Document:

EXHIBIT 10.3

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THIS  LOAN  AGREEMENT  dated  the      day  of  August,  2002,

AMONG:
         BABCOCK  &  BROWN  INVESTMENT  MANAGEMENT  PARTNERS  LP,  a
         limited  partnership  organized  under  the  laws  of  the
         State of  Delaware, having an office at 2 Harrison  Street,
         San  Francisco,  U.S.A.,  94015,  as  Agent

AND:

         BABCOCK  & BROWN INVESTMENT MANAGEMENT PARTNERS LP AND SUCH
         OTHER LENDERS AS ARE SIGNATORIES  HERETO

AND:
         MERCER INTERNATIONAL INC., a Massachusetts trust  organized
         under the laws of the State  of Washington,  U.S.A., having
         its registered office  at Suite  6100,  701  Fifth  Avenue,
         Seattle,  Washington,  U.S.A.,  98104-7098,  as  Borrower

WHEREAS:

A.   The Borrower has requested that the Loan be made available by  the Lenders
     to  the  Borrower;  and

B.   The  Lenders  have  agreed to make the Loan available to the Borrower upon
     the  terms  and  conditions  set  out  herein.

NOW  THEREFORE  THIS  AGREEMENT  WITNESSES  THAT  in consideration of the mutual
covenants  and undertakings and the terms and conditions set out herein, and for
other  good and valuable consideration (the receipt and sufficiency of which are
hereby  acknowledged),  the  parties  hereto  acknowledge, declare, covenant and
agree  as  follows:

                                   ARTICLE 1.
                                 INTERPRETATION

     Section  1.1     Definitions.  When  used  in this Agreement (including the
recitals  and  schedules hereto) or in any amendment hereto, the following terms
shall,  unless  otherwise  expressly  provided,  have  the  following  meanings,
respectively:

"Advance"  means  the  advance  of  the  full  amount  of  the  Loan;

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"Advance  Date" means the date specified in the Advance Request, such date to be
no  earlier  than  the  Closing  Date  and  no  later than the Termination Date;

"Advance  Request"  means  a  written notice in the form set out in Schedule "D"
hereto  to  be  provided by the Borrower to the Agent not less than two (2) days
prior  to  the  Advance  Date  requesting  the  Advance  of  the  Loan;

"Advisory  Fees" means the fees payable by the Borrower to the Financial Advisor
pursuant  to  the  terms  of  the  Financial  Services  Agreement;

"Affiliate"  means,  with respect to any given Person, any other Person directly
or  indirectly  Controlling,  Controlled  by  or under common Control with, such
Person;

"Agent"  means Babcock & Brown Investment Management Partners LP in its capacity
as  agent  hereunder;

"Agreement"  means  this  non-revolving  term  loan  agreement  as supplemented,
amended or otherwise modified, extended, renewed, replaced or restated from time
to  time  by any agreement supplemental or ancillary hereto; and the expressions
"Article"  and  "Section"  followed by a number mean, and refer to the specified
Article  or  Section  of  this  Agreement;

"Amalgamation"  means  a  combination  of two or more corporate entities, or the
businesses  or  assets  of  two  or  more  corporate  entities,  whether  by
reconstruction, reorganization, consolidation, combination, amalgamation, merger
or  otherwise;

"Asset  Sale"  means,  other  than  a sale or sales of inventory and other sales
within  the  ordinary  course  of  business,  any  direct  or  indirect  sale,
disposition,  monetization or securitization or other exchange of assets held by
the  Borrower,  directly  or  indirectly, including a portion or portions of the
Borrower's  interests  in ZPR and/or ZSG and shall include, without limiting the
generality  of  the  foregoing,  any  ZPR  Asset  Sale;

"Assignment  Agreements"  means  the  SPB  Assignment Agreement, the ZPR Holding
Assignment  Agreement  and  the  Borrower's  Assignment  Agreements;

"Authorization"  means  any  permit,  licence,  approval, consent, order, right,
certificate,  judgment,  writ,  injunction,  award,  determination,  direction,
decree,  authorization, franchise, privilege, grant, waiver, exemption and other
concession  or  by-law, rule or regulation of, by or from any Official Body, all
as  amended,  supplemented,  modified,  replaced  or  renewed from time to time;

"BBA"  means  the  British  Bankers'  Association;

"BBA  Libor"  means  the  one  (1)  month, three (3) month or six (6) month Euro
London  Inter-Bank  Offered  Rate  fixed  on  the  Quotation  Date by the BBA as
selected  by  the  Borrower  from  time  to  time;

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"BHV"  means  Bayerische  Hypo-und Vereinsbank AG, a stock corporation organized
under  the  Federal  Republic  of  Germany  having  its  registered office at Am
Tucherpark  1,  80538  Munchen,  Federal  Republic  of  Germany;

"Blitz"  means  Blitz  01-858  GmbH;

"Borrower"  means  Mercer  International  Inc.;

"Borrower's  Assignment  Agreements"  means  each assignment agreement in a form
satisfactory  to  the  Agent, pursuant to which the Borrower shall assign to the
Security  Agent its interests in intercompany loans due or accruing due from SPH
and  ZPR  Holding;

"Borrower's Certificate" means a certificate of a senior officer of the Borrower
substantially  in  the form set out in Schedule "A" hereto or such other form as
may  be  requested  from  time  to  time  by  the  Agent  or  the  Lenders;

"Borrower's  Securities Pledge Agreements" means each pledge agreement in a form
satisfactory  to the Agent, pursuant to which the Pledged Securities held by the
Borrower  shall  be  pledged  in  favor  of  the  Security  Agent;

"Break Fee" means a fee of E 2,500,000 payable by the Borrower to the Lenders in
accordance with, and subject to the terms and conditions set out in, Section 3.2
hereof;

"Business"  means  the  business  of  the  Borrower  as conducted as at the date
hereof;

"Business  Day"  means  any  day  on which the Agent is open for business in New
York,  New  York,  U.S.A.  and  London,  England;

"Capitalized  Interest"  means  accrued  Interest  added  to  the  Principal Sum
pursuant  to  Section  3.1(5)  of  this  Agreement;

"Change  of  Control"  means  when:

     (i) a "person" or "group" (within the meanings Sections 13(d) and 14(d)(2)
     of  the  Exchange  Act)  becomes  the  ultimate "beneficial owner" (as
     defined in Rule 13d-3  under the Exchange Act) of more than 50% of the
     total  voting  power  of  the then  outstanding  Voting  Stock  of the
     Borrower  on  a  fully-diluted  basis;  (ii)  individuals  who  at the
     beginning  of  any  period  of  any  two  consecutive  calendar  years
     constituted  the Trustees (together with any trustees who are Trustees
     on  the  date  hereof  and  any  new  trustees  whose  election  as
     Trustees  or  whose  nomination  for  election  by  the  Borrower's
     stockholders  was approved by a vote of at  least  two-thirds  of  the
     Trustees  then  still  in  office  who  either  were Trustees  at  the
     beginning  of such period or whose election or nomination for election
     was  previously  so  approved)  cease  for  any reason to constitute a
     majority  of  the  Trustees  then  in  office;  (iii) the sale, lease,
     transfer, conveyance or other disposition (other than by way of merger
     or consolidation), in  one  or  a  series  of  related

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     transactions,  of  all  or  substantially  all of the  assets  of  the
     Borrower  to  any such  "person"  or  "group";  or (iv) the merger  or
     consolidation  of the Borrower with  or  into  another corporation  or
     the  merger  of another corporation  with or into  the  Borrower  with
     the  effect that immediately  after such transaction any such "person"
     or "group"  of  persons  or  entities shall have become the beneficial
     owner  of  securities  of  the surviving corporation of such merger or
     consolidation representing a majority of the total voting power of the
     then outstanding Voting Stock  of  the  surviving  corporation;

"Charter Documents" means, in respect of any Person and as the context requires,
the  charter  documents  and by-laws, declaration of trust, trustees regulations
and  all  amendments  thereto,  of  such  Person;

"Closing"  means  the closing of the transactions contemplated by this Agreement
on  the  Closing  Date;

"Closing  Date"  means  two  (2)  Business  Days  following  satisfaction by the
Borrower  or  waiver  by  the Agent of all conditions to Advance set out in this
Agreement;

"Commitment"  means  the  commitment  of  the  Lenders  to fund the Loan, in the
Principal  Sum,  on the Advance Date, and, when used in relation to a particular
Lender,  such Lender's committed share of the Total Commitment as set out on the
signature  pages  hereof  next  to  such  Lender's  name;

"Commitment Fee" means a variable fee accruing from the date of execution of the
Commitment  Letter to and including the Advance Date equal to 0.75% per annum of
the  Principal  Sum  calculated  over such period payable by the Borrower to the
Lenders  in  accordance  with  Section  3.2(1)  hereof;

"Commitment  Letter"  means  the  commitment  letter  prepared  by the Agent and
accepted by the Borrower relating to the Loan dated for reference July 15, 2002;

"Control"  over  a  Person  means the possession, directly or indirectly, of the
power  to  direct  or cause the direction of the management and policies of such
Person,  whether  through  the  ownership  of  voting securities or other equity
interest,  representation on its board of directors or a body performing similar
functions,  by  contract or otherwise.  The terms "Controlling" and "Controlled"
will  have  corollary  meanings;

"corporation"  means  a  body  corporate,  corporation,  company,  partnership,
business  trust  or  joint  venture;

"Credit  Documents"  means  this  Agreement,  the  Intercreditor  Agreement, the
Security  Trust  Agreement and the Security Documents and all other documents to
be  executed  and  delivered  to  the  Agent, the Agent for and on behalf of the
Lenders,  the  Security  Agent,  the  Lenders or a Lender by the Borrower or any
Affiliate  thereof  hereunder  or  thereunder;

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"Dangerous  Substance"  means  any  radioactive  emissions  and  any  natural or
artificial substance (whether in solid or liquid form or in the form of a gas or
vapor  and  whether alone or in combination with any other substance) capable of
causing  harm to man or any other living organism or damaging the environment or
public  health  or welfare including but not limited to any controlled, special,
hazardous,  toxic,  radioactive  or  dangerous  waste;

"Debt"  of  any  Person  means:  (i)  all indebtedness of such Person for and in
respect  of  borrowed  money,  including  obligations  with  respect to bankers'
acceptances,  letters  of credit and letters of guarantee; (ii) all indebtedness
of  such  Person  for the deferred purchase price of property or services; (iii)
all  indebtedness  created  or arising under any conditional sale or other title
retention  agreement  with  respect  to  property  acquired by such Person (even
though  the  rights  or remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property); (iv)
all  obligations  under  leases  which,  in  accordance with GAAP (or accounting
principles  generally  accepted  in  the  jurisdiction  of  incorporation  or
organization of such Person), are recorded as capital leases in respect of which
such Person is liable as lessee; (v) the aggregate amount at which any shares or
equivalent  ownership  rights in the capital of such Person which are redeemable
or retractable at the option of the holder thereof may be retracted or redeemed;
(vi) all indebtedness arising under any currency swap or interest rate swap, cap
or  collar  arrangement,  forward sale or any other derivative instrument; (vii)
any  indebtedness  in  respect  of any amount raised under any other transaction
having  the commercial effect of a borrowing or raising of money; and (viii) all
Debt  Guaranteed  by  such  Person;

"Debt  Guaranteed"  by  any  Person  means  the  maximum  amount  which  may  be
outstanding  at  any time of: (i) any guarantee, indemnity, support agreement or
similar  assurance  of  financial  status  or  against financial loss of another
Person;  and (ii) all  Debt  of the kinds referred to in (i) through (vi) of the
definition  of Debt which is directly or indirectly guaranteed by such Person or
which  such  Person  agreed (contingently or otherwise) to purchase or otherwise
acquire,  or  in  respect  of which such Person has otherwise assured a creditor
against  loss  by  means of an indemnity, security, bond or similar undertaking;

"Default"  means an event which, with the giving of notice or passage of time or
both,  would  constitute  an  Event  of  Default;

"Default  Interest  Rate"  means  Euribor  plus  15.0%  per  annum;

"DP"  means  Dresden  Papier  GmbH;

"DP  Holdings"  means  Dresden  Papier  Holdings  GmbH;

"Drop  Dead Fee" means a fee of E 300,000 payable by the Borrower to the Lenders
in  accordance with, and subject to the terms and conditions set out in, Section
3.2(3)  hereof;

"Drawdown  Fee"  means  a  fee equal to 2.5% of the Principal Sum payable by the
Borrower  to  the  Lenders  as  set  out  in  Section  3.2(2)  hereof;

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"Environmental  Claim"  means  any  claim  by  any  Person  as a result of or in
connection  with  any  violation  of  Environmental  Law  or  any  Environmental
Contamination which could give rise to any remedy or penalty (whether interim or
final)  or  liability  for  any  Group  Company  or  any  Lender;

"Environmental  Contamination"  means  each  of  the  following  and  their
consequences:

     (i)    any  release,  emission,  leakage  or  spillage  of  any  Dangerous
            Substance into  any  part  of  the  environment;

     (ii)   any  accident,  fire,  explosion  or  sudden event which is directly
            or indirectly  caused by or attributable to any Dangerous Substance;
            or

     (iii)  any  other  pollution  of  the  environment;

"Environmental  Law"  means  any  national  or  supranational Law, regulation or
directive  concerning  the  protection  of  human  health  or the environment or
concerning  Dangerous  Substances;

"Environmental  License"  means  any  Authorization under any Environmental Law;

"Equity  Issue" means the issue or sale by the Borrower of the Borrower's equity
securities  or  other  ownership  interests, or rights to acquire the Borrower's
equity  securities or other ownership interests, other than grants of options to
directors,  officers  or  employees  of  the  Borrower  and/or its Affiliates to
purchase  equity  securities  of the Borrower, and equity securities issued upon
the  exercise  of  such  options;

"ERISA"  means the United States Employee Retirement Income Security Act of 1974
as  amended;

"ERISA  Affiliate"  means  each  trade or business, whether or not incorporated,
that  would  be treated as a single employer with the Borrower under Section 414
of  the  United States Internal Revenue Code of 1986. When any provision of this
Agreement  relates  to  a  past  event,  the term "ERISA Affiliate" includes any
Person that  was  an  ERISA  Affiliate  of the Borrower at the time of that past
event;

"Euribor"  means,  subject  to Section 3.5(2) hereof, the rate determined by the
Agent to be:  (i) the one (1) month, three (3) month or six (6) month percentage
rate  set by the European Banking Federation, which appears on the Telerate page
Euribor for that period, or any page replacing such page, at 11:00 a.m., London,
England  local  time,  on  the Quotation Date; or (ii) if the Agent is unable to
access  the  relevant  screen rate or if a rate is not available on the relevant
screen  for  the period, BBA Libor at 11:00 a.m., London, England local time, on
the  Quotation  Date;  or (iii) if no such published rate is then available, the
rate  of  interest  calculated  by  the  Agent,  as being the arithmetic average
(rounded  up, if necessary, to the nearest full multiple of 1/16 of 1%) at which
it  would be prepared to offer to leading banks in the London, England interbank
market for delivery on the first day of the particular Interest Period and for a
period  equal  to  such  Interest  Period  based on the number of days comprised
therein,  deposits  in  Euro  of  amounts

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comparable  to  the Principal Sum or the balance outstanding thereof during such
Interest  Period,  at or prior to 11:00 a.m., London, England local time, on the
Quotation  Date;

"Euro"  and  "E"  means  the  official  currency of the European Monetary Union;

"Event  of  Bankruptcy"  means, in respect of any Person, that such Person shall
generally  not pay its Debts as such Debts become due, or shall admit in writing
its  inability  to  pay  its Debts generally as they become due, or shall make a
general  assignment  for  the  benefit  of  creditors, or that such Person shall
commence  a voluntary case or proceeding under the United States Bankruptcy Code
of  1978,  as  amended,  or  under  any  other  United  States  Federal or State
bankruptcy, insolvency or similar Law (collectively, "U.S. Bankruptcy Laws"), or
an  involuntary  case  under  any U.S. Bankruptcy Law shall be commenced against
such  Person, or any other proceeding shall be instituted by or against any such
Person  seeking to adjudicate it a bankrupt or insolvent or seeking liquidation,
winding-up,  a  reorganization, arrangement, adjustment, protection, relief or a
composition  of it or its Debts under any Law relating to bankruptcy, insolvency
or  reorganization  or  relief  of debtors, or seeking the entry of an order for
relief  or  for  the appointment of a receiver, trustee, custodian,  liquidator,
conservator  or other similar official for it or for any substantial part of its
property  and, in the case of any such proceeding instituted against such Person
(but  not  instituted  by  such  Person),  either  such  proceeding shall remain
undismissed  or  unstayed for a period of thirty (30) days or any of the actions
sought  in such proceeding (including, without limitation, the entry of an order
for  relief  against  such Person or for the appointment of a receiver, trustee,
custodian  or other similar official for such Person or for any substantial part
of  its property) shall occur; or such Person shall take any action to authorize
any  of  the  actions  set  forth  above;

"Event  of  Default"  has  the  meaning  ascribed  to  it  in  Section  9.1;

"Excluded  Payments"  means  collectively:

     (i)     interest  not exceeding  7%  per  annum paid by either ZPR & Co. or
             ZSG  to the  Borrower  or  its Affiliates in respect of Shareholder
             Loans;

     (ii)    all  amounts  realized  by  the Borrower, or any Affiliate thereof,
             arising from  goods sold or services  rendered to ZPR and/or ZSG at
             fair market prices or rates,  on an arm's-length basis and on terms
             approved by the applicable Senior Lenders  or  permitted  under the
             Senior  Credit  Agreements,  including,  without  limitation,  such
             amounts  paid  to  the Borrower pursuant to the Marketing and Sales
             Agreement;

     (iii)   all  amounts  payable  to the Borrower or its Affiliates for goods
             and services  provided  to  ZPR,  at  cost;

     (iv)    all  amounts  distributed  or  distributable  to  the  Borrower
             or  its  Affiliates  as  a result of any adjustment to the ZPR Debt
             Service  Reserve  Account  resulting  from  the  termination and/or
             replacement  of  the  ZPR  Currency  Hedging  Agreement  including,
             without  limitation,  all  direct profits or gains realized by  ZPR
             & Co.  or  any  Affiliate  thereof  upon  such termination together
             with all distributions

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             becoming  available  on  or  following  September  30,  2002  as  a
             result of the replacement  of  the  ZPR Currency Hedging Agreement;
             and

     (v)     any  amounts  available  under  (i)  to (iv) above that are paid by
             Affiliates  to  the Borrower in respect of fees, costs and expenses
             incurred  in  respect  of  Loan,  the  MFC  Loan  and  the  Stendal
             Project.

"Extended Maturity Date" means the date which is 14 months following the Advance
Date,  provided  that  the  First Extension Option is exercised by the Borrower;

"Extended Period" means the period commencing at 12:01 a.m., New York, New York,
U.S.A.  local  time, on the day following the Initial Maturity Date and expiring
at  12:00 a.m.,  New York, New York, U.S.A. local time, on the Extended Maturity
Date;

"Fahrbrucke"  means  Fahrbrucke  GmbH;

"Financial  Advisor"  means  Babcock  &  Brown  Limited;

"Financial  Quarter"  means,  in relation to the Borrower, a period of three (3)
consecutive  months  in  each Financial Year of the Borrower ending on March 31,
June  30,  September  30  and  December  31  of  each  such  Financial  Year;

"Financial  Services Agreement" means a financial advisory services agreement to
be  entered  into  between  the  Borrower and the Financial Advisor on or before
Closing  in  the  form  appended  as  Schedule  "C"  hereto;

"Financial  Statements"  means, in respect of the Borrower, as at any particular
time,  financial statements prepared in accordance with GAAP, including, without
limitation, consolidated balance sheets, statements of earning and statements of
changes  in  financial  position;

"Financial  Year"  means,  in  relation to the Borrower, a financial year of the
Borrower commencing on January 1 of each calendar year and ending on December 31
of  such  calendar  year;

"First Extension Option" means the option granted by the Lenders to the Borrower
hereunder  to  extend  the  Initial  Maturity  Date as set out in Section 5.5(1)
hereof;

"GAAP"  means,  at  any  time,  accounting  principles generally accepted in the
United  States,  applied  on  a  consistent  basis;

"Group  Company" means each Intermediate Holding Company and each of ZSG and ZPR
&  Co.;

"Holzspedition"  means  Holzspedition  Blankenstein  GmbH;

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"Increased  Cost"  means:

     (i)     an  additional  cost  incurred by a Lender or any of its Affiliates
             as a result  of  it having entered into, or performing, maintaining
             or funding its obligations  under,  any  Credit  Document;

     (ii)    that  portion  of an additional cost incurred by a Lender or any of
             its  Affiliates  in  making,  funding  or  maintaining  all  or any
             advances comprised in a class  of  advances  formed by or including
             that  Lender's participations in the Loan  as  is  attributable  to
             that Lender making, funding or maintaining those participations;

     (iii)   a  reduction  in  any  amount  payable  to  a  Lender or any of its
             Affiliates or  in  the  effective  return to a Lender or any of its
             Affiliates under this Agreement  or  (to  the  extent  that  it  is
             attributable to this Agreement) on its capital;  or

     (iv)    the  amount  of  any  payment  made  by  a  Lender  or  any  of its
             Affiliates,  or  the  amount  of  any  interest  or  other  return
             foregone  by  a  Lender  or  any  of  its Affiliates, calculated by
             reference  to any  amount received or receivable by that Lender  or
             any  of  its  Affiliates from any other party under this Agreement;

"Initial Maturity Date" means the date which is 8 months after the Advance Date;

"Initial Period" means the period commencing on the Advance Date and expiring at
12:00  a.m.,  New  York,  New  York,  U.S.A. local time, on the Initial Maturity
Date;

"Intercreditor  Agreement"  means  an  intercreditor  agreement  in  a  form
satisfactory  to  the  Agent,  between:  (i)  the Agent for and on behalf of the
Lenders;  and  (ii)  MFC;

"Interest" means the interest accrued on the Loan or portion thereof outstanding
from  time to time at the Interest Rate calculated semi-annually not in advance,
and  payable,  in  arrears,  on  the  Interest  Payment  Date;

"Interest Payment Date" means the earlier of (i) the Maturity Date; and (ii) the
date  upon  which  a  declaration  is  made  pursuant  to  Section  9.1;

"Interest  Periods"  means periods of one (1) month, three (3) months or six (6)
months,  as  selected  by  the Borrower from time to time, and "Interest Period"
means  any  one (1) such period.  Interest shall be calculated on the basis of a
year  of  three  hundred  and  sixty  (360)  days  and the actual number of days
(including the first day but excluding the last day) occurring in the period for
which  such  Interest  is  payable;

"Interest  Rate"  means,  as applicable:  (i) during the Initial Period, Euribor
plus  6.5%  per  annum;  (ii)  during the Extended Period, Euribor plus 9.0% per
annum;  (iii)  during  the Second Extended Period, Euribor plus 11.5% per annum;
and  (iv)  after the Maturity Date or upon the occurrence of an Event of Default
resulting  in  an  acceleration  of  the  Obligations  under Section 9.1 of this
Agreement,  the  Default  Interest  Rate;

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"Intermediate  Holding  Company"  means  each  of  SPH,  ZPR  Holding  and  SPB;

"Judgment  Currency"  means  the  currency  in  which  a  court  of  competent
jurisdiction  may  render judgment in connection with any litigation relating to
the  repayment  of  the  Outstanding  Amount  under  this  Agreement;

"Law"  means  any  law (including common law and equity), constitution, statute,
order,  treaty,  regulation, rule, ordinance, order, injunction, writ, judgment,
determination,  decree  or  award  of  any  Official  Body;

"Lenders" means Babcock & Brown Investment Management Partners LP and such other
lenders as are or may from time to time become signatories to this Agreement and
their  respective successors and assigns, and "Lender" means any one (1) of them
and  its  successors  and  assigns;

"Lien"  means  any lien, security interest or other charge or encumbrance of any
kind,  or  any  other  type  of  preferential  arrangement,  including,  without
limitation,  the lien or retained security title of a conditional vendor and any
easement  or  other right-of-way or other encumbrance on title to real property;

"Loan"  means  the  non-revolving  term  loan  of  the  Principal Sum to be made
available  by  the  Lenders  hereunder  to  the  Borrower;

"Majority  Lenders"  means at any time, the Lenders obligated, in the aggregate,
in  respect  of  at  least  51%  of  the  Total  Commitment;

"Mandatory  Prepayment  Amounts" means the Net Proceeds received by the Borrower
from:  (i)  all  Asset Sales; (ii) all Equity Issues; and (iii) any of the Group
Companies  or  DP  Holdings including, without limitation, all payments from the
Shareholders  Accounts  and  all dividends, repayments of Shareholders Loans and
releases  from  the  ZPR  Debt  Service  Reserve Account, but excluding Excluded
Payments;

"Marketing  and  Sales  Agreement"  means  the  strategic,  marketing  and sales
agreement  entered  into  between the Borrower and ZPR & Co. dated for reference
January  1,  2000;

"Material  Adverse Effect" means a material adverse effect on: (i) the Business;
or  (ii)  the  financial  condition  of  the  Borrower  or  the Borrower and its
Affiliates  taken as a whole; or (iii) on the ability of the Borrower to perform
and  comply  with this Agreement or to pay or perform any of the Obligations; or
(iv)  a material adverse effect on the priority, effectiveness or enforceability
of  the Security not caused by the Agent or the Lenders excluding in the case of
(i),  (ii)  and (iii) above, any such effect caused by fluctuations in commodity
pulp  prices  within  ranges  that  have  occurred  in the three (3) year period
immediately  preceding  the Advance Date or by other general economic conditions
affecting  the  markets  in  which  the  Borrower  carries  on  its  Business;

<PAGE>

"Maturity  Date"  means:  (i)  the  Initial Maturity Date if the First Extension
Option  is not exercised; (ii) the Extended Maturity Date if the First Extension
Option  is  exercised  (and  the  Second  Extension  Request  is not made by the
Borrower and accepted by the Agent); and (iii) the Second Extended Maturity Date
if  the  Second Extension Request is made by the Borrower and is accepted by the
Agent;

"Mercer Equity Financing" means the equity and subordinated debt contribution to
be  provided  by  the  Borrower  directly or indirectly through any wholly-owned
Affiliate  of  the  Borrower  to  ZSG  in  respect of the Stendal Project on the
Advance  Date  in  the  sum  of  approximately E 63,500,000;

"MFC"  means  MFC  Merchant  Bank  S.A.,  a  bank  organized  under  the Laws of
Switzerland  and  having  an  office  at  Kasernenstrasse  1,  9100  Herisau AR,
Switzerland;

"MFC  Lenders"  means MFC and such other lenders as are or may from time to time
become signatories to the MFC Loan Agreement and their respective successors and
assigns  and  "MFC Lender" means any one of them and its successors and assigns;

"MFC  Loan" means the E 30,000,000 loan to be arranged or advanced by MFC to the
Borrower  under  the  MFC  Loan  Agreement;

"MFC  Loan Agreement"  means the E 30,000,000 loan agreement of even date hereof
between  the  Borrower  and  MFC  relating  to  the  Stendal  Project;

"Net  Proceeds"  means  the  aggregate cash proceeds received by the Borrower in
respect  of  any  Asset  Sale,  Equity Issue or release of funds from any of the
Group  Companies  to  the  Borrower, net of: (i) direct unaffiliated third party
costs  relating to such Asset Sale, Equity Issue or release of funds (including,
without  limitation,  legal,  accounting  and investment banking fees, and sales
commissions); (ii) provisions for Taxes payable in respect of the fiscal year of
incurrence  as a result thereof; and (iii) any reasonable reserve for adjustment
in  respect  of  the  sale  price  of  any  asset  or  assets;

"Obligations"  means:  (i)  all obligations, liabilities and indebtedness of the
Borrower to the Agent, the Lenders or a Lender with respect to the principal and
Interest  on  the  Loan and the payment or performance of all other obligations,
liabilities  and  indebtedness  of  the  Borrower to the Agent, the Lenders or a
Lender  hereunder or arising under and pursuant to any one or more of the Credit
Documents  or  with  respect  to  the  Loan  and  all  fees, costs, expenses and
indemnity  obligations  hereunder or thereunder; and (ii) all Advisory Fees that
become  due  and payable to the Financial Advisor prior to or in connection with
the  payment  or  repayment  of  the  obligations,  liabilities and indebtedness
referred  to  in  (i)  above;

"Official  Body"  means  any  government  or political subdivision or any agency
(including,  without  limitation,  any  licensing  or  regulatory agency), body,
office,  authority,  bureau,  central  bank,  monetary  authority,  commission,
department or instrumentality thereof, or any court, board, tribunal, grand jury
or  arbitrator,  commission  or  instrumentality  thereof,  whether  foreign

<PAGE>

or  domestic  and,  when  used  in  the  context of a particular Person, having
jurisdiction  over  such  Person;

"Original  Currency"  means  Euros;

"Original Lender" means Babcock & Brown Investment Management Partners LP in its
capacity  as  an  original  lender;

"Outstanding  Amount"  means,  in  respect  of  the  Loan, on any day, an amount
calculated  and expressed in Euros equal to the Principal Sum less any repayment
or  prepayment  received  by  the  Agent  as  at  such  date;

"Permitted  Liens"  means:  (i)  in  respect  of  ZPR  & Co., any Liens that are
Permitted  Encumbrances,  as  such  term is defined in the ZPR Credit Agreement;
(ii)  in  respect of ZSG, any Liens that are Permitted Encumbrances as such term
is  defined  in  the ZSG Project Finance Loan Agreement; and (iii) in respect of
the  Intermediate  Holding  Companies,  any  Liens  of  a  nature  that would be
permitted  to  be  incurred  by  ZPR  &  Co.  in  accordance  with  (i)  above;

"Permitted  Subsidiaries"  means  Blitz,  Fahrbrucke,  Holzspedition,
Zellstoff-Spedition,  ZPR  Beteiligungs  and  ZPR  Logistik;

"Person" means an individual, a partnership, a corporation (including a business
trust), joint stock company, trust, unincorporated association, joint venture or
other  entity,  or  a  foreign  state  or a political subdivision thereof or any
agency  of  such  state  or  subdivision;

"Plan"  means  an  "employee benefit plan" within the meaning of Section 3(3) of
ERISA maintained by the Borrower or any ERISA Affiliate currently or at any time
within  the last five (5) years, or to which the Borrower or any ERISA Affiliate
is  required  to  make  payments  or  contributions  or  has  made  payments  or
contributions  within  the  past  five  (5)  years;

"Pledged  Securities"  means the securities described and listed in Schedule "B"
and any and all other securities that may be pledged to the Lenders from time to
time,  and  all  securities  issued  as  stock dividends or as a result of stock
splits  or recapitalizations, accretions, replacements and substitutions thereto
and  therefor;

"Principal  Sum"  means E 15,000,000  together  with  Capitalized  Interest;

"Quotation  Date"  means  with  respect  to any Interest Period the Business Day
which  is  two  (2)  Business  Days  prior  to the commencement of such Interest
Period;

"Reportable Event" means any of the events set forth in Section 4043 of ERISA or
the  related  regulations;

"Request"  means the Advance Request, the exercise of the First Extension Option
or  the  Second  Extension  Request;

<PAGE>

"Second  Extended  Maturity  Date"  means  the date which is 18 months after the
Advance  Date,  provided  that  the  First  Extension Option is exercised by the
Borrower  and  the Second Extension Request is made by the Borrower and accepted
by  the  Agent;

"Second  Extended  Period"  means the period commencing at 12:01 a.m., New York,
New York, U.S.A. local time, on the day following the Extended Maturity Date and
expiring  at  12:00  a.m.,  New York, New York, U.S.A. local time, on the Second
Extended  Maturity  Date;

"Second  Extension  Request" means the Borrower's request to the Agent to extend
the  Extended  Maturity Date to the Second Extended Maturity Date, in accordance
with  Section  5.5(2)  hereof;

"Security" means the security given to: (i) the Security Agent for and on behalf
of  the  Lenders; (ii) the Lenders; or (iii) a Lender, at any time and from time
to  time  to secure the Obligations, including, without limitation, the security
referred  to  in  Section  5.1;

"Security Agent" means MFC Merchant Bank S.A., in its capacity as security agent
under  the Security Trust Agreement for and on behalf of the Lenders and the MFC
Lenders;

"Security  Documents"  means  the  documents  referred to in Section 5.1 and the
agreements,  instruments  and  documents delivered from time to time to: (i) the
Security  Agent  for  and on behalf of the Lenders; (ii) the Lenders; or (iii) a
Lender,  by  the  Borrower  and  other Persons, for the purpose of establishing,
perfecting,  preserving  and  protecting  the  Security, and "Security Document"
means  any  one  of  them  as  the  context  prescribes  or  requires;

"Security  Trust  Agreement"  means  a  security  trust  agreement  in  a  form
satisfactory  to  the  Agent  pursuant to which the Security Agent will hold the
security  granted  under  the  Borrower's  Securities  Pledge Agreements and the
Assignment  Agreements  for  and  on  behalf of the Lenders and the MFC Lenders;

"Senior  Credit  Agreements"  means the ZPR Credit Agreement and the ZSG Project
Finance  Loan  Agreement;

"Senior  Lenders" means the ZPR Senior Lenders and the ZSG Senior Lenders or any
of  them,  as  the  context  requires;

"Shareholders  Accounts"  means  the Borrower's and its Affililates' shareholder
accounts  in  each  of  ZPR  &  Co.,  ZSG  and  the  other  Group  Companies;

"Shareholders  Agreement  Heads of Terms" means the Shareholders Agreement Heads
of  Terms  attached  as  Schedule  "E"  hereto;

"Shareholders  Loans" means the loans between the Borrower and/or its Affiliates
as  lender,  and  any  of  the  Group  Companies,  as  borrower, in an aggregate
principal  amount  not  to  exceed E 115.2  million;

<PAGE>

"SPB"  means  Spezialpapierfabrik  Blankenstein  GmbH;

"SPB  Assignment Agreement" means an assignment agreement in a form satisfactory
to  the  Agent  pursuant  to  which  SPB  shall assign to the Security Agent its
interests  in  intercompany  loans  due  or  accruing  due  from  ZPR  &  Co.

"SPH"  means  Stendal  Pulp  Holding  GmbH;

"Stendal  Project"  means  the  design, development, financing, construction and
operation  of  a  552,000  tonnes  per annum capacity northern bleached softwood
kraft  pulp  mill  to be carried out by ZSG and to be situated in Arneburg, near
Stendal  in  Sachsen-Anhalt,  Germany;

"Subsidiary"  means, at any time, as to any Person, any corporation, partnership
or  other  entity  Controlled  by  such  Person;

"Success Fees" means success fees payable by the Borrower to the Agent under the
Financial  Services Agreement upon the completion of a Transaction (as such term
is  defined  in  the  Financial  Services  Agreement);

"Taxes"  means  any  and  all  present  or  future  taxes  (including,  without
limitation,  all stamp, documentary, excise or property taxes), levies, imposts,
deductions,  charges  or  withholdings  and  liabilities  with  respect  thereto
including,  without  limitation,  interest  and  penalties;

"Termination  Date"  means  October  14,  2002;

"Total  Commitment"  means  the  total  commitment  of  all Lenders under and in
respect  of  the Loan as set out on the signature pages hereto, in the principal
amount  of E 15,000,000  to  fund  the  Loan  on  the  Advance  Date;

"Trustees"  means  trustees  of  the  Borrower;

"Upside  Sharing  Fee" means a fee payable to the Lenders, contingent upon a ZPR
Asset  Sale:  (i)  in  the sum  of E 2,000,000  if  occurring during the Initial
Period; (ii)  in the sum of E 3,500,000 if occurring during the Extended Period;
and  (iii)  in  the sum  of E 6,000,000  if occurring during the Second Extended
Period;

"Zellstoff-Spedition"  means  Zellstoff-Spedition  Blankenstein  GmbH;

"ZPR"  means,  collectively,  ZPR  Holding,  SPB  and  ZPR  &  Co.;

"ZPR  &  Co."  means  Zellstoff-und  Papierfabrik  Rosenthal  GmbH  &  Co.  KG;

"ZPR  Asset  Sale"  means  any  direct  or  indirect  sale, disposition or other
exchange  of assets of ZPR or any interest in ZPR including, without limitation,
a  sale  by ZPR of its assets provided that such sale, exchange or disposal when
aggregated  with  any  connected transaction relates to not less than 40% of the
Borrower's  interest in ZPR or, as the case may be, 40% of the assets of

<PAGE>

ZPR  and  provided  that  such  sale  shall  be deemed to have occurred once the
Borrower  shall  have  received  all  or  a  portion  of  the  proceeds  thereof
(excluding nominal consideration);

"ZPR  Beteiligungs"  means  ZPR  Beteiligungs  GmbH;

"ZPR  Credit  Agreement" means the E 508,000,000 loan agreement among ZPR & Co.,
BHV  and  others  dated  July  6,  1998,  as  amended  and  supplemented;

"ZPR Currency Hedging Agreement" means the ZPR currency swap agreement which was
terminated  on  July  16,  2002;

"ZPR  Debt  Service  Reserve Account" means the ZPR debt service reserve account
created  and  continuing  under  and  pursuant  to  the  ZPR  Credit  Agreement;

"ZPR  Holding"  means  Zellstoff-und  Papierfabrik  Rosenthal  Holding  GmbH;

"ZPR  Holding  Assignment  Agreement"  means  an  assignment agreement in a form
satisfactory  to  the  Agent  pursuant  to which ZPR Holding shall assign to the
Security  Agent its interest in intercompany loans due or accruing due from SPH;

"ZPR  Logistik"  means  ZPR  Logistik  GmbH;

"ZPR  Senior  Lenders"  means  the  lenders  under  the  ZPR  Credit  Agreement;

"ZPR  Senior  Security"  means  the  security  granted by ZPR & Co., SPB and ZPR
Holding  to  the  ZPR  Senior Lenders under or in connection with the ZPR Credit
Agreement;

"ZSG"  means Zellstoff Stendal GmbH, a limited liability company organized under
the  Laws  of  the  Federal Republic of Germany, having its registered office at
Niedergorner  Damm  1,  39596  Arneburg,  Federal  Republic  of  Germany;

"ZSG  Project  Finance  Loan  Agreement" means the E 827,950,000 project finance
loan  agreement  among  ZSG,  the  ZSG  Senior  Lenders,  and others, in respect
of  the Stendal  Project  entered  into  on  or  about  the  date  first  above
written;

"ZSG  Senior  Lenders"  means  BHV,  or  a Subsidiary company thereof, and other
syndicated  lenders  under  the  ZSG  Project  Finance  Loan Agreement and their
respective  successors  and  assigns;  and

"ZSG Senior Security" means the security to be granted to the ZSG Senior Lenders
under  the  ZSG  Project  Finance  Loan  Agreement.

     Section  1.2     Headings,  etc.    The  division  of  this  Agreement into
Articles  and  Sections  and  the  insertion  of headings are for convenience of
reference  only  and shall not affect the construction or interpretation of this
Agreement.

<PAGE>

     Section  1.3     Gender  and  Number.  Words  imparting the singular number
include  the  plural  and  vice-versa  and  words  imparting  gender include the
masculine,  feminine  and  gender  neutral  as  the  context  requires.

     Section  1.4     Interpretation.  A reference in this Agreement to a person
includes its successors and permitted transferees and assigns.  A reference to a
Credit  Document  or  another document is a reference to that Credit Document or
other  document  as  novated,  amended, modified, extended, renewed, replaced or
restated  from  time  to  time.

     Section  1.5     Accounting  Terms.  All  accounting terms not specifically
defined  herein  shall  be  construed  in  accordance  with  GAAP.

     Section  1.6     Loan  Advance.  The  Loan,  if  made  by more than one (1)
Lender, shall be made by deposit by each Lender of such portion thereof required
hereunder  with the Agent in accordance with the provisions hereof and the Agent
shall  upon  receipt  of such rateable shares of the Loan, remit the Loan to the
Borrower,  provided  that the failure of any Lender to make its rateable portion
of  the  Loan  shall  not relieve any other Lender of its obligation to make its
rateable portion of the Loan and provided further that the Original Lender shall
make  up  any  shortfall or failure to Advance by any other Lender such that the
full  Principal  Sum  shall  be  made  available to the Borrower by the Original
Lender.

     Section  1.7     Schedules.  All  documents attached or referred to in this
Agreement  and  the following schedules attached hereto are integral to and form
part  of  this  Agreement:

          Schedule  "A"  -  Form  of  Borrower's  Certificate
          Schedule  "B"  -  List  of  Pledged  Securities
          Schedule  "C"  -  Form  of  Financial  Services  Agreement
          Schedule  "D"  -  Form  of  Advance  Request
          Schedule  "E"  -  Shareholders  Agreement  Heads  of  Terms
          Schedule  "F"  -  Corporate  Chart

                                   ARTICLE 2.
                                    THE LOAN

     Section  2.1     The  Loan.  (1)  Each  Lender hereby agrees, severally, to
lend  to  the  Borrower,  relying  on  each  of the representations, warranties,
covenants  and conditions set out herein, and upon and subject to the provisions
of  this  Agreement,  its  pro  rata  share  of  the  Principal  Sum.

     (2)     Subject  to the terms and conditions hereof, including satisfaction
of the conditions to Advance set out in Article 6, each Lender shall advance its
pro  rata  share  of  the  Principal  Sum  to  the Borrower on the Advance Date.

     (3)     The Borrower shall use the proceeds of the Loan solely: (i) to
partially  fund  the  Mercer  Equity  Financing; and (ii) to pay all fees, costs
and expenses associated  with  the

<PAGE>

negotiation,  execution  and  delivery  of  this  Agreement  including,  without
limitation, all fees payable on the Advance  Date pursuant to Article  3 hereof.

                                   ARTICLE 3.
                                INTEREST AND FEES

     Section  3.1     Interest  on  the Loan.  (1)     The Borrower shall pay to
the  Agent,  for  and  on  behalf  of the Lenders, on the Interest Payment Date,
Interest  on the Outstanding Amount from the Advance Date to the date of payment
at  the  relevant  Interest  Rate.

     (2)     The  Borrower  may,  at  its  option, from time to time, notify the
Agent  of  the  chosen  Interest  Period  to  apply  in  respect  of the Loan by
providing to the Agent  not  less  than  six  (6)  Business Days' notice thereof
prior to the commencement  of  an  Interest  Period.  If  the  Borrower fails to
provide such notice,  it shall be deemed to have selected, and the next Interest
Period shall be,  a  period  of  one  (1)  month.

     (3)     The  first  Interest  Period  will commence on the Advance Date and
each  subsequent  period  will  commence  on  the  expiry of the last day of the
immediately  preceding  Interest  Period.

     (4)     With  each  successive  Interest  Period  selected by the Borrower,
Euribor  shall  be  reset  on  the  Quotation  Date  immediately  prior  to  the
commencement of the Interest Period and there shall be a corresponding change in
the rate of interest payable under this Agreement without the necessity of prior
notice  thereof  to  the  Borrower  or  any  other  Person.

     (5)     Upon  each  extension  of  the  Maturity  Date, including, from the
Initial  Maturity  Date  to  the  Extended  Maturity  Date and from the Extended
Maturity  Date to the Second Extended Maturity Date, all Interest accrued to the
date  of  such extension shall be capitalized and added to the Principal Sum for
the  purpose  of  calculating  Interest  thereafter.

     (6)     Except  as  otherwise  provided herein, all amounts (other than the
Loan)  owed  by the Borrower to the Agent, the Lenders or a Lender which are not
paid  when  due  (whether  at  stated  maturity,  on  demand, by acceleration or
otherwise)  shall be capitalized and compounded monthly on the first day of each
successive  Interest  Period,  until  payment.

     (7)     Interest  Periods in respect of amounts owed by the Borrower to the
Agent,  the  Lenders  or a Lender which are not paid when due (whether at stated
maturity, on demand, by acceleration or otherwise) (an "Unpaid Amount") shall be
for  periods  of  one  (1)  month.

     (8)     All  Unpaid  Amounts  shall  bear  Interest  (both before and after
Default  or  judgment),  from  the  date  on which such amount is due until such
amount  is  paid  in  full at a rate per annum equal at all times to the Default
Interest  Rate.

     (9)     All  Interest payable in respect of Unpaid Amounts shall be payable
on  the  last  day  of  the  relevant  Interest  Period.

<PAGE>

     Section 3.2     Fees.     (1)     The Borrower shall pay the Commitment Fee
to  the  Lenders  on  the  Advance  Date.

     (2)     The  Borrower  shall  pay  the  Drawdown  Fee to the Lenders on the
Advance  Date.

     (3)     If  the  Advance  is  not made on or before the Termination Date in
accordance  with  the  terms  of this Agreement, the Borrower shall pay the Drop
Dead  Fee  to  the  Lenders  on the first Business Day following the Termination
Date.

     (4)  (a)  If  upon  repayment of the Loan, on or before the Maturity
               Date, a ZPR  Asset  Sale has not occurred, the Borrower shall
               pay the Break Fee to the Lenders  upon the date of repayment
               of the Loan; and

          (b)  If  upon  the  occurrence  of  an Event of Default a ZPR Asset
               Sale has not occurred,  and  does  not  occur on or before the
               repayment of the Loan, the Borrower shall pay a Break Fee (the
               "Default Break Fee") to the Lenders upon the date  of
               repayment  of  the  Loan.

     (5)  (a)  If  upon  repayment  of the Loan, on or before the Maturity
               Date, a ZPR  Asset  Sale  has  occurred,  the  Borrower shall
               pay an Upside Sharing  Fee  to the Lenders  upon  the  date
               of  such  repayment;  and

          (b)  If,  following  the  occurrence  of an Event of Default a ZPR
               Asset  Sale occurs, the Borrower  shall  pay  an Upside Sharing
               Fee (the "Default Upside Sharing  Fee")  to  the  Lenders  upon
               the date of repayment of the Loan in the amount  that  would
               have been payable hereunder as  an  Upside Sharing Fee  if no
               Event  of  Default  had  occurred  and  all  extensions of the
               Maturity Date, as applicable, had  occurred,  provided  that
               the Default Upside Sharing Fee shall  also  be  payable  in
               the  sum  of E 6,000,000  in  respect  of  a ZPR  Asset Sale
               occurring  after  the expiry of the Second Extended Period,
               calculated as though no  Event  of  Default  had  occurred
               and  all  extensions  of the Maturity Date provided  for
               hereunder  had  occurred.

     (6)  (a)  Upon  the  payment  of the Break Fee or Default  Break Fee
               to  the Lenders  hereunder, the obligation of the Borrower to
               pay an Upside Sharing Fee or  Default  Upside Sharing Fee to
               the Lenders shall be forever  extinguished  and  the  Borrower
               shall  have  no  further obligations  in  respect thereof; and

           (b)  Any  Break  Fee  paid  or  payable  to  the Lenders hereunder
                shall offset  and reduce  the  amount  of any Success Fee paid
                or payable to the Financial Advisor under  the  Financial
                Services  Agreement, and  vice-versa,  provided  that  if  the
                Loan  is repaid from the proceeds  of  an  Equity  Issue,  no
                such offset or reduction will occur.

<PAGE>

     Section  3.3     Increased  Costs.  (1)  Except  as  set  forth  below, the
Borrower  shall forthwith on demand by a Lender pay to that Lender the amount of
any  Increased  Cost  incurred  by  it  or any of its Affiliates as a result of:

        (a)  the  introduction  of,  or  any  change  in,  or  any change in the
             interpretation  or  application  of,  any  Law  or  regulation;  or

        (b)  compliance  with  any  regulation  made  after  the  date  of  this
             Agreement, (including  any  Law or regulation relating to taxation,
             change in currency of a country  or reserve, reserve asset, special
             deposit,  cash ratio, liquidity or capital adequacy requirements or
             any other form of banking or monetary control).

     (2)     Section  3.3(1)  does  not apply to, and the Borrower shall have no
obligations  thereunder  in  respect  of,  any  Increased  Cost:

        (a)  compensated  for  by  the  operation  of  Section  11.8;

        (b)  attributable  to  any  change  in  the  rate  of,  or change in the
             basis of calculating,  tax on the overall net income of a Lender or
             any of its Affiliates (or  the  overall net income of a division or
             branch  of  the  Lender  or  any  of its Affiliates) imposed in the
             jurisdiction  in  which its principal office or lending office  is
             for  the  time  being  situate;  or

        (c)  attributable to or resulting from any assignment, transfer or grant
             of a participation right by the Agent or a Lender in respect of its
             Commitment to any Person  that  becomes a Lender to the extent that
             such  increased  cost  would  not  have  been  incurred  if no such
             assignment,  transfer  or  grant  of  a  participation  right  had
             occurred.

     Section  3.4     Illegality.  If  it  is  or  becomes  unlawful  in  any
jurisdiction for a Lender, other than the Original Lender, to give effect to any
of  its obligations as contemplated by this Agreement or to fund or maintain its
participation in any loan, then: (i) that Lender may notify the Borrower through
the  Agent  accordingly;  (ii)  the  Original Lender shall forthwith acquire the
participations  of  that  Lender  in  the Loan; and (iii) the Commitment of that
Lender shall forthwith be cancelled and replaced by an identical Commitment from
the  Original  Lender.  If  it  becomes unlawful for the Original Lender to give
effect to any of its obligations as contemplated by this Agreement or to fund or
maintain  its participation in the Loan, then the Original Lender may notify the
Borrower  and  the  Borrower  shall  forthwith  prepay  the participation to the
Original Lender in the Loan and the Original Lender's Commitment shall forthwith
be  cancelled.

     Section 3.5     Evidence and Calculations.  (1)  Accounts maintained by any
Lender  in  connection  with  any Credit Document are in the absence of manifest
error,  conclusive  evidence  of  the  matters  to  which  they  relate.

<PAGE>

     (2)  Any  certification  or determination by the Agent of a rate or amount
under any Credit Document is, in the absence of manifest error, conclusive
evidence of the  matters  to  which  it  relates.

                                   ARTICLE 4.
                           REPAYMENT OF PRINCIPAL SUM

     Section  4.1     Payments.  The  Borrower  shall pay or repay to the Agent,
for  and  on  behalf of the Lenders, on the earlier of the Maturity Date and ten
(10)  Business  Days  following  a  Change of Control, pro rata with payments or
repayments  to  be  made  to  the  MFC Lenders under the MFC Loan Agreement, the
Outstanding  Amount together with all amounts owing hereunder and not previously
paid  or  repaid,  without  set-off,  counterclaim  or  deduction.

     Section  4.2     Borrower's  Right  to  Prepay the Loan.  The Borrower may,
from  time  to  time,  on two (2) Business Days' prior notice given to the Agent
stating the proposed date and aggregate principal amount of the prepayment, and,
if  such  notice is given, the Borrower shall, prepay the Outstanding Amount, in
whole  or  in  part,  as set out in the prepayment notice, together with accrued
Interest to the date of such prepayment on the amount prepaid, provided that the
Borrower  may  not  prepay  any amount hereunder unless a pro rata prepayment is
also  made  in  respect  of  amounts owing to the MFC Lenders under the MFC Loan
Agreement.  Each  prepayment  shall  be  in  a principal amount of not less than
E 500,000 and  in  integral  multiples  of  principal E 500,000  thereafter.

     Section  4.3     Method  and  Place  of  Payment.  All  payments to be made
hereunder  shall  be  made  by  the  Borrower  to the Agent on the day that such
payment  is  due  at  the  Agent's  address  provided  for  in  this  Agreement.

     Section  4.4     Time  of Payment.  Whenever any payment hereunder shall be
stated  to be due on a day other than a Business Day, such payment shall be made
on  the  next  succeeding Business Day, and such extension of time shall in such
case  be  included  in  the computation of Interest or fees, as the case may be.

     Section  4.5     Mandatory  Prepayment.  (1)   The  Borrower  shall  use
reasonable  commercial efforts during the Initial Period and, if applicable, the
Extended  Period  to:  (i)  complete  an  Asset  Sale  or  Asset  Sales on terms
satisfactory  to  the  Borrower,  subject to any restrictions in respect thereof
imposed  under  the Senior Credit Agreements or by any Official Body, including,
without  limitation,  with  respect  to  any  sale  involving  ZSG, the European
Commission;  (ii)  complete  an Equity Issue on terms reasonably satisfactory to
the  Borrower;  and/or  (iii) withdraw, or cause to be withdrawn and paid to the
Borrower,  as  soon  as  practicable,  from  time  to  time,  the maximum amount
available  to  be  withdrawn from the Shareholders' Accounts, as permitted under
generally  accepted  accounting  principles applicable in  Germany and under the
Senior  Credit  Agreements,  the  proceeds  of  which,  collectively,  shall  be
sufficient  to  pay  or  repay  the  Borrower's  Obligations  hereunder.

<PAGE>

     (2)  The Borrower shall utilize all of the Mandatory Prepayment Amounts, as
and when the aggregate of such amounts received by the Borrower total, from time
to  time, E 500,000, to repay all Obligations owing to the Agent and the Lenders
hereunder  and  all  amounts owing to MFC under the MFC Loan Agreement, on a pro
rata  basis.

                                   ARTICLE 5.
                                    SECURITY

     Section  5.1     Security.  As  general  and  continuing  security  for the
performance  of  all  Obligations  of  the  Borrower under the Credit Documents,
including  the  prompt payment when due by the Borrower of the Loan and Interest
and  all  other  monies from time to time owing by the Borrower hereunder, there
shall  be executed, delivered and deposited with and held by the Security Agent,
the  Lenders  and the MFC Lenders the following documents and instruments on the
Closing  Date,  each of which shall be in form and substance satisfactory to the
Agent:

     (a)   the  Borrower's  Securities  Pledge  Agreements;  and

     (b)   the  Assignment  Agreements.

     Section  5.2     Continued Perfection and Agreed Releases of Security.  (1)
The  Borrower  shall  take  such  action and execute and deliver to the Security
Agent  for  and on behalf of the Lenders such agreements, conveyances, deeds and
other  documents  and  instruments as the Agent shall reasonably request for the
purpose  of establishing, perfecting, preserving and protecting the Security, in
each case forthwith upon request therefor by the Agent and in form and substance
reasonably  satisfactory  to  the  Agent.

     (2)     The  Borrower agrees that, where the subject matter of the Security
is  in  the  possession of the Security Agent, the Security Agent:  (i) shall be
entitled to hold as additional Security any increase or profits from the subject
matter  of  the  Security;  (ii) shall not be obligated to keep identifiable and
shall  be  entitled  to commingle the subject matter of the Security as they may
see  fit;  and  (iii)  shall  not  be  obligated to take any steps, necessary or
otherwise,  to preserve rights in respect of any instrument, security or chattel
paper.

     Section  5.3     Release  upon  Payment.  (1)  Subject  to  Subsection  (2)
hereof,  upon  payment by the Borrower of all of the Obligations and performance
of  all  other  obligations  of  the  Borrower  under  the Credit Documents, the
Security  Agent  shall,  for and on behalf of the Lenders, at the expense of the
Borrower,  execute  and deliver such discharges, releases and other documents as
may reasonably be required to release and discharge the Lenders' interest in the
Security.  Partial  repayment  of the Obligations shall not entitle the Borrower
to  the  release or discharge of the Lenders' interest in the Security, in whole
or  in  part.

     (2)     If, following payment by the Borrower of all of the Obligations the
Agent  reasonably  considers that there is a material risk that such payment may
be  set  aside as a result of the insolvency of the Borrower, then the Agent may
request  and,  if  the  Borrower  is  solvent,  the  Borrower  shall  provide  a
certificate  of  a senior officer of the Borrower certifying the solvency of

<PAGE>

the  Borrower,  supported  by  consolidated  annual  and  quarterly  Financial
Statements  for  the  Borrower's  most  recently  completed financial year and
quarter for which such  statements  are  available, and the  Security  Agent's
obligation to provide the  releases,  discharges and other deliveries required
under  Subsection  (1) hereof  shall  be  conditional  upon  receipt  of  such
solvency certificate and Financial  Statements.

     Section 5.4     Conflicts.  If a conflict or inconsistency exists between a
provision  of  this  Agreement  and  the  terms of the Security Documents or the
Credit  Documents  or any one of them, the terms of this Agreement shall prevail
to  the extent necessary to resolve such conflict,  provided that, if any of the
Security  Documents  or  Credit  Documents  contains a representation, warranty,
covenant  or right in favor of the Agent or the Lenders not provided for in this
Agreement, such additional representation, warranty, covenant or right shall not
constitute  a  conflict  or  inconsistency.

     Section  5.5     Extension  of  Maturity  Date.    (1)  The  Borrower shall
have  the  right  to  extend  the  Initial  Maturity  Date  to  the  Extended
Maturity Date by providing written notice of the exercise of the First Extension
Option  to  the  Agent  not  less  than  fifteen  (15) days prior to the Initial
Maturity  Date.

     (2)     The  Borrower  may  request  the extension of the Extended Maturity
Date  to  the  Second  Extended Maturity Date by providing written notice of the
Second  Extension  Request  to the Agent not less than thirty (30) days prior to
the  Extended  Maturity  Date,  provided  that  each Lender shall be entitled to
accept  or  reject  such  Second  Extension  Request  in  its  sole and absolute
discretion.  The  Agent  shall  provide  written  notice  of  such acceptance or
rejection  by the Lenders to the Borrower within ten (10) days of receipt of the
Second  Extension  Request.  If  no such notice is received by the Borrower from
the  Agent  within such period then the Lenders shall be deemed to have rejected
the  request.

                                   ARTICLE 6.
                        CONDITIONS PRECEDENT TO THE LOAN

     Section  6.1     Conditions  Precedent  to the Loan.  The obligation of the
Lenders to Advance the Loan on the Advance Date is subject to the fulfillment of
the  following  conditions  precedent:

     (a)   the  Agent  shall  have received copies of the Borrower's, each Group
           Company's,  DP Holdings'  and  DP's  Charter  Documents  and  of  the
           resolutions of the Borrower's  trustees  and  the  directors  of each
           of SPB and SPH approving the execution,  delivery  and performance of
           the Credit Documents to which each is a party;

     (b)   the  Agent  shall  have received a certificate of a senior officer of
           the  Borrower  certifying  the  names  and  true  signatures  of  the
           officers  and  directors  thereof  authorized  to  sign  the  Credit
           Documents  to  which  it is a party;

<PAGE>

     (c)   the Agent  shall  have  received  certificates  of  good  standing or
           like certificates  issued  by  the  appropriate  Official Body of the
           jurisdiction of  incorporation  or  formation  of  the  Borrower  and
           each  Group  Company;

     (d)   the Credit  Documents and the Financial Services Agreement shall have
           been  executed  and  delivered  to the Agent, the Security shall have
           been  created,  and  all  deliveries,  registrations,  filings  or
           recordings necessary or desirable to preserve, protect or perfect the
           security interest and the enforceability and priority of the Security
           shall  have  been  completed,  all  in such form, content and  manner
           as  is  satisfactory  to  the  Agent, other than notifications of the
           pledge  of the  Pledged  Securities to the companies whose securities
           are set out in  Schedule  "B"  hereto;

     (e)   the Agent shall have received copies certified by a senior officer of
           the Borrower of the Financial Statements of the Borrower for its most
           recently completed  Financial  Year  and  Financial  Quarter;

     (f)   all  of the representations and  warranties  contained  in the Credit
           Documents  to  which  the Borrower is a party shall be correct on and
           as of the Advance  Date as though made on and as of such date and the
           Borrower  shall have delivered  a Borrower's Certificate to the Agent
           to such effect on or before the Advance  Date;

     (g)   the  Agent  shall  have  received  a  certificate  of  the  Borrower
           certifying that:  (i)  all  conditions  precedent to the initial draw
           down  of  the  first  advance  under  the  ZSG  Project  Finance Loan
           Agreement  shall  have  been  satisfied  or  waived  other  than  the
           provision  of  the  Mercer  Equity  Financing and any such conditions
           precedent  that  are  to  be  completed after the  provision  of  the
           Mercer  Equity  Financing;  (ii)  all  conditions precedent  to  the
           Advance  of  the  MFC  Loan shall  have been satisfied or waived; and
           (iii) arrangements reasonably satisfactory to the Agent to facilitate
           the completion of the Mercer Equity Financing  shall be in  place;

     (h)   the Agent  shall  have  received a copy of the MFC Loan Agreement and
           shall be  satisfied  with  the  terms  thereof,  acting  reasonably;

     (i)   the Agent shall have  received  a favorable opinion of counsel to the
           Borrower (in  form and content  satisfactory to the Agent) as to such
           matters  as  the  Agent  may  reasonably  request,  including  the
           corporate status  of the Borrower,  the  corporate power and capacity
           of  the Borrower  to borrow money and to  grant security therefor and
           the due authorization, execution and delivery of the Credit Documents
           to  which  it  is a party and the enforceability of this Agreement;

     (j)   all fees and all expenses required to be paid or  reimbursed  to  the
           Agent and the Lenders on the Advance Date shall have been paid;

     (k)   the  Agent  shall  have received a copy of the Shareholders Agreement
           Heads of  Terms in the form set out as Schedule "E" to this Agreement
           duly executed by the  Borrower;  and

<PAGE>

     (l)   the Agent  shall  have  received  such  other  documents  as  it may
           reasonably request  for  and  on  behalf  of  the  Lenders.

     Section  6.2     Conditions  Solely  for  the  Benefit of the Lenders.  All
conditions  to the obligations of the Lenders to Advance the Loan are solely for
the benefit of the Agent and the Lenders and no other Person shall have standing
to  require satisfaction of any condition and no other Person shall be deemed to
be  a  beneficiary  of  any  such  condition, any and all of which may be freely
waived  in  whole  or in part by the Agent, for and on behalf of the Lenders, at
any  time  that  it  deems  it  advisable  to  do  so.

                                   ARTICLE 7.
                         REPRESENTATIONS AND WARRANTIES

     Section  7.1     Representations  and  Warranties  by  the  Borrower.  The
Borrower  represents  and  warrants  to  the  Lenders  that:

     (a)  Organization.  Each of the Borrower, ZPR Holding, SPB, ZPR & Co., SPH,
          ZSG,  DP  and  DP  Holdings  is  duly  constituted  and organized  and
          is  validly subsisting  and  in  good  standing  under the Laws of its
          jurisdiction;

     (b)  Corporate  Power.  The  Borrower  has  full corporate right, power and
          authority  to  enter  into  and  perform its Obligations under each of
          the  Credit  Documents  to  which  it  is  a  party  and  has  full
          corporate  right,  power  and  authority  to  own  and  operate  its
          properties  and to carry on its Business;

     (c)  Conflict  with  Other  Instruments.  The  execution  and  delivery  by
          the Borrower  of  each  of  the  Credit  Documents  to  which  it is a
          party and the performance  of  its  Obligations thereunder, including,
          without  limitation,  the  grant  of  security  over  the  Pledged
          Securities, and  the  performance  of  the  terms of  the  Security
          Documents  to  which  it is a party, do not and will not: (i) conflict
          with  or  result  in  a  breach  of  any  of  the terms, conditions or
          provisions  of:  (A)  its  Charter Documents; (B) any applicable Law;
          or (C) any contractual  restriction  binding on or affecting it, or
          its  properties; or (ii) result  in,  or  require  or permit: (A) the
          imposition  of  any Lien on or with respect  to  the  properties  now
          owned  or  hereafter  acquired  by it; or (B) the acceleration of the
          maturity  of any of its Debts under any contractual provision binding
          on  or  affecting  it;

     (d)  Corporate  Actions and  Authority.  The execution and delivery by the
          Borrower  of  each  of  the  Credit  Documents  to  which  it  is  a
          party  and  the  performance  by  the  Borrower  of  its  Obligations
          thereunder  has  been duly authorized  by  all  necessary  action  on
          the  part  of  the Borrower and no Authorization under any applicable
          Law  and  no  registration, qualification,  designation,  declaration
          or  filing with any Official Body having jurisdiction over  it  is or
          was  necessary  therefor;

<PAGE>

     (e)  Execution  of  Binding  Obligation.  This  Agreement  has  been  duly
          executed  and  delivered  by  the  Borrower,  and  this  Agreement
          constitutes  and  the  remaining  Credit  Documents  to which it is a
          party,  when  duly  executed  and  delivered  by  the  Borrower, will
          constitute, legal, valid and  binding  Obligations  of  the  Borrower
          enforceable  in accordance with  their respective terms, subject only
          to:  (i)  any  applicable  bankruptcy,  insolvency,  reorganization,
          moratorium  or similar Laws affecting  creditors'  rights  generally;
          and  (ii) general principles of equity (regardless  of  whether  such
          enforceability  is considered in a proceeding in equity or  at  Law);

     (f)  Authorizations.  The  Borrower  possesses all material Authorizations
          under  any  applicable Law which are necessary in connection with the
          operation  of its  Business.  All  such  Authorizations  are  in full
          force  and  effect  and  the  Borrower  is  not  in  default  in  any
          respect thereunder.  No action exists, is pending or threatened which
          has as  its object the revocation, amendment or qualification of  any
          such  Authorization;

     (g)  No  Violation  of  Agreements.  It  is  not  in  default  under  any
          indenture,  mortgage, deed of trust, agreement or other instrument to
          which it is a party or by  which  it  or  any  of  its  property  may
          be  bound;

     (h)  No  Litigation.  There  are no actions, suits or proceedings  pending
          or, to  the  knowledge  of  the  Borrower,  after  due  enquiry,
          threatened  against  or  affecting  the  Borrower  (nor,  to  the
          knowledge of  the Borrower, after due enquiry,  any basis  therefore)
          before  any  Official Body  having  jurisdiction  over  the  Borrower
          which purport to or do challenge the validity or propriety of the
          transactions  contemplated by the Credit Documents or the  documents,
          instruments  or  agreements  executed  and  delivered  in  connection
          therewith or related thereto;

     (i)  No  Conflicts.  It  is  not  in breach of or in default under, in any
          respect:  (i)  its  Charter Documents; (ii) any applicable Law; (iii)
          any  contract  or  agreement  binding  on  or  affecting  it  or  its
          property  or  assets  (including,  without  limitation,  the  Credit
          documents  to  which  it  is a  party);  or  (iv) any writ, judgment,
          determination  or  award binding on it or affecting its properties or
          assets;

     (j)  Financial  Statements.  The Financial Statements  of the Borrower and
          each  of  the  balance  sheets  and  related statements  of earnings,
          retained  earnings and changes  in financial position of the Borrower
          for  a Financial  Year or  a portion thereof  delivered  to the Agent
          pursuant  to  Section  6.1(e)  or  from  time  to  time in accordance
          herewith, fairly present the financial position  of the  Borrower  as
          at  such  dates  and  the  results  of  the  operations  and  changes
          in financial position  of  the  Borrower  for  such  periods  all  in
          accordance  with GAAP;

     (k)  Material  Changes.  No  material  adverse  changes  have occurred  or
          are  continuing  in  respect  of  the  financial  condition  of  the
          Borrower from that set out  in the most recently delivered  Financial
          Statements of the Borrower; and no Law,  regulation,

<PAGE>

          rule or policy, or any change therein, has been enacted  or  proposed
          prior  to  the Advance  Date;

     (l)  Title  to  Pledged  Securities.  The  Borrower  or, where applicable,
          its Affiliate,  is  the  sole  legal  and  beneficial  owner of,  and
          has  good and marketable  title  to the Pledged Securities held by it
          as  set  forth  in  Schedule "B"  hereto  and  the  Security  will
          constitute a pledge of the Pledged Securities ranking pari passu with
          the pledge of the Pledged Securities granted in favor of MFC pursuant
          to  the  MFC  Loan  Agreement;

     (m)  No  Agreements  to  Purchase.   No  Person has any agreement or right
          capable  of  becoming  an  agreement for the purchase of any Pledged
          Securities;

     (n)  Restrictions  on  Doing  Business.  The  Borrower  is  not subject to
          any  legislation  or  any judgment, order or requirement of any court
          or  agency  which  is  not  of  general  application  to  Persons
          carrying  on a business similar to theirs.  There  are  no  facts  or
          circumstances  which could reasonably have a material  adverse effect
          upon the ability of the Borrower to continue to operate its Business,
          operations  and  affairs  as  presently  conducted;

     (o)  ERISA.  Neither  the  Borrower  nor  any  ERISA  Affiliate  sponsors,
          maintains,  administers,  contributes to, participates in, or has any
          obligation  to  contribute to or any liability under, any Plan, or in
          the past five (5) years has sponsored, maintained, administered,
          contributed  to,  participated  in,  or  had  any  obligation  to  or
          liability  under,  any  Plan;

     (p)  Investment  Company Act.  The Borrower is not an "investment company"
          or a  company  "controlled"  by  an "investment company", within  the
          meaning of the United  States  Investment  Company  Act  of  1940  as
          amended;

     (q)  Margin  Stock.  The  Borrower  is  not  engaged  in  the  business of
          extending credit  for  the  purpose  of purchasing or carrying margin
          stock  (within  the meaning  of  Regulations  U and X of the Board of
          Governors  of  the United States  Federal  Reserve  System),  and  no
          portion of the Loan has been or will be used, directly or indirectly,
          to  purchase or carry margin stock or to extend credit to others  for
          the  purpose  of purchasing or carrying margin stock and the Borrower
          will  upon  the  request  of  the  Agent  supply  a statement to such
          effect in conformity with the provisions of Regulation U of the Board
          of Governors of the United  States  Federal  Reserve  System;

     (r)  Proceeds.  The  proceeds  of  the  Loan  will  be  used  only for the
          purposes described  in  Section  2.1;

     (s)  Environmental  Laws.  ZPR  has  been in compliance with all applicable
          Environmental  Laws  and  Environmental  Licenses and, so far as it is
          aware,  there  are  no  circumstances  that may at any time prevent or
          interfere  with  continued

<PAGE>

          compliance  by  it  with  all  applicable Environmental  Laws  and
          Environmental Licenses.  No  Environmental Claim is pending or, to the
          best of its knowledge, threatened against it or any of its properties;

     (t)  Event  of  Default. No Event of Default is outstanding or might result
          from  the making of the Loan; and no other event is outstanding which
          constitutes  (or  with  the  giving  of  notice,  lapse  of  time,
          determination  of  materiality  or  the  fulfilment  of  any  other
          applicable  condition  or  any  combination  of  the foregoing,  might
          constitute)  a  default  under  any  document  which is binding on the
          Borrower  or  any  of  its  assets;

     (u)  Tax Compliance. Each of the Borrower and the Group Companies has filed
          or  caused  to be filed, or has a valid extension of the time to file,
          all  Federal  and  material  state  and  other  tax  returns  that are
          required  to  be  filed  and has paid all Taxes shown to  be  due  and
          payable on said returns or on any assessments made  against  it or any
          of  its  property  and  all other Taxes, fees or other charges  levied
          upon  it  or  any of its property by any governmental authority to the
          extent  that  such  Taxes have become due and payable, and no tax Lien
          has been filed  with  respect  to any such Tax, fee or  other  charge,
          except to the extent the  relevant  taxes  are being contested in good
          faith and by appropriate means and  as  to which  reserves  reasonably
          regarded  as  adequate  have  been  established  in  accordance  with
          applicable  generally  accepted accounting principles; and

     (v)  Documents.  There  are no agreements to which the Borrower or  any  of
          its Affiliates is a party relating  to  the  Pledged  Securities,  the
          Shareholders  Loans  or  loans  that  are  subject  to  the Assignment
          Agreements,  copies  of which have not been  delivered  to  the  Agent
          prior  to  the  date  of  this  Agreement.

     Section  7.2     Repetition  of  Representations  and  Warranties.  The
representations  and  warranties  set  out  in  Section  7.1:

     (a)  are  made  on  the  date  of  this  Agreement;  and

     (b)  are  deemed  to  be  repeated  by  the  Borrower  on the date of each
          Request  and  the first day of each Interest Period with reference to
          the facts and circumstances  then  existing.

     Section  7.3     Survival  of  Representations  and  Warranties.  The
representations  and  warranties  of the Borrower contained in this Agreement or
made  by  the Borrower in any certificate, notice or report delivered under this
Agreement  will  survive  the Advance Date, the making and repayment of the Loan
and  any  novation,  transfer  or  assignment  of  the  Loan.

<PAGE>

                                   ARTICLE 8.
                            COVENANTS OF THE BORROWER

     Section  8.1     Affirmative  Covenants.  So  long  as  any  Lender has any
Commitment under this Agreement and until the Obligations are paid and satisfied
in  full, the Borrower shall (or, if applicable, shall cause the relevant action
to  take  place),  unless  the  Agent  otherwise consents in accordance with the
provisions  of  this  Agreement:

     (a)  Financial  Reporting.  Deliver  to  the  Agent  (except  as  otherwise
          provided  herein)  in  reasonable  detail  the  following  information
          prepared in accordance with  GAAP  and  certified  by a senior officer
          of  the  Borrower as being, to the best  of  his  knowledge  after due
          enquiry,  true and correct in all material respects:  (i)  as soon  as
          available at the end of each Financial Quarter and in any event within
          forty-five  (45)  days  thereafter,  quarterly  Financial  Statements,
          as  at  the end of such Financial Quarter, setting forth, in each case
          in comparative form, the figures for the previous year's corresponding
          Financial  Quarter  and  the  Financial  Year to date; (ii) as soon as
          available and in any event  within  ninety  (90)  days  after  the end
          of  each  Financial  Year  of  the  Borrower  a  copy  of  the audited
          consolidated Financial Statements of the Borrower for  the  respective
          Financial  Year  reported  on  by  the  independent  auditors  of  the
          Borrower,  as  the  case  may  be;  and  (iii)  such  other  financial
          statements  and information  respecting the Borrower as may reasonably
          be requested by the Agent from  time  to  time;

     (b)  Additional  Reporting.  Deliver  to  the  Agent,  promptly  upon  the
          Borrower obtaining  knowledge  thereof,  written  notice  of: (i) any
          Default or Event of Default,  specifying  the nature thereof and  the
          action  the  Borrower proposes to take  or  has  taken  with  respect
          thereto;  (ii)  any  litigation,  including arbitration,  and  of any
          proceedings  before  any  Official  Body  against the Borrower  where
          the  amount  involved  exceeds E 5,000,000;  (iii)  adoption  of,
          participation  in  or  contribution  to  any  Plan by the Borrower or
          any  ERISA  Affiliate,  or  any  action  by  any  of  these to adopt,
          participate  in  or contribute to  any Plan, or the incurrence by any
          of  them  of  any  liability  or  obligation  to  any  Plan;  (iv)
          non-compliance  with  any  Environmental Law or Environmental License
          where non-compliance could reasonably have a Material Adverse Effect;
          (v)  any  Environmental  Claim  or  any  other claim, notice or other
          communication served  on  it  in  respect  of  any  alleged breach of
          any Environmental Law or Environmental  License;  and (vi) any actual
          or  suspected  Environmental Contamination  which  could  reasonably
          result  in  a  Material Adverse Effect;

     (c)  Corporate  Existence. Preserve and maintain in full force and effect:
          (i)  its  corporate  existence  and all qualifications  to  carry  on
          the Business, including,  without  limitation, all rights  (statutory
          and  other);  and  (ii)  all  Authorizations  relating  thereto,
          non-compliance  with which could reasonably have a  Material  Adverse
          Effect;

<PAGE>

     (d)  Compliance  with  Laws,  etc.  Comply  with  all  applicable  Laws
          non-compliance  with  which  could  reasonably  have  a  Material
          Adverse Effect;

     (e)  Payment  of  Taxes  and Claims.  Pay and discharge  before  the  same
          shall become  delinquent:  (i)  all  Taxes,  assessments and Official
          Body  charges  or  levies  imposed  upon  or  in  respect  of  the
          Business or any of the Borrower's assets or properties; and (ii)  all
          lawful  claims  (including,  without limitation, claims  for  labour,
          materials,  supplies  or services) which, if unpaid,  might become  a
          Lien  upon  or in respect of the Business or the Borrower's assets or
          properties;  except,  in each case, any such Tax, assessment, charge,
          levy  or  claim  which  is  being  contested  in good faith by proper
          proceedings  and  for  which the  Borrower  has  maintained  adequate
          reserves  therefor  and  no Liens have attached;

     (f)  Keeping of Books.  Keep proper books of record and account in respect
          of the  Business,  in which full and correct entries shall be made of
          all financial transactions  and  the assets and operations in respect
          of the Business in accordance  with  GAAP;

     (g)  Visitation,  Inspection, etc.  Permit the Agent or any of the Lenders
          or any  representative  thereof  on  reasonable  notice  to visit and
          inspect the Business  of  the  Borrower, to examine its books and
          records  and  to  make  copies  and  take  extracts therefrom, and to
          discuss  its  affairs,  finances and accounts with  the  officers  of
          the  Borrower  and  to  inspect  the Business  to  ensure  compliance
          with all Laws at all such reasonable times during normal office hours
          and  as  often  as the Agent  or  any of  the  Lenders  or  any
          representative thereof may  reasonably  request;

     (h)  Notice  of Default.  Promptly notify the  Agent  in  writing  of  any
          Default  or  Event  of Default or any default, or event, condition or
          Occurrence  which with notice  or  lapse  of  time,  or  both,  would
          constitute  a  default,  under any agreement  for  borrowed  money to
          which the Borrower is a party and under which the  Borrower  owes  at
          least E 5,000,000  or  the  equivalent amount in another currency;

     (i)  Pay  Obligations  to Lenders and Perform Other Covenants.  Make  full
          and  timely  payment  of  its  Obligations  hereunder,  whether  now
          existing or hereafter arising,  and  duly comply with the  terms  and
          covenants contained in each of the Credit  Documents to which it is a
          party,  all  at  the  times  and places and in the manner  set  forth
          therein  after giving effect to all applicable grace periods provided
          for  therein,  and at all times take all action necessary to maintain
          the security  interests and charges provided for under or pursuant to
          this Agreement and  the  Security  Documents  to  which it is a party
          as  valid  and  perfected  security  interests  and  charges  on  the
          property  intended  to  be  covered  thereby  having  priority  as
          contemplated thereby and supply all information to the Agent which is
          reasonably  necessary  for  such  maintenance;

     (j)  Notices  of  Official Body  Action.  Promptly  notify  the  Agent  in
          writing of any notice of any action by any Official Body or any
          action, suit, proceeding or

<PAGE>

          investigation  (or  any  basis therefor) pending, or to the knowledge
          of  the Borrower threatened, against or affecting the Borrower before
          any Official Body, where the amount  involved  exceeds E 5,000,000 or
          the equivalent amount in another currency;

     (k)  Pari  Passu.  Ensure  that its Obligations under the Credit Documents
          do  and  will  rank  at  least pari passu with its present and future
          obligations under the  MFC  Loan  Agreement;

     (l)  Insurance.  Cause  each  of ZPR & Co. and ZSG to  maintain  insurance
          with financially  sound  and  reputable  insurers with respect to its
          assets  of  an insurable  nature  against  such  risks  and  in  such
          amounts  as  are  normally maintained  by  Persons  carrying  on  the
          same or a similar class of business;

     (m)  Environmental  Laws.  Cause each of ZPR & Co. and ZSG to comply with:
          (i)  all  applicable  Environmental  Laws;  and  (ii)  the  terms and
          conditions  of  all Environmental Licenses applicable to any of them,
          in each case, where failure to do  so  could  reasonably  result in a
          Material  Adverse  Effect;

     (n)  Waivers.  Promptly  provide  to  the  Agent  copies  of  any  waivers
          provided by the Senior Lenders and/or any amendments made as the case
          may be, in respect of  any  obligations of ZPR & Co. and/or ZSG under
          the Senior Credit Agreements;

     (o)  Parallel  Reporting. Promptly provide to  the  Agent  copies  of  any
          reports  or  financial  statements  or information provided to any of
          the  Senior  Lenders  under  the  Senior  Credit  Agreements  not
          otherwise  provided  hereunder;

     (p)  Further  Assurances.  At  its  cost  and expense, upon request by the
          Agent, duly  execute  and  deliver,  or cause to be duly executed and
          delivered, to  the Agent,  such  further instruments and do and cause
          to  be  done  such  other  acts  as may be necessary or proper in the
          reasonable opinion of the Lenders to carry out more  effectually  the
          provisions  and  purposes  of  this  Agreement  and  the other Credit
          Documents;

     (q)  Shareholders Agreement.  (1) Within ninety (90) days of the  date  of
          this Agreement,  settle  upon  the  terms of a shareholders agreement
          or equivalent documentation  in  form  and  substance satisfactory to
          the Agent reflecting the terms  of  the  Shareholders Agreement Heads
          of  Terms;

          (2)     Upon  the  occurrence  of an Event of Default and the Lenders
          realizing  upon  their  Security  and  committing  to  sell  all or a
          portion  of  the  Pledged  Securities  to  a  third  party  purchaser
          through  public  auction,  or  otherwise,  enter  into a shareholders
          agreement or equivalent documentation upon the agreed terms with such
          third  party  purchaser;

<PAGE>

     (r)  Maintenance  of  Special  Purpose  Vehicle  Status.  Ensure that each
          Intermediate  Holding  Company  and  DP  Holdings:

          (1)  maintains  its  existence as a limited liability  company  under
               German Law  (Gesellschaft  mit  beschrankter  Haftung),  duly
               organised, validly existing and in good standing  under the Laws
               of Germany and does not:

               (i)     enter  into any Amalgamation or demerger or amend its
                       Charter Documents in  any  manner;

               (ii)    take  any  action  in  furtherance  of  dissolution,
                       liquidation or any scheme  of  voluntary  insolvency,
                       reorganisation  or  the  like;

               (iii)   have  any  Subsidiary  other  than  a Group Company, DP
                       or a Permitted Subsidiary,  which  is its Subsidiary as
                       at  the date  of  this  Agreement;

               (iv)    issue any further capital stock after the date  of this
                       Agreement other than  ordinary  shares;  or

               (v)     engage  in  any  business  or  activity other than: (a)
                       acting  as a special purpose  vehicle  for  subscribing
                       for  and holding shares  in  and advancing Shareholders
                       Loans  to  and holding Shareholders  Loans in the Group
                       Company, or DP,  directly owned  by  it  as at the date
                       hereof;  (b)  performing  its  Obligations  under  any
                       Credit  Document  to which it is a party; (c) complying
                       with its obligations under the ZPR Senior Security; and
                       (d)  holding  its  interests  in,  and  engaging  in
                       transactions  in  the  ordinary  course  of  business
                       with, Group Companies, DP and  Permitted  Subsidiaries;

          (2)  does  not  have  any  assets  other  than:

               (i)     its  rights  under  the  Credit  Documents  and the
                       documents evidencing the Shareholders  Loans;

               (ii)    the  authorizations  referred  to in subparagraph (5)
                       below; or

               (iii)   the  shares  of  the  Group  Company, DP or Permitted
                       Subsidiaries owned by it  as  at  the  date  of  this
                       Agreement;

          (3)  does  not  have  any obligations or liabilities of any nature
               whatsoever other  than:

               (i)     liabilities  arising  in  respect of the Loan and its
                       other Obligations under  the  Credit  Documents;

<PAGE>

               (ii)    obligations  in  respect  of  Taxes  and fees necessary
                       for  maintenance  of  its  corporate  existence  and
                       obligations  imposed  by  Law  in  Germany;

               (iii)   obligations  under  any  contract  referred  to  in
                       subparagraph (4)(iv), (v)  or  (vi)  below;  or

               (iv)    obligations  arising  under  the  ZPR  Senior  Security;

          (4)  is  not party to  any  contract, agreement or arrangement other
               than:

               (i)     the  Credit  Documents  to  which  it  is  a  party;

               (ii)    documents  evidencing  Shareholders  Loans;

               (iii)   contracts  or  arrangements  necessarily  incidental  to
                       maintenance of its existence  and  its  role  as  a
                       special  purpose  vehicle;

               (iv)    contracts  under  which Excluded Payments are made and
                       which  contain  no  other  material  obligation  other
                       than that which is remunerated by the relevant Excluded
                       Payments;

               (v)     contracts,  agreements  or  arrangements  with  Group
                       Companies,  DP and Permitted  Subsidiaries;  and

               (vi)    documents  relating  to the ZPR Senior Security to which
                       it is a party;

          (5)  obtains,  maintains  and  complies  with  the  terms  of  all
               authorizations required under any Law or regulation to enable it
               to  perform  its  Obligations  under,  or  for  the  validity or
               enforceability of, the Credit Documents to which it  is  a party
               and any  documents  evidencing  Shareholders  Loans;

          (6)  complies in all  material  respects  with  all  Laws  and
               regulations applicable  to  it;  and

          (7)  pays  all  its Taxes when due, except to the extent the relevant
               taxes are  being contested in good faith and by appropriate means
               and  as  to which reserves reasonably  regarded  as adequate have
               been established in accordance with applicable generally accepted
               accounting principles;  and

     (s)  Additional  Reporting  of  Indebtedness.  Deliver to the Agent written
          notice  of  the  incurrence  of  any  Debt  or  Debts  in  excess,  in
          aggregate, of E 10,000,000,  following the incurrence thereof, setting
          out in reasonable detail the  particulars  of  such  Debt.

<PAGE>

     Section  8.2     Negative  Covenants.  So  long  as  any  Lender  has  any
Commitment under this Agreement and until the Obligations are paid and satisfied
in  full, the Borrower shall not (or if applicable shall not permit the relevant
action  to  take  place):

     (a)  Change  in  Nature  of Business.  Change the nature of the Business in
          any  material  respect  or  make  or  permit  to  exist  any  change,
          condition, event or occurrence  in  or  with  respect to the nature of
          the Business which when taken with all other  conditions,  events  or
          occurrences could reasonably be expected to have  a  Material  Adverse
          Effect;

     (b)  Mergers,  etc.  Enter  into  or  agree  to  enter into any transaction
          (whether  by  way of  reconstruction,  reorganization,  consolidation,
          combination, amalgamation, merger, transfer, sale, lease, modification
          or otherwise) whereby: (i)  other  than  pursuant  to  an  Asset Sale,
          all  or  substantially  all of the Borrower's undertaking, property or
          assets will become the property of any other Person  or the continuing
          corporation  resulting  therefrom;  (ii)  there would be permitted any
          change in the direct or indirect Control  of  the  Borrower;  or (iii)
          the  corporate  structure  of  the  Borrower  affecting  the  Group
          Companies would be modified,  changed,  altered  or  amended,  in  any
          manner, from that set out in Schedule  "F"  hereto;

     (c)  Distributions.  Make,  allow  or  cause  any  payment  on account of a
          redemption,  distribution  or  return of capital  (including,  without
          limitation,  cash  dividends  or any repayment of Shareholder Loans or
          cash  distributions)  to  any  of its shareholders other than non-cash
          dividends or distributions comprised solely  of  equity  securities of
          the  Borrower;

     (d)  Margin  Stock.  Engage  in  the  business  of  extending  credit  for
          the purpose  of  purchasing  or  carrying  margin  stock  (within the
          meaning  of  Regulations  U and X issued by the Board of Governors of
          the United Sates Federal Reserve  System),  and  no  portion  of  any
          Loan  will  be  used,  directly or indirectly,  to  purchase or carry
          Margin  stock  or to  extend  credit  to  others for the  purpose  of
          purchasing  or  carrying  margin  stock;

     (e)  Investment Company Act.  Either by act or  omission,  become  an
          "investment  company"  or  a  company  "controlled" by an "investment
          company",  within  the  meaning  of  the  United  States  Investment
          Company Act of 1940, as amended;

     (f)  ERISA.  (1)  Adopt, maintain, sponsor, participate  in  or  incur any
          liability  or obligation under or to any Plan or incur any obligation
          to  provide  post-retirement  benefits  to  any  Person nor allow any
          ERISA Affiliate to do so; or

          (2)     Take  any  action  or  omit  to take any action or permit any
          Subsidiary or ERISA  Affiliate  to  take any action or omit  to  take
          any  action  with  respect to any  Plan  that  might  result  in  the
          imposition  of a Lien or other security interest  on  any property of
          the  Borrower or any Subsidiary or otherwise have a Material  Adverse
          Effect;

<PAGE>

     (g)  No Transfers.  Sell, assign or transfer any shares or other interests
          in  ZPR  Holding,  SPB, ZPR & Co. or SPH or any Shareholders Loans or
          allow  any  sale,  assignment  or  transfer to any third party of any
          such interest or Shareholders Loans,  other  than  pursuant  to Asset
          Sales;

     (h)  Negative  Pledge.  Allow  to be created or permit to subsist any Lien
          on any  of  the assets of the Group Companies or DP Holdings,  except
          for: (i) Liens arising under the  Credit  Documents;  (ii)  Permitted
          Liens;  or  (iii)  Liens arising under  or  pursuant  to  the  Senior
          Credit  Agreements;

     (i)  Transactions Similar to  Security.  Allow  any  Intermediate  Holding
          Company  or  DP Holdings  to  sell,  transfer or otherwise dispose of
          any of its assets on terms  whereby  it  is  or  may  be leased to or
          re-acquired or acquired by the Borrower or any Subsidiary or  any  of
          its  related  entities  in  circumstances  where the  transaction  is
          entered into primarily as a method of raising finance or of financing
          the acquisition of an asset unless such transaction would result in a
          Permitted  Lien;

     (j)  Incurrence of Debt.  Permit any of the Group Companies or DP Holdings
          to incur  any additional Debt in excess E 5,000,000, separately or in
          the aggregate, except  under  the  Senior  Credit  Agreements  and/or
          pursuant to any currency hedging,  currency swap, interest rate swap,
          cap  or  collar  arrangement  or other swap arrangement, from time to
          time in relation to the Senior Credit Agreements;

     (k)  Related Party Transactions.  Enter into with any Group Company, DP or
          DP  Holdings  or  allow any Affiliate that is not a Group Company, DP
          or  DP Holdings to  enter  into  with any  Group Company,  DP  or  DP
          Holdings  any  transaction  under  which the aggregate payments to be
          made or the fair market value of the property which  is  the  subject
          of  the  transaction is greater than E 1,000,000, except pursuant  to
          the  Marketing  and  Sales  Agreement,  unless:  (i)  in respect  of
          transactions  that  involve  more  than E 1,000,000  and  up  to
          E 3,000,000, such transaction(s)  are undertaken at fair market value
          on an arm's-length basis, as determined  by the board of directors or
          other  governing  body  of  the Borrower or the  Affiliate which is a
          party to such transaction in good faith, and evidenced by  resolution
          thereof filed with the Agent, and provided that in respect of any
          transaction  which involves more than E 3,000,000, such determination
          shall  be based  upon  the written opinion of a qualified independent
          appraiser, valuator, accounting  firm  or  investment  bank  prepared
          contemporaneously  with  such transaction,  which  opinion  shall  be
          attached  to  the approving resolution;

     (l)  No  Amendments.  Permit  any  amendment  to  be  made  to  the  ZPR
          Credit Agreement  or  the  ZSG  Project Finance Loan Agreement which
          could result in an obligation  to create additional security in favor
          of the ZPR Senior Lenders or the  ZSG  Senior  Lenders  over  a
          Shareholders  Account;  and

<PAGE>

     (m)  Shareholder  Accounts.  Pledge  or  allow  any  Group  Company or DP
          Holdings to  pledge  or  otherwise  deal  with  any  Shareholder
          Account  other  than in accordance  with  Section  4.5(1)(iii)
          hereof.

                                   ARTICLE 9.
                                EVENTS OF DEFAULT

     Section 9.1     Events of Default.  An Event of Default shall have occurred
and  be  continuing  if:

     (a)  Payment  of Principal.  The  Borrower shall fail to pay the  Principal
          Sum or  any  portion  thereof  outstanding  hereunder  when  the  same
          becomes due and payable  and  such  failure  shall  remain  unremedied
          for a period of five (5) Business  Days;

     (b)  Payment  of  Interest,  Fees,  etc.  The  Borrower shall fail to  pay
          any Interest  hereunder  when the same becomes due and payable or the
          Borrower shall fail  to  pay  any fees, expenses or any other amounts
          hereunder when the same becomes  due  and  payable,  and  in any such
          case,  the failure shall remain unremedied  for  a period of ten (10)
          Business  Days;

     (c)  Representations  and  Warranties  Incorrect.  Any  representation  or
          warranty  made  by  the  Borrower  herein  or  in  any  other  Credit
          Document or any representation,  warranty  or  certification made  by
          the  Borrower (or any of its officers)  in  any certificate or  other
          writing delivered in connection with any of  the Credit Documents, or
          any  representation  or  warranty  deemed to be made by the  Borrower
          provided herein or therein, shall prove to  have  been  incorrect  in
          any  respect  when  made  or  deemed to be made or repeated where the
          underlying event  which  gives rise to such representation,  warranty
          or certification being incorrect,  could  reasonably  be  expected to
          have a Material Adverse Effect;

     (d)  Failure  to  Perform  Certain  Covenants. The  Borrower shall fail to
          observe  any  of  the  negative  covenants  contained  in  the Credit
          Documents and  to  be  observed  by  the  Borrower including, without
          limitation, in Section 8.2 of this  Agreement;

     (e)  Failure  to  Perform Other  Covenants.  Except as otherwise provided,
          the  Borrower  shall  fail  to  perform  or  observe  any other term,
          covenant  or  agreement  contained in any of the Credit Documents and
          applicable to the Borrower and such failure  shall  remain unremedied
          for  thirty (30) Business Days, if such term, covenant  or  agreement
          is reasonably capable of being remedied in such period;

     (f)  Failure  to  Pay Debts to Third Parties.  The Borrower shall fail  to
          pay  the  principal  of  or premium or interest on any Debt which  is
          outstanding in an aggregate principal amount in excess of E 5,000,000
          (or  the  equivalent  amount  in  any  other  currency) when the same
          becomes  due  and  payable  (whether by scheduled maturity,  required
          prepayment,  acceleration,  demand  or  otherwise)  and

<PAGE>

          such  failure  shall  continue after  the applicable grace period, if
          any,  specified in the  agreement  or  instrument  relating  to  such
          Debt;  or  any other  event  shall  occur  or  condition shall exist,
          and  shall  continue  after  the  applicable  grace period,  if  any,
          specified  in the agreement or instrument relating to any such  Debt,
          if the effect of  such  event  or  condition  is  to  accelerate,  or
          to  permit the acceleration  of, the maturity of Debt of the Borrower
          which  is  outstanding  in  an aggregate  principal amount  exceeding
          E 5,000,000 (or the equivalent amount in  any  other  currency);

     (g)  Failure  to  Draw.  ZSG  shall  fail  to  complete  the  initial draw
          available  to  it  under  the  ZSG  Project  Finance  Loan  Agreement
          within seven (7) Business Days  of  the  Advance  Date;

     (h)  Event  of  Bankruptcy.  There  shall  exist  any  Event of Bankruptcy
          in respect  of  the  Borrower;

     (i)  Judgments.  Any  judgment or order for the payment of money in excess
          of E 5,000,000  in respect of the Borrower shall be rendered  against
          the  Borrower  and  either:  (i)  enforcement  proceedings shall have
          been commenced by any creditor upon such  judgment  or order; or (ii)
          there  shall  be  any period of thirty (30) consecutive  days  during
          which a stay of enforcement of such judgment or order, by  reason  of
          a  pending  appeal  or  otherwise,  shall  not  be  in  effect;

     (j)  Unenforceability.  This  Agreement  or any  Credit Document shall, at
          any  time  after  execution  and  delivery, and for any reason (other
          than in accordance with  the  respective terms or with the  unanimous
          consent  of  the  Lenders),  cease to  be in full force and effect or
          shall  be  declared  to  be  null  and  void,  or  the  validity  or
          enforceability of any thereof shall be contested by the  Borrower  or
          any  other  party  thereto,  or  the Borrower or any other such party
          shall  deny  that  it  has  any  further  liability  or  obligation
          thereunder;

     (k)  Cross  Default.  ZPR & Co. and/or ZSG, as the case may be, shall fail
          to pay  the  principal  of,  premium or interest or any other amounts
          under the ZPR Credit  Agreement  and/or  the ZSG Project Finance Loan
          Agreement when the same becomes due and payable (whether by scheduled
          maturity, required prepayment, demand  or  otherwise) resulting in an
          acceleration  of  the obligations of ZPR & Co.  and/or  ZSG,  as  the
          case  may  be,  under  the  applicable Senior Credit Agreement;

     (l)  Challenge  to  Security.  Any of the Security shall at any time after
          the execution  and  delivery  of  the  relevant Security Document and
          for  any reason  (other  than  with  the  unanimous  consent  of  the
          Lenders)  cease  to  constitute a valid,  subsisting  and  perfected
          security  interest or charge in respect of the assets and  properties
          referred  to therein or cease to  rank in  priority or in  the manner
          contemplated  herein  or  in  the  relevant  Security Document  other
          than by reason  of  the  act or omission of the Agent or the Lenders;

<PAGE>

     (m)  Cessation of business.  ZPR and/or ZSG ceases, or threatens to cease,
          to  carry  on  all  or  a substantial part of its business, excluding
          any such event flowing  from  an  Asset  Sale;

     (n)  Unlawfulness.  It is or becomes unlawful for the Borrower to perform
          any of  its  Obligations  under  the  Credit  Documents;  or

     (o)  ERISA.  Any  event  or  condition that presents a material risk that
          the Borrower  or  any ERISA Affiliate may incur a material liability
          to  a Plan or to the  United  States  Internal  Revenue  Service  or
          to  the United States Pension benefit  guaranty  corporation;  or an
          "accumulated  funding  deficiency"  (as  that  term  is  defined  in
          Section  412 of the United States Internal Revenue Code of 1986,  as
          amended,  or Section 302 of ERISA), whether or not waived, by reason
          of the  failure  of the Borrower or any ERISA Affiliate  to  make  a
          contribution to a Plan  where  such  event  could  reasonably  have
          a  Material  Adverse  Effect.

Upon  the  happening  of  an  Event  of  Default  described  in  Section  9.1(h)
(Bankruptcy)  all  Commitments will immediately terminate and the Loan, together
with accrued Interest, and all other amounts accrued under the Credit Documents,
will be immediately due and payable.  On and any time after the occurrence of an
Event of Default (other than an Event of Default described in Section 9.1(h) the
Agent  may,  and  shall if so directed by the Majority Lenders, by notice to the
Borrower:  (i)  declare  the Obligations under the Agreement to be forthwith due
and  payable,  whereupon the same shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are  expressly  waived  by the Borrower; and (ii) take all steps and proceedings
as,  in the opinion of the Agent are necessary or desirable to preserve, protect
or  enforce  the  Security.

     Section 9.2     Cure of Default.  The Agent shall have the right, but shall
not  be  obligated,  from time to time while a Default or Event of Default shall
have  occurred  and remain continuing, to take in its name or in the name of the
Borrower or otherwise such action as it shall consider necessary or desirable to
cure  or  rectify such Default or Event of Default and, in so doing, neither the
Agent  nor  the  Lenders  shall  incur any liability to the Borrower if any such
action taken by the Agent or the Lenders or on the Borrower's behalf shall prove
to be in whole or in part inadequate or invalid and the Borrower shall indemnify
and  hold  the  Agent and the Lenders harmless from and against any loss, costs,
liability  or  expense  (including,  without  limitation,  reasonable  fees on a
solicitor and a solicitor's own client basis and disbursements of counsel) paid,
suffered  or  incurred  by  the  Agent or the Lenders in connection therewith or
arising  therefrom.

     Section  9.3     Additional  Provisions.  (1)     Notwithstanding  anything
else set out in this Article 9, in the event that the Obligations are not repaid
on  the  Extended Maturity Date and a Second Extension Request has not been made
by  the  Borrower and accepted by the Agent, (a "Payment Default"), prior to the
exercise of any remedy by the Agent hereunder, the Borrower and the Agent shall,
within  thirty  (30) days following such Payment Default, agree upon a course of
action  pursuant  to  which  the Borrower will sell sufficient assets to pay the
Obligations  to  the

<PAGE>

Lenders,  provided  that,  if no such agreement is reached within the prescribed
time, subject to Subsection (2), the Lenders may exercise all  of  their  rights
in  and  to  the  Security  hereunder.

     (2)     The  Agent and Lenders acknowledge and agree that:  (i) any present
or  future  right  that the Agent and/or the Lenders may otherwise have, or have
had,  hereunder or pursuant to the Security to sell, assign, transfer or realize
upon  any  interest  in  ZPR pursuant to this Agreement or the Security shall be
limited  to  the  sale  of  49% of the shares thereof or interest therein unless
additional sales are consented to in writing by the ZPR Senior Lenders; and (ii)
any right that they may otherwise have to sell any interest in ZSG arising under
the  Security  shall be limited to such percentage thereof which is consented to
by  the  European  Commission  and,  in  any event, to no more than 12.5% of the
shares  thereof  unless  additional sales are consented to in writing by the ZSG
Senior  Lenders.

     (3)     Notwithstanding  Subsection  (2) hereof, the Borrower covenants and
agrees  that  if, following an Event of Default, the Agent reasonably determines
that  it must complete sales of a greater portion of the Borrower's interests in
ZPR  and/or  ZSG  than provided for and allowed under Subsection (2) hereof (the
"Permitted  Sales")  at  the  request of the Agent, the Borrower will co-operate
with the Lenders and make reasonable commercial efforts to obtain the consent of
the  applicable  Senior  Lenders to sales of the Borrower's interests in ZPR and
ZSG  as  applicable,  in  addition  to  the  Permitted  Sales, provided that the
Borrower  shall  not  be  obliged  to incur any expense or disburse any funds in
connection  therewith.

                                   ARTICLE 10.
                                    THE AGENT

     Section 10.1     Authorization and Action.  Each Lender hereby appoints and
authorizes  the Agent to take such action as agent on its behalf and to exercise
such  powers  under  this  Agreement  as are delegated to the Agent by the terms
hereof,  together  with such powers as are reasonably incidental thereto and the
Lenders  and  the  Borrower  acknowledge  that  all  instructions, decisions and
requests  for  decisions not otherwise provided for herein shall be made through
the  Agent.  As  to  any  matters  not  expressly provided for by this Agreement
(including,  without  limitation, enforcement or collection of the Obligations),
the  Agent  shall not be required to exercise any discretion or take any action,
but  shall  be  required  to  act  or to refrain from acting (and shall be fully
protected  in  so acting or refraining from acting) upon the instructions of the
Majority  Lenders  and  such  instructions  shall  be  binding upon all Lenders;
provided, however, that the Agent shall not be required to take any action which
exposes  the  Agent to personal liability or which is contrary to this Agreement
or  applicable  Law.  The Agent agrees to give each Lender prompt notice of each
notice  given  to  it  by  the Borrower pursuant to the terms of this Agreement.

     Section  10.2     Agent  as  Lender.  With  respect  to its Commitment, any
Lender  who  is  also  the Agent hereunder shall have the same rights and powers
under  this Agreement as any other Lender hereunder and may exercise the same as
though  it  were not the Agent; and the term "Lender" or "Lenders" shall, unless
otherwise  expressly  indicated, include the Agent in its individual capacity as
Lender.  The  Agent  and its Affiliates may accept deposits from, lend

<PAGE>

money to,  act  as  trustee  under  indentures  of,  accept  investment  banking
engagements  from  and  generally  engage  in  any  kind  of  business  with the
Borrower, any of its Subsidiaries  and  any  Person who may do business with  or
own securities of the Borrower or any such Subsidiary, all as if it were not the
Agent and without any duty  to  account  therefor  to  the  Lenders.

     Section 10.3       Majority Lenders.  The Agent and its Affiliates shall at
all  times,  collectively,  be  Majority  Lenders  hereunder.

     Section 10.4       Agent's Reliance, Etc.  Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted  to  be  taken by it or them under or in connection with this Agreement,
except  for  its  or  their own gross negligence or willful misconduct.  Without
limitation  of the generality of the foregoing, the Agent:  (i) may consult with
legal  counsel  (including  counsel  for  the  Borrower),  independent  public
accountants  and  other  experts  selected by it and shall not be liable for any
action  taken  or omitted to be taken in good faith by it in accordance with the
advice  of  such  counsel,  accountants  or  experts;  (ii) makes no warranty or
representation  to any Lender and shall not be responsible to any Lender for any
statements,  warranties  or representations (whether written or oral) made in or
in connection with this Agreement; (iii) shall not have any duty to ascertain or
to inquire as to the performance or observance of any of the terms, covenants or
conditions  of  this  Agreement  on  the  part of the Borrower or to inspect the
property  (including  the  books and records) of the Borrower; (iv) shall not be
responsible  to  any  Lender  for  the  due  execution,  legality,  validity,
enforceability,  genuineness,  sufficiency  or  value  of,  or the perfection or
priority  of  any  Lien or security  interest created or purported to be created
under  or in connection with, this Agreement or any other instrument or document
furnished  pursuant hereto; and (v) shall incur no liability under or in respect
to this Agreement by acting upon any notice, Authorization, certificate or other
instrument  or  writing (which may be by telecopier, telegram or telex) believed
by  it  to  be  genuine  and  signed  or  sent  by  the proper party or parties.

     Section  10.5  Lender  Credit  Decisions.  Each Lender acknowledges that it
has,  independently  and without reliance upon the Agent or any other Lender and
based  on  Financial  Statements  referred  to  in Section 6.1(e) and such other
documents  and  information  as  it  has deemed appropriate, made its own credit
analysis  and  decision  to  enter  into  this  Agreement.  Each  Lender  also
acknowledges  that it will, independently and without reliance upon the Agent or
any  other  Lender  and based on such documents and information as it shall deem
appropriate  at the time, continue to make its own credit decisions in taking or
not  taking  action  under  this  Agreement.

     Section  10.6  Agent  Agreements.  From  time  to time, the Agent may enter
into, execute and deliver agreements or instruments supplemental hereto with the
Borrower  for  the  purposes  of:  (i)  adding  to  the  provisions  hereof such
additional  covenants  and  enforcement provisions as are, in the opinion of the
Agent,  necessary  or  desirable  and  not  prejudicial  to the interests of the
Lenders; (ii) making such provisions not inconsistent with this Agreement as may
be  necessary  or  desirable and not prejudicial to the interests of the Lenders
with  respect  to matters or questions arising hereunder; (iii) adding, altering
or  modifying  the  provisions hereof, including relieving the Borrower from any
Obligations, conditions or restrictions herein contained provided such addition,
alteration,  modification  or relief shall be operative or become effective only
if,  in  the

<PAGE>

opinion  of  the Agent, such addition, alteration, modification or relief  in no
way prejudices any of the rights of the Lenders or the Agent (and the  Agent may
in  its  sole  discretion  decline  to enter into any such addition, alteration,
modification  or  relief  which,  in  its  opinion,  may  not  afford  adequate
protection  to  it when same becomes  operative); and (iv) for any other purpose
not  inconsistent  with  the  terms  of  this  Agreement,  including,  without
limitation, the  correction  or  rectification of any ambiguities, defective  or
inconsistent provisions, errors, mistakes or omissions herein provided where, in
the  opinion of the Agent, the rights of the Agent and the Lenders are in no way
prejudiced  thereby.

     Section  10.7  Indemnification.  The  Lenders  agree to indemnify the Agent
(to  the  extent  not  reimbursed  by  the  Borrower), rateably according to the
respective  principal  amount  of  the  Loan then held by each of them (or if no
principal amount is outstanding, rateably according to the respective amounts of
their  Commitments),  from  and  against  any  and all liabilities, obligations,
losses,  damages,  penalties,  actions,  judgments,  suits,  costs,  expenses or
disbursements  of  any kind or nature whatsoever (including, without limitation,
those arising in an action brought by a Lender) that may be imposed on, incurred
by,  or asserted against the Agent in any way relating to or arising out of this
Agreement  or any other Credit Document, or action taken or omitted by the Agent
under  this  Agreement  or  any  other  Credit  Document  (collectively,  the
"Indemnified Costs"), provided that no Lender shall be liable for any portion of
the  Indemnified  Costs  resulting  from the Agent's gross negligence or willful
misconduct.  Without  limitation  of  the  foregoing,  each  Lender  agrees  to
reimburse  the  Agent  promptly  upon  demand  for  its  rateable  share  of any
out-of-pocket  expenses  (including  counsel  fees)  incurred  by  the  Agent in
connection  with  the  preparation,  execution,  delivery,  administration,
modification,  amendment  or  enforcement  (whether  through  negotiations,
legal proceedings or  otherwise)  of,  or  legal  advice in respect of rights or
responsibilities  under,  this  Agreement,  to  the extent that the Agent is not
reimbursed for such expenses by the Borrower.  In the case of any investigation,
litigation or proceeding giving rise to any Indemnified Costs, this Section 10.7
applies  whether  any such investigation, litigation or proceeding is brought by
the  Agent,  any  Lender  or  a  third  party.

     Section  10.8  Sharing  of  Payments.  If  any  Lender  shall  obtain  any
Payment (whether  voluntary,  involuntary, through the exercise of any right of
set-off,  or  otherwise)  on account of the Obligations owing to it (other than
pursuant  to Sections  3.3 or 11.8) in excess of its rateable share of payments
on  account of the  Obligations  obtained  by  all  of the Lenders, such Lender
shall  forthwith  purchase  from  the  other Lenders such participations in the
Obligations  owing  to  them  as  shall  be  necessary to cause such purchasing
Lender  to share the excess payment  rateably  with  each  of  them;  provided,
however,  that if all or any portion  of  such  excess  payment  is  thereafter
recovered from such purchasing Lender,  such purchase from each Lender shall be
rescinded  and such  Lender shall repay to the purchasing Lender  the  purchase
price to the extent of such recovery together  with an  amount  equal  to  such
Lender's  rateable  share (according to the proportion  of  (i)  the  amount of
such  Lender's required repayment to (ii) the total  amount  so recovered  from
the purchasing Lender) of any interest or other amount  paid  or payable by the
Purchasing  Lender in respect of the total amount so  recovered.  The  Borrower
agrees that any Lender purchasing a participation from  another Lender pursuant
to this Section 10.8 may, to the fullest  extent  permitted  by  Law,  exercise
all  of its rights of payment (including right of set-off)

<PAGE>

with  respect to such participation as fully as if such Lender were the direct
creditor  of  the  Borrower  in  the  amount  of  such  participation.

     Section  10.9  Successor Agent.  The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower and may be removed at any
time  with  or without cause by the Majority Lenders.  Upon any such resignation
or  removal,  the  Majority  Lenders shall have the right to appoint a successor
Agent.  If  no  successor  Agent  shall  have  been so appointed by the Majority
Lenders, and shall have accepted such appointment, within thirty (30) days after
the  retiring  Agent's  giving of notice of resignation or the Majority Lenders'
removal  of  the  retiring  Agent, then the retiring Agent may, on behalf of the
Lenders,  appoint  a successor Agent, which shall be a commercial bank organized
under  the  Laws  of  the  United  States of America or of any State thereof and
having  a  combined  capital  and  surplus  of  at  least U.S.$50,000,000.  Upon
acceptance  of  any  appointment  as  Agent hereunder by a successor Agent, such
successor  Agent  shall  thereupon  succeed  to  and  become vested with all the
rights, powers, discretion, privileges and duties of the retiring Agent, and the
retiring  Agent  shall  be discharged from its duties and obligations under this
Agreement.  After  any  retiring  Agent's  resignation  or  removal hereunder as
Agent,  the  provisions  of this Article 10 shall inure to its benefit as to any
actions  taken  or  omitted  to  be  taken  by  it while it was Agent under this
Agreement.

                                   ARTICLE 11.
                                  MISCELLANEOUS

     Section  11.1     Records.  The  unpaid  amount  of the Loan and the unpaid
Interest  accrued  thereon  shall at all times be ascertained from the books and
records  of  the  Agent, which shall be conclusive absent manifest error, fraud,
dishonesty or improper conduct, and a certificate of any officer of the Agent as
to  such  records  shall  be  conclusive  evidence  of  such  records.

     Section  11.2     Brokerage.  The  Agent  and the Lenders represent that it
and they have not engaged any broker in connection with this Agreement.  Neither
the  Agent  nor  the  Lenders  shall be liable in any way for the payment of any
brokerage fees or commissions to any broker or other Person entitled or claiming
to  be entitled to same in connection herewith and the transactions contemplated
hereby,  and  the Borrower by acceptance hereof agrees to hold the Agent and the
Lenders  harmless from all claims for brokerage fees or commissions which may be
made  in  connection  with  the  transactions  contemplated  hereby.

     Section  11.3     Lender  Approval,  Amendments,  etc.  (1)      Except  as
expressly  provided otherwise herein and subject to Section 11.3(2) no amendment
or  waiver  of  any  provision  of  this Agreement or of any of the other Credit
Documents,  nor any consent to any departure by the Borrower therefrom, shall in
any  event  be  effective  unless the same shall be in writing and signed by the
Majority Lenders, and then such waiver or consent shall be effective only in the
specific  instance  and  for  the  specific  purpose  for  which  given.

     (2)     No amendment, waiver or consent shall, unless in writing and signed
by  all  the  Lenders: (i) subject any Lender to any additional obligation; (ii)
reduce  the  principal of, or

<PAGE>

Interest on, the Loan or any fees or other amounts due hereunder; (iii) postpone
any date fixed for any payment of principal of, or Interest on, the Loan or any
fees  or  other  amounts  due  hereunder; (iv) except as provided  for  in  this
Agreement, change the number of Lenders required for the Lenders  or any of them
to take any action hereunder; or (v) amend this Section 11.2.  The  granting  of
such amendment, waiver or consent shall be in the sole discretion of each Lender
and may be arbitrarily declined or withheld by such Lender.

     Section  11.4     Notices,  etc.     (1)     Except  as otherwise expressly
provided  herein,  all notices, requests, demands, directions and communications
by  one  party  to  the  other  shall  be  sent by facsimile or similar means of
recorded  communication  or  hand  delivery,  and  shall  be effective when hand
delivered  or,  in  the  case  of  facsimile  or  similar  means  of  recorded
communication, when received.  All such notices shall be given to a party at its
address given on the signature page of this Agreement, or in accordance with any
unrevoked  written  direction  from  such party to the other party in accordance
with  this  Section  11.4(1).  All  notices,  demands  or  requests to or of the
Borrower  shall  be  copied  to:

<PAGE>

               Sangra,  Moller
               1000  Cathedral  Place
               925  West  Georgia  Street
               Vancouver,  B.C.  V6C  3L2

               Attention:  H.S.  Sangra
               Facsimile  No.:  (604)  669-8803

     (2)     Except as otherwise provided hereunder, all deliveries of Financial
Statements  and  other  documents  to  be  made  by  the Borrower to the Lenders
hereunder  shall  be  made  by  making delivery of such Financial Statements and
documents directly to the Agent at its address set out on the signature pages of
this  Agreement,  or  to  such  other address as the Agent may from time to time
notify to the Borrower.  All such deliveries shall be effective only upon actual
receipt.

     Section  11.5     Reimbursement  for  Certain  Expenses.  (1)  The Borrower
shall  pay  or  cause  to be paid and shall indemnify and save the Agent and the
Lenders  harmless  against  liability  for  the  payment  of  all  reasonable
out-of-pocket  expenses  relating  to the Loan, as agreed to in principal by the
Borrower,  including,  without  limitation:

     (a)  counsel,  assessment  or  compliance  review  fees  and  disbursements
          (including  legal  fees  and  disbursements  on  a  solicitor  and  a
          solicitor's  own client  basis) incurred  by the Agent and the Lenders
          in connection with: (i) the development,  preparation,  execution  and
          interpretation  of  this Agreement and the other  Credit  Documents or
          any agreement or instrument contemplated hereby or thereby  subject to
          the  limitation  set  out in Section 11.5(2); (ii) on-site inspections
          by the Agent or its representatives required in  connection  with  the
          enforcement  of  the  Credit Documents; (iii) advice of counsel to the
          Agent and the Lenders with respect to the administration of the  Loan,
          the  Credit Documents or any  transaction  contemplated  hereunder  or
          thereunder; (iv)  the enforcement or preservation  of rights under  or
          the refinancing, renegotiation or  restructuring  of  the  Obligations
          under  this  Agreement  or  any  Obligations  under  the  other Credit
          Documents or  any  agreement  or  instrument  contemplated  hereby  or
          thereby; (v)  stamp  taxes  and custodian fees incurred and chargeable
          in connection with the  Pledged  Securities  if  charged to the  Agent
          by  a  third  party;  or  (vi)  any requested  amendments,  waivers or
          consents  pursuant  to  the  provisions  hereof or of the other Credit
          Documents,  including such expenses as may be incurred by the Agent or
          a  Lender  in  the  collection  of  the Obligations or any litigation,
          proceeding,  dispute  or  so-called  "work-out"  in  any  way relating
          to  the Obligations  or  the  Credit  Documents;  and

<PAGE>

     (b)  all such  expenses  in  connection  with:  (i)  the Borrower's failure
          to complete the  Loan  or to make any payment, repayment or prepayment
          on  the  date required  hereunder  or  specified  by  it in any notice
          given  hereunder;  (ii)  the  Borrower's  failure  to  pay  any amount
          required to be made by it including, without  limitation, any Interest
          or  fees, due under any Credit Document on its due  date; or (iii) the
          Borrower's failure to give any notice required to be given  by  it  to
          the  Agent or  the  Lenders  hereunder.

The  obligations  of  the  Borrower  under  this  Section 11.5 shall survive the
advance  of  the  Loan  and the payment and satisfaction of the indebtedness and
liability  of  the  Borrower  to  the  Agent  and  the  Lenders pursuant to this
Agreement.

     (2)     The  Agent  shall  be reimbursed on the Advance Date for legal fees
and  disbursements  incurred  in  connection  with the negotiation, preparation,
execution and delivery of this Agreement and the Credit Documents to the Advance
Date  in  an  amount  not  to  exceed  U.S.$100,000.

     Section  11.6     No Waiver; Remedies.  No failure on the part of the Agent
or  the  Lenders  or  the  Borrower to exercise, and no delay in exercising, any
right  under  any of the Credit Documents shall operate as a waiver thereof; nor
shall  any  single  or  partial  exercise  of  any right under any of the Credit
Documents  preclude any other or further exercise thereof or the exercise of any
other  right.  The  remedies herein provided are cumulative and not exclusive of
any  remedies  provided  by  Law.

     Section  11.7     Confidentiality.  Subject to the next following sentence,
the  Agent  and  the  Lenders agree to use reasonable efforts to ensure that any
Financial Statement or other information relating to the Business, properties or
condition, financial or otherwise, of the Borrower which may be delivered to the
Agent  and  the  Lenders pursuant to this Agreement which is not publicly filed,
distributed  to  shareholders of the Borrower or otherwise made available to the
public  generally  (and  which  is  not independently known to the Agent and the
Lenders  or  a  Lender)  will,  to  the  extent  permitted  by  Law,  be treated
confidentially by the Agent and the Lenders and will not, except as provided for
herein  or  with  the  consent of the Borrower, be distributed or otherwise made
available  by  the  Agent or a Lender to any Person other than the Agent's and a
Lender's  employees, authorized agents, counsel or representatives, who shall be
made  aware  of  the confidential nature of such information.  The Agent and the
Lenders  are  hereby authorized to deliver a copy of any Financial Statements or
any  other  information  relating  to  the  Business,  operations,  or financial
condition  of  the  Borrower  and  its Subsidiaries which may be furnished to it
under  this Agreement or otherwise to: (i) any Official Body having jurisdiction
over  the  Agent  or  any  Lender,  if  required by such Official Body; (ii) any
Subsidiary  or  Affiliate  of  the  Agent or any Lender to whom such information
needs  to  be  disclosed  by  reason  of internal credit policy or for any other
proper reason directly related to the advancement of the intents and purposes of
this  Agreement;  and  (iii) any proposed assignee hereunder.  Any such Official
Body,  Subsidiary or Affiliate or assignee to whom such information is disclosed
shall  be  made  aware  of  the  confidential  nature  of  such  information.

<PAGE>

     Section 11.8     Taxes, Costs,  etc.  (1)  All  payments  by  the  Borrower
under this Agreement and the other Credit Documents shall be made free and clear
of,  and  without  deduction  or  withholding  for,  Taxes unless such Taxes are
required  by  Law to be deducted or withheld.  If the Borrower shall be required
by  Law  to  deduct  or withhold any Taxes from or in respect of any sum payable
under this Agreement or the other Credit Documents: (i) the sum payable shall be
increased  as  may  be necessary so that after making all required deductions or
withholdings  applicable  to  additional  amounts  paid  under this Section, the
Lenders  receive an amount equal (on an after-tax basis, taking into account any
income  Taxes  any  Lender  will  owe on the additional amounts) to the sum they
would  have  received (on an after-tax basis) if no deduction or withholding had
been  made;  (ii)  the  Borrower shall make such deductions or withholdings; and
(iii)  the  Borrower  shall  pay  the  full  amount  deducted or withheld to the
relevant  taxation  authority  or  other authority in accordance with applicable
Law, provided that if any transfer, assignment or grant of a participation right
by the Agent or a Lender in respect of its Commitment results at the time of the
transfer,  assignment  or  grant  of a participation right, or thereafter, in an
increased  payment, the transferee, assignee or participant shall be entitled to
receive such increased payment only to the extent that the Agent or Lender would
have  been so entitled had there been no such transfer, assignment or grant of a
participation  right.

     (2)     The  Borrower shall pay all Taxes which arise from any payment made
under  any  of  the  Credit  Documents  or  from  the  execution,  delivery  or
registration  of,  or  otherwise  in  respect  to,  any of the Credit Documents.

     (3)     The  Borrower  shall  indemnify and save harmless the Agent and the
Lenders  for  the  full  amount  of  Taxes  levied by any jurisdiction on, or in
relation to, any sum received or receivable hereunder by the Lenders (other than
income  or  capital  Taxes).  Payment  under  this indemnification shall be made
within  thirty  (30) days from the date the Agent makes written demand therefor.
A  certificate  as  to the amount of such Taxes submitted to the Borrower by the
Agent  shall  be  conclusive  evidence, absent manifest error, of the amount due
from  the  Borrower  to  the  Lenders.

     (4)     Without  prejudice  to  the  survival  of  any  other  agreement or
obligations  of  the  Borrower  hereunder, the obligations of the Borrower under
this  Section  shall  survive  the payment in full of the Outstanding Amount and
Interest  thereon.

     Section  11.9     Right  of  Set-Off.  Upon  the  occurrence and during the
continuance  of  any  Event  of Default each Lender shall have the right, at any
time  and  from time to time, to the fullest extent permitted by Law, to set off
and  apply any and all deposits (general or special, time or demand, provisional
or  final)  at  any  time  held and other indebtedness at any time owing by such
Lender  to or for the credit or the account of the Borrower, against any and all
of  the  Obligations  of the Borrower now or hereafter existing under any of the
Credit  Documents,  irrespective of whether or not the Agent shall have made any
demand  under  any  of the Credit Documents and although such Obligations may be
unmatured.  Each  Lender  agrees  to  promptly notify the Borrower and the Agent
after  any  such  set-off and application made by such Lender, provided that the
failure  to  give  such notice shall not affect the validity of such set-off and
application.  The  rights  of  the Lenders under this Section are in addition to
the  other  rights  and

<PAGE>

remedies  (including,  without  limitation, other rights of set-off)  which  any
Lender  or  the  Agent  may  have.

     Section  11.10     Judgment  Currency.   (1)  If,  for  the  purposes of
obtaining  judgment  in  any  court,  it  is  necessary  to  convert  a sum due
hereunder  to  the  Agent  or  the  Lenders  from the Original Currency into the
Judgment Currency, the parties hereto agree, to the fullest extent that they may
effectively  do  so,  that  the  rate of exchange used shall be that at which in
accordance  with normal banking procedures the Agent could purchase the Original
Currency  with the Judgment Currency on the Business Day preceding that on which
final  judgment  is  paid  or  satisfied.

     (2)     The  Obligations  of  the Borrower in respect of any sum due in the
Original  Currency  from  it to the Agent or the Lenders under any of the Credit
Documents  shall,  notwithstanding  any  judgment  in  any Judgment Currency, be
discharged  only to the extent that on the Business Day following receipt by the
Agent  or  the  Lenders, as the case may be, of any sum adjudged to be so due in
such  Judgment  Currency,  the  Agent  may  in  accordance  with  normal banking
procedures  purchase  the Original Currency with such Judgment Currency.  If the
amount of the Original Currency so purchased is less than the sum originally due
to  the  Agent or the Lenders, as the case may be, in the Original Currency, the
Borrower agrees, as a separate obligation and notwithstanding any such judgment,
to  indemnify  the  Agent or the Lenders, as the case may be, against such loss,
and  if  the  amount  of  the  Original  Currency  so  purchased exceeds the sum
originally  due to the Agent or the Lenders, as the case may be, in the Original
Currency,  the  Agent  or  the  Lenders, as the case may be, agree to remit such
excess  to  the  Borrower.

     Section  11.11     Governing  Law.  The  Credit Documents shall be governed
by,  and  construed  in  accordance  with, the Laws of the State of New York and
shall be treated in all respects as a New York contract without giving effect to
applicable  principles of conflicts of Law to the extent that the application of
the  Laws  of  another  jurisdiction  would  be  required  thereby.

     Section  11.12     Consent  to  Jurisdiction.  (1)  The  Borrower  hereby
irrevocably  submits  to  the  jurisdiction  of  any U.S. State or Federal court
sitting  in  the City of New York, in any action or proceeding arising out of or
relating to this Agreement, or any other Credit Document, and hereby irrevocably
agrees  that all claims in respect of any such action or proceeding may be heard
and  determined  in  such  New  York  court.  The  Borrower  agrees that a final
judgment  in  any  such  action  or  proceeding  shall  be conclusive and may be
enforced  in  other jurisdictions by suit on the judgment or in any other manner
provided  by Law.  The parties agree that any such action or proceeding shall be
conducted  in  the  English  language.

     (2)     Nothing  in this Section shall affect the right of the Agent or the
Lenders  to  serve  legal process in any other manner permitted by Law or affect
the  right of the Agent or the Lenders to bring any action or proceeding against
the  Borrower  or  its  property  in  the  courts  of  other  jurisdictions.

(3)     Without  prejudice  to  any  other  mode  of  service, the Borrower: (a)
irrevocably  appoints  CT  Corporation  System,  111 8th Avenue, 13th Floor, New
York,  New  York  10011  as

<PAGE>

its  agent  for  service of process in relation to any  proceedings  before  any
courts located in the State of New York in connection with  any Credit Document;
(b) agrees to maintain an agent for service of process in  the State of New York
until all Commitments have terminated and the Loan and all other amounts payable
under  the  Credit  Documents  have  been finally, irrevocable  and indefeasibly
repaid  in  full;  (c)  agrees that failure by a process  agent  to  notify  the
Borrower  of  the  process  will not invalidate the proceedings  concerned;  (d)
consents  to  the  service  of  process relating to any proceedings  by  prepaid
posting of a copy of the process to its address for the time  being  set  out on
the signature pages hereof; and (e) agrees that if the appointment of any Person
mentioned  in  paragraph  (a)  above  ceases to be effective, the Borrower shall
immediately appoint a further Person in the State of  New  York, as appropriate,
to  accept  service  of  process  on its behalf in the State  of  New  York,  as
appropriate,  and,  if  the Borrower does not appoint  a  process  agent  within
fifteen  (15)  days, the Agent is entitled and authorized to appoint  a  process
agent  for  the  Borrower  by  notice  to  the  Borrower.

     Section 11.13     Successors and Assigns.  (1)  This Agreement shall become
effective  when  it  is  executed by the parties and thereafter shall be binding
upon and enure to the benefit of the Borrower, and its respective successors and
permitted  assigns, the Agent and its successors and assigns and each Lender and
its  successors  and  permitted  assigns.

     (2)     The  Borrower  shall  not  have  the  right  to  assign  its rights
hereunder  or any interest herein without the prior written unanimous consent of
the  Lenders,  which  consent  may  be  arbitrarily  withheld.  Any  purported
assignment  in  violation  of  this  provision  shall  be void and of no effect.

     (3)     A  Lender  may,  from  time  to  time, assign or transfer, or grant
participations  in,  or  enter into any other arrangement with another Person or
Persons  for  the  purpose  of  sharing,  transferring or otherwise managing its
position  with  respect to, all or part of its rights and obligations in respect
of  its  Commitments,  at  such  times  and upon such terms as it may determine,
without any obligation to obtain any consent from any other Person provided that
by  so  doing  any amounts payable in respect of the Obligations of the Borrower
hereunder  are  not  increased.

     (4)     Any  Lender may pledge its interests in the Credit Documents in the
ordinary  course  of  its  business  or  to  any  Official  Body.

     Section  11.14     Forum  Convenience and Enforcement Abroad.  The Borrower
(a)  waives  objection  to  the  New York State and Federal courts on grounds of
inconvenient  forum  or otherwise as regards proceedings in connection with this
Agreement;  and  (b)  agrees  that  a  judgment  or order of a New York State or
Federal  court in connection with this Agreement is conclusive and binding on it
and  may  be  enforced  against  it  in  the  courts  of any other jurisdiction.

     Section  11.15     Severability.  The  provisions  of  this  Agreement  are
intended  to  be  severable.  If  any  provision of this Agreement shall be held
invalid or unenforceable in whole or in part in any jurisdiction, such provision
shall,  as to such jurisdiction, be ineffective to the extent of such invalidity
or  unenforceability  without  in  any  manner  affecting  the  validity  or

<PAGE>

enforceability  thereof  in  any  other jurisdiction or the remaining provisions
hereof  in  any  jurisdiction.

     Section  11.16     Prior  Understandings.  This  Agreement  and  the Credit
Documents  supersede all prior understandings and agreements, whether written or
oral,  and  constitute the entire agreement among the parties hereto relating to
the  transactions  provided  for  herein.

     Section  11.17     Waiver  of  Immunity.  The  Borrower  irrevocably  and
unconditionally:

     (a)  agrees that if a Lender brings proceedings against it or its assets in
          relation  to  a  Credit Document, no immunity from  those  proceedings
          (including, without  limitation,  suit,  attachment prior to judgment,
          other attachment,  the  obtaining  of  judgment,  execution  or  other
          enforcement) will be claimed by or on behalf of itself or with respect
          to  its  assets;

     (b)  waives  any  such  right of immunity which it or its assets now has or
          may subsequently  acquire;  and

     (c)  consents generally in respect of any such proceedings to the giving of
          any  relief  or  the  issue of any process in  connection  with  those
          proceedings, including,  without limitation, the  making,  enforcement
          or  execution  against  any assets  whatsoever  (irrespective  of  its
          use or intended use) of any order or judgment  which  may  be  made or
          given  in  those  proceedings.

     Section  11.18     Counterparts.  This  Agreement  may  be  executed  in
counterparts and by facsimile and by different parties in separate counterparts,
each  of  which  when  so executed shall be deemed an original and all of which,
taken  together,  shall  constitute  one  and  the  same  instrument.

     SECTION  11.19     WAIVER  OF  JURY TRIAL.  THE BORROWER, THE AGENT AND THE
LENDERS  WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION  BASED  ON  OR  ARISING  FROM  ANY  CREDIT  DOCUMENT  OR THE TRANSACTIONS
CONTEMPLATED  BY  THE  CREDIT  DOCUMENTS.  IN  THE  EVENT  OF  LITIGATION,  THIS
AGREEMENT  MAY  BE  FILED  AS  A  WRITTEN  CONSENT  TO  A  TRIAL  BY  THE COURT.

<PAGE>

     Section  11.20  Payments  to Agent.  All payments required to  be  made  in
respect of  the  Obligations by the Borrower to the  Lenders  hereunder  may  be
made  to  the Agent,  as  agent  for  and  on  behalf  of  the Lenders, and such
payments shall be deemed,  for all purposes, to have been made to the Lenders as
to their pro rata entitlement  thereto.

                                            THE  BORROWER
                                            -------------

                                            MERCER  INTERNATIONAL  INC.

Schutzengasse  32
CH-8001  Zurich,  Switzerland               Per:
Tel:  011-41-43-344-7070                         ----------------------------
Fax:  011-41-43-344-7077                         Authorized  Signing  Officer

                                            Per:
                                                 ----------------------------
                                                 Authorized  Signing  Officer

                                            THE  AGENT
                                            ----------

                                            BABCOCK  &  BROWN  INVESTMENT
                                            MANAGEMENT  PARTNERS  LP
2  Harrison  Street,
San  Francisco,  U.S.A.                     Per:
94015                                            ----------------------------
Tel:     (415)  512-1515                         Authorized  Signing  Officer
Fax:     (415)  267-1500

                                            Per:
                                                 ----------------------------
                                                 Authorized  Signing  Officer

                                            THE  LENDER(S)
                                            --------------

                                            BABCOCK  &  BROWN  INVESTMENT
                                            MANAGEMENT  PARTNERS  LP
2  Harrison  Street,
San  Francisco,  U.S.A.                     Per:
94015                                            ----------------------------
Tel:     (415)  512-1515                         Authorized  Signing  Officer
Fax:     (415)  267-1500
Loan  Commitment: E 15,000,000              Per:
                                                 ----------------------------
                                                 Authorized  Signing  Officer

<PAGE>

                                  SCHEDULE "A"

                             BORROWER'S CERTIFICATE

                            MERCER INTERNATIONAL INC.
                               (the "Corporation")

TO:         Babcock  &  Brown  Investment  Management Partners LP, as Lender,
            and to such  other  Lenders  as  may  from  time  to time become
            signatories to the Loan Agreement  (as  defined  below)

AND TO:     Babcock  &  Brown  Investment  Management  Partners  LP, as agent

RE:         Loan  Agreement  (the  "Loan  Agreement") dated the [21ST] day of
            August,  2002  among  Babcock  &  Brown  Investment  Management
            Partners  LP, as Agent and Lender,  and  such  other  Lenders  as
            may  from  time  to time become signatories thereto,  and  Mercer
            International  Inc.,  as  Borrower

Capitalized  terms  used  in  this  Certificate,  which  are defined in the Loan
Agreement  but  are  not otherwise defined herein, have the meanings ascribed to
such  terms  in  the  Loan  Agreement.

          I, * , HEREBY CERTIFY  solely  in  my  capacity  as  a  duly  elected,
qualified and acting officer of the Corporation, not in my personal capacity and
without  personal  liability,  that:

1.        I am  a trustee and [ * office held] of the Corporation and as such am
authorized  to  execute  this  Certificate on behalf of the Corporation and have
personal  knowledge  of  the  matters  hereinafter  deposed  to.

2.        I have made or caused to be made such  examinations  or investigations
as  are,  in  my opinion, reasonably necessary to  make the statements  set  out
herein  including,  without  limitation,  the  examinations  described  in  this
Certificate, and I have furnished this Certificate with the intent  that it  may
be relied upon  by  the  Lenders  and  the Agent as a basis for the consummation
of the transactions contemplated  by  the  Loan  Agreement.

REPRESENTATIONS  AND  WARRANTIES

3.     The  representations and warranties of the Corporation set out in Section
7.1  of the Loan Agreement and in any of the other Credit Documents to which the
Corporation  is  a  party  are  true  and correct in all respects as at the date
hereof.

<PAGE>

INCUMBENCY

4.     The  persons  referred to below are the trustees(s) and officer(s) of the
Corporation  and  are  duly  elected  or  appointed  to  the  office(s)  of  the
Corporation  as  set  out  opposite  his/her name and, where a signature appears
opposite such name, such signature is his/her true signature and any one trustee
or  officer is authorized to sign any and all documents contemplated by the Loan
Agreement,  including  the Credit Documents to which the Corporation is a party.

Name                   Office                         Signature
----                   ------                         ---------

Jimmy  S.H.  Lee       Trustee and President
                       and Chief Executive            --------------------------
                       Officer

C.S.  Moon             Trustee
                                                      --------------------------

R.  Ian  Rigg          Trustee and Secretary
                       and  Chief  Financial          --------------------------
                       Officer

Michel  Arnulphy       Trustee
                                                      --------------------------

Maarten  Reidel        Trustee
                                                      --------------------------

Jong  Lyel  Ryu        Trustee
                                                      --------------------------

CONDITIONS  PRECEDENT

5.     All  conditions  precedent  to the initial draw down of the first advance
under the ZSG Project Finance Loan Agreement have been satisfied or waived other
than  the  provision  of  the  Mercer  Equity  Financing and any such conditions
precedent  that  are  to  be  completed after the provision of the Mercer Equity
Financing.

6.     All  conditions  precedent  to  the  advance  of  the  MFC Loan have been
satisfied  or  waived.

7.     Upon  receipt  of  the  Loan  and the MFC Loan the Borrower shall be in a
position  to  advance  the  Mercer  Equity  Financing.

CERTIFICATION  OF  DOCUMENTS

8.          EXHIBIT  A  annexed  hereto is a true, accurate and complete copy of
            ----------
the  Declaration of Trust (including any amendments thereto) in effect as of the
date  hereof.  Except  as  attached  hereto,  no  document  with  respect  to an
amendment  thereto has been filed in the office of the Secretary of State of the
State  of  Washington,  and  no  actions  have  been taken by the Corporation in
contemplation  of  the  dissolution  of  the  Corporation.

<PAGE>

9.          EXHIBIT  B  annexed  hereto is a true, accurate and complete copy of
            ----------
the  Financial  Statements  of  the Corporation for the Financial Year ending on
December  31,  2001  and  for  the  Financial  Quarter  ending on June 30, 2002.

<PAGE>

10.          EXHIBIT  C  annexed hereto is a true, accurate and complete copy of
             ----------
the  Resolutions  adopted  by the board of trustees of the Corporation approving
and  authorizing the execution, delivery and performance of the Credit Documents
and  the  transactions  contemplated  thereby.  Such  resolutions  have not been
amended, rescinded or modified since their adoption and remain in full force and
effect  as  of  the  date  hereof  and are the only corporate proceedings of the
Corporation  now  in  force  relating  to  or  affecting the matters referred to
therein.

DATED  as  of  the        day  of  August,  2002
                   ------

---------------------------
*

<PAGE>

                                    EXHIBIT A

                              STATE OF WASHINGTON

                                [Grapic Omitted]

                               SECRETARY OF STATE

    I, SAM REID, Secretary of State of Washington and custodian of its seal,

                               hereby issue this

                     CERTIFICATE OF EXISTENCE/AUTHORIZATION

                                       OF

                            MERCER INTERNATIONAL INC.

    I FURTHER CERTIFY that the records on file in this office show that the

        above named profit corporation was formed under the laws of the

        State of Washington and was issued a Certificate of Incorporation

                        in Washington on September 30, 1968.

    I FURTHER CERTIFY that as of the date of this certificate, no Articles of

        Dissolution have been filed, and that the corporation is duly

      authorized to transact business in the corporate form in the State of

                                  Washington.

[Graphic Omitted]                     Date:  August 5, 2002

                                      Given under my hand and the Seal of the
                                      State of Washington at Olympia, the
                                      State Capital

                                      sm   /s/ Sam Reed
                                        ------------------------------------
                                        Sam Reed, Secretary of State

<PAGE>
                                    EXHIBIT B

                          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, 2001 and 2000, and the
related  consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 2001, 2000
and  1999.  These  financial  statements are the responsibility of the Company's
management.  Our  responsibility  is  to  express  an opinion on these financial
statements  based  on  our  audits.

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

     In  our opinion, the financial statements referred to above present fairly,
in  all  material  respects,  the  consolidated  financial  position  of  Mercer
International  Inc.  and  Subsidiaries as of December 31, 2001 and 2000, and the
consolidated  results  of  their  operations  and their cash flows for the years
ended December 31, 2001, 2000 and 1999, in conformity with accounting principles
generally  accepted  in  the  United  States.

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

Seattle,  Washington
March  15,  2002

<PAGE>

                            MERCER INTERNATIONAL INC.
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                            2001              2000
                                          --------          --------
<S>                                       <C>               <C>

ASSETS
Current Assets
  Cash and cash equivalents               $ 10,458          $ 18,496
  Investments                                4,052             5,320
  Receivables                               42,658            46,088
  Inventories                               22,323            19,977
  Prepaid and other                          3,534             3,000
                                          --------          --------
    Total current assets                    83,025            92,881

Long-Term Assets
  Cash restricted                           29,739            25,150
  Properties                               248,167           265,607
  Investments                                7,658             6,101
  Notes receivable                           4,877             4,296
  Deferred income tax                        9,177             9,624
                                          --------          --------
                                           299,618           310,778
                                          --------          --------
                                          $382,643          $403,659
                                          ========          ========

LIABILITIES
Current Liabilities
  Accounts payable and
    accrued expenses                      $ 46,242          $ 38,204
  Notes payable                              6,584               839
  Debt                                      16,353            27,173
                                          --------          --------
    Total current liabilities               69,179            66,216

Long-Term Liabilities
  Debt                                     193,169           208,315
  Other                                      3,065             3,721
                                          --------          --------
                                           196,234           212,036
                                          --------          --------
    Total liabilities                      265,413           278,252

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 and
   16,794,899 issued and
   outstanding at
   December 31, 2001
   and 2000                                 99,995            99,995
  Retained earnings                         86,171            88,698
  Accumulated other
    comprehensive loss                     (68,936)          (63,286)
                                          --------          --------
                                           117,230           125,407
                                          --------          --------
                                          $382,643          $403,659
                                          ========          ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                  2001       2000       1999
                                                --------   --------   --------
<S>                                             <C>        <C>        <C>
Revenues
  Sales of pulp and paper                       $183,496   $225,626    $125,570
  Transportation                                   4,915      3,857           -
  Other                                            8,578      6,719       2,297
                                                --------   --------   ---------
                                                 196,989    236,202     127,867
Expenses
  Cost of pulp and paper                         161,659    175,420     117,314
  Transportation                                   3,648      2,923           -
  Special charges                                      -          -      22,155
  General, administrative and other               16,502     14,284      22,420
  Loss on foreign currency
    derivative contracts                           2,241          -           -
  Litigation settlement                              918          -           -
  Interest expense                                14,474     13,993       2,995
                                                --------   --------   ---------
                                                 199,442    206,620     164,884
                                                --------   --------   ---------

Income (loss) before income taxes                 (2,453)    29,582     (37,017)
Income tax provision                                 (74)      (108)     (1,092)
                                                --------   --------   ---------

  Net income (loss)                             $ (2,527)  $ 29,474   $ (38,109)
                                                ========   ========   =========

Earnings (loss) per share
  Basic                                         $  (0.15)  $   1.76   $   (2.33)
                                                ========   ========   =========
  Diluted                                       $  (0.15)  $   1.72   $   (2.33)
                                                ========   ========   =========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                                2001       2000        1999
                                              --------   --------    --------
<S>                                           <C>        <C>        <C>
Net income (loss)                             $ (2,527)   $ 29,474   $(38,109)
Other comprehensive income
  Foreign currency translation adjustment       (7,687)     (6,400)   (21,266)
  Unrealized gains (losses) on securities
    Unrealized holding gains (losses)
      arising during the period                  2,037      (1,729)     1,745
    Reclassification adjustment for
      losses included in net income (loss)           -          85      1,340
                                              --------    --------   --------
                                                 2,037      (1,644)     3,085
                                              --------    --------   --------

Other comprehensive loss                        (5,650)     (8,044)   (18,181)
                                              --------    --------   --------
Comprehensive income (loss)                   $ (8,177)   $ 21,430   $(56,290)
                                              ========    ========   ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                        Shares of   Beneficial Interest
                                   ----------------------------------------
                                                                 Amount
                                                                 Paid in
                                   Number          Par           Excess of
                                   Of Shares       Value         Par Value
                                   ----------      --------      ---------
<S>                                <C>            <C>             <C>
Balance at December 31, 1998       15,440,122     $  15,440       $ 76,473
Shares issued for exercise
  of warrants                       1,245,277         1,245          6,097
Repurchase of shares                  (50,000)          (50)          (167)
Payment of dividends                       -             -              -
Net loss                                   -             -              -
Other comprehensive income
  (loss)                                   -             -              -
                                   ----------     ---------       --------

Balance at December 31, 1999       16,635,399        16,635         82,403
Shares issued for exercise
  of options                          159,500           160            797
Net income                                 -             -               -
Other comprehensive income
  (loss)                                   -             -               -
                                   ----------     ---------       --------

Balance at December 31, 2000       16,794,899        16,795         83,200
Net loss                                   -             -              -
Other comprehensive income
  (loss)                                   -             -              -
                                   ----------     ---------       --------

Balance at December 31, 2001       16,794,899     $  16,795       $ 83,200
                                   ==========     =========       ========

</TABLE>

<TABLE>
<CAPTION>

                                                Accumulated Other
                                                Comprehensive
                                                Income
                                         --------------------------------
                                         Foreign
                                         Currency         Unrealized
                           Retained      Translation      Gains (Losses)
                           Earnings      Adjustments      on Securities
                           --------      -------------    --------------
<S>                        <C>           <C>               <C>
Balance at December
  31, 1998                 $ 98,167           $(28,663)         $ (8,398)
Shares issued for
  exercise of warrants            -                  -                 -
Repurchase of shares              -                  -                 -
Payment of dividends           (834)                 -                 -
Net loss                    (38,109)                 -                 -
Other comprehensive
  income (loss)                   -            (21,266)            3,085
                           --------           --------           -------

Balance at December
  31, 1999                   59,224            (49,929)           (5,313)
Shares issued for
  exercise of options             -                  -                 -
Net income                   29,474                  -                 -
Other comprehensive               -             (6,400)           (1,644)
  income (loss)            --------           --------           -------

Balance at December
  31, 2000                  88,698             (56,329)           (6,957)
Net loss                    (2,527)                  -                 -
Other comprehensive
  income (loss)                  -              (7,687)            2,037
                           -------            --------           -------
Balance at December
  31, 2001                 $86,171            $(64,016)          $(4,920)
                           =======            ========           =======

</TABLE>

<TABLE>
<CAPTION>

                                    Accumulated Other
                                    Comprehensive
                                    Income
                                    -----------------
                                                           Shareholders'
                                     Total                 Equity
                                     -----                 -------------
<S>                                      <C>                    <C>
Balance at December 31, 1998         $(37,061)                  $153,019
Shares issued for exercise
  of warrants                              -                       7,324
Repurchase of shares                       -                        (217)
Payment of dividends                       -                        (834)
Net loss                                   -                     (38,109)
Other comprehensive
  income (loss)                       (18,181)                   (18,181)
                                     --------                   --------
Balance at December 31, 1999          (55,242)                   103,020
Shares issued for exercise
  of options                               -                         957
Net income                                 -                      29,474
Other comprehensive
  income (loss)                        (8,044)                    (8,044)
                                     --------                   --------
Balance at December 31, 2000          (63,286)                   125,407
Net loss                                   -                      (2,527)
Other comprehensive income (loss)      (5,650)                    (5,650)
                                     --------                   --------
Balance at December 31, 2001         $(68,936)                  $117,230
                                     ========                   ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                               2001        2000        1999
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
Cash Flows from Operating Activities
  Net income (loss)                          $ (2,527)   $ 29,474    $ (38,109)
  Adjustments to reconcile
      net income (loss) to
      cash flows from
      operating activities
         Special charges                            -           -       22,155
         Depreciation                          20,557      22,139        7,018
  Changes in current assets
      and liabilities
         Investment in
           trading securities                     460        (806)       8,478
         Inventories                            2,337      (3,391)        (996)
         Receivables                            6,955      (7,227)     (12,489)
         Accounts payable and
           accrued expenses                      (841)        267        7,718
         Prepaid and other                       (282)       (504)      (2,411)
                                             --------    --------    ---------
            Net cash provided by
              (used in) operating
                activities                     26,659      39,952       (8,636)

Cash Flows from Investing Activities
  Proceeds from the sales of
    available-for-sale securities                   -         189        6,867
  Proceeds from the sales of
    long-term investments                         605           -            -
  Purchases of available-for-sale
    securities                                   (569)     (1,918)      (1,264)
  Sale of properties                                -      13,346            -
  Acquisition of properties,
    net of investment grants                   (6,845)     26,073     (255,186)
  Purchase of subsidiary,
    net of cash acquired                       (1,839)          -            -
  Change in notes receivable                     (605)        585        4,178
                                             --------    --------    ---------
            Net cash provided by
              (used in) investing
                activities                     (9,253)     38,275     (245,405)

Cash Flows from Financing Activities
  Cash restricted                              (5,921)    (12,285)           -
  Increase (decrease) in pulp
    mill costs payable                           (902)    (50,286)      47,701
  Increase in notes payable
    and debt                                    5,821       5,649      162,863
  Decrease in notes payable
    and debt                                  (25,924)     (5,582)      (2,299)
  Shares of beneficial interest
    issued for cash                                 -         957            -
  Repurchase shares of beneficial
    interest                                        -           -         (217)
  Dividends                                         -           -         (834)
  Other                                             -           -            3
                                             --------    --------    ---------
            Net cash provided by
             (used in) financing
               activities                     (26,926)    (61,547)     207,217

Effect of exchange rate changes
  on cash and cash equivalents                  1,482          94       (4,704)
                                             --------    --------    ---------

Net increase (decrease) in cash
  and cash equivalents                         (8,038)     16,774      (51,528)
Cash and Cash Equivalents,
  beginning of year                            18,496       1,722       53,250
                                             --------    --------    ---------

Cash and Cash Equivalents,
  end of year                                $ 10,458    $ 18,496    $   1,722
                                             ========    ========    =========

</TABLE>

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

<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 security 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. Grants
received  from  a  government  reduce  costs  of  property  improvements.

     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 10 to 50 years 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

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  1.  The  Company  and  Summary  of  Significant  Accounting  Policies
          (Continued)

comprehensive  income.  Realized  gains  or  losses  are included in general and
administrative  expenses  in  the  consolidated  statements  of  operations. The
translation  adjustments  do  not recognize the effect of income tax because the
Company  expects  to  reinvest  the  amounts  indefinitely  in  operations.

Environmental  Conservation

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

Stock-Based  Compensation

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

Taxes  on  Income

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

Derivative  Instruments

     The  Company  adopted  Statement of Financial Accounting Standards No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities,"  effective
January  1, 2001. Derivative instruments are measured at fair value and reported
in  the  balance  sheet as assets or liabilities. Accounting for gains or losses
depends  on  the  Company's intended use of the derivative instruments. Gains or
losses  on derivative instruments which are not designated hedges are recognized
in  earnings  in the period of the change in fair value. Accounting for gains or
losses  on  derivative  instruments  designated as hedges depends on the type of
hedge  and  such  gains  or  losses  are  recognized in either earnings or other
comprehensive  income.

     Retroactive  application  of  this  standard  was  not allowed. There is no
cumulative  effect in the Company's financial statements as a result of adopting
this  standard.  The  Company  had a derivative instrument at December 31, 2000,
which  was  entered  into  at year-end. There was no change in its fair value in
2000.

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.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  1.  The  Company  and  Summary  of  Significant  Accounting  Policies
          (Continued)

Estimates

     The  preparation  of  financial  statements  in  conformity with accounting
principles  generally  accepted in the United States 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  Standards

     Statement  of  Financial  Accounting Standards No. 142, "Goodwill and Other
Intangible  Assets,"  is  to  be  applied  starting  with  years beginning after
December  15,  2001.  This  standard addresses how intangible assets, other than
those  acquired in a business combination, should be accounted for. Goodwill and
intangible  assets that have indefinite useful lives will no longer be amortized
but  will  be  tested annually for impairment. Management has not determined the
effect  this  standard  may have, if any, on the Company's financial statements.

     Statement  of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement  Obligations,"  is effective for years beginning after June 15, 2002.
This standard addresses accounting and reporting for obligations associated with
the  retirement  of  tangible long-lived assets and associated retirement costs.
Management  has not determined the effect, if any, this standard may have on the
Company's  financial  statements.

     Statement  of  Financial  Accounting Standards No. 144, "Accounting for the
Impairment  or  Disposal of Long-Lived Assets," is effective for years beginning
after  December 15, 2001. This standard supersedes the previous standard on this
issue  as well as others which dealt with accounting for discontinued operations
and  the  elimination  of  an  exception  to  consolidation.  Management has not
determined  the  effect  this  standard  may  have  on  the  Company's financial
statements.

Note  2.  Investments

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

<TABLE>
<CAPTION>

                                              DECEMBER 31
                                        -----------------------
                                          2001           2000
                                        --------       --------
<S>                                     <C>            <C>
Bonds                                   $  2,158       $  4,164
Equity securities                          1,894          1,156
                                        --------       --------

                                        $  4,052       $  5,320
                                        ========       ========

</TABLE>

     Included  within  trading  securities is an investment in a bond and common
shares  of  two companies that represent 53% and 46%, respectively, of the total
value  of  trading  securities  at  December  31,  2001.  At  December 31, 2000,
investment  in  a  bond  and common shares of a company represented 39% and 18%,
respectively,  of  the  total  value  of  trading  securities. The change in net
unrealized  holding gains (losses) on trading securities which has been included
in  earnings  was  $1,238,  $(171)  and  $2,411  during  2001,  2000  and  1999,
respectively.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  2.  Investments (Continued)

Available-for-sale  securities  consist  of bonds and equity securities and have
been  classified  as  long-term  investments. Equity securities of two companies
represented  85%  and 91% of the total available-for-sale securities at December
31,  2001  and  2000,  respectively. The proceeds from sales of these securities
amounted  to  none,  $189  and $6,867 which resulted in realized losses of none,
$(77)  and  $(1,340) during 2001, 2000 and 1999, respectively. The fair value of
available-for-sale  securities  included  on  the balance sheets at December 31,
2001,  2000  and  1999, was $7,305, $5,247 and $6,925, respectively. The cost of
these  securities  was $12,225, $12,204 and $12,238 which resulted in unrealized
losses being recorded in comprehensive income of $(4,920), $(6,957) and $(5,313)
at  December  31, 2001, 2000 and 1999, respectively. Also, included in long-term
investments  were  equity securities stated at cost of $353 and $854 at December
31,  2001 and 2000, respectively, which did not have a readily determinable fair
value.  However,  management believes that the estimated market value is greater
than  the  carrying  value.

Note  3.  Receivables

<TABLE>
<CAPTION>

                                                DECEMBER 31
                                           ---------------------
                                             2001         2000
                                           --------     --------
<S>                                        <C>          <C>
Sale of paper and pulp products            $ 21,207     $ 14,869
Securities trading                           12,592       17,645
Sale of properties                                -        6,147
Value added tax                                 956          892
Other                                         7,903        6,535
                                           --------     --------
                                           $ 42,658     $ 46,088
                                           ========     ========

</TABLE>

     At  December  31,  2001  and 2000, the Company pledged $12,592 and $17,645,
respectively,  in  securities  trading  receivables  as  collateral  for amounts
payable  for  securities.

Note  4.  Inventories

<TABLE>
<CAPTION>

                                                       DECEMBER 31
                                                 -----------------------
                                                   2001           2000
                                                 --------       --------
<S>                                               <C>           <C>
Pulp and paper
  Raw materials                                  $ 13,008       $ 10,862
  Work in process and finished goods                9,315          9,115
                                                 --------       --------
                                                 $ 22,323       $ 19,977
                                                 ========       ========

</TABLE>

Note  5.  Properties

<TABLE>
<CAPTION>

                                                    DECEMBER 31
                                            ---------------------------
                                              2001               2000
                                            --------           --------
<S>                                         <C>                <C>
Land                                        $  8,519           $  7,425
Buildings                                     17,252             16,346
Production and other equipment               291,428            290,789
                                            --------           --------
                                             317,199            314,560
Less: Accumulated depreciation                69,032             48,953
                                            --------           --------
                                            $248,167           $265,607
                                            ========           ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  5.  Properties  (Continued)

     During  1999,  management determined that some of the Company's paper mills
were  impaired.  These  mills  were  written down to their estimated fair values
based on existing market conditions. This impairment loss, amounting to $19,064,
was  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,  was  a  loss  of  $3,091  on  abandoned pulp mill equipment.

Note  6.  Notes  Payable  and  Debt

     At  December  31,  2001, the Company had two notes payable to banks. One of
the  notes  amounting  to $5,821 is due on demand at 7% interest. The other note
which  had  a  balance  of  $763  and  $839  at  December  31,  2001  and  2000,
respectively,  is  due  monthly  at  6.75% interest and is secured by inventory.

     Long-term  debt  consists  of  the  following:

<TABLE>
<CAPTION>

                                                         DECEMBER 31
                                                   -----------------------
                                                     2001           2000
                                                   --------       --------
<S>                                                <C>            <C>
Note payable to bank, interest at rates
 varying from 4.5% to 6.8% at December 31,
 2001, principal due in semi-annual
 installments based on a percentage of the
 final loan amount beginning at 2.4% to 5.1%
 at September 30, 2001, after an initial
 payment of $21,300 on March 31, 2001,
 until September 30, 2013 (final payment date),
 collateralized by receivables, inventory
 and pulp mill assets with 48% and 32%
 principal plus interest guaranteed by the
 Federal Republic of Germany and the State
 of Thuringia, respectively; cash restricted
 amounted to $29,739 and $25,150, at
 December 31, 2001 and 2000, respectively, in
 connection with this borrowing                     $193,607       $231,017

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          4,135

Loans payable to a bank, interest at rates
 varying from 3.875% to 6.5%, payment terms
 varying from on demand to December 31, 2003,         11,492              -
 secured by receivables and other properties

Other                                                    288            336
                                                    --------       --------
                                                     209,522        235,488
Less: Current portion                                (16,353)       (27,173)
                                                    --------       --------
                                                    $193,169       $208,315
                                                    ========       ========

</TABLE>

     On  December  29,  2000 and April 1, 2001, the Company entered into foreign
currency  forward  swap  agreements  in  the  notational  amount of $124,700 and
$66,797, respectively, with respect to the long-term note payable to bank. These
agreements  are with the same bank which holds the note payable. These contracts
were  entered into by the Company for its own account consistent with its policy
to  manage  foreign  currency  exchange risks. These agreements cover the period
December  29,  2000,  to  September 30, 2008, and April 1, 2001 to September 30,
2013, respectively. While the Company may be exposed to credit risk with respect
to  these  agreements,  it  does  not anticipate nonperformance by the bank. The
Company

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  6.  Notes  Payable  and  Debt (Continued)

recorded  a  gain from a  change  in  the  fair  value  of  these  contracts  of
$412  during  the  year  ended December 31, 2001. Additionally, during 2001, the
Company  entered  into two foreign currency forward agreements in the notational
value  of  $10,000  each. The contracts were entered into by the Company for its
own  account  and  are  consistent  with  its  policy to manage foreign currency
exchange  risks.  These agreements mature on April 22, 2002 and May 5, 2002. The
Company  recorded  a  loss from a change in the fair value of these contracts of
$352  during the year ended December 31, 2001. During the first quarter of 2001,
the  Company  entered  into a U.S. dollar/euro foreign currency forward contract
with  a notational amount of approximately $31,000 which was settled in March of
2001.  This  contract  resulted  in  a  loss  of  $2,301.

     As  of December 31, 2001, the principal maturities of long-term debt are as
follows:

<TABLE>
<CAPTION>

MATURES                                                    AMOUNT
-------                                                    ------
<S>                                                        <C>
2002                                                       $ 16,353
2003                                                         22,461
2004                                                         12,687
2005                                                         13,513
2006                                                         14,441
Thereafter                                                  130,067
                                                           --------
                                                           $209,522
                                                           ========

</TABLE>

     Interest  paid  amounted  to  $14,191  in 2001, $11,465 in 2000 and $12,100
($9,904  capitalized)  in  1999.

Note  7.  Accounts  Payable  and  Accrued  Expenses

<TABLE>
<CAPTION>

                                                        DECEMBER 31
                                                  ----------------------
                                                    2001          2000
                                                  --------      --------
<S>                                               <C>           <C>
Trade payables                                    $ 18,875      $ 14,926
Accounts payable and accrued expenses               17,640        16,357
Payable for securities                               7,946         6,921
Other                                                1,781             -
                                                  --------      --------
                                                  $ 46,242      $ 38,204
                                                  ========      ========

</TABLE>

Note  8.  Income  Taxes

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

<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31
                                            --------------------------------
                                              2001       2000         1999
                                            --------   --------     --------
<S>                                         <C>        <C>          <C>
Provision for income taxes, non U.S         $  (74)    $ (108)      $ (1,092)
                                            ======     ======       ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  8.  Income  Taxes (Continued)

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

<TABLE>
<CAPTION>

                                                   YEAR ENDED DECEMBER 31
                                            -----------------------------------
                                              2001          2000         1999
                                            --------      --------     --------
<S>                                          <C>          <C>          <C>
U.S. Federal statutory rates on income
  from operations benefit (provision)       $    834      $(10,058)    $ 12,585
Tax differential on foreign income (loss)      3,152          (800)       8,182
Valuation allowance                           (5,494)       10,750      (20,748)
Other                                          1,434             -       (1,111)
                                            --------      --------     --------
                                            $    (74)     $   (108)    $ (1,092)
                                            ========      ========     ========

</TABLE>

     Deferred  tax  assets  are  composed  of  the  following:

<TABLE>
<CAPTION>

                                                  DECEMBER 31
                                            -----------------------
                                              2001           2000
                                            --------       --------
<S>                                         <C>            <C>
German tax loss carryforwards               $ 64,140       $ 63,853
U.S. tax loss carryforwards                    6,075          4,272
Swiss tax loss carryforwards                   3,084              -
Other                                            617            744
                                            --------       --------
                                              73,916         68,869
Valuation allowance                          (64,739)       (59,245)
                                            --------       --------
  Net deferred tax asset                    $  9,177       $  9,624
                                            ========       ========

</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. German tax losses of approximately $175,000 at
December  31, 2001, may be carried forward indefinitely. However, the Company is
the  subject  of  income  tax  audits on a continuing basis in Germany which may
result  in  a  change  in  the German tax loss amount. Management believes that,
while  realization of the net deferred tax asset on the German tax losses 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 $17,800 at
December  31,  2001. Losses of $4,600, $1,900, $1,200, $3,700, $2,800 and $3,600
will expire in 2021, 2020, 2019, 2018, 2012 and 2011, respectively, if not used.
Management  believes  that  these  tax  loss  carryforwards are likely not to be
utilized  under  current  circumstances  and  has  fully  reserved any resulting
potential  tax  benefit.

     The  Company's  Swiss net operating losses amounted to approximately $9,000
at  December 31, 2001. Losses of $3,200 and $5,800 will expire in 2004 and 2007,
respectively, if not used. Management believes that these tax loss carryforwards
are likely not to be utilized under current circumstances and has fully reserved
any  resulting  potential  tax  benefit.

     Income  (loss)  from  foreign source operations amounted to $2,118, $30,152
and  $(34,903)  for  the  years  ended  December  31,  2001,  2000  and  1999,
respectively.  These  amounts  are  intended  to  be  indefinitely reinvested in
operations. Since available-for-sale securities are primarily securities held by
foreign

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  8.  Income  Taxes (Continued)

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,  2001,  2000  and  1999.

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.  Acquisition

     On  December  14,  2001, the Company acquired all of the outstanding common
shares  of  Landqart  AG  ("Landqart"),  a  Swiss  company, for $2,650 cash. The
effective  date  of  this  acquisition  is  December  31,  2001.  The results of
Landqart's  operations  will be included in the Company's consolidated financial
statements  beginning  January  1, 2002. Landqart is a manufacturer of specialty
paper  which  is  expected  to  become  an  integral part of the Company's paper
segment.

     The  following  table  summarizes  the  estimated fair values of the assets
acquired  and  liabilities  assumed  at  the  date  of  acquisition.

<TABLE>
<CAPTION>

<S>                                                <C>
Current assets                                     $11,542
Properties                                           9,912
                                                   -------
  Total assets acquired                             21,454
Current liabilities                                 12,237
Long-term liabilities                                6,567
                                                   -------
  Total liabilities assumed                         18,804
                                                   -------
  Net assets acquired                              $ 2,650
                                                   =======

</TABLE>

     The  following  unaudited  pro  forma  information  presents the results of
operations  of  the Company as if this acquisition had taken place on January 1,
2001  and  2000,  respectively.  The  pro  forma  information is not necessarily
indicative  of  the  results  that would have occurred had the acquisition taken
place  at  the

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  10.  Acquisition (Continued)

beginning  of  the periods presented. Further, the pro forma information is not
necessarily  indicative  of  future  results.

<TABLE>
<CAPTION>

                       YEAR ENDED DECEMBER 31
                      ------------------------
                       2001             2000
                      ------          --------
<S>                   <C>             <C>
Revenues              $232,851        $270,659
Net income (loss)     $ (3,251)       $ 29,473
Earnings per share
  Basic               $  (0.19)       $   1.76
  Diluted             $  (0.19)       $   1.72

</TABLE>

     The  purchase  agreement provides for an additional payment of up to $1,958
based  on  profitability  criteria being met during the period January 1 through
September  30,  2003.  The  purchase  price  may be further increased if certain
parcels  of  real  estate  are sold prior to January 1, 2004. This increase will
amount  to  30%  of  the  difference between the carrying value of the parcel at
December  31, 2000, and its net sales price. If any of these contingent payments
which  are to be paid in cash, become due, they will be treated as an additional
cost  of  acquisition.

<PAGE>

Note  11.  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
trustees  who  are  not  officers  or  employees.

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

     Following  is  a  summary  of  the status of the plan during 2001, 2000 and
1999:

<TABLE>
<CAPTION>

                                           NUMBER OF           WEIGHTED AVERAGE
                                           SHARES              EXERCISE PRICE
                                           ---------           ----------------
<S>                                        <C>                 <C>
Outstanding at December 31, 1999
  and 1998                                   765,500           $   10.03
Granted                                    1,600,000               6.375
Exercised                                   (159,500)               6.00
                                           ---------
Outstanding at December 31, 2001
  and 2000                                 2,206,000           $    7.67
                                           =========           =========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  11.  Stock-based  Compensation (Continued)

     Following  is  a  summary  of  the status of options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>

                    OUTSTANDING OPTIONS
---------------------------------------------------------------
                    WEIGHTED
                    AVERAGE        WEIGHTED
EXERCISE            REMAINING      AVERAGE
PRICE               CONTRACTUAL    EXERCISE
RANGE               NUMBER         LIFE              PRICE
---------------     -----------    -------------     ---------
<S>                 <C>             <C>              <C>
 6.00  -  6.375     1,770,000       8.0              $  6.34
 8.50  - 11.66      231,500         5.1                 9.19
16.89  - 18.47      204,500         3.9                17.50

     EXERCISABLE OPTIONS
-----------------------------
                     WEIGHTED
                     AVERAGE
                     EXERCISE
NUMBER               PRICE
------               --------
<S>                  <C>
1,236,666            $   6.33
  231,500                9.19
  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>

                                      2001     2000      1999
                                    --------  -------  ---------
<S>                                 <C>       <C>      <C>
Net Income (Loss)
  As reported                       $(2,527)  $29,474  $(38,109)
  Proforma                          $(5,403)  $26,598  $(38,421)
Basic Earnings (Loss) Per Share
  As reported                       $  (.15)  $  1.76  $  (2.33)
  Proforma                          $  (.32)  $  1.59  $  (2.34)
Diluted Earnings (Loss) Per Share
  As reported                       $  (.15)  $  1.72  $  (2.33)
  Proforma                          $  (.32)  $  1.55  $  (2.34)

</TABLE>

     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>

                                     2001      2000      1999
                                    ------    ------    ------
<S>                                 <C>       <C>       <C>
Risk-free interest rate               4.5%      8.5%      6.0%
Expected life of the options        2 years   2 years   2 years
Expected volatility                  68.9%     78.4%     60.0%
Expected dividend yield               0.0%      0.0%      0.0%

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  12.  Earnings  Per  Share

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

<TABLE>
<CAPTION>

                                                     NET INCOME (LOSS)
                                            ----------------------------------
                                              2001         2000         1999
                                            --------     --------     --------
<S>                                          <C>         <C>          <C>
Net income (loss) available to
 shareholders of beneficial interest         $ (2,527)    $ 29,474    $ (38,109)
                                            =========     ========    =========

                                                          SHARES
                                            -----------------------------------
                                              2001          2000         1999
                                            --------      --------     --------

Weighted average number of shares
 outstanding - basic                       16,874,899    16,778,962   16,389,944
Effect of dilutive securities:
  Options                                           -       365,528            -
                                           ----------    ----------    ---------

Weighted average number of shares
 outstanding - diluted                     16,874,899    17,144,490   16,389,944
                                           ==========    ==========   ==========

</TABLE>

     For  2001  and  1999,  warrants  and  options  were  not  included  in  the
computation  of  diluted  earnings  per  share  because they were anti-dilutive.

Note  13.  Supplemental  Disclosures  with  Respect  to Statements of Cash Flows

     There  were  no  significant  noncash  transactions  in  2001  and  2000.

     Significant  noncash  transactions  in  1999  include:

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

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

Note  14.  Business  Segment  Information

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

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

     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.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  14.  Business  Segment  Information (Continued)

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

<TABLE>
<CAPTION>

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
2001
Sales to external customers                     $130,903   $ 52,593   $183,496
Intersegment net sales                             5,187          -      5,187
Segment income (loss)                              4,069     (2,891)     1,178
Segment assets                                   333,381     47,384    380,765
Capital expenditures                               6,638      2,400      9,038

Reconciliations
Loss:
  Total income for reportable segments                                $  1,178
  Elimination of intersegment profits                                    2,274
  Unallocated amounts, other corporate expenses.                        (5,905)
                                                                      --------
    Consolidated loss before income taxes                             $ (2,453)
                                                                      ========
Assets:
  Total assets for reportable segments                                $380,765
  Intersegment receivable                                               (6,560)
  Other unallocated amounts                                              8,438
                                                                      --------
    Consolidated total assets                                         $382,643
                                                                      ========

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>

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

Reconciliations
Income:
  Total income for reportable segments                                $ 31,651
  Elimination of intersegment profits                                    1,377
  Unallocated amounts, other corporate expenses                         (3,446)
                                                                      --------
    Consolidated income before income taxes                           $ 29,582
                                                                      ========
Assets:
  Total assets for reportable segments                                $421,652
  Intersegment receivable                                              (22,661)
  Other unallocated amounts                                              4,668
                                                                      --------
    Consolidated total assets                                         $403,659
                                                                      ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  14.  Business  Segment  Information (Continued)

<TABLE>
<CAPTION>

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>

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

Reconciliations
Loss:
  Total loss for reportable segments                                  $(30,085)
  Elimination of intersegment profits                                    2,704
  Unallocated amounts, other corporate expenses.                        (9,636)
                                                                      --------
    Consolidated loss before income taxes                             $(37,017)
                                                                      ========
Assets:
  Total assets for reportable segments                                $452,133
  Intersegment receivable                                                 (357)
  Other unallocated amounts                                              4,069
                                                                      --------
    Consolidated total assets                                         $455,845
                                                                      ========

</TABLE>

     The  following table presents net sales to external customers by geographic
area  based  on  location  of  the  customer.

<TABLE>
<CAPTION>

                                    2001         2000         1999
                                  --------     --------     --------
<S>                               <C>          <C>          <C>
Germany                           $ 84,574     $ 95,376     $ 72,129
Other European Union                64,406       76,827       47,498
Eastern European and other          34,516       53,423        5,943
                                  --------     --------     --------
                                  $183,496     $225,626     $125,570
                                  ========     ========     ========

</TABLE>

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

<TABLE>
<CAPTION>

                                    2001         2000         1999
                                  --------     --------     --------
<S>                               <C>          <C>          <C>
Germany                           $352,538     $398,991     $451,776
Other                               30,105        4,668        4,069
                                  --------     --------     --------
                                  $382,643     $403,659     $455,845
                                  ========     ========     ========

</TABLE>

     The pulp mill has fiber supply contracts with two companies which expire in
2002  and  2003  at  prices  agreed  to periodically. The Company also has labor
agreements  which  expire in 2002. In 2001, pulp sales to two customers amounted
to  22%  of  total pulp sales, and pulp sales to one customer amounted to 27% in
2000.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  15.  Fair  Value  of  Financial  Instruments

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

<TABLE>
<CAPTION>

                              2001                           2000
                      ---------------------         ---------------------
                      CARRYING        FAIR          CARRYING     FAIR
                      AMOUNT          VALUE         AMOUNT       VALUE
                      --------        -----         --------     --------
<S>                   <C>             <C>           <C>             <C>
Cash and cash
  equivalents         $ 10,458        $ 10,458      $ 18,496     $ 18,496
Cash restricted         29,739          29,739        25,150       25,150
Notes receivable         4,877           4,877         4,296        4,296
Notes payable            6,584           6,584           839          839
Long-term debt         209,522         209,522       235,488      235,488

</TABLE>

     The  fair  value  of  cash and cash equivalents is based on reported market
value.  The  fair  value  of  cash  restricted  was equal to its carrying amount
because  it is in an account which bears a market rate of interest. The value of
notes  receivable  is  based  on the value of similar long-term receivables. The
fair  value  of notes payable was based on the value of similar debt incurred in
the  pulp  industry.  The  fair  value  of  long-term  debt was determined using
discounted  cash  flows  at  prevailing  market  rates.  The  other  long-term
liabilities  which  have  a  carrying value of $3,065 and $3,721 at December 31,
2001 and 2000, 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.

Note  16.  Commitments  and  Contingencies

     At  December  31,  2001  and  2000,  the  Company  recorded a liability for
environmental  conservation  expenditures  of  $1,822  and $1,921, 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.

<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>
2001
Net Sales                   $ 55,996     $ 52,310     $ 47,276       $ 41,407
Gross profit                  14,019        9,046        7,402          1,215
Income (loss) before
 extraordinary items
 and cumulative effect
 of a change in accounting     4,575          (71)         169         (7,200)
Income (loss) before
 extraordinary items and
 cumulative effect of a
 change in accounting,
 per share*                     0.27        (0.00)        0.01          (0.43)
Net income (loss)              4,575          (71)         169         (7,200)

2000
Net Sales                   $ 55,760     $ 63,715     $ 61,694       $ 55,033
Gross profit                   6,868       15,531       15,899         19,561
Income before
 extraordinary items
 and cumulative effect
 of a change in accounting     1,071        8,976         9,094        10,333
Income before extraordinary
 items and cumulative effect
 of a change in accounting,
 per share*                     0.06         0.52          0.52          0.61
Net income                     1,071        8,976         9,094        10,333

-----------

</TABLE>

*     on  a  diluted  basis

<PAGE>

                            MERCER INTERNATIONAL INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                     FOR THE SIX MONTHS ENDED JUNE 30, 2002

                                  (UNAUDITED)

<PAGE>

                            MERCER INTERNATIONAL INC.

                           CONSOLIDATED BALANCE SHEETS
                    AS AT JUNE 30, 2002 AND DECEMBER 31, 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                            JUNE 30,           DECEMBER 31,
                                              2002                2001
                                         -------------       ----------------
<S>                                      <C>                <C>
                                     ASSETS

Current Assets
  Cash and cash equivalents               E     22,873      E         11,741
  Investments                                    1,788                 4,549
  Receivables                                   51,622                47,892
  Inventories                                   25,727                25,062
  Prepaid and other                              3,706                 3,968
                                          ------------      ----------------
    Total current assets                       105,716                93,212

Long-Term Assets
  Cash restricted                               25,857                33,388
  Properties                                   268,359               278,617
  Investments                                    7,253                 8,598
  Notes receivable                               5,298                 5,475
  Deferred income tax                           10,197                10,303
                                          ------------      ----------------
                                               316,964               336,381
                                          ------------      ----------------
                                          E    422,680      E        429,593
                                          ============      ================

                                  LIABILITIES

Current Liabilities
  Accounts payable and accrued expenses   E     36,365      E         51,916
  Notes payable                                  8,502                 7,392
  Debt                                          19,193                18,360
                                          ------------      ----------------
    Total current liabilities                   64,060                77,668

Long-Term Liabilities
  Debt                                         208,584               216,871
  Other                                          3,043                 3,441
                                          ------------      ----------------
                                               211,627               220,312
                                          ------------      ----------------
    Total liabilities                          275,687               297,980

                              SHAREHOLDERS' EQUITY

Shares of beneficial interest                   76,722                76,722
Retained earnings                               72,267                59,111
Accumulated other comprehensive loss            (1,996)               (4,220)
                                          ------------      ----------------
                                               146,993               131,613
                                          ------------      ----------------
                                          E    422,680      E        429,593
                                          ============      ================

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

          CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                  FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                  (UNAUDITED)
              (EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>
Revenues
  Sales                                     E  119,535    E  112,404
  Transportation                                 2,753         2,772
  Other                                          5,574         5,575
                                            ----------    ----------
                                               127,862       120,751
Expenses
  Cost of pulp and paper                       104,603        93,004
  Transportation                                 2,478         2,031
  General and administrative                    14,396         9,452
  Interest expense                               8,099         8,366
  (Gain) loss on foreign currency
    derivative contracts                       (14,881)        2,846
                                            ----------    ----------
                                               114,695       115,699
                                            ----------    ----------

Income before income taxes                      13,167         5,052
Income taxes                                        11            29
                                            ----------    ----------
Net income                                      13,156         5,023

Retained earnings, beginning of period          59,111        61,934
                                            ----------    ----------

Retained earnings, end of period            E   72,267    E   66,957
                                            ==========    ==========

Earnings per share
  Basic                                     E     0.78    E     0.30
                                            ==========    ==========
  Diluted                                   E     0.77    E     0.29
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                  FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
               (EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>
Revenues
  Sales                                     E   60,328    E   55,608
  Transportation                                 1,337         1,477
  Other                                          1,910         2,933
                                            ----------    ----------
                                                63,575        60,018
Expenses
  Cost of pulp and paper                        50,684        48,580
  Transportation                                 1,436           927
  General and administrative                     7,766         5,591
  Interest expense                               4,081         4,522
  (Gain) loss on foreign currency
    derivative contracts                       (18,948)          308
                                            ----------    ----------
                                                45,019        59,928
                                            ----------    ----------

Income before income taxes                      18,556            90
Income taxes                                        11            29
                                            ----------    ----------
Net income                                      18,545            61

Retained earnings, beginning of period          53,722        66,896
                                            ----------    ----------

Retained earnings, end of period            E   72,267    E   66,957
                                            ==========    ==========

Earnings per share
  Basic                                     E     1.10    E     0.00
                                            ==========    ==========
  Diluted                                   E     1.08    E     0.00
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>

Net income                                  E   13,156    E    5,023

Other comprehensive income:
  Foreign currency translation adjustments       3,513           233
  Unrealized (loss) gain on securities          (1,289)          988
                                            ----------    ----------

  Other comprehensive income                     2,224         1,221
                                            ----------    ----------

Total comprehensive income                  E   15,380    E    6,244
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                  FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>

Net income                                  E   18,545    E       61

Other comprehensive income:
  Foreign currency translation adjustments       2,186          (608)
  Unrealized (loss) gain on securities          (2,148)          309
                                            ----------    ----------

  Other comprehensive income (loss)                 38          (299)
                                            ----------    ----------

Total comprehensive income (loss)           E   18,583    E     (238)
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                    2002          2001
                                                 ----------    ----------
<S>                                              <C>           <C>
Cash Flows from Operating Activities:
  Net income                                     E   13,156    E    5,023
  Adjustments to reconcile net income
    from operations to cash
      Depreciation and amortization                  13,489        11,593

  Changes in current assets and liabilities
      Investments                                     3,965          (910)
      Inventories                                      (629)        1,941
      Receivables                                    (2,639)        5,242
      Accounts payable and accrued expenses         (16,797)       (2,692)
      Other                                             374           (10)
                                                 ----------    ----------
         Net cash provided by operating
           activities                                10,919        20,187

Cash Flows from Investing Activities:
  Purchases of fixed assets,
    net of investment grants                         (1,710)       (4,923)
  Decrease in note receivable                             -         4,790
  Other                                                 (11)           65
                                                 ----------    ----------
         Net cash used in investing
           activities                                (1,721)          (68)

Cash Flows from Financing Activities:
  Cash restricted                                     7,532         1,530
  Increase in indebtedness                            4,170             -
  Decrease in indebtedness                           (9,727)      (23,685)
                                                 ----------    ----------
         Net cash provided by (used in)
           financing activities                       1,975       (22,155)

Effect of exchange rate changes on cash and
  cash equivalents                                      (41)       (1,063)
                                                 ----------    ----------

Net increase (decrease) in cash
  and cash equivalents                               11,132        (3,099)

Cash and cash equivalents,
  beginning of period                                11,741        19,691
                                                 ----------    ----------
Cash and cash equivalents, end of period         E   22,873    E   16,592
                                                 ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR SIX MONTHS ENDED JUNE 30, 2002
                                   (UNAUDITED)

NOTE  1.     BASIS  OF  PRESENTATION

The  interim  period  consolidated financial statements contained herein include
the  accounts of Mercer International Inc. and its subsidiaries (the "Company").

The  interim  period consolidated financial statements have been prepared by the
Company  pursuant  to  the  rules  and  regulations  of  the U.S. Securities and
Exchange  Commission  (the  "SEC").  Certain information and footnote disclosure
normally  included in financial statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted pursuant to such
SEC rules and regulations.  The interim period consolidated financial statements
should  be  read together with the audited consolidated financial statements and
accompanying  notes  included in the Company's latest annual report on Form 10-K
for  the fiscal year ended December 31, 2001. In the opinion of the Company, the
unaudited  consolidated   financial  statements  contained  herein  contain  all
adjustments  necessary to present a fair statement of the results of the interim
periods  presented.

NOTE  2.     REPORTING  CURRENCY

Effective  January  1, 2002, the Company changed its reporting currency from the
U.S.  dollar  to  the  Euro. The reason for this change is because a significant
majority  of  the  Company's business transactions are originally denominated in
Euros.  The  Company's  functional  currency  and reporting currency are now the
same.  Prior  years' financial statements had been reported in U.S. dollars, but
have  been  restated  into  Euros  using  the guidance of Statement of Financial
Accounting  Standards  No.  52,  "Foreign  Currency  Translation"  ("SFAS  52").
Therefore,  the financial statements for prior years depict the same trends that
the  previous  financial  statements  presented  in  U.S.  dollars  show.

The Euro was initially implemented by the European Community on January 1, 1999.
By adopting the Euro as the Company's reporting currency, most of the cumulative
foreign  currency  translation losses were eliminated from the Company's balance
sheets  and most of the foreign currency translation losses were eliminated from
the  Company's statements of comprehensive income.  Prior to the restatement, at
December  31,  2001, there was a cumulative foreign currency translation loss of
$64,016  (in thousands of U.S. dollars) included as part of shareholders' equity
in the balance sheet.  In conjunction with the restatement, the majority of this
amount  was  eliminated.  During the six months ended June 30, 2001, there was a
foreign  currency  translation  loss  of  $13,004 (in thousands of U.S. dollars)
included  as  part  of  comprehensive  income  (loss).  In  conjunction with the
restatement,  the  majority  of  this  amount  was  eliminated.

For periods prior to 1999, when the Company's functional currency was the German
deutschmark, the financial statements were restated using a fixed rate of 0.5113
Euros  to  each  deutschmark.  As a result of using the fixed exchange rate, the
Company's  consolidated  financial  statements  for  those  periods  may  not be
comparable  to  the  financial  statements  of  companies  from  other countries
reporting  in  the  Euro.

<PAGE>

NOTE  3.     EARNINGS  PER  SHARE

Basic  earnings  per  share  is  computed by dividing income available to common
shareholders  by  the  weighted  average  number  of shares outstanding during a
period.  Diluted  earnings per share takes into consideration shares outstanding
(computed  under  basic earnings per share) and potentially dilutive shares. The
weighted  average  number  of shares outstanding for the purposes of calculating
basic  earnings  per  share  was  16,874,899 for the six months and three months
ended  June  30,  2002  and  2001, respectively.  The weighted average number of
shares  outstanding  for  the purposes of calculating diluted earnings per share
was  17,054,998  and 17,154,277 for the six months ended June 30, 2002 and 2001,
respectively,  and 17,093,390 and 17,089,806 for the three months ended June 30,
2002  and  2001,  respectively.

NOTE  4.     BUSINESS  SEGMENT  INFORMATION

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

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

<TABLE>
<CAPTION>

                                                 PULP        PAPER        TOTAL
                                               ---------   ---------    ---------
                                                      (Euros in thousands)
<S>                                            <C>         <C>          <C>
SIX MONTHS ENDED JUNE 30, 2002
Sales to external customers                    E  68,084   E  51,451    E 119,535
Intersegment net sales                             2,925           -        2,925
Segment profit                                    13,039       3,376       16,415

Reconciliation of profit:
  Total profit for reportable segments                                  E  16,415
  Elimination of intersegment profits                                         833
  Unallocated amounts, other corporate expenses                            (4,081)
                                                                        ---------

    Consolidated income before income taxes                             E  13,167
                                                                        =========

SIX MONTHS ENDED JUNE 30, 2001
Sales to external customers                    E  80,449   E  31,955    E 112,404
Intersegment net sales                             3,608           -        3,608
Segment profit                                     7,251         876        8,127

Reconciliation of profit:
  Total profit for reportable segments                                  E   8,127
  Elimination of intersegment profits                                         671
  Unallocated amounts, other corporate expenses                            (3,746)
                                                                        ---------

    Consolidated income before income taxes                             E   5,052
                                                                        =========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                 PULP        PAPER        TOTAL
                                               ---------   ---------    ---------
                                                      (Euros in thousands)
<S>                                            <C>         <C>          <C>
THREE MONTHS ENDED JUNE 30, 2002
Sales to external customers                    E  34,451   E  25,877    E  60,328
Intersegment net sales                             1,524           -        1,524
Segment profit                                    18,906         596       19,502

Reconciliation of profit:
  Total profit for reportable segments                                  E  19,502
  Elimination of intersegment profits                                         456
  Unallocated amounts, other corporate expenses                            (1,402)
                                                                        ---------

    Consolidated income before income taxes                             E  18,556
                                                                        =========

THREE MONTHS ENDED JUNE 30, 2001
Sales to external customers                    E  40,763   E  14,845    E  55,608
Intersegment net sales                             1,762           -        1,762
Segment profit                                     1,272         801        2,073

Reconciliation of profit:
  Total profit for reportable segments                                  E   2,073
  Elimination of intersegment profits                                         379
  Unallocated amounts, other corporate expenses                            (2,362)
                                                                        ---------

    Consolidated income before income taxes                             E      90
                                                                        =========

</TABLE>

<PAGE>

                                    EXHIBIT C

                              TRUSTEES' RESOLUTIONS
"WHEREAS:

A.    The Company  wishes  to  enter into a loan agreement (the "Babcock Loan
      Agreement")  with Babcock & Brown Investment Management Partners LP, as
      agent  and original  lender,  ("Babcock") pursuant to which Babcock and
      such other lenders as may  from  time to time become signatories to the
      agreement shall make available to the Company a non-revolving term loan
      in the principal sum of Euro 15,000,000 (the  "Babcock  Loan");

B.    It is a condition  to Babcock making the Babcock Loan available to  the
      Company  pursuant  to  the  Babcock  Loan  Agreement  that  the Company
      enter into:

      (i)     the  Borrower's  Securities  Pledge  Agreements;
      (ii)    the  Borrower's  Assignment  Agreements;  and
      (iii)   the  Security  Trust  Agreement,

      (as defined in the Babcock Loan Agreement and, collectively, the
      "Babcock Credit Documents");

C.    In  connection  with  the  Babcock  Loan Agreement, the Company  wishes
      to authorize its duly appointed officer Jimmy S.H. Lee to grant a power
      of  attorney  to  Mr.  Wolfram  Ridder  (the  "Babcock  Loan  Power  of
      Attorney")  to effect the Babcock  Loan  as  described  in  the Babcock
      Loan  Power  of  Attorney;

D.    The  entering  into  of the Babcock Loan Agreement and the consummation
      of  the  transactions contemplated thereby are in the best interests of
      the Company; and

E.    The  Company has the  corporate  power  and  capacity  to  enter  into,
      execute  and  deliver  the  Babcock  Loan  Agreement  and  the  Babcock
      Credit Documents,

NOW  THEREFORE  BE  IT  FURTHER  RESOLVED  THAT:

1.    The Babcock Loan Agreement in the form presented to the trustees be and
      is  hereby  approved;

2.    The  Company  enter  into,  execute  and deliver to Babcock the Babcock
      Loan Agreement;

3.    The  Company  create,  grant,  issue,  execute and  deliver the Babcock
      Credit Documents;

4.    The  Company  take  all  such  further actions and  execute and deliver
      all  such  further  agreements,  instruments and documents relating to,
      contemplated  by, or  necessary or desirable  in  connection  with  the
      performance  of  its obligations  under,  the  Babcock  Loan  Agreement
      and  the  Babcock  Credit  Documents;

5.    Any  one  officer  or trustee of the Company (the "Authorized Officer")
      be,  and  is  hereby,  authorized  and  directed to execute and deliver
      all agreements, instruments  and  documents

<PAGE>

      which  are  the subject of the  foregoing  resolutions  respecting  the
      Babcock  Loan  including, without  limitation,  the  Babcock  Loan
      Agreement and  the Babcock Credit Documents, in the name and on  behalf
      of the Company,  under  its corporate  seal  or otherwise, in the  form
      presented  to  the  trustees  of  the  Company,  with  such  changes,
      modifications and amendments thereto as  such  Authorized  Officer  may
      in  such  person's  discretion  approve,  which  approval  shall  be
      conclusively  evidenced  by  the  execution  and  delivery  of  such
      agreements,  instruments  and documents including, without  limitation,
      the  Babcock  Loan  Agreement and the Babcock Credit  Documents and, to
      the extent  that any such agreements,  instruments  and documents  were
      executed  and delivered prior to the date  hereof,  the  execution  and
      delivery  thereof by any such  Authorized Officer be,  and  is  hereby,
      approved,  ratified,  and  confirmed;

6.    Any  Authorized  Officer  be, and is hereby, authorized and directed to
      take all  such  further  actions,  execute  and  deliver  such  further
      agreements,  instruments and documents in writing and do all such other
      acts  and  things  as  in  such  person's  opinion  may be necessary or
      desirable  in  the  name of and on behalf of  the  Company,  under  its
      corporate  seal  or  otherwise,  to  give  effect  to  the  foregoing
      resolutions  respecting  the  Babcock  Loan,  which  opinion  shall  be
      conclusively  evidenced  by  the  taking  of  such further actions, the
      execution and delivery  of  such  further  agreements,  instruments and
      documents and the doing of such  other  acts  and  things;

7.    Jimmy  S.  H.  Lee, as duly appointed officer of the Company, be and is
      hereby authorized to represent the Company for the purposes of entering
      into  agreements,  making  and  accepting  all  waivers  and  other
      declarations  and  taking  all  other  legal  steps,  in  particular
      acting himself and/or by granting the Babcock  Loan  Power  of Attorney
      to  Mr. Wolfram Ridder, having his business address at Charlottenstrabe
      59,  10117  Berlin,  who  shall then be so authorized to represent  the
      Company  for  such  purposes,  to  act  individually  and  under
      exemption  from  the  restrictions imposed by Section 181 of the German
      Civil Code and  similar  restrictions  under  foreign  laws,  and  each
      having  the  power  to  delegate  his  power  of attorney, whereby such
      delegation  may  also  be  made  under  exemption from the restrictions
      imposed by Section 181 of the German Civil Code and similar
      restrictions  under  foreign  laws,  to enter into and perform all acts
      and  make  all  declarations  required  for  the execution of all
      agreements  and  documents,  including  the  Babcock  Loan  Agreement
      and  the  Babcock  Credit Documents,  to  be  executed by  the  Company
      in connection with the Babcock Loan; and

8.    To  the  extent necessary,  all acts  of the proxys on the basis of the
      aforementioned  Babcock  Loan  Power of Attorney and all actions  taken
      by  Mr. Jimmy  S. H.  Lee  in  connection with the foregoing are hereby
      approved, affirmed and  ratified"

<PAGE>

                                  SCHEDULE "B"

                               PLEDGED SECURITIES

<TABLE>
<CAPTION>

DESCRIPTION OF SHARE CAPITAL               REGISTERED HOLDER
----------------------------               -----------------
<S>                                        <C>
50,000 DM in ZPR Zellstoff-und             Mercer International Inc.
Papierfabrik Rosenthal Holding
GmbH

E 24,750 in Stendal Pulp                   Mercer International Inc.
Holding GmbH

E 250 in Stendal Pulp                      Mercer International Inc.
Holding GmbH

50,000  DM  in Dresden Papier              Mercer International Inc.
Holdings GmbH

</TABLE>

<PAGE>

                                  SCHEDULE "C"

                      FORM OF FINANCIAL SERVICES AGREEMENT

[  ] *  2002

Mercer  International  Inc.
Giesshubel  Strasse  15
8045  Zurich,  Switzerland
Jimmy  S.H.  Lee
President  and  Chairman

Dear  Sirs,

APPOINTMENT  OF  FINANCIAL  ADVISER  FOR  MERCER'S  EQUITY  SALE

The  purpose of this letter agreement is to set out the terms for the engagement
(the  "Assignment")  of  Babcock  &  Brown  Limited  ("B&B") to act as financial
adviser  to  Mercer  International  Inc.  ("Mercer")  in  respect of the sale (a
"Transaction")  of  equity  in  and/or assets held by Zellstoff-und Papierfabrik
Rosenthal  Holding  GmbH  and  Spezialpapierfabrik  Blankenstein  GmbH (together
"ZPR").  The  Transactions  may  take  place individually or in any combination,
either  directly  in  the  above  indicated companies or through their corporate
vehicles,  including  Mercer  itself.  In  the event that Mercer sells equity in
                                                                 =====
and/or  assets  held  by  Stendal  Pulp  Holding  GmbH  ("Stendal"), this letter
agreement  shall  be extended to include such transaction and the same terms and
conditions  outlined  in  this  letter  agreement  would  apply  to  it.

Scope  of  Work

Within  the  context  of  objectives  to  be  agreed with Mercer, and working in
conjunction  with  Mercer's  legal,  accounting,  tax  and  other  advisers,  as
appropriate,  B&B will be required, as requested by Mercer from time to time to:

(a)     provide  strategic  advice  in relation to the disposal of equity and/or
        assets  in  ZPR;

(b)     assist  in  the  valuation  of  ZPR;

(c)     update  the  ZPR  financial  model  originally  developed  by  B&B;

(d)     produce,  based  on  the  stand-alone  financial  models  for  ZPR, a
        consolidated  financial  model  to  be  used for  the  valuation of
        Mercer's global ownership  in  pulp  assets;

<PAGE>

(e)     assist  Mercer  in  identifying  potential and selecting investors or
        financiers;

(f)     assist in the preparation of an information memorandum to be presented
        to  potential  investors  or  financiers;  and

(g)     assist  in  the  negotiation  of  the  terms  and conditions, and of the
        amounts  to  be  paid  by  investor(s)  or  financier(s)  and  the
        associated documentation  and  implementation  of  the  transaction
        until  closing.

B&B  shall  not  contact any third parties with respect to a Transaction without
the  prior  consent  of  Mercer.

Terms  of  Engagement

1.     FINANCIAL  ADVISER  RESOURCES

       1.1    B&B  shall  at  all  times employ adequate resources to meet the
              requirements of its appointment  under  this  letter  agreement.

       1.2    Without  prejudice  to the generality of Clause  1.1, B&B  shall
              endeavour to  ensure  that  throughout  the  term of this letter
              agreement  the following individuals  shall  be  available,  as
              appropriate:

              (i)     Antonino  Lo  Bianco
              (ii)    Patrick  Demilecamps
              (iii)   Mike  Adam
              (iv)    Dominic  Robertson
              (v)     Guy  Thackwray

              Antonino  Lo  Bianco  will  be  responsible  for  overall
              co-ordination  of this assignment,  while  Patrick  Demilecamps
              will be responsible  for  day to day activities.  To the extent
              required, the team will be supported by other members of  B&B's
              European Project Finance team and of B&B's USA Merchant Banking
              team.

       1.3    B&B  shall  prepare  at such reasonable intervals as Mercer may
              request, reports  on  the  financial  status  and  progress  of
              the  assignment.

2.     INSTRUCTIONS

       B&B shall  proceed  with  the  services  in  accordance with decisions
       and  instructions  given  by  Mercer  in  accordance  with this letter
       agreement provided always that if B&B shall, without undue delay after
       being given any decision, or instruction  otherwise  than in

<PAGE>

         writing, require it to be confirmed in  writing,  such  decision  or
         instruction  shall  not  be  effective  until  written  confirmation
         thereof has  been received  by  B&B.

3.     PAYMENT

       3.1    Retainer  Fees

              B&B  shall  be  entitled  to  a  Euro  25,000  (twenty  five
              Thousand  Euro)  monthly retainer  fee  from  the  date  this
              letter  agreement  becoming effective. Monthly retainer  fees
              will be invoiced monthly in arrears and paid by Mercer within
              30 days  of  invoicing.  No retainer fee will be due in those
              months  when Mercer notify B&B in advance  that  no  services
              will be required.  The retainer fees will be  fully  credited
              against the success fees payable under clause 3.2.  and  will
              not  be  offset  against  the  termination  fees  under
              clause  3.3.

        3.2    Success  Fees

               In  the  event  Mercer,  at  its  sole  election,  determines
               to  and  completes  a  Transaction,  B&B shall be entitled to
               success  fees  (together the "Success Fees") in amounts equal
               to  a  percentage "X" applied to the net proceeds (i.e. after
               the  deduction  of  costs,  fees,  expenses  and  any amounts
               relating  to debt or other financial  liabilities  which  are
               assumed  by the purchaser) received  or  to  be  received  by
               Mercer on the closing thereof:. "X" shall be equal to 3.5% if
               the  US$  amount  it  applies  to  is  less  than or equal to
               US$250 million,  3.0%  if  the US$  amount  it  applies to is
               greater  than  US$ 250  million and less than or equal to US$
               350  million, 2.5% if the US$ amount it applies to is greater
               than US$ 350 million.  In  the  event  Mercer effects  one or
               more  Transactions, the  aggregate Success  Fees shall not be
               less  than  Euro  500,000  (five  hundred  thousands  Euro).
               Mercer  shall  pay,  or  cause  to  be  paid,  to  B&B  the
               Success  Fees  within  five  business  days of the receipt of
               funds from the completion of a Transaction.  Any Success  Fee
               paid  or  payable  to  B&B  hereunder shall offset and reduce
               the  amount  of  any  Break  Fee paid or payable to Babcock &
               Brown  Investment Management Partners LP ("BBIMP") under that
               certain  loan agreement entered into on or about August [21],
               2002 among BBIMP as agent and original lender and Mercer (the
               "Loan Agreement"),  and vice-versa, provided that if the Loan
               (as  defined  in  the  Loan  Agreement)  is  repaid  from the
               proceeds  of  any  Equity  Issue  (as  defined  in  the Loan
               Agreement),  no  such  offset  or  reduction  will  occur.

               If  any  Transactions take place in stages, B&B's appointment
               and the terms and conditions  of this letter agreement  shall
               be  in  respect of each stage until the termination  of  this
               letter  agreement  pursuant  to  the  terms  hereof.

<PAGE>

       3.3    Termination  Fee

              (A)  If  Mercer  decides, within 45 days of signing this letter
                   agreement,  to  withdraw  from  pursuing  any  of  the
                   transactions related to the Assignment, a Termination  Fee
                   of Euro 100,000 (one hundred thousands Euro) shall be paid
                   by Mercer  to  B&B.  In the event of termination by Mercer
                   as  aforesaid,  the provisions  of  Section  5.2(b) hereof
                   shall automatically terminate and be null and  void.

              (B)  If  the  withdrawal  decision  is  taken  after  said  45
                   day  period,  a  Termination  Fee  of  Euro  200,000  (two
                   hundred thousands Euro) shall be paid to B&B  by  Mercer.

       3.4    Expenses

              All  reasonable  out-of-pocket  expenses  (including,  but  not
              limited to, travel  or accommodation away from the office) will
              be payable to B&B by Mercer.

       3.5    Invoicing

              Expenses  shall be invoiced by B&B monthly in arrears, and paid
              by Mercer within 30  days.

       3.6    Taxes

              All  fees  and  expenses  are  exclusive  of  VAT.

4.     CONFIDENTIALITY

       4.1    Save  as  may  be  otherwise  agreed,  B&B  shall  treat  as
              confidential  all  information  whether  in  written, visual,
              electronic,  mechanical, optical or  oral  form  supplied  by
              Mercer,  or  acquired in the course of this engagement.

       4.2    Unless specific  authorisation is given in writing by Mercer,
              B&B shall not be entitled to make use of any such information
              for any purpose other than in direct connection  with  the
              Assignment.

       4.3    Clause  4.1  or  4.2 shall not apply to B&B in relation to any
              information if  and  to  the  extent  that  such  information:

              (i)     was  before  the  date  of  its  receipt  under  or
                      pursuant to the engagement  known to B&B, otherwise
                      than  in  consequence  or  communication thereof in
                      confidence  by  or  on  behalf  of  Mercer;

              (ii)    was received by B&B from an unconnected source which
                      B&B believed was entitled to supply the same without
                      breach  of  confidence;

<PAGE>

              (iii)   was  before  or  at  the time of its receipt  under
                      or  pursuant  to  this  engagement  or  thereafter
                      becomes,  in  the  public  domain otherwise in
                      consequence  of  a  breach  of  an  obligation  by
                      B&B;  or

              (iv)   is  required  to  be  disclosed  by  B&B pursuant to
                     law or an order or directive of a court or competent
                     regulatory  authority.

       4.4    The  confidentiality undertaking contained in  this  Clause
              4  shall  continue  for  a  period  of  2  years  from  the
              date of this letter agreement.

5.     TERM  AND  TERMINATION

       5.1    This  letter  agreement  shall  terminate  automatically,
              without  further  action  of  the  parties hereto, on the
              earlier date  (the  "Termination Date") of the  following
              date:

              (i)     the  repayment  in  full  by  Mercer of  the E 15
                      million  bridge  loan  facility  provided  and/or
                      arranged by B&B on the date hereof (the "Facility")
                      in  circumstances  where  Mercer  has  paid  the
                      Break  Fee  under  the  Facility;

              (ii)    the  Facility  having  matured  or been accelerated
                      (by  default  or otherwise)  and  B&B  having  taken
                      action  to  realize on the security for the Facility
                      or  collect the same. In the event of termination by
                      Mercer  pursuant  to  this  clause, a Penalty Fee of
                      Euro 1,000,000 (one million Euro)  shall  be paid by
                      Mercer  to  B&B;  or

              (iii)  [June  30,  2004].

       5.2    (A)    Mercer  shall  be  entitled to terminate this  letter
                     agreement at any  time prior to the Termination Date:
                     (i)  if B&B commits  a material breach of any of its
                     obligations  hereunder  and fails to rectify the same
                     within  10  working days of being notified in writing
                     by Mercer; or (ii) upon giving 30 days written notice
                     to  B&B that  Mercer  has  determined  not to proceed
                     with a  Transaction  for  at  least  12  months  from
                     the  date  of  notice,  in  which case the applicable
                     Termination  Fee  pursuant  to  Clause  3  shall  be
                     due.

              (B)    Subject  to  Section  3.3(A)  hereof,  if  Mercer
                     terminates this letter agreement  pursuant  to Clause
                     5.2(A)(ii),  but pursues a Transaction during such 12
                     month period, then the terms of this letter agreement
                     and  B&B's appointment shall  be reactivated and  B&B
                     shall  deduct any payment received under  Clause  3.2
                     from  the  Success  Fees  payment.

       5.3           Termination  of this letter agreement does not affect
                     the parties' accrued  rights  and  obligations at the
                     date  of  termination.

       5.4    Clauses  4 (Confidentiality), 5 (Term  and  Termination),  6
              (Liability), 7 (Indemnity),  8  (Rights  of  Third Parties),
              9 (Severability) and 10 (Governing Law),

<PAGE>

              together  with  those  Clauses  the  survival  of  which  is
              necessary for the interpretation  or  enforcement  of  this
              letter  agreement,  shall  survive termination  of  this
              letter  agreement  and  shall  continue in full force and
              effect.

6.     LIABILITY

       6.1    Save as expressly provided in this letter agreement, neither
              party shall be liable in any action initiated by one against
              the  other  for  any  consequential  or  indirect  losses
              (including, without limitation, loss  of profit) of any kind
              connected  with  the performance of or  failure  to  perform
              this letter agreement.

       6.2    Without prejudice to Clause 6.1, B&B's (and its affiliates')
              liability to  Mercer  for  any  and  all  other  losses  and
              damages  howsoever  resulting  from B&B's  (and/or  its
              affiliates')  performance  or  failure to perform under this
              letter  agreement, shall not exceed the total fees  paid  to
              B&B  under  this  letter  agreement,  unless  such liability
              arises  from  B&B's  bad faith, gross negligence or  willful
              misconduct.

7.     INDEMNITY

       7.1    Recognising  that  B&B's  role  is  limited  to  acting  as
              Mercer's  adviser,  Mercer  agrees  to  indemnify  and hold
              harmless  B&B  and  its  affiliates  (and  the  partners,
              directors,  officers,  employees and controlling persons of
              B&B  and  its  affiliates)  to  the  full  extent  lawful
              against  any  and all  claims,  damages, losses, liabilities
              and expenses as incurred (including, but not limited to, all
              reasonable  fees (including legal fees), costs, expenses and
              disbursements of B&B and  its  affiliates)  arising  out  of
              B&B's engagement hereunder and the transactions contemplated
              hereby;  provided,  however,  there  shall  be excluded from
              such indemnification any such claim, damage, loss, liability
              or  expense to the  extent that this arises out of or to the
              extent that this is based upon any action  or failure to act
              by  B&B,  other  than an action or failure to act undertaken
              at  Mercer's  specific  request, that is found to constitute
              bad faith, willful  misconduct  or  gross  negligence on the
              part of B&B, its affiliates or those  for  whom  at  law B&B
              is  responsible.

       7.2    The  foregoing  indemnity will be in addition to any  rights
              that  B&B  and  its affiliates (and the partners, directors,
              officers,  employees  and  controlling persons  of  B&B  and
              its  affiliates)  may  have  at  common  law or  otherwise
              (including,  but not limited to, any right of contribution).

<PAGE>

8.     RIGHTS  OF  THIRD  PARTIES

       A  person  who  is  not  a  party  to this letter (other than those
       persons,  companies  and  entities  afforded protection pursuant to
       Clauses 6 and 7) agreement has no right under the Contracts (Rights
       of  Third  Parties)  Act  1999 to enforce any term of  this  letter
       agreement.

9.     SEVERABILITY

     Each  provision  of this letter agreement is severable and if any provision
is or becomes invalid or unenforceable or contravenes any applicable regulations
or  law,  the  remaining  provisions  will  not  be  affected.

10.     GOVERNING  LAW  AND  JURISDICTION

     This letter agreement shall be governed by and construed in accordance with
New  York  Law.  The  parties  agree  that  the  courts  of  New York shall have
exclusive  jurisdiction  in  relation  to any dispute or claim arising from this
letter  agreement.

Yours  faithfully

Signed:                                               Date:
          --------------------------------                   -------------------
          For  and  on  behalf  of
          Babcock  &  Brown  Limited

Signed:                                               Dated:
          --------------------------------                   -------------------
          Acknowledged  and  agreed  for
          Mercer  International  Inc.

<PAGE>

                                  SCHEDULE "D"

                             FORM OF ADVANCE REQUEST

*

Attention:   *

Dear  Sirs:

     The undersigned, Mercer International Inc., (the "Borrower"), refers to the
Loan  Agreement dated as of August *, 2002 (the "Loan Agreement) among Babcock &
Brown  Investment  Management  Partners LP, as Agent and as a Lender thereunder,
and  the  Borrower.

     All  capitalized  terms  herein  bear the meaning given to them in the Loan
Agreement.

     The  Borrower  hereby gives  notice  that  the Borrower hereby requests the
Advance of  the  Loan  under  the  Loan  Agreement,  as  set  out  below:

     (a)  The requested date  of  the Advance, being a Banking Day, is August *,
          2002;  and

     (b)  The  aggregate  amount  of  the  Advance  is E 15,000,000;

                                            Yours  truly,

                                            MERCER  INTERNATIONAL  INC.

                                            Per:
                                                  ------------------------------
                                                  Authorized  Signing  Officer

<PAGE>

                                  SCHEDULE "E"

                      SHAREHOLDERS AGREEMENT HEADS OF TERMS

A  Shareholders' Agreement (the "Agreement") shall be entered into in respect of
ZPR  Zellstoff-und  Papierfabrik Rosenthal Holding GmbH (the "Company") so as to
provide  that upon a disposal (following enforcement of security) by the Lenders
of  an  interest  of  less  than  51%  of  the  Company  (the  "A  Share"):

(1)     pre-emption  rights  are  granted  to  each  shareholder  including  the
        following  terms:

        PRE-EMPTION

        (a)  No  shareholder  shall  be entitled to dispose of any interest in
             any  of  its  shares  (other  than to an affiliate) without first
             offering  them  for  transfer  to  the  other  shareholders  (the
             "Recipient").

        (b)  The  notice  of  transfer shall specify the shares offered, the
             price at which  they are offered, the terms of payment and any
             other material terms.  The notice  may  not  be  revoked.

        (c)  The  Recipient  shall  notify  the  selling  shareholder  within
             15 days whether  it  is  willing  to  purchase  the  shares.

        (d)  On  the  expiry  of  the offer period, if the Recipient has
             notified the selling  shareholder  that it wishes to purchase
             the shares, the Recipient shall be  bound to pay the purchase
             price for, and to accept a transfer of, the shares and the selling
             shareholder shall be bound, on payment of the purchase price, to
             transfer  such  shares  to  the  Recipient.

        (e)  If  after  the  expiry  of  the  offer  period the shares are not
             purchased  by  the  Recipient the selling shareholder may transfer
             the  shares  to  any person and at  a price which is not less than
             the  price specified in the original notice of transfer  and  upon
             terms  no  more advantageous to the buyer as specified in the said
             notice.

(2)     tag along rights are granted to each shareholder including the following
        terms:

        TAG  ALONG

        (a)  If  at  any  time a shareholder intends to dispose of some or all
             of its shares  or  any  interest in its shares to a third party
             (after giving effect to the  pre-emption  rights  set  out above),
             such shareholder shall give notice in writing  to  the  other
             shareholders  (the  "Recipient")  specifying:

             (i)    the  number  of  shares  and the nature of the interest in
                    the shares of which  it  intends  to  dispose;

             (ii)   the  name(s)  of the proposed transferee(s) of the relevant
                    shares; and

<PAGE>

             (iii)  the  terms  of  the  disposal.

        (b)  If  the  Recipient  wishes to dispose of its shares on the same
             terms as specified  in the notice then it shall within 15 business
             days after the date of the  notice  notify the selling shareholder
             in  writing.

       (c)   The  selling  shareholder shall not dispose of the relevant shares
             unless it  has:

             (i)    given  a  notice not less than 15 business days before the
                    disposal; and

             (ii)   procured, on the same terms as contained in the notice,
                    the disposal of the  shares  or  any  interest  in  them
                    of the Recipient if so requested by the Recipient;

(3)    drag  along  rights  are  granted  to  each  shareholder  including  the
       following  terms:

       DRAG  ALONG

       (a)  If at any time a shareholder receives a bona fide third party offer
            to purchase all the shares of the Company (an "Initial Offer"), such
            shareholder shall notify the other  shareholder  (the  "Recipient").

       (b)  The notice  shall specify the offer price, the terms of payment and
            any other  material  terms  of  the  Initial  Offer.

       (c)  The  Recipient  shall  notify  the selling shareholder within 7 days
            of receipt  of  the  notice  whether  t  is  willing  to  accept the
             Initial Offer.

       (d)  If  shareholders  holding  a simple majority  of  the shares in  the
            Company  wish  to  accept  the Initial  Offer  then  they shall give
            notice (the "Second Offer") to those shareholders who have indicated
            that  they  do  not  wish  to  accept  the  offer  (the "Declining
            Shareholders") that they wish to sell to them all of their shares on
            the  terms  and  conditions  of  the  Initial  Offer.

       (e)  If  the  Declining  Shareholders  do  not  accept  the  Second Offer
            and  purchase  the  shares  of  the  accepting  shareholders with 15
            days, the Declining Shareholders  shall  be deemed to have delivered
            a notice accepting the Initial Offer and all  shareholders  will  be
            required to participate and sell their shares pursuant  to the terms
            and  conditions  of  the  Initial  Offer.

(4)     the  following  actions  may  not  be  taken  without  the prior written
        approval  of  each  shareholder:

       (a)  any  revocation  or  alteration  of  the  Company's  constitutional
            documents;

       (b)  the  creation,  or  issuance of any shares in the  Company  or  the
            issuance of any securities, warrants or options exchangeable for or
            carrying the right to subscribe  for  shares  in  the  Company;

<PAGE>

       (c)  any  conversion,  reclassification,  subdivision,  consolidation,
            exchange or  any  other  reorganisation  of  the  Company's  share
            capital;

       (d)  the  redemption  or  purchase  by  the Company of any of its share
            capital or securities convertible into shares or the cancellation
            of subscription rights in respect  of  its  shares  or  securities
            convertible  into  its  shares;

       (c)  the  entry  into  of  any  transaction  with a shareholder or any
            person affiliated  with  a  shareholder (each a "Related Party"),
            including, without limitation,  any loans to a Related Party, the
            payment  of  any management fees to a Related Party, the disposal
            by  the  Company  of  any  assets  to  a  Related  Party  or  the
            acquisition  by  the  Company  of any assets from a Related Party
            other than:

            (i)     transactions  in  the  ordinary  course  of  business
                    involving  aggregate consideration  of not more  than
                    Euro 100,000 per transaction or Euro 300,000 for  all
                    such  transactions  in  any  Financial  Year;

           (ii)     any  agreements,  contracts or arrangements  existing
                    at the date of the Agreement  and  which, if  entered
                    into  after  the  date  of  the  Loan Agreement,  are
                    permitted  under  the  terms  of  the Loan Agreement;

           (iii)    salaries,  benefits  and  other remuneration paid in
                    the ordinary course  and  reasonably  consistent with
                    past practice to officers, directors or employees;

       (d)  the  transfer  or  disposal of all or substantially all of the
            Company's property,  assets  or undertaking, taken as a whole;

       (e)  the  merger,  amalgamation,  reorganisation  or  consolidation
            of  the Company;

       (f)  the  repayment  of  any  loans  owing  by  the  Company  to  a
            shareholder  or  any  person  affiliated  with  a  shareholder
            other  than:

            (i)     pursuant  to  the  terms  of  agreements  existing  at
                    the  date of  the  Agreement  provided  that  any  such
                    payments are permitted under the terms of the ZPR Credit
                    Agreement and the agreements themselves, if entered into
                    after  the  date of the Loan Agreement were entered into
                    in compliance with the terms of the Loan  Agreement; and

            (ii)    repayments  pursuant  to  terms  of  agreements approved
                    by all of the shareholders;  or

       (g)  reorganise  or change in any material respect the nature or scope
            of  the  Company's  business  from  the  pulp,  paper  or  forest
            products  business  and  activities  and  businesses  reasonably
            ancillary  thereto.

(5)    the management of the Company shall not do any of following without the
       agreement  of  the  A  Director:

<PAGE>

       (a)    save  to  the  extent  required  to  do  so as a matter of law,
              pass any resolution  for  winding  up  the  Company;

       (b)    save  to  the extent required to do so as a matter of law, apply
              for the appointment  of  a  receiver  or  an administrator over
              the Company's assets; or

       (c)    do  or  fail to do anything which could reasonably result in an
              event of default  occurring  under  the  ZPR  Credit  Agreement.

(6)    the management of the Company and each of its Subsidiaries shall include
       one  managing  director (Geschaftsfuhrer) appointed by the holder of the
       A  Share  (the  "A  Director")  and,  subject  to  (7) below,  a  board
       meeting shall not be quorate  unless  the  A  Director  is  present;

(7)    quorum  for directors shall be 3 of which one is the A Director provided
       that if  quorom  is not met at a meeting, the meeting shall be adjourned
       for  at  least  7  days and then reconvened.  At the reconvened meeting,
       quorum  shall  be 2 directors  regardless  of  whether  the  A  Director
       is  present.

(8)    a  business  plan  for each Financial Year of the Company (including any
       Subsidiaries  of  the  Company)  shall be submitted for approval to each
       of the shareholders  not less than 45 Days before the end  of  the  then
       current  Financial  Year  of  the  Company.  Each  business  plan  shall
       include:

       (a)  a  projected  balance  sheet  and  profit  and  loss  account;

       (b)  a  detailed  cashflow  statement  detailing,  in  particular,
            payments to affiliated  companies;

       (c)  an  estimate  of  working  capital  requirements;

       (d)  an  operating  budget;  and

       (e)  a  report on the Company's performance during the current Financial
            Year of  the  Company.

Where a matter which would otherwise require approval under these provisions has
been  expressly  included  in  a business plan approved by the A Shareholder, no
further  approval shall be required provided that there is no material change in
the  terms  of  the  transaction  from  those  approved  in  the  business plan.

(9)    If  after  the  date of the Agreement a material breach of the  Agreement
       occurs by a shareholder which is not remedied within 30 days after notice
       or an act  of  insolvency  occurs  relating  to  such  shareholder  (a
       "Defaulting Shareholder"),  the  Defaulting  Shareholder  shall  lose its
       rights to nominate directors, its entitlement to vote, and will be deemed
       to have granted an option to  the non-defaulting  shareholder to purchase
       all  of  its shares for an amount equal  to  the  fair  market  value
       thereof  minus  10%.

<PAGE>

For the purpose of the Agreement, fair market value shall be in an amount agreed
upon  by  the  parties  or failing agreement, on amount determined pursuant to a
valuation  and  arbitration  methodology  to  be  included  in  the  Agreement.

(10)    No shareholder shall be required to advance funds or provide guarantees
        unless  unanimously  approved  by  all  shareholders.

(11)    Any  party acquiring shares will be required to enter into an identical
        shareholders'  agreement.

(12)    Any  shareholder  may  upon  written notice require that, to the extent
        permitted,  the  Company's  constitutional  documents  be  amended  to
        reflect the terms  of  the  Agreement.

In  this  Schedule  capitalised terms not otherwise defined in the Schedule have
the  meaning  given to them in the Loan Agreement and "Loan Agreement" means the
loan  agreement  to  which  this  forms  a  Schedule.

<PAGE>

                                  SCHEDULE "F"

                                 CORPORATE CHART

--------------------------------------------------------------------------------
                            MERCER INTERNATIONAL INC.
                                (THE "BORROWER")
                                      (USA)
--------------------------------------------------------------------------------

ZPR ZELLSTOFF-UND
PAPIERFABRIK                                               STENDAL PULP HOLDINGS
ROSENTHAL                       DRESDEN PAPIER             GMBH
HOLDING  GMBH                   HOLDINGS GMBH              ("SPH")
("ZPR HOLDING")                 (GERMANY)                  (GERMANY)
(GERMANY)

SPECIALPAPIERFABRIK                                        ZELLSTOFF STENDAL
BLANKENSTEIN GMBH               DRESDENT PAPIER GMBH       GMBH
("SPB")                         (GERMANY)                  ("ZSG")
(GERMANY)                                                  (GERMANY)

ZELLSTOFF-UND
PAPIERFABRIK
ROSENTHAL GMBH & CO.
KG
("ZPR & CO.")
(GERMANY)Exhibit 10.4

<PAGE>

THIS  LOAN  AGREEMENT  dated  the     day of August, 2002,

AMONG:
          MFC  MERCHANT  BANK  S.A.,  a  bank  organized under the laws
          of Switzerland and having  an  office  at Kasernenstrasse  1,
          9100 Herisau AR, Switzerland, as Agent

AND:
          MFC  MERCHANT  BANK  S.A.  AND  SUCH  OTHER  LENDERS  AS  ARE
          SIGNATORIES HERETO

AND:
          MERCER  INTERNATIONAL  INC.,  a Massachusetts trust organized
          under  the  laws of  the State of Washington,  U.S.A., having
          its registered  office  at  Suite  6100,  701  Fifth  Avenue,
          Seattle,  Washington,  U.S.A.,  98104-7098,  as  Borrower

WHEREAS:

A.   The Borrower has requested that the Loan be made available by the Lenders
     to  the  Borrower;  and

B.   The  Lenders  have agreed to make the Loan available to the Borrower upon
     the  terms  and  conditions  set  out  herein.

NOW  THEREFORE  THIS  AGREEMENT  WITNESSES  THAT  in consideration of the mutual
covenants  and undertakings and the terms and conditions set out herein, and for
other  good and valuable consideration (the receipt and sufficiency of which are
hereby  acknowledged),  the  parties  hereto  acknowledge, declare, covenant and
agree  as  follows:

                                   ARTICLE 1.
                                 INTERPRETATION

     Section  1.1     Definitions.  When  used  in this Agreement (including the
recitals  and  schedules hereto) or in any amendment hereto, the following terms
shall,  unless  otherwise  expressly  provided,  have  the  following  meanings,
respectively:

"Advance"  means  the  advance  of  the  full  amount  of  the  Loan;

"Advance  Date" means the date specified in the Advance Request, such date to be
no  earlier  than  the  Closing  Date  and  no  later than the Termination Date;

"Advance  Request"  means  a  written notice in the form set out in Schedule "C"
hereto  to  be  provided by the Borrower to the Agent not less than two (2) days
prior  to  the  Advance  Date  requesting  the  Advance  of  the  Loan;

<PAGE>

"Affiliate"  means,  with respect to any given Person, any other Person directly
or  indirectly  Controlling,  Controlled  by  or under common Control with, such
Person;

"Agent"  means  MFC  Merchant  Bank  S.A.  in  its  capacity as agent hereunder;

"Agreement"  means  this  non-revolving  term  loan  agreement  as supplemented,
amended or otherwise modified, extended, renewed, replaced or restated from time
to  time  by any agreement supplemental or ancillary hereto; and the expressions
"Article"  and  "Section"  followed by a number mean, and refer to the specified
Article  or  Section  of  this  Agreement;

"Amalgamation"  means  a  combination  of two or more corporate entities, or the
businesses  or  assets  of  two  or  more  corporate  entities,  whether  by
reconstruction, reorganization, consolidation, combination, amalgamation, merger
or  otherwise;

"Asset  Sale"  means,  other  than  a sale or sales of inventory and other sales
within  the  ordinary  course  of  business,  any  direct  or  indirect  sale,
disposition,  monetization or securitization or other exchange of assets held by
the  Borrower,  directly  or  indirectly, including a portion or portions of the
Borrower's  interests  in ZPR and/or ZSG and shall include, without limiting the
generality  of  the  foregoing,  any  ZPR  Asset  Sale;

"Assignment  Agreements"  means  the  SPB  Assignment Agreement, the ZPR Holding
Assignment  Agreement  and  the  Borrower's  Assignment  Agreements;

"Authorization"  means  any  permit,  licence,  approval, consent, order, right,
certificate,  judgment,  writ,  injunction,  award,  determination,  direction,
decree,  authorization, franchise, privilege, grant, waiver, exemption and other
concession  or  by-law, rule or regulation of, by or from any Official Body, all
as  amended,  supplemented,  modified,  replaced  or  renewed from time to time;

"Babcock"  means  Babcock  &  Brown Investment Management Partners LP, a limited
partnership  organized under the laws of the State of Delaware, having an office
at  2  Harrison  Street,  San  Francisco,  U.S.A.,  94015;

"Babcock  Lenders"  means Babcock and such other lenders as are or may from time
to  time  become  signatories to the Babcock Loan Agreement and their respective
successors  and  assigns  and  "Babcock  Lender"  means  any one of them and its
successors  and  assigns;

"Babcock Loan" means the E 15,000,000 loan to be arranged or advanced by Babcock
to  the  Borrower  under  the  Babcock  Loan  Agreement;

"Babcock  Loan  Agreement"  means the E 15,000,000  loan  agreement of even date
hereof  between  the  Borrower  and  Babcock  relating  to  the Stendal Project;

"BBA"  means  the  British  Bankers'  Association;

"BBA  Libor"  means  the  one  (1)  month, three (3) month or six (6) month Euro
London  Inter-Bank  Offered  Rate  fixed  on  the  Quotation  Date by the BBA as
selected  by  the  Borrower  from  time  to  time;

<PAGE>

"BHV"  means  Bayerische  Hypo-und Vereinsbank AG, a stock corporation organized
under  the  Federal  Republic  of  Germany  having  its  registered office at Am
Tucherpark  1,  80538  Munchen,  Federal  Republic  of  Germany;

"Blitz"  means  Blitz  01-858  GmbH;

"Borrower"  means  Mercer  International  Inc.;

"Borrower's  Assignment  Agreements"  means  each assignment agreement in a form
satisfactory  to  the  Agent, pursuant to which the Borrower shall assign to the
Security  Agent its interests in intercompany loans due or accruing due from SPH
and  ZPR  Holding;

"Borrower's Certificate" means a certificate of a senior officer of the Borrower
substantially  in  the form set out in Schedule "A" hereto or such other form as
may  be  requested  from  time  to  time  by  the  Agent  or  the  Lenders;

"Borrower's  Securities Pledge Agreements" means each pledge agreement in a form
satisfactory  to the Agent, pursuant to which the Pledged Securities held by the
Borrower  shall  be  pledged  in  favor  of  the  Security  Agent;

"Business"  means  the  business  of  the  Borrower  as conducted as at the date
hereof;

"Business Day" means any day on which the Agent is open for business in Herisau,
Switzerland;

"Capitalized  Interest"  means  accrued  Interest  added  to  the  Principal Sum
pursuant  to  Section  3.1(5)  of  this  Agreement;

"Change  of  Control"  means:

        (i) when a "person" or "group" (within the meanings Sections  13(d)  and
        14(d)(2)  of  the Exchange  Act) becomes the ultimate "beneficial owner"
        (as  defined  in Rule 13d-3  under the Exchange Act) of more than 50% of
        the  total voting power of the then  outstanding  Voting  Stock  of  the
        Borrower  on a fully-diluted basis; (ii) when  individuals  who  at  the
        beginning  of  any  period  of  any  two  consecutive calendar  years
        constituted  the  Trustees  (together with any trustees who are Trustees
        on  the date hereof and any  new  trustees whose election as Trustees or
        whose  nomination  for  election  by  the  Borrower's  stockholders  was
        approved  by a vote of at least two-thirds of the Trustees then still in
        office  who  either were Trustees  at  the  beginning  of such period or
        whose election or nomination for election  was  previously  so approved)
        cease  for  any reason  to constitute a majority  of  the  Trustees then
        in  office;  (iii)  the  sale,  lease,  transfer,  conveyance  or  other
        disposition (other than by way of merger or  consolidation), in one or a
        series  of  related  transactions,  of  all  or substantially all of the
        assets  of  the  Borrower  to  any such "person" or "group"; or (iv) the
        merger or consolidation of the Borrower with or into another corporation
        or the merger of another  corporation with or into the Borrower with the
        effect  that  immediately  after  such  transaction any such "person" or
        "group" of persons or entities  shall have  become  the beneficial owner
        of securities of the surviving corporation of such  merger

<PAGE>

        or  consolidation  representing a majority of the total voting power of
        the then outstanding  Voting  Stock  of  the  surviving  corporation;

"Charter Documents" means, in respect of any Person and as the context requires,
the  charter  documents  and by-laws, declaration of trust, trustees regulations
and  all  amendments  thereto,  of  such  Person;

"Closing"  means  the closing of the transactions contemplated by this Agreement
on  the  Closing  Date;

"Closing  Date"  means  two  (2)  Business  Days  following  satisfaction by the
Borrower  or  waiver  by  the Agent of all conditions to Advance set out in this
Agreement;

"Commitment"  means  the  commitment  of  the  Lenders  to fund the Loan, in the
Principal  Sum,  on the Advance Date, and, when used in relation to a particular
Lender,  such Lender's committed share of the Total Commitment as set out on the
signature  pages  hereof  next  to  such  Lender's  name;

"Control"  over  a  Person  means the possession, directly or indirectly, of the
power  to  direct  or cause the direction of the management and policies of such
Person,  whether  through  the  ownership  of  voting securities or other equity
interest,  representation on its board of directors or a body performing similar
functions,  by  contract or otherwise.  The terms "Controlling" and "Controlled"
will  have  corollary  meanings;

"corporation"  means  a  body  corporate,  corporation,  company,  partnership,
business  trust  or  joint  venture;

"Credit  Documents"  means  this  Agreement,  the  Intercreditor  Agreement, the
Security  Trust  Agreement and the Security Documents and all other documents to
be  executed  and  delivered  to  the  Agent, the Agent for and on behalf of the
Lenders,  the  Security  Agent,  the  Lenders or a Lender by the Borrower or any
Affiliate  thereof  hereunder  or  thereunder;

"Dangerous  Substance"  means  any  radioactive  emissions  and  any  natural or
artificial substance (whether in solid or liquid form or in the form of a gas or
vapor  and  whether alone or in combination with any other substance) capable of
causing  harm to man or any other living organism or damaging the environment or
public  health  or welfare including but not limited to any controlled, special,
hazardous,  toxic,  radioactive  or  dangerous  waste;

"Debt"  of  any  Person  means:  (i)  all indebtedness of such Person for and in
respect  of  borrowed  money,  including  obligations  with  respect to bankers'
acceptances,  letters  of credit and letters of guarantee; (ii) all indebtedness
of  such  Person  for the deferred purchase price of property or services; (iii)
all  indebtedness  created  or arising under any conditional sale or other title
retention  agreement  with  respect  to  property  acquired by such Person (even
though  the  rights  or remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property); (iv)
all  obligations  under  leases  which,  in  accordance with GAAP (or accounting
principles  generally  accepted  in  the  jurisdiction  of  incorporation  or
organization of such Person), are recorded as capital leases in respect of which
such Person is liable as lessee; (v) the aggregate amount at which any shares or
equivalent  ownership  rights in the capital of such Person which are redeemable
or retractable

<PAGE>

at  the  option  of  the holder thereof may be retracted or redeemed;  (vi)  all
indebtedness  arising  under  any  currency  swap or interest rate swap, cap  or
collar  arrangement,  forward  sale  or  any  other derivative instrument; (vii)
any  indebtedness  in  respect  of any amount raised under any other transaction
having  the commercial effect of a borrowing or raising of money; and (viii) all
Debt  Guaranteed  by  such  Person;

"Debt  Guaranteed"  by  any  Person  means  the  maximum  amount  which  may  be
outstanding  at  any time of: (i) any guarantee, indemnity, support agreement or
similar  assurance  of  financial  status  or  against financial loss of another
Person;  and  (ii) all Debt  of the kinds referred to in (i) through (vi) of the
definition  of Debt which is directly or indirectly guaranteed by such Person or
which  such  Person  agreed (contingently or otherwise) to purchase or otherwise
acquire,  or  in  respect  of which such Person has otherwise assured a creditor
against  loss  by  means of an indemnity, security, bond or similar undertaking;

"Default"  means an event which, with the giving of notice or passage of time or
both,  would  constitute  an  Event  of  Default;

"Default  Interest  Rate"  means  Euribor  plus  15.0%  per  annum;

"DP"  means  Dresden  Papier  GmbH;

"DP  Holdings"  means  Dresden  Papier  Holdings  GmbH;

"Engagement  Letter" means the engagement letter agreement between the Agent and
the  Borrower  dated  for  reference  August  16,  2002;

"Environmental  Claim"  means  any  claim  by  any  Person  as a result of or in
connection  with  any  violation  of  Environmental  Law  or  any  Environmental
Contamination which could give rise to any remedy or penalty (whether interim or
final)  or  liability  for  any  Group  Company  or  any  Lender;

"Environmental  Contamination"  means  each  of  the  following  and  their
consequences:

   (i)  any  release,  emission,  leakage or spillage of any Dangerous Substance
        into  any  part  of  the  environment;

  (ii)  any  accident,  fire,  explosion  or  sudden event which is directly or
        indirectly  caused  by  or  attributable  to  any  Dangerous  Substance;
        or

 (iii)  any  other  pollution  of  the  environment;

"Environmental  Law"  means  any  national  or  supranational Law, regulation or
directive  concerning  the  protection  of  human  health  or the environment or
concerning  Dangerous  Substances;

"Environmental  License"  means  any  Authorization under any Environmental Law;

"Equity  Issue" means the issue or sale by the Borrower of the Borrower's equity
securities  or  other  ownership  interests, or rights to acquire the Borrower's
equity  securities or other ownership interests, other than grants of options to
directors,  officers  or  employees  of  the

<PAGE>

Borrower and/or its Affiliates to purchase  equity  securities  of the Borrower,
and equity securities issued upon the  exercise  of  such  options;

"ERISA"  means the United States Employee Retirement Income Security Act of 1974
as  amended;

"ERISA  Affiliate"  means  each  trade or business, whether or not incorporated,
that  would  be treated as a single employer with the Borrower under Section 414
of  the United States Internal Revenue Code of 1986.  When any provision of this
Agreement  relates  to  a  past  event,  the term "ERISA Affiliate" includes any
Person  that  was  an  ERISA  Affiliate of the Borrower at the time of that past
event;

"Exchange  Act"  means  the  United  States  Securities Exchange Act of 1934, as
amended,  or  any  successor  statute, and the Rules and Regulations thereunder;

"Euribor"  means,  subject  to Section 3.5(2) hereof, the rate determined by the
Agent to be:  (i) the one (1) month, three (3) month or six (6) month percentage
rate  set by the European Banking Federation, which appears on the Telerate page
Euribor for that period, or any page replacing such page, at 11:00 a.m., London,
England  local  time,  on  the Quotation Date; or (ii) if the Agent is unable to
access  the  relevant  screen rate or if a rate is not available on the relevant
screen  for  the period, BBA Libor at 11:00 a.m., London, England local time, on
the  Quotation  Date;  or (iii) if no such published rate is then available, the
rate  of  interest  calculated  by  the  Agent,  as being the arithmetic average
(rounded  up, if necessary, to the nearest full multiple of 1/16 of 1%) at which
it  would be prepared to offer to leading banks in the London, England interbank
market for delivery on the first day of the particular Interest Period and for a
period  equal  to  such  Interest  Period  based on the number of days comprised
therein,  deposits  in  Euro  of  amounts comparable to the Principal Sum or the
balance  outstanding  thereof  during such Interest Period, at or prior to 11:00
a.m.,  London,  England  local  time,  on  the  Quotation  Date;

"Euro"  and "E"  means  the  official currency of the European Monetary Union;

"Event  of  Bankruptcy"  means, in respect of any Person, that such Person shall
generally  not pay its Debts as such Debts become due, or shall admit in writing
its  inability  to  pay  its Debts generally as they become due, or shall make a
general  assignment  for  the  benefit  of  creditors, or that such Person shall
commence  a voluntary case or proceeding under the United States Bankruptcy Code
of  1978,  as  amended,  or  under  any  other  United  States  Federal or State
bankruptcy, insolvency or similar Law (collectively, "U.S. Bankruptcy Laws"), or
an  involuntary  case  under  any U.S. Bankruptcy Law shall be commenced against
such  Person, or any other proceeding shall be instituted by or against any such
Person  seeking to adjudicate it a bankrupt or insolvent or seeking liquidation,
winding-up,  a  reorganization, arrangement, adjustment, protection, relief or a
composition  of it or its Debts under any Law relating to bankruptcy, insolvency
or  reorganization  or  relief  of debtors, or seeking the entry of an order for
relief  or  for  the appointment of a receiver, trustee, custodian, liquidator,
conservator  or other similar official for it or for any substantial part of its
property  and, in the case of any such proceeding instituted against such Person
(but  not  instituted  by  such  Person),  either  such  proceeding shall remain
undismissed  or  unstayed for a period of thirty (30) days or any of the actions
sought  in such proceeding (including, without limitation, the entry of an order
for  relief  against  such Person or for the appointment of a receiver, trustee,

<PAGE>

custodian  or other similar official for such Person or for any substantial part
of  its property) shall occur; or such Person shall take any action to authorize
any  of  the  actions  set  forth  above;

"Event  of  Default"  has  the  meaning  ascribed  to  it  in  Section  9.1;

"Excluded  Payments"  means  collectively:

   (i)  interest  not  exceeding 7% per annum paid by either ZPR & Co. or ZSG to
        the  Borrower  or  its  Affiliates  in  respect  of  Shareholder  Loans;

  (ii)  all  amounts realized by the Borrower, or any Affiliate thereof, arising
        from  goods  sold  or services rendered to ZPR and/or ZSG at fair market
        prices or rates,  on  an arm's-length basis and on terms approved by the
        applicable  Senior  Lenders  or  permitted  under  the  Senior  Credit
        Agreements,  including, without limitation,  such  amounts  paid  to the
        Borrower pursuant to the Marketing and Sales  Agreement;

 (iii)  all  amounts  payable  to the Borrower or its Affiliates for goods and
        services  provided  to  ZPR,  at  cost;

  (iv)  all  amounts  distributed  or  distributable  to  the  Borrower  or its
        Affiliates as a result of any adjustment to the ZPR Debt Service Reserve
        Account  resulting  from  the  termination and/or replacement of the ZPR
        Currency  Hedging  Agreement  including,  without limitation, all direct
        profits or gains realized by ZPR  &  Co.  or  any Affiliate thereof upon
        such termination together with all distributions  becoming  available on
        or following September 30, 2002 as a result of  the  replacement  of the
        ZPR  Currency  Hedging  Agreement;  and

   (v)  any  amounts  available  under  (i)  to  (iv)  above  that  are  paid by
        Affiliates  to  the  Borrower  in  respect  of  fees, costs and expenses
        incurred in respect of Loan, the Babcock Loan and the Stendal Project.

"Extended Maturity Date" means the date which is 14 months following the Advance
Date,  provided  that  the  First Extension Option is exercised by the Borrower;

"Extended Period" means the period commencing at 12:01 a.m., New York, New York,
U.S.A.  local  time, on the day following the Initial Maturity Date and expiring
at  12:00  a.m., New York, New York, U.S.A. local time, on the Extended Maturity
Date;

"Fahrbrucke"  means  Fahrbrucke  GmbH;

"Fee  Letter"  means the fee letter agreement entered into between the Agent and
the  Borrower  dated  for  reference  August  16,  2002;

"Fees" means all fees payable by the Borrower to the Lenders pursuant to the Fee
Letter  and  to  the  Agent  pursuant  to  the  Engagement  Letter;

<PAGE>

"Financial  Quarter"  means,  in relation to the Borrower, a period of three (3)
consecutive  months  in  each Financial Year of the Borrower ending on March 31,
June  30,  September  30  and  December  31  of  each  such  Financial  Year;

"Financial  Statements"  means, in respect of the Borrower, as at any particular
time,  financial statements prepared in accordance with GAAP, including, without
limitation, consolidated balance sheets, statements of earning and statements of
changes  in  financial  position;

"Financial  Year"  means,  in  relation to the Borrower, a financial year of the
Borrower commencing on January 1 of each calendar year and ending on December 31
of  such  calendar  year;

"First Extension Option" means the option granted by the Lenders to the Borrower
hereunder  to  extend  the  Initial  Maturity  Date as set out in Section 5.5(1)
hereof;

"GAAP"  means,  at  any  time,  accounting  principles generally accepted in the
United  States,  applied  on  a  consistent  basis;

"Group  Company" means each Intermediate Holding Company and each of ZSG and ZPR
&  Co.;

"Holzspedition"  means  Holzspedition  Blankenstein  GmbH;

"Increased  Cost"  means:

   (i)  an  additional  cost  incurred by a Lender or any of its Affiliates as a
        result  of  it  having  entered  into,  or  performing,  maintaining  or
        funding its obligations  under,  any  Credit  Document;

  (ii)  that  portion  of  an additional cost incurred by a Lender or any of its
        Affiliates  in  making,  funding  or  maintaining  all  or  any advances
        comprised in a class  of advances  formed  by or including that Lender's
        participations in the Loan  as  is  attributable  to that Lender making,
        funding or maintaining those participations;

 (iii)  a reduction  in  any amount payable to a Lender or any of its Affiliates
        or in the effective  return  to  a Lender or any of its Affiliates under
        this  Agreement  or  (to  the  extent  that  it  is attributable to this
        Agreement) on its capital;  or

  (iv)  the amount  of any payment made by a Lender or any of its Affiliates, or
        the amount  of  any interest or other return foregone by a Lender or any
        of  its  Affiliates,  calculated  by reference to any amount received or
        receivable by that Lender  or  any  of  its  Affiliates  from any  other
        party under this Agreement;

"Initial Maturity Date" means the date which is 8 months after the Advance Date;

"Initial Period" means the period commencing on the Advance Date and expiring at
12:00 a.m., New York, New York, U.S.A. local time, on the Initial Maturity Date;

<PAGE>

"Intercreditor  Agreement"  means  an  intercreditor  agreement  in  a  form
satisfactory  to  the  Agent,  between:  (i)  the Agent for and on behalf of the
Lenders;  and  (ii)  Babcock;

"Interest" means the interest accrued on the Loan or portion thereof outstanding
from  time to time at the Interest Rate calculated semi-annually not in advance,
and  payable,  in  arrears,  on  the  Interest  Payment  Date;

"Interest Payment Date" means the earlier of (i) the Maturity Date; and (ii) the
date  upon  which  a  declaration  is  made  pursuant  to  Section  9.1;

"Interest  Periods"  means periods of one (1) month, three (3) months or six (6)
months,  as  selected  by  the Borrower from time to time, and "Interest Period"
means  any  one (1) such period.  Interest shall be calculated on the basis of a
year  of  three  hundred  and  sixty  (360)  days  and the actual number of days
(including the first day but excluding the last day) occurring in the period for
which  such  Interest  is  payable;

"Interest  Rate"  means,  as applicable:  (i) during the Initial Period, Euribor
plus  6.5%  per  annum;  (ii)  during the Extended Period, Euribor plus 9.0% per
annum;  (iii)  during  the Second Extended Period, Euribor plus 11.5% per annum;
and  (iv)  after the Maturity Date or upon the occurrence of an Event of Default
resulting  in  an  acceleration  of  the  Obligations  under Section 9.1 of this
Agreement,  the  Default  Interest  Rate;

"Intermediate  Holding  Company"  means  each  of  SPH,  ZPR  Holding  and  SPB;

"Judgment  Currency"  means  the  currency  in  which  a  court  of  competent
jurisdiction  may  render judgment in connection with any litigation relating to
the  repayment  of  the  Outstanding  Amount  under  this  Agreement;

"Law"  means  any  law (including common law and equity), constitution, statute,
order,  treaty,  regulation, rule, ordinance, order, injunction, writ, judgment,
determination,  decree  or  award  of  any  Official  Body;

"Lenders" means MFC Merchant Bank S.A. and such other lenders as are or may from
time  to  time  become  signatories  to  this  Agreement  and  their  respective
successors  and  assigns,  and  "Lender"  means  any  one  (1)  of  them and its
successors  and  assigns;

"Lien"  means  any lien, security interest or other charge or encumbrance of any
kind,  or  any  other  type  of  preferential  arrangement,  including,  without
limitation,  the lien or retained security title of a conditional vendor and any
easement  or  other right-of-way or other encumbrance on title to real property;

"Loan"  means  the  non-revolving  term  loan  of  the  Principal Sum to be made
available  by  the  Lenders  hereunder  to  the  Borrower;

"Majority  Lenders"  means at any time, the Lenders obligated, in the aggregate,
in  respect  of  at  least  51%  of  the  Total  Commitment;

<PAGE>

"Mandatory  Prepayment  Amounts" means the Net Proceeds received by the Borrower
from:  (i)  all  Asset Sales; (ii) all Equity Issues; and (iii) any of the Group
Companies  or  DP  Holdings including, without limitation, all payments from the
Shareholders  Accounts  and  all dividends, repayments of Shareholders Loans and
releases  from  the  ZPR  Debt  Service  Reserve Account, but excluding Excluded
Payments;

"Marketing  and  Sales  Agreement"  means  the  strategic,  marketing  and sales
agreement  entered  into  between the Borrower and ZPR & Co. dated for reference
January  1,  2000;

"Material  Adverse Effect" means a material adverse effect on: (i) the Business;
or  (ii)  the  financial  condition  of  the  Borrower  or  the Borrower and its
Affiliates  taken as a whole; or (iii) on the ability of the Borrower to perform
and  comply  with this Agreement or to pay or perform any of the Obligations; or
(iv)  a material adverse effect on the priority, effectiveness or enforceability
of  the Security not caused by the Agent or the Lenders excluding in the case of
(i),  (ii)  and (iii) above, any such effect caused by fluctuations in commodity
pulp  prices  within  ranges  that  have  occurred  in the three (3) year period
immediately  preceding  the Advance Date or by other general economic conditions
affecting  the  markets  in  which  the  Borrower  carries  on  its  Business;

"Maturity  Date"  means:  (i)  the  Initial Maturity Date if the First Extension
Option  is not exercised; (ii) the Extended Maturity Date if the First Extension
Option  is  exercised  (and  the  Second  Extension  Request  is not made by the
Borrower and accepted by the Agent); and (iii) the Second Extended Maturity Date
if  the  Second Extension Request is made by the Borrower and is accepted by the
Agent;

"Mercer Equity Financing" means the equity and subordinated debt contribution to
be  provided  by  the  Borrower  directly or indirectly through any wholly-owned
Affiliate  of  the  Borrower  to  ZSG  in  respect of the Stendal Project on the
Advance  Date  in  the  sum  of  approximately E 63,500,000;

"Net  Proceeds"  means  the  aggregate cash proceeds received by the Borrower in
respect  of  any  Asset  Sale,  Equity Issue or release of funds from any of the
Group  Companies  to  the  Borrower, net of: (i) direct unaffiliated third party
costs  relating to such Asset Sale, Equity Issue or release of funds (including,
without  limitation,  legal,  accounting  and investment banking fees, and sales
commissions); (ii) provisions for Taxes payable in respect of the fiscal year of
incurrence  as a result thereof; and (iii) any reasonable reserve for adjustment
in  respect  of  the  sale  price  of  any  asset  or  assets;

"Obligations"  means:  (i)  all obligations, liabilities and indebtedness of the
Borrower to the Agent, the Lenders or a Lender with respect to the principal and
Interest  on  the  Loan and the payment or performance of all other obligations,
liabilities  and  indebtedness  of  the  Borrower to the Agent, the Lenders or a
Lender  hereunder or arising under and pursuant to any one or more of the Credit
Documents  or  with  respect  to  the  Loan  and  all  fees, costs, expenses and
indemnity obligations hereunder or thereunder; and (ii) all Fees that become due
and  payable  to the Lenders and to the Agent prior to or in connection with the
payment  or  repayment of the obligations, liabilities and indebtedness referred
to  in  (i)  above;

"Official  Body"  means  any  government  or political subdivision or any agency
(including,  without  limitation,  any  licensing  or  regulatory agency), body,
office,  authority,  bureau,

<PAGE>

central  bank,  monetary  authority,  commission, department or instrumentality
thereof,  or any court, board, tribunal, grand jury or  arbitrator,  commission
or  instrumentality  thereof,  whether  foreign  or  domestic  and,  when  used
in  the  context of  a particular Person, having jurisdiction over such Person;

"Original  Currency"  means  Euros;

"Original  Lender"  means  MFC Merchant Bank S.A. in its capacity as an original
lender;

"Outstanding  Amount"  means,  in  respect  of  the  Loan, on any day, an amount
calculated  and expressed in Euros equal to the Principal Sum less any repayment
or  prepayment  received  by  the  Agent  as  at  such  date;

"Permitted  Liens"  means:  (i)  in  respect  of  ZPR  & Co., any Liens that are
Permitted  Encumbrances,  as  such  term is defined in the ZPR Credit Agreement;
(ii)  in  respect of ZSG, any Liens that are Permitted Encumbrances as such term
is  defined  in  the ZSG Project Finance Loan Agreement; and (iii) in respect of
the  Intermediate  Holding  Companies,  any  Liens  of  a  nature  that would be
permitted  to  be  incurred  by  ZPR  &  Co.  in  accordance  with  (i)  above;

"Permitted  Subsidiaries"  means  Blitz,  Fahrbrucke,  Holzspedition,
Zellstoff-Spedition,  ZPR  Beteiligungs  and  ZPR  Logistik;

"Person" means an individual, a partnership, a corporation (including a business
trust), joint stock company, trust, unincorporated association, joint venture or
other  entity,  or  a  foreign  state  or a political subdivision thereof or any
agency  of  such  state  or  subdivision;

"Plan"  means  an  "employee benefit plan" within the meaning of Section 3(3) of
ERISA maintained by the Borrower or any ERISA Affiliate currently or at any time
within  the last five (5) years, or to which the Borrower or any ERISA Affiliate
is  required  to  make  payments  or  contributions  or  has  made  payments  or
contributions  within  the  past  five  (5)  years;

"Pledged  Securities"  means the securities described and listed in Schedule "B"
and any and all other securities that may be pledged to the Lenders from time to
time,  and  all  securities  issued  as  stock dividends or as a result of stock
splits  or recapitalizations, accretions, replacements and substitutions thereto
and  therefor;

"Principal  Sum"  means E 30,000,000  together  with  Capitalized  Interest;

"Quotation  Date"  means  with  respect  to any Interest Period the Business Day
which  is  two  (2)  Business  Days  prior  to the commencement of such Interest
Period;

"Reportable Event" means any of the events set forth in Section 4043 of ERISA or
the  related  regulations;

"Request"  means the Advance Request, the exercise of the First Extension Option
or  the  Second  Extension  Request;

<PAGE>

"Second  Extended  Maturity  Date"  means  the date which is 18 months after the
Advance  Date,  provided  that  the  First  Extension Option is exercised by the
Borrower  and  the Second Extension Request is made by the Borrower and accepted
by  the  Agent;

"Second  Extended  Period"  means the period commencing at 12:01 a.m., New York,
New York, U.S.A. local time, on the day following the Extended Maturity Date and
expiring  at  12:00  a.m.,  New York, New York, U.S.A. local time, on the Second
Extended  Maturity  Date;

"Second  Extension  Request" means the Borrower's request to the Agent to extend
the  Extended  Maturity Date to the Second Extended Maturity Date, in accordance
with  Section  5.5(2)  hereof;

"Security" means the security given to: (i) the Security Agent for and on behalf
of  the  Lenders; (ii) the Lenders; or (iii) a Lender, at any time and from time
to  time  to secure the Obligations, including, without limitation, the security
referred  to  in  Section  5.1;

"Security Agent" means MFC Merchant Bank S.A., in its capacity as security agent
under  the  Security  Trust  Agreement  for and on behalf of the Lenders and the
Babcock  Lenders;

"Security  Documents"  means  the  documents  referred to in Section 5.1 and the
agreements,  instruments  and  documents delivered from time to time to: (i) the
Security  Agent  for  and on behalf of the Lenders; (ii) the Lenders; or (iii) a
Lender,  by  the  Borrower  and  other Persons, for the purpose of establishing,
perfecting,  preserving  and  protecting  the  Security, and "Security Document"
means  any  one  of  them  as  the  context  prescribes  or  requires;

"Security  Trust  Agreement"  means  a  security  trust  agreement  in  a  form
satisfactory  to  the  Agent  pursuant to which the Security Agent will hold the
security  granted  under  the  Borrower's  Securities  Pledge Agreements and the
Assignment  Agreements for and on behalf of the Lenders and the Babcock Lenders;

"Senior  Credit  Agreements"  means the ZPR Credit Agreement and the ZSG Project
Finance  Loan  Agreement;

"Senior  Lenders" means the ZPR Senior Lenders and the ZSG Senior Lenders or any
of  them,  as  the  context  requires;

"Shareholders  Accounts"  means  the  Borrower's and its Affiliates' shareholder
accounts  in  each  of  ZPR  &  Co.,  ZSG  and  the  other  Group  Companies;

"Shareholders  Agreement  Heads of Terms" means the Shareholders Agreement Heads
of  Terms  attached  as  Schedule  "D"  hereto;

"Shareholders  Loans" means the loans between the Borrower and/or its Affiliates
as  lender,  and  any  of  the  Group  Companies,  as  borrower, in an aggregate
principal  amount  not  to  exceed E 115.2  million;

"SPB"  means  Spezialpapierfabrik  Blankenstein  GmbH;

<PAGE>

"SPB  Assignment Agreement" means an assignment agreement in a form satisfactory
to  the  Agent  pursuant  to  which  SPB  shall assign to the Security Agent its
interests  in  intercompany  loans  due  or  accruing  due  from  ZPR  &  Co.

"SPH"  means  Stendal  Pulp  Holding  GmbH;

"Stendal  Project"  means  the  design, development, financing, construction and
operation  of  a  552,000  tonnes  per annum capacity northern bleached softwood
kraft  pulp  mill  to be carried out by ZSG and to be situated in Arneburg, near
Stendal  in  Sachsen-Anhalt,  Germany;

"Subsidiary"  means, at any time, as to any Person, any corporation, partnership
or  other  entity  Controlled  by  such  Person;

"Taxes"  means  any  and  all  present  or  future  taxes  (including,  without
limitation,  all stamp, documentary, excise or property taxes), levies, imposts,
deductions,  charges  or  withholdings  and  liabilities  with  respect  thereto
including,  without  limitation,  interest  and  penalties;

"Termination  Date"  means  October  14,  2002;

"Total  Commitment"  means  the  total  commitment  of  all Lenders under and in
respect  of  the Loan as set out on the signature pages hereto, in the principal
amount  of E 30,000,000  to  fund  the  Loan  on  the  Advance  Date;

"Trustees"  means  trustees  of  the  Borrower;

"Voting  Stock" means, with respect to any Person, capital stock of any class or
kind  ordinarily  entitled to vote for the election of directors at a meeting of
stockholders  called  for such purpose, without the occurrence of any additional
event  or  contingencies;

"Zellstoff-Spedition"  means  Zellstoff-Spedition  Blankenstein  GmbH;

"ZPR"  means,  collectively,  ZPR  Holding,  SPB  and  ZPR  &  Co.;

"ZPR  &  Co."  means  Zellstoff-und  Papierfabrik  Rosenthal  GmbH  &  Co.  KG;

"ZPR  Asset  Sale"  means  any  direct  or  indirect  sale, disposition or other
exchange  of assets of ZPR or any interest in ZPR including, without limitation,
a  sale  by ZPR of its assets provided that such sale, exchange or disposal when
aggregated  with  any  connected transaction relates to not less than 40% of the
Borrower's  interest in ZPR or, as the case may be, 40% of the assets of ZPR and
provided that such sale shall be deemed to have occurred once the Borrower shall
have  received  all  or  a  portion  of  the proceeds thereof (excluding nominal
consideration);

"ZPR  Beteiligungs"  means  ZPR  Beteiligungs  GmbH;

"ZPR Credit Agreement" means the E 508,000,000 loan agreement among ZPR & Co.,
BHV  and  others  dated  July  6,  1998,  as  amended  and  supplemented;

<PAGE>

"ZPR Currency Hedging Agreement" means the ZPR currency swap agreement which was
terminated  on  July  16,  2002;

"ZPR  Debt  Service  Reserve Account" means the ZPR debt service reserve account
created  and  continuing  under  and  pursuant  to  the  ZPR  Credit  Agreement;

"ZPR  Holding"  means  ZPR  Zellstoff-und  Papierfabrik  Rosenthal Holding GmbH;

"ZPR  Holding  Assignment  Agreement"  means  an  assignment agreement in a form
satisfactory  to  the  Agent  pursuant  to which ZPR Holding shall assign to the
Security  Agent its interest in intercompany loans due or accruing due from SPH;

"ZPR  Logistik"  means  ZPR  Logistik  GmbH;

"ZPR  Senior  Lenders"  means  the  lenders  under  the  ZPR  Credit  Agreement;

"ZPR  Senior  Security"  means  the  security  granted by ZPR & Co., SPB and ZPR
Holding  to  the  ZPR  Senior Lenders under or in connection with the ZPR Credit
Agreement;

"ZSG"  means Zellstoff Stendal GmbH, a limited liability company organized under
the  Laws  of  the  Federal Republic of Germany, having its registered office at
Niedergorner  Damm  1,  39596  Arneburg,  Federal  Republic  of  Germany;

"ZSG  Project  Finance  Loan  Agreement" means the E 827,950,000 project finance
loan  agreement among ZSG, the ZSG Senior Lenders, and others, in respect of the
Stendal  Project  entered  into  on  or  about  the  date  first  above written;

"ZSG  Senior  Lenders"  means  BHV,  or  a Subsidiary company thereof, and other
syndicated  lenders  under  the  ZSG  Project  Finance  Loan Agreement and their
respective  successors  and  assigns;  and

"ZSG Senior Security" means the security to be granted to the ZSG Senior Lenders
under  the  ZSG  Project  Finance  Loan  Agreement.

     Section  1.2     Headings,  etc.       The  division of this Agreement into
Articles  and  Sections  and  the  insertion  of headings are for convenience of
reference  only  and shall not affect the construction or interpretation of this
Agreement.

     Section  1.3     Gender  and  Number.  Words  imparting the singular number
include  the  plural  and  vice-versa  and  words  imparting  gender include the
masculine,  feminine  and  gender  neutral  as  the  context  requires.

     Section  1.4     Interpretation.  A reference in this Agreement to a person
includes its successors and permitted transferees and assigns.  A reference to a
Credit  Document  or  another document is a reference to that Credit Document or
other  document  as  novated,  amended, modified, extended, renewed, replaced or
restated  from  time  to  time.

     Section  1.5     Accounting  Terms.  All  accounting terms not specifically
defined  herein  shall  be  construed  in  accordance  with  GAAP.

<PAGE>

     Section  1.6     Loan  Advance.  The  Loan,  if  made  by more than one (1)
Lender, shall be made by deposit by each Lender of such portion thereof required
hereunder  with the Agent in accordance with the provisions hereof and the Agent
shall  upon  receipt  of such rateable shares of the Loan, remit the Loan to the
Borrower,  provided  that the failure of any Lender to make its rateable portion
of  the  Loan  shall  not relieve any other Lender of its obligation to make its
rateable portion of the Loan and provided further that the Original Lender shall
make  up  any  shortfall or failure to Advance by any other Lender such that the
full  Principal  Sum  shall  be  made  available to the Borrower by the Original
Lender.

     Section  1.7     Schedules.  All  documents attached or referred to in this
Agreement  and  the following schedules attached hereto are integral to and form
part  of  this  Agreement:

          Schedule  "A"  -  Form  of  Borrower's  Certificate
          Schedule  "B"  -  List  of  Pledged  Securities
          Schedule  "C"  -  Form  of  Advance  Request
          Schedule  "D"  -  Shareholders  Agreement  Heads  of  Terms
          Schedule  "E"  -  Corporate  Chart

                                   ARTICLE 2.
                                    THE LOAN

     Section  2.1     The  Loan.  (1)  Each  Lender hereby agrees, severally, to
lend  to  the  Borrower,  relying  on  each  of the representations, warranties,
covenants  and conditions set out herein, and upon and subject to the provisions
of  this  Agreement,  its  pro  rata  share  of  the  Principal  Sum.

     (2)   Subject  to  the  terms and conditions hereof, including satisfaction
of the conditions to Advance set out in Article 6, each Lender shall advance its
pro  rata  share  of  the  Principal  Sum  to  the Borrower on the Advance Date.

     (3)   The Borrower shall use the proceeds of the Loan solely: (i) to
partially fund the  Mercer Equity Financing; and (ii) to pay all fees, costs and
expenses  associated  with  the  negotiation,  execution  and  delivery  of this
Agreement  including,  without  limitation, all Fees payable on the Advance Date
pursuant to the  Fee  Letter.

                                   ARTICLE 3.
                                INTEREST AND FEES

     Section  3.1     Interest  on  the Loan.  (1)     The Borrower shall pay to
the  Agent,  for  and  on  behalf  of the Lenders, on the Interest Payment Date,
Interest  on the Outstanding Amount from the Advance Date to the date of payment
at  the  relevant  Interest  Rate.

     (2)   The  Borrower may, at its option, from time to time, notify the Agent
of  the  chosen  Interest Period to apply in respect of the Loan by providing to
the  Agent  not  less  than  six  (6) Business Days' notice thereof prior to the
commencement  of  an  Interest  Period.  If  the

<PAGE>

Borrower fails to provide such notice, it shall be deemed to have selected, and
the  next  Interest  Period  shall  be,  a  period  of  one  (1)  month.

     (3)     The  first  Interest  Period  will commence on the Advance Date and
each  subsequent  period  will  commence  on  the  expiry of the last day of the
immediately  preceding  Interest  Period.

     (4)     With  each  successive  Interest  Period  selected by the Borrower,
Euribor  shall  be  reset  on  the  Quotation  Date  immediately  prior  to  the
commencement of the Interest Period and there shall be a corresponding change in
the rate of interest payable under this Agreement without the necessity of prior
notice  thereof  to  the  Borrower  or  any  other  Person.

     (5)     Upon  each  extension  of  the  Maturity  Date, including, from the
Initial  Maturity  Date  to  the  Extended  Maturity  Date and from the Extended
Maturity  Date to the Second Extended Maturity Date, all Interest accrued to the
date  of  such extension shall be capitalized and added to the Principal Sum for
the  purpose  of  calculating  Interest  thereafter.

     (6)     Except  as  otherwise  provided herein, all amounts (other than the
Loan)  owed  by the Borrower to the Agent, the Lenders or a Lender which are not
paid  when  due  (whether  at  stated  maturity,  on  demand, by acceleration or
otherwise)  shall be capitalized and compounded monthly on the first day of each
successive  Interest  Period,  until  payment.

     (7)     Interest  Periods in respect of amounts owed by the Borrower to the
Agent,  the  Lenders  or a Lender which are not paid when due (whether at stated
maturity, on demand, by acceleration or otherwise) (an "Unpaid Amount") shall be
for  periods  of  one  (1)  month.

     (8)     All  Unpaid  Amounts  shall  bear  Interest  (both before and after
Default  or  judgment),  from  the  date  on which such amount is due until such
amount  is  paid  in  full at a rate per annum equal at all times to the Default
Interest  Rate.

     (9)     All  Interest payable in respect of Unpaid Amounts shall be payable
on  the  last  day  of  the  relevant  Interest  Period.

     Section  3.2     Fees.  The  Borrower shall pay the Fees in accordance with
the  terms  and  conditions  of  the  Fee  Letter.

     Section  3.3     Increased Costs.(1) Except as set forth below, the
Borrower  shall forthwith on demand by a Lender pay to that Lender the amount of
any  Increased  Cost  incurred  by  it  or any of its Affiliates as a result of:

        (a)  the  introduction  of,  or  any  change  in,  or  any change in the
             interpretation  or  application  of,  any  Law  or  regulation;  or

        (b)  compliance  with  any  regulation  made  after  the  date  of  this
             Agreement, (including  any  Law or regulation relating to taxation,
             change in currency of a country  or reserve, reserve asset, special
             deposit, cash ratio, liquidity or capital adequacy requirements or
             any other form of banking or monetary control).

<PAGE>

     (2)     Section  3.3(1)  does  not apply to, and the Borrower shall have no
obligations  thereunder  in  respect  of,  any  Increased  Cost:

             (a)  compensated  for  by  the  operation  of  Section  11.8;

             (b)  attributable  to  any change in the rate of, or change in  the
                  basis  of  calculating,  tax  on  the  overall net income of a
                  Lender  or any of its Affiliates (or  the  overall  net income
                  of  a  division  or  branch  of  the  Lender  or  any  of  its
                  Affiliates) imposed in the jurisdiction in which its principal
                  office or lending office  is  for  the  time being situate; or

             (c)  attributable  to or resulting from any assignment, transfer or
                  grant  of  a  participation  right by the Agent or a Lender in
                  respect of its Commitment to any Person  that becomes a Lender
                  to  the  extent  that such increased cost would not have  been
                  incurred  if  no  such  assignment,  transfer  or  grant  of a
                  participation right  had  occurred.

     Section 3.4     Illegality. If it is or becomes unlawful in any
Jurisdiction for a Lender, other than the Original Lender, to give effect to any
of  its obligations as contemplated by this Agreement or to fund or maintain its
participation in any loan, then: (i) that Lender may notify the Borrower through
the  Agent  accordingly;  (ii)  the  Original Lender shall forthwith acquire the
participations  of  that  Lender  in  the Loan; and (iii) the Commitment of that
Lender shall forthwith be cancelled and replaced by an identical Commitment from
the  Original  Lender.  If  it  becomes unlawful for the Original Lender to give
effect to any of its obligations as contemplated by this Agreement or to fund or
maintain  its participation in the Loan, then the Original Lender may notify the
Borrower  and  the  Borrower  shall  forthwith  prepay  the participation to the
Original Lender in the Loan and the Original Lender's Commitment shall forthwith
be  cancelled.

     Section  3.5     Evidence  and Calculations.(1)  Accounts maintained by any
Lender  in  connection  with  any Credit Document are in the absence of manifest
error,  conclusive  evidence  of  the  matters  to  which  they  relate.

     (2)  Any  certification  or  determination by the Agent of a rate or amount
under  any  Credit  Document  is,  in  the absence of manifest error, conclusive
evidence  of  the  matters  to  which  it  relates.

                                   ARTICLE 4.
                           REPAYMENT OF PRINCIPAL SUM

     Section  4.1     Payments.  The  Borrower  shall pay or repay to the Agent,
for  and  on  behalf of the Lenders, on the earlier of the Maturity Date and ten
(10)  Business  Days  following  a  Change of Control, pro rata with payments or
repayments  to  be made to the Babcock Lenders under the Babcock Loan Agreement,
the  Outstanding  Amount  together  with  all  amounts  owing  hereunder and not
previously  paid  or  repaid,  without  set-off,  counterclaim  or  deduction.

<PAGE>

     Section  4.2     Borrower's  Right  to  Prepay the Loan.  The Borrower may,
from  time  to  time, on five (5) Business Days' prior notice given to the Agent
stating the proposed date and aggregate principal amount of the prepayment, and,
if  such  notice is given, the Borrower shall, prepay the Outstanding Amount, in
whole  or  in  part,  as set out in the prepayment notice, together with accrued
Interest to the date of such prepayment on the amount prepaid, provided that the
Borrower  may  not  prepay  any amount hereunder unless a pro rata prepayment is
also  made  in respect of amounts owing to the Babcock Lenders under the Babcock
Loan Agreement.  Each prepayment shall be in a principal amount of not less than
E 500,000  and  in  integral  multiples  of  principal E 500,000  thereafter.

     Section  4.3     Method  and  Place  of  Payment.  All  payments to be made
hereunder  shall  be  made  by  the  Borrower  to the Agent on the day that such
payment  is  due  at  the  Agent's  address  provided  for  in  this  Agreement.

     Section  4.4     Time  of Payment.  Whenever any payment hereunder shall be
stated  to be due on a day other than a Business Day, such payment shall be made
on  the  next  succeeding Business Day, and such extension of time shall in such
case  be  included  in  the computation of Interest or fees, as the case may be.

     Section  4.5     Mandatory  Prepayment.  (1)   The  Borrower  shall  use
reasonable  commercial efforts during the Initial Period and, if applicable, the
Extended  Period  to:  (i)  complete  an  Asset  Sale  or  Asset  Sales on terms
satisfactory  to  the  Borrower,  subject to any restrictions in respect thereof
imposed  under  the Senior Credit Agreements or by any Official Body, including,
without  limitation,  with  respect  to  any  sale  involving  ZSG, the European
Commission;  (ii)  complete  an Equity Issue on terms reasonably satisfactory to
the  Borrower;  and/or  (iii) withdraw, or cause to be withdrawn and paid to the
Borrower,  as  soon  as  practicable,  from  time  to  time,  the maximum amount
available  to  be  withdrawn from the Shareholders' Accounts, as permitted under
generally  accepted  accounting  principles  applicable in Germany and under the
Senior  Credit  Agreements,  the  proceeds  of  which,  collectively,  shall  be
sufficient  to  pay  or  repay  the  Borrower's  Obligations  hereunder.

     (2)     The Borrower shall utilize all of the Mandatory Prepayment Amounts,
as  and  when the aggregate of such amounts received by the Borrower total, from
time  to  time, E 500,000, to  repay  all Obligations owing to the Agent and the
Lenders  hereunder  and  all  amounts  owing  to  Babcock under the Babcock Loan
Agreement,  on  a  pro  rata  basis.

                                   ARTICLE 5.
                                    SECURITY

     Section  5.1     Security.  As  general  and  continuing  security  for the
performance  of  all  Obligations  of  the  Borrower under the Credit Documents,
including  the  prompt payment when due by the Borrower of the Loan and Interest
and  all  other  monies from time to time

<PAGE>

owing  by  the Borrower  hereunder,  there  shall  be  executed,  delivered  and
deposited  with  and  held  by  the Security Agent, the  Lenders and the Babcock
Lenders  the  following documents and instruments on the  Closing  Date, each of
which shall be in form and substance satisfactory to the  Agent:

     (a)  the  Borrower's  Securities  Pledge  Agreements;  and

     (b)  the  Assignment  Agreements.

     Section  5.2     Continued Perfection and Agreed Releases of Security.  (1)
The  Borrower  shall  take  such  action and execute and deliver to the Security
Agent  for  and on behalf of the Lenders such agreements, conveyances, deeds and
other  documents  and  instruments as the Agent shall reasonably request for the
purpose  of establishing, perfecting, preserving and protecting the Security, in
each case forthwith upon request therefor by the Agent and in form and substance
reasonably  satisfactory  to  the  Agent.

     (2)     The  Borrower agrees that, where the subject matter of the Security
is  in  the  possession of the Security Agent, the Security Agent:  (i) shall be
entitled to hold as additional Security any increase or profits from the subject
matter  of  the  Security;  (ii) shall not be obligated to keep identifiable and
shall  be  entitled  to commingle the subject matter of the Security as they may
see  fit;  and  (iii)  shall  not  be  obligated to take any steps, necessary or
otherwise,  to preserve rights in respect of any instrument, security or chattel
paper.

     Section  5.3     Release  upon  Payment.  (1)  Subject  to  Subsection  (2)
hereof,  upon  payment by the Borrower of all of the Obligations and performance
of  all  other  obligations  of  the  Borrower  under  the Credit Documents, the
Security  Agent  shall,  for and on behalf of the Lenders, at the expense of the
Borrower,  execute  and deliver such discharges, releases and other documents as
may reasonably be required to release and discharge the Lenders' interest in the
Security.  Partial  repayment  of the Obligations shall not entitle the Borrower
to  the  release or discharge of the Lenders' interest in the Security, in whole
or  in  part.

     (2)     If, following payment by the Borrower of all of the Obligations the
Agent  reasonably  considers that there is a material risk that such payment may
be  set  aside as a result of the insolvency of the Borrower, then the Agent may
request  and,  if  the  Borrower  is  solvent,  the  Borrower  shall  provide  a
certificate  of  a senior officer of the Borrower certifying the solvency of the
Borrower,  supported  by  consolidated annual and quarterly Financial Statements
for  the Borrower's most recently completed financial year and quarter for which
such  statements  are  available, and the Security Agent's obligation to provide
the  releases,  discharges  and  other  deliveries required under Subsection (1)
hereof  shall  be  conditional  upon  receipt  of  such solvency certificate and
Financial  Statements.

     Section 5.4     Conflicts.  If a conflict or inconsistency exists between a
provision  of  this  Agreement  and  the  terms of the Security Documents or the
Credit  Documents  or any one of them, the terms of this Agreement shall prevail
to  the extent necessary to resolve such conflict,  provided that, if any of the
Security  Documents  or  Credit  Documents  contains a representation, warranty,
covenant  or right in favor of the Agent or the Lenders not provided for in this
Agreement, such additional representation, warranty, covenant or right shall not
constitute  a  conflict  or  inconsistency.

<PAGE>

     Section  5.5     Extension  of  Maturity  Date.       (1)     The  Borrower
shall  have  the  right  to  extend  the  Initial  Maturity Date to the Extended
Maturity Date by providing written notice of the exercise of the First Extension
Option  to  the  Agent  not  less  than  fifteen  (15) days prior to the Initial
Maturity  Date.

     (2)     The  Borrower  may  request  the extension of the Extended Maturity
Date  to  the  Second  Extended Maturity Date by providing written notice of the
Second  Extension  Request  to the Agent not less than thirty (30) days prior to
the  Extended  Maturity  Date,  provided  that  each Lender shall be entitled to
accept  or  reject  such  Second  Extension  Request  in  its  sole and absolute
discretion.  The  Agent  shall  provide  written  notice  of  such acceptance or
rejection  by the Lenders to the Borrower within ten (10) days of receipt of the
Second  Extension  Request.  If  no such notice is received by the Borrower from
the  Agent  within such period then the Lenders shall be deemed to have rejected
the  request.

                                   ARTICLE 6.
                        CONDITIONS PRECEDENT TO THE LOAN

     Section  6.1     Conditions  Precedent  to the Loan.  The obligation of the
Lenders to Advance the Loan on the Advance Date is subject to the fulfillment of
the  following  conditions  precedent:

     (a)  the  Agent  shall have received  copies  of the Borrower's, each Group
          Company's,  DP  Holdings'  and  DP's  Charter  Documents  and  of  the
          resolutions of the Borrower's  trustees  and  the directors of SPB and
          SPH approving the execution, delivery  and  performance  of the Credit
          Documents to which each is a party;

     (b)  the  Agent  shall  have  received a certificate of a senior officer of
          the Borrower  certifying the names and true signatures of the officers
          and directors thereof  authorized  to  sign  the  Credit  Documents to
          which  it is a party;

     (c)  the  Agent  shall  have received certificates of good standing or like
          certificates  issued  by  the  appropriate  Official  Body  of  the
          jurisdiction  of  incorporation  or  formation  of  the  Borrower  and
          each  Group  Company;

     (d)  the  Credit  Documents, the Fee Letter and the Engagement Letter shall
          have  been  executed  and  delivered  to the Agent, the Security shall
          have  been  created,  and  all  deliveries,  registrations, filings or
          recordings necessary or desirable  to  preserve,  protect  or  perfect
          the  security  interest  and the enforceability  and  priority  of the
          Security  shall  have been completed, all in such  form,  content  and
          manner  as  is  satisfactory to the Agent, other than notification  of
          the pledge of the Pledged Securities to the companies whose securities
          are  set  out  in  Schedule  "B"  hereto;

     (e)  the  Agent shall have received copies certified by a senior officer of
          the  Borrower of the Financial Statements of the Borrower for its most
          recently completed  Financial  Year  and  Financial  Quarter;

<PAGE>

     (f)  all  of the representations  and  warranties  contained  in the Credit
          Documents to which the  Borrower is a party shall be correct on and as
          of  the  Advance  Date  as  though made on and as of such date and the
          Borrower shall have delivered a Borrower's Certificate to the Agent to
          such effect on or before the Advance  Date;

     (g)  the Agent shall have received a certificate of the Borrower certifying
          that:  (i)  all  conditions  precedent to the initial draw down of the
          first  advance under the ZSG Project Finance Loan Agreement shall have
          been satisfied or waived other than the provision of the Mercer Equity
          Financing and any such conditions precedent  that  are to be completed
          after  the  provision  of  the  Mercer  Equity  Financing;  (ii)  all
          conditions  precedent  to  the advance of the Babcock Loan shall  have
          been  satisfied  or  waived;  and  (iii)  arrangements  reasonably
          satisfactory  to  the  Agent  to  facilitate  the  completion  of  the
          Mercer Equity Financing  shall  be  in  place;

     (h)  the Agent shall have received a copy of the Babcock Loan Agreement and
          shall  be  satisfied  with  the  terms  thereof,  acting  reasonably;

     (i)  the Agent shall  have  received  a favorable opinion of counsel to the
          Borrower  (in  form  and content satisfactory to the Agent) as to such
          matters  as the  Agent may reasonably request, including the corporate
          status  of  the  Borrower,  the  corporate  power  and capacity of the
          Borrower to borrow money and to  grant security therefor  and  the due
          authorization,  execution  and  delivery of the  Credit  Documents  to
          which  it  is a party and the enforceability of this Agreement;

     (j)  all  fees  and  all  expenses required to be paid or reimbursed to the
          Agent and  the  Lenders  on  the  Advance  Date shall have  been paid;

     (k)  the  Agent  shall  have  received a copy of the Shareholders Agreement
          Heads  of  Terms in the form set out as Schedule "D" to this Agreement
          duly executed by the  Borrower;  and

     (l)  the  Agent  shall  have  received  such  other  documents  as it may
          reasonably request  for  and  on  behalf  of  the  Lenders.

     Section  6.2     Conditions  Solely  for  the  Benefit of the Lenders.  All
conditions  to the obligations of the Lenders to Advance the Loan are solely for
the benefit of the Agent and the Lenders and no other Person shall have standing
to  require satisfaction of any condition and no other Person shall be deemed to
be  a  beneficiary  of  any  such  condition, any and all of which may be freely
waived  in  whole  or in part by the Agent, for and on behalf of the Lenders, at
any  time  that  it  deems  it  advisable  to  do  so.

<PAGE>

                                   ARTICLE 7.
                         REPRESENTATIONS AND WARRANTIES

     Section  7.1     Representations  and  Warranties  by  the   Borrower.  The
Borrower  represents  and  warrants  to  the  Lenders  that:

     (a)  Organization. Each of the Borrower, ZPR Holding,  SPB, ZPR & Co., SPH,
          ZSG,  DP  and  DP  Holdings  is  duly  constituted  and  organized and
          is  validly  subsisting  and  in  good  standing  under  the  Laws  of
          its  jurisdiction;

     (b)  Corporate Power.  The Borrower has  full  corporate  right,  power and
          authority  to  enter  into and perform  its Obligations under each  of
          the Credit Documents  to  which  it is a party and has full  corporate
          right, power and authority  to  own  and operate  its  properties  and
          to carry on its Business;

     (c)  Conflict  with  Other  Instruments.  The  execution  and  delivery  by
          the Borrower  of  each  of  the  Credit  Documents  to  which it is  a
          party and the performance  of  its Obligations thereunder,  including,
          without  limitation,  the  grant  of  security  over  the  Pledged
          Securities,  and  the  performance  of  the  terms  of  the   Security
          Documents  to  which  it is a party, do not and will not: (i) conflict
          with  or  result  in  a  breach  of  any  of  the terms, conditions or
          provisions  of:  (A)  its  Charter  Documents; (B) any applicable Law;
          or (C) any contractual  restriction binding on or affecting it, or its
          properties;  or  (ii)  result  in,  or  require  or  permit:  (A)  the
          imposition  of  any  Lien on or with respect  to  the  properties  now
          owned  or  hereafter  acquired  by  it; or (B) the acceleration of the
          maturity  of  any of its Debts under any contractual provision binding
          on  or  affecting  it;

     (d)  Corporate  Actions and Authority.  The  execution  and delivery by the
          Borrower  of  each  of  the  Credit  Documents  to which it is a party
          and the performance  by  the  Borrower  of  its Obligations thereunder
          has  been duly authorized  by  all  necessary  action  on  the part of
          the  Borrower  and  no Authorization  under  any  applicable  Law  and
          no  registration, qualification, designation,  declaration  or  filing
          with any Official Body having jurisdiction over it is or was necessary
          therefor;

     (e)  Execution  of   Binding  Obligation.  This  Agreement  has  been  duly
          executed  and  delivered  by  the  Borrower,  and  this  Agreement
          constitutes  and  the  remaining Credit Documents  to  which it  is  a
          party,  when  duly  executed  and  delivered  by  the  Borrower,  will
          constitute, legal, valid  and  binding  Obligations  of  the  Borrower
          enforceable  in  accordance  with their respective terms, subject only
          to:  (i)  any  applicable  bankruptcy,  insolvency,  reorganization,
          moratorium  or  similar Laws affecting  creditors'  rights  generally;
          and  (ii) general  principles of equity (regardless  of  whether  such
          enforceability  is considered in a proceeding in equity  or  at  Law);

     (f)  Authorizations.  The  Borrower  possesses  all material Authorizations
          under  any  applicable  Law which are necessary in connection with the
          operation  of  its  Business.  All  such  Authorizations  are  in full
          force and effect and the

<PAGE>

          Borrower  is  not  in  default  in any respect thereunder.  No  action
          exists,  is  pending  or  threatened  which  has  as  its  object  the
          revocation, amendment or qualification  of  any  such  Authorization;

     (g)  No Violation of Agreements.  It is not in default under any indenture,
          mortgage,  deed of trust, agreement or other instrument to which it is
          a party or by  which  it  or  any  of  its  property  may  be  bound;

     (h)  No Litigation.  There are no actions, suits or proceedings pending or,
          to  the  knowledge  of  the  Borrower,  after  due enquiry, threatened
          against or affecting  the  Borrower  (nor, to  the  knowledge  of  the
          Borrower, after due enquiry,  any  basis therefor) before any Official
          Body  having  jurisdiction  over the  Borrower  which purport to or do
          challenge  the validity or propriety of the transactions  contemplated
          by  the  Credit  Documents or the documents, instruments or agreements
          executed and delivered in connection therewith or related thereto;

     (i)  No  Conflicts.  It  is  not in breach  of  or in default under, in any
          respect: (i) its Charter Documents; (ii) any applicable Law; (iii) any
          contract or  agreement  binding  on or affecting it or its property or
          assets (including, without  limitation,  the Credit Documents to which
          it  is  a  party);  or (iv) any writ, judgment, determination or award
          binding on it or affecting its properties or  assets;

     (j)  Financial Statements.  The  Financial  Statements  of the Borrower and
          each  of  the  balance  sheets and  related  statements  of  earnings,
          retained  earnings  and changes  in financial position of the Borrower
          for  a  Financial  Year  or a portion thereof  delivered  to the Agent
          pursuant  to  Section  6.1(e)  or  from  time to  time  in  accordance
          herewith,  fairly present the financial position of the Borrower as at
          such  dates  and  the  results  of  the  operations  and  changes  in
          financial  position  of  the  Borrower  for  such  periods  all  in
          accordance  with GAAP;

     (k)  Material Changes.  No material  adverse  changes  have occurred or are
          continuing  in respect of the financial condition of the Borrower from
          that  set  out  in the most recently delivered Financial Statements of
          the Borrower; and no Law,  regulation, rule  or  policy, or any change
          therein, has been enacted or proposed  prior  to  the  Advance  Date;

     (l)  Title  to  Pledged Securities.  The Borrower or, where applicable, its
          Affiliate,  is  the  sole  legal  and beneficial  owner  of,  and  has
          good and marketable title  to the Pledged Securities held by it as set
          forth  in  Schedule  "B"  hereto  and  the  Security will constitute a
          pledge of the Pledged Securities ranking pari passu with the pledge of
          the  Pledged Securities granted in favor of Babcock  pursuant  to  the
          Babcock  Loan  Agreement;

     (m)  No Agreements to  Purchase.   No  Person  has  any  agreement or right
          capable  of  becoming  an  agreement for the purchase of any Pledged
          Securities;

     (n)  Restrictions on Doing  Business.  The  Borrower  is not subject to any
          legislation  or  any judgment, order or requirement of any court or
          agency

<PAGE>

          which  is  not  of  general  application  to  Persons  carrying  on a
          business similar to theirs.  There  are  no  facts  or  circumstances
          which  could  reasonably  have  a  material  adverse effect upon  the
          ability  of  the  Borrower  to  continue  to  operate  its  Business,
          operations  and  affairs  as  presently  conducted;

     (o)  ERISA.  Neither  the  Borrower  nor  any  ERISA  Affiliate  sponsors,
          maintains,  administers,  contributes to, participates in, or has any
          obligation  to contribute to or any liability under, any Plan, or  in
          the past five (5)  years  has  sponsored,  maintained,  administered,
          contributed  to,  participated  in,  or  had  any  obligation  to  or
          liability  under,  any  Plan;

     (p)  Investment  Company Act.  The Borrower is not an "investment company"
          or  a  company  "controlled"  by  an "investment company", within the
          meaning of the United  States  Investment  Company  Act  of  1940  as
          amended;

     (q)  Margin  Stock.  The Borrower  is  not  engaged  in  the  business  of
          extending  credit  for  the  purpose  of  purchasing  or  carrying
          margin stock (within the meaning  of Regulations U and X of the Board
          of  Governors of the United States Federal  Reserve  System),  and no
          portion of the Loan has been or will be used, directly or indirectly,
          to  purchase or carry margin stock or to extend credit to others  for
          the  purpose  of purchasing or carrying margin stock and the Borrower
          will upon  the  request  of  the  Agent  supply  a  statement to such
          effect in conformity with the provisions of Regulation U of the Board
          of Governors of the United  States  Federal  Reserve  System;

     (r)  Proceeds.  The  proceeds  of  the  Loan  will  be  used  only for the
          purposes described  in  Section  2.1;

     (s)  Environmental  Laws.  ZPR  has been in compliance with all applicable
          Environmental  Laws  and  Environmental Licenses and, so far as it is
          aware,  there are  no  circumstances  that may at any time prevent or
          interfere  with  continued  compliance  by  it  with  all  applicable
          Environmental  Laws  and  Environmental  Licenses.  No  Environmental
          Claim is pending or, to the best of its knowledge, threatened against
          it  or  any  of  its  properties;

     (t)  Event of Default.  No Event of Default is outstanding or might result
          from  the making of the Loan; and no other event is outstanding which
          constitutes  (or  with  the  giving  of  notice,  lapse  of  time,
          determination  of  materiality  or  the  fulfilment  of  any  other
          applicable  condition  or  any  combination  of the foregoing,  might
          constitute)  a  default  under  any  document which is binding on the
          Borrower  or  any  of  its  assets;

     (u)  Tax  Compliance.  Each  of  the  Borrower and the Group Companies has
          filed or  caused to be filed, or has a valid extension of the time to
          file, all Federal and  material  state and other tax returns that are
          required  to  be  filed  and  has  paid all Taxes shown to be due and
          payable on said returns or on any assessments made  against it or any
          of  its  property  and all other Taxes, fees or other charges  levied
          upon it or any of its property by any governmental authority  to  the
          extent  that  such Taxes have become due and payable, and no

<PAGE>

          tax Lien has been filed  with  respect  to any such  Tax, fee or other
          charge, except to the extent the  relevant  taxes  are being contested
          in  good  faith  and  by  appropriate means and  as  to which reserves
          reasonably  regarded  as adequate have been established in  accordance
          with  applicable  generally  accepted accounting principles; and

     (v)  Documents.  There  are  no  agreements to which the Borrower or any of
          its  Affiliates  is  a  party  relating to the Pledged Securities, the
          Shareholders  Loans  or  loans  that  are  subject  to  Assignment
          Agreements, copies of  which  have not been  delivered  to  the  Agent
          prior  to  the  date  of  this  Agreement.

     Section  7.2     Repetition  of  Representations  and  Warranties.  The
representations  and  warranties  set  out  in  Section  7.1:

     (a)  are  made  on  the  date  of  this  Agreement;  and

     (b)  are  deemed to be repeated by the Borrower on the date of each Request
          and  the  first  day  of  each  Interest  Period with reference to the
          facts and circumstances  then  existing.

     Section  7.3     Survival  of  Representations  and  Warranties.  The
representations  and  warranties  of the Borrower contained in this Agreement or
made  by  the Borrower in any certificate, notice or report delivered under this
Agreement  will  survive  the Advance Date, the making and repayment of the Loan
and  any  novation,  transfer  or  assignment  of  the  Loan.

                                   ARTICLE 8.
                            COVENANTS OF THE BORROWER

     Section  8.1     Affirmative  Covenants.  So  long  as  any  Lender has any
Commitment under this Agreement and until the Obligations are paid and satisfied
in  full, the Borrower shall (or, if applicable, shall cause the relevant action
to  take  place),  unless  the  Agent  otherwise consents in accordance with the
provisions  of  this  Agreement:

     (a)  Financial  Reporting.  Deliver  to  the  Agent  (except  as  otherwise
          provided  herein)  in  reasonable  detail  the  following  information
          prepared in accordance with  GAAP  and  certified  by a senior officer
          of  the Borrower as being, to the best  of  his  knowledge  after  due
          enquiry,  true and  correct in all material respects:  (i)  as soon as
          available at the end of each Financial Quarter and in any event within
          forty-five  (45)  days  thereafter,  quarterly  Financial  Statements,
          as  at  the end of such Financial Quarter, setting forth, in each case
          in comparative form, the figures for the previous year's corresponding
          Financial Quarter  and  the  Financial  Year to date; (ii) as soon  as
          available and in any event  within  ninety  (90)  days  after  the end
          of  each  Financial  Year  of  the Borrower  a  copy  of  the  audited
          consolidated  Financial  Statements of the Borrower for the respective
          Financial  Year  reported  on  by  the  independent  auditors  of  the
          Borrower,  as  the  case  may  be;  and  (iii)  such  other  financial
          statements and information  respecting the Borrower as may  reasonably
          be requested by the Agent from  time  to  time;

<PAGE>

     (b)  Additional  Reporting.  Deliver  to  the  Agent,  promptly  upon  the
          Borrower obtaining  knowledge  thereof,  written  notice  of: (i) any
          Default  or Event of Default,  specifying  the nature thereof and the
          action  the  Borrower proposes to take  or  has  taken  with  respect
          thereto;  (ii)  any  litigation,  including arbitration,  and  of any
          proceedings  before  any  Official  Body  against the Borrower  where
          the  amount  involved  exceeds E 5,000,000;  (iii)  adoption  of,
          participation  in  or  contribution  to  any  Plan  by  the  Borrower
          or  any  ERISA  Affiliate,  or any action by any of these  to  adopt,
          participate in or contribute to any Plan, or the incurrence by any of
          them of any liability or obligation to any  Plan; (iv) non-compliance
          with  any  Environmental  Law  or  Environmental  License  where
          non-compliance  could reasonably  have  a  Material  Adverse  Effect;
          (v)  any  Environmental  Claim  or  any  other claim, notice or other
          communication served  on  it  in  respect  of  any  alleged breach of
          any Environmental Law or Environmental  License;  and (vi) any actual
          or  suspected  Environmental  Contamination  which  could  reasonably
          result  in  a  Material Adverse Effect;

     (c)  Corporate Existence. Preserve and  maintain in full force and effect:
          (i) its  corporate  existence  and all qualifications to carry on the
          Business, including,  without  limitation, all rights (statutory  and
          other); and  (ii) all Authorizations relating thereto, non-compliance
          with which could reasonably have a  Material  Adverse  Effect;

     (d)  Compliance  with  Laws,  etc.  Comply  with  all  applicable  Laws
          non-compliance  with  which  could reasonably have a Material Adverse
          Effect;

     (e)  Payment  of  Taxes and Claims. Pay and discharge before the same shall
          become  delinquent:  (i)  all  Taxes,  assessments  and  Official Body
          charges  or levies  imposed  upon  or  in  respect  of the Business or
          any of the Borrower's assets or properties; and (ii) all lawful claims
          (including, without limitation, claims for labour, materials, supplies
          or  services)  which,  if unpaid, might  become  a  Lien  upon  or  in
          respect  of  the Business or  the  Borrower's  assets  or  properties;
          except,  in  each  case,  any such Tax, assessment,  charge,  levy  or
          claim which is being contested in good faith by proper proceedings and
          for which the  Borrower  has  maintained  adequate  reserves  therefor
          and  no Liens have attached;

     (f)  Keeping of Books.  Keep proper books of record and account in  respect
          of  the  Business,  in which full and correct entries shall be made of
          all financial transactions and the  assets  and  operations in respect
          of the Business in accordance  with  GAAP;

     (g)  Visitation, Inspection, etc. Permit the Agent or any of the Lenders or
          any  representative  thereof  on   reasonable   notice  to  visit  and
          inspect  the  Business  of  the  Borrower,  to  examine  its books and
          records  and  to  make  copies  and  take  extracts  therefrom, and to
          discuss its affairs, finances and accounts with  the  officers  of the
          Borrower  and  to  inspect  the Business to ensure compliance with all
          Laws at all such reasonable times during normal office hours and  as
          often

<PAGE>

          as  the  Agent or any of the Lenders or any representative thereof may
          reasonably  request;

     (h)  Notice  of Default.  Promptly notify  the  Agent  in  writing  of  any
          Default  or  Event  of  Default or any default, or event, condition or
          occurrence  which  with notice  or  lapse  of  time,  or  both,  would
          constitute  a  default,  under  any agreement  for  borrowed  money to
          which  the Borrower is a party and under which the  Borrower  owes  at
          least E 5,000,000  or  the  equivalent amount in another currency;

     (i)  Pay Obligations to Lenders and Perform Other Covenants.  Make full and
          timely  payment  of its Obligations hereunder, whether now existing or
          hereafter  arising,  and  duly  comply  with  the  terms and covenants
          contained in each of the Credit  Documents to which it is a party, all
          at  the times and places and in the manner  set  forth  therein  after
          giving  effect  to  all applicable grace periods provided for therein,
          and  at all  times  take all action necessary to maintain the security
          interests and charges provided for under or pursuant to this Agreement
          and  the  Security  Documents  to  which  it  is  a party as valid and
          perfected security  interests  and charges on the property intended to
          be covered thereby having  priority as contemplated thereby and supply
          all information to the Agent which  is  reasonably  necessary for such
          maintenance;

     (j)  Notices  of Official Body Action. Promptly notify the Agent in writing
          of any notice  of any action by any Official Body or any action, suit,
          proceeding  or investigation  (or  any  basis therefor) pending, or to
          the  knowledge  of  the Borrower  threatened, against or affecting the
          Borrower  before  any Official Body, where the amount involved exceeds
          E 5,000,000 or the equivalent amount in another currency;

     (k)  Pari Passu.  Ensure that its Obligations under the Credit Documents do
          and  will  rank  at  least  pari  passu  with  its  present and future
          obligations under the  Babcock  Loan  Agreement;

     (l)  Insurance.  Cause each of ZPR & Co. and ZSG to maintain insurance with
          financially  sound  and  reputable insurers with respect to its assets
          of  an insurable  nature  against  such  risks  and  in  such  amounts
          as  are normally maintained  by  Persons  carrying  on  the  same or a
          similar class of business;

     (m)  Environmental  Laws.  Cause each of ZPR & Co. and ZSG to comply  with:
          (i)  all  applicable  Environmental  Laws;  and  (ii)  the  terms  and
          conditions of all Environmental Licenses applicable to any of them, in
          each  case,  where failure to do  so  could  reasonably  result  in  a
          Material  Adverse  Effect;

     (n)  Waivers.  Promptly provide to the Agent copies of any waivers provided
          by  the Senior  Lenders and/or any amendments made as the case may be,
          in  respect  of  any  obligations  of  ZPR & Co. and/or ZSG under  the
          Senior Credit Agreements;

<PAGE>

     (o)  Parallel  Reporting. Promptly  provide to  the  Agent  copies  of  any
          reports  or  financial  statements  or  information provided to any of
          the Senior Lenders under  the  Senior  Credit Agreements not otherwise
          provided  hereunder;

     (p)  Further  Assurances.  At  its  cost  and  expense, upon request by the
          Agent,  duly  execute  and  deliver,  or cause to be duly executed and
          delivered, to the Agent,  such further instruments and do and cause to
          be  done  such  other  acts  as  may  be necessary or  proper  in  the
          reasonable  opinion of the Lenders to carry out more  effectually  the
          provisions  and  purposes  of  this  Agreement  and  the  other Credit
          Documents;

     (q)  Shareholders Agreement.  (1) Within  ninety  (90)  days of the date of
          this Agreement, settle  upon  the  terms  of  a shareholders agreement
          or  equivalent documentation  in  form  and  substance satisfactory to
          the Agent reflecting the terms  of  the  Shareholders  Agreement Heads
          of  Terms;

          (2)  Upon  the  occurrence  of  an  Event  of  Default and the Lenders
               realizing upon  their  Security  and  committing  to  sell all or
               a  portion  of  the Pledged Securities to a third party purchaser
               through  public  auction or otherwise, enter into  a shareholders
               agreement  or equivalent documentation upon the agreed terms with
               such  third  party  purchaser;

     (r)  Maintenance of  Special  Purpose  Vehicle  Status.  Ensure  that  each
          Intermediate  Holding  Company  and  DP  Holdings:

          (1)  maintains  its  existence  as  a  limited liability company under
               German  Law  (Gesellschaft  mit  beschrankter  Haftung),  duly
               organised, validly existing and in good  standing  under the Laws
               of  Germany  and  does  not:

              (i)   enter into any Amalgamation or demerger or amend its Charter
                    Documents in  any  manner;

              (ii)  take  any  action in furtherance of dissolution, liquidation
                    or any scheme  of  voluntary  insolvency,  reorganisation or
                    the  like;

              (iii) have  any  Subsidiary  other  than  a Group Company, DP or a
                    Permitted Subsidiary,  which  is  its  Subsidiary  as at the
                    date  of  this  Agreement;

              (iv)  issue  any  further  capital  stock  after  the date of this
                    Agreement other than  ordinary  shares;  or

              (v)  engage in  any business or activity other than: (a) acting as
                   a special purpose  vehicle  for  subscribing  for and holding
                   shares  in  and advancing Shareholders  Loans  to and holding
                   Shareholders  Loans  in  the  Group Company, or DP,  directly
                   owned  by it as  at  the  date  hereof;  (b)  performing  its
                   Obligations under  any  Credit  Document  to  which  it  is a
                   party;  (c)  complying with its  obligations  under  the  ZPR
                   Senior Security;

<PAGE>

                   and  (d)  holding  its  interests  in,  and  engaging  in
                   transactions  in  the ordinary course of business with, Group
                   Companies,  DP  and  Permitted  Subsidiaries;

          (2)  does  not  have  any  assets  other  than:

               (i)    its rights under  the  Credit  Documents  and  the
                              documents evidencing the Shareholders  Loans;

               (ii)   the  authorizations  referred  to  in subparagraph
                      (5)  below;  or

               (iii)  the  shares  of the Group Company, DP or Permitted
                      Subsidiaries owned by it as at  the  date  of this
                      Agreement;

          (3)  does  not  have  any obligations  or  liabilities of any
               nature whatsoever other  than:

               (i)    liabilities arising in respect of the Loan and its
                      other Obligations under  the  Credit  Documents;

               (ii)   obligations  in  respect  of  Taxes  and  fees
                      necessary  for  maintenance  of  its  corporate
                      existence  and  obligations  imposed  by  Law  in
                      Germany;

               (iii)  obligations  under  any  contract  referred  to in
                      subparagraph (4)(iv), (v)  or  (vi)  below;  or

                       (iv)   obligations arising under the ZPR Senior Security;

          (4)  is not  party  to any contract, agreement or arrangement
               other than:

               (i)    the Credit Documents to  which  it  is  a  party;

               (ii)   documents  evidencing  Shareholders  Loans;

               (iii)  contracts  or arrangements necessarily incidental
                      to maintenance of its existence  and  its role as
                      a  special  purpose  vehicle;

               (iv)   contracts  under  which Excluded Payments are made
                      and  which  contain no other  material  obligation
                      other  than  that  which  is  remunerated  by  the
                      relevant Excluded  Payments;

               (v)    contracts,  agreements  or  arrangements with Group
                      Companies, DP and Permitted  Subsidiaries;  and

               (vi)   documents  relating  to  the ZPR Senior Security to
                      which it is a party;

          (5)  obtains,  maintains  and  complies with the terms of all
               authorizations required under  any Law  or regulation to
               enable it to perform its Obligations under, or  for  the
               validity  or  enforceability  of, the Credit

<PAGE>

               Documents to which  it  is  a  party  and any  documents
               evidencing Shareholders  Loans;

          (6)  complies in  all  material  respects with  all  Laws and
               regulations applicable  to  it;  and

          (7)  pays  all  its Taxes  when due, except to the extent the
               relevant taxes are being  contested in good faith and by
               appropriate means  and  as  to which reserves reasonably
               regarded as adequate have been established in accordance
               with  applicable  generally  accepted  accounting
               principles; and

     (s)  Additional Reporting  of  Indebtedness. Deliver  to  the Agent written
          notice of the incurrence of any Debt or Debts in excess, in aggregate,
          of E 10,000,000,  following  the incurrence  thereof,  setting  out in
          reasonable detail the  particulars  of  such  Debt.

     Section  8.2     Negative  Covenants.  So  long  as  any  Lender  has  any
Commitment under this Agreement and until the Obligations are paid and satisfied
in  full, the Borrower shall not (or if applicable shall not permit the relevant
action  to  take  place):

     (a)  Change  in  Nature  of Business.  Change the nature of the Business in
          any material respect or make or permit to exist any change, condition,
          event or occurrence in or  with  respect to the nature of the Business
          which when taken with all  other  conditions,  events  or  occurrences
          could reasonably be expected to have  a  Material  Adverse  Effect;

     (b)  Mergers,  etc.  Enter  into  or  agree  to enter into  any transaction
          (whether  by  way  of  reconstruction,  reorganization, consolidation,
          combination, amalgamation, merger, transfer, sale, lease, modification
          or otherwise) whereby: (i)  other  than  pursuant  to  an  Asset Sale,
          all  or  substantially  all of the Borrower's undertaking, property or
          assets will become the property of any other Person  or the continuing
          corporation  resulting therefrom; (ii) there would  be  permitted  any
          change in the direct or indirect Control of the Borrower; or (iii) the
          corporate  structure  of  the  Borrower  affecting the Group Companies
          would  be modified,  changed,  altered  or  amended,  in  any  manner,
          from that set out in Schedule  "E"  hereto;

     (c)  Distributions.  Make,  allow  or  cause  any  payment  on account of a
          redemption,  distribution  or  return  of  capital (including, without
          limitation,  cash  dividends  or any repayment of Shareholder Loans or
          cash  distributions)  to  any  of its shareholders other than non-cash
          dividends  or  distributions  comprised solely  of  equity  securities
          of  the  Borrower;

     (d)  Margin  Stock.  Engage in the  business  of  extending  credit for the
          purpose  of  purchasing  or  carrying margin stock (within the meaning
          of  Regulations U and X issued by the Board of Governors of the United
          Sates Federal Reserve  System),  and  no  portion  of  any  Loan  will
          be  used,  directly or indirectly,  to

<PAGE>

          purchase or carry margin stock or to extend credit to others for  the
          purpose  of  purchasing  or  carrying  margin  stock;

     (e)  Investment  Company  Act.  Either  by  act  or  omission,  become  an
          "investment company"  or  a  company  "controlled"  by an "investment
          company", within  the  meaning  of  the  United  States Investment
          Company Act of 1940, as amended;

     (f)  ERISA.  (1) Adopt, maintain,  sponsor,  participate  in  or incur any
          liability  or obligation under or to any Plan or incur any obligation
          to provide post-retirement benefits to any Person nor allow any ERISA
          Affiliate to do so; or

          (2)  Take  any  action  or  omit  to  take  any  action or permit any
               Subsidiary  or  ERISA  Affiliate  to  take any action or omit to
               take any action with respect  to  any  Plan  that  might  result
               in  the  imposition  of a Lien or  other  security  interest  on
               any property of the Borrower or any Subsidiary or otherwise have
               a Material  Adverse  Effect;

     (g)  No Transfers.  Sell, assign or transfer any shares or other interests
          in ZPR  Holding, SPB, ZPR & Co. or  SPH  or any Shareholders Loans or
          allow any sale, assignment or transfer to any third party of any such
          interest or Shareholders Loans, other than pursuant to  Asset  Sales;

     (h)  Negative Pledge. Allow to be created or permit to subsist any Lien on
          any of  the assets of the Group Companies or DP Holdings, except for:
          (i) Liens  arising  under the Credit Documents; (ii) Permitted Liens;
          or  (iii)  Liens arising under  or  pursuant  to  the  Senior  Credit
          Agreements;

     (i)  Transactions  Similar  to  Security.  Allow  any Intermediate Holding
          Company or  DP  Holdings  to sell, transfer or  otherwise  dispose of
          any of its assets on terms  whereby it  is  or  may  be  leased to or
          re-acquired  or  acquired by the Borrower or any Subsidiary or any of
          its  related  entities  in  circumstances  where the  transaction  is
          entered into primarily as a method of raising finance or of financing
          the acquisition of an asset unless such transaction would result in a
          Permitted  Lien;

     (j)  Incurrence of Debt.  Permit any of the Group Companies or DP Holdings
          to incur any additional Debt in excess E 5,000,000, separately or  in
          the aggregate, except  under  the  Senior  Credit  Agreements  and/or
          pursuant to any currency hedging, currency  swap, interest rate swap,
          cap  or  collar  arrangement  or other swap arrangement, from time to
          time in relation to the Senior Credit Agreements;

     (k)  Related Party Transactions.  Enter into with any Group Company, DP or
          DP  Holdings  or  allow any Affiliate that is not a Group Company, DP
          Or  DP  Holdings  to  enter  into  with  any  Group Company, DP or DP
          Holdings  any  transaction  under  which the aggregate payments to be
          made or the fair market value of the property which  is  the  subject
          of  the  transaction  is greater than E 1,000,000, except pursuant to
          the  Marketing  and  Sales  Agreement,  unless:  (i)  in  respect  of
          transactions  that  involve more than E 1,000,000 and up to

<PAGE>

          E 3,000,000, such  transaction(s) are undertaken at fair market value
          on an arm's-length basis, as determined  by the board of directors or
          other  governing  body  of  the Borrower or the  Affiliate which is a
          party to such transaction in good faith, and evidenced by  resolution
          thereof filed with the Agent, and provided that  in  respect  of  any
          transaction  which involves more than E 3,000,000, such determination
          shall  be based  upon  the written opinion of a qualified independent
          appraiser, valuator, accounting  firm  or  investment  bank  prepared
          contemporaneously  with  such transaction,  which  opinion  shall  be
          attached  to  the approving resolution;

     (l)  No Amendments. Permit any  amendment  to  be  made  to the ZPR Credit
          Agreement  or  the  ZSG  Project Finance Loan Agreement  which  could
          result  in an obligation  to  create additional security in  favor of
          the  ZPR  Senior  Lenders  or  the  ZSG  Senior  Lenders  over  a
          Shareholders  Account;  and

     (m)  Shareholder  Accounts.  Pledge or  allow  any  Group  Company  or  DP
          Holdings to  pledge  or  otherwise  deal with any Shareholder Account
          other  than in accordance  with  Section  4.5(1)(iii)  hereof.

                                   ARTICLE 9.
                                EVENTS OF DEFAULT

     Section 9.1     Events of Default.  An Event of Default shall have occurred
and  be  continuing  if:

     (a)  Payment  of Principal.  The  Borrower shall fail to pay the  Principal
          Sum or  any  portion  thereof  outstanding  hereunder  when  the  same
          becomes due and payable  and  such  failure  shall  remain  unremedied
          for a period of five (5) Business  Days;

     (b)  Payment  of  Interest,  Fees,  etc.  The  Borrower  shall  fail to pay
          any  Interest  hereunder  when the same becomes due and payable or the
          Borrower shall fail  to  pay  any  fees, expenses or any other amounts
          hereunder when the same becomes  due  and  payable,  and  in  any such
          case,  the failure shall remain unremedied  for  a period  of ten (10)
          Business  Days;

     (c)  Representations  and  Warranties  Incorrect.  Any  representation   or
          warranty  made  by  the  Borrower  herein  or  in  any  other   Credit
          Document  or any representation,  warranty  or  certification  made by
          the  Borrower (or any of its officers)  in  any  certificate or  other
          writing delivered in connection with any of  the  Credit Documents, or
          any  representation  or  warranty  deemed  to be made by the  Borrower
          provided herein or therein, shall prove to have been incorrect in  any
          respect  when  made  or  deemed to  be  made  or  repeated  where  the
          underlying event  which  gives rise to such  representation,  warranty
          or certification being incorrect,  could  reasonably  be  expected  to
          have a Material Adverse Effect;

<PAGE>

     (d)  Failure to Perform  Certain  Covenants.  The  Borrower  shall  fail to
          observe  any  of  the  negative  covenants  contained  in  the  Credit
          Documents  and  to  be  observed  by  the  Borrower including, without
          limitation, in Section 8.2 of this  Agreement;

     (e)  Failure to Perform Other Covenants.  Except as otherwise provided, the
          Borrower shall fail to perform or observe any other term, covenant  or
          agreement contained in any of the Credit Documents and  applicable  to
          the  Borrower  and such failure  shall  remain  unremedied  for thirty
          (30) Business Days, if such term, covenant  or agreement is reasonably
          capable of being remedied in such period;

     (f)  Failure to Pay Debts to Third Parties.  The Borrower shall fail to pay
          the  principal  of  or  premium  or  interest  on  any Debt  which  is
          outstanding in an aggregate  principal amount in excess of E 5,000,000
          (or the equivalent amount in any other currency) when the same becomes
          due and payable (whether by scheduled maturity,  required  prepayment,
          acceleration,  demand  or  otherwise) and such failure  shall continue
          after the applicable grace period, if any, specified in the  agreement
          or  instrument  relating  to such Debt; or any other event shall occur
          or  condition  shall  exist, and shall continue after  the  applicable
          grace  period,  if  any,  specified  in  the  agreement  or instrument
          relating to any such Debt,  if  the  effect of such event or condition
          is  to accelerate, or to permit the  acceleration  of, the maturity of
          Debt  of  the Borrower which is outstanding in  an aggregate principal
          Amount  exceeding E 5,000,000 (or the equivalent amount in  any  other
          currency);

     (g)  Failure  to Draw.  ZSG  shall  fail  to  complete  the  initial  draw
          available to it  under  the  ZSG Project Finance Loan Agreement within
          seven (7) Business Days  of  the  Advance  Date;

     (h)  Event  of  Bankruptcy.  There shall exist  any  Event of Bankruptcy in
          respect  of  the  Borrower;

     (i)  Judgments. Any judgment or order for the payment of money in excess of
          E 5,000,000  in respect of the Borrower shall be rendered  against the
          Borrower  and  either:  (i)  enforcement  proceedings  shall have been
          commenced by any creditor upon  such  judgment or order; or (ii) there
          shall  be  any  period  of thirty (30) consecutive  days  during which
          a  stay  of enforcement of such judgment  or  order, by  reason  of  a
          pending  appeal  or  otherwise,  shall  not  be  in  effect;

     (j)  Unenforceability.  This  Agreement  or  any  Credit Document shall, at
          any  time  after  execution  and  delivery,  and for any reason (other
          than  in  accordance with  the  respective terms or with the unanimous
          consent  of  the  Lenders),  cease  to  be in full force and effect or
          shall  be  declared  to  be  null  and  void,  or  the  validity  or
          enforceability of any thereof shall be contested by  the  Borrower  or
          any other party thereto, or the Borrower or any other such party shall
          deny that it  has  any  further  liability  or  obligation thereunder;

<PAGE>

     (k)  Cross  Default.  ZPR & Co.  and/or ZSG, as the case may be, shall fail
          to  pay  the  principal  of,  premium or interest or any other amounts
          under the ZPR Credit  Agreement  and/or  the  ZSG Project Finance Loan
          Agreement  when  the  same  becomes  due  and  payable  (whether  by
          scheduled  maturity,  required  prepayment,  demand  or  otherwise)
          resulting  in  an acceleration of the obligations of ZPR & Co.  and/or
          ZSG,  as  the  case  may  be,  under  the  applicable  Senior  Credit
          Agreement;

     (l)  Challenge  to Security.  Any of the Security shall at any  time  after
          the  execution  and  delivery  of  the  relevant Security Document and
          for  any  reason  (other  than  with  the  unanimous  consent  of  the
          Lenders)  cease  to  constitute  a  valid,  subsisting  and  perfected
          security  interest  or  charge in respect of the assets and properties
          referred  to  therein  or  cease  to rank in priority or in the manner
          contemplated herein or in the relevant Security Document other than by
          reason  of  the  act  or  omission  of  the  Agent  or  the  Lenders;

     (m)  Cessation  of business.  ZPR and/or ZSG ceases, or threatens to cease,
          to  carry  on  all  or  a substantial  part of its business, excluding
          any such event flowing  from  an  Asset  Sale;

     (n)  Unlawfulness.  It is or becomes unlawful for the Borrower  to  perform
          any of  its  Obligations  under  the  Credit  Documents;  or

     (o)  ERISA.  Any  event or condition that presents a material risk that the
          Borrower  or  any  ERISA Affiliate may incur a material liability to a
          Plan  or to the  United  States  Internal  Revenue  Service  or to the
          United  States  Pension  benefit  guaranty  corporation;  or  an
          "accumulated funding deficiency" (as that term  is  defined in Section
          412 of the United States Internal Revenue Code of 1986, as amended, or
          Section 302 of ERISA), whether or not waived, by reason of the failure
          of  the  Borrower  or any  ERISA Affiliate to make a contribution to a
          Plan  where  such  event  could  reasonably  have  a  Material Adverse
          Effect;

Upon  the  happening  of  an  Event  of  Default  described  in  Section  9.1(h)
(Bankruptcy)  all  Commitments will immediately terminate and the Loan, together
with accrued Interest, and all other amounts accrued under the Credit Documents,
will be immediately due and payable.  On and any time after the occurrence of an
Event of Default (other than an Event of Default described in Section 9.1(h) the
Agent  may,  and  shall if so directed by the Majority Lenders, by notice to the
Borrower:  (i)  declare  the Obligations under the Agreement to be forthwith due
and  payable,  whereupon the same shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are  expressly  waived  by the Borrower; and (ii) take all steps and proceedings
as,  in the opinion of the Agent are necessary or desirable to preserve, protect
or  enforce  the  Security.

     Section 9.2     Cure of Default.  The Agent shall have the right, but shall
not  be  obligated,  from time to time while a Default or Event of Default shall
have  occurred  and remain continuing, to take in its name or in the name of the
Borrower or otherwise such action as it shall consider necessary or desirable to
cure  or  rectify such Default or Event of Default and, in so doing, neither the
Agent  nor  the  Lenders  shall  incur any liability to the Borrower if any such
action taken by the Agent or the Lenders or on the Borrower's behalf

<PAGE>

shall prove to be in whole or in part inadequate or  invalid  and  the  Borrower
shall  indemnify and  hold  the  Agent and the Lenders harmless from and against
any  loss,  costs,  liability  or  expense  (including,  without  limitation,
reasonable  fees  on  a  solicitor  and  a  solicitor's  own  client  basis  and
disbursements  of  counsel)  paid, suffered  or  incurred  by  the  Agent or the
Lenders in connection therewith or arising  therefrom.

     Section  9.3     Additional  Provisions.  (1)     Notwithstanding  anything
else set out in this Article 9, in the event that the Obligations are not repaid
on  the  Extended Maturity Date and a Second Extension Request has not been made
by  the  Borrower and accepted by the Agent, (a "Payment Default"), prior to the
exercise of any remedy by the Agent hereunder, the Borrower and the Agent shall,
within  thirty  (30) days following such Payment Default, agree upon a course of
action  pursuant  to  which  the Borrower will sell sufficient assets to pay the
Obligations  to  the  Lenders,  provided  that,  if no such agreement is reached
within  the prescribed time, subject to Subsection (2), the Lenders may exercise
all  of  their  rights  in  and  to  the  Security  hereunder.

     (2)     The  Agent and Lenders acknowledge and agree that:  (i) any present
or  future  right  that the Agent and/or the Lenders may otherwise have, or have
had,  hereunder or pursuant to the Security to sell, assign, transfer or realize
upon  any  interest  in  ZPR pursuant to this Agreement or the Security shall be
limited  to  the  sale  of  49% of the shares thereof or interest therein unless
additional sales are consented to in writing by the ZPR Senior Lenders; and (ii)
any right that they may otherwise have to sell any interest in ZSG arising under
the  Security  shall be limited to such percentage thereof which is consented to
by  the  European  Commission  and,  in  any event, to no more than 12.5% of the
shares  thereof  unless  additional sales are consented to in writing by the ZSG
Senior  Lenders.

     (3)     Notwithstanding  Subsection  (2) hereof, the Borrower covenants and
agrees  that  if, following an Event of Default, the Agent reasonably determines
that  it must complete sales of a greater portion of the Borrower's interests in
ZPR  and/or  ZSG  than provided for and allowed under Subsection (2) hereof (the
"Permitted  Sales")  at  the  request of the Agent, the Borrower will co-operate
with the Lenders and make reasonable commercial efforts to obtain the consent of
the  applicable  Senior  Lenders to sales of the Borrower's interests in ZPR and
ZSG  as  applicable,  in  addition  to  the  Permitted  Sales, provided that the
Borrower  shall  not  be  obliged  to incur any expense or disburse any funds in
connection  therewith.

                                   ARTICLE 10.
                                    THE AGENT

     Section 10.1     Authorization and Action.  Each Lender hereby appoints and
authorizes  the Agent to take such action as agent on its behalf and to exercise
such  powers  under  this  Agreement  as are delegated to the Agent by the terms
hereof,  together  with such powers as are reasonably incidental thereto and the
Lenders  and  the  Borrower  acknowledge  that  all  instructions, decisions and
requests  for  decisions not otherwise provided for herein shall be made through
the  Agent.  As  to  any  matters  not  expressly provided for by this Agreement
(including,  without  limitation, enforcement or collection of the Obligations),
the  Agent  shall not be required to exercise any discretion or take any action,
but  shall  be  required  to  act  or to refrain from acting (and shall be fully
protected  in  so acting or refraining from acting) upon the instructions of the
Majority  Lenders  and  such  instructions  shall  be  binding

<PAGE>

upon  all  Lenders;  provided, however, that the Agent shall not be required  to
take  any  action  which  exposes  the  Agent  to personal liability or which is
contrary  to  this Agreement or  applicable  Law.  The Agent agrees to give each
Lender prompt notice of each notice  given  to  it  by  the Borrower pursuant to
the terms of this Agreement.

     Section  10.2     Agent  as  Lender.  With  respect  to its Commitment, any
Lender  who  is  also  the Agent hereunder shall have the same rights and powers
under  this Agreement as any other Lender hereunder and may exercise the same as
though  it  were not the Agent; and the term "Lender" or "Lenders" shall, unless
otherwise  expressly  indicated, include the Agent in its individual capacity as
Lender.  The  Agent  and its Affiliates may accept deposits from, lend money to,
act  as  trustee under indentures of, accept investment banking engagements from
and  generally  engage  in  any  kind  of business with the Borrower, any of its
Subsidiaries  and  any  Person who may do business with or own securities of the
Borrower or any such Subsidiary, all as if it were not the Agent and without any
duty  to  account  therefor  to  the  Lenders.

     Section 10.3       Majority Lenders.  The Agent and its Affiliates shall at
all  times,  collectively,  be  Majority  Lenders  hereunder.

     Section 10.4       Agent's Reliance, Etc.  Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted  to  be  taken by it or them under or in connection with this Agreement,
except  for  its  or  their own gross negligence or willful misconduct.  Without
limitation  of the generality of the foregoing, the Agent:  (i) may consult with
legal  counsel  (including  counsel  for  the  Borrower),  independent  public
accountants  and  other  experts  selected by it and shall not be liable for any
action  taken  or omitted to be taken in good faith by it in accordance with the
advice  of  such  counsel,  accountants  or  experts;  (ii) makes no warranty or
representation  to any Lender and shall not be responsible to any Lender for any
statements,  warranties  or representations (whether written or oral) made in or
in connection with this Agreement; (iii) shall not have any duty to ascertain or
to inquire as to the performance or observance of any of the terms, covenants or
conditions  of  this  Agreement  on  the  part of the Borrower or to inspect the
property  (including  the  books and records) of the Borrower; (iv) shall not be
responsible  to  any  Lender  for  the  due  execution,  legality,  validity,
enforceability,  genuineness,  sufficiency  or  value  of,  or the perfection or
priority  of  any  Lien  or security interest created or purported to be created
under  or in connection with, this Agreement or any other instrument or document
furnished  pursuant hereto; and (v) shall incur no liability under or in respect
to this Agreement by acting upon any notice, Authorization, certificate or other
instrument  or  writing (which may be by telecopier, telegram or telex) believed
by  it  to  be  genuine  and  signed  or  sent  by  the proper party or parties.

     Section  10.5  Lender  Credit  Decisions.  Each Lender acknowledges that it
has,  independently  and without reliance upon the Agent or any other Lender and
based  on  Financial  Statements  referred  to  in Section 6.1(e) and such other
documents  and  information  as  it  has deemed appropriate, made its own credit
analysis  and  decision  to  enter  into  this  Agreement.  Each  Lender  also
acknowledges  that it will, independently and without reliance upon the Agent or
any  other  Lender  and based on such documents and information as it shall deem
appropriate  at the time, continue to make its own credit decisions in taking or
not  taking  action  under  this  Agreement.

<PAGE>

     Section  10.6  Agent Agreements. From  time  to  time,  the Agent may enter
into, execute and deliver agreements or instruments supplemental hereto with the
Borrower  for  the  purposes  of:  (i)  adding  to  the  provisions  hereof such
additional  covenants  and  enforcement provisions as are, in the opinion of the
Agent,  necessary  or  desirable  and  not  prejudicial  to the interests of the
Lenders; (ii) making such provisions not inconsistent with this Agreement as may
be  necessary  or  desirable and not prejudicial to the interests of the Lenders
with  respect  to matters or questions arising hereunder; (iii) adding, altering
or  modifying  the  provisions hereof, including relieving the Borrower from any
Obligations, conditions or restrictions herein contained provided such addition,
alteration,  modification  or relief shall be operative or become effective only
if,  in  the  opinion  of  the Agent, such addition, alteration, modification or
relief  in  no way prejudices any of the rights of the Lenders or the Agent (and
the  Agent  may  in its sole discretion decline to enter into any such addition,
alteration,  modification  or  relief  which,  in  its  opinion,  may not afford
adequate  protection  to it when same becomes operative); and (iv) for any other
purpose  not  inconsistent  with the terms of this Agreement, including, without
limitation,  the  correction  or  rectification of any ambiguities, defective or
inconsistent provisions, errors, mistakes or omissions herein provided where, in
the  opinion of the Agent, the rights of the Agent and the Lenders are in no way
prejudiced  thereby.

     Section  10.7  Indemnification.  The  Lenders  agree to indemnify the Agent
(to  the  extent  not  reimbursed  by  the  Borrower), rateably according to the
respective  principal  amount  of  the  Loan then held by each of them (or if no
principal amount is outstanding, rateably according to the respective amounts of
their  Commitments),  from  and  against  any  and all liabilities, obligations,
losses,  damages,  penalties,  actions,  judgments,  suits,  costs,  expenses or
disbursements  of  any kind or nature whatsoever (including, without limitation,
those arising in an action brought by a Lender) that may be imposed on, incurred
by,  or asserted against the Agent in any way relating to or arising out of this
Agreement  or any other Credit Document, or action taken or omitted by the Agent
under  this  Agreement  or  any  other  Credit  Document  (collectively,  the
"Indemnified Costs"), provided that no Lender shall be liable for any portion of
the  Indemnified  Costs  resulting  from the Agent's gross negligence or willful
misconduct.  Without  limitation  of  the  foregoing,  each  Lender  agrees  to
reimburse  the  Agent  promptly  upon  demand  for  its  rateable  share  of any
out-of-pocket  expenses  (including  counsel  fees)  incurred  by  the  Agent in
connection  with  the  preparation,  execution,  delivery,  administration,
modification,  amendment  or  enforcement  (whether  through negotiations, legal
proceedings  or  otherwise)  of,  or  legal  advice  in  respect  of  rights  or
responsibilities  under,  this  Agreement,  to  the extent that the Agent is not
reimbursed for such expenses by the Borrower.  In the case of any investigation,
litigation or proceeding giving rise to any Indemnified Costs, this Section 10.7
applies  whether  any such investigation, litigation or proceeding is brought by
the  Agent,  any  Lender  or  a  third  party.

Section  10.8  Sharing  of  Payments.  If  any  Lender  shall obtain any payment
(whether  voluntary,  involuntary, through the exercise of any right of set-off,
or  otherwise) on account of the Obligations owing to it (other than pursuant to
Sections  3.3 or 11.8) in excess of its rateable share of payments on account of
the  Obligations  obtained  by  all  of the Lenders, such Lender shall forthwith
purchase  from the other Lenders such participations in the Obligations owing to
them  as  shall be necessary to cause such purchasing Lender to share the excess
payment  rateably  with  each  of  them;  provided,  however, that if all or any
portion  of  such  excess  payment  is thereafter recovered from such purchasing
Lender,  such purchase from each Lender shall be rescinded and such Lender shall
repay to the purchasing Lender

<PAGE>

the purchase price to the extent of such recovery together  with an amount equal
to such Lender's rateable share (according to the proportion  of  (i) the amount
of such Lender's required repayment to (ii) the total  amount  so recovered from
the  purchasing Lender) of any interest or other amount  paid  or payable by the
Purchasing  Lender  in respect of the total amount so  recovered.  The  Borrower
agrees that any Lender purchasing a participation from  another Lender  pursuant
to  this  Section  10.8 may, to the fullest extent permitted  by  Law,  exercise
all  of its rights of payment (including right of set-off)  with respect to such
participation  as  fully  as  if  such Lender were the direct  creditor  of  the
Borrower  in  the  amount  of  such  participation.

     Section  10.9  Successor Agent.  The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower and may be removed at any
time  with  or without cause by the Majority Lenders.  Upon any such resignation
or  removal,  the  Majority  Lenders shall have the right to appoint a successor
Agent.  If  no  successor  Agent  shall  have  been so appointed by the Majority
Lenders, and shall have accepted such appointment, within thirty (30) days after
the  retiring  Agent's  giving of notice of resignation or the Majority Lenders'
removal  of  the  retiring  Agent, then the retiring Agent may, on behalf of the
Lenders,  appoint  a successor Agent, which shall be a commercial bank organized
under  the  Laws  of  the  United  States of America or of any State thereof and
having  a  combined  capital  and  surplus  of  at  least U.S.$50,000,000.  Upon
acceptance  of  any  appointment  as  Agent hereunder by a successor Agent, such
successor  Agent  shall  thereupon  succeed  to  and  become vested with all the
rights, powers, discretion, privileges and duties of the retiring Agent, and the
retiring  Agent  shall  be discharged from its duties and obligations under this
Agreement.  After  any  retiring  Agent's  resignation  or  removal hereunder as
Agent,  the  provisions  of this Article 10 shall inure to its benefit as to any
actions  taken  or  omitted  to  be  taken  by  it while it was Agent under this
Agreement.

                                   ARTICLE 11.
                                  MISCELLANEOUS

     Section  11.1     Records.  The  unpaid  amount  of the Loan and the unpaid
Interest  accrued  thereon  shall at all times be ascertained from the books and
records  of  the  Agent, which shall be conclusive absent manifest error, fraud,
dishonesty or improper conduct, and a certificate of any officer of the Agent as
to  such  records  shall  be  conclusive  evidence  of  such  records.

     Section  11.2     Brokerage.  The  Agent  and the Lenders represent that it
and they have not engaged any broker in connection with this Agreement.  Neither
the  Agent  nor  the  Lenders  shall be liable in any way for the payment of any
brokerage fees or commissions to any broker or other Person entitled or claiming
to  be entitled to same in connection herewith and the transactions contemplated
hereby,  and  the Borrower by acceptance hereof agrees to hold the Agent and the
Lenders  harmless from all claims for brokerage fees or commissions which may be
made  in  connection  with  the  transactions  contemplated  hereby.

     Section  11.3     Lender  Approval,  Amendments,  etc.  (1)      Except  as
expressly  provided otherwise herein and subject to Section 11.3(2) no amendment
or  waiver  of  any  provision  of  this Agreement or of any of the other Credit
Documents,  nor any consent to any departure by the Borrower therefrom, shall in
any  event  be  effective  unless the same shall be

<PAGE>

in  writing and signed by the Majority Lenders, and then such waiver or consent
shall  be  effective  only  in  the specific  instance  and  for  the  specific
purpose  for  which  given.

     (2)     No amendment, waiver or consent shall, unless in writing and signed
by  all  the  Lenders: (i) subject any Lender to any additional obligation; (ii)
reduce  the  principal of, or Interest on, the Loan or any fees or other amounts
due hereunder; (iii) postpone any date fixed for any payment of principal of, or
Interest on, the Loan or any fees or other amounts due hereunder; (iv) except as
provided  for  in  this Agreement, change the number of Lenders required for the
Lenders  or  any of them to take any action hereunder; or (v) amend this Section
11.2.  The  granting  of  such amendment, waiver or consent shall be in the sole
discretion  of  each  Lender and may be arbitrarily declined or withheld by such
Lender.

     Section  11.4     Notices,  etc.     (1)     Except  as otherwise expressly
provided  herein,  all notices, requests, demands, directions and communications
by  one  party  to  the  other  shall  be  sent by facsimile or similar means of
recorded  communication  or  hand  delivery,  and  shall  be effective when hand
delivered  or,  in  the  case  of  facsimile  or  similar  means  of  recorded
communication, when received.  All such notices shall be given to a party at its
address given on the signature page of this Agreement, or in accordance with any
unrevoked  written  direction  from  such party to the other party in accordance
with  this  Section  11.4(1).  All  notices,  demands  or  requests to or of the
Borrower  shall  be  copied  to:

<PAGE>

               Sangra,  Moller
               1000  Cathedral  Place
               925  West  Georgia  Street
               Vancouver,  B.C.  V6C  3L2

               Attention:  H.S.  Sangra
               Facsimile  No.:  (604)  669-8803

     (2)     Except as otherwise provided hereunder, all deliveries of Financial
Statements  and  other  documents  to  be  made  by  the Borrower to the Lenders
hereunder  shall  be  made  by  making delivery of such Financial Statements and
documents directly to the Agent at its address set out on the signature pages of
this  Agreement,  or  to  such  other address as the Agent may from time to time
notify to the Borrower.  All such deliveries shall be effective only upon actual
receipt.

     Section  11.5     Reimbursement  for  Certain  Expenses.  (1)  The Borrower
shall  pay  or  cause  to be paid and shall indemnify and save the Agent and the
Lenders  harmless  against  liability  for  the  payment  of  all  reasonable
out-of-pocket  expenses  relating  to the Loan, as agreed to in principal by the
Borrower,  including,  without  limitation:

     (a)  counsel,  assessment  or  compliance  review  fees  and  disbursements
          (including  legal  fees  and  disbursements  on  a  solicitor  and  a
          solicitor's  own  client  basis) incurred by the Agent and the Lenders
          in connection with: (i) the  development,  preparation,  execution and
          interpretation  of this Agreement and the other  Credit  Documents  or
          any agreement or instrument contemplated hereby or thereby  subject to
          the  limitation  set  out in Section 11.5(2); (ii) on-site inspections
          by  the  Agent  or its representatives required in connection with the
          enforcement  of  the  Credit Documents; (iii) advice of counsel to the
          Agent  and the Lenders with respect to the administration of the Loan,
          the  Credit  Documents  or  any  transaction contemplated hereunder or
          thereunder;  (iv) the enforcement or preservation  of rights under  or
          the  refinancing,  renegotiation or restructuring of  the  Obligations
          under  this  Agreement  or  any  Obligations  under  the  other Credit
          Documents  or  any  agreement  or  instrument  contemplated  hereby or
          thereby; (v)  stamp  taxes  and custodian fees incurred and chargeable
          in  connection with the  Pledged  Securities  if  charged to the Agent
          by  a  third  party;  or  (vi)  any requested  amendments,  waivers or
          consents  pursuant  to  the  provisions  hereof or of the other Credit
          Documents, including such expenses as may be incurred by the Agent  or
          a  Lender  in  the  collection  of  the Obligations or any litigation,
          proceeding,  dispute  or  so-called  "work-out"  in  any  way relating
          to  the Obligations  or  the  Credit  Documents; and

<PAGE>

     (b)  all  such  expenses  in connection with: (i) the Borrower's failure to
          complete the Loan or to  make  any  payment,  repayment  or prepayment
          on the date required hereunder  or specified by it in any notice given
          hereunder; (ii)  the Borrower's failure  to  pay  any  amount required
          to  be  made  by it including,  without  limitation,  any  Interest or
          fees,  due  under any Credit  Document  on its  due date; or (iii) the
          Borrower's failure to  give  any  notice  required  to  be given by it
          to the  Agent  or  the Lenders  hereunder.

The  obligations  of  the  Borrower  under  this  Section 11.5 shall survive the
advance  of  the  Loan  and the payment and satisfaction of the indebtedness and
liability  of  the  Borrower  to  the  Agent  and  the  Lenders pursuant to this
Agreement.

     (2)     The  Agent  shall  be reimbursed on the Advance Date for legal fees
and  disbursements  incurred  in  connection  with the negotiation, preparation,
execution and delivery of this Agreement and the Credit Documents to the Advance
Date  in  an  amount  not  to  exceed  U.S.$100,000.

     Section  11.6     No Waiver; Remedies.  No failure on the part of the Agent
or  the  Lenders  or  the  Borrower to exercise, and no delay in exercising, any
right  under  any of the Credit Documents shall operate as a waiver thereof; nor
shall  any  single  or  partial  exercise  of  any right under any of the Credit
Documents  preclude any other or further exercise thereof or the exercise of any
other  right.  The  remedies herein provided are cumulative and not exclusive of
any  remedies  provided  by  Law.

     Section  11.7     Confidentiality.  Subject to the next following sentence,
the  Agent  and  the  Lenders agree to use reasonable efforts to ensure that any
Financial Statement or other information relating to the Business, properties or
condition, financial or otherwise, of the Borrower which may be delivered to the
Agent  and  the  Lenders pursuant to this Agreement which is not publicly filed,
distributed  to  shareholders of the Borrower or otherwise made available to the
public  generally  (and  which  is  not independently known to the Agent and the
Lenders  or  a  Lender)  will,  to  the  extent  permitted  by  Law,  be treated
confidentially by the Agent and the Lenders and will not, except as provided for
herein  or  with  the  consent of the Borrower, be distributed or otherwise made
available  by  the  Agent or a Lender to any Person other than the Agent's and a
Lender's  employees, authorized agents, counsel or representatives, who shall be
made  aware  of  the confidential nature of such information.  The Agent and the
Lenders  are  hereby authorized to deliver a copy of any Financial Statements or
any  other  information  relating  to  the  Business,  operations,  or financial
condition  of  the  Borrower  and  its Subsidiaries which may be furnished to it
under  this Agreement or otherwise to: (i) any Official Body having jurisdiction
over  the  Agent  or  any  Lender,  if  required by such Official Body; (ii) any
Subsidiary  or  Affiliate  of  the  Agent or any Lender to whom such information
needs  to  be  disclosed  by  reason  of internal credit policy or for any other
proper reason directly related to the advancement of the intents and purposes of
this  Agreement;  and  (iii) any proposed assignee hereunder.  Any such Official
Body,  Subsidiary or Affiliate or assignee to whom such information is disclosed
shall  be  made  aware  of  the  confidential  nature  of  such  information.

     Section 11.8     Taxes, Costs, etc.  (1)       All payments by the Borrower
under this Agreement and the other Credit Documents shall be made free and clear
of,  and  without  deduction  or  withholding  for,  Taxes unless such Taxes are
required  by  Law to be deducted or

<PAGE>

withheld.  If the  Borrower shall be  required by  Law  to  deduct  or  withhold
any  Taxes  from  or  in respect of any sum payable under this  Agreement or the
other  Credit  Documents: (i)  the  sum payable shall be  increased  as  may  be
necessary  so  that  after  making  all  required  deductions  or  withholdings
applicable  to  additional  amounts  paid  under  this  Section,  the  Lenders
receive  an  amount  equal  (on  an  after-tax  basis,  taking into  account any
income Taxes  any  Lender  will  owe on the additional amounts)  to the sum they
would have  received (on an after-tax basis) if no deduction or  withholding had
been  made;  (ii)  the  Borrower shall make such deductions or withholdings; and
(iii)  the  Borrower  shall  pay  the  full  amount  deducted or withheld to the
relevant  taxation  authority  or  other authority in accordance with applicable
Law, provided that if any transfer, assignment or grant of a participation right
by the Agent or a Lender in respect of its Commitment results at the time of the
transfer,  assignment  or  grant  of a participation right, or thereafter, in an
increased  payment, the transferee, assignee or participant shall be entitled to
receive such increased payment only to the extent that the Agent or Lender would
have  been so entitled had there been no such transfer, assignment or grant of a
participation  right.

     (2)     The  Borrower shall pay all Taxes which arise from any payment made
under  any  of  the  Credit  Documents  or  from  the  execution,  delivery  or
registration  of,  or  otherwise  in  respect  to,  any of the Credit Documents.

     (3)     The  Borrower  shall  indemnify and save harmless the Agent and the
Lenders  for  the  full  amount  of  Taxes  levied by any jurisdiction on, or in
relation to, any sum received or receivable hereunder by the Lenders (other than
income  or  capital  Taxes).  Payment  under  this indemnification shall be made
within  thirty  (30) days from the date the Agent makes written demand therefor.
A  certificate  as  to the amount of such Taxes submitted to the Borrower by the
Agent  shall  be  conclusive  evidence, absent manifest error, of the amount due
from  the  Borrower  to  the  Lenders.

     (4)     Without  prejudice  to  the  survival  of  any  other  agreement or
obligations  of  the  Borrower  hereunder, the obligations of the Borrower under
this  Section  shall  survive  the payment in full of the Outstanding Amount and
Interest  thereon.

     Section  11.9     Right  of  Set-Off.  Upon  the  occurrence and during the
continuance  of  any  Event  of Default each Lender shall have the right, at any
time  and  from time to time, to the fullest extent permitted by Law, to set off
and  apply any and all deposits (general or special, time or demand, provisional
or  final)  at  any  time  held and other indebtedness at any time owing by such
Lender  to or for the credit or the account of the Borrower, against any and all
of  the  Obligations  of the Borrower now or hereafter existing under any of the
Credit  Documents,  irrespective of whether or not the Agent shall have made any
demand  under  any  of the Credit Documents and although such Obligations may be
unmatured.  Each  Lender  agrees  to  promptly notify the Borrower and the Agent
after  any  such  set-off and application made by such Lender, provided that the
failure  to  give  such notice shall not affect the validity of such set-off and
application.  The  rights  of  the Lenders under this Section are in addition to
the  other  rights  and remedies (including, without limitation, other rights of
set-off)  which  any  Lender  or  the  Agent  may  have.

     Section  11.10     Judgment  Currency.   (1)     If,  for  the  purposes
of  obtaining  judgment  in  any  court,  it  is  necessary to convert a sum due
hereunder  to  the  Agent  or  the  Lenders  from the Original Currency into the
Judgment Currency, the parties hereto agree, to

<PAGE>

the fullest extent that they may effectively  do  so,  that the rate of exchange
used shall be that at which in accordance  with  normal  banking  procedures the
Agent could purchase the Original Currency  with the Judgment  Currency  on  the
Business Day preceding that on which final  judgment  is  paid  or  satisfied.

     (2)     The  Obligations  of  the Borrower in respect of any sum due in the
Original  Currency  from  it to the Agent or the Lenders under any of the Credit
Documents  shall,  notwithstanding  any  judgment  in  any Judgment Currency, be
discharged  only to the extent that on the Business Day following receipt by the
Agent  or  the  Lenders, as the case may be, of any sum adjudged to be so due in
such  Judgment  Currency,  the  Agent  may  in  accordance  with  normal banking
procedures  purchase  the Original Currency with such Judgment Currency.  If the
amount of the Original Currency so purchased is less than the sum originally due
to  the  Agent or the Lenders, as the case may be, in the Original Currency, the
Borrower agrees, as a separate obligation and notwithstanding any such judgment,
to  indemnify  the  Agent or the Lenders, as the case may be, against such loss,
and  if  the  amount  of  the  Original  Currency  so  purchased exceeds the sum
originally  due to the Agent or the Lenders, as the case may be, in the Original
Currency,  the  Agent  or  the  Lenders, as the case may be, agree to remit such
excess  to  the  Borrower.

     Section  11.11     Governing  Law.  The  Credit Documents shall be governed
by,  and  construed  in  accordance  with, the Laws of the State of New York and
shall be treated in all respects as a New York contract without giving effect to
applicable  principles of conflicts of Law to the extent that the application of
the  Laws  of  another  jurisdiction  would  be  required  thereby.

     Section  11.12     Consent  to  Jurisdiction.  (1)    The  Borrower  hereby
irrevocably  submits  to  the  jurisdiction  of  any U.S. State or Federal court
sitting  in  the City of New York, in any action or proceeding arising out of or
relating to this Agreement, or any other Credit Document, and hereby irrevocably
agrees  that all claims in respect of any such action or proceeding may be heard
and  determined  in  such  New  York  court.  The  Borrower  agrees that a final
judgment  in  any  such  action  or  proceeding  shall  be conclusive and may be
enforced  in  other jurisdictions by suit on the judgment or in any other manner
provided  by Law.  The parties agree that any such action or proceeding shall be
conducted  in  the  English  language.

     (2)     Nothing  in this Section shall affect the right of the Agent or the
Lenders  to  serve  legal process in any other manner permitted by Law or affect
the  right of the Agent or the Lenders to bring any action or proceeding against
the  Borrower  or  its  property  in  the  courts  of  other  jurisdictions.

     (3)    Without prejudice to any other  mode  of  service, the Borrower: (a)
irrevocably  appoints  CT  Corporation  System,  111 8th Avenue, 13th Floor, New
York,  New  York  10011  as  its agent for service of process in relation to any
proceedings  before  any  courts  located in the State of New York in connection
with any Credit Document; (b) agrees to maintain an agent for service of process
in  the State of New York until all Commitments have terminated and the Loan and
all  other  amounts  payable  under  the  Credit  Documents  have  been finally,
irrevocable  and  indefeasibly  repaid  in  full;  (c)  agrees that failure by a
process  agent  to  notify  the  Borrower of the process will not invalidate the
proceedings  concerned;  (d)  consents to the service of process relating to any
proceedings  by  prepaid posting of a copy of the process to its address for the
time  being  set  out  on the signature pages hereof; and (e) agrees that if the

<PAGE>

appointment  of  any  Person  mentioned  in  paragraph  (a)  above  ceases to be
effective,  the Borrower shall immediately appoint a further Person in the State
of  New  York, as appropriate, to accept service of process on its behalf in the
State  of  New  York,  as  appropriate,  and, if the Borrower does not appoint a
process  agent within fifteen (15) days, the Agent is entitled and authorized to
appoint  a  process  agent  for  the  Borrower  by  notice  to  the  Borrower.

     Section 11.13     Successors and Assigns.  (1)  This Agreement shall become
effective  when  it  is  executed by the parties and thereafter shall be binding
upon and enure to the benefit of the Borrower, and its respective successors and
permitted  assigns, the Agent and its successors and assigns and each Lender and
its  successors  and  permitted  assigns.

     (2)     The  Borrower  shall  not  have  the  right  to  assign  its rights
hereunder  or any interest herein without the prior written unanimous consent of
the  Lenders,  which  consent  may  be  arbitrarily  withheld.  Any  purported
assignment  in  violation  of  this  provision  shall  be void and of no effect.

     (3)     A  Lender  may,  from  time  to  time, assign or transfer, or grant
participations  in,  or  enter into any other arrangement with another Person or
Persons  for  the  purpose  of  sharing,  transferring or otherwise managing its
position  with  respect to, all or part of its rights and obligations in respect
of  its  Commitments,  at  such  times  and upon such terms as it may determine,
without any obligation to obtain any consent from any other Person provided that
by  so  doing  any amounts payable in respect of the Obligations of the Borrower
hereunder  are  not  increased.

     (4)     Any  Lender may pledge its interests in the Credit Documents in the
ordinary  course  of  its  business  or  to  any  Official  Body.

     Section  11.14     Forum  Convenience and Enforcement Abroad.  The Borrower
(a)  waives  objection  to  the  New York State and Federal courts on grounds of
inconvenient  forum  or otherwise as regards proceedings in connection with this
Agreement;  and  (b)  agrees  that  a  judgment  or order of a New York State or
Federal  court in connection with this Agreement is conclusive and binding on it
and  may  be  enforced  against  it  in  the  courts  of any other jurisdiction.

     Section  11.15     Severability.  The  provisions  of  this  Agreement  are
intended  to  be  severable.  If  any  provision of this Agreement shall be held
invalid or unenforceable in whole or in part in any jurisdiction, such provision
shall,  as to such jurisdiction, be ineffective to the extent of such invalidity
or  unenforceability  without  in  any  manner  affecting  the  validity  or
enforceability  thereof  in  any  other jurisdiction or the remaining provisions
hereof  in  any  jurisdiction.

     Section  11.16     Prior  Understandings.  This  Agreement  and  the Credit
Documents  supersede all prior understandings and agreements, whether written or
oral,  and  constitute the entire agreement among the parties hereto relating to
the  transactions  provided  for  herein.

     Section  11.17     Waiver  of  Immunity.  The  Borrower  irrevocably  and
unconditionally:

<PAGE>

     (a)  agrees  that if a Lender brings proceedings against it or its assets
          in  relation  to  a  Credit  Document,  no  immunity  from  those
          proceedings (including, without  limitation,  suit,  attachment prior
          to  judgment, other attachment, the obtaining  of judgment, execution
          or other enforcement) will be claimed by or on behalf  of  itself  or
          with  respect  to  its  assets;

     (b)  waives  any such right of immunity which it or its assets now has or
          may subsequently  acquire;  and

     (c)  consents  generally  in respect of any such proceedings to the giving
          of any  relief  or  the issue of any process in connection with those
          proceedings,  including,  without limitation, the making, enforcement
          or  execution  against any assets  whatsoever  (irrespective  of  its
          use  or intended use) of any order or judgment  which  may  be  made
          or  given  in  those  proceedings.

     Section  11.18     Counterparts.  This  Agreement  may  be  executed  in
counterparts and by facsimile and by different parties in separate counterparts,
each  of  which  when  so executed shall be deemed an original and all of which,
taken  together,  shall  constitute  one  and  the  same  instrument.

     SECTION  11.19     WAIVER  OF  JURY TRIAL.  THE BORROWER, THE AGENT AND THE
LENDERS  WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION  BASED  ON  OR  ARISING  FROM  ANY  CREDIT  DOCUMENT  OR THE TRANSACTIONS
CONTEMPLATED  BY  THE  CREDIT  DOCUMENTS.  IN  THE  EVENT  OF  LITIGATION,  THIS
AGREEMENT  MAY  BE  FILED  AS  A  WRITTEN  CONSENT  TO  A  TRIAL  BY  THE COURT.

<PAGE>

     Section 11.20     Payments  to  Agent. All  payments required to be made in
respect of the  Obligations  by  the  Borrower  to the  Lenders hereunder may be
made  to  the  Agent,  as  agent  for  and  on  behalf  of the Lenders, and such
payments shall be deemed,  for all purposes, to have been made to the Lenders as
to their pro rata entitlement  thereto.

     IN  WITNESS  WHEREOF  the  parties  hereto have caused this Agreement to be
executed  by their respective officers thereunto duly authorized, as of the date
first  above  written.

                                        THE  BORROWER
                                        -------------

                                        MERCER  INTERNATIONAL  INC.

Schutzengasse  32
CH-8001  Zurich,  Switzerland           Per:
Tel:     011-41-43-344-7070                  ------------------------------
Fax:     011-41-43-344-7077                  Authorized  Signing  Officer

                                        Per:
                                             ------------------------------
                                             Authorized  Signing  Officer

                                        THE  AGENT
                                        ----------

                                        MFC  MERCHANT  BANK  S.A.

Kasernenstrasse  1
9100  Herisau  AR                       Per:
Switzerland                                  ------------------------------
Tel:     011  41  71  353  0880              Authorized  Signing  Officer
Fax:     011  41  71  353  0888

                                        Per:
                                             ------------------------------
                                             Authorized  Signing  Officer

                                        THE  LENDER(S)
                                        --------------

                                        MFC  MERCHANT  BANK  S.A.

Kasernenstrasse  1
9100  Herisau  AR                       Per:
Switzerland                                  ------------------------------
Tel:     011  41  71  353  0880              Authorized  Signing  Officer
Fax:     011  41  71  353  0888
Loan  Commitment: E 30,000,000
                                        Per:
                                             ------------------------------
                                             Authorized  Signing  Officer

<PAGE>

                                  SCHEDULE "A"

                             BORROWER'S CERTIFICATE

                            MERCER INTERNATIONAL INC.
                               (the "Corporation")

TO:       MFC Merchant Bank S.A., as Lender, and to such other Lenders as
          may from time  to time become signatories to the Loan Agreement
          (as defined below)

AND  TO:  MFC  Merchant  Bank  S.A.,  as  agent

RE:       Loan  Agreement  (the  "Loan Agreement") dated the [21ST] day of
          August, 2002  among  MFC Merchant Bank S.A., as Agent and Lender,
          and  such  other  Lenders  as  may  from  time  to  time  become
          signatories thereto, and Mercer International Inc., as  Borrower

Capitalized  terms  used  in  this  Certificate,  which  are defined in the Loan
Agreement  but  are  not otherwise defined herein, have the meanings ascribed to
such  terms  in  the  Loan  Agreement.

          I, , HEREBY CERTIFY solely in my capacity as a duly elected, qualified
and  acting  officer of the Corporation, not in my personal capacity and without
personal  liability,  that:

1.     I  am  a  trustee  and  [  office held] of the Corporation and as such am
authorized  to  execute  this  Certificate on behalf of the Corporation and have
personal  knowledge  of  the  matters  hereinafter  deposed  to.

2.     I  have  made or caused to be made such examinations or investigations as
are,  in  my opinion, reasonably necessary to make the statements set out herein
including,  without  limitation, the examinations described in this Certificate,
and I have furnished this Certificate with the intent that it may be relied upon
by the Lenders and the Agent as a basis for the consummation of the transactions
contemplated  by  the  Loan  Agreement.

REPRESENTATIONS  AND  WARRANTIES

3.     The  representations and warranties of the Corporation set out in Section
7.1  of the Loan Agreement and in any of the other Credit Documents to which the
Corporation  is  a  party  are  true  and correct in all respects as at the date
hereof.

<PAGE>

INCUMBENCY

4.     The  persons  referred to below are the trustees(s) and officer(s) of the
Corporation  and  are  duly  elected  or  appointed  to  the  office(s)  of  the
Corporation  as  set  out  opposite  his/her name and, where a signature appears
opposite such name, such signature is his/her true signature and any one trustee
or  officer is authorized to sign any and all documents contemplated by the Loan
Agreement  , including the Credit Documents to which the Corporation is a party.

<TABLE>
<CAPTION>

Name                  Office                           Signature
----                  ------                           --------
<S>                   <C>                              <C>
Jimmy S.H. Lee        Trustee and President
                      and Chief Executive Officer
                                                       ------------------------

C.S. Moon             Trustee
                                                       ------------------------

R. Ian Rigg           Trustee and Secretary
                      and Chief Financial Officer
                                                       ------------------------

Michel Arnulphy       Trustee
                                                       ------------------------

Maarten Reidel        Trustee
                                                       ------------------------

Jong Lyel Ryu         Trustee
                                                       ------------------------

</TABLE>

CONDITIONS  PRECEDENT

5.     All  conditions  precedent  to the initial draw down of the first advance
under the ZSG Project Finance Loan Agreement have been satisfied or waived other
than  the  provision  of  the  Mercer  Equity  Financing and any such conditions
precedent  that  are  to  be  completed after the provision of the Mercer Equity
Financing.

6.     All  conditions  precedent  to  the  advance  of  the  MFC Loan have been
satisfied  or  waived.

7.     Upon  receipt of the Loan and the Babcock Loan the Borrower shall be in a
position  to  advance  the  Mercer  Equity  Financing.

CERTIFICATION  OF  DOCUMENTS

8.     EXHIBIT  A  annexed  hereto  is  a  true,  accurate  and complete copy of
       ----------
the  Declaration of Trust (including any amendments thereto) in effect as of the
date  hereof.  Except  as  attached  hereto,  no  document  with  respect  to an
amendment  thereto  has  been  filed  in the office of the Secretary of State of
the  State of Washington, and no actions have been taken by the  Corporation  in
contemplation  of  the  dissolution  of  the  Corporation.

<PAGE>

9.     EXHIBIT  B  annexed  hereto is a true, accurate and complete copy of
       ----------
the  Financial  Statements  of  the Corporation for the Financial Year ending on
December  31,  2001  and  for  the  Financial  Quarter  ending  June  30,  2002.

10.    EXHIBIT  C  annexed hereto is a true, accurate and complete copy of
       ----------
the  Resolutions  adopted  by the board of trustees of the Corporation approving
and  authorizing the execution, delivery and performance of the Credit Documents
and  the  transactions  contemplated  thereby.  Such  resolutions  have not been
amended, rescinded or modified since their adoption and remain in full force and
effect  as  of  the  date  hereof  and are the only corporate proceedings of the
Corporation  now  in  force  relating  to  or  affecting the matters referred to
therein.

DATED  as  of  the        day  of  August,  2002
                    -----

-------------------------------------
*

<PAGE>

                                    EXHIBIT A

                              STATE OF WASHINGTON

                                [Grapic Omitted]

                               SECRETARY OF STATE

    I, SAM REID, Secretary of State of Washington and custodian of its seal,

                               hereby issue this

                     CERTIFICATE OF EXISTENCE/AUTHORIZATION

                                       OF

                            MERCER INTERNATIONAL INC.

    I FURTHER CERTIFY that the records on file in this office show that the

        above named profit corporation was formed under the laws of the

        State of Washington and was issued a Certificate of Incorporation

                    in Washington on September 30, 1968.

    I FURTHER CERTIFY that as of the date of this certificate, no Articles of

        Dissolution have been filed, and that the corporation is duly

      authorized to transact business in the corporate form in the State of

                                  Washington.

[Graphic Omitted]                     Date:  August 5, 2002

                                      Given under my hand and the Seal of the
                                      State of Washington at Olympia, the
                                      State Capital

                                      sm   /s/ Sam Reed
                                        ------------------------------------
                                        Sam Reed, Secretary of State

<PAGE>
                                    EXHIBIT B

                          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, 2001 and 2000, and the
related  consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 2001, 2000
and  1999.  These  financial  statements are the responsibility of the Company's
management.  Our  responsibility  is  to  express  an opinion on these financial
statements  based  on  our  audits.

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

     In  our opinion, the financial statements referred to above present fairly,
in  all  material  respects,  the  consolidated  financial  position  of  Mercer
International  Inc.  and  Subsidiaries as of December 31, 2001 and 2000, and the
consolidated  results  of  their  operations  and their cash flows for the years
ended December 31, 2001, 2000 and 1999, in conformity with accounting principles
generally  accepted  in  the  United  States.

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

Seattle,  Washington
March  15,  2002

<PAGE>

                            MERCER INTERNATIONAL INC.
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                            2001              2000
                                          --------          --------
<S>                                       <C>               <C>

ASSETS
Current Assets
  Cash and cash equivalents               $ 10,458          $ 18,496
  Investments                                4,052             5,320
  Receivables                               42,658            46,088
  Inventories                               22,323            19,977
  Prepaid and other                          3,534             3,000
                                          --------          --------
    Total current assets                    83,025            92,881

Long-Term Assets
  Cash restricted                           29,739            25,150
  Properties                               248,167           265,607
  Investments                                7,658             6,101
  Notes receivable                           4,877             4,296
  Deferred income tax                        9,177             9,624
                                          --------          --------
                                           299,618           310,778
                                          --------          --------
                                          $382,643          $403,659
                                          ========          ========

LIABILITIES
Current Liabilities
  Accounts payable and
    accrued expenses                      $ 46,242          $ 38,204
  Notes payable                              6,584               839
  Debt                                      16,353            27,173
                                          --------          --------
    Total current liabilities               69,179            66,216

Long-Term Liabilities
  Debt                                     193,169           208,315
  Other                                      3,065             3,721
                                          --------          --------
                                           196,234           212,036
                                          --------          --------
    Total liabilities                      265,413           278,252

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 and
   16,794,899 issued and
   outstanding at
   December 31, 2001
   and 2000                                 99,995            99,995
  Retained earnings                         86,171            88,698
  Accumulated other
    comprehensive loss                     (68,936)          (63,286)
                                          --------          --------
                                           117,230           125,407
                                          --------          --------
                                          $382,643          $403,659
                                          ========          ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                  2001       2000       1999
                                                --------   --------   --------
<S>                                             <C>        <C>        <C>
Revenues
  Sales of pulp and paper                       $183,496   $225,626    $125,570
  Transportation                                   4,915      3,857           -
  Other                                            8,578      6,719       2,297
                                                --------   --------   ---------
                                                 196,989    236,202     127,867
Expenses
  Cost of pulp and paper                         161,659    175,420     117,314
  Transportation                                   3,648      2,923           -
  Special charges                                      -          -      22,155
  General, administrative and other               16,502     14,284      22,420
  Loss on foreign currency
    derivative contracts                           2,241          -           -
  Litigation settlement                              918          -           -
  Interest expense                                14,474     13,993       2,995
                                                --------   --------   ---------
                                                 199,442    206,620     164,884
                                                --------   --------   ---------

Income (loss) before income taxes                 (2,453)    29,582     (37,017)
Income tax provision                                 (74)      (108)     (1,092)
                                                --------   --------   ---------

  Net income (loss)                             $ (2,527)  $ 29,474   $ (38,109)
                                                ========   ========   =========

Earnings (loss) per share
  Basic                                         $  (0.15)  $   1.76   $   (2.33)
                                                ========   ========   =========
  Diluted                                       $  (0.15)  $   1.72   $   (2.33)
                                                ========   ========   =========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                                2001       2000        1999
                                              --------   --------    --------
<S>                                           <C>        <C>        <C>
Net income (loss)                             $ (2,527)   $ 29,474   $(38,109)
Other comprehensive income
  Foreign currency translation adjustment       (7,687)     (6,400)   (21,266)
  Unrealized gains (losses) on securities
    Unrealized holding gains (losses)
      arising during the period                  2,037      (1,729)     1,745
    Reclassification adjustment for
      losses included in net income (loss)           -          85      1,340
                                              --------    --------   --------
                                                 2,037      (1,644)     3,085
                                              --------    --------   --------

Other comprehensive loss                        (5,650)     (8,044)   (18,181)
                                              --------    --------   --------
Comprehensive income (loss)                   $ (8,177)   $ 21,430   $(56,290)
                                              ========    ========   ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                        Shares of   Beneficial Interest
                                   ----------------------------------------
                                                                 Amount
                                                                 Paid in
                                   Number          Par           Excess of
                                   Of Shares       Value         Par Value
                                   ----------      --------      ---------
<S>                                <C>            <C>             <C>
Balance at December 31, 1998       15,440,122     $  15,440       $ 76,473
Shares issued for exercise
  of warrants                       1,245,277         1,245          6,097
Repurchase of shares                  (50,000)          (50)          (167)
Payment of dividends                       -             -              -
Net loss                                   -             -              -
Other comprehensive income
  (loss)                                   -             -              -
                                   ----------     ---------      ---------

Balance at December 31, 1999       16,635,399        16,635         82,403
Shares issued for exercise
  of options                          159,500           160            797
Net income                                 -             -               -
Other comprehensive income
  (loss)                                   -             -               -
                                   ----------     ---------      ---------

Balance at December 31, 2000       16,794,899        16,795         83,200
Net loss                                   -             -              -
Other comprehensive income
  (loss)                                   -             -              -
                                   ----------     ---------      ---------

Balance at December 31, 2001       16,794,899     $  16,795       $ 83,200
                                   ==========     =========      =========

</TABLE>

<TABLE>
<CAPTION>

                                                Accumulated Other
                                                Comprehensive
                                                Income
                                         --------------------------------
                                         Foreign
                                         Currency         Unrealized
                           Retained      Translation      Gains (Losses)
                           Earnings      Adjustments      on Securities
                           --------      -------------    --------------
<S>                        <C>           <C>               <C>
Balance at December
  31, 1998                 $ 98,167           $(28,663)         $ (8,398)
Shares issued for
  exercise of warrants            -                  -                 -
Repurchase of shares              -                  -                 -
Payment of dividends           (834)                 -                 -
Net loss                    (38,109)                 -                 -
Other comprehensive
  income (loss)                   -            (21,266)            3,085
                           --------           --------           -------

Balance at December
  31, 1999                   59,224            (49,929)           (5,313)
Shares issued for
  exercise of options             -                  -                 -
Net income                   29,474                  -                 -
Other comprehensive               -             (6,400)           (1,644)
  income (loss)            --------           --------           -------

Balance at December
  31, 2000                  88,698             (56,329)           (6,957)
Net loss                    (2,527)                  -                 -
Other comprehensive
  income (loss)                  -              (7,687)            2,037
                           -------            --------           -------
Balance at December
  31, 2001                 $86,171            $(64,016)          $(4,920)
                           =======            ========           =======

</TABLE>

<TABLE>
<CAPTION>

                                    Accumulated Other
                                    Comprehensive
                                    Income
                                    -----------------
                                                           Shareholders'
                                     Total                 Equity
                                     -----                 -------------
<S>                                      <C>                    <C>
Balance at December 31, 1998         $(37,061)                  $153,019
Shares issued for exercise
  of warrants                              -                       7,324
Repurchase of shares                       -                        (217)
Payment of dividends                       -                        (834)
Net loss                                   -                     (38,109)
Other comprehensive
  income (loss)                       (18,181)                   (18,181)
                                     --------                   --------
Balance at December 31, 1999          (55,242)                   103,020
Shares issued for exercise
  of options                               -                         957
Net income                                 -                      29,474
Other comprehensive
  income (loss)                        (8,044)                    (8,044)
                                     --------                   --------
Balance at December 31, 2000          (63,286)                   125,407
Net loss                                   -                      (2,527)
Other comprehensive income (loss)      (5,650)                    (5,650)
                                     --------                   --------
Balance at December 31, 2001         $(68,936)                  $117,230
                                     ========                   ========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                               2001        2000        1999
                                             --------    --------    ---------
<S>                                          <C>         <C>         <C>
Cash Flows from Operating Activities
  Net income (loss)                          $ (2,527)   $ 29,474    $ (38,109)
  Adjustments to reconcile
      net income (loss) to
      cash flows from
      operating activities
         Special charges                            -           -       22,155
         Depreciation                          20,557      22,139        7,018
  Changes in current assets
      and liabilities
         Investment in
           trading securities                     460        (806)       8,478
         Inventories                            2,337      (3,391)        (996)
         Receivables                            6,955      (7,227)     (12,489)
         Accounts payable and
           accrued expenses                      (841)        267        7,718
         Prepaid and other                       (282)       (504)      (2,411)
                                             --------    --------    ---------
            Net cash provided by
              (used in) operating
                activities                     26,659      39,952       (8,636)

Cash Flows from Investing Activities
  Proceeds from the sales of
    available-for-sale securities                   -         189        6,867
  Proceeds from the sales of
    long-term investments                         605           -            -
  Purchases of available-for-sale
    securities                                   (569)     (1,918)      (1,264)
  Sale of properties                                -      13,346            -
  Acquisition of properties,
    net of investment grants                   (6,845)     26,073     (255,186)
  Purchase of subsidiary,
    net of cash acquired                       (1,839)          -            -
  Change in notes receivable                     (605)        585        4,178
                                             --------    --------    ---------
            Net cash provided by
              (used in) investing
                activities                     (9,253)     38,275     (245,405)

Cash Flows from Financing Activities
  Cash restricted                              (5,921)    (12,285)           -
  Increase (decrease) in pulp
    mill costs payable                           (902)    (50,286)      47,701
  Increase in notes payable
    and debt                                    5,821       5,649      162,863
  Decrease in notes payable
    and debt                                  (25,924)     (5,582)      (2,299)
  Shares of beneficial interest
    issued for cash                                 -         957            -
  Repurchase shares of beneficial
    interest                                        -           -         (217)
  Dividends                                         -           -         (834)
  Other                                             -           -            3
                                             --------    --------    ---------
            Net cash provided by
             (used in) financing
               activities                     (26,926)    (61,547)     207,217

Effect of exchange rate changes
  on cash and cash equivalents                  1,482          94       (4,704)
                                             --------    --------    ---------

Net increase (decrease) in cash
  and cash equivalents                         (8,038)     16,774      (51,528)
Cash and Cash Equivalents,
  beginning of year                            18,496       1,722       53,250
                                             --------    --------    ---------

Cash and Cash Equivalents,
  end of year                                $ 10,458    $ 18,496    $   1,722
                                             ========    ========    =========

</TABLE>

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

<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 security 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. Grants
received  from  a  government  reduce  costs  of  property  improvements.

     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 10 to 50 years 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

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  1.  The  Company  and  Summary  of  Significant  Accounting  Policies
          (Continued)

comprehensive  income.  Realized  gains  or  losses  are included in general and
administrative  expenses  in  the  consolidated  statements  of  operations. The
translation  adjustments  do  not recognize the effect of income tax because the
Company  expects  to  reinvest  the  amounts  indefinitely  in  operations.

Environmental  Conservation

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

Stock-Based  Compensation

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

Taxes  on  Income

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

Derivative  Instruments

     The  Company  adopted  Statement of Financial Accounting Standards No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities,"  effective
January  1, 2001. Derivative instruments are measured at fair value and reported
in  the  balance  sheet as assets or liabilities. Accounting for gains or losses
depends  on  the  Company's intended use of the derivative instruments. Gains or
losses  on derivative instruments which are not designated hedges are recognized
in  earnings  in the period of the change in fair value. Accounting for gains or
losses  on  derivative  instruments  designated as hedges depends on the type of
hedge  and  such  gains  or  losses  are  recognized in either earnings or other
comprehensive  income.

     Retroactive  application  of  this  standard  was  not allowed. There is no
cumulative  effect in the Company's financial statements as a result of adopting
this  standard.  The  Company  had a derivative instrument at December 31, 2000,
which  was  entered  into  at year-end. There was no change in its fair value in
2000.

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.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  1.  The  Company  and  Summary  of  Significant  Accounting  Policies
          (Continued)

Estimates

     The  preparation  of  financial  statements  in  conformity with accounting
principles  generally  accepted in the United States 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  Standards

     Statement  of  Financial  Accounting Standards No. 142, "Goodwill and Other
Intangible  Assets,"  is  to  be  applied  starting  with  years beginning after
December  15,  2001.  This  standard addresses how intangible assets, other than
those  acquired in a business combination, should be accounted for. Goodwill and
intangible  assets that have indefinite useful lives will no longer be amortized
but  will  be  tested annually for impairment. Management has not determined the
effect  this  standard  may have, if any, on the Company's financial statements.

     Statement  of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement  Obligations,"  is effective for years beginning after June 15, 2002.
This standard addresses accounting and reporting for obligations associated with
the  retirement  of  tangible long-lived assets and associated retirement costs.
Management  has not determined the effect, if any, this standard may have on the
Company's  financial  statements.

     Statement  of  Financial  Accounting Standards No. 144, "Accounting for the
Impairment  or  Disposal of Long-Lived Assets," is effective for years beginning
after  December 15, 2001. This standard supersedes the previous standard on this
issue  as well as others which dealt with accounting for discontinued operations
and  the  elimination  of  an  exception  to  consolidation.  Management has not
determined  the  effect  this  standard  may  have  on  the  Company's financial
statements.

Note  2.  Investments

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

<TABLE>
<CAPTION>

                                              DECEMBER 31
                                        -----------------------
                                          2001           2000
                                        --------       --------
<S>                                     <C>            <C>
Bonds                                   $  2,158       $  4,164
Equity securities                          1,894          1,156
                                        --------       --------

                                        $  4,052       $  5,320
                                        ========       ========

</TABLE>

     Included  within  trading  securities is an investment in a bond and common
shares  of  two companies that represent 53% and 46%, respectively, of the total
value  of  trading  securities  at  December  31,  2001.  At  December 31, 2000,
investment  in  a  bond  and common shares of a company represented 39% and 18%,
respectively,  of  the  total  value  of  trading  securities. The change in net
unrealized  holding gains (losses) on trading securities which has been included
in  earnings  was  $1,238,  $(171)  and  $2,411  during  2001,  2000  and  1999,
respectively.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  2.  Investments (Continued)

Available-for-sale  securities  consist  of bonds and equity securities and have
been  classified  as  long-term  investments. Equity securities of two companies
represented  85%  and 91% of the total available-for-sale securities at December
31,  2001  and  2000,  respectively. The proceeds from sales of these securities
amounted  to  none,  $189  and $6,867 which resulted in realized losses of none,
$(77)  and  $(1,340) during 2001, 2000 and 1999, respectively. The fair value of
available-for-sale  securities  included  on  the balance sheets at December 31,
2001,  2000  and  1999, was $7,305, $5,247 and $6,925, respectively. The cost of
these  securities  was $12,225, $12,204 and $12,238 which resulted in unrealized
losses being recorded in comprehensive income of $(4,920), $(6,957) and $(5,313)
at  December  31, 2001, 2000 and 1999, respectively. Also, included in long-term
investments  were  equity securities stated at cost of $353 and $854 at December
31,  2001 and 2000, respectively, which did not have a readily determinable fair
value.  However,  management believes that the estimated market value is greater
than  the  carrying  value.

Note  3.  Receivables

<TABLE>
<CAPTION>

                                                DECEMBER 31
                                           ---------------------
                                             2001         2000
                                           --------     --------
<S>                                        <C>          <C>
Sale of paper and pulp products            $ 21,207     $ 14,869
Securities trading                           12,592       17,645
Sale of properties                                -        6,147
Value added tax                                 956          892
Other                                         7,903        6,535
                                           --------     --------
                                           $ 42,658     $ 46,088
                                           ========     ========

</TABLE>

     At  December  31,  2001  and 2000, the Company pledged $12,592 and $17,645,
respectively,  in  securities  trading  receivables  as  collateral  for amounts
payable  for  securities.

Note  4.  Inventories

<TABLE>
<CAPTION>

                                                       DECEMBER 31
                                                 -----------------------
                                                   2001           2000
                                                 --------       --------
<S>                                               <C>           <C>
Pulp and paper
  Raw materials                                  $ 13,008       $ 10,862
  Work in process and finished goods                9,315          9,115
                                                 --------       --------
                                                 $ 22,323       $ 19,977
                                                 ========       ========

</TABLE>

Note  5.  Properties

<TABLE>
<CAPTION>

                                                    DECEMBER 31
                                            ---------------------------
                                              2001               2000
                                            --------           --------
<S>                                         <C>                <C>
Land                                        $  8,519           $  7,425
Buildings                                     17,252             16,346
Production and other equipment               291,428            290,789
                                            --------           --------
                                             317,199            314,560
Less: Accumulated depreciation                69,032             48,953
                                            --------           --------
                                            $248,167           $265,607
                                            ========           ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  5.  Properties  (Continued)

     During  1999,  management determined that some of the Company's paper mills
were  impaired.  These  mills  were  written down to their estimated fair values
based on existing market conditions. This impairment loss, amounting to $19,064,
was  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,  was  a  loss  of  $3,091  on  abandoned pulp mill equipment.

Note  6.  Notes  Payable  and  Debt

     At  December  31,  2001, the Company had two notes payable to banks. One of
the  notes  amounting  to $5,821 is due on demand at 7% interest. The other note
which  had  a  balance  of  $763  and  $839  at  December  31,  2001  and  2000,
respectively,  is  due  monthly  at  6.75% interest and is secured by inventory.

     Long-term  debt  consists  of  the  following:

<TABLE>
<CAPTION>

                                                         DECEMBER 31
                                                   -----------------------
                                                     2001           2000
                                                   --------       --------
<S>                                                <C>            <C>
Note payable to bank, interest at rates
 varying from 4.5% to 6.8% at December 31,
 2001, principal due in semi-annual
 installments based on a percentage of the
 final loan amount beginning at 2.4% to 5.1%
 at September 30, 2001, after an initial
 payment of $21,300 on March 31, 2001,
 until September 30, 2013 (final payment date),
 collateralized by receivables, inventory
 and pulp mill assets with 48% and 32%
 principal plus interest guaranteed by the
 Federal Republic of Germany and the State
 of Thuringia, respectively; cash restricted
 amounted to $29,739 and $25,150, at
 December 31, 2001 and 2000, respectively, in
 connection with this borrowing                     $193,607       $231,017

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          4,135

Loans payable to a bank, interest at rates
 varying from 3.875% to 6.5%, payment terms
 varying from on demand to December 31, 2003,         11,492              -
 secured by receivables and other properties

Other                                                    288            336
                                                    --------       --------
                                                     209,522        235,488
Less: Current portion                                (16,353)       (27,173)
                                                    --------       --------
                                                    $193,169       $208,315
                                                    ========       ========

</TABLE>

     On  December  29,  2000 and April 1, 2001, the Company entered into foreign
currency  forward  swap  agreements  in  the  notational  amount of $124,700 and
$66,797, respectively, with respect to the long-term note payable to bank. These
agreements  are with the same bank which holds the note payable. These contracts
were  entered into by the Company for its own account consistent with its policy
to  manage  foreign  currency  exchange risks. These agreements cover the period
December  29,  2000,  to  September 30, 2008, and April 1, 2001 to September 30,
2013, respectively. While the Company may be exposed to credit risk with respect
to  these  agreements,  it  does  not anticipate nonperformance by the bank. The
Company

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  6.  Notes  Payable  and  Debt (Continued)

recorded  a  gain  from  a  change  in  the  fair  value  of  these contracts of
$412  during  the  year  ended December 31, 2001. Additionally, during 2001, the
Company  entered  into two foreign currency forward agreements in the notational
value  of  $10,000  each. The contracts were entered into by the Company for its
own  account  and  are  consistent  with  its  policy to manage foreign currency
exchange  risks.  These agreements mature on April 22, 2002 and May 5, 2002. The
Company  recorded  a  loss from a change in the fair value of these contracts of
$352  during the year ended December 31, 2001. During the first quarter of 2001,
the  Company  entered  into a U.S. dollar/euro foreign currency forward contract
with  a notational amount of approximately $31,000 which was settled in March of
2001.  This  contract  resulted  in  a  loss  of  $2,301.

     As  of December 31, 2001, the principal maturities of long-term debt are as
follows:

<TABLE>
<CAPTION>

MATURES                                                    AMOUNT
-------                                                    ------
<S>                                                        <C>
2002                                                       $ 16,353
2003                                                         22,461
2004                                                         12,687
2005                                                         13,513
2006                                                         14,441
Thereafter                                                  130,067
                                                           --------
                                                           $209,522
                                                           ========

</TABLE>

     Interest  paid  amounted  to  $14,191  in 2001, $11,465 in 2000 and $12,100
($9,904  capitalized)  in  1999.

Note  7.  Accounts  Payable  and  Accrued  Expenses

<TABLE>
<CAPTION>

                                                        DECEMBER 31
                                                  ----------------------
                                                    2001          2000
                                                  --------      --------
<S>                                               <C>           <C>
Trade payables                                    $ 18,875      $ 14,926
Accounts payable and accrued expenses               17,640        16,357
Payable for securities                               7,946         6,921
Other                                                1,781             -
                                                  --------      --------
                                                  $ 46,242      $ 38,204
                                                  ========      ========

</TABLE>

Note  8.  Income  Taxes

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

<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31
                                            --------------------------------
                                              2001       2000         1999
                                            --------   --------     --------
<S>                                         <C>        <C>          <C>
Provision for income taxes, non U.S         $  (74)    $ (108)      $ (1,092)
                                            ======     ======       ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  8.  Income  Taxes (Continued)

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

<TABLE>
<CAPTION>

                                                   YEAR ENDED DECEMBER 31
                                            -----------------------------------
                                              2001          2000         1999
                                            --------      --------     --------
<S>                                          <C>          <C>          <C>
U.S. Federal statutory rates on income
  from operations benefit (provision)       $    834      $(10,058)    $ 12,585
Tax differential on foreign income (loss)      3,152          (800)       8,182
Valuation allowance                           (5,494)       10,750      (20,748)
Other                                          1,434             -       (1,111)
                                            --------      --------     --------
                                            $    (74)     $   (108)    $ (1,092)
                                            ========      ========     ========

</TABLE>

     Deferred  tax  assets  are  composed  of  the  following:

<TABLE>
<CAPTION>

                                                  DECEMBER 31
                                            -----------------------
                                              2001           2000
                                            --------       --------
<S>                                         <C>            <C>
German tax loss carryforwards               $ 64,140       $ 63,853
U.S. tax loss carryforwards                    6,075          4,272
Swiss tax loss carryforwards                   3,084              -
Other                                            617            744
                                            --------       --------
                                              73,916         68,869
Valuation allowance                          (64,739)       (59,245)
                                            --------       --------
  Net deferred tax asset                    $  9,177       $  9,624
                                            ========       ========

</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. German tax losses of approximately $175,000 at
December  31, 2001, may be carried forward indefinitely. However, the Company is
the  subject  of  income  tax  audits on a continuing basis in Germany which may
result  in  a  change  in  the German tax loss amount. Management believes that,
while  realization of the net deferred tax asset on the German tax losses 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 $17,800 at
December  31,  2001. Losses of $4,600, $1,900, $1,200, $3,700, $2,800 and $3,600
will expire in 2021, 2020, 2019, 2018, 2012 and 2011, respectively, if not used.
Management  believes  that  these  tax  loss  carryforwards are likely not to be
utilized  under  current  circumstances  and  has  fully  reserved any resulting
potential  tax  benefit.

     The  Company's  Swiss net operating losses amounted to approximately $9,000
at  December 31, 2001. Losses of $3,200 and $5,800 will expire in 2004 and 2007,
respectively, if not used. Management believes that these tax loss carryforwards
are likely not to be utilized under current circumstances and has fully reserved
any  resulting  potential  tax  benefit.

     Income  (loss)  from  foreign source operations amounted to $2,118, $30,152
and  $(34,903)  for  the  years  ended  December  31,  2001,  2000  and  1999,
respectively.  These  amounts  are  intended  to  be  indefinitely reinvested in
operations. Since available-for-sale securities are primarily securities held by
foreign

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  8.  Income  Taxes (Continued)

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,  2001,  2000  and  1999.

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.  Acquisition

     On  December  14,  2001, the Company acquired all of the outstanding common
shares  of  Landqart  AG  ("Landqart"),  a  Swiss  company, for $2,650 cash. The
effective  date  of  this  acquisition  is  December  31,  2001.  The results of
Landqart's  operations  will be included in the Company's consolidated financial
statements  beginning  January  1, 2002. Landqart is a manufacturer of specialty
paper  which  is  expected  to  become  an  integral part of the Company's paper
segment.

     The  following  table  summarizes  the  estimated fair values of the assets
acquired  and  liabilities  assumed  at  the  date  of  acquisition.

<TABLE>
<CAPTION>

<S>                                                <C>
Current assets                                     $11,542
Properties                                           9,912
                                                   -------
  Total assets acquired                             21,454
Current liabilities                                 12,237
Long-term liabilities                                6,567
                                                   -------
  Total liabilities assumed                         18,804
                                                   -------
  Net assets acquired                              $ 2,650
                                                   =======

</TABLE>

     The  following  unaudited  pro  forma  information  presents the results of
operations  of  the Company as if this acquisition had taken place on January 1,
2001  and  2000,  respectively.  The  pro  forma  information is not necessarily
indicative  of  the  results  that would have occurred had the acquisition taken
place  at  the

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  10.  Acquisition (Continued)

beginning  of  the periods presented. Further, the pro forma information is not
necessarily  indicative  of  future  results.

<TABLE>
<CAPTION>

                       YEAR ENDED DECEMBER 31
                      ------------------------
                       2001             2000
                      ------          --------
<S>                   <C>             <C>
Revenues              $232,851        $270,659
Net income (loss)     $ (3,251)       $ 29,473
Earnings per share
  Basic               $  (0.19)       $   1.76
  Diluted             $  (0.19)       $   1.72

</TABLE>

     The  purchase  agreement provides for an additional payment of up to $1,958
based  on  profitability  criteria being met during the period January 1 through
September  30,  2003.  The  purchase  price  may be further increased if certain
parcels  of  real  estate  are sold prior to January 1, 2004. This increase will
amount  to  30%  of  the  difference between the carrying value of the parcel at
December  31, 2000, and its net sales price. If any of these contingent payments
which  are to be paid in cash, become due, they will be treated as an additional
cost  of  acquisition.

<PAGE>

Note  11.  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
trustees  who  are  not  officers  or  employees.

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

     Following  is  a  summary  of  the status of the plan during 2001, 2000 and
1999:

<TABLE>
<CAPTION>

                                           NUMBER OF           WEIGHTED AVERAGE
                                           SHARES              EXERCISE PRICE
                                           ---------           ----------------
<S>                                        <C>                 <C>
Outstanding at December 31, 1999
  and 1998                                   765,500           $   10.03
Granted                                    1,600,000               6.375
Exercised                                   (159,500)               6.00
                                           ---------
Outstanding at December 31, 2001
  and 2000                                 2,206,000           $    7.67
                                           =========           =========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  11.  Stock-based  Compensation (Continued)

     Following  is  a  summary  of  the status of options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>

                       OUTSTANDING OPTIONS
----------------------------------------------------------------
                                    WEIGHTED
                                    AVERAGE           WEIGHTED
EXERCISE                            REMAINING         AVERAGE
PRICE                               CONTRACTUAL       EXERCISE
RANGE               NUMBER          LIFE              PRICE
---------------     ---------       -------------     ----------
<S>                 <C>              <C>              <C>
 6.00  -  6.375     1,770,000        8.0              $  6.34
 8.50  - 11.66      231,500          5.1                 9.19
16.89 -  18.47      204,500          3.9                17.50

     EXERCISABLE OPTIONS
-----------------------------
                     WEIGHTED
                     AVERAGE
                     EXERCISE
NUMBER               PRICE
------               --------
<S>                  <C>
1,236,666            $   6.33
  231,500                9.19
  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>

                                      2001     2000      1999
                                    --------  -------  ---------
<S>                                 <C>       <C>      <C>
Net Income (Loss)
  As reported                       $(2,527)  $29,474  $(38,109)
  Proforma                          $(5,403)  $26,598  $(38,421)
Basic Earnings (Loss) Per Share
  As reported                       $  (.15)  $  1.76  $  (2.33)
  Proforma                          $  (.32)  $  1.59  $  (2.34)
Diluted Earnings (Loss) Per Share
  As reported                       $  (.15)  $  1.72  $  (2.33)
  Proforma                          $  (.32)  $  1.55  $  (2.34)

</TABLE>

     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>

                                     2001      2000      1999
                                    ------    ------    ------
<S>                                 <C>       <C>       <C>
Risk-free interest rate               4.5%      8.5%      6.0%
Expected life of the options        2 years   2 years   2 years
Expected volatility                  68.9%     78.4%     60.0%
Expected dividend yield               0.0%      0.0%      0.0%

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  12.  Earnings  Per  Share

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

<TABLE>
<CAPTION>

                                                     NET INCOME (LOSS)
                                            ----------------------------------
                                              2001         2000         1999
                                            --------     --------     --------
<S>                                          <C>         <C>          <C>
Net income (loss) available to
 shareholders of beneficial interest         $ (2,527)    $ 29,474    $ (38,109)
                                            =========     ========    =========

                                                          SHARES
                                            -----------------------------------
                                              2001          2000         1999
                                            --------      --------     --------

Weighted average number of shares
 outstanding - basic                       16,874,899    16,778,962   16,389,944
Effect of dilutive securities:
  Options                                           -       365,528            -
                                           ----------    ----------    ---------

Weighted average number of shares
 outstanding - diluted                     16,874,899    17,144,490   16,389,944
                                           ==========    ==========   ==========

</TABLE>

     For  2001  and  1999,  warrants  and  options  were  not  included  in  the
computation  of  diluted  earnings  per  share  because they were anti-dilutive.

Note  13.  Supplemental  Disclosures  with  Respect  to Statements of Cash Flows

     There  were  no  significant  noncash  transactions  in  2001  and  2000.

     Significant  noncash  transactions  in  1999  include:

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

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

Note  14.  Business  Segment  Information

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

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

     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.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  14.  Business  Segment  Information (Continued)

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

<TABLE>
<CAPTION>

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
2001
Sales to external customers                     $130,903   $ 52,593   $183,496
Intersegment net sales                             5,187          -      5,187
Segment income (loss)                              4,069     (2,891)     1,178
Segment assets                                   333,381     47,384    380,765
Capital expenditures                               6,638      2,400      9,038

Reconciliations
Loss:
  Total income for reportable segments                                $  1,178
  Elimination of intersegment profits                                    2,274
  Unallocated amounts, other corporate expenses.                        (5,905)
                                                                      --------
    Consolidated loss before income taxes                             $ (2,453)
                                                                      ========
Assets:
  Total assets for reportable segments                                $380,765
  Intersegment receivable                                               (6,560)
  Other unallocated amounts                                              8,438
                                                                      --------
    Consolidated total assets                                         $382,643
                                                                      ========

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>

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

Reconciliations
Income:
  Total income for reportable segments                                $ 31,651
  Elimination of intersegment profits                                    1,377
  Unallocated amounts, other corporate expenses                         (3,446)
                                                                      --------
    Consolidated income before income taxes                           $ 29,582
                                                                      ========
Assets:
  Total assets for reportable segments                                $421,652
  Intersegment receivable                                              (22,661)
  Other unallocated amounts                                              4,668
                                                                      --------
    Consolidated total assets                                         $403,659
                                                                      ========

</TABLE>

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  14.  Business  Segment  Information (Continued)

<TABLE>
<CAPTION>

                                                  PULP       PAPER      TOTAL
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>

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

Reconciliations
Loss:
  Total loss for reportable segments                                  $(30,085)
  Elimination of intersegment profits                                    2,704
  Unallocated amounts, other corporate expenses.                        (9,636)
                                                                      --------
    Consolidated loss before income taxes                             $(37,017)
                                                                      ========
Assets:
  Total assets for reportable segments                                $452,133
  Intersegment receivable                                                 (357)
  Other unallocated amounts                                              4,069
                                                                      --------
    Consolidated total assets                                         $455,845
                                                                      ========

</TABLE>

     The  following table presents net sales to external customers by geographic
area  based  on  location  of  the  customer.

<TABLE>
<CAPTION>

                                    2001         2000         1999
                                  --------     --------     --------
<S>                               <C>          <C>          <C>
Germany                           $ 84,574     $ 95,376     $ 72,129
Other European Union                64,406       76,827       47,498
Eastern European and other          34,516       53,423        5,943
                                  --------     --------     --------
                                  $183,496     $225,626     $125,570
                                  ========     ========     ========

</TABLE>

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

<TABLE>
<CAPTION>

                                    2001         2000         1999
                                  --------     --------     --------
<S>                               <C>          <C>          <C>
Germany                           $352,538     $398,991     $451,776
Other                               30,105        4,668        4,069
                                  --------     --------     --------
                                  $382,643     $403,659     $455,845
                                  ========     ========     ========

</TABLE>

     The pulp mill has fiber supply contracts with two companies which expire in
2002  and  2003  at  prices  agreed  to periodically. The Company also has labor
agreements  which  expire in 2002. In 2001, pulp sales to two customers amounted
to  22%  of  total pulp sales, and pulp sales to one customer amounted to 27% in
2000.

<PAGE>

                            MERCER INTERNATIONAL INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note  15.  Fair  Value  of  Financial  Instruments

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

<TABLE>
<CAPTION>

                              2001                           2000
                      ---------------------         ---------------------
                      CARRYING        FAIR          CARRYING     FAIR
                      AMOUNT          VALUE         AMOUNT       VALUE
                      --------        -----         --------     --------
<S>                   <C>             <C>           <C>             <C>
Cash and cash
  equivalents         $ 10,458        $ 10,458      $ 18,496     $ 18,496
Cash restricted         29,739          29,739        25,150       25,150
Notes receivable         4,877           4,877         4,296        4,296
Notes payable            6,584           6,584           839          839
Long-term debt         209,522         209,522       235,488      235,488

</TABLE>

     The  fair  value  of  cash and cash equivalents is based on reported market
value.  The  fair  value  of  cash  restricted  was equal to its carrying amount
because  it is in an account which bears a market rate of interest. The value of
notes  receivable  is  based  on the value of similar long-term receivables. The
fair  value  of notes payable was based on the value of similar debt incurred in
the  pulp  industry.  The  fair  value  of  long-term  debt was determined using
discounted  cash  flows  at  prevailing  market  rates.  The  other  long-term
liabilities  which  have  a  carrying value of $3,065 and $3,721 at December 31,
2001 and 2000, 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.

Note  16.  Commitments  and  Contingencies

     At  December  31,  2001  and  2000,  the  Company  recorded a liability for
environmental  conservation  expenditures  of  $1,822  and $1,921, 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.

<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>
2001
Net Sales                   $ 55,996     $ 52,310     $ 47,276       $ 41,407
Gross profit                  14,019        9,046        7,402          1,215
Income (loss) before
 extraordinary items
 and cumulative effect
 of a change in accounting     4,575          (71)         169         (7,200)
Income (loss) before
 extraordinary items and
 cumulative effect of a
 change in accounting,
 per share*                     0.27        (0.00)        0.01          (0.43)
Net income (loss)              4,575          (71)         169         (7,200)

2000
Net Sales                   $ 55,760     $ 63,715     $ 61,694       $ 55,033
Gross profit                   6,868       15,531       15,899         19,561
Income before
 extraordinary items
 and cumulative effect
 of a change in accounting     1,071        8,976         9,094        10,333
Income before extraordinary
 items and cumulative effect
 of a change in accounting,
 per share*                     0.06         0.52          0.52          0.61
Net income                     1,071        8,976         9,094        10,333

-----------

</TABLE>

*     on  a  diluted  basis

<PAGE>

                            MERCER INTERNATIONAL INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                     FOR THE SIX MONTHS ENDED JUNE 30, 2002

                                  (UNAUDITED)

<PAGE>

                            MERCER INTERNATIONAL INC.

                           CONSOLIDATED BALANCE SHEETS
                    AS AT JUNE 30, 2002 AND DECEMBER 31, 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                            JUNE 30,           DECEMBER 31,
                                              2002                2001
                                         -------------       ----------------
<S>                                      <C>                <C>
                                     ASSETS

Current Assets
  Cash and cash equivalents               E     22,873      E         11,741
  Investments                                    1,788                 4,549
  Receivables                                   51,622                47,892
  Inventories                                   25,727                25,062
  Prepaid and other                              3,706                 3,968
                                          ------------      ----------------
    Total current assets                       105,716                93,212

Long-Term Assets
  Cash restricted                               25,857                33,388
  Properties                                   268,359               278,617
  Investments                                    7,253                 8,598
  Notes receivable                               5,298                 5,475
  Deferred income tax                           10,197                10,303
                                          ------------      ----------------
                                               316,964               336,381
                                          ------------      ----------------
                                          E    422,680      E        429,593
                                          ============      ================

                                  LIABILITIES

Current Liabilities
  Accounts payable and accrued expenses   E     36,365      E         51,916
  Notes payable                                  8,502                 7,392
  Debt                                          19,193                18,360
                                          ------------      ----------------
    Total current liabilities                   64,060                77,668

Long-Term Liabilities
  Debt                                         208,584               216,871
  Other                                          3,043                 3,441
                                          ------------      ----------------
                                               211,627               220,312
                                          ------------      ----------------
    Total liabilities                          275,687               297,980

                              SHAREHOLDERS' EQUITY

Shares of beneficial interest                   76,722                76,722
Retained earnings                               72,267                59,111
Accumulated other comprehensive loss            (1,996)               (4,220)
                                          ------------      ----------------
                                               146,993               131,613
                                          ------------      ----------------
                                          E    422,680      E        429,593
                                          ============      ================

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

          CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                  FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                  (UNAUDITED)
              (EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>
Revenues
  Sales                                     E  119,535    E  112,404
  Transportation                                 2,753         2,772
  Other                                          5,574         5,575
                                            ----------    ----------
                                               127,862       120,751
Expenses
  Cost of pulp and paper                       104,603        93,004
  Transportation                                 2,478         2,031
  General and administrative                    14,396         9,452
  Interest expense                               8,099         8,366
  (Gain) loss on foreign currency
    derivative contracts                       (14,881)        2,846
                                            ----------    ----------
                                               114,695       115,699
                                            ----------    ----------

Income before income taxes                      13,167         5,052
Income taxes                                        11            29
                                            ----------    ----------
Net income                                      13,156         5,023

Retained earnings, beginning of period          59,111        61,934
                                            ----------    ----------

Retained earnings, end of period            E   72,267    E   66,957
                                            ==========    ==========

Earnings per share
  Basic                                     E     0.78    E     0.30
                                            ==========    ==========
  Diluted                                   E     0.77    E     0.29
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                  FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
               (EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>
Revenues
  Sales                                     E   60,328    E   55,608
  Transportation                                 1,337         1,477
  Other                                          1,910         2,933
                                            ----------    ----------
                                                63,575        60,018
Expenses
  Cost of pulp and paper                        50,684        48,580
  Transportation                                 1,436           927
  General and administrative                     7,766         5,591
  Interest expense                               4,081         4,522
  (Gain) loss on foreign currency
    derivative contracts                       (18,948)          308
                                            ----------    ----------
                                                45,019        59,928
                                            ----------    ----------

Income before income taxes                      18,556            90
Income taxes                                        11            29
                                            ----------    ----------
Net income                                      18,545            61

Retained earnings, beginning of period          53,722        66,896
                                            ----------    ----------

Retained earnings, end of period            E   72,267    E   66,957
                                            ==========    ==========

Earnings per share
  Basic                                     E     1.10    E     0.00
                                            ==========    ==========
  Diluted                                   E     1.08    E     0.00
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>

Net income                                  E   13,156    E    5,023

Other comprehensive income:
  Foreign currency translation adjustments       3,513           233
  Unrealized (loss) gain on securities          (1,289)          988
                                            ----------    ----------

  Other comprehensive income                     2,224         1,221
                                            ----------    ----------

Total comprehensive income                  E   15,380    E    6,244
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                  FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                               2002          2001
                                            ----------    ----------
<S>                                         <C>           <C>

Net income                                  E   18,545    E       61

Other comprehensive income:
  Foreign currency translation adjustments       2,186          (608)
  Unrealized (loss) gain on securities          (2,148)          309
                                            ----------    ----------

  Other comprehensive income (loss)                 38          (299)
                                            ----------    ----------

Total comprehensive income (loss)           E   18,583    E     (238)
                                            ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                   (UNAUDITED)
                              (EUROS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                    2002          2001
                                                 ----------    ----------
<S>                                              <C>           <C>
Cash Flows from Operating Activities:
  Net income                                     E   13,156    E    5,023
  Adjustments to reconcile net income
    from operations to cash
      Depreciation and amortization                  13,489        11,593

  Changes in current assets and liabilities
      Investments                                     3,965          (910)
      Inventories                                      (629)        1,941
      Receivables                                    (2,639)        5,242
      Accounts payable and accrued expenses         (16,797)       (2,692)
      Other                                             374           (10)
                                                 ----------    ----------
         Net cash provided by operating
           activities                                10,919        20,187

Cash Flows from Investing Activities:
  Purchases of fixed assets,
    net of investment grants                         (1,710)       (4,923)
  Decrease in note receivable                             -         4,790
  Other                                                 (11)           65
                                                 ----------    ----------
         Net cash used in investing
           activities                                (1,721)          (68)

Cash Flows from Financing Activities:
  Cash restricted                                     7,532         1,530
  Increase in indebtedness                            4,170             -
  Decrease in indebtedness                           (9,727)      (23,685)
                                                 ----------    ----------
         Net cash provided by (used in)
           financing activities                       1,975       (22,155)

Effect of exchange rate changes on cash and
  cash equivalents                                      (41)       (1,063)
                                                 ----------    ----------

Net increase (decrease) in cash
  and cash equivalents                               11,132        (3,099)

Cash and cash equivalents,
  beginning of period                                11,741        19,691
                                                 ----------    ----------
Cash and cash equivalents, end of period         E   22,873    E   16,592
                                                 ==========    ==========

</TABLE>

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

<PAGE>

                            MERCER INTERNATIONAL INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR SIX MONTHS ENDED JUNE 30, 2002
                                   (UNAUDITED)

NOTE  1.     BASIS  OF  PRESENTATION

The  interim  period  consolidated financial statements contained herein include
the  accounts of Mercer International Inc. and its subsidiaries (the "Company").

The  interim  period consolidated financial statements have been prepared by the
Company  pursuant  to  the  rules  and  regulations  of  the U.S. Securities and
Exchange  Commission  (the  "SEC").  Certain information and footnote disclosure
normally  included in financial statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted pursuant to such
SEC rules and regulations.  The interim period consolidated financial statements
should  be  read together with the audited consolidated financial statements and
accompanying  notes  included in the Company's latest annual report on Form 10-K
for  the fiscal year ended December 31, 2001. In the opinion of the Company, the
unaudited  consolidated   financial  statements  contained  herein  contain  all
adjustments  necessary to present a fair statement of the results of the interim
periods  presented.

NOTE  2.     REPORTING  CURRENCY

Effective  January  1, 2002, the Company changed its reporting currency from the
U.S.  dollar  to  the  Euro. The reason for this change is because a significant
majority  of  the  Company's business transactions are originally denominated in
Euros.  The  Company's  functional  currency  and reporting currency are now the
same.  Prior  years' financial statements had been reported in U.S. dollars, but
have  been  restated  into  Euros  using  the guidance of Statement of Financial
Accounting  Standards  No.  52,  "Foreign  Currency  Translation"  ("SFAS  52").
Therefore,  the financial statements for prior years depict the same trends that
the  previous  financial  statements  presented  in  U.S.  dollars  show.

The Euro was initially implemented by the European Community on January 1, 1999.
By adopting the Euro as the Company's reporting currency, most of the cumulative
foreign  currency  translation losses were eliminated from the Company's balance
sheets  and most of the foreign currency translation losses were eliminated from
the  Company's statements of comprehensive income.  Prior to the restatement, at
December  31,  2001, there was a cumulative foreign currency translation loss of
$64,016  (in thousands of U.S. dollars) included as part of shareholders' equity
in the balance sheet.  In conjunction with the restatement, the majority of this
amount  was  eliminated.  During the six months ended June 30, 2001, there was a
foreign  currency  translation  loss  of  $13,004 (in thousands of U.S. dollars)
included  as  part  of  comprehensive  income  (loss).  In  conjunction with the
restatement,  the  majority  of  this  amount  was  eliminated.

For periods prior to 1999, when the Company's functional currency was the German
deutschmark, the financial statements were restated using a fixed rate of 0.5113
Euros  to  each  deutschmark.  As a result of using the fixed exchange rate, the
Company's  consolidated  financial  statements  for  those  periods  may  not be
comparable  to  the  financial  statements  of  companies  from  other countries
reporting  in  the  Euro.

<PAGE>

NOTE  3.     EARNINGS  PER  SHARE

Basic  earnings  per  share  is  computed by dividing income available to common
shareholders  by  the  weighted  average  number  of shares outstanding during a
period.  Diluted  earnings per share takes into consideration shares outstanding
(computed  under  basic earnings per share) and potentially dilutive shares. The
weighted  average  number  of shares outstanding for the purposes of calculating
basic  earnings  per  share  was  16,874,899 for the six months and three months
ended  June  30,  2002  and  2001, respectively.  The weighted average number of
shares  outstanding  for  the purposes of calculating diluted earnings per share
was  17,054,998  and 17,154,277 for the six months ended June 30, 2002 and 2001,
respectively,  and 17,093,390 and 17,089,806 for the three months ended June 30,
2002  and  2001,  respectively.

NOTE  4.     BUSINESS  SEGMENT  INFORMATION

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

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

<TABLE>
<CAPTION>

                                                 PULP        PAPER        TOTAL
                                               ---------   ---------    ---------
                                                      (Euros in thousands)
<S>                                            <C>         <C>          <C>
SIX MONTHS ENDED JUNE 30, 2002
Sales to external customers                    E  68,084   E  51,451    E 119,535
Intersegment net sales                             2,925           -        2,925
Segment profit                                    13,039       3,376       16,415

Reconciliation of profit:
  Total profit for reportable segments                                  E  16,415
  Elimination of intersegment profits                                         833
  Unallocated amounts, other corporate expenses                            (4,081)
                                                                        ---------

    Consolidated income before income taxes                             E  13,167
                                                                        =========

SIX MONTHS ENDED JUNE 30, 2001
Sales to external customers                    E  80,449   E  31,955    E 112,404
Intersegment net sales                             3,608           -        3,608
Segment profit                                     7,251         876        8,127

Reconciliation of profit:
  Total profit for reportable segments                                  E   8,127
  Elimination of intersegment profits                                         671
  Unallocated amounts, other corporate expenses                            (3,746)
                                                                        ---------

    Consolidated income before income taxes                             E   5,052
                                                                        =========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                 PULP        PAPER        TOTAL
                                               ---------   ---------    ---------
                                                      (Euros in thousands)
<S>                                            <C>         <C>          <C>
THREE MONTHS ENDED JUNE 30, 2002
Sales to external customers                    E  34,451   E  25,877    E  60,328
Intersegment net sales                             1,524           -        1,524
Segment profit                                    18,906         596       19,502

Reconciliation of profit:
  Total profit for reportable segments                                  E  19,502
  Elimination of intersegment profits                                         456
  Unallocated amounts, other corporate expenses                            (1,402)
                                                                        ---------

    Consolidated income before income taxes                             E  18,556
                                                                        =========

THREE MONTHS ENDED JUNE 30, 2001
Sales to external customers                    E  40,763   E  14,845    E  55,608
Intersegment net sales                             1,762           -        1,762
Segment profit                                     1,272         801        2,073

Reconciliation of profit:
  Total profit for reportable segments                                  E   2,073
  Elimination of intersegment profits                                         379
  Unallocated amounts, other corporate expenses                            (2,362)
                                                                        ---------

    Consolidated income before income taxes                             E      90
                                                                        =========

</TABLE>

<PAGE>

                                    EXHIBIT C

                              TRUSTEES' RESOLUTIONS

"WHEREAS:

A.     The  Company  wishes  to  enter  into  a  loan  agreement  (the "MFC Loan
       Agreement")  with  MFC Merchant  Bank S.A., as agent and original lender,
       ("MFC") pursuant  to  which  MFC  and such other lenders as may from time
       to  time  become signatories to the agreement shall make available to the
       Company a non-revolving term loan in the principal sum of Euro 30,000,000
       (the  "MFC  Loan");

B.     It  is  a  condition  to MFC making the MFC Loan available to the Company
       pursuant  to  the  MFC  Loan  Agreement  that  the  Company  enter  into:

       (i)    the  Borrower's  Securities  Pledge  Agreements;
       (ii)   the  Borrower's  Assignment  Agreements;  and
       (iii)  the  Security  Trust  Agreement,

       (as  defined  in  the  MFC  Loan  Agreement,  and, collectively, the "MFC
       Credit Documents");

C.     In  connection  with  the  MFC  Loan  Agreement,  the  Company  wishes to
       authorize  its  duly appointed officer Jimmy S.H. Lee to grant a power of
       attorney  to  Mr.  Wolfram  Ridder  (the "MFC Loan Power of Attorney") to
       effect the MFC Loan as described in  the  MFC  Loan  Power  of  Attorney;

D.     The  entering  into of the MFC Loan Agreement and the consummation of the
       transactions  contemplated  thereby  are  in  the  best  interests of the
       Company; and

E.     The  Company  has the corporate power and capacity to enter into, execute
       and deliver  the  MFC  Loan  Agreement  and  the  MFC  Credit  Documents;

NOW  THEREFORE  BE  IT  RESOLVED  THAT:

1.     The  MFC  Loan  Agreement in the form presented to the trustees be and is
       hereby  approved;

2.     The  Company  enter  into,  execute  and  deliver  to  MFC  the  MFC Loan
       Agreement;

3.     The  Company  create,  grant,  issue,  execute and deliver the MFC Credit
       Documents;

4.     The  Company  take  all  such further actions and execute and deliver all
       such  further  agreements,  instruments  and  documents  relating  to,
       contemplated  by,  or  necessary  or  desirable  in  connection  with the
       performance of its obligations under,  the  MFC  Loan  Agreement and each
       of  the  MFC  Credit  Documents;

<PAGE>

5.     Any  one officer or trustee of the Company (the "Authorized Officer") be,
       and  is  hereby,  authorized and directed  to  execute  and  deliver  all
       agreements, instruments  and  documents  which  are the subject  of  the
       foregoing  resolutions  respecting  the  MFC  Loan  including,  without
       limitation,  the  MFC Loan Agreement and  the  MFC  Credit Documents,  in
       the  name  and  on  behalf of the Company, under its  corporate  seal  or
       otherwise,  in  the  form presented to the trustees of the Company,  with
       such  changes,  modifications and amendments  thereto  as such Authorized
       Officer may in such person's discretion approve, which approval shall be
       conclusively  evidenced by the execution and delivery of such agreements,
       instruments  and  documents  including,  without limitation, the MFC Loan
       Agreement and  the  MFC  Credit  Documents  and,  to  the extent that any
       Such  agreements,  instruments  and documents were executed and delivered
       prior to the date hereof, the  execution  and  delivery  thereof  by  any
       such  Authorized  Officer  be,  and is hereby,  approved,  ratified,  and
       confirmed;

6.     Any Authorized Officer be, and is hereby, authorized and directed to take
       all  such  further  actions,  execute  and  deliver  such  further
       agreements,  instruments  and  documents in writing and do all such other
       acts and things as in such person's opinion may be necessary or desirable
       in the name of and on behalf of  the  Company,  under  its corporate seal
       or  otherwise,  to  give effect to the foregoing  resolutions  respecting
       the  MFC  Loan,  which  opinion  shall  be conclusively  evidenced by the
       taking  of  such  further  actions,  the  execution and delivery  of such
       further agreements, instruments and documents and the doing of such other
       acts  and  things;

7.     Jimmy  S.  H. Lee, as duly appointed of officer of the Company, be and is
       hereby  authorized  to represent the Company for the purposes of entering
       into agreements,  making and accepting all waivers and other declarations
       and  taking  all  other  legal steps, in particular acting himself and/or
       by  granting  the  MFC  Loan  Power  of  Attorney  to Mr. Wolfram Ridder,
       having  his  business  address at Charlottenstrabe 59, 10117 Berlin, who
       shall  then  be so authorized to represent the Company for such purposes,
       to  act  individually and under exemption from the  restrictions  imposed
       by  Section  181  of  the  German  Civil  Code  and  similar restrictions
       under  foreign  laws,  and  each having  the  power to delegate his power
       of  attorney,  whereby  such  delegation may also be made under exemption
       from  the  restrictions  imposed  by  Section  181 of  the  German  Civil
       Code  and  similar  restrictions  under  foreign  laws, to enter into and
       perform all acts and make  all  declarations  required  for the execution
       of  all  agreements  and documents,  including the MFC Loan Agreement and
       the MFC Credit Documents, to be executed  by  the  Company  in connection
       with  the  MFC  Loan;  and

8.     To  the  extent  necessary,  all  acts  of the proxys on the basis of the
       aforementioned  MFC Loan  Power of Attorney and all actions  taken by Mr.
       Jimmy S.  H.  Lee  in connection with the foregoing are hereby approved,
       affirmed and ratified"

<PAGE>

                                  SCHEDULE "B"

                               PLEDGED SECURITIES

<TABLE>
<CAPTION>

DESCRIPTION OF SHARE CAPITAL           REGISTERED HOLDER
----------------------------           ------------------
<S>                                    <C>

50,000 DM in ZPR Zellstoff-und         Mercer International Inc.
Papierfabrik Rosenthal Holding
GmbH

E 24,750 in Stendal Pulp Holding       Mercer International Inc.
GmbH

E 250 in Stendal Pulp Holding GmbH     Mercer International Inc.

50,000 DM in Dresden Papier            Mercer International Inc.
Holdings GmbH

</TABLE>

                                  SCHEDULE "C"

                             FORM OF ADVANCE REQUEST

*

Attention:      *

Dear  Sirs:

     The undersigned, Mercer International Inc., (the "Borrower"), refers to the
Loan  Agreement  dated  as  of  August  ,  2002  (the "Loan Agreement) among MFC
Merchant  Bank  S.A.,  as  Agent  and  as a Lender thereunder, and the Borrower.

     All  capitalized  terms  herein  bear the meaning given to them in the Loan
Agreement.

     The  Borrower  hereby  gives  notice  that the Borrower hereby requests the
Advance of  the  Loan  under  the  Loan  Agreement,  as  set  out  below:

     (a)  The  requested  date of the Advance, being a Banking Day, is August *,
          2002;  and

     (b)  The  aggregate  amount  of  the  Advance  is E 30,000,000;

                                            Yours  truly,

                                            MERCER  INTERNATIONAL  INC.

                                            Per:
                                                  ----------------------------
                                                  Authorized  Signing  Officer

<PAGE>

                                  SCHEDULE "D"

                      SHAREHOLDERS AGREEMENT HEADS OF TERMS

A  Shareholders' Agreement (the "Agreement") shall be entered into in respect of
ZPR  Zellstoff-und  Papierfabrik Rosenthal Holding GmbH (the "Company") so as to
provide  that upon a disposal (following enforcement of security) by the Lenders
of  an  interest  of  less  than  51%  of  the  Company  (the  "A  Share"):

(1)   pre-emption  rights  are  granted  to  each  shareholder  including  the
      following  terms:

      PRE-EMPTION

      (a)  No shareholder shall be entitled to dispose of any interest in any of
           its  shares  (other than to an affiliate) without first offering them
           for transfer to  the  other  shareholders  (the  "Recipient").

      (b)  The  notice  of  transfer shall specify the shares offered, the price
           at  which  they  are  offered,  the  terms  of  payment and any other
           material terms.  The notice  may  not  be  revoked.

     (c)  The  Recipient  shall  notify  the  selling shareholder within 15 days
          whether  it  is  willing  to  purchase  the  shares.

     (d)  On  the  expiry of the offer period, if the Recipient has notified the
          selling  shareholder  that  it  wishes  to  purchase  the  shares, the
          Recipient shall be  bound to pay the purchase price for, and to accept
          a  transfer of, the shares and the selling shareholder shall be bound,
          on  payment  of the purchase price, to transfer  such  shares  to  the
          Recipient.

     (e)  If  after the expiry of the offer period the shares are not  purchased
          by  the  Recipient  the selling shareholder may transfer the shares to
          any person and at  a price which is not less than the price  specified
          in  the  original  notice  of  transfer  and  upon  terms no more
          advantageous to the buyer as specified in the said  notice.

(2)  tag along rights are granted to each shareholder including the following
     terms:

     TAG  ALONG

     (a)  If  at  any  time a shareholder intends to dispose of some or all of
          its  shares  or  any  interest in its shares to a third party (after
          giving  effect to  the  pre-emption  rights  set  out  above),  such
          shareholder shall give notice in writing  to  the other shareholders
          (the  "Recipient")  specifying:

          (i)    the number  of  shares  and the nature of the interest in the
                 shares of which  it  intends  to  dispose;

          (ii)   the  name(s)  of  the  proposed transferee(s) of the relevant
                 shares; and

<PAGE>

          (iii)  the  terms  of  the  disposal.

     (b)  If the  Recipient  wishes to dispose of its shares on the same terms
          as  specified  in  the  notice then it shall within 15 business days
          after the date of the  notice  notify  the  selling  shareholder  in
          writing.

     (c)  The  selling  shareholder  shall  not dispose of the relevant shares
          unless it  has:

          (i)    given  a  notice not less than 15 business days before the
                 disposal; and

          (ii)   procured, on the same terms as contained in the notice, the
                 disposal of the  shares  or  any  interest  in  them of the
                 Recipient if so requested by the Recipient;

(3)  drag  along  rights  are  granted  to  each  shareholder  including  the
     following  terms:

     DRAG  ALONG

     (a)  If at  any time a shareholder receives a bona  fide  third  party
          offer  to purchase all the shares of  the  Company  (an  "Initial
          Offer"), such shareholder shall  notify  the  other  shareholder
          (the "Recipient").

     (b)  The  notice  shall specify the offer price, the terms of payment
          and any other  material  terms  of  the  Initial  Offer.

     (c)  The  Recipient  shall  notify  the  selling shareholder within 7
          days of receipt  of  the  notice  whether  it  is  willing  to
          accept the Initial Offer.

     (d)  If  shareholders  holding a simple majority of the shares in  the
          Company  wish  to  accept  the  Initial  Offer  then  they  shall
          give notice (the "Second Offer") to those shareholders  who  have
          indicated  that  they  do  not  wish  to accept  the  offer  (the
          "Declining Shareholders") that they wish to sell to them  all  of
          their  shares  on  the  terms  and  conditions  of  the  Initial
          Offer.

     (e)  If the Declining Shareholders do  not  accept  the  Second Offer
          and purchase  the  shares  of the accepting shareholders with 15
          days,  the  Declining  Shareholders  shall  be  deemed to have
          delivered a  notice  accepting  the  Initial  Offer  and  all
          shareholders will be required to participate and sell their
          shares  pursuant  to  the  terms  and  conditions  of  the
          Initial  Offer.

(4)  the  following  actions  may  not  be  taken  without  the prior written
     approval  of  each  shareholder:

     (a)  any  revocation or alteration of the Company's constitutional
          documents;

<PAGE>

     (b)  the  creation,  or issuance  of  any  shares in the Company or the
          issuance of  any securities, warrants  or options exchangeable for
          or carrying the right to subscribe  for  shares  in  the  Company;

     (c)  any  conversion,  reclassification,  subdivision,  consolidation,
          exchange  or  any  other reorganisation of  the  Company's  share
          capital;

     (d)  the  redemption  or  purchase by the Company of any of its share
          capital or securities  convertible  into  shares  or  the
          cancellation of subscription rights in respect  of  its  shares  or
          securities  convertible  into  its shares;

     (c)  the  entry  into  of  any  transaction  with a shareholder  or  any
          person affiliated  with  a  shareholder  (each  a "Related Party"),
          including, without  limitation,  any loans  to  a Related  Party,
          the  payment of any management  fees  to  a  Related  Party, the
          disposal by the Company of any assets to a Related Party or the
          acquisition  by the Company of any assets from a Related Party
          other than:

          (i)    transactions  in  the  ordinary  course  of  business
                 involving aggregate  consideration  of  not  more  than
                 Euro  100,000  per  transaction  or  Euro 300,000 for all
                 such  transactions  in  any  Financial  Year;

          (ii)   any  agreements,  contracts or arrangements existing at
                 the date of the Agreement  and  which, if entered into
                 after the date of the  Loan Agreement, are permitted
                 under  the  terms  of  the  Loan Agreement;

          (iii)  salaries,  benefits  and  other remuneration paid in the
                 ordinary  course  and  reasonably  consistent  with  past
                 practice  to officers, directors or employees;

     (d)  the  transfer  or  disposal of all or substantially all of the
          Company's property,  assets  or  undertaking, taken as a whole;

     (e)  the  merger,  amalgamation,  reorganisation  or  consolidation
          of  the Company;

     (f)  the  repayment of any loans owing by the Company to a
          shareholder or any person  affiliated  with  a  shareholder
          other  than:

          (i)   pursuant  to  the  terms of agreements existing at the date
                of the  Agreement  provided  that any such payments are
                permitted under the terms of the ZPR  Credit  Agreement and
                the agreements themselves, if entered into after the date
                of the Loan Agreement were entered into in compliance with
                the terms of the Loan  Agreement;  and

          (ii)  repayments  pursuant  to  terms  of  agreements  approved
                by all of the shareholders;  or

<PAGE>

     (g)  reorganise  or change in any material respect the nature or
          scope of the Company's  business  from  the  pulp,  paper or
          forest products business and activities  and  businesses
          reasonably  ancillary  thereto.

(5)  the  management of the Company shall not do any of following without the
     agreement  of  the  A  Director:

     (a)  save to the extent required to do  so as a matter of law, pass any
          resolution  for  winding  up  the  Company;

     (b)  save  to  the extent required to do so as a matter of law, apply
          for the appointment  of  a  receiver  or  an administrator over the
          Company's assets; or

     (c)  do  or  fail to do anything which could reasonably result in an
          event of default  occurring  under  the  ZPR  Credit  Agreement.

(6)  the  management  of  the Company and each of its Subsidiaries shall include
     one  managing  director (Geschaftsfuhrer) appointed by the holder of the A
     Share (the  "A  Director")  and,  subject  to  (7) below, a board meeting
     shall not be quorate  unless  the  A  Director  is  present;

(7)  quorum  for  directors  shall  be 3 of which one is the A Director provided
     that  if  quorom  is not  met  at a meeting, the meeting shall be adjourned
     for  at  least  7 days  and  then  reconvened.  At the reconvened meeting,
     quorum shall be 2 directors  regardless  of  whether  the  A  Director is
     present.

(8)  a  business  plan  for  each  Financial  Year of the Company (including any
     Subsidiaries  of  the  Company)  shall  be submitted  for  approval to each
     of  the  shareholders  not  less  than 45 Days before  the  end of the then
     current Financial Year  of  the  Company.  Each  business  plan  shall
     include:

     (a)  a  projected  balance  sheet  and  profit  and  loss  account;

     (b)  a  detailed  cashflow statement detailing, in particular, payments to
          affiliated  companies;

     (c)  an  estimate  of  working  capital  requirements;

     (d)  an  operating  budget;  and

     (e)  a  report on the Company's performance during the current Financial
          Year of  the  Company.

Where a matter which would otherwise require approval under these provisions has
been  expressly  included  in  a business plan approved by the A Shareholder, no
further  approval shall be required provided that there is no material change in
the  terms  of  the  transaction  from  those  approved  in  the  business plan.

<PAGE>

(9)  If  after  the  date  of  the Agreement  a material breach of the Agreement
     occurs  by a shareholder which is not remedied within 30 days after  notice
     or an act of insolvency occurs relating to such shareholder (a  "Defaulting
     Shareholder"),  the  Defaulting  Shareholder  shall  lose  its  rights  to
     nominate directors, its entitlement to vote, and will  be  deemed  to have
     granted an option to  the  non-defaulting  shareholder to purchase all of
     its shares for an amount equal  to  the  fair  market  value  thereof
     minus  10%.

For the purpose of the Agreement, fair market value shall be in an amount agreed
upon  by  the  parties  or failing agreement, on amount determined pursuant to a
valuation  and  arbitration  methodology  to  be  included  in  the  Agreement.

(10) No shareholder shall be required to advance funds or provide guarantees
     unless  unanimously  approved  by  all  shareholders.

(11) Any  party acquiring shares will be required to enter into an identical
     shareholders'  agreement.

(12) Any  shareholder  may  upon  written notice require that, to the extent
     permitted,  the  Company's  constitutional  documents  be amended to
     reflect the terms  of  the  Agreement.

In  this  Schedule capitalised terms not otherwise defined in the Schedule have
the  meaning  given to them in the Loan Agreement and " Loan Agreement" means
the loan  agreement  to  which  this  forms  a  Schedule.

<PAGE>

                                  SCHEDULE "E"

                                CORPORATE CHART

--------------------------------------------------------------------------------
                            MERCER INTERNATIONAL INC.
                                (THE "BORROWER")
                                      (USA)
--------------------------------------------------------------------------------

ZPR ZELLSTOFF-UND
PAPIERFABRIK                                               STENDAL PULP HOLDINGS
ROSENTHAL                       DRESDEN PAPIER             GMBH
HOLDING  GMBH                   HOLDINGS GMBH              ("SPH")
("ZPR HOLDING")                 (GERMANY)                  (GERMANY)
(GERMANY)

SPECIALPAPIERFABRIK                                        ZELLSTOFF STENDAL
BLANKENSTEIN GMBH               DRESDENT PAPIER GMBH       GMBH
("SPB")                         (GERMANY)                  ("ZSG")
(GERMANY)                                                  (GERMANY)

ZELLSTOFF-UND
PAPIERFABRIK
ROSENTHAL GMBH & CO.
KG
("ZPR & CO.")
(GERMANY)

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00043-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00043-of-00352.parquet"}]]