Analyst Withdraws 'Buy' on Mercer : Investing: He says the firm should explain $14-million trading loss and method of calculating earnings from paper mills.

From Bloomberg Business News

Stephen Weinress, an analyst for L.H. Friend, Weinress & Frankson Inc. of Irvine, has withdrawn his "buy" recommendation on Mercer International after questioning the company's accounting and disclosure practices.

Weinress said in a report to investors this week that Mercer owes them an explanation of a $14-million trading loss and its method for calculating operating earnings from its paper mills. He is the only analyst who has followed the company closely in recent months.

Weinress also criticized Mercer for not making its chief financial officer, Mike Smith, available for comment.

Mercer, originally formed as a Massachusetts real estate investment trust, is incorporated in Washington state and based in Vancouver, Canada. The company has interests in financial services worldwide and in several paper mills in Germany.

Smith is in Germany negotiating the purchase of another paper mill from the government, a company official said last week. Weinress is also out of town not available for comment.

William Atkinson, Mercer's vice chairman, said the analyst was meeting with company officials Wednesday to resolve "significant misunderstandings."

According to financial statements filed with the Securities and Exchange Commission, the company reported a $14-million loss on its investment in Industry Secco, an Italian company formerly traded on the Milan stock exchange.

Weinress said he did not know about the investment or the loss.

"In light of the fact that we have been following the company since November of 1993 and spent time with management, it seems peculiar that we were not made aware of an investment of this magnitude nor the potential liability," he wrote in his report.

Atkinson said the investment was made several years ago, and Mercer decided to write down its holdings in Secco after trading of the company's stock was suspended in Milan.

"I think people were under the impression that this investment was somehow kept secret," he said. "This investment had been on our balance sheet for some time."

About half of Mercer's revenue is generated by the company's paper mill investments. Mercer already owns two mills and is negotiating to buy a third, although the talks have stalled because of rising pulp prices, Atkinson said.

According to the company's financial statements, the paper mills generated $57.1 million in revenue last year, of which $29.8 million was subsidies from the German government. In other words, the mills generated $27.3 million, less than their $34.7 million in operating costs, according to the SEC filing.

Weinress said Mercer told him government subsidies would be used only to offset losses on the plants. As a result, the analyst concluded, Mercer was able to post profit from operations of $9.6 million instead of a loss.

"Without the supplements and after the investment loss, the company would have lost money on operations," he wrote.

Atkinson, however, said the terms of the subsidies changed. Instead of simply providing "loss guarantees," the German government gave Mercer complete control over more than $42 million in subsidies.

"They were to be used as additional revenue at our discretion," Atkinson said.

The company plans to book the remaining $12.2 million in subsidies as revenue in 1994, he said.

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