Mercer International Inc.

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Mercer International Inc.

14900 Interurban Avenue South, Suite 282
Seattle, Washington 98168
U.S.A.
Telephone: (206) 674-4639
Fax: (206) 674-4629
Web site: http://www.mercerinternational.com

Public Company
Incorporated: 1968 as Pacific West Realty Trust
Employees: 1,022
Sales: $244.6 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: MERCS
NAIC: 322121 Paper (Except Newsprint) Mills

Mercer International Inc. maintains its legal address in Seattle, Washington, although its CEO, Jimmy S.H. Lee, resides in Zurich, Switzerland, and the company's business of pulp and paper manufacturing is conducted in Germany. Controversy has often surrounded Mercer in the 20 years since Lee and his business associates gained control of a real estate investment trust, converted it into an operational company, and became involved in a number of activities, including iron ore royalties and insurance. After spinning off some financial assets in the mid-1990s, Mercer has concentrated on the pulp and business, primarily located in the former territory of East Germany, which is advantageously located close to many European customers. The company owns two paper mills that produce specialty papers and printing and writing papers, a pulp mill with a capacity to produce 300,000 tons of market kraft pulp, and a 63.6 percent share in another kraft pulp mill, a state-of-the-art Greenfield project with a capacity in excess of 550,000 tons.

1968 Origins

The corporate entity that evolved into Mercer was launched in 1968 as a real estate investment vehicle, organized under the laws of the state of Washington and named Pacific West Realty Trust. The company formed a limited partnership that attracted more than 450 Washington state investors, whose $4.7 million was invested in strip malls, a nursing home, and other western Washington assets. Many of these types of limited partnerships were used during this period as tax shelters, a practice which was shut down by the passage of the Tax Reform Act of 1986. Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. Many of these limited partnerships were rolled up by syndicators who converted them into stock. In the case of Pacific West, investors in 1988 eagerly accepted a chance to trade their limited partnership positions for stock, thereby gaining a way to cash out. The stock company that entered the picture was called Asiamerica Equities Ltd., which according to the Seattle Times, "was owned by Stone Mark Capital, a previously empty shell company on the Vancouver Stock Exchange" whose "principals were in Hong Kong." Asiamerica offered $3.5 million in stock for Pacific West's land, buildings, and other assets, which were transferred to Asiamerica. According to the Seattle Times, however, the stock was not conveyed to the limited partners.

Asiamerica was founded by Mercer's current CEO Jimmy S.H. Lee. Press reports reveal that he was born into a wealthy Korean family and came to Canada by way of Hong Kong. After graduating from the University of British Columbia with a degree in chemical engineering in 1981, he then worked for two years as a process engineer for FMC Canada Ltd. In 1984, Lee and associates, including English-born Michael Smith, founded Asiamerica with assets of $3 million. The company looked for opportunities to acquire undervalued assets in any number of industries. Early on, by way of a subsidiary, it began quietly acquiring shares to control a Montreal-based mining company called Nalcap Holdings Ltd., which each year generated more than $10 million in royalties from Labrador iron ore deposits and western petroleum leases. Doing business under the name of Javelin International Ltd. a dozen years earlier, Nalcap had become notorious after its chairman, John C. Doyle, was convicted of some 400 fraud charges and fled to Panama. By court order, Doyle's shares in the company were frozen. Also vying for control of Nalcap was another controversial figure, J. Bob Carter, president of Vancouver-based Kelvin Energy Ltd. The Toronto Star described Carter as "a grade eight dropout, a former barroom bouncer, high-steel rigger and undercover drug agent. He wears cowboy boots, sucks on half-dead cigars and swears a lot." Carter also had on his resume two criminal convictions on sex-related charges involving prostitutes. "I'm an outcast now and I will continue to be an outcast," he admitted. "I might as well be a rich one." On the other hand, Lee, according to the newspaper, "wears stylish oversized suits with padded shoulders, and cultivates a refined and sophisticated air." Regardless of the contrast, both men were more than willing to negotiate on the quiet with Doyle to purchase his Nalcap shares at below-market prices. Moreover, Lee formed a joint venture with Australian businessman Ron Brierly, who owned a pivotal 10 percent stake in Nalcap, which gave Asiamerica tentative control of the company. However, Carter was then able to convince Brierly to make a handshake deal to sell his shares to him instead. Brierly backed out of this agreement when pressed by Lee, and the entire matter landed in court in 1988. Although he would ultimately prevail, the reticent Lee received much unwelcome publicity for the way he and his associates did business. It would not be the last time Lee's group came under scrutiny.

Mercer Name Adopted in 1991

Gaining Nalcap's royalty stream laid the foundation for Mercer. The acquisition of Pacific West in 1988 not only added real estate assets but also provided the corporate entity that would later emerge as Mercer. Asiamerica's assets were merged with Pacific West, which then took on the Asiamerica name. Because Asiamerica failed to pay Pacific West's limited partners the stock owed to them for turning over their real estate assets, Lee found his company in court once again. The matter would finally be settled in 1991 when Asiamerica agreed to settle the class action suit by repaying $3.4 million plus legal fees of another $500,000. Also in 1991, the company was able to take another major step by gaining control of Constitution Insurance Co. of Canada, a deal that brought with it a $63 million investment portfolio. As a result, Asiamerica's revenues grew to $70.1 million in 1991, a three-fold improvement over the previous year. At the end of 1991, Asiamerica decided to change its name to Mercer International to reflect the company's move away from investment and to de-emphasize its Asian roots.

Mercer was now very much interested in becoming involved in international environmental services, especially in Europe. Lee was attracted to the recently reunified Germany, especially the Saxony/Sachsen Anhalt areas of the former communist state of East German, which was undergoing privatization and offering a number of incentives to investors. In 1991, Mercer acquired a 70 percent interest in Spezialreinigung Meissen GmbH, an environmental services company. In early 1992, Mercer formed a joint venture with Canada Energy Services Ltd., an environmental engineering and industrial cleaning company operating in Europe and North America. Mercer was particularly interested in becoming involved in the North American hospital waste disposal business.

With a focus still on environmental services, Mercer gained a foothold in the paper industry in 1993 with the acquisition of Dresden Paper AG, a state-owned paper recycling company. Mercer was able to buy Dresden Paper, whose assets were valued at $76.8 million, for just $660,000 plus the guarantee of 490 jobs and the investment of $49 million over the next three years to upgrade the facilities. Moreover, the state agreed to forgive $80 million in debt owed by Dresden Paper and pledged as much as $41 million to help the company meet short-term financial requirements. Mercer's investment would also be financed with state-subsidized low-interest loans, and the company was in line to receive a rebate of 31 percent of its investment as a cash payment.

As Mercer began to convert Dresden Paper into a specialized maker of grease paper, tissue paper, and wallpaper, it also lined up its next deal in Germany and further committed the company to the paper industry while moving it away from environmental services, which did not prove to have as much promise as many had thought. To gain access to raw material, and forward its new goal of becoming a leading supplier of specialty pulp and paper in Europe, in 1994 Mercer acquired another state-owned business, Sellstoff & Papierfabrik Rosenthal GmbH, a 160,000-ton sulfite paper mill producing chlorine-free pulp and ethanol. Under the terms of this sale, Mercer committed to keeping at least 350 people employed until 1998 and investing $45 million in capital improvements. In return, the state forgave $76 million in debt, pledged nearly $44 million in cash contributions, and offered other rebates and tax incentives. Also in 1994, Mercer acquired a 70 percent interest in another German pulp operation, Bundesanstalt fur Vereinigungsbedingte Sonderaufgaben.

By now, Mercer was essentially being operated out of Zurich, where Lee chose to reside. As the company's focus on the pulp and paper industry increased, revenues on the financial services side steadily declined, falling from $56.5 million in 1992 to $23.7 million in 1994, while during the same period pulp and paper revenues grew by nearly 300 percent. At this point, it was decided that it was in the best interest of the company to split the pulp and paper business from financial services, and the assets of the later were spun-off as Arbatax International Inc. They included the iron ore royalties, insurance assets, and real estate investments. Mercer, as a result, became a pure-play pulp and paper manufacturer.

Company Perspectives:

Mercer International Inc. owns and operates market pulp and paper businesses in the southern German states of Saxony and Thuringia in the former East Germany.

Focus on Specialty Paper in
the Late 1990s and Beyond

Aside from removing non-pulp and paper assets from Mercer, management also began in late 1997 to restructure its remaining business to focus on specialty papers, especially wallpaper based paper production. During 1998, Mercer sold a packaging paper mill in Greiz and a carton paper mill in Raschau. In addition, a packaging paper mill and a corrugating base paper mill in Trebsen and a printing paper mill and recycled paper facility in Hainsberg were divested in 2000. The Rosenthal mill completed an important capital project in 1999 when it was converted from the production of sulfite pulp to that of kraft pulp, making it the only kraft chemical facility operating in Germany. In December 2001, Mercer paid approximately $2.7 million to acquire Landqart AG, a Swiss manufacturer of security and specialized printing papers, used to print such documents as banknotes, customs forms, and passports. The following year, Mercer also began construction on a new 552,000-ton kraft-pulp facility near the town of Stendal. This project was originally scheduled to begin in 1999, but three years were required to complete the financing. When operational by the end of 2004, the plant would nearly triple the company's pulp capacity and make Mercer into one of the largest pulp producers in the world.

Although Mercer appeared to have a promising future, it was not performing that well. Then, in 2003, the company once again became associated with controversy when its chief financial officer resigned after becoming involved in a criminal investigation unrelated to the company. Some of the company's investors, in particular Greenlight Capital LLC, a New York hedge fund and the largest institutional investor, with a stake of nearly 15 percent, expressed severe reservations about the way Mercer was being managed. According to the Puget Sound Business Journal, Greenlight officials claimed that Mercer's board was in "disarray." They had been concerned about the business during the previous year, and the resignation of the CFO was simply the final straw. As a result, Greenlight launched a proxy fight with the intention of placing two nominees on Mercer's board of trustees. If elected, they would have the ability to change the way the board operated. Although he would not elaborate, Lee said he suspected that Greenlight had a hidden agenda in the proxy fight. Within a matter of weeks, however, Greenlight, Mercer, and three other significant shareholders worked out a deal to add two outside trustees, and the proxy solicitation was terminated.

Free to focus on growing its pulp and paper business, Mercer was able to raise new funding to complete the Stendal project and look for acquisition candidates. The company was especially interested in opportunities in other former Soviet Bloc countries, such as Poland, which were attempting to gain a more prominent role in the European economy.

Principal Subsidiaries

Dresden Papier GmbH; Papierfabrik Fahrbrucke GmbH; Spezialpapierfabrik Blankenstein GmbH; Zellstoff-und Papierfabrik Rosenthal Gmbh & Co KG.

Principal Competitors

International Paper Company; Norske Skogindustrier ASA; Svenska Cellulosa Aktiebolaget SCA.

Key Dates:

1968:
The company is formed as Pacific West Realty Trust.: 1988:
Pacific West is acquired by Asiamerica Equities and assumes Asiamerica name.: 1992:
Mercer International name is adopted.: 1993:
Company purchases Dresden Papier AG.: 1996:
Non-paper assets are spun off.: 2001:
Mercer acquires Landqart AG.