UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
June 30, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to __________.
Commission File Number: 0-16289
Repap Enterprises Inc.
(Exact name of registrant as specified in its charter)
Canada 98-0178526
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 Atlantic Street, Suite 200 Stamford, CT, 06901
(Address of principal executive offices) (City, State, Zip Code)
(203) 964-6160
(Registrant's telephone number, including area code)
___________________________________________________
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
743,460,637 shares of the registrant's Common Stock, no par value, were
outstanding as of the close of business on June 30, 1999.
REPAP ENTERPRISES INC.
INDEX
EXCHANGE RATES
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Interim Balance Sheet
Condensed Consolidated Interim Statements of Operations
Condensed Consolidated Interim Statements of Cash Flows
Condensed Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item. 1 Legal Proceedings
Item. 2 Changes in Securities and Use of Proceeds
Item. 3 Defaults Upon Senior Securities
Item. 4 Submission of Matters to a Vote of Security Holders
Item. 5 Other Information
Item. 6 Exhibits and Reports on Form 8-K
SIGNATURES
EXCHANGE RATES
Repap Enterprises Inc. ("Repap Enterprises" or the "Company")
publishes its consolidated financial statements in Canadian dollars. In
this quarterly report, unless otherwise specified or the context
otherwise requires, all dollar amounts are expressed in Canadian dollars
("$", "C$", "dollars", or "Cdn. dollars").
The following table sets forth the exchange rates of the Canadian
dollar to the U.S. dollar for the period ended and as at December 31,
1998 and for the six months ended and as at June 30, 1999 and 1998 (such
rates, which are expressed in dollars, being the noon buying rates in
New York City for cable transfer in U.S. dollars as certified for
customs purposes by the Federal Reserve Bank of New York). On August 9,
1999, US$1.00 equaled C$1.5028.
Six Months Year Ended
Ended June 30, December 31,
-------------- ------------
1999 1998 1998
---- ---- ----
(C$ per US$)
High 1.4512 1.4075 1.4658
Low 1.5302 1.4710 1.5770
Average (1) 1.4922 1.4386 1.4641
At End of Period (2) 1.4735 1.4717 1.5263
- --------------------
(1) The average of the daily buying rates during the applicable period.
(2) Noon buying rate on last banking day.
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements.
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET (see Note 1)
(unaudited as at June 30, 1999)
(dollars in millions)
As at As at
June 30, December 31,
1999 1998
ASSETS -------- ------------
Current assets
Cash and short term deposits $ 72.3 $ 9.4
Accounts receivable 52.1 68.5
Inventories 66.8 66.5
Prepaid expenses and other assets 4.5 0.8
-------- --------
195.7 145.3
-------- --------
Fixed assets, net 966.8 980.0
Investments 16.2 16.2
Other assets 137.2 187.4
-------- --------
$1,315.9 $1,328.9
LIABILITIES ======== ========
Current liabilities
Accounts payable and accrued liabilities $ 103.4 $ 117.8
Current portion of long-term debt and
repayable grants 6.1 7.6
Revolving credit facility 0.0 77.6
-------- --------
109.5 203.0
-------- --------
Long-term debt 1,193.1 1,084.6
Repayable grants and other liabilities 19.0 21.0
-------- --------
1,212.1 1,105.6
CAPITAL SOURCES -------- --------
Investment tax credits 105.7 108.3
Grants-non-repayable 22.2 22.8
-------- --------
127.9 131.1
-------- --------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred shares 16.0 16.0
Common shares 640.6 640.6
Deficit (805.5) (782.7)
Other paid-in capital 15.3 15.3
-------- --------
(133.6) (110.8)
-------- --------
$1,315.9 $1,328.9
======== ========
See accompanying notes
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(see Note 1) (unaudited) (dollars in millions)
Second Six Months
Quarter Ended June 30
1999 1998 1999 1998
------ ------ ------ ------
Revenues from continuing operations $142.4 $168.8 $305.0 $332.1
Effects of currency hedging (1.7) (1.7) (2.9) (2.9)
------ ------ ------ ------
Net revenues 140.7 167.1 302.1 329.2
------ ------ ------ ------
Net sales from continuing operations 125.9 151.2 270.8 298.1
Cost of sales before depreciation and
amortization 92.9 99.4 192.4 194.4
Selling, administrative and research
expenses 7.0 8.6 14.6 16.5
Depreciation and amortization 14.7 15.0 31.8 31.1
------ ------ ------ ------
Operating profit 11.3 28.2 32.0 56.1
Interest expense 28.3 27.0 56.5 53.5
Miscellaneous (income) expenses (4.0) 1.8 (2.8) 1.6
------ ------ ------ ------
Income (loss) before the undernoted (13.0) (0.6) (21.7) 1.0
Provision for income taxes 0.5 0.5 1.1 1.3
------ ------ ------ ------
Loss from continuing operations (13.5) (1.1) (22.8) (0.3)
Unusual charges 0.0 46.3 0.0 46.3
Income (loss) from discontinued operations 0.0 (0.3) 0.0 17.8
------ ------ ------ ------
Net loss (13.5) (47.7) (22.8) (28.8)
Provision for accretion of other paid-in
capital 0.0 1.3 0.0 2.9
------ ------ ------ ------
Net loss attributable to common
shareholders $(13.5) $(49.0) $(22.8) $(31.7)
====== ====== ====== ======
Average common shares outstanding
(millions) 743.5 742.5 743.5 742.5
------ ------ ------ ------
Loss per share:
Continuing operations $(0.02) $(0.07) $(0.03) $(0.07)
Discontinued operations 0.00 0.00 0.00 0.02
------ ------ ------ ------
Total $(0.02) $(0.07) $(0.03) $(0.05)
====== ====== ====== ======
See accompanying notes
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(see Note 1)
(unaudited) (dollars in millions)
Second Six Months
Quarter Ended June 30
1999 1998 1999 1998
------ ------ ------ ------
Operating activities:
Loss from continuing operations $(13.5) $(47.4) $(22.8) $(46.6)
Add items not affecting cash:
Depreciation and amortization 14.6 15.0 31.8 31.2
Effects of currency hedging 1.7 1.7 2.9 2.9
Other 0.4 48.7 0.6 47.0
------ ------ ------- -------
Cash flow before net changes in non-cash
working capital 3.2 18.0 12.5 34.5
Non-cash working capital changes (9.6) (4.2) (1.5) (20.0)
------ ------ ------ -------
Cash provided by (used in) continuing
operations (6.4) 13.8 11.0 14.5
Investing activities:
Additions to fixed assets (8.1) (5.5) (12.9) (8.2)
Deferred charges and other assets (5.8) (20.9) (5.6) (18.2)
------ ------ ------ ------
Cash used in investing activities (13.9) (26.4) (18.5) (26.4)
Financing activities:
Additions to debt 150.7 516.4 151.1 521.8
Repayment of debt (1.9) (434.4) (5.6) (458.7)
Redemption of debentures 0.0 (75.0) 0.0 (75.0)
Revolving credit facility, net change (65.7) 4.5 (74.8) (11.4)
Other (0.2) (17.6) (0.1) (17.2)
------- ------- ------ -------
Cash provided by (used in) financing
activities 82.9 (6.1) 70.6 (40.5)
Cash provided by (used in) discontinued
operations (0.2) 0.6 (0.2) 17.7
Net increase (decrease) in cash 62.4 (18.1) 62.9 (34.7)
Cash position at beginning of period 9.9 26.7 9.4 43.3
----- ----- ----- -----
Cash position at end of period $72.3 $8.6 $72.3 $8.6
===== ===== ===== =====
Represented by:
Cash and short-term deposits $72.3 $8.6 $72.3 $8.6
===== ===== ===== =====
See accompanying notes
REPAP ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Six months ended June 30, 1999 and 1998
(unaudited)
(dollars in millions)
1. Financial Statement Presentation
These condensed consolidated interim financial statements of Repap
Enterprises Inc. ("Repap Enterprises" or the "Company") have been
prepared by management in accordance with accounting principles
generally accepted in Canada ("Canadian GAAP"). These condensed
consolidated interim financial statements are the responsibility of
management and, in its opinion, include all the adjustments, which are
of a normal recurring nature, necessary to a fair statement of the
results for the interim periods presented.
Reference is made to the Notes to the Consolidated Financial
Statements which appear in the Repap Enterprises 1998 Consolidated
Financial Statements, including Note 1 on "Financial Statement
Presentation". The significant accounting policies disclosed therein
apply to these condensed consolidated interim financial statements.
As further described in Note 3, the accounting policies followed by
Repap Enterprises differ in certain respects from those that would have
been followed had these condensed consolidated interim financial
statements been prepared in conformity with the accounting principles
generally accepted in the United States ("U.S. GAAP") and the
accounting principles and practices required by the United States
Securities and Exchange Commission ("SEC").
Basis of financial statement presentation and going concern
assumption
These condensed consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles on
a going concern basis which presumes the realization of assets and
discharge of liabilities in the normal course of business for the
foreseeable future. Repap Enterprises' ability to continue as a going
concern is dependent upon achieving profitable operations and
generating positive cash flow on a sustained basis (See Note 1 to the
1998 Consolidated Financial Statements). The outcome of these matters
cannot be predicted at this time. These condensed consolidated interim
financial statements do not include any adjustments to the amounts and
classifications of assets and liabilities that might be necessary
should Repap Enterprises be unable to continue in business.
2. Inventories
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials and supplies $41.0 $48.7
Work in process 1.0 1.0
Finished goods 24.7 16.8
----- -----
$66.7 $66.5
Raw materials include chemicals, chips and logs used in the
production of pulp, paper and lumber. Work in process and finished
goods include pulp, paper and lumber.
3. Generally Accepted Accounting Principles in the United States
The condensed consolidated interim financial statements have been
prepared in accordance with Canadian GAAP. The following summary sets
out the material adjustments to Repap Enterprises' reported net income
(loss) which would be made in order to conform with U.S. GAAP and the
accounting principles and practices required by the SEC. For
information on the nature of these adjustments, refer to Note 22 of
Repap Enterprises' 1998 Consolidated Financial Statements.
Unaudited
Six Months
Statement of Operations components: Ended June 30,
1999 1998
------ ------
Income (loss) from continuing operations before provision
for accretion in paid-in capital in accordance with
Canadian GAAP. $(22.8) $(46.6)
Earnings adjustments:
Add (deduct):
Reversal of revenue-stream hedge 2.9 2.9
Unrealized gain (loss) on translation of long-term debt 44.5 (24.2)
Interest expense on convertible debentures 0.4 (2.9)
Reversal of amortization of investment tax credits 0.6 0.0
Foreign exchange gain on currency contracts 2.4 0.0
Cost of early redemption of long-term debt 0.0 46.3
----- ------
Income (loss) from continuing operations before effects
of change in accounting principle and discontinued
operations in accordance with US GAAP. 28.2 (24.5)
Income from discontinued operations in accordance with US
GAAP 0.0 17.7
Extraordinary item net of related taxes 0.0 (23.7)
Effects of change in accounting principle (1) (5.2) 0.0
----- -----
Net income $23.0 $30.5
===== =====
(1)The AICPA issued Statement of Position 98-5 which requires that the
cost of start-up activities be expensed as incurred. The new method
of accounting for the costs of start-up activities has reduced start-
up costs of $5.2 million previously included in capital assets. The
initial application of this Statement of Position has been reported
as a cumulative effect of a change in accounting principle.
As at As at
June 30, 1999 December 31, 1998
In accordance In accordance
with GAAP in with GAAP in
Canada U.S. Canada U.S.
------ ------ ------ ------
Balance Sheet components:
Other assets $137.1 $65.8 $187.4 $64.2
Net capital assets 967.0 961.8 980.0 980.0
Accounts payable 103.4 123.6 117.8 119.9
Repayable grants and other liabilities 18.9 35.7 21.0 58.0
Investment tax credits 105.9 137.6 108.3 140.6
Convertible debentures 52.0 66.2 53.1 69.7
Other paid-in capital 15.2 0.0 15.2 0.0
Shareholders' (deficiency) (148.9) (293.1) (110.8) (322.0)
New accounting pronouncements under US GAAP
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement
requires all derivatives to be recorded on the balance sheet at fair
value and provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The
Company is studying the application of this new statement and has not
yet determined the impact, if any, on its consolidated financial
statements. The adoption of this statement is not expected to change
the Company's business practices. As required, the Company plans to
adopt this statement upon its applicable effective date in fiscal 2000.
4. Segmented Information
The Company is organized on the basis of its three primary products:
high quality coated groundwood paper products, northern bleached
softwood kraft pulp and construction grade lumber. The Company has
three reportable segments: paper, pulp and lumber. Summarized
segmented information is as follows:
Information about Segment Operating Profit before
Depreciation and Amortization
For the six-months ended Segment
June 30, 1999 Paper Pulp Lumber Totals
Net sales before intersegment revenues $238.7 $85.6 $9.5 $333.8
Intersegment revenues 0.0 (60.1) 0.0 (60.1)
------ ----- ---- ------
Net sales 238.7 25.5 9.5 273.7
Operating profit before depreciation
and amortization 62.3 3.6 0.8 66.7
Amortization of capital assets and
goodwill 14.3 7.6 0.4 22.3
For the six-months ended Segment
June 30, 1998 Paper Pulp Lumber Totals
Net sales before intersegment revenues $268.3 $85.1 $10.7 $364.1
Intersegment revenues 0.0 (63.1) 0.0 (63.1)
------ ----- ----- ------
Net sales 268.3 22.0 10.7 301.0
Operating profit before depreciation
and amortization 85.1 3.3 1.7 90.1
Amortization of capital assets and
goodwill 13.6 7.4 0.4 21.4
Reconciliation of Reportable Segment Revenues, Segment Profit or Loss
and Segment Assets
For the six-months ended June 30, 1999 1998
------ ------
Net sales $273.7 $301.0
Effects of revenue stream hedging (2.9) (2.9)
------ ------
Consolidated net sales 270.8 298.1
Operating profit before depreciation and
amortization 66.7 90.1
Effects of revenue stream hedging 2.9 2.9
Depreciation and amortization 31.8 31.1
Interest expense 56.5 53.5
Foreign exchange loss (1.8) 3.9
Other expense (revenue) (1.0) 44.0
------ ------
Loss before taxes $(21.7) $(45.3)
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
FINANCIAL REVIEW (IN CANADIAN DOLLARS UNLESS OTHERWISE NOTED)
Repap Enterprises Inc. recorded a net loss of $13.5 million ($0.02
per share) for the second quarter ended June 30, 1999, compared with a
net loss of $49.0 million ($0.07 per share) in the second quarter of
1998. The second quarter of 1998 included one-time refinancing charges
of $46.3 million.
For the six months ended June 30, 1999, Repap reported a loss of
$22.8 million ($0.03 per share) compared to a loss of $31.7 million
($0.05 per share) for the corresponding period in 1998.
Shipments in the Company's three product lines were as follows:
Second Quarter Six Months
1999 1998 1999 1998
---- ---- ---- ----
Coated paper (000 tons) 110 114 227 226
Kraft pulp (000 metric tons) 16 20 39 33
Lumber (mmfbm) 13 16 24 28
Revenues from operations for the second quarter of 1999 were $142.4
million, down 15.6% from revenues of $168.8 million in the second
quarter of 1998 and down 12.5% from revenues of $162.7 million in the
first quarter of 1999. Revenues for the six month period ending June
30, 1999 were $305.0 million, down 8.2% from revenues of $332.1 million
for the same period of 1998. The reduction in revenues is due
primarily to lower prices in all product lines.
- Revenues from coated paper were $266.9 million, down $29.3 million
or 9.9% from the first half of 1998 revenues of $296.2 million,
reflecting mainly the impact of lower pricing resulting from weak paper
markets, offset partially by a weaker Canadian dollar and marginally
higher shipments.
- Revenues from pulp in the first half of 1999 were $28.0 million, up
$3.4 million or 13.8% from the first half of 1998 revenues of $24.6
million, reflecting the impact of higher shipments and a weaker Canadian
dollar, offset in part by lower prices.
- Revenues from lumber were $10.1 million in the first half of 1999,
down slightly from revenues of $11.3 million in the same period of 1998,
reflecting lower shipments, offset partially by higher pricing.
Shipments of coated paper totaled 226,825 tons in the first half of
1999 compared to 225,750 tons for the same period in 1998. The
increase of 1,075 tons represents increased shipments due to a 6%
increase in productivity, offset partially by the negative impact of a
6-day labor strike by the unionized employees of the paper and kraft
pulp mill operations during June 1999, which resulted in lost
production of approximately 8,700 tons of paper and 5,300 metric tons
of kraft pulp. A new 6-year collective agreement was reached between
the Company and the employees, and operations resumed immediately.
Shipments of kraft pulp totaled 39,030 metric tons in the first
half of 1999 compared to 33,365 metric tons for the same period in
1998. The increase of 5,665 metric tons was due mainly to a reduction
in inventories offset, in part, by the impact of the labor strike.
Shipments of lumber totaled 23.7 million foot board measure
("mmfbm") compared to 27.6 mmfbm for the same period in 1998. The
decrease of 3.9 mmfbm related to the negative impact of a 30-day labor
strike by the unionized sawmill employees from mid-June 1999 to mid-
July 1999. A new 4-year collective agreement was signed with the
employees and operations have resumed.
Cost of sales were $192.4 million in the first half of 1999
compared to $194.4 million in the first half of 1998, a decrease of
$2.0 million. The decrease in costs is due mainly to the benefit of
increased productivity and lower costs in the Company's pulp and paper
operations.
Selling, general and administrative expenses decreased by $1.9
million to $14.6 million in the first half of 1999 from $16.5 million in
the same period of 1998, reflecting continued efforts to reduce costs.
Repap Enterprises' operating profit, before depreciation and
amortization, and excluding non-cash currency adjustments, ("EBITDA")
was $27.7 million for the second quarter of 1999 compared to an EBITDA
of $44.9 million in the second quarter of 1998 and to an EBITDA of $39.0
million in the first quarter of 1999. The decrease of $17.2 million
from the second quarter of 1998 reflects the impact of lower prices for
coated paper and pulp, offset partially by higher shipments, the
benefits of increased productivity and lower costs, and a weaker
Canadian dollar.
Repap's EBITDA for the first six months of 1999 was $66.7 million,
compared to $90.1 million for the same period in 1998. The decrease of
$23.4 million is due primarily to lower pricing for paper and pulp,
offset partially by higher shipments, increased productivity and lower
costs.
Depreciation and amortization increased by $0.7 million to $31.8
million for the six months ending June 30, 1999 from $31.1 million in
the corresponding quarter of 1998. The increase is due primarily to
higher amortization of deferred foreign exchange losses on long-term
debt, resulting from a weaker Canadian dollar.
Interest expense in the first half of 1999 was $56.5 million compared
to $53.5 million in the same period of 1998, reflecting higher
borrowings.
Liquidity and Capital Resources
Repap Enterprises generated $12.5 million in cash from operations
in the first half of 1999 compared to a cash generation of $34.5 million
in the first half of 1998. Non-cash working capital changes used cash
of $1.5 million in the first half of 1999 compared to a use of cash of
$20.0 million for the same period in 1998. The cash generated from
operations after working capital in the first half of 1999 was used
primarily to finance capital expenditures of $12.9 million.
On May 28, 1998, the Company's wholly-owned subsidiary, Repap New
Brunswick Inc., ("Repap New Brunswick") completed a US$100 million,
11 1/2%, Senior Secured Note financing, secured by trade receivables,
inventories and the fixed assets of Repap New Brunswick's Blackville
sawmill. The net proceeds of the financing were used to terminate and
repay in full all amounts outstanding under Repap New Brunswick's
revolving credit facility and to provide increased liquidity. Cash on
hand at June 30, 1999 totaled $65.2 million in Repap New Brunswick. In
addition, Repap Enterprises had cash on hand of $7.1 million at June 30,
1999.
During the second quarter of 1999, the Company had total debt
servicing requirements of $46.7 million, of which $45.3 million was
interest and $1.4 million was principal. During the third quarter of
1999, the Company has debt servicing requirements of approximately $7.7
million, of which $6.2 million is interest and $1.5 million is
principal.
Coated Paper Outlook
Repap's June 30, 1999 coated paper inventories were at 22,000 tons,
or 20 days supply. They were up 4,500 tons from March 31, 1999
inventories of 17,500 tons. A portion of this increase (2,000 tons) was
planned and the balance was due to timing.
Industry mill inventories of coated groundwood paper were at
approximately 218,000 tons at the end of May, up somewhat from March 31,
1999.
Reported buyer inventories were at 587,000 tons at the end of May,
1999, down 30,000 tons from the prior month and compared to a peak of
747,000 tons in July 1998.
Coated groundwood shipments from U.S. producers were down 4.6%
through May versus the same period last year. Purchases during that
period were down 6% reflecting depletion of inventory, continued grade
substitution and market related downtime by several mills.
Since June 1999, order activity has strengthened resulting in increasing
order backlogs. The Company's order book for the third quarter is
essentially full, as it enters a traditionally strong advertising
season. Coated paper prices, which have been declining for about one
year, appear to have bottomed in the second quarter. There can be no
assurances that prices will not continue to decline nor that there will
be any increase in the future.
Year 2000 Computer Issue
The Company, as well as its customers, suppliers, the financial
institutions and governmental entities with which it deals
(collectively, "third parties"), utilize information systems that will
be affected by the date change to the year 2000. Many of these systems,
if not modified or replaced, will be unable to properly recognize and
process date-sensitive information before, on and after January 1, 2000.
State of Readiness
In 1997, the Company formalized its Year 2000 preparation efforts
by appointing a project team consisting of management, operations and
information systems personnel. Their mandate was to assess the impact
of Year 2000 issues on the Company's operations, develop plans to
address the issues and implement compliance. The project team also
developed plans to gather information to assess the Year 2000
compliance status and remediation efforts of major third parties.
Repap's information systems consist of business information and process
control systems. The business information systems support financial
and administrative processes such as customer order management and
product tracking, maintenance and materials management, personnel,
payroll, accounts payable, accounts receivable and general ledger. The
process control systems are used primarily in manufacturing operations;
they include information technology systems as well as embedded
technology, such as chips in various machine components. With respect
to the business information systems, the inventorying of computers and
the analysis of compliance have been completed. The Company has
elected to replace non-compliant information systems for customer order
management and process information history ("data historian"). The
customer order system became operational in July 1999, and, while no
assurances can be given, the data historian is expected to be completed
in the third quarter. The programming and testing of most other
information systems has been completed. With respect to the process
control systems, Repap has completed the inventorying of its control
systems as well as remediation of its main control systems. Repap
expects to complete comprehensive testing to confirm its remediation
work by October 1999. This schedule assumes timely assistance by the
vendors of certain systems in the remediation of those systems. The
vendors of those systems that are essential to the Company's operations
have provided or agreed to provide the necessary assistance.
The Year 2000 issue also will impact the information systems of
third parties. The Company, through meetings in some cases and written
requests in others, is in the process of seeking to ascertain and
assess the progress of major third parties in identifying and
addressing problems with respect to Year 2000 issues. Many of these
third parties have indicated that they expect to successfully address
the issue in a timely fashion. Some others, however, have not yet
provided information regarding their state of readiness or have
provided responses deemed unsatisfactory by the Company. Repap will
continue to seek and to assess information regarding Year 2000
compliance by major third parties.
Estimated Cost of Remediation
Repap currently estimates total expenditures of approximately $6
million of which approximately $4.914.94.94 million has been expended
as of June 30, 1999, to make the required Year 2000 modifications and
replacements to its own systems. All of these costs are being funded
through internal cash flow or vendor financing. The estimated total
cost does not include any expenditures that may be incurred in
connection with the implementation of contingency plans, discussed
below.
Risks to the Company of Non-Compliance
The Company currently believes that it will be able to modify or
replace its own affected systems in a timely fashion so as to minimize
detrimental effects on its operations, subject to timely assistance by
the vendors of certain process control systems. Repap has received
written assurances regarding Year 2000 compliance from some, but not
all, third parties with respect to their own systems and is not in a
position to reliably predict whether third parties will experience
remediation problems. If the Company or major third parties fail to
successfully address the Year 2000 issue, there could be a material
adverse impact on the business and results of operations of the
Company. For example, while the Company self-generates approximately
31% of its electrical power requirements, it purchases the balance from
outside sources. If the electrical power grid is disrupted as a result
of Year 2000 systems failures, the Company might have to curtail
production until the grid is restored. If the Company or a major third
party fails to successfully address these issues the Company may have
to take steps that could adversely and temporarily impact its ability
to produce product, process orders and deliver finished products to
customers on a timely basis. In the event of Year 2000 disruptions in
the operations of the Company's customers, the Company may experience
increased levels of inventories and receivables.
Contingency Plans
To date, the Company's Year 2000 efforts have been devoted
primarily to the readiness program described above. Repap has not yet
developed contingency plans to address and mitigate the potential risks
associated with the most reasonably likely worst-case scenario. Repap
expects to have such plans in place by October 1999. Such plans may
include, among other things, seeking alternative sources of supply,
stockpiling raw materials and increasing inventory levels. Repap's Year
2000 program is an ongoing process. Estimates of remediation costs and
completion dates as well as projections of the possible effects of any
non-compliance are subject to change.
Forward-looking statements in this report are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are not guarantees of future
performance or events and are subject to risks and uncertainties that
could cause actual results and company plans and objectives to differ
materially from those expressed in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, changes in the
United States and international economies; changes in worldwide demand
for the company's products; changes in worldwide production and production
capacity in the forest products industry; competitive pricing pressures
for the company's products; changes in raw material, energy, and other
costs; and currency fluctuations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Currency
The profitability level of Repap's Canadian operations is sensitive
to fluctuations in foreign exchange rates as most of their revenues are
derived in US dollars. A US$0.01 variation in exchange rates affects
Repap's cash flow by approximately $3.8 million. The competitiveness of
Repap's operations in world markets depends on the relative strength of
the currency in the countries of competitive producers. Repap actively
hedges its future revenue streams to protect against foreign exchange
exposure with the use of forward contracts of varying terms not normally
exceeding one year. The objective of the hedging program is to manage
the risk of adverse cash flow due to fluctuations in foreign currencies
against the Canadian dollar. The percentage of transaction exposure
hedged is generally between 20 percent and 80 percent, after taking into
account the amounts of US dollars required under Repap's revenue-stream
hedging practices.
At June 30, 1999, essentially all of Repap's consolidated
borrowings of approximately Cdn.$1.2 billion were in US dollars.
Repap is naturally hedged against the exchange risk associated with
holding US dollar debt because most of Repap's products are sold in US
dollars. Repap has chosen to issue primarily US dollar denominated debt
because of this natural hedge and to take advantage of interest rates
available on US dollar denominated debt which have, at times, been
significantly less than corresponding rates on Canadian dollar-
denominated debt.
Accordingly, effective July 1, 1992, Repap designated future US
dollar revenue streams as effective hedges against currency risks
related to US dollar debt borrowings. Designation of revenues as a
hedge results in exchange gains and losses on debt being deferred
without amortization until repayment. At maturity, any exchange
adjustment is included with revenues, recognizing that Repap has
realized equal and offsetting exchange adjustments in the period the
debt is repaid.
Revenues in the six months ending June 30, 1999 were reduced by
$2.9 million as a result of the application of this accounting method.
As at December 31, 1998, approximately $43.4 million of hedged currency
exchange losses remained on the balance sheet, and are expected to
reduce revenues by the following non-cash currency exchange adjustments:
Revenue reduction resulting from non-cash currency adjustments
Year (dollars in millions)
1999 $ 5.7
2000 22.4
Thereafter 15.3
Total $43.4
In April 1995, Repap and Repap New Brunswick refinanced the
majority of their US dollar long-term debt with US dollar denominated
senior secured notes issued by Repap New Brunswick. However, the
revenue streams which had been identified as an effective hedge in
connection with scheduled US dollar principal repayments on the old debt
continue to constitute an effective hedge against accumulated exchange
losses at the time of refinancing, as it remains highly likely that such
revenue streams will be earned as anticipated in the relevant future
periods.
Under generally accepted accounting principals in the United States
("US GAAP"), any change in the currency fluctuations is immediately
recognized in income. The total amount of the above-mentioned non-cash
currency adjustments to future revenues has already been charged to
income under US GAAP. Accordingly, any reduction in revenues and income
of future years resulting from these currency adjustments under Canadian
GAAP will be added back in the reconciliation of revenues and income
under US GAAP. (See Note 22 to the Company's Consolidated Financial
Statements).
Interest Rates
The Company's variable-rate debt from continuing operations,
totaling US$120 million, is subject to fluctuations in Canadian, US and
LIBOR lending rates. A 1% change in interest rates affects Repap's cash
flow by approximately US$1.2 million.
Environmental Concerns and Regulations
The forest products industry is subject to evolving environmental
legislation, regulations and standards from various levels of
governments which impose effluent and emission standards and other
requirements on Repap's operations. Future capital investments may be
required to meet legislation, regulations and standards as they evolve.
In addition to regulatory pressure, market pressures may influence
product evolution. Repap's ability to continue to address changing
market needs could require additional capital investments as well as
additional investments in product and process development.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 1999, Mr. F. Steven Berg filed a summons with the
Supreme Court of the State of New York in the County of New York
seeking a declaratory judgement that his employment agreement is a valid
and binding corporate obligation of the Company. On July 7, 1999 the
summons and the related complaint were served upon the Company. The
Company is taking advice of counsel with respect to such action. At
present, the Company is due to respond to Mr. Berg's complaint on or
before August 20, 1999.
In the spring of 1999, certain shareholders of the Company
expressed concern over Mr. Berg's employment contract with the Company.
In a notice to shareholders published in the financial press on June 11,
1999, TD Asset Management Inc. and EQSF Advisors, Inc., which acts as
advisor to Third Avenue Value Fund and to Third Avenue Small Cap Value
Fund (the "dissident shareholders") advised of their intention to
nominate and vote for an alternative slate of directors at an annual
and special meeting of the shareholders of the Company originally
scheduled for June 18, 1999. On June 23, 1999, the dissident
shareholders received written communication from the existing directors
with the exception of Messrs. Larson and Berg, indicating their
willingness to resign in the event that shareholders holding a
significant number of shares of the Company so desired. On June 25,
1999, the existing directors, with the exception of Messrs. Larson and
Berg, resigned in favor of nominees of the dissident shareholders. The
new Board of Directors then formed an Independent Committee of the
Board comprised of all directors with the exception of Messrs. Berg
and Larson. The mandate of the Independent Committee is to investigate
the circumstances surrounding the negotiation and approval of Mr.
Berg's employment agreement and to make a recommendation to the Board
of Directors with respect thereto. The Independent Committee is
actively pursuing its mandate with a view to determining the facts and
resolving the issues between the Company and Mr. Berg in an expeditious
manner.
If the employment agreement is determined to be a valid and
binding obligation of the Company, grounds do not exist to set it
aside and Mr. Berg is not found to be in breach of the agreement,
then the Company would incur substantial financial obligations to Mr.
Berg in the event that he is not elected by the shareholders as a
director at the Annual Meeting of Shareholders to be held on August
16, 1999. The Board of Directors, however, has concluded that Mr.
Berg does not have the support of management or of the shareholders
of the Company and, accordingly, has determined not to nominate him
for election as a director at such Meeting.
Item 2. Changes in Securities and Use of Proceeds.
No material changes to the constituent instruments defining the
rights of the holders of any class of registered securities have
occurred during the second quarter of fiscal 1999.
Item 3. Defaults Upon Senior Securities.
No material defaults upon senior securities have occurred during
the second quarter of fiscal 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
second quarter of fiscal 1999.
Item 5. Other Information.
N/A
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
No. Description
11.1 Statement re Computation of per Share Earnings
27 Financial Data Schedule
b) Reports on Form 8-K.
No current Report on Form 8-K was filed by the Company during
second quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
REPAP ENTERPRISES INC.
Registrant
Date: August 10, 1999 /s/ Michelle A. Cormier
Michelle A. Cormier
Vice President, Finance
EXHIBIT INDEX
Exh. 11.1 Statement Re: Computation of per Share Earnings
Exh. 27 Financial Data Schedule
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(dollars in millions of Canadian dollars)
(shares in millions)
Six Months
ended June 30,
--------------
1999 1998
---- ----
BASIC
Average shares outstanding 743.5 742.5
Income (loss) from continuing operations (22.8) (49.5)
Net Income (loss) attributable to common shareholders (22.8) (31.7)
Basic earnings (loss) from continuing operations
per share (0.03) (0.07)
Basic earnings (loss) per share (0.03) (0.04)
DILUTED (1)
Average shares outstanding 743.5 742.5
Stock options granted 55.6 63.2
Assumed conversion of convertible debentures 0.0 0.0
- -----------------------------------------
(1) Diluted earnings per share are not computed as the effect of the
conversions of convertible debentures and the exercise of stock
options are antidilutive. The convertible debentures are
convertible at US$0.35 per common share.
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