UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934:
For the fiscal year ended December 31, 1998
Commission File No. 0-16289
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
REPAP ENTERPRISES INC.
(Exact name of Registrant as specified in its charter)
CANADA 98-0178526
(State or other Jurisdiction of (I.R. S. Employer Identification No.)
incorporation or organization)
300 Atlantic Street, Suite 200 06901
Stamford, Connecticut
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 964-6160
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common shares
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
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common shares held by non-affiliates of the
registrant as of March 29, 1999 was $47,221,088.10. As of March 29, 1998,
there were 768,460,637 Common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 1998 Annual Report to Shareholders is incorporated by reference
into Parts I, II and IV of this report. The Registrant's Management Proxy
Circular for the 1999 Annual Meeting of Shareholders is incorporated by
reference into Part III of this report. Only those sections of the Annual Report
to Shareholders and the Management Proxy Circular referred to in Parts I, II,
III and IV are deemed "filed" as part of this Form 10-K report.
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FORM 10-K Table of Contents
PAGE
EXCHANGE RATES 4
PART I
- --------------------------------------------------------------------------------
1. Business................................................................6
(a) General Description of Business................................6
(b) Financial Information about Industry Segments..................8
(c) Principal Products.............................................8
(d) Customers......................................................9
(e) Raw Materials.................................................10
(f) Human Resources.............................................. 10
(g) Research and Development......................................11
(h) Environment ..................................................11
(i) Executive Officers of the Registrant..........................11
2. Properties.............................................................12
3. Legal Proceedings......................................................12
4. Submission of Matters to a Vote of Security Holders....................13
PART II
- --------------------------------------------------------------------------------
5. Market for Registrant's Common Equity and
Related Stockholder Matters............................................14
6. Selected Financial Data................................................15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................16
7A. Quantitative and Qualitative Disclosures About Market Risk.............16
8. Financial Statements and Supplementary Data............................16
9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure.................................16
PART III
- --------------------------------------------------------------------------------
10. Directors and Executive Officers of the Registrant.....................17
11. Executive Compensation.................................................17
12. Security Ownership of Certain Beneficial Owners and Management.........17
13. Certain Relationships and Related Transactions.........................17
PART IV
- ------------------------------------------------------------------------------
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......18
(a)(1) Documents.....................................................18
(2) Financial Statement Schedules.................................18
(3) Exhibit Index.................................................18
(b) Reports on Form 8-K...........................................23
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EXCHANGE RATES
Repap Enterprises Inc. publishes its consolidated financial statements in
Canadian dollars. In this annual report, unless otherwise specified or the
context otherwise requires, all dollar amounts are expressed in Canadian dollars
("$", "Cdn.$", "dollars" or "Cdn. dollars").
The Government of Canada permits a floating exchange rate to determine the value
of the Canadian dollar against the United States dollar ("U.S.$" or "U.S.
dollar"). The exchange rates at the end of each of the five years ended December
31 and the average, the high, and the low exchange rates, being the noon buying
rates in New York City for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York expressed in U.S.
dollars, for each of those periods were as follows:
U.S.$ per Cdn.$
---------------
December 31,
Years Ended
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
At end of year(1) .6552 .6997 .7301 .7323 .7128
Average for year(2) .6830 .7222 .7226 .7305 .7300
High for year .6822 .7496 .7513 .7527 .7628
Low for year .6341 .6945 .7235 .7023 .7103
- ------------------------------------
(1) Noon buying rate on last banking day
(2) Based on the average of the daily buying rates during the year.
On March 26, 1999, the U.S.$ exchange rate was U.S.$0.6607 per Cdn.$1.00.
Forward-Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical facts included in this Form 10-K , including, without limitation, the
statements under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations", Item 1 "Business" and located elsewhere
herein regarding industry prospects, the Corporation's prospects and the
Corporation's financial position are forward-looking statements. Although the
Corporation believes that the expectations reflected in those forward-looking
statements are reasonable, there can be no
4
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assurance that those expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
Corporation's expectations include, without limitation, general economic
conditions, changes in the coated paper, pulp or lumber environment, changes in
customer budgets, unusual weather patterns, competition from existing and
potential competitors, pricing pressures and the cost of labor, supplies and
other costs and expenses, and other factors disclosed in this Form 10-K (the
"Cautionary Statements"). All subsequent written and oral forward-looking
statements attributable to the Corporation or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
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PART I
Item 1. Business.
(a) General Description of Business
-------------------------------
Repap Enterprises Inc. (the "Corporation") was incorporated under the laws of
Canada on January 9, 1963 and was continued under the Canada Business
Corporations Act on April 9, 1980. The Corporation, together with its
subsidiaries (collectively "Repap"), currently carries on business as a North
American coated groundwood paper company. Repap's coated paper operations
consist of a fully integrated coated groundwood paper facility located in
Miramichi, New Brunswick, Canada that is owned by the Corporation's wholly owned
subsidiary, Repap New Brunswick Inc. ("Repap New Brunswick"), a Canadian
corporation.
Prior to 1998, the Corporation's assets included a pulp mill and three sawmills
in British Columbia, an unbleached pulp and Kraft paper mill and sawmill in
Manitoba and coated paper mills in Wisconsin and New Brunswick. During 1997, the
British Columbia, Manitoba and Wisconsin operations were sold or otherwise
disposed of and no longer form part of the ongoing operations of the
Corporation. As of December 31, 1997, Repap's only production facilities were in
New Brunswick. Repap has its executive offices and sales headquarters in
Connecticut.
Repap New Brunswick's coated paper mill produces coated groundwood paper with an
annual capacity of 492,000 tons. The New Brunswick coated paper mill is
integrated with a Kraft pulp mill which has an annual capacity of 235,000 metric
tons ("metric tons") of northern bleached softwood Kraft ("NBSK") pulp and a
groundwood pulp mill which has an annual capacity of 123,000 metric tons of
groundwood pulp. Repap New Brunswick also operates two sawmills with an annual
production capacity of 58 Mmfbm (million foot board measures). The coated paper
operations of Repap New Brunswick are ISO 9002 certified.
In May 1996, the Board of Directors of Repap retained financial advisors to
assist it in identifying strategic alternatives available to Repap, including a
sale or merger. During this process Repap British Columbia Inc. a wholly owned
subsidiary of the Corporation sought protection from its creditors under the
Companies' Creditors Arrangement Act (Canada) and the Corporation's interest in
that subsidiary was surrendered to Repap British Columbia Inc.'s secured
lenders. The strategic alternatives program culminated in the sale in 1997 of
the Corporation's unbleached pulp and Kraft paper mill and sawmill in Manitoba
and its coated paper mill in Wisconsin. The net proceeds of these sales,
approximately $35 million and US$227 million, respectively, were used to repay
indebtedness of the Corporation, to invest in Repap New Brunswick and for
general corporate purposes.
On August 1, 1997 the Corporation repaid all of its 8.5% Convertible Debentures
due on that date by issuing 619,023,800 Common shares to the holders of its 8.5%
Convertible
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Debentures. At the same time as these shares were issued, the resignations of
the Chief Executive Officer and the Chief Financial Officer as directors and
officers of the Corporation were sought and received. Also at that time, six of
the Corporation's remaining directors resigned. Mr. Stephen C. Larson, the
Corporation's President and Chief Operating Officer, was appointed the
Corporation's President and Chief Executive Officer. Mr. William J. Anderson, a
director of Silverton International Fund Limited, the Corporation's single
largest shareholder, became the Chairman of the Corporation. Mr. Anderson,
together with Mr. Robert Poile and Mr. David McAusland, were appointed directors
of the Corporation.
On February 20, 1998 the Corporation sold to Tembec Inc. all of the issued and
outstanding shares in the capital of Alcell Forest Products Inc., the subsidiary
which acquired a 125,000 tonne-per-year magnesium-bisulphite Pulp Mill in
Atholville, New Brunswick from Noranda Forest Inc. in December 1994. The
purchase price was $1 million in cash and 10,000 6.75% redeemable Class B shares
in the capital of AV Cell Inc., the acquiring corporation formed as a joint
venture between Tembec Inc. and the Aditya Birla Group. At the same time the
Province of New Brunswick released the Corporation from its obligation to
provide recourse to the Province on the province's $37 million guarantee of
Alcell Forest Products Inc.'s bank debt. As consideration for this release, the
Corporation transferred to the Province the 10,000 Class B shares, paid the
Province $12 million and issued to the Province a $5 million promissory note due
2013.
On May 15, 1998, the Corporation issued a US$45 million 6% convertible
subordinated debenture due 2005 to Enron Capital & Trade Resources Corp.
("ECT"). The net proceeds from this issue together with approximately $15
million of the Corporation's general funds were used to redeem the Corporation's
$75 million 9% convertible subordinated debentures due June 30, 1998. At the
same time Repap New Brunswick and ECT entered into three agreements, namely, a
pulp agency agreement whereby Repap New Brunswick appointed ECT its exclusive
agent for the marketing and sale of its market pulp; an energy advisory service
agreement whereby ECT was to provide Repap New Brunswick with energy advisory
services and be compensated based upon the savings generated from the advise
given; and an International Swap Dealers Association, Inc. Master Agreement.
On June 4, 1998, Repap New Brunswick completed the issuance of US$200 million
aggregate principal amount of its 9% First Priority Fixed Rate Senior Secured
Notes due 2004 and the incurrence of US$120 million in Floating Rate Senior
Secured Loans due 2004. The net proceeds from these notes and loans were used to
fund a tender offer for Repap New Brunswick's 9 7/8% First Priority Fixed Rate
Senior Secured Notes due 2000 and its First Priority Floating Rate Senior
Secured Notes due 2000. Substantially all of the 9 7/8% First Priority Fixed
Rate Senior Secured Notes due 2000 and all of the First Priority Floating Rate
Senior Secured Notes due 2000 were tendered pursuant to this offer. The 9% First
Priority Fixed Rate Senior Secured Notes due 2004 were exchanged on September
16, 1998 for US$ 200 million 9% First Priority Fixed Rate Senior Secured Notes
due 2004 that have been registered under the Securities Act of 1933.
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The Corporation has been unsuccessful in its attempts to sell its wholly owned
subsidiary, Alcell Technologies Inc., which owns a research and development
solvent pulping facility located adjacent to Repap New Brunswick's Kraft pulp
mill. This facility has been shut down since April 1996 and is carried on the
books of the Corporation at nil value. The Corporation has ceased its efforts to
sell this subsidiary and has permanently closed the operations. The Corporation
has no liability for the amounts owed by Alcell Technologies Inc. to Industry
Canada. The Corporation's research and development efforts, which have
previously been conducted by Repap Technologies Inc., are now performed by Repap
New Brunswick at rented facilities in Miramichi.
On December 31, 1998, the Corporation declined to proceed with the amalgamation
between itself and its wholly owned subsidiary Repap New Brunswick.
On February 8, 1999 the Shareholder Protection Rights Plan adopted by the
Corporation in 1994 expired. On February 22, 1999, the Corporation's board of
directors decided against requesting the shareholders to adopt a new plan with
the same or similar terms on the basis that such plans are perceived as an
effort to protect current management and discourage potential acquirers of the
Corporation.
(b) Financial Information about Industry Segments and Geographic Segmentation
-------------------------------------------------------------------------
For certain financial information for each of the industry segments during the
three years ended December 31, 1998, and for certain information regarding
geographic segmentation, see note 19 to the Notes to Consolidated Financial
Statements contained in the Corporation's 1998 Annual Report attached hereto as
Appendix A and filed herewith as an exhibit, which Consolidated Financial
Statements are incorporated herein by reference.
(c) Principal Products
------------------
Coated Paper
Coated groundwood paper is used primarily for magazine publishing and is also
used by commercial printers for catalogues, inserts and flyers where cost and
weight considerations are critical. Repap New Brunswick produces a variety of
grades and weights of lightweight coated groundwood paper on two machines at its
Miramichi, New Brunswick mill site. Repap New Brunswick's shipments represent
approximately 9% of North American coated groundwood paper capacity.
Pulp
The Repap New Brunswick operations include two pulp mills: a fully integrated
groundwood pulp mill with an annual capacity of 123,000 metric tons; and a Kraft
pulp mill with an annual capacity of 235,000 metric tons of northern bleached
softwood Kraft pulp. All of the groundwood pulp and approximately two-thirds of
Kraft pulp is used in Repap New Brunswick's coated paper operations. The
remaining approximately one-third of the Kraft pulp mill's production is sold to
the market, primarily to customers in North America.
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Lumber
Repap New Brunswick's lumber operation consists of two sawmills with a combined
annual capacity of 58 Mmfbm of dimension lumber. On-site kilns provide the
capacity to dry 50% of lumber production. The two sawmills also provide wood
chips for the Repap New Brunswick Kraft pulp mill.
Markets
Repap's products are sold primarily in the United States and Canada with a
relatively small volume of coated paper and pulp sold in off-shore markets.
Sales of coated paper in the United States are made through Repap Marketing
Inc., a wholly owned subsidiary. Sales in Canada are made directly by Repap New
Brunswick and off-shore sales are made by international agents. Pulp sales are
made by ECT under a five year pulp agency agreement. Lumber sales are made
either directly or through brokers.
Competition
Repap competes in North America with North American and European coated paper
producers. Approximately 8-10% of the North American coated groundwood paper
market is supplied by European producers. Repap, the fifth-largest coated
groundwood paper producer in North America, has approximately 9% of the North
American coated groundwood paper capacity. Significant competitors of the
Corporation with similar or greater capacity in coated groundwood paper include
Consolidated Papers, Inc., Champion International Corporation, International
Paper Co., Mead Corporation, UPM Kymmene and Bowater Incorporated. Coated
groundwood paper also competes with other grades of paper such as coated
freesheet and supercalendered paper. Price, quality and service are important
competitive considerations.
Repap's pulp and lumber products are global commodities. Pricing and the level
of shipments are influenced by the supply and demand for those products which in
turn is influenced by inventory levels, exchange rates and economic conditions.
(d) Customers
---------
During 1998, Repap sold approximately 107,000 tons of lightweight coated
groundwood paper to WWF Paper Corporation representing in excess of 20% of the
Corporation's consolidated revenues. WWF Paper Corporation is a privately owned
North American paper distributor in which the Corporation has a preferred share
investment.
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(e) Raw Materials
-------------
Approximately 44% of the wood supply for the Repap New Brunswick operations is
obtained from Crown timber allocations licensed by the Province of New Brunswick
to Repap under the "Lower Miramichi Licence" and the "Upper Miramichi Licence".
The remaining wood is acquired from third parties under various supply
agreements or harvested from land owned by Repap New Brunswick.
Repap New Brunswick has approximately 300,000 hectares under the Lower Miramichi
Licence and approximately 400,000 hectares under the Upper Miramichi Licence
representing a combined allowable annual cut ("AAC") of 1.2 million cubic
metres. The lands cover areas in the northeastern part of New Brunswick in
proximity to the pulp mills. The species mix available from these licences
consists primarily of spruce and balsam fir.
These forest licences were granted by the Province of New Brunswick for 25-year
terms and are governed by forest management agreements which provide that every
five years, in order for such agreements to remain in effect, Repap is required
to submit for approval a renewed five-year plan for management of the licensed
tenures. Repap New Brunswick's forest licences expire in 2017, however, in 1997,
Repap New Brunswick submitted a forest management plan for the five-year period
ending in 2002 and for a new 25-year period ending in 2022. This plan has been
approved and, subject to the Repap New Brunswick completing some additional
silviculture on its Crown Timber License area, will be incorporated into an
amended and restated forest management agreement for a term ending in 2022.
Additional wood requirements are met by purchases of wood from local wood lot
suppliers and of chips from local sawmills. Repap New Brunswick also obtains
wood from its own freehold acreage aggregating approximately 17,000 hectares
representing an AAC of 35,000 cubic metres.
(f) Human Resources
---------------
Repap has approximately 1,650 employees as at March 29, 1999. At Repap New
Brunswick, approximately 1,340 unionized employees are represented by three
labour organizations, namely: International Woodworkers of America-Canada
("IWA"); Communications, Energy and Paperworkers of Canada ("CEP"); and United
Brotherhood of Carpenters and Joiners of America "(UBJC"). Five CEP Local
contracts involving approximately 1,110 employees and one UBJC contract covering
approximately 80 employees expired in 1998 and will be renegotiated in 1999. The
IWA contract which covers 26 employees at the Miramichi sawmill expires May 31,
1999. One CEP contract covering 64 employees was renegotiated in 1997 and
expires April 30, 2000.
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(g) Research and Development
------------------------
Repap Technologies Inc., a wholly owned subsidiary of the Corporation, provided
technical assistance to Repap's coated paper and pulp mills through its research
facilities in Valley Forge, Pennsylvania. This function was moved to Miramichi,
New Brunswick as of January 1999 and is now performed by Repap New Brunswick. As
of April 1, 1999, Repap Technologies Inc. will be merged into Repap Marketing
Inc., a wholly owned subsidiary of the Corporation.
(h) Environment
-----------
Repap is subject to environmental laws, regulations and standards by Canadian
federal, provincial and local authorities which impose effluent and emission
standards and other requirements of the Company's operations. These laws and
regulations require Repap to obtain permits and licences from appropriate
governmental authorities with respect to its mill and to operate its mill in
compliance with such permits and licences. Repap believes it operates in
material compliance with all applicable environmental laws and regulations.
Repap New Brunswick has begun a program to eliminate substantially the release
of foul condensate containing total reduced sulphur compounds. This program is
expected to be completed in 1999 at an approximate cost of $9 million. In
addition, Repap New Brunswick is in the process of replacing its existing
landfill site at an approximate cost of $5.4 million. The new facility is
expected to be completed in the third quarter of 1999. An application by Eel
Ground Native Band before the Court of Queen's Bench for the Province of New
Brunswick for an interim injunction seeking to prevent the development of the
new landfill site was unsuccessful. The Eel Ground Native Band has indicated its
intention to proceed to trial although no dates have been set.
(i) Executive Officers of the Registrant
------------------------------------
The Corporation's executive officers and significant employees are as listed
below:
Name Age Principal Occupation
--- --------------------
F. STEVEN BERG 63 Chairman and Senior Executive
Officer
STEPHEN C. LARSON 50 President and Chief Executive
Officer
MICHELLE A. CORMIER 42 Vice-President, Finance
NEIL M. FALCO 50 President, Repap Marketing Inc.
TERRY W. McBRIDE 56 Vice-President and Secretary
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During the past five years, the above individuals have held those positions with
the companies indicated opposite their names, except as follows: prior to
January 27, 1999, Mr. Berg served, and continues to serve, as president of
Bishopsgate Financial Corp. and as a member of Mahoney & Berg; from August 1991
to October 1994, Mr. Larson served as President - Pulp and Paper Group of Domtar
Inc., between October 1994 and March 1, 1996 he served as President and Chief
Operating Officer of Domtar Inc. and from March 1, 1996 to August 1997 he served
as President and Chief Operating Officer of the Corporation; prior to October 1,
1997, Mr. Falco served as President of Repap Sales Corporation, a subsidiary of
Repap that was sold as part of the transaction with Consolidated Papers, Inc.
completed in 1997; from January 1993 to May 1994, Ms. Cormier served as Manager,
Finance of the Corporation, from May 1994 to January 1996 she served as
Assistant Vice President, Finance of the Corporation and from January 1996 to
August 1997 she served as Vice President, Finance-Operations of the Corporation.
Item 2. Properties.
The Repap New Brunswick operations consist of the Repap New Brunswick coated
paper mill, the Repap New Brunswick Kraft pulp mill, the Repap New Brunswick
groundwood pulp mill and the Miramichi sawmill (all which are located in
Miramichi, New Brunswick) and the Blackville sawmill (which is located 45
kilometers west of Miramichi, New Brunswick).
(i) The Repap New Brunswick Coated Paper Mill includes two coated paper
machines. The A-1 machine, built in 1985/86, has a design capacity of 240,000
tons per year and produces lightweight coated groundwood paper. The A-2 machine,
built in 1989, has a design capacity of 252,000 tons and produces coated
groundwood paper.
(ii) The Repap New Brunswick Kraft Pulp Mill, acquired by Repap in 1985, has
an annual design capacity of 235,000 metric tons of NBSK pulp, of which
approximately two-thirds are used in Repap New Brunswick's Coated Paper Mill,
with the balance sold as market pulp.
(iii) The Repap New Brunswick Groundwood Pulp Mill manufactures stone
groundwood pulp, with a capacity of 123,000 metric tons per year. All of the
available groundwood pulp produced by the Repap New Brunswick groundwood pulp
mill is used in the coated paper operations.
(iv) The Miramichi sawmill (formerly the Nelson sawmill) produces stud lumber
for the North American market and has an annual capacity of 10 Mmfbm. The
Blackville sawmill produces dimension lumber for the North American market and
has a capacity of 48 Mmfbm.
Item 3. Legal Proceedings.
There are no material legal proceedings and there are no proceedings under any
environmental protection laws, which are pending or, to the Corporation's
knowledge, threatened, against Repap.
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Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 29, 1999, there were 1789 holders of record of Common shares, of
which 1211 were shareholders of record with addresses in the United States
holding approximately 48% of the outstanding common shares in the capital of the
Corporation. There is no established public market for the Common shares in the
United States. The Common shares of the Corporation are listed and traded in
Canada on the Montreal Exchange and The Toronto Stock Exchange. The following
tables show the high and low prices and volume of trading of the Common shares
on The Toronto Stock Exchange which is the principal trading market in Canada:
TSE
---
High Low Volume
---- --- ------
1997
- ----
First Quarter $ 4.20 $ 1.45 35,637,612
Second Quarter 1.73 0.50 38,812,144
Third Quarter 0.72 0.16 172,461,712
Fourth Quarter 0.28 0.10 192,330,631
1998
- ----
First Quarter $ 0.29 $ 0.165 103,435,266
Second Quarter 0.395 0.22 89,244,547
Third Quarter 0.27 0.12 17,839,240
Fourth Quarter 0.15 0.08 135,616,225
On March 29, 1999 the closing price of the Common shares on The Toronto Stock
Exchange was $0.10.
The Corporation has paid no dividends to holders of Common shares in the past
five years. The Corporation currently intends to retain any earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future.
The following summary of certain tax provisions is applicable to the purchase,
ownership and disposition of Common shares by United States corporations,
citizens and resident alien individuals that are residents of the United States
for purposes of the United States-Canada income tax treaty (the "Treaty") ("U.S.
Persons") and is based on the assumption that a holder of Common shares is, for
Canadian tax purposes, neither a resident of Canada nor carrying on business in
Canada and does not own 10% or more of the voting stock of the Corporation. This
summary does not deal with all aspects of United States federal taxation that
may be relevant to particular investors.
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Dividends paid to U.S. Persons on Common shares will be subject to Canadian
non-resident withholding tax at the Treaty-reduced rate of 15%. For United
States federal income tax purposes, a U.S. Person generally will include in
gross income the gross amount of any dividends paid before reduction for
Canadian withholding taxes by the Corporation out of its current and accumulated
earnings and profits (as determined for United States federal income tax
purposes), as ordinary income upon the U.S. Person's receipt of distributions on
the Common shares. The amount of a dividend distribution includible in income of
a U. S. Person will be the U.S. dollar value of the Canadian payments made,
determined at the spot Canadian dollar/U.S. dollar rate on the date such
dividend distribution is received by the U.S. Person, regardless of whether the
payment is in fact converted into U.S. dollars. Generally, any gain or loss
resulting from currency exchange fluctuations during the period from the date
the dividend payment is includible in income to the date such payment is
converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States for
foreign tax credit limitation purposes. The Canadian tax withheld may be
credited, subject to certain limitations, against the U.S. Person's United
States federal income tax liability, or, alternatively, may be deducted in
computing the U.S. Person's United States federal taxable income. For foreign
tax credit purposes, the dividend will be income from sources without the United
States, but generally will be treated separately, together with other items of
"passive income" (or, in the case of certain holders, "financial services
income"). Dividends paid on the Common shares will not be eligible for the
dividends-received deduction available in certain cases to United States
corporations.
Under the Treaty, a U.S. Person generally will not be subject to Canadian income
tax in respect of any capital gains realized on the disposition of Common
shares.
For United States federal income tax purposes, upon a sale or exchange of Common
shares, a U.S. Person will recognize gain or loss equal to the difference
between the U.S. dollar value of the amount realized on such sale or exchange
and the holder's tax basis in such Common shares (determined in U.S. dollars).
Generally any such gain or loss will be a capital gain or loss if the Common
shares are held as capital assets and will be long-term capital gain or loss if
the U.S. Person's holding period for the Common shares is greater than one (1)
year.
This summary is of a general nature only and is not intended to be, and should
not be interpreted as, legal or tax advice to any particular holder of Common
shares.
Item 6. Selected Financial Data.
A summary of selected historical financial data is set forth on page 30 of the
1998 Annual Report of the Corporation and is incorporated herein by reference.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The management's discussion and analysis of financial condition and results of
operations is set forth on pages 6 to 12 of the Corporation's 1998 Annual Report
and is incorporated herein by reference.
As described in note 1 to the Notes to Consolidated Financial Statements set
forth on page 18 of the Corporation's 1998 Annual Report, which is incorporated
herein by reference, the Corporation's ability to continue as a going concern is
dependent upon its ability to refinance the revolving credit facility at its
maturity, to achieve profitable operations and to generate positive cash flow
from continuing operations. While the Corporation did achieve positive cash flow
from operations during 1998, its ability to do so throughout 1999 cannot be
determined with certainty at this time. The Corporation's financial statements
do not include any adjustments to the amounts and classifications of assets and
liabilities that might be necessary should the Corporation be unable to continue
its business.
As further described under note 22 to the Notes to Consolidated Financial
Statements set forth on pages 26 to 28 of the Corporation's 1998 Annual Report
(attached hereto as Appendix A and filed herewith as an exhibit) which pages are
incorporated herein by reference, the accounting policies followed by the
Corporation differ in certain respects from those that would have been followed
had these financial statements been prepared in conformity with accounting
principles generally accepted in the United States and the accounting principles
and practices required by the United States Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative information on the material market risks to which
the Corporation is exposed is set forth on pages 10 and 11 of the Corporation's
Annual Report under the heading "Risks and Uncertainties" and in Note 23,
"Financial Instruments" to the Consolidated Financial Statements set forth on
pages 28 and 29 of the Corporation's Annual Report of the Corporation, which
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Auditors Report, Consolidated Balance Sheets, Statements of Operations,
Statements of Changes in Financial Position and Deficit, Notes to Consolidated
Financial Statements and Quarterly Financial Information appearing on pages 13
to 30 of the 1998 Annual Report of the Corporation are incorporated herein by
reference.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure.
None.
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the Corporation's directors is incorporated herein by
reference to the material under the heading "Nominees for Election as Director"
in the Corporation's Proxy Circular with respect to the 1999 Annual Meeting of
Shareholders(the "Proxy Circular") which will be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.
Information regarding the Corporation's executive officers is provided under the
heading "Executive Officers of the Registrant" in Part I of this report.
Item 11. Executive Compensation.
Information regarding executive compensation is incorporated herein by reference
to the material under the heading "Compensation of Directors and Executive
Officers" in the Proxy Circular.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding the share ownership of Repap's voting securities (1) of
any person or group known to the Corporation to be the beneficial owner of more
than five per cent of Repap's voting securities and (2) of the directors and the
named executive officers is incorporated herein by reference to the material
under the heading "Voting Shares and Principal Holders Thereof" in the Proxy
Circular.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain transactions between the Corporation and certain
executive officers of the Corporation is incorporated herein by reference to the
material under the heading "Indebtedness of Directors and Executive Officers"
and "Interest of Management and others in Material Transactions" in the Proxy
Circular.
17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Report on Form 10-K:
(1) The following documents are included at the indicated page in the
Corporation's 1998 Annual Report and are incorporated herein by reference:
Page(s)
Report of auditors 13
Consolidated Balance Sheets 14-15
Consolidated Statements of Operations 16
Consolidated Statements of Changes in Financial Position 17
Consolidated Statements of Deficit 16
Notes to Consolidated Financial Statements 18-29
(2) Financial Statement Schedules
Schedule 1 - Condensed Financial Information of Registrant
(3) Exhibit Index (numbered in accordance with Item 601 of Regulation S-K)
2.1 Stock Purchase Agreement between the Corporation and Tolko Industries
Ltd. dated as of July 18, 1997 which has been filed as an exhibit to
the Annual Report on Form 10-K of the Corporation for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K") and is incorporated
herein by reference.
2.2 Stock Purchase Agreement between the Corporation and Consolidated
Papers, Inc. dated as of August 8, 1997 which has been filed as an
exhibit to the 1997 Form 10-K and is incorporated herein by reference.
3.1 Certificate of Amendment and Articles of Amendment of the Corporation
dated July 8, 1994, which certificate and articles of amendment were
filed as an exhibit to the Annual Report on Form 20-F of the
Corporation for the fiscal year ended December 31, 1994 (the "1994 Form
20-F") and are incorporated herein by reference.
3.1.1* Certificate of Amendment and Articles of Amendment of the Corporation
dated June 17, 1998 and June 5, 1998, respectively.
3.2 By-law 1986-1 of the Corporation dated September 22, 1986; By-law
1986-2 of the Corporation dated October 14, 1986; and By-law 1987-1 of
the Corporation
18
<PAGE>
dated May 11, 1988 which By-laws were filed as an exhibit to the 1997
Form 10-K and is incorporated herein by reference.
4.1 Indenture, dated as of April 15, 1995, between Repap New Brunswick and
The Bank of New York, as trustee, relating to the 9 7/8% First Priority
Fixed Rate Senior Secured Notes Due 2000 of Repap New Brunswick, which
indenture was filed as an exhibit to the Annual Report on Form 20-F of
Repap New Brunswick for the fiscal year ended December 31, 1994 (the
"1994 RNB Form 20-F") and is incorporated herein by reference.
4.2 First Supplemental Indenture, dated as of June 1, 1998 between Repap
New Brunswick and the Bank of New York, as trustee, relating to the 9
7/8% First Priority Fixed Rate Senior Secured Notes Due 2000 of Repap
New Brunswick, which supplemental indenture was files as an exhibit to
the Annual Report on Form 20-F of Repap New Brunswick for the fiscal
year ended December 31, 1997 (the "1997 RNB Form 20-F") and is hereby
incorporated by reference.
4.3 Indenture, dated as of April 15, 1995, between Repap New Brunswick and
Bankers Trust Company, as trustee, relating to the 10 5/8% Second
Priority Senior Secured Notes due 2005 of Repap New Brunswick, which
indenture was filed as an exhibit to the 1994 RNB Form 20-F and is
incorporated herein by reference.
4.4 First Supplemental Indenture, dated as of June 1, 1998, between Repap
New Brunswick and the Bankers Trust Company, as trustee, relating to
the 10 5/8% Second Priority Fixed Rate Senior Secured Notes Due 2005 of
Repap New Brunswick, which supplemental indenture was filed as an
exhibit to the 1997 RNB Form 20-F and is hereby incorporated by
reference.
4.5 Credit Agreement, dated as of June 4, 1998, between Repap New Brunswick
Inc. and Credit Suisse First Boston, as Administrative Agent, relating
to the First Priority Floating Rate Loans due June 1,2004 of Repap New
Brunswick Inc which has been filed as an exhibit to the registration
statement on Form F-4 (Registration No. 333-9210) of Repap New
Brunswick filed with the SEC on July 31, 1998 (the "1998 RNB F-4") and
is hereby incorporated by reference.
4.6(1) Trust Indenture, dated as of May 15, 1998, between the Corporation and
Montreal Trust Company, as trustee, relating to the 6% Convertible
Subordinated Debentures due 2005 of the Corporation.
4.7 Collateral Agency and Intercreditor Agreement, dated April 15, 1995,
among Repap New Brunswick, The Bank of New York and Bankers Trust
Company and an Undertaking thereto, dated June 4, 1998, by each of The
Bank of New
19
<PAGE>
York and Credit Suisse First Boston, which has been filed as an exhibit
to the 1998 RNB F-4 and is hereby incorporated by reference.
4.8 Debenture, dated April 24, 1995, by and between Repap New Brunswick and
The Bank of New York, which has been filed as an exhibit to the 1998
RNB Form F-4 and is hereby incorporated by reference.
4.9 Debenture Amending Agreement, dated June 1, 1998, between Repap New
Brunswick and The Bank of New York, which has been filed as an exhibit
to the 1998 RNB F-4 and is hereby incorporated by reference.
4.10 Debenture Amending Agreement, dated as of October 26, 1998, between
Repap New Brunswick, The Bank of New York and Credit Suisse First
Boston, which has been filed as an exhibit to the 1998 RNB F-4 and is
hereby incorporated by reference.
4.11* Debenture, dated April 24, 1994, by and between Repap New Brunswick,
The Bank of New York and Bankers Trust Company.
4.12* Debenture Amending Agreement, dated as of October 26, 1998, between
Repap New Brunswick, The Bank of New York and Bankers Trust Company.
4.13 Indenture, dated as of June 1, 1998, between Repap New Brunswick Inc.
and The Bank of New York, as trustee, relating to the 9% First Priority
Fixed Rate Senior Secured Notes due 2004 of Repap New Brunswick Inc
which has been filed as an exhibit to the 1998 RNB F-4 and is hereby
incorporated by reference.
10.1 Amended and Restated Forest Management License dated April 1, 1992
between Her Majesty the Queen in right of the Province of New Brunswick
and Miramichi Pulp & Paper Inc. which has been filed as an exhibit to
the 1997 Form 10-K and is incorporated herein by reference.
10.2 Amended and Restated Forest Management License dated April 1, 1992
between Her Majesty the Queen in right of the Province of New Brunswick
and Miramichi Pulp & Paper Inc. which has been filed as an exhibit to
the 1997 Form 10-K and is incorporated herein by reference.
10.3 Employment contract between the Corporation and Stephen C. Larson dated
as of September 25, 1997 which has been filed as an exhibit to the 1997
Form 10- K and is incorporated herein by reference.
10.3.1* Amendment to employment agreement between the Corporation and Stephen
C. Larson dated as of December 15, 1998.
20
<PAGE>
10.4 Change in Control contract between the Corporation and Terry W. McBride
dated October 1, 1997 which has been filed as an exhibit to the 1997
Form 10- K and is incorporated herein by reference.
10.4.1* Amendment to change in control contract between the Corporation and
Terry W. McBride dated as of December 15, 1998.
10.5 Change in Control contract between the Corporation and Michelle A.
Cormier dated October 1, 1997 which has been filed as an exhibit to the
1997 Form 10- K and is incorporated herein by reference.
10.5.1* Amendment to change in control contract between the Corporation and
Michelle A. Cormier dated as of December 15, 1998.
10.6 Change in Control contract between Repap Enterprises Inc. and Neil M.
Falco dated October 1, 1997 which has been filed as an exhibit to the
1997 Form 10- K and is incorporated herein by reference.
10.7 The Corporation's Registered Pension Plan and Amendment No. 1 which has
been filed as an exhibit to the 1997 Form 10-K and is incorporated
herein by reference.
10.7.1* The Corporation's Registered Pension Plan Amendment No, 2.
10.8 The Corporation's Supplemental Registered Pension Plan which has been
filed as an exhibit to the 1997 Form 10-K and is incorporated herein by
reference.
10.9 The Corporation's Top Executive Registered Pension Plan which has been
filed as an exhibit to the 1997 Form 10-K and is incorporated herein by
reference.
10.10 The Corporation's 1987 Directors, Officers and Employees Stock Option
Plan, as amended which has been filed as an exhibit to the 1997 Form
10-K and is incorporated herein by reference.
10.11* The Corporation's 1991 Employee Stock Option Plan, as amended.
10.12* Employment contract between the Corporation and F. Steven Berg dated as
of January 27, 1999.
10.13* Stock Option Grant Agreement between the Corporation and F. Steven Berg
dated as of March 23, 1999.
11.1* Statement regarding computation of per share earnings.
13.1* The Corporation's Annual Report to Shareholders (except for those
portions thereof which are expressly incorporated by reference herein,
this exhibit is furnished for the information of the Commission and is
not deemed to be filed as a part hereof).
21.1* Subsidiaries of Repap Enterprises Inc.
21
<PAGE>
23.1* Consent of Ernst & Young.
27.1* Financial Data Schedule
* Filed herewith.
(1) Instruments, other than as set forth above, have been omitted with respect
to long-term debt of the Registrant and its subsidiaries which authorized
securities having a face value not exceeding 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. The Registrant hereby
agrees to furnish a copy of those instruments on request.
22
<PAGE>
(b) Reports on Form 8-K
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REPAP ENTERPRISES INC.
By: "Stephen C. Larson"
-------------------
STEPHEN C. LARSON
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on March 31, 1999.
SIGNATURE TITLE
"F. Steven Berg" Director, Chairman and
- ---------------- Senior Executive Officer
F. Steven Berg
Director
- -----------------
Marshall A. Cohen
Director
- -----------------
Pierre Fitzgibbon
"Stephen C. Larson" Director, President and
- ------------------- Chief Executive Officer
Stephen C. Larson
"Stephen W. Phillips" Director
- ---------------------
Stephen W. Phillips
"Clifford M. Sifton" Director
- --------------------
Clifford M. Sifton
"Michelle A. Cormier" Vice President, Finance
- ---------------------
Michelle A. Cormier
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 69
<ALLOWANCES> 0
<INVENTORY> 67
<CURRENT-ASSETS> 145
<PP&E> 1,428
<DEPRECIATION> 448
<TOTAL-ASSETS> 1,329
<CURRENT-LIABILITIES> 203
<BONDS> 1,106
0
16
<COMMON> 641
<OTHER-SE> (767)
<TOTAL-LIABILITY-AND-EQUITY> 1,329
<SALES> 612
<TOTAL-REVENUES> 684
<CGS> 403
<TOTAL-COSTS> 509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> (63)
<INCOME-TAX> 2
<INCOME-CONTINUING> (66)
<DISCONTINUED> 17
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
SCHEDULE 3.1.1
Consumer and Consommation FORM 4 FORMULE 4
Corporate Affairs et Corporations
Canada Canada
Canada Business ARTICLES OF AMENDMENT CLAUSES
Corporations Act MODIFICATRICES
Loi sur les socits
commerciales canadiennes (SECTION 27 OR 171) (ARTICLES 27 OU 171)
- -----------------------------------------------------------------------------
1 Name of Corporation - 2-Corporation No. -
Denomination de la societe No de la societe
Repap Enterprises Inc.
Les Enterprises Repap Inc. 057881-9
----------------------------------------------------------------------------
3-The articles of the above named Les statuts de la societe
corporation are amended as follows: ci-haut mentionnee sont
modifies de la facon suivante:
RESOLVED as a special resolution that the articles of the Corporation are hereby
amended to change the place in Canada where the registered office is to be
situated from the Montreal Urban Community in the province of Quebec to the City
of Miramichi in the province of New Brunswick.
- ----------------------------------------------------------------------------
Date Signature Description of Office -
Description du poste
- ----------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY A L'USAGE DU MINISTERE SEULEMENT
-------------------------------------
1
SCHEDULE 4.11
FORM A56
DEBENTURE
Standard Forms of Conveyances Act, S.N.B. 1980, c. S-12.2, s.2
The parties to this debenture are:
REPAP NEW BRUNSWICK INC., a corporation incorporated under the laws of Canada,
having an office at 345 Curtis Road, in the City of Miramichi, in the Province
of New Brunswick, the "corporation"
- - and -
BANKERS TRUST COMPANY, a New York banking corporation, having an office at Four
Albany Street, in the City of New York, in the State of New York, U.S.A. 10006,
in its capacity as Second Priority Note Trustee (as defined herein) and THE BANK
OF NEW YORK, a New York banking corporation, having an office at 101 Barclay
Street, Floor 21 West, in the City of New York, in the State of New York, U.S.A.
10286, in it capacity as Collateral Agent (as defined herein) for Bankers Trust
Company as Second Priority Note Trustee (as defined herein), the "lender"
The recitals attached hereto as Schedule "D" form part of this debenture.
For value received, the corporation promises to pay on demand to or to the order
of the lender the principal sum and interest as hereafter set out.
Principal Sum: as set forth in Schedule "C"
Interest Rate: as set forth in Schedule "C"
How Interest Calculated: as set forth in Schedule "C"
Place of Payment: as set forth in Schedule "C"
As security for the payment of all money payable hereunder and the performance
of the covenants and conditions herein contained, the corporation grants,
mortgages and charges, as applicable, to and in favour of the lender:
(f) in accordance with Schedule "F".
This debenture contains the covenants and conditions which are set out in:
(b) Schedule "C" attached hereto.
DATED on April 24, 1995.
IN WITNESS WHEREOF the corporation has executed this debenture.
REPAP NEW BRUNSWICK INC.
by: c.s.
1
<PAGE>
SCHEDULE "C"
1.01 Promise to Pay
For value received, the Company hereby acknowledges itself indebted and
promises to pay on demand to or to the order of the Second Priority Note Trustee
for the benefit of the holders of the Second Priority Notes, all Obligations up
to the maximum principal sum of four hundred million dollars (U.S.$400,000,000)
in lawful money of the United States at the place and in the manner specified in
the Second Priority Note Indenture, and to pay interest thereon from the date
hereof at the rate of twenty-five percent (25%) per annum in like
money at the same place monthly on the last day of each month, both before and
after maturity and before and after default, with interest on overdue interest
at the rate aforesaid.
2.01 Mortgage and Charge
(a) As continuing security for the due payment and performance of the
Obligations, the Company hereby:
(i) grants, mortgages and charges as and by way of a second fixed and
specific mortgage and charge to and in favour of the Collateral
Agent, all right, title and interest, now existing or
after-acquired, of the Company in and to:
(A) all freehold real property and all leaseholds of real
property, including, but not limited to, the freehold
and leasehold lands and premises described in Schedule
"A" hereto (the freehold real property subject to the
fixed mortgage and charge being collectively referred
to herein as the "Freehold Lands" and the leaseholds
of real property subject to the fixed mortgage and
charge being collectively referred to herein as
the "Leasehold Lands");
(B) all buildings, improvements, erections, structures and
fixtures now or hereafter constructed or placed on the
Freehold Lands or the Leasehold Lands (collectively, the
"Improvements");
(C) all of the Company's present and after-acquired
personal property (other than inventory, accounts
receivable arising from the sale or lease of, or
otherwise relating to, inventory, insurance in respect
of such inventory and accounts receivable, records
relating to such inventory, accounts receivable and
insurance, substitutions and replacements of, and
property derived from dealings with, such inventory,
accounts receivable, insurance and records and claims,
choses in action and security for such inventory,
accounts receivable, insurance, records and other
property);
(D) Crown Timber Licences Number 3 and Number 4 issued to the
Company pursuant to the Crown Lands and Forests Act of New
Brunswick (the "Crown Timber Licences");
(E) all replacements of, substitutions for and increases,
additions and accessions to any of the property described in
clauses (i)(A) to (i)(D) inclusive above; and
(F) all proceeds of any of the property described in
clauses (i)(A) to (i)(E) inclusive above stated to be
subject to the fixed and specific mortgage and charge
created hereby, in any form derived directly or indirectly
from any dealing with such property or that indemnifies or
compensates for the loss of or damage to such property
including, without limitation, proceeds of insurance, and
the right to collect and receive the same, and all awards
or other compensation including the interest payable
2
<PAGE>
thereon and the right to collect and receive the same,
heretofore and hereafter made with respect to the taking by
eminent domain, condemnation or otherwise of such property by
the Government of Canada, the government of any province, or
any municipality or other governmental authority.
(ii) charges as and by way of a floating charge to and in favour
of the Collateral Agent, all its undertaking, property and
assets, both present and after-acquired, of whatsoever nature and
kind and wheresoever situate (other than (A) inventory, accounts
receivable arising from the sale or lease of, or otherwise
relating to, inventory, insurance in respect of such inventory
and accounts receivable, records relating to such inventory,
accounts receivable and insurance, substitutions and replacements
of, and property derived from dealings with, such inventory,
accounts receivable, insurance and records and claims, choses in
action and security for such inventory, accounts receivable,
insurance, records and other property (B) such of the
undertaking, property and assets of the Company that is
effectively and validly subject to the fixed and specific
mortgage and charge created under clause (i) above, and (C) the
property that is excluded from the Security pursuant to Section
2.01(b));
(iii) assigns to the Collateral Agent all right, title and
interest, now existing or after-acquired, of the Company as
landlord or licensor, as the case may be, in (A) all leases,
subleases or other agreements for the lease, use or occupancy of
any of the Freehold Lands or the Leasehold Lands or any part
thereof or space therein, whether written or oral, and as amended
and renewed from time to time (collectively, the "Leases"), (B)
all rents and other amounts owing from time to time under the
Leases, and (C) every guarantee of the payment of the Rents or
performance and observance of the covenants, conditions and
agreements to be performed by any parties thereto other than the
Company (such rents and other amounts and the benefit of all
guarantees, conditions and agreements being hereinafter
collectively referred to as the "Rents"); provided, that so long
as no Event of Default has occurred and is continuing, the
Company shall have the right to collect, sue for, recover and
retain all Rents, give receipts therefor and to enforce payment
thereof.
3
<PAGE>
The fixed and specific mortgage and charge, floating charge and assignment
created by this Debenture are collectively referred to herein as the "Security"
and the property, both real and personal, subject to such fixed and specific
mortgage and charge, floating charge or assignment is collectively referred to
herein as the "Collateral".
(b) The Security shall not apply to:
(i) any property or assets acquired by the Company after the date
hereof to the extent that within 30 days after the date of
acquisition the Company transfers such property or assets to a
Person and then leases them back from such Person; and
(ii) the last day of the term of any lease or any agreement therefore
now held or hereafter acquired by the Company, provided that the
Company shall stand possessed of the reversion remaining in the
Company of any leasehold interest forming part of the Collateral
upon trust to assign and dispose thereof as the Collateral Agent
shall direct; and upon any sale or sales of such leasehold
interest or any part thereof, the Collateral Agent, for the
purpose of vesting the aforesaid reversion of such term or any
renewal thereof in any purchaser or purchasers thereof, shall be
entitled by deed or writing to appoint such purchaser or
purchasers or any other person or persons a new trustee or
trustees of the aforesaid reversion or any renewal thereof in the
place of the Company and to vest the same accordingly in the new
trustee or trustees so appointed, freed and discharged from any
obligation respecting the same.
(c) This Debenture shall constitute and be a continuing security
to the Collateral Agent for the payment and performance of all
Obligations and shall not be considered as satisfied or discharged
by any payment or performance of all or any part of the Obligations
outstanding at any time; and the execution and delivery of this
Debenture shall not act as a merger of any simple contract debt or
suspend the fulfilment of, or affect the rights, remedies or powers
of the Collateral Agent in respect of, any present or future debts,
liabilities or obligations of the Company to the Collateral Agent
or any security now or hereafter held by the Collateral Agent for
the payment or fulfilment thereof; and notwithstanding the release
or discharge of any of the Collateral, this Debenture shall
continue to secure the full amount of the Obligations.
(d) The Collateral Agent shall not, by virtue of the assignment in Section
2.01(a)(iii) or its receipt of any Rents become or be deemed a
mortgagee in possession of the Freehold Lands or the Leasehold Lands.
(e) Notwithstanding any provisions of this Debenture, payment by the
Company to the Second Priority Note Trustee of interest for any
period in respect of the Obligations shall be deemed to be
payment in satisfaction of the interest payment for the same
period under this Debenture, and the Collateral Agent in
realizing on the Security of the Debenture shall not claim under
this Debenture for the benefit of the Second Priority Note
Trustee any greater amount in the aggregate for principal and
interest than the amount of the Obligations.
4
<PAGE>
3.01 Definitions and Interpretations
(a) Unless otherwise defined herein, all capitalized terms used in this
Debenture shall have the respective meanings defined in the Second
Priority Note Indenture.
(b) In this Debenture, unless something in the context is inconsistent
therewith, the following terms shall have the following meanings:
"Alteration" has the meaning defined in Section 4.01(f);
"Collateral" has the meaning defined in Section 2.01(a);
"Collateral Agency Agreement" has the meaning defined
in Recital D of Schedule "D";
"Collateral Agent" means The Bank of New York, in its capacity as the
collateral agent under the Collateral Agency Agreement for the Second
Priority Note Trustee;
"Company" means Repap New Brunswick Inc.;
"Contaminant" means any of the following: (i) any organic or inorganic
matter in a solid, liquid or gaseous state including, without
limitation, a fuel (such as petroleum or petroleum products, crude
oil, natural gas, liquified natural gas, synthetic fuel or any
combination of the above), resulting directly or indirectly from human
activities that may cause an adverse effect on the Environment as
defined in or pursuant to applicable Environmental Laws; (ii) any form
of energy or combination of matter and energy including, without
limitation, a sound, a vibration, a ray, heat, an odour or a radiation
resulting, directly or indirectly, from human activities that may
cause an adverse effect on the Environment as defined in or pursuant
to applicable Environmental Laws, (iii) any matter, energy or of a
combination of matter and energy including, without limitation, any
nuclear materials, in any such case deemed toxic, hazardous, a
pollutant or a contaminant resulting, directly or indirectly, from
human activities that may cause an adverse effect on the Environment
as defined in or pursuant to applicable Environmental Laws, or (iv)
any substance or material that is or becomes prohibited, controlled or
regulated by any government or governmental authority, whether
federal, provincial or local, including, without limitation,
pollutants, contaminants, dangerous goods or substances, toxic or
hazardous substances or materials, hazardous wastes and nonhazardous
wastes, all as defined in or pursuant to Environmental Laws;
"Debenture" means this Debenture and all Schedules
hereto, as amended or supplemented from time to time;
"Default" means any condition or event which constitutes, or which,
after notice or lapse of time or both, would constitute an Event of
Default hereunder;
5
<PAGE>
"Developed Premises" means each of the Freehold Lands (other than the
Timber Lands) and each of the Leasehold Lands and the Improvements and
the personal property situated on each of the Freehold Lands (other
than the Timber Lands) or Leasehold Lands;
"Environment" means all components of the natural environment
including, without limitation, air that is open air (but not air that
is enclosed in a building, structure, machine, chimney, stack or
flue), land (and all surface and subsurface soil, and all land
submerged under water) and water (and all surface and underground
water), as defined in or pursuant to applicable Environmental Laws;
"Environmental Laws" means all past, present or future statutes,
regulations, ordinances, official directives, standards, by-laws,
orders, judgments, approvals, certificates of approval, policies and
guidelines having the force of law, permits and rules, of any
government or governmental authority having jurisdiction in the
Province of New Brunswick and any other jurisdictions in which the
Company is doing business relating, in whole or in part, to the
Environment or its protection, including, without limitation, (i) to
any actual or threatened emission, deposit, discharge, release,
spraying, injection, inoculation, dumping, throwing, pouring,
spilling, emptying, placing, leaking, seeping, migration, exhausting,
abandonment, burial, disposal or incineration of any Contaminant into
the Environment; (ii) to the required notification to applicable
governmental authorities of the event or occurrence referred to in
clause (i) above; (iii) to preventive or remedial measures in
connection with any event or occurrence referred to in clause (i)
above; (iv) to the manufacturing, generation, processing, use,
handling, packaging, labelling, sale, storage, recycling, disposal,
destruction, incineration, burial or transportation of any
Contaminant; (v) to any nuisance in connection with the Environment;
or (vi) to any applicable common law.
"Eminent domain" means the expropriation or confiscation of
property by any government or governmental authority;
"Event of Default" has the meaning defined in Section 8.01;
"First Priority Debenture" has the meaning defined in
Recital D of Schedule "D";
"First Priority Fixed Rate Note Indenture" has the meaning
defined in Recital B of Schedule "D";
"First Priority Fixed Rate Note Trustee" has the meaning
defined in Recital B of Schedule "D";
"First Priority Fixed Rate Notes" has the meaning defined
in Recital B of Schedule "D";
"First Priority Floating Rate Note Indenture" has the
meaning defined in Recital A of Schedule "D";
6
<PAGE>
"First Priority Floating Rate Note Trustee" has the meaning
defined in Recital A of Schedule "D";
"First Priority Floating Rate Notes" has the meaning
defined in Recital A of Schedule "D";
"First Priority Note Indentures" has the meaning defined
in Recital B of Schedule "D";
"First Priority Note Trustees" has the meaning defined
in Recital B of Schedule "D";
"First Priority Notes" has the meaning defined in
Recital B of Schedule "D";
"Freehold Lands" has the meaning defined in Section
2.01(a)(i)(A);
"Impositions" has the meaning defined in Section 4.01(j);
"Improvements" has the meaning defined in Section
2.01(a)(i)(B);
"Indentures" has the meaning defined in Recital C of
Schedule "D";
"Leasehold Lands" has the meaning defined in Section
2.01(a)(i)(A);
"Leases" has the meaning defined in Section 2.01(a)(iii);
"Lien" has the meaning defined in the Second Priority
Note Indenture;
"Major Casualty or Condemnation Event" means any destruction of or
damage to any Developed Premises by fire or any other casualty, or any
condemnation or taking by eminent domain of any of the Developed
Premises, with respect to which restoration, repair and replacement of
the Developed Premises in accordance with Section 5.01(d), (i) cannot
reasonably be completed within 240 days after the occurrence of such
event, (ii) involves 50% or more of such Developed Premises or (iii)
involves 50% or more of the estimated value of such Developed
Premises, all as determined in the reasonable opinion of the Board of
Directors of the Company as evidenced by an Officers' Certificate
setting forth the actions of the Board of Directors;
"Material Adverse Effect" means a material adverse effect on (a) the
business, assets, liabilities (actual or contingent), operations or
condition (financial or otherwise) of the Company in respect of any of
the Developed Premises, (b) the ability of the Company to perform its
obligations under this Debenture in respect of any of the Developed
Premises, or (c) the validity or enforceability of this Debenture or
the rights and remedies of the Collateral Agent hereunder in respect
of any of the Developed Premises;
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<PAGE>
"Obligations" has the meaning defined in Recital E of
Schedule "D";
"Permitted Liens" has the meaning defined in the Second
Priority Note Indenture;
"Person" means any individual, corporation, company, partnership,
unincorporated association, trust, joint venture, or any government or
governmental body or governmental authority;
"Personal property" has the meaning defined in the Personal Property
Security Act (New Brunswick), as such statute was assented to on May
7, 1993;
"Rents" has the meaning defined in Section 2.01(a)(iii);
"Required Licences" means all present and future federal, provincial
and municipal consents, approvals, licenses, permits, authorizations,
regulations, exemptions and certificates applicable to the Company or
the Collateral and necessary for the operation of any of the
Collateral;
"Requirements of Law" means the certificate of incorporation and
by-laws or other organizational or governing documents of the Company,
and any law, treaty, rule, regulation, order, judgement, decree,
injunction or requirement, or determination of an arbitrator or a
court or government or governmental authority, applicable to or
binding upon the Company or any of its property or to which the
Company or any of its property is subject;
"Second Priority Note Indenture" has the meaning defined in
Recital C of Schedule "D";
"Second Priority Notes" has the meaning defined in Recital
C of Schedule "D";
"Second Priority Note Trustee" has the meaning defined in
Recital C of Schedule "D";
"Security" has the meaning defined in Section 2.01(a);
"Timber Lands" means the Freehold Lands described in Sections F, G, H
and J in Schedule A hereto;
"Total Taking" means a condemnation or taking by eminent domain of (i)
all the Developed Premises or (ii) a substantial portion of the
Developed Premises which renders the remaining portion of the
Developed Premises unsuitable, in the reasonable judgment of the
Collateral Agent, for continued use by the Company; and
"Trust Moneys" has the meaning defined in the Second Priority
Note Indenture.
(c) Words in the singular include the plural and words in the plural
include the singular. Words importing any gender include all genders.
The division of this Debenture into sections and subsections and the
insertion of headings is
8
<PAGE>
for convenience of reference only and does not affect the
construction or the interpretation of this Debenture.
(d) In the event of any conflict between the provisions of this Debenture
and the provisions of the Second Priority Note Indenture or the
Collateral Agency Agreement, the provisions of the Second Priority
Note Indenture or the Collateral Agency Agreement shall prevail.
4.01 Representations and General Covenants of the Company
The Company hereby represents to and covenants with the Collateral Agent on
behalf of the Second Priority Note Trustee for the benefit of the holders of the
Second Priority Notes as follows:
(a) Corporate Existence and Authority. The Company is a
corporation duly incorporated and validly existing under the
laws of Canada and has all necessary corporate power and
authority to own its property and carry on its business as
currently carried on, to execute and deliver this Debenture
and to do all acts and execute and deliver all documents as
are required hereunder to be done, observed or performed by
it in accordance with the terms hereof and is duly licensed,
registered or qualified in all jurisdictions where the
character of its property owned or leased or the nature of
the activities conducted by it requires such licensing,
registration or qualification except where the failure to
be so licensed, registered or qualified could not, in the
aggregate, reasonably be expected to have a Material Adverse
Effect.
(b) Valid and Enforceable. The Company has taken all necessary
corporate action to authorize the execution and delivery of
this Debenture, the creation of the Security and the
performance of its obligations hereunder. This Debenture
constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with
its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles. The
mortgage and charge created in Section 2.01(a)(i) constitutes
valid and (subject to the exceptions in the preceding sentence)
enforceable second priority security over the Collateral
expressed to be subject thereto, subject only to Permitted
Liens. The charge created in Section 2.01(a)(ii)
constitutes a valid and (subject to the exceptions in the
second preceding sentence) enforceable floating charge over
the Collateral expressed to be subject thereto, subject only
to Permitted Liens. The assignment created in Section
2.01(a)(iii) constitutes a valid and (subject to the exceptions
in the third preceding sentence) enforceable assignment of the
Leases and Rents, subject only to Permitted Liens.
(c) Permits and Approvals. The Company has obtained and possesses all
Required Licences under all Requirements of Law, including, without
limitation, Environmental Laws, to carry on its business as currently
carried on and to own the Collateral or occupy the lands and premises
currently occupied by it,
9
<PAGE>
except where the failure to obtain or possess such Required Licences
would not have a Material Adverse Effect. No consent or authorization
of, filing with or other act by or in respect of any Person is
required in connection with the execution, delivery, performance,
validity or enforceability of this Debenture, other than that which
has been obtained or made and other than any filing or registrations
required under the laws of the Province of New Brunswick for the
protection and perfection of the Security.
(d) The Collateral. The Company represents that (i) it is the
lawful owner of the Freehold Lands, (ii) it is the lawful
tenant of the Leasehold Lands, (iii) it has full right, power
and authority to mortgage and charge the Freehold Lands and
the Leasehold Lands to the Collateral Agent in accordance
with this Debenture, and (iv) subject only to Permitted Liens
and the qualifications as to title to the Freehold Lands and
the Leasehold Lands expressed in the opinion of counsel for
the Company dated the date hereof and delivered to the
Collateral Agent, it has good and marketable title to the
Freehold Lands and good title to the Collateral other than
the Freehold Lands, in each case free of all encumbrances.
The Company represents that, upon the proper registration of
this Debenture in the appropriate land registry offices in
the Province of New Brunswick, this Debenture will constitute
a valid second fixed and specific mortgage and charge on
the Freehold Lands and the Company's leasehold interest in
the Leasehold Lands, subject only to Permitted Liens, and
that upon the registration of this Debenture or a financing
statement in respect thereof, as the case may be, in the
appropriate registration office in the Province of New
Brunswick, this Debenture will constitute a valid second
perfected fixed and specific mortgage and charge and a valid
perfected floating charge of the Collateral that constitutes
personal property and a valid assignment of the Leases and
Rents, subject only to Permitted Liens. The Company shall
(i) preserve the validity and priority of the Security and
its title to the Collateral and shall forever warrant and
defend the same against the claims of all Persons whomsoever
claiming or threatening to claim the same or any part
thereof, (ii) make, execute, acknowledge and deliver all
such further and other documents, instruments or assurances,
and cause to be done all such further acts and things as may
at any time hereafter be reasonably requested by the
Collateral Agent to preserve, perfect and defend the
Security and title to the Collateral and the right of the
Collateral Agent therein against the claims of all Persons,
subject only to Permitted Liens. The Company shall do all
such further acts and things and execute and deliver such
mortgages, deeds of trust, security agreements, hypothecs,
assignments, financing statements and other documents,
instruments and assurances as shall be reasonably
necessary to better assure, mortgage, charge and assign the
Collateral unto the Collateral Agent and to vest in the
Collateral Agent a valid and perfected mortgage, charge,
assignment and security interest, as applicable, in any
Material After-Acquired Property, subject only to Permitted
Liens. Notwithstanding the foregoing, any acknowledgment by
the Collateral Agent herein or in the Second Priority Note
Indenture as to any mortgages, charges, security interests,
10
<PAGE>
encumbrances or other liens upon the Collateral or any part thereof
shall not constitute an acknowledgment of the priority thereof over
the Security or the subordination or postponement of the Security
thereto except to the security created by the First Priority
Debenture.
(e) Strict Compliance. The Company shall duly and punctually
pay or cause to be paid the principal, interest and other
amounts at the times and places and in the manner specified
in the Second Priority Notes and the Second Priority Note
Indenture, and this Debenture, and shall observe and perform
all the conditions, covenants and obligations (including the
Obligations) on the part of the Company to be performed
hereunder or thereunder.
(f) Alterations. Except as otherwise provided in the Second
Priority Note Indenture, the Company shall not, without the
prior written consent of the Collateral Agent (which consent
shall not be unreasonably withheld), make any addition,
modification or change (each, an "Alteration"), structural
or nonstructural, to the Developed Premises which could
reasonably be expected to decrease, in any material respect,
the value of such Developed Premises in the reasonable
opinion of the Board of Directors of the Company. Whether
or not the Collateral Agent has consented to the making of any
Alteration, the Company shall (i) complete each Alteration
promptly, in a good and workmanlike manner and in compliance,
in all material respects, with all applicable local laws,
ordinances and requirements and (ii) pay when due all claims
for labor performed and materials furnished in connection
with such Alteration, unless contested by appropriate legal
proceedings, but such rights shall not be deemed or construed
in any way as relieving, modifying or extending the Company's
covenants to pay when due such claims as provided in this
Section 4.01(f) unless (a) the legal proceedings shall operate
conclusively to prevent the sale or forfeiture of such
Developed Premises, or any part thereof, for failure to pay
such claims when due prior to final determination of such
proceedings; (b) if during such contest, a Lien shall exist
with respect to any of the Developed Premises for an amount
in excess of Cdn.$7,500,000, the Company shall have provided
the Collateral Agent with a good and sufficient bond from a
surety company reasonably satisfactory to the Collateral Agent
or other security reasonably satisfactory to the Collateral
Agent in an amount equal to the aforesaid Lien; (c) the Company
shall have set aside adequate reserves in accordance with
generally accepted accounting principles for discharge of
such Lien; and (d) the Collateral Agent shall not be subject
either to civil or criminal liability for any failure by the
Company to pay such claim during pendency of such contest
(except, with respect to civil liability, for amounts bonded
or secured in accordance with the above).
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<PAGE>
(g) Proper Care and Use; Inspection.
(i) The Company shall:
(A) not commit or suffer waste with respect to the
Collateral;
(B) keep and maintain in all material respects, the
Improvements and all machinery and equipment in good
repair, working order and condition and in the state
of good operating efficiency, and make or cause to be
as and when the same shall become necessary, all
repairs, renewals and replacements necessary to that
end, ordinary wear and tear excepted, damage from
casualty and condemnation as more particularly set
forth in Section 5.01(d) hereof excepted and except
as may be otherwise set forth in the Second Priority
Note Indenture;
(C) not commit or suffer any act to be done in or upon the
Collateral which violates any law, ordinance or regulation
in any material respect;
(D) except as otherwise provided in the Second Priority Note
Indenture, the Developed Premises shall not be demolished
nor shall any material portion of the machinery and
equipment situated thereon be removed without the prior
written consent of the Collateral Agent, which consent shall
not be unreasonably withheld;
(E) comply in all material respects with all of its obligations
as lessee under all leases and shall not surrender any lease
or cause or allow the same to be terminated or forfeited or
agree to any amendment thereto, except where such
non-compliance, surrender, termination, forfeiture or
amendment would not have a Material Adverse Effect.
(ii) The Collateral Agent and any persons authorized by the
Collateral Agent shall have the right (but not the obligation) to
enter upon any premises of the Company and inspect the Collateral
at all reasonable times (which shall be deemed to be normal
business hours) upon reasonable notice (which, in the absence of
an Event of Default, shall be deemed to be at least two days'
advance notice). If an Event of Default shall have occurred and
be continuing, the Collateral Agent and any persons authorized by
the Collateral Agent may (without being obligated to do so), upon
not less than 10 days' prior written notice to the Company
(except in the case of an Event of Default, which if left
unremedied, would reasonably be expected to (i) affect the
priority of the Security constituted by this Debenture or (ii)
have a Material Adverse Effect, in which case no prior notice
shall be necessary), it being understood that said notice may be
given prior to a Default becoming an Event of Default, enter or
cause entry to be made upon any premises of the Company and
repair and/or maintain as the Collateral Agent may reasonably
deem
12
<PAGE>
necessary, and may (without being obligated to do so) make such
expenditures and outlays of money as the Collateral Agent may
deem reasonably necessary for the preservation of the Collateral.
All reasonable expenditures and outlays of money made by the
Collateral Agent pursuant hereto, together with interest thereon
from the date of payment at the interest rate applicable under
the Second Priority Notes, shall be added to the Obligations. All
such reasonable expenditures and outlays of money, together with
all interest thereon as aforesaid, shall be (i) a charge on the
Collateral prior to any right or title to, interest in, or claim
upon any of the Collateral subordinate to the Security
constituted by this Debenture, and (ii) payable on demand.
(h) Compliance. The Company shall comply with any and all material
obligations affecting the Developed Premises, including,
without limitation, all material easements, rights-of-way,
covenants, restrictions and conditions and material agreements
and Required Licenses affecting the Developed Premises. The
Company shall have the right, at the Company's sole cost and
expense, to contest the validity of any such obligations
affecting the Developed Premises by appropriate legal
proceedings, but such right shall not be deemed or construed
in any way as relieving, modifying or extending the Company's
covenant to comply therewith as provided in this Section
4.01(h) unless (a) the legal proceedings shall operate
conclusively to prevent the sale or forfeiture of the Developed
Premises, or any part thereof, for failure to comply with such
obligations prior to the final determination of such
proceedings, (b) if during such contest a Lien shall exist
with respect to any of the Developed Premises for an
amount in excess of Cdn.$7,500,000, the Company shall
provide the Collateral Agent with a good and sufficient bond
from a surety company reasonably satisfactory to the
Collateral Agent or other security reasonably satisfactory
to the Collateral Agent in an amount equal to the aforesaid
Lien, (c) the Company shall have set aside adequate
reserves in accordance with generally accepted accounting
principles for the payment of such obligations, and (d)
the Collateral Agent shall not be subject either to civil
or criminal liability for any failure by the Company to
comply with such obligations during the pendency of such
contest (except, with respect to civil liability, for
amounts bonded or secured in accordance with the above).
(i) Requirements of Law. The Company, at the Company's sole
cost and expense, shall, in all material respects, comply
with, or cause to be complied with, and conform to all
present and future Required Licences and Requirements of
Law, including, without limitation, any applicable health,
sanitary, zoning, building, fire, occupational health and
safety, use, land use and other laws and regulations,
Environmental Laws and any occupancy permits, which may
be applicable to the Company or to any of the Collateral,
or to the ownership, use, manner of use, occupancy,
possession, operation, maintenance, alteration, repair or
reconstruction of any of the Collateral. The Company shall
13
<PAGE>
promptly notify the Collateral Agent of any material non-compliance
with Environmental Laws relating to the Collateral upon becoming aware
of such non-compliance. The Company shall have the right, at the
Company's sole cost and expense, to contest or object to the validity
of any Requirements of Law by appropriate legal proceedings, but such
right shall not be deemed or construed in any way as relieving,
modifying or extending the Company's covenant to comply therewith as
provided in this Section 4.01(i) unless (a) the legal proceedings
shall operate conclusively to prevent the sale or forfeiture of the
Collateral, or any part thereof, or the termination or revocation of
any Required Licence, for failure to comply with such Requirements of
Law prior to final determination of such proceedings, (b) if during
such contest a Lien shall exist with respect to any of the Collateral
for an amount in excess of Cdn.$7,500,000, the Company shall provide
the Collateral Agent with a good and sufficient bond from a surety
company satisfactory to the Collateral Agent or other security
reasonably satisfactory to the Collateral Agent in an amount equal to
the aforesaid Lien, (c) the Company shall have set aside adequate
reserves in accordance with generally accepted accounting principles
for discharge of such Lien, and (d) the Collateral Agent shall not be
subject either to civil or criminal liability for any failure by the
Company to comply with such Requirements of Law during the pendency of
such contest (except, with respect to civil liability, for amounts
bonded or secured in accordance with the above). Not later than thirty
(30) days prior to the expiration date of any Required Licence, the
Company shall, if the Collateral Agent shall so request, deliver to
the Collateral Agent (i) a copy of the renewal of such Required
Licence or (ii) other evidence satisfactory to the Collateral Agent
that such Required Licence will be renewed prior to its expiration;
provided that, in the case of clause (ii), the Company shall deliver
to the Collateral Agent the copy of the renewal of such Required
Licence not later than the expiration date thereof.
(j) Payment of Impositions.
(i) The Company shall pay and discharge before the last
date payment may be made without the imposition of
interest or a penalty all taxes of every kind and nature
(including, without limitation, all real, personal
property, income, franchise, withholding, profits and
gross receipts taxes), all charges for any easement or
agreement maintained for the benefit of any of the
Collateral, all general and special assessments, levies,
permits, and inspection and licence fees, all utility
charges for gas, electricity, water and sewer services
and all other public charges whether of a like or
different nature, even if unforeseen or extraordinary,
imposed upon or assessed on or against the Collateral,
together with any interest or penalties on any of the
foregoing (all the foregoing being hereinafter
collectively referred to as the "Impositions"). The
Company shall have the right, at the Company's sole cost
and expense, to contest or object to the amount or
validity of any Impositions by appropriate legal
proceedings, but such right shall not be deemed or
14
<PAGE>
construed in any way as relieving, modifying or extending the
Company's covenant to pay such Impositions at the time and in the
manner provided in this Section 4.01(j) unless (A) such legal
proceedings shall operate conclusively to prevent the sale or
forfeiture of the Collateral, or any part thereof, to satisfy
such Impositions, or the termination or revocation of any
Required Licence, prior to final determination of such
proceedings, (B) if such Impositions are for an amount in excess
of Cdn.$7,500,000, the Company shall furnish a good and
sufficient bond from a surety company satisfactory to the
Collateral Agent or other security reasonably satisfactory to the
Collateral Agent in the amount of the Impositions which are being
contested plus any interest and penalty which may be imposed
thereon and which could become a Lien against the Collateral, (C)
the Company shall have set aside adequate reserves in accordance
with generally accepted accounting principles for the payment of
such Impositions, and (D) the Collateral Agent shall not be
subject either to civil or criminal liability for any failure by
the Company to pay such Impositions (except with respect to civil
liability, for amounts bonded or secured in accordance with the
above). Subject to the foregoing, and if the Collateral Agent
shall so request, the Company shall deliver to the Collateral
Agent receipts evidencing the payment of all Impositions.
(ii) The Collateral Agent shall have the right, after written demand
to the Company, to pay any Imposition on or after the last date
payment of such Imposition may be made without imposition of
interest or a penalty (provided that the Company shall not be
exercising its right to contest such Imposition as hereinbefore
provided), and to add the amount so paid, together with interest
thereon from the date of such payment at the interest rate
applicable under the Second Priority Notes, to the Obligations
and nothing herein contained shall affect such right and such
remedy. Any sums paid by the Collateral Agent in discharge of any
Impositions, together with all interest thereon as aforesaid,
shall be (A) a charge on the Collateral secured hereby prior to
any right or title to, interest in, or claim upon any of the
Collateral subordinate to the Security constituted by this
Debenture, and (B) payable on demand.
(iii) If an Event of Default shall have occurred and be continuing, the
Company, upon the Collateral Agent's written request therefore,
shall pay to the Collateral Agent an amount equal to one twelfth
of the (i) annual
Impositions reasonably estimated by the Collateral Agent so that
the Collateral Agent shall have sufficient funds to pay the
Impositions on the first day of the month preceding the month in
which they become due and (ii) estimated aggregate annual
insurance premiums on all policies of insurance required by this
Debenture on a specified date each month. In such event, the
Company further agrees to cause all bills, statements or other
documents relating to Impositions and insurance premiums
15
<PAGE>
to be sent or mailed directly to the Collateral Agent. Upon
receipt of such bills, statements or other documents, and
provided the Company has deposited sufficient funds with the
Collateral Agent pursuant to this Section 4.01(j)(iii), the
Collateral Agent shall pay such amounts as may be due thereunder
out of the funds so deposited with the Collateral Agent in
accordance with the Second Priority Note Indenture. If at any
time and for any reason the funds deposited with the Collateral
Agent shall be insufficient to pay such amounts as may then or
subsequently be due, the Collateral Agent shall notify the
Company and the Company shall immediately deposit an amount equal
to such deficiency with the Collateral Agent. The Collateral
Agent shall be deemed a trustee of said funds and shall hold,
invest and disburse said funds in accordance with and pursuant to
the terms of the Second Priority Note Indenture. If amounts
collected by the Collateral Agent under this Section 4.01(j)(iii)
exceed amounts necessary in order to pay Impositions or insurance
premiums, as the case may be, the Collateral Agent may reserve
for, and shall credit against the next due instalment(s) for,
payment of Impositions or insurance premiums, as the case may be,
such portion of such excess payments as the Collateral Agent in
its reasonable discretion may deem proper, and, in accordance
with the terms of the Second Priority Note Indenture, the
remainder, if any, shall be promptly paid to the Company. Should
the Company fail to deposit with the Collateral Agent sums
sufficient to pay such Impositions or insurance premiums, as the
case may be, in full at least 30 days before delinquency thereof,
the Collateral Agent may, at the Collateral Agent's election and
upon not less than ten (10) days' prior written notice to the
Company, but without any obligation to do so, advance any amounts
required to make up the deficiency. All such advances, together
with interest thereon from the date of payment thereof at the
interest rate applicable under the Second Priority Notes, shall
be added to the Obligations. All such advances, together with
interest thereon as aforesaid, shall be (i) a charge on the
interest in, or claim upon any of the Collateral subordinate to
the Security constituted by this Debenture and (ii) payable on
demand.
(k) Compliance With Environmental Laws. The Freehold Lands and
the Leasehold Lands and all operations on the Freehold Lands
and the Leasehold Lands are currently in compliance and in the
last three years have been in compliance with all Environmental
Laws and no Contaminants have been released or disposed at, on,
from or under the Freehold Lands and the Leasehold Lands except
to the extent that any such presence of Contaminants or
non-compliance could not reasonably be expected to have a
Material Adverse Effect. The Company has not received any
notice of violation, alleged violation, non-compliance,
liability or potential liability regarding compliance with
Environmental Laws with regard to the Freehold Lands, the
Leasehold Lands or the business of the Company or with regard
to any Person whose liabilities for environmental matters the
Company has retained or assumed, in whole or in part,
contractually, by operation of law or otherwise, which, in the
aggregate, could reasonably be expected to have a Material
16
<PAGE>
Adverse Effect, nor does the Company have knowledge or reason to
believe that any such notice will be received or is being threatened.
Contaminants have not been transported or disposed of from the
Freehold Lands or the Leasehold Lands, nor have Contaminants been
generated, treated, stored or disposed of at, on or under any of the
Freehold Lands or the Leasehold Lands in violation of any
Environmental Law or in a manner that could reasonably give rise to
liability under any Environmental Law, except to the extent that the
foregoing, in the aggregate, could not reasonably be expected to have
a Material Adverse Effect; nor does the Company reasonably believe
that it has retained or assumed any liability, contractually, by
operation of law or otherwise, with respect to the generation,
treatment, storage or disposal of Contaminants, except to the extent
that the foregoing, in the aggregate, could not reasonably be expected
to have a Material Adverse Effect. No material judicial proceedings or
governmental or administrative action is pending, or, to the knowledge
of the Company, threatened under any Environmental Law to which the
Company is or will be named a party with respect to the Freehold
Lands, the Leasehold Lands, the business of the Company or any
liabilities pursuant to Environmental Laws reasonably believed by the
Company to be retained or assumed by the Company contractually, by
operation of law or otherwise and there are no material decrees,
consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any
Environmental Law with respect to the Freehold Lands, the Leasehold
Lands, the business of the Company or any liabilities pursuant to
Environmental Laws reasonably believed by the Company to be retained
or assumed by the Company contractually, by operation of law or
otherwise. The provisions of this Section 4.01(k) shall not apply to
matters disclosed in the prospectus of the Company dated April 13,
1995, relating to the First Priority Notes and the Second Priority
Notes or to matters arising from the alleged violation by the Company
of the Clean Water Act (New Brunswick) referenced in the summons of
the Provincial Court of New Brunswick to the Company dated March 27,
1995.
(l) Change of Name. The Company shall not change its name without giving
prior written notice to the Collateral Agent of the new name and the
date upon which such change of name is to take affect, and in such
connection shall cause to be made all filings and registrations
necessary or appropriate to preserve the perfection and priority of
the Security.
5.01 Covenant to Insure/Condemnation/Eminent Domain
(a) The Company shall maintain, with respect to the Collateral,
insurance coverages with reputable insurers in such amounts and
against such liabilities and hazards as may be deemed, after due
inquiry, on a not less than annual basis, as to the customary
standards of the industry in which the Company operates,
commercially reasonable in the good faith, prudent, reasonable
opinion of the Board of Directors of the Company. Each insurance
policy shall (i) be non-cancellable (which term shall include any
reduction in the scope or limits of coverage) without at least 30
days' prior written notice to the Collateral Agent, (ii) except
in the case of comprehensive public liability insurance, be
endorsed to name the Collateral Agent as an additional insured
as its interest may appear, with loss payable to the Collateral
17
<PAGE>
Agent, without contribution, under a standard Insurance Bureau of
Canada mortgage clause (or equivalent), and, in the case of
comprehensive public liability insurance, be endorsed to name the
Collateral Agent as an additional insured, and provide that all
insurance proceeds for losses in excess of Cdn.$6,000,000 be adjusted
only with participation by the Collateral Agent and the Company, and
be payable in accordance with the terms and provisions of the Second
Priority Note Indenture and that proceeds for losses less than
Cdn.$6,000,000 be adjusted only by the Company and shall be payable
directly to the Company, and (iii) contain an endorsement or
agreement by the insurer that any loss shall be payable in accordance
with the terms of such policy notwithstanding any act or negligence
of the Company which might otherwise result in forfeiture of said
insurance and the further agreement of the insurer waiving all rights
of set-off, counterclaim, deduction or subrogation against the
Company. If said insurance or any part thereof shall expire, be
withdrawn, become void by breach of any condition thereof by the
Company or by any lessee of any part of the Freehold Lands or
otherwise, or become void by reason of the failure or impairment of
the capital of any insurer, the Company shall obtain new or
additional insurance complying with the requirements of this
Debenture. The Company shall not take out any separate or additional
insurance which is contributing in the event of loss unless it is
properly compatible with all other insurance carried by the Company.
(b) The Company shall (i) pay as they become due all premiums for
such insurance, and (ii) not later than ten (10) days prior to
the expiration of each policy to be furnished pursuant to the
provisions of this Section 5.01, deliver a valid certificate of
insurance (or if such certificate is not then available, a
renewal binder), evidencing a renewed policy or policies marked
"premium paid", or accompanied by other evidence of payment
reasonably satisfactory to the Collateral Agent. Subject to the
terms of the Collateral Agency Agreement, the Collateral Agent
shall have no responsibility for determining compliance of such
insurance with the terms of this Debenture.
(c) If the Company shall be in default of its obligations so to
insure in accordance with paragraphs (a) and (b) above, then the
Collateral Agent, at the Collateral Agent's option and upon not
less than ten (10) days' prior written notice (provided, however,
that, with respect to any material default of its obligation to
obtain and maintain any of the policies required pursuant to this
Section 5.01, no such notice shall be required), may reasonably
effect such insurance for such year, and pay the premium or
premiums therefore. All such reasonable premiums, together with
interest thereon from the date of payment thereof at the interest
rate applicable under the Second Priority Notes, shall be added
to the Obligations. All such premiums, together with interest
thereon as aforesaid, shall be (i) a charge on the Collateral
secured hereby prior to any right or title to, interest in, or
claim upon any of the Collateral subordinate to the Security
constituted by this Debenture and (ii) payable on demand.
(d) If the Collateral, or any portion thereof, shall be destroyed or
damaged by fire or any other casualty, the Company shall, except as
provided below and provided that the insurance proceeds are made
available to the Company in accordance with the terms of
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<PAGE>
the Second Priority Note Indenture (provided that the Company agrees
to use reasonable efforts to provide the Officers' Certificate
described in Section 11.03(a) of the Second Priority Note Indenture
and provided further that if the Company is unable, in the reasonable
opinion of the Board of Directors of the Company, to provide the
certification described at Section 11.03(a)(v) of the Second Priority
Note Indenture, then the Company shall have no obligation hereunder to
restore, repair or replace the property as to which the Company is
unable to give such certification, without regard to the availability
of insurance proceeds in connection therewith) and are sufficient
therefor (provided, however, that if the Company elects on the
insurable portions of the Collateral not to carry casualty insurance
(including other hazards insured under the then standard "Special"
Form Causes of Loss or equivalent) in the amount of full replacement
cost, then the Company shall be required to contribute to the costs of
such restoration, repair or replacement, the difference between the
proceeds actually paid out as a result of a loss and the proceeds
which reasonably would have been paid out if the Company had carried
such casualty insurance at full replacement cost (the "Insurance
Standard") unless the Collateral Agent shall have consented to a
standard less than the Insurance Standard, which consent shall not be
unreasonably withheld, as determined by an independent insurance
consultant designated by the Company in its reasonable discretion and
at its sole expense), commence, within a reasonable time thereafter,
and diligently pursue to completion the restoration, repair and
replacement of the Collateral, or such portion thereof so that, and in
such manner that, the Collateral shall be restored to an economically
viable facility in the reasonable judgment of the Board of Directors
of the Company and so that the value of any Trust Moneys remaining
after restoration and the value of the Collateral after restoration,
in the aggregate, are reasonably equivalent to the value of the
Collateral immediately prior to any such casualty as determined in the
reasonable judgment of the Board of Directors of the Company. The
Company shall give immediate notice to the Collateral Agent of any
such destruction or damage resulting in a loss in excess of
Cdn.$6,000,000, who, subject to the provisions of the Collateral
Agency Agreement, may (but shall not be obligated to) make proof of
loss if not promptly made by the Company, and each insurance company
concerned is hereby authorized and directed to make payment for any
loss directly to the Collateral Agent. The Collateral Agent and the
Company shall be entitled (but not obligated) to participate at the
Company's reasonable expense, in the adjustment of any such loss in
excess of Cdn.$6,000,000 and available insurance proceeds, if any,
shall be paid in accordance with the terms and provisions of the
Second Priority Note Indenture. In the case of any such loss of less
than Cdn.$6,000,000 and provided no Event of Default hereunder shall
have occurred and be continuing, the Company shall have the right to
adjust such loss independently of the Collateral Agent and all such
proceeds shall be paid directly to the Company. If a Major Casualty or
Condemnation Event occurs with respect to the Collateral, the Company
may elect, in lieu of restoring the Collateral, to prepay or defease
its obligations under the Second Priority Notes in accordance with the
terms and provisions of the Second Priority Note Indenture. In the
event of any prepayment pursuant to the immediately preceding
sentence, the Collateral Agent shall make the insurance proceeds or
any
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<PAGE>
part thereof received by the Collateral Agent in accordance with the
provisions of the Second Priority Note Indenture and the Collateral
Agency Agreement available for such purpose.
(e) The insurance required by this Debenture may be effected by
blanket and/or umbrella policies issued to the Company or an
affiliate of the Company covering the Collateral and other
properties (real and personal) owned or leased by the Company;
provided that any such blanket policy shall specify, except in
the case of public liability insurance, the sub-limit, if any,
of the total coverage afforded under such policy that is
available in respect of any occurrence on or about or casualty
to the Collateral and shall in any case comply in all other
respects with the requirements of this Section 5.01. Subject to
the terms of the Collateral Agency Agreement, the Collateral
Agent shall have no responsibility for determining compliance
of such insurance with the terms of this Debenture.
(f) Any transfer of the Collateral by mortgage sale shall transfer
therewith all of the Company's interest, including any unearned
premiums, in all insurance policies then in force covering the
Collateral, subject, however, to the approval of the insurance company
issuing any such policy.
(g) If, in the reasonable opinion of the Board of Directors of
the Company, any insurance coverage required to be maintained
by the Company hereunder (i) becomes unavailable except upon
payment of extraordinary premiums or (ii) is no longer
customarily required by institutional lenders and obtained by
persons owning or using facilities comparable in class and
quality to facilities comprising part of the Collateral, then
such insurance coverage shall be maintained by the Company only
to the extent that the conditions set forth in either clause
(i) or (ii) above are inapplicable. Subject to the terms of the
Collateral Agency Agreement, the Collateral Agent shall have no
responsibility for determining satisfaction of any conditions or
requirements of this Section 5.01(g).
(h) All insurance and condemnation award proceeds held by the Collateral
Agent and any additional amounts deposited with the Collateral Agent
by the Company in connection with any restoration of the Improvements
shall be invested in accordance with the terms and provisions of the
Second Priority Note Indenture pending their disposition in accordance
with the terms thereof.
(i) Immediately upon obtaining knowledge of the institution of any
proceedings for the condemnation or taking by eminent domain of
any of the Freehold Lands, Leasehold Lands or any Improvements
thereon, or any portion thereof, the Company shall notify the
Collateral Agent of the pendency of such proceedings. Except in
the case of a Total Taking, the Company shall be required, to the
extent practicable and to the extent condemnation awards or
proceeds are made available to the Company and are sufficient
therefore, to restore the Developed Premises to the full extent
provided by Section 5.01(d) in the case of casualty events. The
Collateral Agent shall be entitled (but not obligated) to
participate, at the Company's reasonable expense, with the
Company in any such proceedings where the amount in controversy
exceeds Cdn.$6,000,000, and the Company shall from time to time
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<PAGE>
deliver to the Collateral Agent all instruments requested by it to
permit such participation. The Company shall, at its expense,
diligently prosecute any such proceedings, as appropriate, and shall
consult with the Collateral Agent, its attorneys and experts and shall
cooperate with the Collateral Agent in any reasonable defense of any
such proceedings. In any case, the award of compensation, if any,
shall be paid to the Collateral Agent on behalf of the Second Priority
Note Trustee or as otherwise provided pursuant to the Second Priority
Note Indenture and shall be disbursed to the Company pursuant to the
terms and provisions of the Second Priority Note Indenture.
6.01 Collateral Agent's Costs and Expenses
Upon the occurrence of any Event of Default hereunder or if any action or
proceeding be commenced, to which action or proceeding the Collateral Agent is
or becomes a party or in which it becomes necessary to defend or uphold the
Security constituted by this Debenture or upon the occurrence and in connection
with any condemnation or eminent domain proceeding with respect to which the
Collateral Agent reasonably elects to participate or otherwise become involved,
all reasonable costs, expenses and fees incurred by the Collateral Agent in
connection therewith, including, without limitation, for the enforcement of the
Security and for the repossession, holding, repairing, processing, preparing for
disposition and disposing of any of the Collateral (including reasonable legal
fees and disbursements and the reasonable fees and disbursements of all other
professional advisors retained by the Second Priority Note Trustee or the
Collateral Agent), shall be paid or reimbursed by the Company and unless and
until so paid shall be added to the Obligations secured hereby. All such
amounts, together with interest thereon as aforesaid, shall be (i) secured by a
charge on the Collateral prior to any right or title to, interest in, or claim
upon any of the Collateral subordinate to the Security constituted by this
Debenture and (ii) payable on demand.
7.01 Collateral Agent's Right to Perform
If any Event of Default hereunder shall have occurred and be continuing,
the Collateral Agent, without waiving or releasing the Company from any
obligation or default under this Debenture, may (without being obligated to do
so) upon at least ten (10) days' prior written notice to the Company (except in
the case of an Event of Default, which if left unremedied, would reasonably be
expected to (a) affect the priority of the Security or (b) materially and
adversely affect the value of any of the Developed Premises, in which case no
prior notice shall be necessary) it being understood that said notice may be
given prior to a Default becoming an Event of Default pursuant to the terms
hereof, perform the same, and the cost thereof, together with interest at the
interest rate applicable under the Second Priority Notes, shall be paid or
reimbursed by the Company and unless and until so paid shall be added to the
Obligations secured hereby. All such amounts, together with interest thereon as
aforesaid, shall be (i) secured by a charge on the Collateral prior to any right
or title to, interest in, or claim upon any of the Collateral subordinate to the
Security constituted by this Debenture and (ii) payable on demand. No payment or
advance of money by the Collateral Agent under this Section 7.01 shall be deemed
or construed to cure the Company's default or waive any right or remedy of the
Collateral Agent hereunder.
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8.01 Events of Default
The occurrence of an "Event of Default" as defined in the Second Priority
Note Indenture shall be an "Event of Default" hereunder. Notwithstanding
anything to the contrary contained herein, in the Second Priority Note
Indenture, the Collateral Agency Agreement or in any other document executed in
connection herewith, for purposes of determining whether an Event of Default
shall have occurred under the Second Priority Note Indenture, the Company's
failure to perform or comply with any of its agreements contained herein shall
not be deemed to continue past the 60-day grace period provided for in Section
6.01(5) of the Second Priority Note Indenture if any such failure cannot
reasonably be cured within such 60-day period and such failure does not affect
the priority of the Security constituted by this Debenture, so long as the
Company, upon receiving written notice with respect thereto under the Second
Priority Note Indenture, promptly commences and diligently pursues such cure to
completion. Notwithstanding anything to the contrary contained in this Section
8.01, it shall be an Event of Default hereunder if the Company fails, in any
material respect, to maintain the insurance coverage on the Collateral required
pursuant to Section 5.01 and after receiving written notice from the Collateral
Agent with respect thereto, fails within two (2) business days to cure such
failure.
9.01 Enforcement of Security
Upon the occurrence of an Event of Default, the Collateral Agent may,
subject to the terms of the Collateral Agency Agreement and the Second Priority
Note Indenture, declare the Second Priority Notes and any amounts owing under
the Second Priority Note Indenture and this Debenture, or any part thereof, to
be immediately due and payable, whereupon the Security shall immediately become
enforceable and so long as it remains enforceable, the Collateral Agent may,
subject to provisions of the Second Priority Note Indenture and the Collateral
Agency Agreement and applicable law, exercise in its sole discretion the
following rights and remedies (which may be exercised either independently or
concurrently):
(a) Take Possession: immediately enter upon and take possession
of the Collateral or any part thereof and exclude the
Company and all persons claiming under the Company
therefrom; hold, operate and manage the Collateral and from
time to time make all necessary repairs, alterations,
additions and improvements thereto; collect, sue for,
recover and receive the Rents, income and profits therefrom
and use the same to pay all proper and reasonable costs and
expenses of so taking, holding, operating and managing the
Collateral, including the reasonable expenses and
compensation of the Collateral Agent, its agents and
solicitors, and any taxes, assessments and other charges
which the Collateral Agent may, in its reasonable discretion,
deem it wise to pay, and apply the remainder of the moneys so
received as provided in the Collateral Agency Agreement and
the Second Priority Note Indenture;
(b) Disposition: to the extent and in the manner permitted by
applicable law (the power of sale and other powers conferred on
the Collateral Agent by virtue of the Property Act (New
Brunswick) as in force from time to time being incorporated
herein by reference) (provided, however, that,
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<PAGE>
in the event that any of the following provisions are more
restrictive with respect to the exercise by the Collateral Agent
of its rights pursuant thereto, then the following notice,
provisions, limitations and other restrictions shall govern),
sell, lease or otherwise dispose of the Collateral or any part
thereof or interest therein at public auction or by public tender
to the highest bidder for cash or upon credit or by private
disposition or auction but only after demand and only upon not
less than 30 days' prior written notice to the Company setting
forth the date, time, place, and manner of disposition upon such
terms as the Collateral Agent may, acting in a commercially
reasonable manner, approve and whether or not the Collateral
Agent has taken possession of the Collateral, and upon such
disposition the Collateral Agent shall make and deliver to the
purchaser or purchasers or lessee or lessees a good and
sufficient deed or deeds (or other instrument or instruments of
transfer or lease, as the case may be) for the same. The
Collateral Agent is hereby irrevocably appointed the true and
lawful attorney of the Company, in its name and stead, to make
all necessary conveyances, assignments, leases and transfers of
property thus disposed of; and for that purpose it may execute
all necessary deeds, bills of sale, and instruments of
assignment, lease and transfer, and may substitute one or more
persons with like power, the Company hereby ratifying and
confirming all that its said attorney, or such substitute or
substitutes, shall lawfully do by virtue hereof. Nevertheless, if
so requested by the Collateral Agent or any purchaser or lessee
of the Collateral or any part thereof, the Company shall ratify
and confirm any such disposition by executing and delivering to
the Collateral Agent or such purchaser or lessee all proper
conveyances, assignments, instruments of transfer, leases and
releases as may be designated in any such request.
(c) Appointment of Receiver, Etc.: by instrument in writing
appoint any Person, whether an officer or employee of the
Collateral Agent or not, to be a receiver (which term shall
include a receiver and manager or receiver/manager) of the
Collateral or of any part thereof and remove any receiver
so appointed and appoint another in his stead; and, subject
to the provisions of the instrument appointing such receiver,
any such receiver so appointed shall have (to the extent
permitted by law):
(i) the same rights and powers as are conferred on the
Collateral Agent by law or pursuant to Sections 9.01(a)
and (b); and
(ii) the power to borrow money on the security of the
Collateral and in priority to this Debenture for the
purpose of the maintenance, preservation or protection
of the Collateral or any part thereof or for carrying
on all or any part of the business of the Company
relating to the Collateral (and in so doing the
receiver may issue certificates called "Receiver's
Certificates"). Receiver's Certificates may be payable
either to order or to bearer and may be payable at such
time or times as the receiver may think expedient
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<PAGE>
and shall bear interest as shall be stated therein and
the amounts from time to time payable by virtue of
Receiver's Certificates shall form a charge upon the
Collateral in priority to the Security of this
Debenture;
provided that such receiver shall be deemed the agent of the Company and not
that of the Collateral Agent and the Collateral Agent shall not be in any way
responsible for any misconduct, negligence or non-feasance of any such receiver,
his servants, agents or employees. To facilitate the foregoing powers, any such
receiver may, to the exclusion of all others, including the Company, enter upon,
use and occupy all premises owned or occupied by the Company wherein the
Collateral may be situate, maintain the Collateral upon such premises, borrow
money and use the Collateral directly in carrying on the Company's business or
as security for loans or advances to enable him to carry on the Company's
business or otherwise, as such receiver shall, in his discretion, determine.
Except as may be otherwise directed by the Collateral Agent, the net profits of
carrying on the said business and the net proceeds of sale shall be paid by the
receiver to the Collateral Agent to be held and distributed in accordance with
the provisions of the Collateral Agency Agreement and the Second Priority Note
Indenture;
(d) Further Rights: exercise any of the other rights to
which the Collateral Agent is entitled as holder of this
Debenture, including the right to take proceedings in any
court of competent jurisdiction for the appointment of a
receiver and manager, for the sale of the Collateral or any
part thereof and the right to take any other action, suit,
remedy or proceeding authorized or permitted thereunder or
by law or in equity in order to enforce the Security;
provided, that the Collateral Agent shall not be liable or accountable for any
failure to collect, enforce the Security or realize on any Collateral and shall
not be bound to institute proceedings for the purpose of collection, enforcing
the Security or realizing on the same for the purpose of preserving any right of
the Collateral Agent, the Company or any other Person in respect of the same,
and shall have no obligation to take any steps to preserve rights against prior
parties to any debt, instrument or chattel paper whether Collateral or the
proceeds thereof and whether or not in the Collateral Agent's possession and
shall not be liable or accountable for any delay in or failure to do so.
10.01 Proceeds of Disposition
The proceeds of any disposition of the Collateral or any part thereof or
any interest therein, together with any other moneys at the time held by the
Collateral Agent as part of the Collateral, shall (except as otherwise provided
herein) be applied in accordance with the terms and provisions of the Second
Priority Note Indenture and the Collateral Agency Agreement except as required
by applicable law.
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<PAGE>
11.01 Deficiency
If the proceeds of disposition of the Collateral and any other moneys held
by the Collateral Agent are insufficient to satisfy the Obligations in full, the
Company shall remain liable to pay any deficiency to the Collateral Agent on
behalf of the Second Priority Note Trustee for the benefit of the holders of the
Second Priority Notes forthwith on demand.
12.01 Discharge
If the Company pays and performs the Obligations in full and the conditions
for the satisfaction and discharge of the Second Priority Note Indenture have
been satisfied, and otherwise observes and performs the terms and conditions
hereof, then the Collateral Agent shall, at the request and at the expense of
the Company, cancel and discharge the Security and execute and deliver to the
Company such deeds and other instruments that shall be requisite therefor;
provided that until such cancellation and discharge this Debenture shall remain
in full force and effect. Notwithstanding anything herein to the contrary, the
Collateral, or any part thereof, may only be, and shall be, released or
discharged from the terms of this Debenture only in accordance with the
provisions relating to the release or discharge of Collateral contained in the
Second Priority Note Indenture.
13.01 Waiver
No waiver of any provision of this Debenture shall be effective unless it
is in writing, makes express reference to the provision affected thereby and is
signed by the Collateral Agent, and then such waiver shall be effective only in
the specific instance and for the specific purpose for which given. No waiver
shall be taken in any manner whatsoever to affect any subsequent breach of any
provision of the Debenture or the rights resulting therefrom.
14.01 Transfers, Subordinate Security
Except as permitted in the Second Priority Note Indenture, the Company will
not, directly or indirectly, (i) sell, assign, convey, transfer or otherwise
dispose of legal or equitable title to any of the Collateral, or (ii) mortgage,
hypothecate or otherwise encumber or grant a security interest in any of the
Collateral.
15.01 Notices
Any notice or demand required or permitted to be given or made by the
Collateral Agent to the Company shall be given and be deemed to be received in
the manner prescribed in the Collateral Agency Agreement.
16.01 Successors and Assigns
This Debenture shall enure to the benefit of and be binding upon the Second
Priority Note Trustee, the Collateral Agent and the Company and their respective
successors and assigns.
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17.01 Amendments
No amendment of any provision of this Debenture shall be made except in
accordance with the provisions of the Second Priority Note Indenture and only by
a written agreement executed by the parties hereto.
18.01 Severability
In the event that any provision of this Debenture, as amended from time to
time, shall be deemed invalid or void, in whole or in part, by any court of
competent jurisdiction, the remaining provisions of this Debenture shall remain
in full force and effect.
19.01 Governing Law
This Debenture shall be governed in all respects by the laws of the
Province of New Brunswick and the laws of Canada applicable therein.
20.01 Receipt of Copy
The Company acknowledges that it has received a true copy of this
Debenture.
21.01 Collateral Agent's Capacity and Disclaimers
The Collateral Agent is acting hereunder in its capacity as the Collateral
Agent under the Collateral Agency Agreement and any duties and obligations of
the Collateral Agent hereunder are subject to all terms and provisions of the
Collateral Agency Agreement, which are incorporated herein by reference. The
Collateral Agent shall not be responsible for and makes no representation as to
the validity or adequacy of this Debenture, shall not be responsible for the use
by the Company of any funds payable to or retainable by the Company hereunder
and shall not be responsible for the accuracy of any statements, certifications
or other information provided to it by the Company or any other person pursuant
hereto. In the absence of bad faith, the Collateral Agent may conclusively rely,
as to the truth of the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the Collateral Agent
hereunder and conforming to the requirements hereof. Any reference herein to
knowledge of the Collateral Agent with respect to any circumstance, fact or
event shall mean the actual knowledge of a responsible officer in the Corporate
Trust Department of the Collateral Agent. The Collateral Agent undertakes to
perform such duties, and only such duties, as are specifically set forth herein,
in the Second Priority Note Indenture and in the Collateral Agency Agreement,
and no implied covenants or obligations shall be read into this Debenture
against the Collateral Agent.
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SCHEDULE "D"
RECITALS
A. The Company and The Bank of New York, as trustee (together with any
successors and assigns in such capacity, the "First Priority Floating Rate
Note Trustee") have entered into a certain indenture (as amended from time
to time, the "First Priority Floating Rate Note Indenture") dated as of
April 15, 1995, pursuant to which the Company has issued First Priority
Floating Rate Senior Secured Notes Due 2000 (the "First Priority Floating
Rate Notes") in the aggregate principal amount of U.S.$150,000,000.
B. The Company and The Bank of New York, as trustee (together with any
successors and assigns in such capacity, the "First Priority Fixed
Rate Note Trustee", together with the First Priority Floating Rate
Note Trustee, the "First Priority Note Trustees") have entered into
a certain indenture (as amended from time to time, the "First
Priority Fixed Rate Note Indenture" and, together with the First
Priority Floating Rate Note Indenture, the "First Priority Note
Indentures") dated as of April 15, 1995, pursuant to which the
Company has issued 9 7/8% First Priority Fixed Rate Senior Secured
Notes Due 2000 (the "First Priority Fixed Rate Notes" and, together
with the First Priority Floating Rate Notes, the "First Priority
Notes") in the aggregate principal amount of U.S.$150,000,000.
C. The Company and Bankers Trust Company, as trustee (together with
any successors and assigns in such capacity, the "Second Priority
Note Trustee", together with the First Priority Note Trustees, the
"Trustees") have entered into a certain indenture (as amended from
time to time, the "Second Priority Note Indenture" and, together
with the First Priority Note Indentures, the "Indentures") dated as
of April 15, 1995, pursuant to which the Company has issued 10 5/8%
Second Priority Senior Secured Notes Due 2005 (the "Second Priority
Notes") in the aggregate principal amount of U.S.$350,000,000.
D. Simultaneously with the execution and delivery of this Debenture,
the Company, the Trustees and The Bank of New York, in its capacity
as collateral agent (the "Collateral Agent"), have entered into a
certain Collateral Agency and Intercreditor Agreement (as amended
from time to time, the "Collateral Agency Agreement") dated as of
April 15, 1995, providing, among other things, for the Collateral
Agent to receive and hold in trust on behalf of the First Priority
Floating Rate Note Trustee for the benefit of the holders of the
First Priority Floating Rate Notes and in trust on behalf of the
First Priority Fixed Rate Note Trustee for the benefit of the holders
of the First Priority Fixed Rate Notes, mortgages, charges and
assignments on or in respect of certain property of the Company as
evidenced by a Debenture of the Company dated even date herewith
(the "First Priority Debenture") as security for the First Priority
Notes and to receive and hold in trust on behalf of the Second
Priority Note Trustee for the benefit of the holders of the Second
Priority Notes, mortgages, charges and assignments on or in respect
of the same property of the Company as evidenced by this Debenture
as security for the Second Priority Notes, which mortgages, charges
and assignments of the First Priority Debenture shall be prior to
this Debenture in accordance with the terms of the Indentures and
the Collateral Agency Agreement.
E. The mortgages, charges and assignments of this Debenture are given
by the Company to secure (a) the repayment of all principal and
payment of all interest, prepayment premiums, if any, and other
amounts evidenced by the Second Priority Notes and all other sums
due or to become due under the Second Priority Notes, and any
renewals or extensions thereof, and the payment of all sums payable
under this Debenture, the Collateral Agency Agreement (but only as
it relates to the Second Priority Notes and the Second Priority Note
Indenture) and the Second Priority Note Indenture, and (b) the
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performance of all covenants, agreements, obligations and liabilities of
the Company under or pursuant to this Debenture, the Collateral Agency
Agreement (but only as it relates to the Second Priority Notes and the
Second Priority Note Indenture), the Second Priority Note Indenture or any
other instruments or documents securing payment of the Second Priority
Notes (collectively, the "Obligations").
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SCHEDULE "F"
(a) As continuing security for the due payment and performance of the
Obligations, the Company hereby:
(i) grants, mortgages and charges as and by way of a second fixed
and specific mortgage and charge to and in favour of the
Collateral Agent, all right, title and interest, now existing or
after-acquired, of the Company in and to:
(A) all freehold real property and all leaseholds of real
property, including, but not limited to, the freehold and
leasehold lands and premises described in Schedule "A"
hereto (the freehold real property subject to the fixed
mortgage and charge being collectively referred to herein as
the "Freehold Lands" and the leaseholds of real property
subject to the fixed mortgage and charge being collectively
referred to herein as the "Leasehold Lands");
(B) all buildings, improvements, erections, structures and
fixtures now or hereafter constructed or placed on the
Freehold Lands or the Leasehold Lands (collectively, the
"Improvements");
(C) all of the Company's present and after-acquired personal
property (other than inventory, accounts receivable arising
from the sale or lease of, or otherwise relating to,
inventory, insurance in respect of such inventory and
accounts receivable, records relating to such inventory,
accounts receivable and insurance, substitutions and
replacements of, and property derived from dealings with,
such inventory, accounts receivable, insurance and records
and claims, choses in action and security for such
inventory, accounts receivable, insurance, records and other
property);
(D) Crown Timber Licences Number 3 and Number 4 issued to
the Company pursuant to the Crown Lands and Forests Act of
New Brunswick (the "Crown Timber Licences");
(E) all replacements of, substitutions for and increases,
additions and accessions to any of the property described in
clauses (i)(A) to (i)(D) inclusive above; and
(F) all proceeds of any of the property described in clauses
(i)(A) to (i)(E) inclusive above stated to be subject to the
fixed and specific mortgage and charge created hereby, in
any form derived directly or indirectly from any dealing
with such property or that indemnifies or compensates for
the loss of or damage to such property including, without
limitation, proceeds of insurance, and the right to collect
and receive the same, and all awards or other compensation
including the interest payable thereon and the right to
collect and receive the same, heretofore and hereafter made
with respect to the taking by eminent domain, condemnation
or otherwise of such property by the Government of Canada,
the government of any province, or any municipality or other
governmental authority;
(ii) charges as and by way of a floating charge to and in favour of
the Collateral Agent, all its undertaking, property and assets, both
present and after-acquired, of whatsoever nature and kind and
wheresoever situate (other than (A) inventory, accounts receivable
arising from the sale or lease of, or otherwise relating to,
inventory, insurance in respect of such inventory and accounts
receivable, records relating to such inventory, accounts receivable
and insurance, substitutions and replacements of, and property derived
from dealings with, such inventory, accounts receivable, insurance and
records and claims, choses in action and security for such inventory,
accounts receivable, insurance, records and other property (B) such of
the undertaking, property and assets of the Company that is
effectively and validly subject to the fixed and specific mortgage and
charge created under clause (i) above, and (C) the property that is
excluded from the Security pursuant to paragraph (b) below);
(iii) assigns to the Collateral Agent all right, title and interest, now
existing or after-acquired, of the Company as landlord or licensor, as
the case may be, in (A) all leases, subleases or other agreements for
the lease, use or occupancy of any of the Freehold Lands or the
Leasehold Lands or any part thereof or space therein, whether written
or oral, and as amended and renewed from time to time (collectively,
the "Leases"), (B) all rents and other amounts owing from time to time
under the Leases, and (C) every guarantee of the payment of the Rents
or performance and observance of the covenants, conditions and
agreements to be performed by any parties thereto other than the
Company (such rents and other amounts and the benefit of all
guarantees, conditions and agreements being hereinafter collectively
referred
29
<PAGE>
to as the "Rents"); provided, that so long as no Event of Default has
occurred and is continuing, the Company shall have the right to
collect, sue for, recover and retain all Rents, give receipts therefor
and to enforce payment thereof.
The fixed and specific mortgage and charge, floating charge and assignment
created by this Debenture are collectively referred to herein as the "Security"
and the property, both real and personal, subject to such fixed and specific
mortgage and charge, floating charge or assignment is collectively referred to
herein as the "Collateral".
(b) The Security shall not apply to:
(i) any property or assets acquired by the Company after the date
hereof to the extent that within 30 days after the date of
acquisition the Company transfers such property or assets to a
Person and then leases them back from such Person; and
(ii) the last day of the term of any lease or any agreement therefor
now held or hereafter acquired by the Company, provided that the
Company shall stand possessed of the reversion remaining in the
Company of any leasehold interest forming part of the Collateral
upon trust to assign and dispose thereof as the Collateral Agent
shall direct; and upon any sale or sales of such leasehold
interest or any part thereof, the Collateral Agent, for the
purpose of vesting the aforesaid reversion of such term or any
renewal thereof in any purchaser or purchasers thereof, shall be
entitled by deed or writing to appoint such purchaser or
purchasers or any other person or persons a new trustee or
trustees of the aforesaid reversion or any renewal thereof in the
place of the Company and to vest the same accordingly in the new
trustee or trustees so appointed, freed and discharged from any
obligation respecting the same.
Notwithstanding the Principal Sum as set out in this Debenture, the charges on
the Crown Timber Licenses under this Debenture shall be limited to the amount
set out in the Order of the Lieutenant Governor-in-Council of the Province of
New Brunswick dated April 6, 1995 being Order-in-Council 95-430 as amended by
Order-in-Council 95-433 dated April 13, 1995 namely the sum of three hundred
fifty million dollars (U.S.$350,000,000.00) in lawful money of the United
States. Provided however that in the event the said Order-in-Council is further
amended by increasing the said sum of three hundred fifty million dollars
(U.S.$350,000,000.00) in lawful money of the United States to the Principal Sum,
and the Minister of Natural Resources of the Province of New Brunswick gives his
written consent to such increase, the charges in this Debenture on the Crown
Timber Licenses shall thereafter be for the full Principal Sum.
30
SCHEDULE 4.12
THIS DEBENTURE AMENDING AGREEMENT made as of the 26th day
of October, 1998.
BETWEEN: REPAP NEW BRUNSWICK INC., a corporation
incorporated under the laws of Canada,
having an office at 345 Curtis Road, in
the City of Miramichi, in the Province of
New Brunswick (the "Corporation")
AND: THE BANK OF NEW YORK, a New York banking
corporation, having an office at 101 Barclay
Street, Floor 21 West, in the City of New
York, in the State of New York, as Collateral
Agent and BANKERS TRUST COMPANY, a New York
banking corporation, having an office at
Four Albany Street, in the City of New York,
in the State of New York, as Trustee
(collectively the "Lender")
WHEREAS:
1. The Corporation executed in favour of the Lender a Form A56
Debenture dated on April 24, 1995 (the "Debenture").
2. The capitalized terms used in this Amending Agreement, unless
something in the context is inconsistent therewith, shall have the
meanings set out in the Debenture.
3. The Debenture was registered as follows:
(a) in the Northumberland County Registry Office on April 24, 1995,
in Book 956 as Number 081282;
(b) in the Kent County Registry Office on April 24, 1995, in Book 618
as Number 171481;
(c) in the Gloucester County Registry Office on April 24, 1995, in
Book 1829 as Number 267756; and
(d) in the York County Registry Office on April 24, 1995, in Book
1780 as Number 382734.
1
<PAGE>
4. The parties hereto have always intended to exclude from the
mortgages and charges of the Debenture:
(a) any interest of the Corporation in the sawmill operation and
related property at Blackville, New Brunswick (the "Blackville
Sawmill");
(b) any accretions, additions or technological upgrades to the
Blackville Sawmill;
(c) accounts receivable and inventory of the Corporation; and
(d) property and assets of the Corporation involved in certain
sale/leaseback transactions.
However, in the absence of an express exclusion of items (a) and (b)
above from the mortgages and charges of the Debenture the status of
the Corporation's interest in the property described therein is
unclear on the public record.
5. The Corporation and the Lender have now agreed to amend the
Debenture as hereinafter set out to accurately reflect their intent in
the Debenture as authorized and permitted by Section 17.01 of Schedule
"C" of the Debenture and section 9.01 of the Second Priority Note
Indenture and a Direction to the Collateral Agent pursuant to Section
2(a) of the Collateral Agency Agreement from each of The Bank of New
York as a First Priority Refinancing Debt Representative, Credit
Suisse First Boston as a First Priority Refinancing Debt
Representative and Bankers Trust Company as a Representative under the
Collateral Agency Agreement.
NOW THEREFORE in consideration of the sum of One Dollar
($1.00) paid by each of the Lender and the Corporation to each other
2
<PAGE>
and for other good and valuable consideration, it is hereby agreed the
Debenture is further amended as follows:
1. Paragraph 2.01(b) of Schedule "C" and paragraph (b) of Schedule
"F" of the Debenture are each hereby amended as follows:
(a) by deleting the word "and" at the end of subparagraph (i)
thereof;
(b) by deleting the period at the end of subparagraph (ii) thereof
and substituting a semi-colon;
(c) by adding the following new sub-paragraphs (iii) and (iv)
thereto:
"(iii) Any and all interest of the Company, legal
or beneficial, now owned or hereafter acquired, in
any and all real and personal property located in
Blackville, New Brunswick associated with the
sawmill operation carried on there under the name
Blackville Lumber, including, without limiting the
generality of the foregoing, the real property
more particularly described in the Deed from
Nautical Terra Lumber Inc. as grantor to
Blackville Lumber Inc. as grantee dated November
25, 1988 and registered in the Registry Office for
Northumberland County New Brunswick in Book 661,
as Number 45931; and
(iv) Any and all interest of the Company, legal or
beneficial, now owned or hereafter acquired, in
any and all real and personal property
constituting accretions, additions or
technological upgrades to the real and personal
property described in clause (iii) above."
3
<PAGE>
2. This Debenture Amending Agreement shall be governed by the laws
of the Province of New Brunswick and the laws of Canada applicable
therein.
3. In all other respects, the parties confirm the terms and
conditions of the Debenture except as modified herein.
4. This Debenture Amending Agreement shall be binding upon the
parties hereto, their respective successors and assigns.
IN WITNESS WHEREOF the parties hereto have caused these presents
to be duly executed as of the day and year first above written.
REPAP NEW BRUNSWICK INC.
Per:----------------------------
THE BANK OF NEW YORK
Per:----------------------------
BANKERS TRUST COMPANY
Per:----------------------------
SCHEDULE 10.3.1
AMENDING AGREEMENT entered into as of December 15, 1998
BY AND BETWEEN: REPAP ENTERPRISES INC., a corporation duly
incorporated under the laws of Canada,
having its principal place of business at
345 Curtis Road, Miramichi, New Brunswick,
(hereinafter, the "Corporation")
AND STEPHEN C. LARSON, having his address for
the purposes of the present agreement at 200
Broad Street, Apartment 2138, Stamford,
Connecticut
(hereinafter, the "Executive")
1
<PAGE>
WHEREAS the Corporation and the Executive have previously entered into an
Employment Contract dated as of February 2, 1996 which agreement was amended by
a letter agreement dated October 16, 1997 and further amended and restated by
agreement dated September 25, 1997 (the "Agreement"); and
WHEREAS the Corporation considers the continuous maintenance of a sound and
vital management team to be essential to protecting and enhancing the best
interests of the Corporation and its shareholders; and
The Corporation and the Executive wish to amend certain provisions of the
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Section 4.2A i of the Agreement is hereby amended by deleting the number
"4.5" appearing at the end of that section and substituting therefor the
number "one".
2. Section 4.2.4 of the Agreement is hereby amended by deleting the number "4.5"
appearing in the fifth line of that section and substituting therefor the
number "one".
3. Section 4.2.5 (A) of the Agreement is hereby amended by deleting the number
"4.5" appearing in the tenth line of that section and substituting therefor
the number "one".
4. Section 8.2 of the Agreement is deleted in its entirety and the following
substituted therefor:
"This Agreement shall be governed by and construed and enforced in accordance
with the laws of the Province of New Brunswick and the laws of Canada
applicable therein."
5. The parties hereto hereby agree in their own name and on behalf of, as the
case may be, their respective heirs, legatees, successors, testamentary
executors and permitted assigns, to sign all documents and to take all
necessary or desirable measures to fulfill the terms and intent of this
Agreement.
6. Any offer, notice, direction or other instrument required or permitted to be
given hereunder shall be in writing and given by registered mail, by delivery
or sent by telecopier or similar telecommunications device and addressed to
the other party at the address of such party first mentioned in this
Agreement.
Any notice, direction or other instrument given as aforesaid shall be deemed
to have been effectively given and received, if by registered mail then on
the date of delivery thereof, if sent by telecopier or similar
telecommunications device on the next business day following such
transmission or, if delivered, to have been given and received on the date of
such a delivery. Any address for service may be changed by written notice
given as aforesaid.
2
<PAGE>
7. Except as otherwise expressly provided for herein, this Agreement, and the
rights granted and the obligations incurred hereunder, are not assignable,
whether in whole or in part, by the Executive without the prior written
consent of the Corporation.
8. Each of the Corporation and the Executive hereby confirm the terms of the
Agreement as amended by this Agreement.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of
the date and at the place first hereinabove mentioned.
REPAP ENTERPRISES INC.
----------------------
Stephen C. Larson
by:
----------------------
by:
----------------------
3
SCHEDULE 10.4.1
AMENDING AGREEMENT entered into as of December 15, 1998
BY AND BETWEEN: REPAP ENTERPRISES INC., a company duly incorporated
under the laws of Canada, having its principal place
of business at 345 Curtis Road, Miramichi, New
Brunswick,
(hereinafter "Repap")
AND Terry W. McBride, having his address for the
purposes of the present Agreement at New Canaan,
Connecticut,
(hereinafter the "Executive")
THE PARTIES DECLARE AS FOLLOWS:
WHEREAS Repap and the Executive have previously entered into a Memorandum of
Agreement dated as of June 17, 1996 which agreement was amended and replaced by
a Memorandum of Agreement dated October 1, 1997 (the "Agreement"); and
WHEREAS Repap considers the continuous maintenance of a sound and vital
management team to be essential to protecting and enhancing the best interests
of Repap and its shareholders during this process; and
Repap and the Executive wish to amend certain provisions of the Agreement.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH THAT, in consideration of the mutual
promises contained herein, and other good and valuable consideration the
adequacy and sufficiency of which is hereby acknowledged by the parties hereto,
it is hereby agreed by and between the parties hereto as follows:
1
<PAGE>
ARTICLE 1
INTERPRETATION
1.1 Definitions. For the purpose of this Agreement, or for the purposes of any
notice or communication required hereunder, capitalized terms shall have
the meaning ascribed thereto in the Agreement.
1.2 Gender. Any reference in this Agreement to any gender shall include all
genders and words used herein importing the singular number only shall
include the plural and vice versa.
1.3 Headings. The insertion of headings is for convenience of reference only
and shall not affect or be utilized in the construction or interpretation
hereof.
1.4 Severability. Any article, section, subsection or other subdivision of this
Agreement or any other provision of this Agreement which is deemed to be or
becomes, illegal, invalid or unenforceable shall be severed herefrom and
shall be ineffective to the extent of such illegality, invalidity or
unenforceability and shall not affect or impair the remaining provisions
hereof which shall remain in full force and effect.
1.5 Entire Agreement. This amending agreement together with the Agreement and
any instruments to be delivered pursuant hereto or thereto constitute the
entire agreement between the parties hereto pertaining to the subject
matter hereof and supersede all prior agreements (including the Prior
Agreement), understandings, negotiations, and discussions, whether oral or
written, by or among the said parties in respect of such subject matter.
1.6 Amendment. No amendment hereto shall be binding unless expressly provided
for in an instrument duly executed by the parties hereto.
1.7 Waiver. No waiver by any party hereto, whether by conduct or otherwise, of
any of the provisions of this Agreement shall be deemed to constitute a
waiver by such party of any other provisions (whether or not similar) nor
shall such waiver constitute a continuing waiver hereof, unless otherwise
expressly provided in an instrument duly executed by the party or parties
hereto to be bound thereby.
1.8 Governing Law. This Agreement shall be governed by and interpreted and
construed in accordance with the laws of New Brunswick.
ARTICLE 2
AMENDMENT
2.1 Amendment of Section 1.8. Section 1.8 of the Agreement is hereby amended to
read as follows:
"1.8 Governing Law. This Agreement shall be governed by and
interpreted and construed in accordance with the laws of New
Brunswick."
2
<PAGE>
2.1 Amendment of Section 2.1(d). Section 2.1 of the Agreement is hereby amended
to read as follows:
"(d) Indemnity - in consideration of the Executive agreeing to continue to
be employed by Repap and in lieu of any further compensation payments to
the Executive for periods subsequent to the date of termination, Repap
shall pay to the Executive a lump sum indemnity (the "Indemnity") equal to
one times the highest of the Executive's annual salary in the three years
preceding the Change in Control, or if there has not been a Change of
Control within twenty-four months from the date of termination then in the
three years preceding the date of termination. The Indemnity shall be paid
to the Executive in cash as soon as practical, but no later than thirty
(30) days following the date of termination;"
ARTICLE 3
GENERAL
3.1 Further Assurances. The parties hereto hereby agree in their own name and
on behalf of, as the case may be, their respective heirs, legatees,
successors, testamentary executors and permitted assigns, to sign all
documents and to take all necessary or desirable measures to fulfill the
terms and intent of this Agreement.
3.2 Notice. Any offer, notice, direction or other instrument required or
permitted to be given hereunder shall be in writing and given by registered
mail, by delivery or sent by telecopier or similar telecommunications
device and addressed to the other party at the address of such party first
mentioned in this Agreement.
Any notice, direction or other instrument given as aforesaid shall be
deemed to have been effectively given and received, if by registered mail
then on the date of delivery thereof, if sent by telecopier or similar
telecommunications device on the next business day following such
transmission or, if delivered, to have been given and received on the date
of such a delivery. Any address for service may be changed by written
notice given as aforesaid.
3.3 Assignment. Except as otherwise expressly provided for herein, this
Agreement, and the rights granted and the obligations incurred hereunder,
are not assignable, whether in whole or in part, by the Executive without
the prior written consent of Repap.
3.4 Confirmation. Each of Repap and the Executive hereby confirm the terms of
the Agreement as amended by this Agreement.
3
<PAGE>
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of
the date and at the place first hereinabove mentioned.
REPAP ENTERPRISES INC.
-------------------------
Terry W. McBride
by:
------------------------
by:
------------------------
4
SCHEDULE 10.5.1
AMENDING AGREEMENT entered into as of December 15, 1998
BY AND BETWEEN: REPAP ENTERPRISES INC., a company duly incorporated
under the laws of Canada, having its principal place
of business at 345 Curtis Road, Miramichi, New
Brunswick,
(hereinafter "Repap")
AND Michelle A. Cormier, having her address for the
purposes of the present Agreement at Westport,
Connecticut
(hereinafter the "Executive")
THE PARTIES DECLARE AS FOLLOWS:
WHEREAS Repap and the Executive have previously entered into a Memorandum of
Agreement dated as of June 17, 1996 which agreement was amended and replaced by
a Memorandum of Agreement dated October 1, 1997 (the "Agreement"); and
WHEREAS Repap considers the continuous maintenance of a sound and vital
management team to be essential to protecting and enhancing the best interests
of Repap and its shareholders during this process; and
Repap and the Executive wish to amend certain provisions of the Agreement.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH THAT, in consideration of the mutual
promises contained herein, and other good and valuable consideration the
adequacy and sufficiency of which is hereby acknowledged by the parties hereto,
it is hereby agreed by and between the parties hereto as follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions. For the purpose of this Agreement, or for the purposes of any
notice or communication required hereunder, capitalized terms shall have
the meaning ascribed thereto in the Agreement.
1
<PAGE>
1.2 Gender. Any reference in this Agreement to any gender shall include all
genders and words used herein importing the singular number only shall
include the plural and vice versa.
1.3 Headings. The insertion of headings is for convenience of reference only
and shall not affect or be utilized in the construction or interpretation
hereof.
1.4 Severability. Any article, section, subsection or other subdivision of this
Agreement or any other provision of this Agreement which is deemed to be or
becomes, illegal, invalid or unenforceable shall be severed herefrom and
shall be ineffective to the extent of such illegality, invalidity or
unenforceability and shall not affect or impair the remaining provisions
hereof which shall remain in full force and effect.
1.5 Entire Agreement. This amending agreement together with the Agreement and
any instruments to be delivered pursuant hereto or thereto constitute the
entire agreement between the parties hereto pertaining to the subject
matter hereof and supersede all prior agreements (including the Prior
Agreement), understandings, negotiations, and discussions, whether oral or
written, by or among the said parties in respect of such subject matter.
1.6 Amendment. No amendment hereto shall be binding unless expressly provided
for in an instrument duly executed by the parties hereto.
1.7 Waiver. No waiver by any party hereto, whether by conduct or otherwise, of
any of the provisions of this Agreement shall be deemed to constitute a
waiver by such party of any other provisions (whether or not similar) nor
shall such waiver constitute a continuing waiver hereof, unless otherwise
expressly provided in an instrument duly executed by the party or parties
hereto to be bound thereby.
1.8 Governing Law. This Agreement shall be governed by and interpreted and
construed in accordance with the laws of New Brunswick.
ARTICLE 2
AMENDMENT
2.1 Amendment of Section 1.8. Section 1.8 of the Agreement is hereby amended to
read as follows:
"1.8 Governing Law. This Agreement shall be governed by and
interpreted and construed in accordance with the laws of
New Brunswick."
2.1 Amendment of Section 2.1(d). Section 2.1 of the Agreement is hereby amended
to read as follows:
"(d)Indemnity - in consideration of the Executive agreeing to continue to
be employed by Repap and in lieu of any further compensation payments to
the Executive for periods subsequent to the date of termination, Repap
shall pay to the Executive a lump sum indemnity (the "Indemnity") equal
2
<PAGE>
to one times the highest of the Executive's annual salary in the three
years preceding the Change in Control, or if there has not been a Change of
Control within twenty-four months from the date of termination then in the
three years preceding the date of termination. The Indemnity shall be paid
to the Executive in cash as soon as practical, but no later than thirty
(30) days following the date of termination;"
ARTICLE 3
GENERAL
3.1 Further Assurances. The parties hereto hereby agree in their own name and
on behalf of, as the case may be, their respective heirs, legatees,
successors, testamentary executors and permitted assigns, to sign all
documents and to take all necessary or desirable measures to fulfill the
terms and intent of this Agreement.
3.2 Notice. Any offer, notice, direction or other instrument required or
permitted to be given hereunder shall be in writing and given by registered
mail, by delivery or sent by telecopier or similar telecommunications
device and addressed to the other party at the address of such party first
mentioned in this Agreement.
Any notice, direction or other instrument given as aforesaid shall be
deemed to have been effectively given and received, if by registered mail
then on the date of delivery thereof, if sent by telecopier or similar
telecommunications device on the next business day following such
transmission or, if delivered, to have been given and received on the date
of such a delivery. Any address for service may be changed by written
notice given as aforesaid.
3.3 Assignment. Except as otherwise expressly provided for herein, this
Agreement, and the rights granted and the obligations incurred hereunder,
are not assignable, whether in whole or in part, by the Executive without
the prior written consent of Repap.
3.4 Confirmation. Each of Repap and the Executive hereby confirm the terms of
the Agreement as amended by this Agreement.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of
the date and at the place first hereinabove mentioned.
REPAP ENTERPRISES INC.
---------------------------
Michelle A. Cormier
by:
------------------------
by:
------------------------
3
SCHEDULE 10.7.1
AMENDMENT NO. 2 TO
THE REPAP ENTERPRISES INC.
HEAD OFFICE REGISTERED PENSION PLAN
- -------------------------------------------------------------------
The following change is effective January 1, 1996.
1. Section 1.19 is deleted and replaced by the following:
"1.19 Pensionable Service" means Service in Canada while participating as
an active Member in this Plan and Service prior to the Effective Date but
excluding:
(a) Service before January 1, 1976;
(b) Service after December 31, 1989 but before the Effective Date which
the Employee chooses not to include;
(c) Service after December 31, 1989 but before the date the Executive
becomes a Member of this Plan which the Executive chooses not to
include;
(d) Service after the Normal Retirement Date; and (e) for an Employee who
is a connected person as defined in the
regulations of the Income Tax Act -
(i) Service prior to the Effective Date,
(ii) Service on or after the Effective Date which is an unpaid leave
of absence.
Pensionable Service includes a period acceptable to The Minister of
National Revenue throughout which the Member is employed outside Canada."
CERTIFIED AS A TRUE AND COMPLETE COPY
- -----------------------------
Date
- -----------------------------
Terry W. McBride
Secretary
SCHEDULE 10.11
REPAP ENTERPRISES INC.
1991 Salaried Employees Amended Stock Option Plan
- ---------------------------------------------------------
PART 1 - PURPOSE AND PARTICIPANTS
1.01 Purpose. The purpose of the stock option plan (the "Plan") is to provide an
incentive to, and serve to supplement the income of, certain Designated
Participants, as herein defined, of Repap Enterprises Inc. (the
"Corporation") and its subsidiaries by providing them with the opportunity
to acquire a proprietary
1
<PAGE>
interest in the Corporation through the grant of options (the "Options") to
purchase Common Shares ("Common Shares") of the Corporation on the terms
and conditions set forth in the Plan.
1.02 Designated Participants. Designated Participants entitled to participate in
the Plan shall be those full-time salaried employees of the Corporation or
any of its subsidiaries (as defined in section 2(2) of the Canada Business
Corporations Act, as the same may be amended or replaced from time to time)
who are designated solely by a committee of two or more directors (the
"1991 Stock Option Committee"), in its absolute discretion, each of whom is
appointed by the board of directors of the Corporation (the "board of
directors") and who qualifies as a "disinterested person" within the
meaning of Rule 16b-3 under the United States Securities Exchange Act of
1934 or any successor rule or regulation. A Designated Participant shall
also include a person who becomes a full-time salaried employee of the
Corporation or of one of its subsidiaries within 30 days after his or her
designation as such by the 1991 Stock Option Committee.
Notwithstanding the foregoing, the 1991 Stock Option Committee shall not
designate an insider as a Designated Participant if the effect of that
designation could result, together with all of the Corporation's previously
established share compensation arrangements, at any time, in (i) the number of
Common Shares reserved for issuance to insiders exceeding 10% of the outstanding
issue; (ii) the issuance to insiders, within a one-year period, of a number of
shares exceeding 10% of the outstanding issue; or (iii) the issuance to any one
insider and such insider's associates, within a one-year period, of a number of
Common Shares exceeding 5% of the outstanding issue. For the purposes of the
Plan, the terms "insider", "outstanding issue" and "share compensation
arrangements" shall have the meaning attributed to them respectively by the
Revised Policy on listed Company Share Incentive Arrangements of The Toronto
Stock Exchange dated March 22, 1994, as amended from time to time.
PART 2 - TERMS RELATING TO THE PLAN
2.01 Shares. Subject to Section 2.08 of the Plan, the aggregate number of Common
Shares that may be purchased pursuant to Options granted under the Plan
shall not exceed in the aggregate 1,000,000 Common Shares. In the event
that Options granted under the Plan are surrendered, terminate or expire
without being exercised, in whole or in part, new Options may be
subsequently granted by the 1991 Stock Option Committee covering the Common
Shares not purchased under any lapsed Options.
2.02 Participants. The participants in the Plan will be Designated Participants.
2.03 Number and Price of Optioned Common Shares.
(a) The number of Common Shares subject to an Option granted to a
Designated Participant and, subject to subsection 2.03(c), the price
at which the Option may be exercised (the "Option Price") shall be
determined solely by resolution of the 1991 Stock Option Committee, in
its absolute discretion.
(b) The total number of Common Shares reserved for issuance under Options
and under any other employee stock option plans, options for services
and employee stock purchase
2
<PAGE>
plans of the Corporation for any one person shall not exceed five per
cent (5%) of the outstanding Common Shares, from time to time; but
this limitation shall not affect any outstanding options or the right
of any person to exercise any such options granted pursuant to the
terms of this Plan or any other plan of the Corporation.
(c) In no event shall the Option Price be less than the market price of
the Common Shares at the time of the grant of the Option. The market
price at the time of grant of an Option shall be the closing price of
the Common Shares on The Toronto Stock Exchange on the trading day on
The Toronto Stock Exchange preceding the day of the grant of that
Option.
(d) If, as and when any Common Shares have been duly purchased and paid
for in cash under the terms of an Option granted under the Plan and in
accordance with the terms of the Option, those Common Shares shall be
conclusively deemed allotted and issued, at that time, as fully paid
and non assessable Common Shares at the price paid therefor.
2.04 Consideration, Option Period and Payment.
(a) The term of the Option granted hereunder (the "Option
Period") shall be the period commencing on the day which is the first
business day immediately following the date of the grant and
terminating at 5 p.m. (Montreal time) on the fifth anniversary of the
date of the grant, except as the same may be reduced with respect to
any Option as provided in Section 2.06 of the Plan covering cessation
as a full-time salaried employee of the Corporation or any
subsidiaries, as the case may be, of the Designated Participant.
(b) Options may be exercised (in each case to the nearest full share) at
any time and from time to time during the Option Period, in whole or
in part, upon and subject to the terms and conditions determined by
the 1991 Stock Option Committee.
(c) Except as set forth in Sections 2.06 and 2.07 of the Plan, no Option
may be exercised unless the Designated Participant is at the time of
exercise a full-time salaried employee of the Corporation or of one of
its subsidiaries and shall, subject to Section 1.02, have been a
full-time salaried employee continuously since the grant of the
Option.
(d) The exercise of any Option will be contingent upon receipt
by the Corporation (i) of a duly signed written notice of
exercise substantially in the form attached as Schedule One,
specifying the number of Common Shares with respect to which
the Option is being exercised and (ii) a certified cheque or
bank draft for the full purchase price of Common Shares with
respect to which the Option is exercised. No Designated
Participant or his legal representatives will be, or will be
deemed to be, a holder of any Common Shares subject to an
Option under the Plan, unless and until certificates for
such Common Shares are issued to him or them under the terms
of the Plan.
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(e) A Designated Participant shall have no right whatsoever as a
shareholder of the Corporation in respect of any of the
Common Shares covered by an Option (including any right to
receive dividends or other distributions therefrom or
thereunder) other than in respect of Common Shares in
respect of which the Designated Participant shall have
exercised an Option to purchase under the Plan and which the
Optionee shall have actually taken up and paid for in full.
(f) Each Option shall be subject to the requirement that if at
any time the 1991 Stock Option Committee shall determine
that the listing, registration or qualification of the
Common Shares subject thereto upon any securities exchange
or under any applicable securities law or the consent or
approval of any governmental or regulatory body is necessary
or desirable in connection with the issue or purchase of the
Common Shares subject thereto, then no such Option may be
exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not
acceptable to the 1991 Stock Option Committee.
2.05 Transferability. The Option granted pursuant to the Plan shall not be
transferable otherwise than by will or by the laws of descent and
distribution. During the lifetime of a holder of an Option, the Option
shall be exercisable only by the holder.
2.06 Ceasing to be a Full-time Salaried Employee.
(a) If a Designated Participant shall cease to be a fulltime
salaried employee of the Corporation or its subsidiaries for any
reason other than death, retirement at normal retirement age or any
other reason acceptable to the Corporation (as determined by the 1991
Stock Option Committee), he may, but only during the Option Period or
until 5:00 p.m. (Montreal time) on the ninetieth day following the
date on which he ceased to be a full-time salaried employee, whichever
first occurs, exercise his Option to the extent that he was entitled
to exercise it at the date of that cessation. Upon the expiration of
the Option Period, as altered by this Section 2.06, the Option
previously granted under this Plan to a Designated Participant shall
ipso facto cease and terminate and be of no further force or effect
whatsoever, except only to the extent of the number of Common Shares
then duly purchased and paid for.
(b) Nothing contained in the Plan, nor in any Option granted pursuant to
the Plan, shall as such confer upon a Designated Participant any right
with respect to continuance as a full-time salaried employee of the
Corporation or one of its subsidiaries.
2.07 Death of Designated Participant. In the event of the death of a Designated
Participant, the Option previously granted to him shall be exercisable
until the expiration of the Option Period or until 5:00 p.m. (Montreal
time) on the one hundred and eightieth day following the date of death of
the Designated Participant, whichever last occurs, and then only:
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(i) by the person or persons to whom the Designated Participant's rights
under the Option shall pass by the Designated Participant's will or
the laws of descent and distribution; and
(ii) if and to the extent that he was entitled to exercise the Option at
the date of his death.
Upon the expiration of the Option Period, as extended, if at all, by this
Section 2.07, the Option previously granted under the Plan to the Designated
Participant shall ipso facto cease and terminate and be of no further force or
effect whatsoever, except only to the extent of the number of Common Shares then
duly purchased and paid for.
2.08 Adjustment in Common Shares Subject to the Plan.
(a) In the event of any subdivision or redivision of the Common
Shares of the Corporation into a greater number of Common Shares at
any time after the date of the Plan and prior to the expiry time of an
Option held by any Designated Participant, the Corporation shall
deliver to that Designated Participant at the time of any subsequent
exercise of his Option in accordance with the terms hereof, in lieu of
the number of Common Shares to which he was theretofore entitled upon
exercise, but for the same aggregate consideration payable therefore,
such number of Common Shares as that Designated Participant would have
held as a result of the subdivision or redivision if on the record
date thereof the Designated Participant had been the registered holder
of the number of Common Shares to which he was theretofore entitled
upon exercise.
(b) In the event of any consolidation of the Common Shares of
the Corporation into a lesser number of Common Shares at any
time after the date of the Plan and prior to the expiry time
of an Option held by any Designated Participant, the
Corporation shall deliver to that Designated Participant at
the time of any subsequent exercise of his Option in
accordance with the terms hereof, in lieu of the number of
Common Shares to which he was theretofore entitled upon
exercise, but for the same aggregate consideration payable
theretofore, such number of Common Shares as that Designated
Participant would have held as a result of the consolidation
if on the record date thereof the Designated Participant had
been the registered holder of the number of Common Shares to
which he was theretofore entitled upon exercise.
(c) If at any time prior to the expiry time of the Option held
by a Designated Participant the Common Shares of the
Corporation shall be reclassified, reorganized or otherwise
changed, otherwise than as specified in Subsections 2.08 (a)
and (b) of the Plan or, subject to amendment or discontinuance
of the Plan pursuant to its terms and conditions, the
Corporation shall consolidate, merge or amalgamate with or
into another corporation (the corporation resulting or
continuing from such consolidation, merger or amalgamation
being herein called the "Successor Corporation"), the
Designated Participant shall be entitled to receive upon the
subsequent exercise of his Option in accordance with the terms
hereof and shall accept in lieu of the number of Common Shares
then subscribed for, but for the same aggregate consideration
payable therefore, the aggregate number of shares of the
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appropriate class and other securities of the Corporation or the
Successor Corporation, as the case may be, and other consideration
from the Corporation or the Successor Corporation, as the case may be,
that the Designated Participant would have been entitled to receive as
a result of the reclassification, reorganization or other change of
shares or, as a result of the consolidation, merger or amalgamation,
if on the record date of the reclassification, reorganization or other
change of shares or the effective date of the consolidation, merger or
amalgamation, as the case may be, he had been the registered holder of
the number of Common Shares to which he was immediately theretofore
entitled upon exercise.
(d) Any fractional Common Shares or other shares resulting from any
adjustment under Section 2.08(a), (b) or (c) of the Plan shall be
eliminated.
PART 3 - GENERAL
3.01 Benefits and Rights. No benefits or rights accruing to any Designated
Participant in accordance with the terms and conditions of the Plan shall
be transferrable unless specifically provided herein. During the lifetime
of a Designated Participant any benefits or rights may only be exercised by
the Designated Participant.
3.02 Record Keeping. The Corporation shall maintain a register in which shall be
recorded: (i) the name and address of each Designated Participant, (ii) the
number of Options granted to a Designated Participant, (iii) the number of
Common Shares under Options and (iv) the number of Common Shares subscribed
and paid for pursuant to Options.
3.03 Necessary Approvals. The obligation of the Corporation to issue and deliver
Common Shares in accordance with the Plan is subject to any approvals which
may be required from any regulatory authority or stock exchange having
jurisdiction over the securities of the Corporation. If any Common Shares
cannot be issued to any Designated Participant for whatever reason, the
obligation of the Corporation to issue Common Shares shall terminate and
any Option exercise price paid to the Corporation will be returned to the
Designated Participant.
3.04 Common Shares. As used in this Plan, "Common Shares" means subordinate
voting shares in the capital of the Corporation, subject to Section 2.08 of
the Plan.
3.05 Administration and Amendment of the Plan.
(a) The Plan will be administered by the 1991 Stock Option
Committee. The board of directors may, from time to time, remove
members from the 1991 Stock Option Committee or add members thereto,
and vacancies in the 1991 Stock Option Committee, however caused,
shall be filled by action of the board of directors. Subject to the
provisions of the Plan, the 1991 Stock Option Committee shall have
sole authority, in its absolute discretion, to determine the time and
frequency when Options shall be granted, the terms of such Options and
the number of Common Shares for which Options shall be granted. The
grant of Options under the Plan shall
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be effected by execution of a stock option agreement in the form
approved by the 1991 Stock Option Committee. The 1991 Stock Option
Committee shall have the authority to do everything necessary and
appropriate to administer the Plan, including, without limitation,
interpreting the Plan and executing all instruments, undertakings,
applications and writings as they, in their absolute discretion,
consider necessary for the implementation of rules and regulations by
the 1991 Stock Option Committee for administering the Plan and from
time to time amending or rescinding such rules or regulations. Any
interpretation or construction of any provision of the Plan and any
decision or determination by the 1991 Stock Option Committee shall be
final, conclusive and binding on all optionees and their successors,
and upon all other persons claiming under or through any of them. All
administration costs of the Plan shall be paid by the Corporation.
(b) Subject to the prior approval of The Toronto Stock Exchange
and any other stock exchange on which the Common Shares are
listed for trading, the board of directors reserves the
right to amend, modify or terminate the Plan at any time if
and when it is advisable in the absolute discretion of the
board of directors, except with respect to any Options then
outstanding under the Plan; provided, however, that, without
the approval of a majority of the Corporation's shareholders,
no amendment or modification may be made which would (i)
materially increase the benefits accruing to Designated
Participants under the Plan, (ii) materially increase the
number of Common Shares which may be issued under the Plan
(except by operation of Section 2.08 of the Plan) or (iii)
materially modify the requirements as to eligibility for
participation in the Plan.
(c) Should changes be required in this Plan by any securities
commission, stock exchange or other governmental or
regulatory body of any jurisdiction to which this Plan or
the Corporation now is or hereafter becomes subject, those
changes shall be made in this Plan in accordance with
Section 3.05(b) of the Plan as are necessary to conform with
those requirements. If changes are approved by the board of
directors, this Plan, as amended, shall be filed with the
records of the Corporation and shall remain in full force
and effect in its amended form.
3.06 Escrow. Common Shares to be issued upon exercise of an Option shall be
escrowed if required by any applicable law, regulation, regulatory body or
stock exchange, and the Designated Participant shall, upon request by the
Corporation, execute an escrow agreement in form required or requested by a
regulatory body, stock exchange or the Corporation and no Common Shares
shall be issued on exercise of an Option if the required escrow agreement
is not entered into by the Designated Participant.
3.07 Legal Opinion. Common Shares to be issued upon exercise of an Option to a
Designated Participant who is not residing in Canada shall be subject to
the receipt, by the Corporation, of a favorable legal opinion addressed to
the Corporation by a legal counsel designated by the Corporation,
establishing that all formalities, registration, consent, approval and
filing required
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under any applicable laws, if any, have been done or obtained in order to
issue Common Shares to that Designated Participant.
3.08 No Representation or Warranty. The Corporation makes no representation or
warranty as to the future market value of any Common Shares issued in
accordance with the provisions of the Plan.
3.09 Interpretation. The Plan will be governed by and construed in accordance
with the laws of Canada and of the Province of Quebec.
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SCHEDULE A
REPAP ENTERPRISES INC.
Exercise of Option
The undersigned hereby exercises the option to purchase ___________
_____________ Common Shares in the capital of Repap Enterprises Inc. pursuant to
the 1991 Stock Option Plan, as amended, at a price per share of $__________
granted to him by agreement dated _______________ and tenders a cheque therefore
in the amount of $_____________.
Dated this __________ day of ____________________ 19_______.
Signature of Designated Participant
-----------------------------------
Name and Address of Designated
Participant
----------------------------------
Exhibit 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is dated effective as of
January 27, 1999 (the "Effective Date"), between Repap Enterprises Inc., a
Canadian corporation (the "Company"), and F. Steven Berg (the "Executive").
W I T N E S S E T H
WHEREAS, Company desires to employ Executive as the Chairman of the Board
of Directors of the Company;
WHEREAS, Executive desires to serve in such capacity.
WHEREAS, the parties hereto desire to set forth in writing the terms and
conditions of their understandings and agreements.
NOW THEREFORE, in consideration of the foregoing, of the mutual promises
contained herein and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. EMPLOYMENT TERM. The Executive's term of employment under this Agreement
shall be for a term commencing on the Effective Date and, unless terminated
earlier as provided in Section 7, ending on the fifth anniversary thereof
("Initial Term"), which Initial Term shall automatically be extended and renewed
for additional successive two (2) year periods on the anniversary date of the
Effective Date unless terminated by the Company or the Executive by written
notice not less than ninety (90) days immediately prior to the expiration of the
Initial Term or any renewal thereof (the Initial Term and any such extension
being hereinafter collectively referred to as the "Employment Term").
2. POSITION/DUTIES.
(a) During the Employment Term, the Executive shall serve as the Chairman
of the Board of Directors of the Company (the "Board"). In this capacity the
Executive shall have such duties and responsibilities that are consistent with
the Executive's position as the senior executive officer, including the
performance of duties strategic in nature including the creating and
implementing of policies, addressing shareholder-related issues, developing
banking and financing relationships, directing and handling acquisitions,
recapitalizations and similar transactions, addressing financial and strategic
issues, reviewing management and personnel including, without limitation,
determining compensation and benefits for such persons and the employment and
tenure of executives, and retaining and approving professionals including,
without limitation, investment bankers, consultants, actuaries, attorneys,
accountants and experts. While the Executive has general oversight
responsibilities for all aspects of the Company, it is
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not intended that he perform duties relating to the day-to-day manufacturing
operations of the Company.
(b) During the Employment Term, the Executive shall devote
substantially all of his full business time (excluding periods of vacation and
sick leave), energy and skill in the performance of his duties with the Company,
provided the foregoing will not prevent the Executive from (i) participating in
charitable, civic, educational, professional, community or industry affairs or
serving on the board of directors of other noncompetitive companies and (ii)
managing his and his family's personal passive investments and acting as trustee
for trusts (where he currently is trustee or where he becomes trustee for other
trusts); provided that the activities described in (i) and (ii) do not
materially interfere with his duties and responsibilities under this Agreement.
3. BASE SALARY. The Company agrees to pay the Executive a base salary
("Base Salary") at an annual rate of not less than $420,000 , payable in
accordance with the regular payroll practices of the Company, but not less
frequently than monthly. The Executive's Base Salary shall be subject to annual
review by the Board and may be increased, but not decreased. No increase to Base
Salary shall be used to offset or otherwise reduce any obligations of the
Company to the Executive hereunder or otherwise. All dollar amounts set forth in
this Agreement shall be in U.S. dollars.
4. BONUS. During the Employment Term, the Executive shall be entitled to an
annual cash bonus based on increases in the Company's market capitalization as
described in Exhibit B attached hereto.
5. STOCK PLANS.
(a) SIGNING BONUS. The Company shall grant the Executive a signing
bonus of $1.25 million in shares (25 million Common Shares of the Company as of
the Effective Date) which may not be sold on the open market for twelve months
following the Effective Date.
(b) STOCK OPTION GRANT. As soon as practicable following the
Effective Date, Executive shall receive an option to purchase 75 million of the
Company's Common Shares (the "Option"), based on the fair market value on the
date of grant. The Option shall vest as follows: 50% on the first anniversary of
the date of grant and the remaining 50% on the second anniversary on the date of
grant. The Option shall have a ten (10) year term and shall be exercisable, in
whole or part, and at any time during the entire term without regard to the
Executive's termination and to the expiration of the term. It is intended that
the Option be designated as an "incentive stock option" ("ISO") under Section
422 of the Internal Revenue Code to the maximum amount allowable by law; to the
extent that the Option is not an ISO, it shall be treated as a nonqualified
stock option. To the extent that the Option is a nonqualified stock option, it
may be transferred subject to applicable regulatory compliance, if required, by
the Executive to: (i) the Executive's spouse, children, stepchildren,
grandchildren, great-grandchildren and later generations of issue, step-parents
or parents (the "Immediate Family
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Members"); (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members and/or the Executive; (iii) partnerships in which such Immediate
Family Members are the only partners; or (iv) a limited liability company in
which such Immediate Family Members are the only members.
6. EMPLOYEE BENEFITS
(a) BENEFIT PLANS AND PERQUISITES. The Executive shall be entitled
to participate in all executive-level benefit plans, compensation arrangements
and fringe benefits including, without limitation, pension benefits,
supplementary pension, bonus, health and welfare benefits, and accounting and
tax preparation fees and expenses up to $10,000. The Company shall provide to
the Executive, at the Company's cost, all perquisites to which other senior
executives of the Company (including the Company's President) are entitled to
receive and such other perquisites which are suitable to the character of the
Executive's position with the Company and adequate for the performance of his
duties hereunder but not less than the level being provided to the Executive on
the Effective Date. To the extent legally permissible, the Company shall not
treat such amounts as income to the Executive.
(b) AUTOMOBILE. During the Employment Term, the Company shall pay
the expenses to purchase or lease an automobile of the Executive's choice
consistent with the Executive's position as Chairman. The Company shall pay for
all expenses associated with the use, operation and enjoyment of the automobile
(including insurance coverage but exclusive of gasoline expense unless in
connection with reasonable and necessary business expense).
(c) VACATIONS. The Executive shall be entitled to an annual paid
vacation in accordance with the Company's policy applicable to senior
executives, but in no event less than six (6) weeks per calendar year (as
prorated for partial years and accrued, but not used, with respect to prior
years), which vacation may be taken at such times as the Executive elects with
due regard to the needs of the Company.
(d) EXECUTIVE PENSION. During the Employment Term, the Executive
shall be eligible to participate in the Company's supplementary pension plan. On
Effective Date, the Executive shall be immediately credited with eight (8) years
of pension credit for benefit accrual purposes and shall be fully vested in any
pension accrued thereunder.
(e) LIFE INSURANCE. During the Employment Term, the Company shall
provide Executive with life insurance (such as whole life, split dollar or other
insurance product mutually agreed to between the Company and the Executive which
creates cash surrender value) equal to two and one-half (2 1/2) times base
salary payable to his beneficiary. Upon any termination (other than Executive's
termination for cause), the Executive shall have the right to convert such life
insurance into an individual life insurance policy at no cost to the Executive
and where the Executive becomes owner of such policy.
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(f) DISABILITY. During the Employment Term, the Company shall
provide Executive with long term disability insurance coverage equal to at least
one times base salary. Upon any termination (other than Executive's termination
for cause), the Executive shall have the right to convert such long term
disability policy into an individual long term disability policy. Disability
benefits due under applicable plans and programs of the Company shall be
determined under the provisions of such plans and programs. For purposes of this
Agreement, "Disability" shall be defined as the inability of the Executive to
perform his material duties hereunder due to a physical or mental injury,
infirmity or incapacity for 180 consecutive days or an aggregate period of more
than 210 days in any twelve (12) consecutive month period. The existence or
nonexistence of a Disability shall be determined by a physician agreed in good
faith to by the Executive and the Company.
7. TERMINATION EVENTS. The Executive's employment and the Employment Term
shall terminate on the first of the following to occur:
(a) upon thirty (30) days written notice by the Company to the
Executive of termination due to Disability.
(b) automatically on the date of death of the Executive.
(c) upon written notice by the Company of a termination with or
without Cause. "Cause" shall mean (i) the willful and continuing failure by the
Executive to perform his material obligations with the Company that has a
material adverse effect on the Company or to follow the written, legal and
ethical instructions of the Board (other than any such failure resulting from
his incapacity due to Disability) that has a material adverse effect on the
Company, unless any such failure is corrected within thirty (30) days following
written notice by the Company specifying the details thereof; (ii) the
commission of any act of gross negligence, willful misconduct, fraud or theft by
the Executive (other than good faith expense account disputes) that has a
material adverse affect on the Company; (iii) the conviction of the Executive of
(or the pleading by the Executive of nolo contendere to) any felony that has a
material adverse effect on the Company; or (iv) any willful material breach by
the Executive of the terms of this Agreement, unless any such breach is
corrected within thirty (30) days following written notice by the Company
specifying the details thereof. No act or failure to act on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's action or
omission was in the best interest of the Company. The Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the entire membership of the
Board, exclusive of the Executive, at a meeting of the Board called and held for
such purpose (after reasonable written notice to the Executive and an
opportunity for the Executive, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, the Executive was
guilty of the conduct described in (i), (ii), (iii) or (iv) above that has a
material adverse effect on the Company (after giving the Executive the ability
to correct such conduct as described above) and specifying the particulars
thereof in detail.
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(d) upon written notice by the Executive to the Company of a
termination with or without Good Reason. "Good Reason" shall mean, without the
express written consent of the Executive, the occurrence of any of the following
events unless such events are fully corrected in all material respects by the
Company within thirty (30) days following written notification by the Executive
to the Company that he intends to terminate his employment hereunder for one of
the reasons set forth below:
(i) any reduction or diminution (except temporarily
during any period of Disability) in the Executive's titles, positions,
authorities, duties or responsibilities or reporting requirements
(including removal from the Board or reporting to anyone other than the
Board) with the Company as the Executive determines in good faith in
his sole discretion;
(ii) a material breach by the Company of any provisions
of this Agreement as the Executive determines in good faith in his
sole discretion, including, but not limited to, any reduction in
the Executive's Base Salary;
(iii) the failure of the Company to obtain and deliver to
the Executive a satisfactory written agreement from any
successor to the Company to assume and agree to perform this Agreement.
8. CONSEQUENCES OF TERMINATION.
(a) DISABILITY. Upon such termination, the Company shall pay or
provide the Executive (i) any unpaid Base Salary through the date of termination
and any accrued vacation; (ii) any pro rata portion of unpaid bonus accrued
(including the market capitalization bonus) with respect to the fiscal year
ending on or preceding the date of termination; (iii) reimbursement for any
unreimbursed expenses incurred through the date of termination; and (iv) all
other payments, benefits or fringe benefits to which the Executive may be
entitled under the terms of any applicable compensation arrangement or benefit,
equity or fringe benefit plan or program or grant (collectively, "Accrued
Benefits").
(b) DEATH. In the event the Employment Term ends on account of the
Executive's death, the Executive's beneficiary will receive: (i) the Accrued
Benefits; (ii) a lump sum payment equal to (a) Base Salary and bonus (other than
the market capitalization bonus) for remainder of the calendar year in which the
Executive dies plus (b) two (2) times base salary plus two (2) times the highest
bonus (other than the market capitalization bonus) payable in the three years
prior to termination; (iii) continued health and welfare benefits for
twenty-four (24) months after termination date; and (iv) the market
capitalization bonus, in calculation of which the date of death is the
measurement date, as provided in Exhibit B.
(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Executive's
employment by the Company is terminated (x) by the Company other than for Cause
or (y) by the Executive for Good Reason, the Company shall pay or provide the
Executive
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with: (i) Accrued Benefits; (ii) on or within five (5) days following the date
of termination, a lump sum payment equal to the greater of (A) the Executive's
Base Salary and bonus (other than the market capitalization bonus) for the
remainder of this Agreement's Employment Term or (B) two (2) times Base Salary
plus two (2) times the highest bonus (other than the market capitalization
bonus) for the three (3) years prior to termination; (iii) medical and dental
benefits for the Executive (and eligible dependents) upon the same terms and
conditions in effect on the date of termination for the twenty-four (24) month
period following the date of termination (and COBRA commences at the end of that
period); (iv) life insurance and long-term disability insurance coverage upon
the same terms and conditions in effect on the date of termination for the
twenty-four (24) month period following the date of termination; (v) full
vesting for any stock options; (vi) additional past service credit of eight (8)
years under the supplementary pension plan described in Section 6(d) and an
immediate lump sum payment of the benefit under such supplementary pension plan;
and (vii) the market capitalization bonus, in calculation of which the date of
termination is the measurement date, as provided in Exhibit B.
(d) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If the Executive's
employment should be terminated (x) by the Company for Cause, or (y) by the
Executive without Good Reason, the Company shall pay to the Executive, unpaid
salary, unpaid accrued vacation and out-of-pocket business expenses incurred
prior to the termination date.
(e) CHANGE OF CONTROL. If the Executive's employment should
terminate within two years following a Change of Control or within six (6)
months prior to a Change of Control (whether by the Executive with or without
Good Reason or by the Company without Cause), the Company shall pay to the
Executive: (i) a lump sum payment equal to the greater of (a) Base Salary and
bonus (other than the market capitalization bonus) payable to the Executive for
the remainder of the Agreement's Employment Term or (b) three (3) times Base
Salary plus three (3) times the highest bonus (other than the market
capitalization bonus) earned during the three (3) years preceding the Change of
Control; (ii) continued health and welfare benefits for thirty-six (36) months
after termination (and COBRA commences at the end of that period); (iii) the
transfer of car ownership; (iv) additional eleven (11) years of past credit
service under the supplementary pension plan described in Section 6(d) and an
immediate lump sum payment of the benefit under such supplementary pension plan;
and (v) the market capitalization bonus, in calculation of which the Change of
Control date is the measurement date, as provided in Exhibit B. Upon a Change of
Control or if the Executive's employment terminates within six (6) months prior
to a Change of Control (whether by the Executive with or without Good Reason or
by the Company without Cause), the Executive's stock options will become fully
vested on such date.
9. INTEREST ON LATE PAYMENTS. Nothing herein shall be construed as
permitting or authorizing delayed payment of any obligation hereunder. However,
in the event that any required payments to the Executive are not paid when due,
the Company shall pay interest from the due date to the date of payment of such
amount at a rate of nine percent (9%) per annum.
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10. NO ASSIGNMENTS. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto. However,
in the event of the death of the Executive, all rights to receive payments
hereunder shall become rights of the Executive's estate.
(a) The Company shall use its best efforts to require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean the
Company and any successor to its business and/or assets, which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Executive and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amount would still be payable to him hereunder
had he continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there is no such designee, to his estate.
11. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the Executive, at P.O. Box 1089, Loxahatchee, FL 33470, and to the
Company at Repap Enterprises Inc.; 200-300 Atlanta Street, Stamford, Connecticut
06901; Attention: Secretary of the Company (provided that all notices to the
Company shall also be directed to the attention of the Board), with a copy (in
the case of notices to either the Executive or the Company) to Andrea S.
Rattner, Esq., Proskauer Rose LLP, 1585 Broadway, New York, NY 10036 or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
12. (a) CONFIDENTIALITY. The Executive acknowledges that during the
Employment Term, he has occupied and will continue to occupy a position of trust
and confidence. The Executive shall not, except as may be required to perform
his duties hereunder, to defend his own rights or as required by applicable law,
without limitation in time or until such information shall have become public or
known in the Company's industry other than by the Executive's unauthorized
disclosure, disclose to others or use, whether directly or indirectly, any
Confidential Information regarding the Company. "Confidential Information" shall
mean information about the Company and its clients and customers that is not
disclosed by the Company for financial reporting purposes and that was learned
by the Executive in the course of his employment by the Company, including
(without limitation) any proprietary knowledge, trade secrets, data, formulae,
information and client and customer lists and all papers, resumes, and records
(including computer records) of the documents containing such Confidential
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<PAGE>
Information. The Executive acknowledges that such Confidential Information is
specialized, unique in nature and of great value to the Company, and that such
information gives the Company a competitive advantage. The Executive agrees to
deliver or return to the Company, at the Company's request at any time or upon
termination or expiration of his employment or as soon thereafter as possible,
all documents, computer tapes and disks, records, lists, data, drawings, prints,
notes and written information (and all copies thereof) furnished by the Company
or prepared by the Executive during the term of his employment by the Company.
Notwithstanding the foregoing, the Executive may retain his rolodex and similar
phone directories.
(b) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the
Employment Term and for the one year period thereafter, the Executive shall not,
directly or indirectly, influence or attempt to influence customers or suppliers
of the Company or any of its subsidiaries or affiliates, to divert their
business to any Competitor of the Company.
(c) NON-SOLICITATION OF EMPLOYEES. The Executive recognizes that he
possesses and will possess confidential information about other employees of the
Company relating to their education, experience, skills, abilities, compensation
and benefits, and inter-personal relationships with customers of the Company.
The Executive recognizes that the information he possesses and will possess
about these other employees is not generally known, is of substantial value to
the Company in developing its business and in securing and retaining customers,
and has been and will be acquired by him because of his business position with
the Company. The Executive agrees that, during the Employment Term and for the
one year period thereafter, he will not, directly or indirectly, solicit or
recruit any non-administrative or non- clerical employee of the Company for the
purpose of being employed by him or by any Competitor of the Company on whose
behalf he is acting as an agent, representative or employee and that he will not
convey any such confidential information or trade secrets about other employees
of the Company to any other person.
(d) SURVIVAL OF PROVISIONS. The obligations contained in this
Section 11 shall survive the termination or expiration of the Executive's
employment with the Company and shall be fully enforceable thereafter. If it is
determined by a court of competent jurisdiction in any state that any
restriction in this Section 11 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the intention
of the parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that state.
13. GROSS-UP PAYMENT. (a) In the event any payment that is either
received by the Executive or paid by the Company on his behalf or any property,
or any other benefit provided to him under this Agreement or under any other
plan, arrangement or agreement with the Company or any other person whose
payments or benefits are treated as contingent on a change of ownership or
control of the Company (or in the ownership of a substantial portion of the
assets of the Company) or any person affiliated with the Company or such person
(but only if such payment or other benefit is in connection with the Executive's
employment by the
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<PAGE>
Company) (collectively, the "Total Value") will be subject to the excise tax
(the "Excise Tax") imposed by Code Section 4999 (or any successor provision),
the Company shall, subject to the limitations and requirements specified in
subsection (b) of this Section 13, pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction (i) of any Excise Tax imposed on the Total Value and (ii) of any
Excise Tax, federal, state, or local income, payroll, and/or other taxes imposed
on the Gross-up Payment, shall be equal to the Total Value.
(b) If the Executive determines that he is liable for the Excise Tax
with respect to a payment or other benefit described in subparagraph (a), the
Executive must promptly so notify the Company in writing; provided, however,
that no delay on the part of the Executive in notifying the Company shall
relieve the Company from any obligation hereunder. Upon receipt of such notice
from the Executive, the Company must, within twenty (20) days thereafter, either
(i) notify the Executive, in writing, that the Company agrees with the
Executive's determination of Excise Tax liability, in which case the Company
shall become obligated to immediately pay to the Executive the Gross-Up Payment,
or (ii) submit to the Executive an opinion, prepared by counsel of the Company's
choice which counsel is reasonably satisfactory to the Executive, that the
Executive is not liable for the Excise Tax (the "Tax Opinion"). If the Tax
Opinion is provided to the Executive and the Executive nevertheless chooses not
to contest the assertion of the Excise Tax, the Company shall be relieved of its
obligation to make the Gross-Up Payment specified in subsection (a) of this
Section 13. If the Executive chooses to contest the assertion of the Excise Tax
after receipt of the Tax Opinion, he may do so with counsel of his choice that
is reasonably satisfactory to the Company, and the reasonable legal fees and
expenses of such contest shall be paid by the Company on a monthly basis,
subject to the Company's receipt of proper documentation therefor. If the Excise
Tax is so contested, then the Company shall pay to the Executive the Gross-Up
Payment upon the earlier of ten (10) days after (A) the entry of a final
judgment, decree, or other order by a court of competent jurisdiction that the
Executive is liable for the Excise Tax or (B) a mutual determination of the
Executive and the Company not to proceed further with the contest. The Company
also shall reimburse the Executive at that time for any penalties and interest
attributable to any delay in payment of the Excise Tax that results from a
decision by the Executive not to pay the Excise Tax liability based upon the Tax
Opinion. If, pursuant to this subsection (b), the Company is required to
reimburse the Executive for legal fees and expenses and/or for penalties and
interest incurred by the Executive ("Reimbursement Payments"), then the Company
also shall be required to pay to the Executive an additional gross-up amount
such that the net amount retained by the Executive, after deduction of any
Excise Tax, federal, state, or local income, payroll, and/or other taxes imposed
on the Reimbursement Payments and gross-up amount, shall be equal to the amount
of the Reimbursement Payments.
(c) If the IRS notifies the Executive in writing that the Excise Tax
will or may be assessed against the Executive, if the Company provides the
Executive with the Tax Opinion specified in subsection (b), and if the Executive
chooses to contest the assertion of the Excise Tax, then the Company shall
obtain and deliver to the Executive an irrevocable standby letter of credit (the
"Letter of Credit") issued by a bank acceptable to the Executive and the Company
in
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<PAGE>
an amount equal to the amount of the Company's potential payment obligation
under subsection (b), computed as if the Excise Tax were paid to the IRS on the
date the Letter of Credit was obtained. Immediately upon the earlier of (i) a
determination (within the meaning of Code Section 1313) that the Executive is
not liable for the Excise Tax, or (ii) the Company's payment to the Executive of
the full amount of its obligation under subsection (b), the Executive shall mark
the Letter of Credit "canceled" and return it to the Company. In lieu of such a
Letter of Credit, the Company may choose, under the circumstances described in
the first sentence of this subsection (c), to secure its obligations under
subsection (b) by establishing an appropriate escrow account with terms
reasonably satisfactory to the Executive, and by depositing therein the same
amount as would be required for the Letter of Credit.
(d) The obligations contained in this Section 13 shall survive the
termination or expiration of the Executive's employment with the Company and
shall be fully enforceable thereafter.
14. ATTORNEY'S FEES. If the Executive incurs legal or other fees and
expenses in an effort to establish entitlement to compensation and benefits
under this Agreement or otherwise enforce the terms of this Agreement, the
Company shall advance amounts to the Executive for such fees and expenses
subject to and within ten (10) days of the receipt by the Company or proper
documentation therefor and shall reimburse the Executive for any additional
amount of legal or other fees and expenses.
15. SECTION HEADINGS. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
16. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity of unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. COUNTERPARTS. This Agreement may be executed in several counter
parts, each of which shall be deemed to be an original but all of which together
will constitute one and the same instruments.
18. INDEMNIFICATION. The Company hereby covenants and agrees to
indemnify the Executive and hold him harmless to the fullest extent permitted by
law and under the By-laws of the Company against and in respect to any and all
actions, suits, proceedings, claims, demands, judgments, costs, expenses
(including attorney's fees), losses, and damages resulting from the Executive's
good faith performance of his duties and obligations hereunder. The Company,
within ten (10) days of presentation of invoices, shall advance to the Executive
reimbursement of all legal fees and disbursements incurred by the Executive in
connection with any potentially indemnifiable matter. The Company will cover the
Executive under directors' and officers' liability insurance both during and,
while potential liability exists (but no less than
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<PAGE>
six (6) years), after the Employment Term in the same amount and to the same
extent as the Company covers its other officers and directors.
19. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver or similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Connecticut without
regard to its conflicts of law principles. All references to sections of the
Exchange Act shall be deemed also to refer to any successor provisions to
sections.
20. FULL SETTLEMENT. Except as set forth in this Agreement, the
Company's obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
circumstances, including without limitation, set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obliged to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement, nor shall the
amount of any payment thereunder be reduced, by any compensation earned by the
Executive as a result of employment by another employer.
21. REPRESENTATION. The Executive represents and warrants to the
Company that he has the legal right to enter into this Agreement and to perform
all of the obligations on his part to be performed hereunder in accordance with
its terms and that he is not a party to any agreement or understanding, written
or oral, which could prevent him form entering into this Agreement or performing
all of his obligations hereunder. In the event of a breach of such
representation or warranty or if there is any other legal impediment that
prevents the Executive from entering into this Agreement or performing all of
his obligations hereunder, the Company shall have the right to terminate this
Agreement immediately and shall have no further obligation to the Executive
hereunder.
22. SUCCESSORS. This Agreement is binding on any and all
successors of the Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
REPAP ENTERPRISES INC.
By: ______________________________________
Stephen W. Phillips
Chairman of the Compensation Committee
of the Board of Directors
By: ______________________________________
Michelle A. Cormier
Vice President, Finance
F. STEVEN BERG
__________________________________________
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<PAGE>
EXHIBIT A
"Change of Control" means the occurrence of any of the following
events: (i) any sale, acquisition, transfer or other conveyance (other than to
the Company or a wholly owned subsidiary of the Company), whether direct or
indirect, by any person or group who become the beneficial owner of ten percent
(10%) or more of the total Voting Stock; (ii) reduction in share ownership by
Third Avenue Fund to less than ten percent (10%), other than a reduction caused
solely by the conversion of any of the Company's outstanding debt as of the
Effective Date into securities of the Company; (iii) during any period of
twenty-four (24) consecutive months, individuals who at the beginning of such
period constituted the Board (together with any new directors whose election by
such Board or whose nomination of election by the shareholders of the Company
was approved by a vote of a majority of the directors then still in the office
who were either directors 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 Board then in office; (iv) any merger,
consolidation, amalgamation or sale of assets of the Company under circumstances
where the beneficial owners of ten percent (10%) or more of the equity
securities of the surviving entity of such transaction were not holders of
Voting Stock immediately prior to the consummation of the transaction; or (v) a
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
For purposes of this definition, (i) the terms "person" and "group"
shall have the meanings used for purposes of Rules 13d and 13d-5 of the Exchange
Act, whether or not applicable; and (ii) the term "beneficial owner" shall have
the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable, except that a person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time or upon the
occurrence of certain events.
"Voting Stock" means shares of the Company having generally the right
to vote in the election of directors of the Company.
<PAGE>
EXHIBIT B
Market Capitalization Bonus
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The Company will pay Executive an annual market appreciation bonus
o 6% of that portion of the Company's market capitalization in excess of
$38,000,000, but equal to or less than $48,000,000.
o 10% of the portion of the Company's market capitalization in excess of
$48,000,000, but equal to or less than $96,000,000.
o 12% of the portion of the Company's market capitalization in excess of
$96,000,000, but equal to or less than $144,000,000.
o 16% of the portion of the Company's market capitalization in excess of
$144,000,000, but equal to or less than $192,000,000.
o 20% of the portion of the Company's market capitalization in excess
of $192,000,000.
1. Except in the case of a Change of Control, each year's bonus will be
reduced by the prior year's bonus. Market capitalization to be determined
by multiplying the relevant Average Share Value (the average closing price
of the Company's Common Shares for over a 20 consecutive trading day period
prior to each "applicable measurement date", as defined below, except in a
Change of Control the Average Share Value shall equal the value of the
consideration paid to purchase the Company's Common Shares in connection
with such Change of Control, if greater) by total number of Common Shares
issued and outstanding on the applicable measurement date (i.e., the last
business day of each fiscal year), except that issuances of Common Shares
at or below the fair market value of such shares after the Effective Date
by the Company in exchange for the outstanding debt of the Company as of
the Effective Date or issuances of Common Shares after the Effective Date
upon the conversion of convertible preferred shares received in exchange
for the outstanding debt of the Company as of the Effective Date, provided
that such conversion is at or below fair market value, shall not count as
issued and outstanding for purposes of this calculation.
2. Bonus paid in cash. Executive may defer bonus in accordance with applicable
tax rules.
3. The "applicable measurement date" will be the last business day of each
fiscal year, except that if Executive dies, becomes disabled, terminates
without Cause or terminates with or without Good Reason, the termination
date will be the applicable measurement date. In the event of a Change of
Control, the applicable measurement date will be the date of Change of
Control.
<PAGE>
Exhibit 10.13 NQSO
STOCK OPTION GRANT AGREEMENT
This STOCK OPTION GRANT AGREEMENT (the "Agreement") is dated effective
March 23, 1999 (the "Grant Date"), between Repap Enterprises Inc., a Canadian
corporation (the "Company") and F. Steven Berg (the"Executive").
W I T N E S S E T H
WHEREAS, the Company and the Executive have entered into an employment
agreement, effective as of January 27, 1999 (the "Employment Agreement");
WHEREAS, pursuant to the terms of the Employment Agreement, the Company
agreed to grant to the Executive an option to purchase 75 million of the
Company's Common Shares on such terms and conditions as set forth in the
Employment Agreement and as may be agreed to by the parties;
WHEREAS, the parties hereto desire to set forth in writing the terms
and conditions of the portion of the option which is intended to constitute a
nonqualified stock option to purchase 75 million of the Company's Common Shares
(the "Option").
NOW THEREFORE, in consideration of the foregoing, of the mutual
promises contained in the Employment Agreement and herein, the parties hereto
hereby agree that the terms and conditions of the Option are as follows:
1. Grant of Option. The Executive is hereby granted an Option to
purchase from the Company 75 million of the Company's Common Shares, at a price
per share of U.S. $.05 (the "Option Price").
2. Tax Matters. No part of the Option granted hereby is intended to
qualify as an "incentive stock option" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
3. Exercisability. Subject to Sections 4 and 5 below, the Option shall
become vested and exercisable in two installments as follows: 50% on the first
anniversary of the Grant Date and the remaining 50% on the second anniversary of
the Grant Date.
4. Termination of Option. Except as provided in the following sentence,
the Option shall expire on the tenth (10th) anniversary of the Grant Date and,
to the extent vested, shall be exercisable by the Executive (or, in the event of
the Executive's death, the legal representative of the Executive's estate), in
whole or in part, and at any time during such ten (10) year term without regard
to the Executive's termination of employment. Notwithstanding the foregoing, in
the event the Executive is terminated for "Cause" (as such term is defined in
the Employment Agreement), the Option shall immediately terminate and shall be
null and void.
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<PAGE>
5. Acceleration of Vesting.
(a) If the Executive's employment by the Company is terminated (i) by
the Company without Cause, or (ii) by the Executive for "Good Reason" (as such
term is defined in the Employment Agreement), the Option shall become fully
vested and exercisable in accordance with the terms of this Agreement.
(b) Upon a "Change of Control" (as such term is defined in the
Employment Agreement) or within six (6) months prior to a Change of Control
(whether by the Executive with or without Good Reason or by the Company without
Cause), the Option shall become fully vested and exercisable in accordance with
the terms of this Agreement.
(c) The Compensation Committee of the Company's Board of Directors (the
"Committee") may, in its sole discretion, accelerate the vesting and
exercisability of the Option at any time and for any reason.
6. Method of Exercise. Subject to Sections 3, 4 and 5 above, the Option
may be exercised in whole or in part at any time during the Option term, by
giving written notice of exercise to the Company specifying the number of Common
Shares to be purchased, accompanied by payment in full of the Option Price.
Common Shares purchased pursuant to the exercise of the Option shall be paid for
at the time of exercise as follows: (a) in cash or by check, bank draft or money
order payable to the order of Company; (b) if the Common Shares are traded on a
national securities exchange, the Nasdaq Stock Market, Inc. or quoted on a
national quotation system sponsored by the National Association of Securities
Dealers or, to the extent permissible, on an international securities exchange,
through a "cashless" exercise procedure through a broker where the Executive
delivers irrevocable instructions to the broker to deliver promptly to the
Company an amount equal to the Option Price; (c) by payment in full or part in
the form of Common Shares owned by the Executive for a period of at least six
(6) months (and for which the Executive has good title free and clear of any
liens and encumbrances) based on the fair market value of the Common Shares on
the payment date; or (d) on such other terms and conditions as may be acceptable
to the Committee (which may include the surrender of a vested portion of the
Option).
7. Restriction on Transfer of Option. Subject to the following
sentence, the Option granted hereby is not transferable other than by will or by
the laws of descent and distribution and may be exercised only by the Executive
during his lifetime. Notwithstanding the foregoing, the Option may be
transferred, subject to applicable regulatory compliance, if required, by the
Executive to: (a) the Executive's spouse, children, stepchildren, grandchildren,
great-grandchildren and later generations of issue, step-parents or parents (the
"Immediate Family Members"); (b) a trust or trusts for the exclusive benefit of
such Immediate Family Members and/or the Executive; (c) partnerships in which
such Immediate Family Members are the only partners; or (d) a limited liability
company in which such Immediate Family Members are the only members. Any attempt
to transfer the Option, except as described in the prior sentence, shall be
void. The Option shall not, in any manner, be used for the payment of, subject
to, or otherwise encumbered by or hypothecated for the debts, contracts,
liabilities, engagements or torts of any person who shall be entitled to such
Option, nor shall it be subject to attachment or legal process for or against
such person.
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<PAGE>
8. Rights as a Stockholder. The Executive shall have no rights as a
stockholder with respect to any Common Shares covered by the Option until the
Executive shall have become the holder of record of the shares, and no
adjustments shall be made for dividends in cash or other property, distributions
or other rights in respect of any such shares, except as otherwise provided
herein.
9. Changes in Common Shares.
(a) In the event of any change in the capital structure or business of
the Company by reason of any stock dividend or extraordinary dividend, stock
split or reverse stock split, recapitalization, reorganization, merger,
consolidation, amalgamation, split-up, combination or exchange of shares,
non-cash distributions with respect to its outstanding Common Shares or capital
stock other than Common Shares, reclassification of its capital stock, any sale
or transfer of all or part of the Company's assets or business, or any similar
change affecting the Company's capital structure or business and the Committee
determines in good faith that an adjustment is necessary or appropriate to
prevent substantial dilution or enlargement of the Executive's rights under this
Agreement or as otherwise necessary to reflect the change, then the aggregate
number and kind of shares to be issued upon exercise of the Option and the
Option Price shall be appropriately adjusted consistent with such change in such
manner as the Committee may deem equitable to prevent substantial dilution or
enlargement of the Executive's rights under this Agreement or as otherwise
necessary to reflect the change.
(b) Fractional Common Shares resulting from any adjustment in Options
pursuant to Section 9(a) shall be aggregated until, and eliminated at, the time
of exercise. No fractional Common Shares shall be issued hereunder and, the
Company shall pay the Executive cash in lieu any fractional Common Shares in
settlement of the Option granted hereunder. The Committee shall promptly notify
the Executive in the event any adjustment under this Section 9 is made.
10. Termination or Amendment. This Agreement may at any time, and from
time to time, be amended, in whole or in part, or suspended or terminated
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of Executive with
respect to the Option, may not be impaired without the consent of the Executive.
11. Administration. This Agreement shall be administered and
interpreted by the Committee. The determinations of the Committee in connection
with this Agreement shall be final, conclusive and binding on the Company and on
the Executive and their respective executors, administrators, successors and
assigns.
12. Legend. Certificates for Common Shares delivered hereunder shall be
subject to such stock transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Common
Shares are then listed or any national securities association system upon whose
system the Common Shares are then quoted, any applicable Federal, state or
provincial securities law, and any applicable corporate law, and the Committee
may cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
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<PAGE>
13. Withholding of Taxes. The Company shall have the right to deduct
from any payment to be made to the Executive, or to otherwise require, prior to
the issuance or delivery of any Common Shares or the payment of any cash
hereunder, payment by the Executive of, any Federal, state, provincial or local
taxes required by law to be withheld. The Company may permit any such
withholding obligation to be satisfied by reducing the number of Common Shares
otherwise deliverable or by delivering Common Shares already owned. Any fraction
of a Common Share required to satisfy such tax obligations shall be disregarded
and the amount due shall be paid instead in cash by the Executive.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Connecticut (regardless of the law that
might otherwise govern under applicable Connecticut principles of conflict of
laws).
15. Other Benefits. The Option granted hereunder shall not be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or its affiliates and it shall not affect any benefits under any other
benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation, except as may be
specifically set forth in the documents governing such plan.
16. Death. The Company may in its discretion require the transferee of
the Executive's Option to supply it with written notice of the Executive's death
and to supply it with a copy of the will or such other evidence as the Committee
deems necessary to establish the validity of the transfer of the Option. The
Company may also require the agreement of the transferee to be bound by all of
the terms and conditions of this Agreement.
17. Severability of Provisions. If any provision of this Agreement
shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and the Agreement shall be
construed and enforced as if such provisions had not been included.
18. Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
19. Notices. Any notice or communication given hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person or,
in the case of notice to the Company, by facsimile to the facsimile number set
forth below confirmed by simultaneous notice by mail, or when dispatched by
telecopy, or one business day after having been dispatched by a nationally
recognized courier service or three business days after having been mailed by
United States registered or certified mail, return receipt requested, postage
prepaid, to the appropriate party at the address (or, in the case of notice to
the Company, facsimile number) set forth below (or such other facsimile number
or address as the Company or you shall hereafter from time to time specify).
If to the Company, to:
Repap Enterprises Inc.
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<PAGE>
300 Atlantic Street, Suite 200
Stamford, Connecticut 06901
If to the Executive, to:
F. Steven Berg
P.O. Box 1089
Loxahatchee, Florida 33470
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
REPAP ENTERPRISES INC.
By: /s/
----------------------------
Stephen W. Phillips
Chairman of the Compensation Committee
of the Board of Directors
F. STEVEN BERG
/s/
----------------------------
5
EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Dollars in millions of Canadian dollars)
(shares in millions)
Year ended December 31,
1998 1997 1996
BASIC
Weighted Average shares outstanding 742.7 381.2 123.4
Earnings (loss) from continuing operations
attributable to common shareholders (68.4) (137.3) (93.8)
Net income (loss) (51.4) (63.5) (492.0)
Basic earnings (loss) from
continuing operations per share (0.09) (0.36) (0.76)
Basic earnings (loss) per share (0.07) (0.17) (3.99)
FULLY DILUTED
Weighted Average shares outstanding 742.7 381.2 123.4
Net effect of dilutive stock options (1) 0.0 0.0 0.0
Assumed conversion of convertible
debentures (1) 0.0 0.0 0.0
742.7 381.2 123.4
Earnings (loss) from continuing operations
attributable to common shareholders (68.4) (137.3) (93.8)
Net income (loss) (51.4) (63.5) (492.0)
Add interest on convertible debentures (1) 0.0 0.0 0.0
Add other interest income (1) 0.0 0.0 0.0
Earnings (loss) from continuing operations (68.4) (137.3) (93.8)
Net income (loss) (51.4) (63.5) (492.0)
Fully diluted earnings (loss) from
continuing operations per share (0.09) (0.36) (0.76)
Fully diluted earnings (loss) per share (0.07) (0.17) (3.99)
(1) Conversion of options and the convertible debentures is not assumed in 1998,
1997 and 1996 in the computation of fully diluted earnings per share because
its effects are antidilutive.
EXHIBIT 13.1
[REPAP LOGO]
ANNUAL REPORT 1998
REPAP ENTERPRISES INC.
[REPAP LOGO]
1998 Annual Report
Repap Enterprises Inc. ("Repap")
Repap is an integrated North American coated groundwood paper company with total
assets of approximately $1.3 billion. Its manufacturing subsidiary, Repap New
Brunswick Inc., is located in New Brunswick, Canada, and its marketing
subsidiary, Repap Marketing Inc., is located in Stamford, Connecticut, with
satellite sales offices in Chicago, Philadelphia and Montreal. Repap's executive
offices are located in Stamford, Connecticut. Repap employs approximately 1,520
people with annual revenues of $684 million in 1998.
Repap's operations have an annual capacity of 492,000 tons of coated groundwood
paper, 235,000 metric tons ("tonnes") of northern bleached softwood kraft pulp,
123,000 tonnes of groundwood pulp and 58 million board feet of lumber.
Repap's shares trade on the Toronto Stock Exchange and on the Montreal Exchange
(symbol RPP).
Repap has approximately 9% of the North American coated groundwood paper market.
Table of Contents Page
President's Message. . . . . . . . . . . . . . . . . . 1
Financial Highlights . . . . . . . . . . . . . . . . . 2
Overview of Operations . . . . . . . . . . . . . . . . 5
Financial Review . . . . . . . . . . . . . . . . . . . 6
Consolidated Financial Statements. . . . . . . . . . . 13
Summary of Selected Financial Data . . . . . . . . . . 30
Price Range and Trading Volume of Common Shares. . . . 31
Glossary . . . . . . . . . . . . . . . . . . . . . . . 32
Officers . . . . . . . . . . . . . . . . . . . . . . . IBC
1
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Financial Highlights
MILLIONS OF CANADIAN DOLLARS,
EXCEPT PER SHARE DATA 1998 1997
Statement of operations data (1)
Revenues from continuing operations $683.6 $609.9
Net sales from continuing operations 611.7 520.4
Operating profit (loss) 102.6 (4.0)
EBITDA (2) 177.1 83.3
EBITDA Margin (3) 28.7% 15.1%
Interest expense 111.5 117.9
Loss from continuing operations (65.5) (122.9)
Income from discontinued operations 17.0 73.8
Loss attributable to common shareholders (51.4) (63.5)
Average US$/Cdn$ exchange rate 1.4830 1.3848
Balance sheet data
Net fixed assets $980.0 $1,008.7
Total assets 1,328.9 1,397.9
Debt (4) 1,185.7 1,096.8
Shareholders' deficiency (110.8) (17.3)
Year-end Cdn$/US$ exchange rate 1.5305 1.4291
Cash flow from continuing operations data (1)
Cash flow from operations (5) $56.5 $(34.8)
Additions to fixed assets 20.8 16.2
Net additions to (reductions in) long-term 52.1 (229.4)
debt
Conversion/redemption of convertible (75.0) (157.1)(6)
debentures
Issue of share capital 0.2 157.16
Per share data (1)
Earnings (loss) from
- - Continuing operations, basic $(0.09) $(0.36)
- - Discontinued operations 0.02 0.19
Total, basic (0.07) (0.17)
Voting shares (thousands)
Common shares at year end 743,461 742,461
1. See Note 1 to the Corporation's consolidated financial statements.
2. EBITDA is equal to operating profit (loss) plus depreciation and
amortization plus effects of currency hedging.
3. EBITDA margin is equal to EBITDA as a percentage of net sales plus
effects of currency hedging.
4. Includes long-term debt, revolving credit facilities and repayable grants.
5. Before net change in non-cash working capital.
6. On August 1, 1997 US$130 million convertible debentures, maturing
on that date, were converted into common shares of the Corporation at a
formula price of US$0.21 per share, being 95% of the weighted average price
of the common shares traded on the Toronto Stock Exchange for the 20 days
preceding conversion date. The total number of common shares issued on
conversion was 619,023,800.
2
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[REPAP LOGO]
CHAIRMAN'S MESSAGE
To Our Shareholders:
On January 27, 1999, I was elected a Director and Chairman of the Board of Repap
Enterprises Inc. Additionally, a number of new directors have joined and will be
joining the Board. This election followed a series of changes in major
shareholder ownership.
The Third Avenue Funds, as well as myself, representing the largest personal
shareholding in the Company, made further significant investment in the
Company's shares.
The substantial position taken by Third Avenue Funds, which is managed by Martin
J. Whitman, a distinguished and highly regarded investment manager with enormous
business experience, indicates their confidence in the future potential of the
Company. Mr. Whitman has assured us that he will be an active investor providing
us with advice and counsel. We expect to benefit significantly from his insight
and knowledge which should reflect in shareholder enhancement.
Repap has tremendous assets and market position in the coated groundwood paper
industry. Repap's asset base is supported by strong, highly competent and
experienced management. Under the leadership of Steve Larson, this Company has
successfully "turned around" with competitive, substantive and material
operating results as described in his President's Message.
This outstanding management team and our 1,520 proud and dedicated employees are
the key to our success. Their continued high standard of performance and support
I am confident of, as I focus my energies on developing strategies to increase
shareholder value for the long term.
Change will be a major theme for the future, as we reposition our financial
strengths. My commitment to the success of the Company is apparent, as we
explore the challenges and focus on the opportunities to deliver superior value
to our shareholders.
We will continue as specialists in coated papers to provide the highest quality
products in the industry, to the finest customers in the world.
On behalf of management and your Board of Directors, we thank our many investors
and employees for their continuing support and efforts.
F. Steven Berg
Chairman
3
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[REPAP LOGO]
PRESIDENT'S MESSAGE
Introduction
1998 was the first full year of operations by the new management team since
assuming control in the third quarter of 1997. Substantial progress was made in
the turnaround of Repap as evidenced by the following results:
Operational Performance
Paper Production Record
Coated paper production in 1998 reached a new record of 1,271 tons per day, up
80 tons per day or 7% from 1997. Both the A1 paper machine (up 52 tons per day
or 10%) and the A2 paper machine (up 28 tons per day or 4%) increased their
performance and the operating teams realized improvements in overall efficiency,
including speed, machine uptime and shrink. [CHART]
Total Mill Production Record
As an integrated facility, pulp mill performance is a critical factor for
cost and quality performance. Here again, in combination with paper, new
total production records were set increasing total productivity by 4% from
818,000 tons to 848,000 tons. [CHART]
Inventory At All-Time Low
Even with the production increase in coated paper, paper inventories were
well-managed at extremely low levels. At 14,400 tons against an average monthly
sales volume of 38,300, monthly turns of 2.7 are very good. Against an industry
in which producers almost doubled their inventory year over year, Repap reduced
its inventories 20% from 18,000 tons at year end 1997 to 14,400 tons at year-end
1998. [CHART]
[REPAP LOGO]
Sales Volume Record
With a reduction in inventory and with record production, our sales force also
delivered record results by increasing coated paper sales volumes 4% in a year
when industry shipments by US producers declined by 4%. Great credit must be
shared with the continued support of our customers, our distribution channels,
our grade and basis weight mix, and our product quality. [CHART]
Cost Effectiveness
It is readily apparent that price improvement cannot be depended upon as the
sole determinant of financial performance. Cost effectiveness must be diligently
managed and here again, Repap performed well.
In an independent analysis by Jacobs-Sirrine consultants* analyzing the cost
competitiveness of all North American producers of coated groundwood paper, they
concluded that, "The lowest cost 34lb. #5 producer is Repap's Newcastle, NB mill
- - The lowest cost 40lb. #5 producer is also Repap's Newcastle, NB mill - The
lowest cost 50lb. #4 producer is again Repap's Newcastle, NB mill." [CHART]
Coated paper has an unusually steep cost curve. Maintaining Repap's low cost
position is aggressively managed and is a critically important competitive
advantage. The profit improvement program for 1998 was set at $13 million - this
target was surpassed as we achieved $16.7 million in savings. In fact, $44.0
million in savings have been achieved since mid-1996, when these programs were
first implemented. It is important to note that
4
<PAGE>
these savings represent permanent reductions in cost and do not include
one-time savings. Our target for 1999 is $9.0 million, a challenging
objective as these cost reductions are becoming more and more difficult to
achieve since they are being delivered with no discretionary capital. [CHART]
[REPAP LOGO]
Margin Excellence
EBITDA margins are the ultimate translation of the productivity, grade,
market and cost positions previously described. Here again, with an EBITDA
margin of 28.7% in 1998, Repap excelled relative to its competitors. [CHART]
Balance Sheet Initiatives
In spite of the extreme market volatility seen in 1998, numerous financial
structural initiatives were achieved:
The sale of the Atholville magnefite pulp mill reduced debt and other
obligations by approximately $50 million.
The $75 million convertible debentures due June 1998 were repaid in full.
US$45 million convertible debentures were purchased by Enron Capital and Trade
Resources, thereby avoiding any immediate shareholder dilution.
The successful completion of approximately US$320 million of financing
activities resulted in the elimination of mandatory principal repayments of
US$37 million in 1998 and 1999, the extension of maturities on certain debt
instruments, and lower interest rates.
Outlook
1998 market conditions that improved in the first half and declined in the
second half offered no opportunity to reduce debt and the associated financial
risk of Repap's excessive leverage, even though EBITDA improved over 1997 by
$94.0 million to $177 million. This recorded our second best year of EBITDA
performance, exceeded only by the peak year of 1995 when EBITDA was $243 million
and average prices of coated paper were US$205 per ton higher than the 1998
average. Repap has demonstrated its ability to generate tremendous cash flow
from an extremely cost efficient operation.
1999 will again be a challenging year as markets that weakened in mid-1998 have
not yet stabilized and we continue to be burdened by the legacy of high debt.
Tight cost control, strong productivity and aggressive cash management will
continue to be our primary focus as we work through this uncertain period.
Stephen C. Larson
President and Chief Executive Officer
5
<PAGE>
[REPAP LOGO]
Overview of Operations
Location Coated Paper Products
- --------------------------------- ---------------------
Repap New Brunswick Description End Uses
- --------------------------------- --------------------- ----------------
Repap New Brunswick is located on Coated Groundwood
the Eastern coast of Canada in Contains at least 10 High circulation
Miramichi, New Brunswick. The percent mechanical magazines,
Company consists of an integrated pulp. catalogues,
lightweight coated groundwood paper Typically manufactured newspaper
complex, operating two modern high using approximately advertising
speed coated paper machines with one-third mechanical inserts and
492,000 tons of annual capacity, (groundwood or wood- direct mail
representing the highest productive containing) pulp, one- advertising
capacity per machine in North third chemical pulp materials.
America. The Company also produces (including NBSK pulp), Represents
Northern bleached softwood kraft and one-third clays approximately 55
pulp with an annual capacity of and fillers. percent of total
235,000 tonnes, two-thirds of which Typically produced in North American
is used internally in the lighter weights. coated paper
manufacture of paper, 123,000 Comprises grades No. 4 consumption.
tonnes of groundwood pulp, used and 5.
internally, and dimension lumber
with an annual capacity of 58
million board feet.
Mill Data Pulp Products
- ----------------------------------- --------------------
Description End Uses
-------------------- ----------------
New Brunswick Operations Softwood Kraft Pulp
(Miramichi) Chemical pulp Includes tissue,
Annual Capacity manufactured from specialty papers
Coated Paper Mill 492,000 tons softwood trees and printing and
Kraft Pulp Mill 235,000 tonnes (evergreen, cone- writing papers,
Groundwood Pulp Mill 123,000 tonnes bearing trees such as particularly the
Sawmills 58,000 Mfbm pine, spruce, hemlock, lighter weight
and fir) which have grades which
long fibres imparting require superior
high strength fibre strength
characteristics. to run on high-
Derived from the speed paper
German word for machines and
"strong", the kraft presses.
process involves Represents
cooking wood chips in approximately 35
an alkaline solution percent of
for several hours to global white
produce pulp by chemical paper
chemically removing grade market
the lignin which binds pulp.
the cellulose fibres
together.
6
<PAGE>
Fibre Supply Lumber Products
- ----------------------------------- ---------------------
Description End Uses
--------------------- ----------------
Approximately 44% of the wood Dimension
supply for the kraft and groundwood North American term Typical product
pulp mills and sawmills is obtained for construction-grade is 2x4's.
from Crown Timber Licenses with the lumber.
Province of New Brunswick. The
licensed areas cover 1.7 million
acres. The remaining wood is
acquired from third parties under
various supply agreements.
Capacity, Production, Shipments
- ------------------------------- 1994 1995 1996 1997 1998
Coated Paper (000's tons)
Capacity* 492 492 492 492 492
Production 411 427 403 428 457
Shipments 440 420 384 443 460
Northern Bleached Softwood
Kraft Pulp (000's tonnes)
Capacity 215 235 235 235 235
Production 209 221 224 235 232
Shipments
Total 212 215 218 248 231
Less: Internal Use 126 144 136 138 149
Net Market 86 71 82 110 82
Groundwood Pulp (000's tonnes)
Capacity 123 123 123 123 123
Production (used internally) 112 117 116 119 123
Lumber (MMFBM)
Capacity 58 58 58 58 58
Production 54 49 53 57 55
Shipments 53 47 54 58 55
* Based on a theoretical basis weight of 40 lbs. Average basis weight in
1998 on the A-1 paper machine was 35.3 lbs. and on the A-2 paper machine
was 43.3 lbs.
7
<PAGE>
[REPAP LOGO]
Financial Review
Financial Results
The Corporation's financial results are determined in accordance with accounting
principles generally accepted in Canada. These accounting principles differ in
certain respects from accounting principles generally accepted in the United
States and the accounting rules and requirements of the SEC, as described in
Note 22 to the Corporation's audited Consolidated Financial Statements.
During 1997, Repap completed a restructuring which included the divestiture of
three of its four operating subsidiaries (see Note 2 to the Corporation's
audited Consolidated Financial Statements).
The Company's continuing operations consist entirely of its wholly-owned
subsidiary, Repap New Brunswick Inc. This world-class coated paper complex
operates two modern paper machines with a design capacity of 492,000 tons, a
northern bleached softwood kraft pulp mill with an annual capacity of 235,000
metric tons, an integrated groundwood pulp mill with an annual capacity of
123,000 metric tons and lumber operations with an annual capacity of 58 million
board feet. The Company's other subsidiary, Repap Marketing Inc., is responsible
for the sale and customer service functions related to the marketing of its
coated paper.
Revenues from continuing operations were $683.6 million in 1998, up 12.1% over
revenues of $609.9 million reported in 1997. Repap's revenue-stream hedge
accounting resulted in a $5.7 million non-cash reduction of revenues in 1998,
and a $30.1 million non-cash reduction of revenues in 1997. Net sales (revenues
less revenue hedge and sales deductions) totaled $611.7 million in 1998 compared
with $520.4 million 1997.
Operating Profit (Loss) Highlights
(millions of Canadian dollars)
PAPER PULP LUMBER OTHER CONSOLIDATED
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
Revenues 604.3 501.6 57.3 81.4 22.0 26.9 -- -- 683.6 609.9
Net sales 542.0 450.3 54.6 74.7 20.8 25.5 (5.7) (30.1) 611.7 520.4
Operating
profit 171.0 82.7 9.6 14.5 2.5 7.1 (11.7) (51.1) 171.4 53.2
(loss)
before
depreciation
and
amortization
EBITDA* 171.0 82.7 9.6 14.5 2.5 7.1 (6.0) (21.0) 177.1 83.3
EBITDA 31.5% 18.4% 17.6% 19.4% 12.0% 27.8% -- -- 28.7% 15.1%
margin**
Depreciation (68.8)(57.2)
and
amortization
Operating 102.6 (4.0)
profit
(loss)
- ----------------------------------
* EBITDA is defined as operating profit (loss) before depreciation and
amortization plus non-cash effects of currency hedging.
** EBITDA margin is defined as EBITDA as a percentage of net sales plus non-cash
effects of currency hedging.
Repap's operating profit from continuing operations was $102.6 million in 1998
compared with an operating loss of $4.0 million in 1997, reflecting the benefit
of higher shipments and prices for coated paper, increased productivity, lower
costs, a weaker Canadian dollar as compared with the US dollar and a lower
non-cash charge for foreign-exchange hedging, offset partially by lower
shipments and prices for pulp and lumber and by higher depreciation and
amortization charges. Repap's EBITDA was $177.1 million in 1998, up $93.8
million from 1997's EBITDA of $83.3 million. Repap's EBITDA margin was 28.7% in
1998 compared to 15.1% in 1997.
8
<PAGE>
Repap's loss attributable to common shareholders was $51.4 million ($0.07 per
share) in 1998 compared with a loss of $63.5 million ($0.17 per share) in 1997.
The 1998 results included an unusual charge of $46.4 million related to the
refinancing of certain long-term debt instruments and income from discontinued
operations of $17 million, reflecting mainly the gain on the sale of the
Atholville magnefite pulp mill which was owned by Repap's wholly-owned
subsidiary, Alcell Forest Products Inc. The 1997 results included income from
discontinued operations of $73.8 million, reflecting mainly the sale of Repap
Manitoba and Repap USA. (See Note 17 to the Consolidated Financial Statements
for futher details on Discontinued Operations). Excluding discontinued
operations and unusual items, Repap's loss attributable to common shareholders
was $22.0 million in 1998 compared to $137.3 million in 1997.
Coated Paper
Repap's coated paper revenues increased $102.7 million (20.5%) to $604.3 million
in 1998 compared with $501.6 million in 1997, reflecting higher shipments and
prices and the favorable impact of a weaker Canadian dollar compared with the
United States dollar.
[REPAP LOGO]
Coated paper shipments increased by 4% to 460,000 tons in 1998 compared to
443,000 tons in 1997, while inventories declined from 18,000 tons at the end of
1997 to a minimal level of 14,400 tons by the end of 1998.
Repap's average coated paper transaction price increased by 8% to US$883 per ton
in 1998 from US$816 per ton in 1997. Coated paper prices reached a high point in
the first quarter of 1998 and have been decreasing gradually since then. The
average transaction price in the fourth quarter of 1998 was US$842 per ton. A
US$30 per ton price decrease is expected during the first quarter of 1999.
Approximately 88% of Repap's coated paper production was sold in the United
States in 1998. The value of the Canadian dollar depreciated in 1998, averaging
Cdn$1.4830 per US$1.00 compared with an average value of Cdn$1.3848 per US$1.00
in 1997, thereby increasing Repap's revenues on translation into Canadian
dollars.
Average coated paper production costs declined by $27 per ton in 1998 compared
with 1997, with cost per ton in the fourth quarter well below the average cost
per ton for the year 1998, reflecting a consistently improving trend. This
favorable cost performance reflects the benefits of an ongoing cost reduction
program combined with an increase in coated paper production to 457,000 tons in
1998, up 29,000 tons over 1997.
Repap's operating profit before depreciation and amortization ("EBITDA") from
coated paper operations totaled $171.0 million, up $88.3 million from $82.7
million realized in 1997 reflecting substantially higher average prices, a
weaker Canadian dollar, increased shipments, increased production and lower
costs. Repap's EBITDA margin was 31.5% in 1998 compared to 18.4% in 1997.
On the market side, coated groundwood shipments from US producers were down 4.2%
through December 1998. Purchases during that period were actually up 1.7% with
this growth absorbed by a rise in imports. Import numbers include Canadian
shipments into the US. Total coated groundwood imports were up 21% for the first
ten months of 1998 compared to the same period in 1997.
Canadian imports during this period were up 15%.
9
<PAGE>
Industry mill inventories for coated groundwood doubled from year-end 1997,
growing from 104,000 to 205,000 tons at the end of November 1998. They have
remained at this level since July 1998, but are still well below their 327,000
ton peak in May of 1996. Reported buyer inventories, however, have come down for
the fourth consecutive month. They were at 593,000 tons at the end of November
compared to a peak of 747,000 tons in July 1998. (Sources: Statistics have been
derived from reports issued by the American Forest Products Association, Gaptrac
and Resource Information Systems Inc.)
Pulp
Repap's pulp revenues decreased $24.1 million (30%) to $57.3 million in 1998
compared with $81.4 million in 1997, as shipments and pulp prices were both
lower.
Pulp shipments decreased 24% to 83,000 metric tons in 1998 compared with 110,000
metric tons in 1997. Inventories were at 4,400 metric tons at the end of 1998,
compared to 3,000 metric tons at the end of 1997. Shipments in 1997 were higher
mainly as a result of a significant reduction in inventories from the previous
year.
Repap's average pulp transaction price fell by 15% to US$460 per metric ton in
1998 from US$540 per metric ton in 1997. Average pulp production costs remained
flat as compared to 1997.
Repap's EBITDA from pulp operations totaled $9.6 million, down 34% from $14.5
million realized in 1997, reflecting lower shipments and prices. Repap's EBITDA
margin was 17.6% in 1998, down from 19.4% in 1997.
Lumber
Lumber revenues decreased by $4.9 million (18%) to $22.0 million in 1998
compared with $26.9 million in 1997. Average lumber prices decreased by 19% to
US$271 per thousand foot board measure in 1998 compared with US$334 per thousand
foot board measure in 1997. Lumber shipments decreased 6% to 54.5 million board
feet in 1998 compared with 58 million board feet in 1997. Repap's EBITDA from
lumber operations decreased to $2.5 million in 1998, from the $7.1 million
realized in 1997. EBITDA margin for 1998 was 12.0%, down from 27.8% in 1997.
Repap's lumber operations are not subject to quotas and tariffs on shipments to
the United States market.
Selling, administrative and research expenses
Selling, administrative and research expenses from continuing operations totaled
$37.2 million in 1998, down $13.8 million from expenses of $51.0 million in
1997. The corporate downsizing completed in late 1997 increased 1997 expenses by
approximately $21.0 million while 1998 expenses included approximately $10
million in one-time charges related to the previous year's large corporation tax
and to bonuses.
Depreciation and Amortization
Depreciation and amortization totaled $68.8 million in 1998, up $11.6 million
from $57.2 million in 1997, primarily as a result of increasing productivity and
higher amortization of foreign exchange losses. The Company uses the unit of
production method in accounting for depreciation on certain fixed assets,
resulting in increased depreciation as productivity increases. (See Note 3 to
the Consolidated Financial Statements.)
10
<PAGE>
[REPAP LOGO]
Profit improvement program
The Company's profit improvement objective was $13 million in 1998. Actual
results surpassed the target, achieving $16.7 million. 1999's target is set at
$9 million. There are no assurances that the Company will be successful in
realizing the benefits of this 1999 program.
Interest expense
Interest expense totaled $111.5 million in 1998, down $6.4 million from 1997
interest expense of $117.9 million. Interest expense increased in Repap New
Brunswick by $4.4 million from $103.5 million to $107.9 million reflecting
mainly higher average borrowings and the impact of a weaker Canadian dollar on
translation of US dollar interest. Interest expense at the parent company level
decreased by $10.9 million from $14.4 million to $3.5 million reflecting
signficantly lower debt.
Income taxes
The Company has incurred $268.5 million of accounting losses (1997: $228.6
million) on which income tax benefits of approximately $105.0 million (1997:
$88.3 million) have not been recognized in the accounts. See Note 13 to the
Consolidated Financial Statements for further details on available tax benefits.
Discontinued operations
Repap has adopted financial statement presentation applicable to discontinued
operations for its ALCELL-technology related operations, for Repap British
Columbia, for Repap Manitoba and for Repap USA (see Notes 2 and 17 to the
Consolidated Financial Statements).
Repap recorded income from discontinued operations of $17.0 million in 1998
reflecting mainly the gain on sale of the Atholville magnefite pulp mill which
was owned by Alcell Forest Products, a wholly-owned subsidiary of Repap.
In 1997, Repap recorded income from discontinued operations of $73.8 million in
1997, reflecting primarily the net gain on the sale of Repap Manitoba and Repap
USA as well as the net gain related to the write-off of ALCELL-related
liabilities, offset by losses related to the disposition of Repap British
Columbia. A net loss from discontinued operations of $398.2 million in 1996
reflects the write-off of ALCELLr-technology related operations and Repap
British Columbia operating losses.
Write-off of investments related to the ALCELLr operations resulted in $315.8
million of the loss from discontinued operations in 1996. In 1997, an amount of
$37.0 million was recorded in income from discontinued operations, reflecting a
$56.6 million gain from the write-off of non-repayable grants provided to fund
the development of the ALCELL-technology, partially offset by the cost of
maintaining the ALCELL operations for future sale. The conditions under which
the grants were repayable by Repap never materialized and they therefore no
longer represented liabilities to Repap.
Ownership of Repap British Columbia was transferred to that company's lenders in
March 1997 for a nominal amount. A loss of $115.2 million on the disposition of
this investment is recorded in discontinued operations in 1997 and a loss of
$103.1 million was recorded in 1996, recognizing the loss from those operations
in 1996.
11
<PAGE>
In August 1997, Repap Manitoba was sold. A net loss of $65.2 million was
recorded as a loss from discontinued operations in 1997. Net income from
discontinued operations related to Repap Manitoba operations was $15.2 million
in 1996.
In September 1997, Repap USA, was sold. Net income from discontinued operations
related to Repap USA includes a net gain of $217.2 million on the sale in 1997
and $5.5 million related to operations in 1996.
Results of Operations: 1997 compared with 1996
Repap's revenues from continuing operations increased 8% to $609.9 million in
1997 from $564.0 million in 1996, reflecting primarily a weaker Canadian dollar,
higher coated paper and pulp shipments, offset partially by lower prices for
both coated paper and pulp.
Coated paper revenues increased 4% in 1997 to $501.6 million, reflecting higher
shipments and a weaker Canadian dollar, offset by lower prices. Coated paper
shipments increased 15% to 443,000 tons in 1997 from 384,000 tons in 1996.
Repap's 1996 year end coated paper inventory was 36,000 tons compared to 18,000
tons at December 1997.
Repap's prices fell by 11% to US$816 per ton in 1997 compared to US$920 per ton
in 1996.
Coated paper production costs were down $36 per ton compared with 1996
reflecting increased productivity and the benefits of the profit improvement
program. 1996 costs were also affected by market and maintenance related
downtime of approximately 18,000 tons.
Pulp revenues increased by 34% to $81.4 million in 1997 from $60.8 million in
1996. Repap's average kraft pulp prices declined to US$540 per metric ton in
1997 from US$545 per metric ton in 1996. Shipments of kraft pulp increased by
28,000 metric tons to 110,000 metric tons in 1997 compared with 82,000 metric
tons in 1996, reflecting an industry-wide increase in purchases by pulp
customers.
Kraft pulp production costs were down $22 per ton in 1997, reflecting mainly
higher production and the benefits of the profit improvement program.
[REPAP LOGO]
Lumber revenues increased by 22% to $26.9 million in 1997 compared with $22.0
million in 1996. Average lumber prices increased by 13% to US$334 per thousand
foot board measure in 1997 compared with US$299 per thousand foot board measure
in 1996. Lumber shipments increased 7% to 58 million board feet in 1997 compared
with 54 million board feet in 1996.
Selling, administrative and research expenses from continuing operations totaled
$51.0 million in 1997, up $16.1 million from $34.9 million in 1996. The increase
resulted from approximately $21 million in charges related to the 1997
downsizing.
Depreciation and amortization charges increased by $16.2 million to $57.2
million in 1997, reflecting higher amortization of deferred foreign exchange
losses and and a $4.4 million charge for obsolete assets.
Interest expense from continuing operations totaled $117.9 million in 1997, up
$4.9 million over 1996. The primary reason for the increase is due to the
translation of US dollar denominated interest into Canadian dollars.
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Liquidity and Capital Resources
Cash flow from operating activities before net changes in non-cash working
capital totaled $56.5 million in 1998 compared with cash used of $34.8 million
in 1997, reflecting significantly improved operating performance, higher prices
of coated paper and a weaker Canadian dollar. Working capital used cash of $3.1
million during 1998, reflecting mainly a decrease in payables as well as lower
receivables. In 1997, working capital generated cash of $32.6 million reflecting
lower receivables and a decrease in inventories.
Capital expenditures during 1998 totaled $20.8 million compared to $16.2 million
in 1997. Capital spending related to maintenance projects and to certain
environmental related capital projects. Environmental related spending totaled
$7 million in 1998 and $2.7 million in 1997. Planned capital spending for 1999
is approximately $23 million, $4.5 million of which is related to environmental
projects.
Cash required for investing activities and for the repayment of convertible
debentures during 1998 was provided by cash from continuing operations, the
issue of US$45 million 6% Convertible Subordinated Debentures and by cash on
hand.
Going Concern Assumption
Maintenance, environmental and Year 2000 capital spending for 1999 is expected
to total approximately $23.0 million. Funding for these expenditures, along with
government grant repayments of approximately $6.6 million will depend, as
mentioned under "Basis of Financial Statement Presentation and Going Concern
Assumption", on a variety of factors, some of which are beyond the Corporation's
control including being able to, among other things, i) return to profitability,
ii) continue to generate positive cash-flow from continuing operations and iii)
its ability to refinance the revolving credit facility prior to its maturity.
The outcome of these matters cannot be predicted at this time.
1998 Financing Activities
On February 20, 1998, Repap concluded a Share Purchase Agreement with AV Cell
Inc. ("AV Cell"), a joint venture between Tembec Inc. and the Aditya Birla Group
of India for the sale of all of the shares of Alcell Forest Products which owned
the magnefite pulp mill located in Atholville, New Brunswick.
In conjunction with the sale of Alcell Forest Products, Repap agreed to settle
the $37 million secured bank loan of Alcell Forest Products, guaranteed by the
Province of New Brunswick with a recourse back to Repap, with a cash payment of
$12 million. The balance of $25 million was satisfied with a fifteen year $5
million 6.75% promissory note from Repap to the Province and the transfer of the
$10 million Class B shares of AV Cell to be received as part of the purchase
price.
On April 30, 1998, Repap New Brunswick amended its operating credit agreement
with The Toronto-Dominion Bank and ABN Amro Bank Canada to provide for an
operating facility of $102 million, a swing line facility of $3 million
(together the "Base Facility") and a term facility of $15 million (the "Term
Facility"). The Base Facility matures October 31, 1999 and the Term Facility
matures May 22, 1999. During 1998, the Term Facility was reduced from $15
million to $10 million pursuant to terms and conditions under the operating
credit agreement.
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On May 15, 1998, Repap entered into a Purchase Agreement with Enron Capital and
Trade Resources Corp. for the issue of US$45 million 6% Convertible Subordinated
Debentures due 2005. The proceeds of the issue and cash on hand were used to
redeem at par $75 million 9% Convertible Redeemable Subordinate Debentures due
June 1998.
On June 1, 1998, Repap New Brunswick completed the issue of 9% first priority
fixed rate senior secured notes in the aggregate amount of US$200 million and of
first priority floating rate senior secured loans in the amount of US$120
million, together maturing June 1, 2004. The net proceeds were used to repay in
full the outstanding US$150 million first priority floating rate senior secured
notes due 2000 and to repurchase, including premiums, US$149.8 million first
priority fixed rate senior secured notes due 2000.
[REPAP LOGO]
1997 Financing Activities
In April 1997, Repap New Brunswick's secured lenders increased the maximum
borrowings under its revolving credit facility by $20 million. The maximum
borrowing under the revolving credit facility is $150 million, subject to
available borrowing base. At December 31, 1997, the amount of borrowings
outstanding under this facility totaled $97.5 million and unutilized credit
totaled $16.1 million.
On July 7, 1997, the Corporation received the consent of the lenders under the
Standby Loan Agreement and of Ferrostaal AG to extend the maturity of the
respective amounts owed each of them from July 31, 1997 to September 30, 1997
conditional on the signing of definitive agreements for the sale of each of
Repap Manitoba and Repap Wisconsin and the conversion to Common Shares of the
aggregate amount of principal outstanding of the US$130 million, 8.5%
Convertible Debentures due August 1, 1997.
On July 18, 1997 a Stock Purchase Agreement was entered into between the
Corporation and Tolko Industries Ltd. ("Tolko") for all of the shares of Repap
Manitoba for a purchase price of $109 million. This transaction closed on August
8, 1997 and provided $34.5 million of net proceeds which the Corporation applied
to reduce its long-term secured indebtedness under the standby loan agreement.
The sale of the shares to Tolko resulted in a loss from discontinued operations
of $65.2 million for the year ended December 31, 1997.
On September 25, 1997, shareholders passed a resolution approving the sale to
Consolidated Papers, Inc. ("Consolidated Papers") of all the outstanding shares
of Repap USA and all of the Preferred Stock of Repap Wisconsin for net proceeds
of US$227 million. The sale of the shares to Consolidated Papers Inc. resulted
in a gain from discontinued operations of $217.2 million for the year ended
December 31, 1997. Proceeds were used to repay the standby lenders and
Ferrostaal AG in full.
On August 1, 1997, the Corporation proceeded to the conversion of the US$130
million convertible debentures into common shares. The number of common share
issued on conversion totaled 619,024,800 increasing the total number of
outstanding shares at December 31, 1997 to 742,460,637 shares.
1996 Financing Activities
In March 1996, Repap Wisconsin, Inc.'s ("Repap Wisconsin") revolving credit
facility was renewed, increasing availability thereunder by US$10 million to
US$70 million. In June 1996, Repap New Brunswick's revolving credit facility was
renewed, increasing availability thereunder by $26 million to
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<PAGE>
$136 million (US$100 million) and extending its maturity to April 1998. In July
1996, the maturity under Repap Manitoba's revolving credit facility was also
extended to July 1998.
In August 1996, Repap completed arrangements for a $140 million standby credit
facility of which tranche A amounting to $65 million was made available for
general corporate purposes and tranche B amounting to $75 million was used to
improve liquidity at Repap British Columbia in 1996. Amounts owing under
tranches A and B were repayable on July 31, 1997.
No dividends were declared on Repap's outstanding common shares in 1998, 1997
and 1996.
Risks and Uncertainties
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 December 31, 1998, approximately 97% of Repap's consolidated borrowings of
approximately Cdn.$1.1 billion were in US dollars.
Repap is naturally hedged against the exchange risk associated with holding US
dollar debt. Since most of Repap's products are sold in US dollars, it is highly
likely that future US dollar revenue streams will be more than enough to
accommodate any US dollar principal repayment as it falls due. 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.
[REPAP LOGO]
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 1998 were reduced by $5.7 million as a result of the application of
this accounting method. On 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:
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Revenue reduction resulting from non-
cash currency adjustments
Year (millions in dollars)
1999 $ 5.7
2000 22.4
2001 3.7
Thereafter 11.6
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. The revenue streams which had been identified as an
effective hedge in connection with scheduled US dollar principal repayments on
the old debt continue; however, 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 Corporation's
Consolidated Financial Statements).
Interest Rates
The Corporation's variable-rate debt from continuing operations, totalling $0.3
billion, is subject to fluctuations in Canadian, US and LIBOR lending rates. A
1% change in interest rates affects Repap's cash flow by approximately $2.6
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.
Year 2000
The Corporation, as well as its customers and suppliers and 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 Corporation formalized its Year 2000 preparation efforts by
appointing a project team consisting of management, operations and information
systems personnel to assess the impact of the Year 2000 issue on its operations,
develop plans to address the issue and implement compliance. The project team
also developed plans to seek information
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regarding and 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 order management and
product tracking, maintenance and materials management, personnel, payroll,
accounts payable and accounts receivable. The process control systems are used
primarily in manufacturing operations; they include information technology
systems as well as embedded technology, such as chips embedded in various
machine components. With respect to the business information systems, the
inventorying of computers and the analysis of compliance have been completed.
The Corporation has elected to replace non-compliant information systems for
order management and process information history. Although no assurances can be
given, the replacement systems are expected to be operational by September 1999.
The programming and testing of other information systems is on target for
completion by April 1999. With respect to the process control systems, Repap has
completed the inventorying of its control systems as well as remediation to its
main control systems. Repap expects to complete all remaining control systems by
June 1999. Repap expects to complete comprehension testing to confirm its
remediation work by September 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 Corporation'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 Corporation, 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 the Year 2000
issue. 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 Corporation. 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 $0.6 million had been expended as of December 31, 1998, 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.
The Risks to the Corporation of not being Year 2000
Compliant
The Corporation 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 Corporation 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 Corporation. For
example, while the Corporation self-generates approximately 31% of its
electrical power
17
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requirements, it purchases the balance from outside sources. If the electrical
power grid is disrupted as the result of Year 2000 systems failures, the
Corporation might have to curtail production until the grid is restored. If the
Corporation or a major Third Party fails to successfully address these issues
the Corporation 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 Corporation's customers, the Corporation may experience
increased levels of inventories and receivables.
Contingency Plans
To date, the Corporation'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
mid-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.
[REPAP LOGO]
Management's Responsibility
For Consolidated Financial Reporting
REPAP ENTERPRISES INC.
The consolidated financial statements of Repap Enterprises Inc. are the
responsibility of management and have been approved by the Board of Directors.
This responsibility includes the selection of appropriate accounting principals
and the exercise of careful judgement in establishing reasonable estimates in
accordance with generally accepted accounting principals appropriate in the
circumstances. Financial information shown elsewhere in this annual report is
consistent with that contained in the consolidated financial statements.
Management of Repap Enterprises Inc. and its subsidiaries has developed and
maintains accounting systems and internal controls designed to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use
and that the financial records are reliable for preparing the financial
statements.
The Board of Directors has appointed an Audit Committee, which consists of
three independent directors of the Corporation. The Audit Committee meets
periodically with the external auditors and management to discuss accounting
policies and practices, internal control systems, financial reporting issues,
the scope of the annual audit and other matters. This Committee makes
recommendations to the Board of Directors concerning management's selection of
external auditors. The external auditors have direct access to the Committee to
discuss the results of their audit and any recommendations they have for
improvements in internal controls, the quality of financial reporting and any
other matters of interest. The Committee reviews the Corporation's annual
consolidated financial statements before recommending them to the Board of
Directors for approval. It also reviews the Form 10-K before it is filed with
securities regulators and stock exchanges.
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These consolidated financial statements have been audited by Ernst & Young,
LLP, Chartered Accountants, on behalf of the shareholders and their report
stating the scope of their audit examination and their opinion on the
consolidated financial statements is presented hereafter.
Stephen C. Larson Michelle A. Cormier
President & CEO Vice President, Finance
January 27, 1999
Auditors' Report
To The Shareholders of Repap Enterprises Inc.:
We have audited the consolidated balance sheets of Repap Enterprises Inc.
as at December 31, 1998 and 1997 and the consolidated statements of operations,
deficit and changes in financial position for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation as at December
31, 1998 and 1997 and the results of its operations and the changes in its
financial position for each of the years in the three-year period ended December
31, 1998 in accordance with accounting principles generally accepted in Canada.
Montreal, Canada
January 27, 1999
Chartered Accountants
Comments by Auditors for US Readers on Canada-US Reporting Difference
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Corporation's ability to continue as a going concern, such as those
described in Note 1 to the consolidated financial statements. Our report to the
shareholders dated January 27, 1999, is expressed in accordance with Canadian
reporting standards which do not permit a reference to such conditions and
events in the auditors' report when these are adequately disclosed in the
financial statements.
Montreal, Canada
January 27, 1999
Chartered Accountants
19
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[REPAP LOGO]
Consolidated Balance Sheets
(See Note 1)
REPAP ENTERPRISES INC. (INCORPORATED UNDER THE LAWS OF CANADA)
AS AT DECEMBER 31
(MILLIONS OF CANADIAN DOLLARS) NOTES 1998 1997
ASSETS
Current:
Cash and short-term deposits $ 9.4 $ 43.3
Accounts receivable 7 69.4 79.9
Inventories 4,7 66.5 65.9
Total current assets 145.3 189.1
Fixed assets, at cost 1,6,7,15 1,428.2 1,408.3
Less accumulated depreciation 448.2 399.6
Net fixed assets 980.0 1,008.7
Investment tax credits recoverable 9,13 -- 35.5
Investments 16.2 16.2
Deferred charges, goodwill and other 5 187.4 148.4
assets
$1,328.9 $1,397.9
20
<PAGE>
[REPAP LOGO]
Consolidated Balance Sheets
(See Note 1)
REPAP ENTERPRISES INC. (INCORPORATED UNDER THE LAWS OF CANADA)
AS AT DECEMBER 31
(MILLIONS OF CANADIAN DOLLARS) NOTES 1998 1997
LIABILITIES
Current:
Accounts payable and accrued $ 117.8 $ 129.0
liabilities
Current portion of long-term debt and
repayable grants 7,8 7.6 75.7
Revolving credit facility 7 77.6 97.5
Total current liabilities 203.0 302.2
Long-term debt 7 1,084.6 901.3
Repayable grants and other liabilities 8 21.0 25.6
1,105.6 926.9
CAPITAL SOURCES
Non-controlling interest 10 -- 14.3
Investment tax credits 108.3 148.0
Grants - non-repayable 8 22.8 23.8
131.1 186.1
Shareholders' Deficiency:
Preferred shares 11 16.0 16.0
Common shares 11 640.6 640.4
Deficit (782.7) (745.3)
Other paid-in capital 12 15.3 71.6
(110.8) (17.3)
$1,328.9 $1,397.9
See accompanying notes On behalf of the Board:
Stephen C. Larson F. Steven Berg
Director Director
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[REPAP LOGO]
Consolidated Statements of Operations
(See Note 1)
REPAP ENTERPRISES INC. (INCORPORATED UNDER THE LAWS OF CANADA)
FOR THE YEAR ENDED DECEMBER 31
(MILLIONS OF CANADIAN DOLLARS) NOTES 1998 1997 1996
Revenues from continuing operations 2,17 $683.6 $609.9 $564.0
Effects of currency hedging 5.7 30.1 20.2
Sales deductions 66.2 59.4 58.7
Net sales from continuing operations 611.7 520.4 485.1
Cost of sales excluding depreciation 403.1 416.2 367.6
and amortization
Selling, administrative and research 37.2 51.0 34.9
expenses
Depreciation and amortization 15 68.8 57.2 41.0
Operating profit (loss) 102.6 (4.0) 41.6
Interest expense 14 111.5 117.9 113.0
Miscellaneous expense (income) 8.1 (1.0) 0.9
Unusual items 16 46.4 -- --
Loss before the undernoted (63.4) (120.9) (72.3)
Provision for income taxes 13 2.1 2.0 2.5
Loss from continuing operations (65.5) (122.9) (74.8)
Income (loss) from discontinued 17 17.0 73.8 (398.2)
operations
Net loss (48.5) (49.1) (473.0)
Provision for accretion of other paid- 2.9 14.4 19.0
in capital
Loss attributable to common $(51.4) $(63.5) $(492.0)
shareholders
Loss from continuing operations per
share
Basic $(0.09) $(0.36) $(0.76)
Adjusted basic -- $(0.17) --
Fully diluted $(0.09) $(0.36) $(0.76)
Loss per share
Basic $(0.07) $(0.17) $(3.99)
Adjusted basic -- $(0.07) --
Fully diluted $(0.07) $(0.17) $(3.99)
See accompanying notes
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Consolidated Statements of Deficit
(See Note 1)
REPAP ENTERPRISES INC. (INCORPORATED UNDER THE LAWS OF CANADA)
FOR THE YEAR ENDED DECEMBER 31
(MILLIONS OF CANADIAN DOLLARS) NOTES 1998 1997 1996
Deficit, beginning of year $(745.3) $(681.8) $(189.8)
Loss attributable to common (51.4) (63.5) (492.0)
shareholders
Gain on sale of preferred shares 10,11,17 14.0 -- --
Deficit, end of year $(782.7) $(745.3) $(681.8)
See accompanying notes
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[REPAP LOGO]
Consolidated Statements of Changes in Financial Position
(See Note 1)
REPAP ENTERPRISES INC. (INCORPORATED UNDER THE LAWS OF CANADA)
FOR THE YEAR ENDED DECEMBER 31
(MILLIONS OF CANADIAN DOLLARS) NOTES 1998 1997 1996
Operating activities:
Loss from continuing operations $(65.5) $(122.9) $(74.8)
Add items not affecting cash:
Depreciation and amortization 68.8 57.2 41.0
Effects of currency hedging 5.7 30.1 20.2
Unusual items and other 16 47.5 0.8 0.1
Cash flow before net changes in non-
cash working capital 56.5 (34.8) (13.5)
Non-cash working capital changes 20 (3.1) 32.6 6.4
Cash provided by (used in) continuing 53.4 (2.2) (7.1)
operations
Investing activities:
Additions to fixed assets (20.8) (16.2) (19.3)
Deferred charges and other assets (19.6) (0.5) (2.8)
Cash used in investing activities (40.4) (16.7) (22.1)
Financing activities:
Additions to debt 522.3 64.3 126.1
Repayment of debt (470.2) (293.7) (20.7)
Revolving credit lines, net change (25.0) (23.5) 28.1
Issue of share capital 11 0.2 157.1 --
Conversion or repayment of 12 (75.0) (157.1) --
convertible debentures
Others (16.2) -- --
Cash provided by (used in) financing (63.9) (252.9) 133.5
activities
Cash provided by (used in) discontinued 17 17.0 291.6 (118.3)
operations
Net increase (decrease) in cash (33.9) 19.8 (14.0)
Cash position, beginning of year 43.3 23.5 37.5
Cash position, end of year $9.4 $43.3 $23.5
Cash position is represented by cash and short-term deposits.
See accompanying notes
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[REPAP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPAP ENTERPRISES INC.
DECEMBER 31, 1998
(MILLIONS OF CANADIAN DOLLARS UNLESS OTHERWISE INDICATED)
The consolidated financial statements of the Corporation have been
prepared by management in accordance with accounting principles generally
accepted in Canada ("Canadian GAAP"). The financial statements have, in
management's opinion, been properly prepared using careful judgement within
reasonable limits of materiality and within the framework of the accounting
policies summarized hereafter.
As further described under Note 22, the accounting policies followed by the
Corporation differ in certain respects from those that would have been followed
had these financial statements been prepared in conformity with accounting
principles generally accepted in the United States ("US GAAP") and the
accounting principles and practices required by the United States Securities and
Exchange Commission ("SEC").
Note 1 Financial Statement Presentation
Description of business
The Corporation is a North American forest products company with production
facilities located in New Brunswick, Canada. It is an integrated producer of
high quality coated groundwood paper, northern bleached softwood kraft ("NBSK")
pulp and lumber. It manufactures paper products used for magazines, catalogues,
newspaper advertising inserts and direct mail advertising materials. The
Corporation predominantly markets its paper, pulp and lumber in North America.
It has an annual production capacity for coated groundwood paper of 492,000
tons. The Corporation also has an NBSK facility with an annual capacity of
235,000 tonnes, an integrated groundwood pulp facility with an annual capacity
of 123,000 tonnes and lumber operations with an annual capacity of 58 million
board feet, which produce dimension lumber products.
Basis of financial statement presentation and going concern assumption
These consolidated financial statements include the accounts of
Repap Enterprises Inc. ("Repap" or "the Corporation") and its wholly-owned
subsidiaries Repap New Brunswick Inc. ("Repap New Brunswick"), Repap
Marketing Inc. ("Repap Marketing") and Repap Technologies Inc. ("Repap
Technologies").
These consolidated financial statements also include, presented as
discontinued operations, the accounts of Alcell Technologies Inc.
("Alcell"), Alcell Forest Products Inc. ("Alcell Forest Products"), Repap
USA Inc. ("Repap USA"), Repap Sales Corporation ("Repap Sales"), Repap
Wisconsin, Inc. ("Repap Wisconsin"), Repap Manitoba Inc. ("Repap
Manitoba"), and Repap British Columbia Inc. ("Repap British Columbia").
(See Notes 2 and 17).
The consolidated financial statements of the Corporation have been prepared
in accordance with generally accepted accounting principles on a going concern
basis which presumes the realization of assets and the discharge of liabilities
in the normal course of business for the foreseeable future.
The Corporation's revolving credit facility of $77.6 million matures in
1999, $10 million in May 1999 and $67.6 million in October 1999. Additionally,
during 1996 and 1997, the Corporation's continuing operations did not generate
sufficient cash flow to cover operating costs and to fund
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investments in working capital and additions to fixed assets. The Corporation
also incurred operating losses during 1998, and as at December 31, 1998, has a
net deficit in shareholders' equity of $110.8 million. Repap is currently
negotiating with the lenders of its revolving credit facility and is also
currently considering other financing alternatives to replace its existing
revolving credit facility.
The Corporation's ability to continue as a going concern is dependent upon
its ability to refinance the revolving credit facility at its maturity,
achieving profitable operations and upon generating positive cash flow from
operations. While the Corporation did achieve positive cash flow from continuing
operations during 1998, the outcome of these matters cannot be determined with
certainty at this time. These financial statements do not include any
adjustments to the amounts and classifications of assets and liabilities that
might be necessary should the Corporation be unable to continue in business.
Note 2 Significant Activities
Discontinued operations and related activities
In July 1996, Repap engaged investment advisors to explore strategic
alternatives available to Repap in maximizing shareholder value.
On March 3, 1997 the Corporation and other parties entered into a
Restructuring and Settlement Agreement (the "Restructuring Agreement"). Pursuant
to the Restructuring Agreement, Repap British Columbia and its subsidiaries
agreed to seek protection from their creditors by applying for an order staying
all of their creditors under the Companies' Creditors Arrangement Act (Canada).
An order was granted by the Supreme Court of British Columbia on March 3, 1997.
As part of the Restructuring Agreement the lenders to Repap British Columbia
were granted an option to acquire all of the shares of Repap British Columbia
for a nominal amount. On March 27, 1997, they exercised their right to purchase
all of the shares of Repap British Columbia. The sale of the shares of Repap
British Columbia resulted in a loss from discontinued operations of $115.2
million for the year ended December 31, 1997. (See Note 17).
On July 18, 1997 a Stock Purchase Agreement was entered into between the
Corporation and Tolko Industries Ltd. ("Tolko") for all of the issued and
outstanding shares in the capital of Repap Manitoba. This transaction closed on
August 8, 1997 and provided $34.5 million of net proceeds which the Corporation
applied to reduce its long-term secured indebtedness.
The sale of the shares to Tolko resulted in a loss from discontinued
operations of $65.2 million for the year ended December 31, 1997 (See Note 17).
On September 25, 1997, the shareholders of the Corporation passed a
resolution approving the sale to Consolidated Papers Inc. ("Consolidated
Papers") of all the outstanding shares of Repap USA and all of the Preferred
Stock of Repap Wisconsin for net proceeds of US$227 million. The sale of the
shares to Consolidated Papers Inc. resulted in a gain from discontinued
operations of $217.2 million for the year ended December 31, 1997 (See Note 17).
On February 20, 1998, Repap concluded a Share Purchase Agreement with AV
Cell Inc. ("AV Cell"), a joint venture between Tembec Inc. and the Aditya Birla
Group of India for the sale of all of the shares of Alcell Forest Products which
owned the magnefite pulp mill located in Atholville, New Brunswick.
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In conjunction with the sale of Alcell Forest Products, Repap agreed to
settle the $37 million secured bank loan of Alcell Forest Products, guaranteed
by the Province of New Brunswick with a recourse back to Repap, with a cash
payment of $12 million. The balance of $25 million was satisfied with a fifteen
year $5 million 6.75% promissory note from Repap to the Province and the
transfer of 10,000, $10 million par value Class B shares of AV Cell to be
received as part of the purchase price (see Notes 7 and 17).
[REPAP LOGO]
Financing activities
On April 30, 1998, Repap New Brunswick amended its operating credit
agreement with The Toronto-Dominion Bank and ABN Amro Bank Canada to provide for
an operating facility of $102 million, a swing line facility of $3 million
(together the "Base Facility") and a term facility of $15 million (the "Term
Facility"). The Base Facility, secured by a first priority claim on receivables
and inventories, matures October 31, 1999 and the Term Facility, secured by a
second priority claim on receivables and inventories, matures May 22, 1999.
During 1998, the Term Facility was reduced from $15 million to $10 million
pursuant to terms and conditions under the operating credit agreement.
On May 15, 1998, Repap entered into a Purchase Agreement with Enron Capital
and Trade Resources Corp. ("Enron") for the issue of US$45 million, 6%
Convertible Subordinated Debentures due 2005. The proceeds of the issue and cash
on hand were used to redeem at par $75 million, 9%, Convertible Redeemable
Subordinate Debentures due June 1998 (see Note 12).
On June 1, 1998, Repap New Brunswick completed the issue of 9% first
priority fixed rate senior secured notes in the aggregate amount of US$200
million and closed first priority floating rate senior secured loans in the
amount of US$120 million, together maturing June 1, 2004. The net proceeds were
used to repay in full the outstanding US$150 million first priority floating
rate senior secured notes due 2000 and to repurchase, including premiums,
US$149.8 million first priority fixed rate senior secured notes due 2000 (see
Note 7).
On April 14, 1997, Repap New Brunswick's secured lenders increased the
amount of borrowings under its revolving credit facility by $20 million.
Committed revolving credit facilities from continuing operations aggregated
approximately $150 million as at December 31, 1997 of which $97.5 million was
drawn and $16.1 million was available to be drawn.
On August 1, 1997, the Corporation repaid its US$130 million 8.5%
convertible debentures through the issuance of 619,023,800 common shares (See
Note 11).
On September 30, 1997, the Corporation repaid amounts due under the Standby
Loan Agreement and US$64 million to Ferrostaal AG, representing payment in full.
Note 3 Significant Accounting Policies
(a) Short-term deposits
Short-term deposits consist of term deposits with banks and other financial
institutions, renewable on a daily to weekly basis.
(b) Investments
Investments in which the Corporation has significant influence are
accounted for on the equity basis. Other investments are accounted for at cost.
As at December 31, 1998, none of these investments had a quoted market value.
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(c) Inventories
Logs, chips and supplies are valued at the lower of cost, determined
primarily on a weighted average basis, and replacement cost. Coated paper, pulp
and lumber are valued at the lower of cost, determined on a weighted average
basis, and net realizable value.
(d) Fixed assets and leases, depreciation and amortization
Fixed assets are recorded at cost. Cost includes all costs associated with
the acquisition or construction of the related asset, including interest on
indebtedness and start-up costs related to assets under construction. Interest
and start-up costs are capitalized until the asset is ready for its intended
use. Assets under construction are reflected in construction in progress until
they are ready for their intended use. Intended use is reached when certain
objectives have been met such as production operating rates, operating
efficiency parameters, development of product grades and product quality
standards. Depreciation, which begins when construction is completed and
start-up begins, is provided over the estimated useful lives of the assets,
using straight-line and unit-of-production methods, at the rates set out below:
Buildings straight-line over 25 to 40 years
Machinery and equipment straight-line over 20 to 35 years, and
unit-of-production over 20 to 35
years' estimated production
Automotive and sawmill straight-line over 5 to 15 years
equipment
Office equipment straight-line over 5 to 10 years
Roads straight-line over 10 to 20 years
Crown rights straight-line over 25 years
Leases which transfer substantially all of the risks and rewards of
ownership are capitalized and are depreciated on the same basis as purchased
fixed assets.
(e) Income taxes and investment tax credits recoverable
Income taxes are accounted for on the tax allocation basis. Investment tax
credits are accounted for under the cost reduction method and are recorded as
deferred credits. Such credits are recognized in the accounts when earned and
when there is reasonable assurance of their realization. They are amortized to
income on a basis consistent with the depreciation method used for the related
fixed assets. When reasonable assurance of their realization no longer exists,
investment tax credits recoverable are charged against the related deferred
credits, to the extent such deferred credits are available, with the excess
charged to income.
The amounts recorded for income tax benefits and investment tax credits
recoverable are based on estimated future earnings.
(f) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at rates of exchange prevailing at the
year-end. Other foreign currency transactions are translated into Canadian
dollars at rates of exchange in effect when the transactions were entered into.
Exchange gains and losses arising from the translation of unhedged monetary
assets and liabilities with terms in excess of one year are deferred and
amortized over the life of these assets and liabilities.
When a future revenue stream is hedged by a monetary liability, the revenue
amount included in the determination of net income of future periods is adjusted
as a result of the foreign currency amount being translated at the exchange rate
in effect when the revenue stream was
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identified as a hedge. The difference arising due to cash received being
translated at current rates is offset against the deferred amount relating to
the hedged monetary liability. The Corporation has put into place a revenue
stream hedge commencing July 1, 1992.
Other exchange gains and losses arising from the translation of foreign
currency items are included in the determination of net income for the year.
(g) Other assets and amortization
Charges related to obtaining debt financing are deferred and amortized on a
straight-line basis over the duration of the financing. Other deferred costs are
deferred and amortized over the periods benefited.
Goodwill is amortized using the straight-line method over periods not
exceeding 30 years. The Corporation evaluates the carrying value of goodwill for
possible impairment on an annual basis. This evaluation considers operating
trends and other relevant factors. Based upon its most recent analysis, the
Corporation believes that no impairment of goodwill exists at December 31, 1998.
(h) Government grants Government grants are recorded in the accounts when
there is reasonable assurance that the Corporation has complied with, and will
continue to comply with, all conditions necessary to obtain the grants.
The non-repayable grants are deferred and amortized on the same basis as
that on which the related assets are depreciated or amortized.
[REPAP LOGO]
(i) Pension costs and obligations
The projected benefit obligation is calculated using the projected benefit
method prorated on services. The transition gains, obligations and other
adjustments are amortized to income on a straight-line basis over the expected
average remaining service life of the plan participants. The plan assets are
measured at their market-related values.
The cost of the defined benefit plans reflects management's best estimates
of the pension plans' expected investment yields, salary escalations, mortality
of members, terminations and the ages at which members will retire. Accordingly,
these costs are subject to measurement uncertainty, and the impact on the
financial statements of future periods may be material.
(j) Revenues and net sales
Revenues are recognized when goods are shipped and title has passed to the
customer. In arriving at net sales, revenues are reduced by commissions,
discounts and freight.
(k) Earnings (loss) per share
Basic earnings (loss) per share are calculated using the weighted average
number of voting shares outstanding during the period. Where common shares have
been issued on the conversion of debt, adjusted basic earnings (loss) per share
are calculated as though the conversion had taken place at the beginning of the
period. Fully diluted earnings (loss) per share are calculated taking into
consideration the effect of the actual and potential conversion of convertible
debentures and the exercise of stock options.
(l) Financial Instruments
The Corporation uses forward contracts to manage exposures to fluctuations
in foreign currency exchange rates and the prices of paper, pulp and oil. The
Corporation does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
Gains and losses on forward contracts for the sale of pulp and paper are
not recognized until reflected in sales revenues when the related production is
sold. The Corporation's policy is to hedge between 20% and
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<PAGE>
80% of future US Dollar revenue streams with foreign exchange forward contracts
of varying terms normally not exceeding one year. Gains and losses on foreign
exchange forward contracts are recognized as the contracts mature.
Note 4 Inventories
DECEMBER 31 1998 1997
Raw Materials $22.8 $23.1
Work in process 1.0 1.0
Finished goods 16.8 19.2
Supplies 25.9 22.6
$66.5 $65.9
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.
Note 5 Deferred Charges, Goodwill and Other
DECEMBER 31 1998 1997
Goodwill $30.3 $30.3
Deferred:
Foreign exchange loss 180.2 127.5
Financing charges 51.7 37.6
Pension costs and other 14.1 11.4
276.3 206.8
Less accumulated amortization (88.9) (58.4)
$187.4 $148.4
Note 6 Fixed Assets
Accumulated
DECEMBER 31, 1998 Gross Depreciation Net
Land $2.9 $-- $2.9
Buildings 232.2 67.9 164.3
Machinery and equipment 1,155.4 368.0 787.4
Roads 22.7 11.3 11.4
Crown rights 1.6 1.0 0.6
1,414.8 448.2 966.6
Construction in progress 13.4 -- 13.4
$1,428.2 $448.2 $980.0
Accumulated
DECEMBER 31, 1997 Gross Depreciation Net
Land $2.9 $-- $2.9
Buildings 232.4 61.3 171.1
Machinery and equipment 1,141.6 327.6 814.0
Roads 21.3 9.8 11.5
Crown rights 1.6 0.9 0.7
1,399.8 399.6 1,000.2
Construction in progress 8.5 -- 8.5
$1,408.3 $399.6 $1,008.7
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Note 7 Long-Term Debt and Revolving Credit Facility
DECEMBER 31, 1998
US Dollar
Component
in US Maturity
Dollars Date 1998 1997
Repap New Brunswick-
First priority senior $-- 2000 $-- $214.4
secured notes, LIBOR +3.25%
First priority senior 0.2 2000 0.3 214.4
secured notes, 9.875%
First priority senior 120.0 2004 183.7 --
secured loans, LIBOR +3.75%
First priority senior 200.0 2004 306.1 --
secured notes, 9%
Second priority senior 350.0 2005 535.7 500.2
secured notes, 10.625%
Revolving credit facility; 41.0 1999 77.6 97.5
LIBOR +2.25% CDN prime
+3.25%
Long-term purchase -- 1999-2003 1.7 2.4
agreements, 4.30% - 10.1%
1,105.1 1,028.9
Alcell Forest Products -
Loan bearing interest at 1998 -- 37.0
Canadian prime
Repap (parent company) -
Promissory note (Note 17) 2013 5.0 --
Debt component of 9% 1998 -- 3.3
convertible debentures
(Note 12)
Debt component of 6% 34.7 2005 53.1 --
convertible debentures
(Note 12)
58.1 3.3
Total debt and revolving
credit facility $1,163.2 $1,069.2
[REPAP LOGO]
The long-term debt and revolving credit facility are classified on the
balance sheet as follows:
DECEMBER 31 1998 1997
Revolving credit facility $77.6 $97.5
Current portion of long term debt 1.0 70.4
Long term debt 1,084.6 901.3
$1,163.2 $1,069.2
As at December 31, 1998, the Canadian prime, US prime and LIBOR rates
were 6.75% (1997: 6%), 7.75% (1997: 8.5%) and 5.07% (1997: 5.83%),
respectively.
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Scheduled principal maturities of long-term debt, including the revolving
credit facility, for the next ten years, are as follows:
1999 - $78.6 2004 - $489.8
2000 - $0.7 2005 - $588.8
2001 - $0.2 2006 - $--
2002 - $0.1 2007 - $--
2003 - $-- thereafter- $5.0
During 1998 and 1997, the Corporation was involved in significant financing
and refinancing activities, as described in Note 2.
Substantially all of Repap New Brunswick's assets collateralize the debt
and revolving credit facility. A significant portion of the Corporation's
long-term debt for 1998 and 1997 was denominated in US dollars. The December 31
exchange rates used were 1.5305 for US$1.00 (1997-$1.4291 for US$1.00).
The debt agreements restrict the incurrence of additional debt, the payment
of dividends on and redemption of Repap New Brunswick's capital stock, the
redemption of certain of Repap New Brunswick's subordinated obligations, the
sale of assets and subsidiaries' stock, certain transactions with affiliates,
the creation of liens and sales leaseback transactions. The debt agreements also
prohibit certain restrictions on distributions from subsidiaries; restrict Repap
New Brunswick from merging; and place certain limitations on asset disposition.
Note 8 Grants
The Corporation has earned grants in respect of eligible expenditures, a
portion of which is repayable.
The repayable portion, including consumer price index adjustments, amounted
to $22.4 million as at December 31, 1998 (1997 - $27.7 million) and the
estimated current portion as at December 31, 1998 was $6.6 million (1997 - $5.3
million). The repayable portion is due at varying dates under varying methods as
follows: (i) $1.5 million (1997 - 1.5 million) on March 1, 1999, plus interest
at 8% (1997 - 6.5%) thereon; (ii) $7.3 million (1997 - $10.0 million) on a
quarterly basis at a rate of 1% of net sales on the A-1 Coated Paper Mill for
the immediately preceding quarter; and (iii) $13.0 million (1997 - $14.7
million) is repayable in equal monthly installments plus accrued interest at
6.75% (1997 - 6.75%) per annum at the rate of $2 million in 1999 and 2000, $3
million in 2001 and 2002, with the remaining balance due on December 31, 2002.
In 1988 the Corporation entered into a Contribution Agreement with the
Government of Canada and in 1993, Alcell entered into Research and Development
Contribution Agreements with the Government of Canada. The combined agreements
provided up to $56.6 million in repayable grants in conjunction with the
construction of an Alcell plant in New Brunswick.
During 1997, as a result of the Corporation's decision to discontinue the
operations of Alcell and as a result of renegotiated agreements with the
Government of Canada, the grants of $56.6 million which had previously been
recorded in the Corporation's consolidated balance sheet were written off and
accounted for as a reduction in the loss from discontinued operations of Alcell
for the year ended December 31, 1997 (see Note 17).
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Note 9 Investment Tax Credits Recoverable
The Corporation has available investment tax credits of $127.8 million
(1997 - $135.7 million), none of which are recognized in the accounts in
1998 (1997: $35.5 million).
The tax credits are available to reduce income taxes payable in the future
years and expire as follows:
1999 $91.7
2000 16.2
2001 1.0
2002 3.0
2003 5.1
2004 4.5
2005 2.7
2006 1.4
2007 1.3
2008 0.9
$127.8
In accordance with Canadian generally accepted accounting principles,
investment tax credits amounting to approximately $35.5 million (1997 - $104.1)
were credited against the related deferred credits, with no impact on the
results of operations during 1998.
Note 10 Non-Controlling Interest (see Note 17)
DECEMBER 31 1998 1997
Non-cumulative, redeemable preferred shares
of Alcell Forest Products $-- $14.3
During 1998, a gain of $14 million has been credited to the deficit as a
result of the sale of the shares of Alcell Forest Products Inc.
Note 11 Share Capital
Authorized-
Common Shares:
Unlimited Common Shares carrying one vote each.
Preferred Shares:
Unlimited Preferred Shares issuable in Series, of which 400,000 Non-Voting
Preferred Shares, Series A, 280,000 Non-Voting Preferred Shares, Series C,
316,397 Non-Voting Preferred Shares, Series D, 900,000 Non-Voting Preferred
Shares, Series E and 400,000 Non-Voting Preferred Shares, Series F were
created and issued. Preferred Shares, Series C have a non-cumulative annual
dividend of 8% and are redeemable by the Corporation at any time for $25
per share together with all declared and unpaid dividends. Preferred
Shares, Series F have a non-cumulative annual dividend of 7%, in priority
to shares of any other class or series of the Corporation, except Preferred
Shares, Series A, are redeemable by the Corporation at any time for $25 per
share together with all declared and unpaid dividends, and rank ahead of
any other class or series of shares of the Corporation except Preferred
Shares, Series A, on dissolution or wind-up.
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[REPAP LOGO]
Issued and Outstanding -
DECEMBER 31 1998 1997 1996
Common Shares:
Beginning of year: $640.4 $483.3 $483.3
Shares issued:
(1998: 1,000,000) 0.2 157.1 --
(1997: 619,023,800)
(1996: 12,360)
End of year:
Shares outstanding:
(1998: 743,460,637)
(1997: 742,460,637)
(1996: 123,436,837)
Total common shares, end of year $640.6 $640.4 $483.3
DECEMBER 31 1998 1997 1996
Preferred Shares:
Preferred Shares, Series A -
Beginning of year: $-- $10.0 $10.0
Redemption and cancellation -- (10.0) --
End of year:
(1996: 400,000 shares) -- -- 10.0
Preferred Shares, Series C-
Beginning and end of year:
(1998, 1997 & 1996: 240,000 shares) 6.0 6.0 6.0
Preferred Shares, Series F-
Beginning and end of year:
(1998, 1997 & 1996: 400,000 shares) 10.0 10.0 10.0
Deduct -
Preferred shares held by Repap Wisconsin -- -- (10.0)
Total Preferred Shares, end of year $16.0 $16.0 $16.0
1998 1997 1996
Weighted average number of shares (in
thousands) used in the calculation of
basic earnings (loss) per share 742,713 381,222 123,432
Basic earnings (loss) per share $(0.07) $(0.17) $(3.99)
Adjusted basic earnings (loss) per share -- (0.07) --
Fully diluted earnings (loss) per share $(0.07) $(0.17) $(3.99)
On August 1, 1997, 619,023,800 Common Shares were issued in connection with
the conversion of 8.5% US$130 million Convertible Redeemable Subordinate
Debentures (see Note 12). During 1998, 1,000,000 Common Shares (1996: 12,360
Shares) were issued in connection with the exercise of stock options for cash
proceeds of $0.2 million.
The values assigned to the Corporation's shares for accounting purposes
differ from the corresponding amounts for legal and income tax purposes.
The Officers, directors and certain employees of the Corporation have
options to purchase up to 64.7 million Common Shares in the capital of the
Corporation. 1.7 million of these options had been issued prior to 1997 and are
exercisable at prices in excess of $4.00. During 1997, 61 million were issued at
$0.235. During 1998, 2 million options were granted with an exercise price of
$0.235 and one million were granted at an exercise price of $0.335. 23 million
of the options granted in 1997 and 1998 to "non-insiders" were repriced in
January 1999 to $0.08. All options are now fully vested and may be exercised
immediately.
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<PAGE>
Changes in shares under option are summarized as follows:
1998 1997 1996
(In Thousands of Shares)
Outstanding - beginning of year 63,165 6,656 4,508
Granted 3,000 61,000 2,136
Exercised (1,000) 0 (12)
Expired or cancelled (425) (4,491) 24
Outstanding - end of year 64,740 63,165 6,656
Shares under exercisable options
- -end of year 64,740 63,165 6,656
- ------------------------
See Note 12 for details of the conversion option for convertible debentures.
On August 8, 1996, the Corporation entered, in connection with the Standby
Loan Agreement, into a warrant indenture providing for the creation and issue of
926,250 Series A Warrants, 471,250 Series B Warrants and 227,500 Series C
Warrants, which entitled the holders thereof to purchase Common Shares at the
rate of one Common Share for one Warrant. In connection with the repayment of
the Standby Loan Agreement as described in Note 2, all of the warrants were
surrendered and cancelled.
During 1989, the shareholders of the Corporation approved an Employee Share
Ownership Plan (the "Plan") available to all employees with a minimum of six
months of consecutive service. Under the terms of the Plan, the Corporation
contributed an amount equal to 30%, over a three-year period, of the amount of
contributions of each employee, net of withdrawals. This plan was terminated in
December 1996.
Note 12 Convertible Debentures
DECEMBER 31 1998 1997
9% Convertible Redeemable Subordinate
Debentures due 1998 $-- $75.0
6% Convertible Subordinated Debentures due 2005
(US$45 million) 68.3 --
Total $68.3 $75.0
Total convertible debentures are classified on
the balance sheet as follows:
Current portion of long-term debt and repayable
grants (Note 7) $-- $3.3
Long term debt (Note 7) 53.1 --
Other paid-in capital 15.2 71.7
Total $68.3 $75.0
- The 9% Convertible Redeemable Subordinate Debentures were repaid in full on
June 15, 1998 through the issuance of new 6% Convertible Subordinated
Debentures and cash on hand.
- The 6% Convertible Subordinated Debentures mature June 30, 2005. They are
convertible into common shares at the option of the holder on the business
day prior to maturity at US$0.35 per share.
- On August 1, 1997, the Corporation repaid its US$130 million 8.5%
convertible debentures through the issuance of 619,023,800 Common Shares
(see Note 11).
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[REPAP LOGO]
Note 13 Income Taxes
The following summarizes the Corporation's income tax provisions on
earnings of its continuing operations:
YEARS ENDED DECEMBER 31 1998 1997 1996
Loss from continuing operations before
income taxes $(66.3) $(135.3) $(91.3)
Income taxes:
Current 2.1 2.0 2.5
Loss from continuing operations $(68.4) $(137.3) $(93.8)
The Corporation's effective income tax rates are as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
Federal income tax rates 38.0% 37.5% 36.3%
Provincial income tax rates 6.1 6.1 3.8
Unrecognized income tax benefit on
losses (37.5) (38.5) (33.2)
Other (9.8) (6.6) (9.6)
(3.2%) (1.5%) (2.7%)
The Corporation and its continuing subsidiaries have incurred $268.5
million of accounting losses (1997: $228.6 million) on which income tax benefits
of approximately $105.0 million (1997: $88.4 million) have not been recognized
in the accounts.
The Corporation and its continuing subsidiaries have available net
operating loss carryforwards for income tax purposes of approximately $319.9
million and investment tax credits of approximately $127.8 million. These
potential deferred income tax benefits are available to be carried forward and
applied against income tax in future years and expire between 1999 and 2008.
Also, the Corporation and its continuing subsidiaries have available
capital loss carryforwards for income tax purposes of approximately $148.2
million on which income tax benefits have not been recognized in the accounts.
Note 14 Interest Expense
Interest expense comprises the following:
YEARS ENDED DECEMBER 31 1998 1997 1996
Interest on short-term borrowings $0.8 $2.1 $3.8
Interest on long-term debt and
convertible debentures 110.7 115.8 109.2
$111.5 $117.9 $113.0
Note 15 Depreciation and Amortization
YEARS ENDED DECEMBER 31 1998 1997 1996
Depreciation and amortization expense
comprises the following:
Depreciation of fixed assets $49.7 $48.5 $44.4
Amortization of other assets 24.8 19.5 6.5
Amortization of investment tax credits (4.7) (9.8) (9.1)
Amortization of non-repayable government
grants (1.0) (1.0) (0.8)
$68.8 $57.2 $41.0
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Note 16 Unusual Items
During 1998, $46.4 million was charged to operating results in connection
with the issue by Repap New Brunswick of senior secured notes and loans in the
aggregate amount of US$320 million. Charges to Unusual Items included deferred
foreign exchange losses, deferred financing costs and early redemption premiums
related to the indebtedness repaid from proceeds.
Note 17 Discontinued Operations (see Note 2)
a) Alcell:
Alcell developed the proprietary ALCELL pulping process and related
co-products in a small-scale demonstration facility located in Miramichi, New
Brunswick. In December 1994, Alcell Forest Products, a wholly-owned subsidiary
of Alcell, was incorporated to acquire a magnesium-bisulphite pulp mill in
Atholville, New Brunswick from a third party with a view to eventually
converting it into a pulp mill employing the ALCELL process. In 1995, the
Corporation decided to commission the acquired mill using the
magnesium-bisulphite process.
In March 1996, the magnesium-bisulphite pulp mill in Atholville and the
ALCELL demonstration facility in Miramichi, New Brunswick were shut down
indefinitely due to market conditions. In March 1997, management determined that
the magnesium-bisulphite pulp mill in Atholville and Alcell would be put up for
sale. The Corporation has been unable to sell Alcell and efforts to do so have
ceased.
The results of Alcell have been reported separately as part of amounts
under the caption "Income (loss) from discontinued operations" in the statement
of operations. The results are summarized as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
Revenues $-- $0.1 $3.3
Income (loss) from operations before
income taxes and gain on settlement of
government grant (1.5) (15.2) (315.4)
Gain on settlement of government grant
(Note 8) -- 56.6 --
Gain on disposition of Alcell Forest
Products 20.0 -- --
Provision for income taxes -- 0.1 0.4
Income (loss) from operations before the
following 18.5 41.3 (315.8)
Provision for future losses (1.5) (4.3) --
Income (loss) from discontinued
operations $17.0 $37.0 $(315.8)
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[REPAP LOGO]
In December 1996, a provision of $305.5 million was recorded against income
on the ALCELL assets as their recovery could no longer be regarded as assured
considering the lack of adequate resources available or expected to be available
to complete the commercialization of the ALCELL technology.
The assets and liabilities of Alcell included in the consolidated balance
sheets are as follows:
DECEMBER 31 1998 1997
Assets
Working capital assets $0.1 $0.6
Total assets 0.1 0.6
Liabilities and capital sources 1.7 4.8
Working capital liabilities
Long-term debt, repayable grants and
other liabilities -- 37.0
Non-controlling interest -- 14.3
Total liabilities and capital sources 1.7 56.1
Net liabilities $(1.6) $(55.5)
On February 20, 1998 the Corporation concluded a Share Purchase Agreement
with AV Cell Inc. ("AV Cell"), a non-related party, for the sale to AV Cell of
all the shares of Alcell Forest Products, which owed the magnefite mill, located
in Atholville, New Brunswick. In conjunction with the sale of Alcell Forest
Products, the Corporation agreed to settle the $37.0 million secured bank loan
of Alcell Forest Products guaranteed by the Province of New Brunswick with a
recourse back to the Corporation with a cash payment of $12.0 million. The
balance of $25.0 million was paid to the lender by the Province of New Brunswick
under its guarantee. The $25.0 million which was then due to the Province of New
Brunswick by the Corporation under its guarantee was satisfied with a fifteen
year $5.0 million, 6.75% promissory note (the "Note") from the Corporation to
the Province of New Brunswick and the transfer of the 10,000 $10.0 million par
value class B Preferred Shares (the "Shares") of AV Cell received for the sale
of Alcell Forest Products. Accordingly, the Corporation recorded a $20.0 million
gain on the settlement of this debt and related government assistance, which has
been reflected in income from discontinued operations. In addition, expenses
related to Alcell Technologies totaled approximately $3.0 million in 1998 and
were reflected in income from discontinued operations. In management's opinion,
it is unlikely that material amounts will be required to be paid under the
contingent interest, dividend, and share repurchase agreements described below.
The Note is repayable in 2013. Early repayments of one tenth of the
principal amount of the notes are required in years following the tenth
anniversary of the note in which year the average Northern Bleached Softwood
Kraft pulp ("NBSK") price is equal to or in excess of US$900 per metric ton
during the four consecutive calendar quarters in that year. Interest on the Note
shall accrue and be payable only in calendar quarters in which the average NBSK
price for the two previous consecutive quarters is in excess of the US$750 per
metric ton.
The Shares carry a non-cumulative quarterly dividend at a rate of up to
1.6875% payable by AV Cell only if the price of the NBSK pulp is at or above
US$900 per metric ton for three consecutive quarters. The Shares are redeemable
at par by AV Cell at any time and there is a retraction privilege exercisable by
the Province of New Brunswick on the fifteenth anniversary. The redemption or
retraction can be paid in either cash or AV Cell Common shares, at the lower of
book or market value. The Corporation is obliged to make payments to the
Province of New Brunswick
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equal to the quarterly dividend otherwise due on the Shares provided that the
average NBSK price is greater than US$750 per metric ton for the two previous
consecutive quarters and less than US$900 per metric ton for the three previous
consecutive quarters in constant dollar terms.
The Corporation will purchase from the Government of New Brunswick 1,000
shares for $1,000 in each of the years following the tenth anniversary but prior
to the fifteenth anniversary for each of the years in which the average NBSK
price is equal to or greater than US$900 per metric ton for each of the calendar
quarters in constant dollar terms in that year less the amount of Shares
redeemed by AV Cell in that year.
b) Repap British Columbia
As described in Note 2, on March 3, 1997, Repap British Columbia entered
into a restructuring and settlement agreement with its secured lenders. On March
27, 1997, the Westcoast Lenders exercised their right to purchase all of the
shares of Repap British Columbia for a nominal amount. The results of Repap
British Columbia as well as the loss on disposal have been reported separately
as part of amounts under the caption "Income (loss) from discontinued
operations" in the statement of operations. The results and loss on disposition
are summarized as follows:
YEARS ENDED DECEMBER 31 1997 1996
Revenues $71.6 $422.2
Earnings (loss) from operations before
income taxes (28.0) (104.6)
Provision for (recovery of) income taxes (0.1) (1.5)
Income (loss) from operations (27.9) (103.1)
Loss on disposition of discontinued
operations (87.3) --
Loss from discontinued operations $(115.2) $(103.1)
c) Repap Manitoba
On July 18, 1997, a Stock Purchase Agreement was entered into between the
Corporation and Tolko for all of the issued and outstanding shares in the
capital of Repap Manitoba of net proceeds of $34.5 million.
The results of Repap Manitoba as well as the loss on disposal have been
reported separately as part of amounts under the caption "Income (loss) from
discontinued operations" in the statement of operations. The results and loss on
disposition are summarized as follows:
YEARS ENDED DECEMBER 31 1997 1996
Revenues $96.0 $164.3
Earnings before income taxes 6.0 15.7
Provision for income taxes 0.2 0.5
Income from operations 5.8 15.2
Loss on disposition of discontinued
operations (71.0) --
Income (loss) from discontinued operations $(65.2) $15.2
d) Repap USA:
On September 25, 1997, shareholders of Repap passed a resolution approving
the sale to Consolidated Papers, of all the outstanding shares of Repap USA and
all of the Preferred Stock of Repap Wisconsin exclusive of certain assets of
Repap USA. This transaction closed on September 30, 1997 and provided US$227
million of net proceeds.
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The results of Repap Wisconsin as well as the gain on disposal have been
reported separately as part of amounts under the caption "Income (loss) from
discontinued operations" in the statement of operations. The results and gain on
disposition are summarized as follows:
YEARS ENDED DECEMBER 31 1997 1996
Revenues $513.3 $581.9
Earnings before income taxes 8.2 (4.0)
Provision for income taxes 1.0 (9.5)
Income from operations 7.2 5.5
Gain on disposition of discontinued
operations 210.0 --
Income from discontinued operations $217.2 $5.5
Note 18 Contingencies
The Corporation is involved in various cases of litigation. Management is
of the opinion, based on information presently available to it, that the
eventual outcome of these matters will not have a material adverse effect on the
Corporation.
<PAGE> 25
[REPAP LOGO]
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or as some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failures which
could effect an entity's ability to conduct normal business operations.
Management has developed and is implementing a plan designed to identify and
address the expected effects of the Year 2000 Issue on the Corporation. As at
December 31, 1998, the Corporation has commenced the identification of computer
systems that will require modification or replacement. An assessment of the
readiness of third parties such as customers, suppliers and others is ongoing.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
Note 19 Segmented Information: Product Segmentation from
Continuing Operations
The Corporation has adopted the new guidance on segment disclosures as
recommended by section 1701 of the Canadian Institute of Chartered Accountants'
Handbook for all public companies with a fiscal year beginning on or after
January 1, 1998. These recommendations are consistent with FASB's SFAS 130 on
"Disclosures about segments of an enterprise and other related information."
Reportable Segments
The Corporation 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 Corporation has three reportable segments: paper, pulp and lumber. The
paper segment derives its revenues from the sale of high quality coated
groundwood paper. The Corporation typically produces lighter basis weights
comprising grades No. 4 and 5 which are used in high circulation magazines,
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catalogues, newspaper advertising inserts and direct mail advertising materials.
The pulp segment derives its revenues from the sale of northern bleached
softwood kraft pulp which is used in the production of tissue, specialty papers,
as well as printing and writing papers. The lumber segment produces
construction-grade lumber such as 2"x4"s.
Measurement of Segment Operating Profit before Depreciation and
Amortization and Segment Assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The only intersegment
transaction is the transfer of pulp from the kraft and groundwood mills to the
paper mill. This transfer is done at cost, therefore not requiring the
elimination of intersegment profit on such transfers.
Information about Segment Operating Profit before Depreciation and
Amortization and Segment Assets:
For the Year Ended and As at December 31, 1998
Segment
Paper Pulp Lumber Totals
Net sales before intersegment
transfers $542.0 $176.9 $20.8 $739.7
Intersegment transfers -- (122.3) -- (122.3)
Net sales 542.0 54.6 20.8 617.4
Operating profit before depreciation
and amortization 171.0 9.6 2.5 183.1
Amortization of capital assets and
goodwill 27.4 14.8 0.7 42.9
Segment assets 763.3 262.3 10.2 1,035.8
Additions to capital assets 4.2 14.3 0.2 18.7
For the Year Ended and As at December 31, 1997
Segment
Paper Pulp Lumber Totals
Net sales before intersegment
transfers $450.3 $194.2 $25.5 $670.0
Intersegment transfers -- (119.5) -- (119.5)
Net sales 450.3 74.7 25.5 550.5
Operating profit before depreciation
and amortization 82.7 14.5 7.1 104.3
Amortization of capital assets and
goodwill 27.5 13.2 0.5 41.2
Segment assets 806.9 272.8 10.3 1,090.0
Additions to capital assets 6.9 7.9 0.7 15.5
For the Year Ended and As at December 31, 1996
Segment
Paper Pulp Lumber Totals
Net sales before intersegment
transfers $428.4 $177.4 $20.6 $626.4
Intersegment transfers -- (121.1) -- (121.1)
Net sales 428.4 56.3 20.6 505.3
Operating profit before depreciation
and amortization 90.6 8.8 3.4 102.8
Amortization of capital assets and
goodwill 20.6 12.5 0.5 33.6
Additions to capital assets 4.0 12.1 0.6 16.7
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Reconciliations of Reportable Segment Sales, Operating Profit before
Depreciation and Amortization and Segment Assets
Years Ended December 31 1998 1997 1996
Net sales $617.4 $550.5 $505.3
Effects of currency hedging (5.7) (30.1) (20.2)
Consolidated net sales $611.7 $520.4 $485.1
Operating profit before depreciation
and amortization $183.1 $104.3 $102.8
Effects of currency hedging (5.7) (30.1) (20.2)
Unallocated administrative expenses (6.0) (21.0) --
Consolidated operating profit before
depreciation and amortization $171.4 $53.2 $82.6
Assets 1998 1997
Total assets for reportable segments $1,035.8 $1,090.0
Unallocated amounts:
Cash 9.4 43.3
Accounts receivable 67.6 75.7
Inventories 0.1 0.3
Prepaids expenses 0.3 1.7
Investments 16.2 16.8
Deferred charges, goodwill and other assets
187.4 159.1
Fixed assets, net 12.1 11.0
Total Assets $1,328.9 $1,397.9
[REPAP LOGO]
Other Significant Items 1998 1997 1996
Total amortization of capital assets $42.9 $41.2 $33.6
and goodwill for reportable segments
Adjustments for unallocated items:
Amortization of other assets 24.8 15.2 7.1
Amortization of unallocated fixed
assets 1.1 0.8 0.3
$68.8 $57.2 $41.0
Total expenditures for additions to
capital assets for reportable
segments $18.7 $15.5 $16.7
Unallocated capital asset additions
related to office and administrative
building and equipment
2.1 0.7 2.6
$20.8 $16.2 $19.3
Geographic Segmentation
Capital Assets and
Net Sales Goodwill
1998 1997 1996 1998 1997
Canada $87.6 $110.6 $101.8 $1,017.2 $1,045.4
United States 506.1 375.6 318.4 -- --
Europe 4.7 11.9 33.8 -- --
Other 13.3 22.3 31.1 -- --
$611.7 $520.4 $485.1 $1,017.2 $1,045.4
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Information about Major Customers
Sales to one customer of the Corporation's coated groundwood paper
represents approximately $126.5 (1997 - $84.7, 1996 - $53.3) of the
Corporation's total net sales for the year ended December 31, 1998.
Note 20 Net Changes in Non-Cash Working Capital
YEARS ENDED DECEMBER 31 1998 1997 1996
Decrease in accounts receivable $9.5 $34.8 $6.1
Decrease (increase) in inventories (0.9) 30.0 (13.7)
Increase (decrease) in accounts
payable and accrued liabilities (11.7) (32.2) 14.0
$(3.1) $32.6 $6.4
Note 21 Pension Plans
The Corporation maintains defined benefit final average pension plans which
cover certain of its employees. The periodic cost of pension benefits is
determined using the projected benefit method prorated on services.
Pursuant to certain collective agreements, the Corporation also contributes
to pension plans for the benefit of some of its employees. These pension plans
are administered by the Corporation or jointly with labor unions of which
certain of its employees are members, through representative boards of trustees.
At December 31, 1998, the Corporation maintains defined contribution plans which
cover certain of its employees.
Net periodic pension expense from operations for plans in 1998, 1997 and
1996 are included in the following components:
1998 1997 1996
Current service cost $3.2 $5.4 $5.9
Interest cost on projected benefit
obligation 10.1 13.9 11.9
Actual return on plan assets (10.3) (13.6) (10.6)
Net amortization and deferral 2.5 2.8 2.4
Net periodic pension expense $5.5 $8.5 $9.6
The assumptions used in the majority of the Corporation's plans at December
31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
Weighted average discount rate 7.55% 8.50% 8.50%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
Expected long-term rate of increase in wages 4.00% 4.00% 4.00%
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The following table sets forth the funded status for the Corporation's
defined benefit plans at December 31, 1998 and 1997:
DECEMBER 31, 1998 DECEMBER 31, 1997
Plans where Plans where Plans where Plans where
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
Actuarial present value of:
Vested and non-
vested benefit
obligation $(59.8) $(66.2) $(72.8) $(48.4)
Additional benefits
based on wage
projection (4.5) (11.0) (5.2) (9.5)
Projected benefit
obligation (64.3) (77.2) (78.0) (57.9)
Plan assets at fair
market value
(primarily listed
stocks and bonds) 66.5 48.6 83.8 33.6
Plan assets in
excess of (less
than) projected
benefit obligation 2.2 (28.6) 5.8 (24.3)
Unrecognized net
liability (asset)
at transition (1.3) 6.9 (0.5) 7.3
Unrecognized net
(gain) loss 3.3 13.3 (0.8) 9.4
Unrecognized prior
service cost 3.8 6.5 4.9 5.4
Pension asset
(liability)
included in the
consolidated
balance sheets $8.0 $(1.9) $9.4 $(2.2)
Note 22 Generally Accepted Accounting Principles in the United States
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The following summary sets out the material adjustments to the
Corporation's reported net income (loss) which would be made in order to conform
with US GAAP and the accounting principles and practices required by the SEC.
44
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[REPAP LOGO]
YEARS ENDED DECEMBER 31 1998 1997 1996
Earnings adjustments:
Loss from continuing operations before
provision for accretion of paid-in
capital in accordance with Canadian GAAP $(65.5) $(122.9) $(74.8)
Adjustments (net of applicable income
taxes):
Unusual item (1) 46.4 -- --
Unrealized loss on translation of long-
term debt (2) (58.6) (32.9) (3.3)
Reversal of revenue stream hedge (2) 5.7 30.1 20.2
Amortization of investment tax credits (3) 1.3 (5.1) (7.2)
Interest expense (4) (2.1) (14.4) (19.0)
Loss on foreign exchange forward
contracts (5) (2.1) -- --
Other (4) (0.2) -- --
Income (loss) from continuing operations
before extraordinary items in
accordance with US GAAP (75.1) (145.2) (84.1)
Extraordinary items, net of related
income taxes (1) (23.8) -- --
Income (loss) from discontinued
operations in accordance with US GAAP (6, 7) 0.2 162.3 (310.3)
Net income (loss) in accordance with US GAAP (98.7) 17.1 (394.4)
Foreign currency translation adjustments 0.2 7.4 --
Additional minimum pension liability (11) (20.2) -- --
Comprehensive income (loss) in accordance
with US GAAP $(118.7) $24.5 $(394.4)
Basic earnings (loss) from continuing operations per share:
Before extraordinary items $(0.10) $(0.38) $(0.68)
After extraordinary items $(0.13) $(0.38) $(0.68)
Diluted earnings (loss) per share $(0.13) $(0.38) $(0.68)
Basic earnings (loss) per share:
Before extraordinary items $(0.10) $(0.04) $(3.20)
After extraordinary items $(0.13) $(0.04) $(3.20)
Diluted earnings (loss) per share $(0.13) $(0.04) $(3.20)
45
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The following sets out the material differences between the Corporation's
balance sheet and statement of changes in financial position components in
accordance with Canadian GAAP and US GAAP:
1998 1997
Canada US Canada US
In accordance with GAAP in
Balance sheet components:
Investment tax credits recoverable(3) -- -- 35.5 --
Other assets (2) 187.4 64.2 148.4 53.8
Accounts payable (4) 117.8 119.9 129.0 129.0
Long-term debt (4) 1,031.5 1,031.5 971.7 968.3
Repayable grants and other
liabilities (6, 11) 21.0 58.0 25.6 25.6
Investment tax credits (3) 108.3 140.6 148.0 146.2
Convertible debentures (4) 53.1 69.7 -- 75.0
Other paid-in capital (4) 15.2 -- 71.6 --
Shareholders' equity (deficiency) (110.8) (322.0) (17.3) (217.3)
1998 1997 1996
Canada US Canada US Canada US
In accordance with
GAAP in Statement of
changes in financial
position components:
Cash provided by (used
in) operating
activities (8) 53.4 (0.4) (2.2) (22.6) (7.1) (27.0)
Cash provided by (used
in) investing
activities (40.4) (8.1) (16.7) (16.7) (22.1) (22.1)
Cash provided by (used
in) financing
activities (8) (63.9) (25.6) (252.9) (232.5) 133.5 153.4
Cash provided by (used
in) discontinued
operations 17.0 0.2 291.6 291.6 (118.3) (118.3)
Net increase (decrease)
in cash (33.9) (33.9) 19.8 19.8 (14.0) (14.0)
Interest paid by the Corporation amounted to $126.8 million in 1998
(1997: $135.4 million; 1996: $173.9 million).
(1) Under Canadian GAAP, the Corporation expensed the unamortized balances
of deferred financing fees and deferred foreign exchange losses as well as
certain fees for early repayment of long-term debt, all of which were related to
the refinanced US$150 million first priority senior secured notes, LIBOR +3.25%
and the US$149.8 million first priority senior secured notes, 9.875%. Under US
GAAP the deferred foreign exchange losses were expensed in prior periods,
whereas the deferred financing fees and any fees for early repayment are
presented as extraordinary items.
(2) Unrealized gains and losses arising from the translation of foreign
monetary assets or liabilities with terms in excess of one year are deferred and
amortized over the remaining life of the related debt. Where future revenue
streams have been designated as an effective hedge against exchange losses, such
losses are deferred without amortization until principal repayments fall due. US
GAAP permits neither revenue-stream hedging nor the amortization of foreign
exchange gains and losses. Under US GAAP, such gains and losses would be
included in income as they arise.
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<PAGE>
[REPAP LOGO]
(3) Under Canadian GAAP, the Corporation may continue to recognize earned
investment tax credits in situations where investment tax credits recoverable
exceed deferred income tax credits when there is reasonable assurance of their
realization. US GAAP does not permit the recognition of these investment tax
credits unless certain limitations to their recognition are removed.
(4) Under Canadian GAAP, the liability and equity components of compound
financial instruments, such as the Corporations' convertible debentures are
included in long-term debt, and shareholders' deficiency respectively and
interest costs pertaining to the equity component are accreted directly to
long-term debt. Similarly, deferred financing fees related to convertible
debentures are allocated to both the debt and equity components, the portion
related to the debt component is included in deferred charges, and the remainder
is netted against the equity component of the convertible debenture without
being amortized. Under US GAAP, the convertible debentures are presented outside
shareholders' deficiency, all interest costs are charged to operations, and all
deferred financing fees are included in deferred charges and amortized over the
term to maturity.
(5) Under Canadian GAAP, foreign exchange forward contracts can be designed
as a hedge of future revenue streams, with the resulting gains and losses on the
contracts only charged against operations when the contracts are executed in
future periods. US GAAP does not permit revenue-stream hedging and requires such
contracts to be specifically designated as hedges of committed future sales in
order to qualify for the deferral of unrealized foreign exchange gains and
losses. Unrealized gains and losses on all contracts not specifically designated
are charged against operations in the current period.
(6) Under US GAAP, amounts that remain contingently payable to the Province
of New Brunswick as described in Note 17 should continue to be recorded as
liabilities until the related contingencies are resolved. As a result, under US
GAAP, the gain on the settlement of debt included in discontinued operations is
restricted to the amount by which the carrying value of the debt, exceeds the
total amount contingently payable.
(7) Under Canadian GAAP, certain project development costs are deferred and
amortized over the periods benefited. Under US GAAP, such costs are included in
income as incurred. In 1995, the loss from discontinued operations under
Canadian GAAP included an unusual charge of $305.5 million, as described in Note
17, which included $89.0 million of deferred development costs charged to income
in prior years under US GAAP. Consequently, this amount represents an income
adjustment in 1996 to reconcile to the loss from discontinued operations in
accordance with US GAAP in 1996.
(8) In these financial statements, the definition of cash used in the
measurement of cash flows includes short-term borrowings. Under US GAAP, changes
in short-term borrowings would be excluded from the definition of cash and
presented as financing transactions.
(9) Under US GAAP, the Corporation is required to account for deferred
income taxes using the liability method whereby deferred tax assets and
liabilities are measured at currently enacted tax rates and valuation allowances
are required when it is more likely than not that portions of the deferred tax
assets will not be realized.
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The components of the Corporation's deferred tax assets (liabilities),
including the valuation allowance, comprise the following:
1998 1997
Differences between net book value of assets
and liabilities for accounting and income tax
purposes $(11.6) $(9.2)
Net operating losses 112.2 97.1
Net capital losses 23.9 17.6
Net other 6.9 3.0
Investment tax credits -- 21.4
131.4 129.9
Valuation allowance (131.4) (129.9)
$-- $--
During 1998, the valuation allowance decreased by $1.5 million
(1997: $20.7 million).
(10) Under Canadian GAAP, distribution costs, which include freight,
commissions and discounts, are deducted from revenues in arriving at net sales.
Under US GAAP, commission and freight expenses should not be presented as
deductions from sales but rather should be treated as expenses. If this
presentation had been adopted, net sales and operating expenses would have
increased by $52.7 million in 1998, $49.1 million in 1997, and $107.0 million in
1996. This difference in presentation would have had no effect on operating
profit (loss) and net income (loss).
(11) Under US GAAP the Corporation is required to present the changes in
both the fair value of pension plan assets and the projected benefit obligation
during the year.
1998 1997
Fair value of pension plan asset
Balance, beginning of year $117.2 $102.3
Actual return (loss) on plan assets (3.2) 10.4
Contributions 6.0 7.9
Benefit payments (4.9) (3.4)
Balance, end of year $115.1 $117.2
Projected benefit obligation
Balance, beginning of year $144.6 $122.2
Benefit payments (5.8) (4.4)
Service and interest costs 16.0 13.3
Assumption changes 8.6 10.5
Liability (gain) loss (0.7) 3.0
Balance, end of year 162.7 144.6
Less: Projected salary increase 18.1 15.8
Accumulated benefit obligation, end of year $144.6 $128.8
Under US GAAP, if the accumulated benefit obligation exceeded the fair
value of plan assets, an additional minimum liability would be recognized.
Accounting for Stock-Based Compensation
SFAS 123, "Accounting for Stock-Based Compensation" allows the choice of
accounting for stock-based compensation in accordance with APB 25, "Accounting
for Stock Issued to Employees", using the intrinsic value approach, and
providing supplementary pro-forma net income and earnings per share note
disclosure calculated in accordance with SFAS 123, or using the fair value
approach established by SFAS 123. In accordance with the
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[REPAP LOGO]
provisions of SFAS 123, if the Corporation had elected to recognize compensation
expense based on the fair value methodology prescribed by SFAS 123, the
Corporation's net income and earnings per share would not be significantly
different from amounts currently reported using APB 25.
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 Corporation 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 Corporation's business practices. As required, the Corporation plans to
adopt this statement upon its applicable effective date in fiscal 2000.
The AICPA issued Statement of Position 98-5 which requires that the cost
of start-up activities be expensed as incurred. This SOP is effective for
entities with fiscal years beginning after December 15, 1998. The initial
application of this SOP is reported as a cumulative effect of a change in
accounting principles. The Corporation has not yet determined the impact of this
standard on its consolidated financial statements.
Note 23 Financial Instruments
Fair value
The Corporation has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies. However, considerable
judgment is necessary to develop these estimates. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Corporation
could realize in a current market exchange. The use of different assumptions or
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument.
Short-term financial assets and liabilities are valued at their carrying
amounts as presented in the balance sheet, which are reasonable estimates of
fair value due to the relatively short period to maturity of the instruments.
Rates currently available to the Corporation for its revolving credit
facility with similar terms and remaining maturities are not significantly
different from the contractual interest rates disclosed in Note 7. The carrying
value for the revolving credit facility is therefore a reasonable estimate of
its fair value.
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Year-end quoted market prices for the Corporation's long-term debt and
convertible debentures are used to estimate the fair values presented below.
Year-end spot prices are used to value foreign currency forward contracts and
commodity forward contracts.
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Value Value Value Value
Financial Assets:
Commodity forward contracts -- 4.7 -- --
Financial Liabilities
Convertible debentures 68.3 68.3 75.0 59.3
Long-term debt 1,025.8 817.9 929.0 909.0
Foreign currency forward
contracts -- 5.7 -- 3.9
Credit risk
Sales to one customer, in which the Corporation has an investment in
preferred stock, were 21% of net sales during 1998, 16% of net sales during
1997, and 11% of net sales during 1996. Accounts receivable from this customer
were $14.0 million at December 31, 1998 and $11.1 million at December 31, 1997.
1997 accounts receivable from two customers were $8.9 and $7.7 million,
respectively.
The Corporation is also exposed to credit risk in the event of
non-performance by counter parties in connection with its currency and commodity
forward contracts. The Corporation does not obtain any security to support
financial instruments subject to credit risk but mitigates this risk by only
dealing with financially sound counter parties, and accordingly does not
anticipate losses from non-performance.
Currency risk from continuing operations
A significant proportion of the Corporation's products are sold in the
United States in US dollars, while a large proportion of the Corporation's costs
are incurred in Canadian dollars. As a result, the profitability and cash flow
of the Corporation are affected by exchange rate fluctuations.
The Corporation enters into foreign exchange forward contracts to hedge
expected future revenues denominated in US dollars. The table below summarizes,
by currency, the contractual amounts of the Corporation's foreign exchange
forward contracts with one major Canadian financial institution at December 31.
1998 1997
Nominal Nominal
amount in Forward Unrealized amount in Forward Unrealized
foreign contracts gain foreign contracts gain
currency $ (loss) $ currency $ (loss) $
Currency: $110.0 $162.9 $(5.7) $109.0 $151.9 $(3.9)
US Dollars -- -- -- 0.7 1.6 --
Pounds
Sterling -- -- -- 0.3 0.2 --
Deutsche Marks $110.0 $162.9 $(5.7) $110.0 $153.7 $(3.9)
Outstanding foreign exchange forward contracts as at December 31, 1998 are
scheduled to mature evenly over the period ended January 21, 2000.
Price risk
A significant portion of the Corporation's revenues are generated from the
sale of high-quality coated groundwood paper and northern bleached softwood
kraft pulp. The Corporation also consumes a significant amount of oil in all
aspects of the production of coated paper, kraft pulp and lumber.
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As a result, the profitability and cash flow of the Corporation are affected by
market price fluctuations for these commodities.
During 1998 the Corporation entered into forward contracts for the sale of
relatively small amounts of both coated paper and kraft pulp, as well as forward
contracts for the purchase of 3% high sulphur oil for a period of approximately
two to two and one half years from December 31, 1998 in order to protect against
fluctuating market prices. These contracts guarantee the Corporation a fixed
price for equal monthly transactions of the nominal amount over the periods of
the contracts. At December 31, 1998, the net gain on these contracts to the
Corporation was not significant.
Forward sales contracts establish a selling price for future production at
the time they are entered into, thereby limiting the risk of declining prices
but also limiting gains on price increases. Forward purchase contracts establish
a price for future purchases at the time that they are entered into, thereby
limiting the risk of increasing prices but also limiting gains on price
decreases.
The actual gain or loss to be realized on commodity hedging contracts will
be determined by the spot price as the contracts mature.
Note 24 Comparative Figures
Certain of the comparative figures have been reclassified to conform to the
presentation adopted for the current year.
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Summary of Selected Financial Data (1)
REPAP ENTERPRISES INC.
MILLIONS OF CANADIAN DOLLARS
EXCEPT PER SHARE DATA AND VOTING SHARES
1998 1997 1996 1995 1994
Operating Data
Revenues from continuing $683.6 $609.9 $564.0 $724.3 $528.5
operations
Net sales from continuing 611.7 520.4 485.1 657.3 466.7
operations
Operating profit (loss) 102.6 (4.0) 41.6 186.3 (0.6)
Interest expense 111.5 117.9 113.0 108.2 88.4
Unusual items(2) 46.4 -- -- 41.7 --
Income (loss) from continuing (65.5) (122.9) (74.8) 39.3 (104.5)
operations
Income (loss) from 17.0 73.8 (398.2) 121.9 21.2
discontinued operations
Net income (loss) (51.4) (63.5) (492.0) 143.6 (83.3)
attributable to common
shareholders
Average Cdn$/US$ exchange 1.4830 1.3848 1.3636 1.3725 1.3659
rate
Balance Sheet Data
Net fixed assets $980.0 $1,008.7 $2,284.2 $2,452.0 $2,392.7
Total assets 1,328.9 1,397.9 3,303.7 3,618.3 3,422.3
Debt (3) 1,185.6 1,096.8 2,489.8 2,299.6 2,233.9
Shareholders' equity (110.8) (17.3) 41.1 514.0 185.8
(deficiency)
Year-end Cdn$/US$ exchange 1.5305 1.4291 1.3696 1.3652 1.4028
rate
Cash Flow Data from
Continuing Operations
Cash flow from operations (4) $56.5 $(34.8) $(13.5) $135.5 $(38.2)
Additions to fixed assets 20.8 16.2 19.3 35.7 18.9
Net additions to (repayments 52.1 (229.4) 105.4 51.0 (68.2)
of) long-term debt
Issue of share capital 0.2 157.1 -- 13.2 150.2
Per Share Data (in dollars)
Cash dividends $-- $-- $-- $-- $--
Earnings (loss) from:
-Continuing operations, (0.09) (0.36) (0.76) 0.18 (0.89)
basic
-Discontinued operations 0.02 0.19 (3.23) 0.99 0.18
-Total (0.07) (0.17) (3.99) 1.17 (0.71)
Voting shares (thousands)
Common shares 743,461 742,461 123,437 123,424 121,940
52
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Quarterly Financial Information
REPAP ENTERPRISES INC.
YEARS ENDED DECEMBER 31 (Unaudited, not reviewed)
(MILLIONS OF CANADIAN DOLLARS, Q1 Q2 Q3 Q4 YEAR
EXCEPT PER SHARE DATA)
1998
Net sales from continuing $146.9 $151.2 $154.5 $159.1 $611.7
operations
Operating profit 27.9 28.2 22.5 24.0 102.6
Loss from continuing operations (0.8) (48.6) (11.7) (7.3) (68.4)
Net income (loss) attributable to 17.3 (49.0) (12.3) (7.4) (51.4)
common shareholders
Loss from continuing operations
per share
Basic -- (0.07) (0.02) (0.01) (0.09)
Fully diluted -- (0.07) (0.02) (0.01) (0.09)
1997
Net sales from continuing $123.7 $133.8 $115.6 $147.3 $520.4
operations
Operating profit (loss) (6.9) 6.1 (24.2) 21.0 (4.0)
Loss from continuing operations (42.1) (31.4) (55.8) (8.0) (137.3)
Net income (loss) attributable to (125.9) (52.2) 65.2 49.4 (63.5)
common shareholders
Earnings (loss) from continuing
operations per share
Basic (0.34) (0.25) (0.11) (0.01) (0.36)
Adjusted basic (1.02) (0.42) 0.12 0.03 (0.17)
Fully diluted (1.02) (0.42) 0.03 0.06 (0.36)
(1) See Note 1 to the Corporation's consolidated financial statements.
(2) See Note 16 to the Corporation's consolidated financial statements.
(3) Includes long-term debt, revolving credit facilities and repayable grants.
(4) Before net change in non-cash working capital.
(5) In August 1, 1997, US$130 million convertible debentures, maturing on
that date, were converted into common shares of the Corporation at a
formula price of US$0.21 per share, being 95% of the weighted average price
of the common shares traded on the Toronto Stock Exchange for the 20 days
preceding conversion date. The total number of common shares issued on
conversion was 619,023,800.
Price Range and Trading Volume of Common Shares
REPAP ENTERPRISES INC.
Canada (1)
High Low Close Volume
(in Canadian $ per share) (000's of Shares)
1998 First Quarter $0.290 $0.165 $0.275 158,745
Second Quarter 0.395 0.220 0.240 151,641
Third Quarter 0.270 0.120 0.133 40,909
Fourth Quarter 0.150 0.080 0.085 203,312
1997 First Quarter $4.20 $1.45 $1.55 46,015
Second Quarter 1.73 0.51 0.57 48,347
Third Quarter 0.70 0.16 0.265 245,675
Fourth Quarter 0.285 0.10 0.185 234,034
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[REPAP LOGO]
United States (1)
High Low Close Volume
(in Canadian $ per share) (000's of Shares)
1997 First Quarter $3.083 $1.031 $1.125 24,693
Second Quarter 1.25 0.359 0.469 17,726
Third Quarter 0.531 0.094 0.219 36,114
Fourth Quarter* 0.219 0.094 0.094 17,985
*From Oct. 1 to Dec. 5 - Repap was delisted on Dec. 5
Liquidity 1998 1997
Total Volume (000's of shares) 554,606 670,689
Canada 554,606 574,071
United States 0 96,618
Monthly Average Trading
Volume (000's of shares) 46,217 55,882
Value ($ Millions) (2) $9.36 $24.0
Major Shareholders
AS AT FEBRUARY 22, 1999: Shares (Millions) Vote (%)
Public Float 504.3 67.8
EQSF Advisers, Inc. 139.6 18.8
TD Asset Management 99.6 13.4
Total (3) 743.5 100.0
1 1998 High, Low, Close and Volume statistics are for The Toronto Stock
Exchange. In Canada, Repap's common shares are traded on The Toronto Stock
Exchange and The Montreal Exchange. Until December 31, 1997 Repap's common
shares were also traded on The Vancouver Stock Exchange. In the United
States, Repap's common shares were traded on The NASDAQ National Market
System until December 5, 1997.
2 Based on monthly weighted average share price on The Toronto Stock Exchange
(1998: $0.20; 1997: $0.44).
3 No dividends were paid on the common shares in 1998, 1997 and 1996.
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Glossary
- ------------------- --------------------- ---------------------
Annual Allowable Groundwood Pulp: Short Ton or Ton:
Cut: A type of 2,000 pounds.
Average volume of mechanical pulp
timber which the produced by Timber License:
holder of a Forest grinding. A license granted
License or a Tree by a government
Farm License is Integrated: providing for the
legally entitled to Generally refers to management of a
harvest in a a company that portion of public
designated managed produces the pulp forest for a period
forest area during it uses in of years, and
one year. papermaking. A providing for the
captive pulp harvesting of a
Basis Weight: company. certain volume of
A measure of paper timber each year.
thickness and Kraft Pulp:
weight. The weight The principal type Tonne or Metric Ton:
of a ream (500 of chemical pulp, One metric ton, equal
sheets) of paper of produced by an to 1,000 kilograms or
specific length and alkaline cooking approximately 2,205
width. process and noted pounds.
for its strength.
Board Foot: Wood Pulp:
One square foot of Lightweight Coated Wood fibres produced
lumber, one inch Paper: from solid wood for
thick. Groundwood coated use in the production
paper in basis of paper, paperboard
Chemical Pulp: weights ranging and other products.
Pulp produced by from 30 to 45
cooking wood chips pounds. Conversion Table:
in a pressure Imperial Metric
vessel (digester) Market Pulp: Measure System
in the presence of Wood pulp produced 1 inch =2.54
certain chemicals by one company and centrimetres
to remove lignin sold to another in 1 foot =0.3048 metre
and other wood the open market. 1 yard =0.9144 metre
chemicals. 1 mile =1.6093
Mfbm: kilometres
Coated Paper: One thousand foot 1 acre =0.4047
Paper which is board measures hectare
coated with clay (board feet). 1 short ton =0.9072 tonne
and usually 1 cubic yard=0.7646 cubic
supercalendered to metre
produce a glossy Mmfbm:
surface. The paper One million foot
may be coated on board measures
only one side or (board feet).
both sides.
Northern Softwood
Kraft Pulp:
Coated Paper Kraft pulp produced
Grades: from slow-growing
Paper can be coated northern softwood
on one side (C1S) trees which
or two sides (C2S). commands a premium
C2S is classified price because it is
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[REPAP LOGO]
in five "enamel stronger than
numbers" in terms southern softwood
of brightness, pulp.
gloss and pulp
content with No. 1
being the top
grade. Nos. 1
through 3 and about
one-quarter of No.
4 are freesheet
papers while the
other half of No. 4
and essentially all
of No. 5 are
groundwood papers.
Groundwood Coated
Paper:
A term to describe
paper where a major
component is groundwood
or mechanical pulp. The
chemical pulps such as
kraft are used to
provide sufficient
strength to enable the
paper to run properly
on high-speed paper
machines and printing
presses.
Officers Shareholder Executive Offices
Information
F. Steven Berg Annual Meeting: Repap Enterprises Inc.
Chairman 300 Atlantic Street
The Annual and Suite 200
Stephen C. Larson Special Meeting of Stamford, CT 06901
President and Chief Shareholders will be Tel: 203-964-6160
Executive Officer held Thursday, May 13, Fax: 203-964-6175
1999 at 11:00 a.m. at:
Michelle A. Cormier Hilton Toronto
Vice President, Toronto III Room
Finance 145 Richmond Street West
Toronto, Ontario M5H 2L2
Terry W. McBride
Vice President, Share Information:
General Counsel and
Secretary The Corporation's Common
Shares are traded on The
* Member of Audit Toronto Stock Exchange and
Committee The Montreal Exchange.
The stock market symbol
Operating Management is RPP.
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[REPAP LOGO]
Repap New Brunswick Transfer agent and
David T. Nelligan registrar:
Vice President and
General Manager Montreal Trust Company
1800 McGill College Avenue
Repap Marketing Inc. 7th Floor
Neil M. Falco Montreal, Quebec H3A 3K9
President
Auditors:
Ernst & Young, LLP
1 Place Ville Marie,
Suite 2400
Montreal, Quebec H3B 3M9
Solicitors:
Canada
Stikeman Elliott
1155 Rene-Levesque Blvd. West
Suite 3900
Montreal, Quebec H3B 3V2
Gowling, Strathy & Henderson
160 Elgin Street, Suite 2600
Ottawa, Ontario K1N 8S3
United States
Sullivan & Cromwell
125 Broad Street, 32nd Floor
New York, NY 10004
Version francaise:
Pour obtenir la version
francaise de ce rapport,
il suffic d'ecrire au:
Secretaire
Les Entreprises
Repap
300 Atlantic Street,
Suite 200
Stamford, CT 06901
57
EXHIBIT 21.1
REPAP ENTERPRISES INC. & SUBSIDIARIES
REPAP ENTERPRISES INC. - Incorporated under the laws of Canada
(formerly Repap Enterprises Corporation Inc. -
formerly Quinsprack Limited)
ALCELL TECHNOLOGIES INC. - Continued under the laws of the Province
of New Brunswick
(formerly Alcell Developments Inc. - formerly 155945
Canada Inc.)
BLACKVILLE LUMBER INC. - Incorporated under the laws of the Province
of New Brunswick
REPAP MARKETING INC. - Incorporated under the laws of the State of
Delaware
(formerly Green Forest Corporation, into which was merged
the original Repap Ferrostaal (U.S.A.) Inc.)
(formerly Repap Ferrostaal (U.S.A.)
(formerly Repap Development Inc.)
REPAP NEW BRUNSWICK INC. - Incorporated under the laws of Canada
(formerly Miramichi Pulp & Paper Inc.,)
(formerly Acadia Forest Products Limited)
(formerly Aidaca Pulp & Paper Limited)
REPAP TECHNOLOGIES INC. - Incorporated under the laws of the State of
Delaware
(formerly Biological Energy Corporation)
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Repap Enterprises Inc. of our report dated January 27, 1999 and of our
comments by auditors for US readers on Canada-US reporting difference dated
January 27, 1999, included in the 1998 Annual Report of Repap Enterprises Inc.
Our audit also included the financial statements schedule of Repap Enterprises
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Montreal, Canada
January 27, 1999 Chartered Accountants
Ernst & Young LLP
[Signed]
