              PULP        PAPER        TOTAL
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
1997
Sales to external customers..............   $ 75,460     $ 94,472     $169,932
Intersegment net sales...................      1,806           --        1,806
Segment loss.............................     (7,432)     (18,552)     (25,984)
Segment assets...........................    137,752       58,557      196,309
Capital expenditures.....................      9,536        5,255       14,791

RECONCILIATIONS
Loss:
  Total loss for reportable segments.....                             $(25,984)
  Elimination of intersegment profits....                                2,094
  Unallocated amounts, other corporate
    expenses.............................                               (8,660)
                                                                      --------
    Consolidated loss before income taxes                             $(32,550)
                                                                      ========
Assets:
  Total assets for reportable segments...                             $196,309
  Intersegment receivable................                                 (393)
  Other unallocated amounts..............                               14,378
                                                                      --------
    Consolidated total assets............                             $210,294
                                                                      ========
</TABLE>

                                       46
<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>
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Germany..................................   $ 72,129     $ 89,829     $ 92,120
European Union...........................     47,498       65,806       59,794
Other....................................      5,943       10,598       18,018
                                            --------     --------     --------
                                            $125,570     $166,233     $169,932
                                            ========     ========     ========
</TABLE>

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

<TABLE>
<CAPTION>
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Germany..................................   $451,776     $317,603     $195,916
Other....................................      4,069       15,681       14,378
                                            --------     --------     --------
                                            $455,845     $333,284     $210,294
                                            ========     ========     ========
</TABLE>

    The pulp mill has a fiber supply contract 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.

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                              1999                    1998
                                      ---------------------   ---------------------
                                      CARRYING                CARRYING
                                       AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                      --------   ----------   --------   ----------
<S>                                   <C>        <C>          <C>        <C>
Cash and cash equivalents...........  $  1,722    $  1,722    $ 53,250    $ 53,250
Cash restricted.....................    12,865      12,865      15,000      15,000
Notes receivable....................     4,869       4,869      10,150      10,150
Notes payable.......................       553         553       1,839       1,839
Long-term debt......................   252,284     252,162     122,886     122,604
</TABLE>

    The fair value of cash and cash equivalents is based on reported market
value. The fair value of cash restricted is equal to its carrying amount because
it is in an account which bears a market rate of interest. The notes receivable
at December 31, 1999 and 1998, were from one company with interest at 8%, and
were unsecured. Their values are 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 $3,506 and $2,022 at
December 31, 1999 and 1998, 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.

                                       47
<PAGE>
                           MERCER INTERNATIONAL INC.

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15.  COMMITMENTS AND CONTINGENCIES

    At December 31, 1999 and 1998, the Company recorded a liability for
environmental conservation expenditures of $1,544 and $1,800, 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.

                                       48
<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>
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)

1998
Net Sales.........................................   $52,509    $48,295       $39,702         $34,390
Gross profit......................................    12,929     11,705        10,731             829
Income before extraordinary items and cumulative
  effect of a change in accounting................     6,262      4,535         4,239          (6,024)
Income before extraordinary items and cumulative
  effect of a change in accounting, per share*....      0.41       0.30          0.28           (0.39)
Net income........................................     6,262      4,535         4,239          (6,024)
</TABLE>

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

*  on a diluted basis

                                       49
<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 27, 2000                                  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 27, 2000
------------------------------------------------
Jimmy S.H. Lee
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND TRUSTEE

/s/ MICHEL ARNULPHY                                                 Date: March 27, 2000
------------------------------------------------
Michel Arnulphy
TRUSTEE

/s/ C.S. MOON                                                       Date: March 27, 2000
------------------------------------------------
C.S. Moon
TRUSTEE

/s/ MAARTEN REIDEL                                                  Date: March 27, 2000
------------------------------------------------
Maarten Reidel
TRUSTEE

/s/ R. IAN RIGG                                                     Date: March 27, 2000
------------------------------------------------
R. Ian Rigg
CHIEF FINANCIAL OFFICER AND TRUSTEE
</TABLE>

                                       50
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Shareholders
Mercer International Inc.

    Our report on the consolidated financial statements of Mercer
International Inc. is included on page 29 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed in Item 14 of this Form 10-K.

    In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

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

March 15, 2000
Seattle, Washington

                                       51
<PAGE>
                           MERCER INTERNATIONAL INC.
           SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEET

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>        <C>
ASSETS
  Cash......................................................  $  1,722   $ 53,250
  Receivables...............................................    46,317     43,978
  Inventories...............................................    17,697     19,540
  Investments...............................................    12,317     26,517
  Properties................................................   351,828    161,012
  Deferred income tax assets................................    10,242     11,780
  Other.....................................................    15,722     17,207
                                                              --------   --------
                                                              $455,845   $333,284
                                                              ========   ========
LIABILITIES AND SHAREHOLDERS' EQUITY
  Accounts payable and accrued expenses.....................  $ 99,988   $ 55,540
  Debt......................................................   252,837    124,725
  Shareholders' equity......................................   103,020    153,019
                                                              --------   --------
                                                              $455,845   $333,284
                                                              ========   ========
</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues
  Pulp and paper and related sales..........................  $125,570   $166,233   $169,932
  Other.....................................................     2,297      8,663     14,175
                                                              --------   --------   --------
                                                               127,867    174,896    184,107
Expenses
  Cost of sales.............................................   117,314    138,702    141,559
  General and administrative................................    22,420     23,490     23,600
  Interest..................................................     2,995      3,384      3,046
  Special charges...........................................    22,155         --     48,452
  Income tax................................................     1,092        308         73
                                                              --------   --------   --------
                                                               165,976    165,884    216,730
                                                              --------   --------   --------
Income (loss) from continuing operations....................  $(38,109)  $  9,012   $(32,623)
                                                              ========   ========   ========
</TABLE>

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net cash provided by (used in) operating activities.........  $ (8,636)  $ 10,008   $ 15,980
Net cash used in investing activities, purchase of fixed
  assets....................................................  (245,405)   (59,965)   (17,011)
Net cash provided by (used in) financing activities.........   202,513     98,793     (4,522)
                                                              --------   --------   --------
Net change in cash..........................................   (51,528)    48,836     (5,553)
Cash and cash equivalent, beginning of year.................    53,250      4,414      9,967
                                                              --------   --------   --------
Cash and cash equivalent, end of year.......................  $  1,722   $ 53,250   $  4,414
                                                              ========   ========   ========
</TABLE>

                                       52
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
---------------------   ------------------------------------------------------------
<S>                     <C>
         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.

        21              List of Subsidiaries of Registrant.

        23              Independent Auditors Consent.

        27              Article 5-Financial Data Schedule for the Year Ended
                          December 31, 1999.
</TABLE>

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

* Filed in Form 10-K for prior years.