UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-16289
Repap Enterprises Inc.
(Exact name of registrant as specified in its charter)
Canada 98-0178526
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 Atlantic Street, Suite 200 Stamford, CT, 06901
(Address of principal executive offices) (City, State, Zip Code)
(203) 964-6160
(Registrant's telephone number, including area code)
___________________________________________________
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [ X ] Yes [ ] No
743,460,637 shares of the registrant's Common Stock, no par value,
were outstanding as of the close of business on September 30, 1999.
REPAP ENTERPRISES INC.
INDEX
EXCHANGE RATES
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Interim Balance Sheet
Condensed Consolidated Interim Statements of Operations
Condensed Consolidated Interim Statements of Cash Flows
Condensed Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item. 1 Legal Proceedings
Item. 2 Changes in Securities and Use of Proceeds
Item. 3 Defaults Upon Senior Securities
Item. 4 Submission of Matters to a Vote of Security Holders
Item. 5 Other Information
Item. 6 Exhibits and Reports on Form 8-K
SIGNATURES
EXCHANGE RATES
Repap Enterprises Inc. ("Repap Enterprises" or the "Company")
publishes its consolidated financial statements in Canadian dollars.
In this quarterly report, unless otherwise specified or the context
otherwise requires, all dollar amounts are expressed in Canadian
dollars ("$", "C$", "dollars", or "Cdn. dollars").
The following table sets forth the exchange rates of the Canadian
dollar to the U.S. dollar for the period ended and as at December 31,
1998 and for the nine months ended and as at September 30, 1999 and
1998 (such rates, which are expressed in dollars, being the noon
buying rates in New York City for cable transfer in U.S. dollars as
certified for customs purposes by the Federal Reserve Bank of New
York). On November 2, 1999, US$1.00 equaled C$1.4690.
Nine Months Year Ended
Ended September 30, December 31,
------------------- ------------
1999 1998 1998
------ ------ ------
(C$ per US$)
High 1.4512 1.4658 1.4075
Low 1.5302 1.5770 1.5770
Average (1) 1.4903 1.4642 1.4836
At End of Period (2) 1.4695 1.5262 1.5375
- --------------------
(1) The average of the daily buying rates during the applicable period.
(2) Noon buying rate on last banking day.
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements.
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET (see Note 1)
(unaudited as at September 30, 1999)
(dollars in millions)
As at As at
September 30, December 31,
1999 1998
ASSETS ------------- ------------
Current assets
Cash and short term deposits $73.8 $9.4
Accounts receivable 72.8 68.5
Inventories 73.6 66.5
Prepaid expenses and other assets 2.8 0.8
-------- --------
223.0 145.3
-------- --------
Fixed assets, net 959.3 980.0
Investments 16.2 16.2
Other assets 132.8 187.4
-------- --------
$1,331.3 $1,328.9
========= =========
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $136.0 $117.8
Current portion of long-term debt and
repayable grants 6.2 7.6
Revolving credit facility -- 77.6
-------- ---------
142.2 203.0
-------- ---------
Long-term debt 1,192.2 1,084.6
Repayable grants and other liabilities 17.7 21.0
--------- ---------
1,209.9 1,105.6
--------- ---------
CAPITAL SOURCES
Investment tax credits 104.5 108.3
Grants-non-repayable 22.0 22.8
--------- ---------
126.5 131.1
SHAREHOLDERS' DEFICIENCY
Preferred shares 16.0 16.0
Common shares 640.6 640.6
Deficit (819.2) (782.7)
Other paid-in capital 15.3 15.3
--------- ---------
(147.3) (110.8)
--------- ---------
$1,331.3 $1,328.9
========= =========
See accompanying notes
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(see Note 1) (unaudited) (dollars in millions)
Third Nine Months
Quarter Ended September 30,
-------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues from continuing operations $160.4 $172.7 $465.5 $504.8
Effects of currency hedging (1.2) (1.2) (4.1) (4.0)
------- ------- ------- -------
Net revenues 159.2 171.5 461.4 500.8
------- ------- ------- -------
Net sales from continuing operations 141.5 154.5 412.3 452.7
Cost of sales before depreciation and
amortization 102.6 101.2 295.0 295.7
Selling, administrative and research
expenses 7.0 11.1 21.6 27.6
Depreciation and amortization 15.6 19.6 47.5 50.7
------- ------- ------- -------
Operating profit 16.3 22.6 48.2 78.7
Interest expense 30.0 29.2 86.4 82.6
Miscellaneous (income) expenses (0.4) 4.2 (3.2) 5.8
------- ------- ------- -------
Income (loss) before the undernoted (13.3) (10.8) (35.0) (9.7)
Provision for income taxes 0.5 0.8 1.6 2.1
Unusual charges -- 0.1 -- 46.4
------- ------- ------- -------
Loss from continuing operations (13.8) (11.7) (36.6) (58.2)
Income (loss) from discontinued
operations -- (0.5) -- 17.2
------- ------- ------- -------
Net loss (13.8) (12.2) (36.6) (41.0)
Provision for accretion of other
paid-in capital -- -- -- 3.0
------- ------- ------- -------
Net loss attributable to common
shareholders $(13.8) $(12.2) $(36.6) $(44.0)
======= ======= ======= =======
Average common shares outstanding
(millions) 743.5 742.5 743.5 742.5
------- ------- ------- -------
Loss per share:
Continuing operations $(0.02) $(0.02) $(0.05) $(0.08)
Discontinued operations -- -- -- 0.02
------- -------- -------- --------
Total $(0.02) $(0.02) $(0.05) $(0.06)
See accompanying notes
REPAP ENTERPRISES INC.
Incorporated under the laws of Canada
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(see Note 1)
(unaudited) (dollars in millions)
Third Nine Months
Quarter Ended September 30,
-------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
Operating activities:
Loss from continuing operations $(13.8) $(11.7) $(36.6) $(58.2)
Add items not affecting cash:
Depreciation and amortization 15.6 19.6 47.5 50.7
Effects of currency hedging 1.2 1.2 4.1 4.0
Other 0.2 0.4 0.7 47.5
------- ------ ------ ------
Cash flow before net changes in
non-cash working capital 3.2 9.5 15.7 44.0
Non-cash working capital changes 6.7 34.7 5.2 14.7
------- ------ ------ ------
Cash provided by continuing operations 9.9 44.2 20.9 58.7
Investing activities:
Additions to fixed assets (5.6) (4.2) (18.5) (12.4)
Deferred charges and other assets (2.3) (4.6) (7.9) (22.8)
------- ------ ------ ------
Cash used in investing activities (7.9) (8.8) (26.4) (35.2)
Financing activities:
Additions to debt 1.3 0.5 152.4 522.3
Repayment of debt (1.9) (1.6) (7.5) (460.3)
Redemption of debentures -- -- -- (75.0)
Revolving credit facility, net change -- (34.1) (74.8) (45.5)
Other -- 0.2 (0.1) (17.0)
------- ------ ------ -------
Cash provided by (used in)
financing activities (0.6) (35.0) 70.0 (75.5)
Cash provided by (used in)
discontinued operations 0.1 (0.6) (0.1) 17.1
Net increase (decrease) in cash 1.5 (0.2) 64.4 (34.9)
Cash position at beginning of period 72.3 8.6 9.4 43.3
------- ------ ------ -------
Cash position at end of period $73.8 $8.4 $73.8 $8.4
======= ====== ====== =======
Represented by:
Cash and short-term deposits $73.8 $8.4 $73.8 $8.4
======= ====== ====== =======
See accompanying notes
REPAP ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Nine months ended September 30, 1999 and 1998
(unaudited)
(dollars in millions)
1. Financial Statement Presentation
These condensed consolidated interim financial statements of
Repap Enterprises Inc. ("Repap Enterprises" or the "Company") have
been prepared by management in accordance with accounting principles
generally accepted in Canada ("Canadian GAAP"). These condensed
consolidated interim financial statements are the responsibility of
management and, in its opinion, include all the adjustments, which are
of a normal recurring nature, necessary to a fair statement of the
results for the interim periods presented.
Reference is made to the Notes to the Consolidated Financial
Statements which appear in the Repap Enterprises 1998 Consolidated
Financial Statements, including Note 1 on "Financial Statement
Presentation". The significant accounting policies disclosed therein
apply to these condensed consolidated interim financial statements.
As further described in Note 3, the accounting policies followed
by Repap Enterprises differ in certain respects from those that would
have been followed had these condensed consolidated interim financial
statements been prepared in conformity with the accounting principles
generally accepted in the United States ("U.S. GAAP") and the
accounting principles and practices required by the United States
Securities and Exchange Commission ("SEC").
Basis of financial statement presentation and going concern assumption
These condensed consolidated interim financial statements have
been prepared in accordance with generally accepted accounting
principles on a going concern basis which presumes the realization of
assets and discharge of liabilities in the normal course of business
for the foreseeable future. Repap Enterprises' ability to continue as
a going concern is dependent upon achieving profitable operations and
generating positive cash flow on a sustained basis (See Note 1 to the
1998 Consolidated Financial Statements). The outcome of these matters
cannot be predicted at this time. These condensed consolidated interim
financial statements do not include any adjustments to the amounts and
classifications of assets and liabilities that might be necessary
should Repap Enterprises be unable to continue in business.
2. Inventories
September 30, December 31,
1999 1998
------------- ------------
Raw materials and supplies $46.4 $48.7
Work in process 1.4 1.0
Finished goods 25.8 16.8
----- -----
$73.6 $66.5
===== =====
Raw materials include chemicals, chips and logs used in the
production of pulp, paper and lumber. Work in process and finished
goods include pulp, paper and lumber.
3. Generally Accepted Accounting Principles in the United States
The condensed consolidated interim financial statements have
been prepared in accordance with Canadian GAAP. The following summary
sets out the material adjustments to Repap Enterprises' reported net
income (loss) which would be made in order to conform with U.S. GAAP
and the accounting principles and practices required by the SEC. For
information on the nature of these adjustments, refer to Note 22 of
Repap Enterprises' 1998 Consolidated Financial Statements.
Unaudited
Nine Months Ended
September 30,
-----------------
Statement of Operations components: 1999 1998
------ ------
Net loss before provision for accretion in paid-in
capital in accordance with Canadian GAAP. $(36.6) $(41.0)
Earnings adjustments:
Add (deduct):
Reversal of revenue-stream hedge 4.1 4.0
Unrealized gain (loss) on translation of
long-term debt 53.5 (37.3)
Interest expense on convertible debentures 1.3 (2.5)
Amortization of fees (0.1) --
Reversal of amortization of investment tax credits 1.0 --
Foreign exchange gain (loss) on forward contracts 2.4 --
Cost of early redemption of long-term debt -- 46.4
------ ------
Income (loss) before effects of change in accounting
principle in accordance with US GAAP. 25.6 (30.4)
Extraordinary item net of related taxes -- (23.8)
Effects of change in accounting principle (1) (5.1) --
------ ------
Net income (loss) $20.5 $(54.2)
====== =======
(1) The AICPA issued Statement of Position 98-5 which requires that
the cost of start-up activities be expensed as incurred. The new
method of accounting for the costs of start-up activities has
reduced start-up costs of $5.3 million previously included in
capital assets. The initial application of this Statement of
Position has been reported as a cumulative effect of a change in
accounting principle.
As at As at
September 30, 1999 December 31, 1998
In accordance In accordance
with GAAP in with GAAP in
------------------ -----------------
Balance Sheet components: Canada U.S. Canada U.S.
------ ------ ------ ------
Other assets $132.8 $66.4 $187.4 $64.2
Net capital assets 959.3 954.2 980.0 980.0
Accounts payable 136.0 156.2 117.8 119.9
Repayable grants and other
non-current liabilities 17.7 34.5 21.0 58.0
Convertible debentures 52.4 66.2 53.1 69.7
Investment tax credits 104.6 135.9 108.3 140.6
Other paid-in capital 15.3 -- 15.3 --
Shareholders' (deficiency) (147.3) (301.1) (110.8) (322.0)
New accounting pronouncements under US GAAP
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires all
derivatives to be recorded on the balance sheet at fair value and
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The Company is
studying the application of this new statement and has not yet
determined the impact, if any, on its consolidated financial
statements. The adoption of this statement is not expected to change
the Company's business practices. As required, the Company plans to
adopt this statement upon its applicable effective date in fiscal
2000.
4. Segmented Information
The Company is organized on the basis of its three primary
products: high quality coated groundwood paper products, northern
bleached softwood kraft pulp and construction grade lumber. The
Company has three reportable segments: paper, pulp and lumber.
Summarized segmented information is as follows:
Information about Segment Operating Profit
before Depreciation and Amortization
For the nine-months ended
September 30, 1999
-------------------------------
Segment
Paper Pulp Lumber Totals
------ ------- ------ -------
Net sales before intersegment revenues $362.3 $130.9 $14.0 $507.2
Intersegment revenues -- (90.8) -- (90.8)
------ ------- ------ -------
Net sales 362.3 40.1 14.0 416.4
Operating profit before depreciation
and amortization 91.0 7.4 1.4 99.8
Amortization of capital assets and
goodwill 21.5 11.5 0.6 33.6
For the nine-months ended
September 30, 1998
--------------------------------
Segment
Paper Pulp Lumber Totals
------ ---- ------ -------
Net sales before intersegment revenues $408.6 $126.4 $15.8 $550.8
Intersegment revenues -- (94.1) -- (94.1)
------ ------ ------ -------
Net sales 408.6 32.3 15.8 456.7
Operating profit before depreciation
and amortization 126.4 4.8 2.2 133.4
Amortization of capital assets and
goodwill 20.5 11.1 0.6 32.2
Reconciliation of Reportable Segment Revenues, Segment Profit
or Loss and Segment Assets
For the nine-months
ended September 30,
-------------------
1999 1998
------ ------
Net sales $416.4 $456.7
Effects of currency hedging (4.1) (4.0)
------ ------
Consolidated net sales 412.3 452.7
------ ------
Operating profit before depreciation
and amortization 99.8 133.4
Effects of currency hedging 4.1 4.0
Depreciation and amortization 47.5 50.7
Interest expense 86.4 82.6
Foreign exchange (income) loss (2.0) 7.4
Miscellaneous (income) expenses (1.2) (1.6)
Unusual charges -- 46.4
Paid-in capital accretion -- 3.0
------- -------
Loss before taxes and discontinued operations $(35.0) $(59.1)
======= =======
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Financial Review (in Canadian dollars unless otherwise noted - unaudited)
Results of Operations
Repap Enterprises Inc. recorded a net loss of $13.8 million ($0.02
per share) for the third quarter ended September 30, 1999, compared
with a net loss of $12.2 million ($0.02 per share) in the third quarter
of 1998.
For the nine months ended September 30, 1999, Repap reported a
loss of $36.6 million ($0.05 per share) compared to a loss of $44.0
million ($0.06 per share) for the corresponding period in 1998. 1998
results included one-time refinancing charges of $46.4 million, offset
partially by a gain from discontinued operations of $17.2 million.
Shipments in the Company's three product lines were as follows:
Nine Months Ended
Third Quarter September 30,
------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
Coated paper (000 tons) 120 117 347 342
Kraft pulp (000 metric tons) 22 16 61 49
Lumber (mmfbm) 10 13 34 41
Revenues from operations for the third quarter of 1999 were $160.4
million, down 7.1% from revenues of $172.7 million in the third quarter
of 1998 and up 12.6% from revenues of $142.4 million in the second
quarter of 1999. Revenues for the nine month period ending September
30, 1999 were $465.5 million, down 7.8% from revenues of $504.8 million
for the same period of 1998. The reduction in revenues is due
primarily to lower prices in all product lines, offset partially by
higher shipments of pulp and paper and the favorable impact of a weaker
Canadian dollar during the first nine months of 1999 compared to the
corresponding period in 1998.
- - Revenues from coated paper were $139.8 million, down $16.5 million
or 10.6% from revenues of $156.3 million in the third quarter of
1998, reflecting mainly the impact of a reduction of approximately
US$96 per ton in pricing resulting from weak paper markets and the
impact of a stronger Canadian dollar quarter over quarter, offset
partially by marginally higher shipments.
- - Revenues from pulp for the third quarter of 1999 were $15.9
million, up $4.9 million or 44.5% from revenues of $11.0 million
in 1998, reflecting the impact of significantly higher shipments,
offset in part by a decrease of US$28 per metric ton in average
prices and the impact of a stronger Canadian dollar.
- - Revenues from lumber were $4.7 million for the third quarter of
1999, down slightly from revenues of $5.4 million in the same
period of 1998, reflecting lower shipments, offset partially by an
increase in pricing of approximately US$60 per mfbm.
Shipments of coated paper totaled 347,000 tons in the nine months
of 1999 compared to 342,000 tons for the same period in 1998. The
increase of 5,000 tons represents increased shipments due to a 5%
increase in production, net of the negative impact of a six-day labor
strike which reduced production by 8,700 tons of paper.
Shipments of kraft pulp totaled 61,000 metric tons in the nine
months of 1999 compared to 49,000 metric tons for the same period in
1998. The increase of 12,000 metric tons was due mainly to an effort
to reduce inventories.
Shipments of lumber totaled 34 million foot board measure
("mmfbm") compared to 41 mmfbm for the same period in 1998. The
reduction in shipments was due mainly to the impact of a 30-day labor
strike during 1999.
Cost of sales of $295.0 million in the nine months of 1999 were
essentially flat compared to $295.7 million in the nine months of 1998.
In spite of incurring the increased costs associated with shipping an
incremental 12,000 metric tons of pulp and 5,000 tons of paper, costs
actually declined period over period by $700,000 due to productivity
and cost improvements throughout the operations.
Selling, general and administrative expenses decreased by $6.0
million to $21.6 million in the nine months of 1999 from $27.6 million
in the same period of 1998. 1998 included one-time adjustments of
approximately $6.1 million.
Repap Enterprises' operating profit, before depreciation and
amortization, and excluding non-cash currency adjustments, ("EBITDA")
was $33.1 million for the third quarter of 1999 compared to an EBITDA
of $43.4 million in the third quarter of 1998 and to an EBITDA of $27.7
million in the second quarter of 1999. The decrease of $10.3 million
from the third quarter of 1998 reflects the impact of lower prices for
coated paper and pulp and a stronger Canadian dollar, offset partially
by higher shipments and the benefits of increased productivity and
lower costs.
Repap's EBITDA for the first nine months of 1999 was $99.8
million, compared to $133.4 million for the same period in 1998. The
decrease of $33.6 million is due primarily to lower pricing for paper
and pulp, offset partially by higher shipments, increased productivity
and lower costs and the favorable impact of a weaker Canadian dollar.
Depreciation and amortization decreased by $3.2 million to $47.5
million for the nine months ended September 30, 1999 from $50.7 million
in the corresponding period of 1998. The decrease is due primarily to
lower amortization of deferred foreign exchange losses related to Repap
New Brunswick's operating credit facility which was refinanced in 1999
($5.5 million), offset partially by higher depreciation due to
increased productivity ($2.0 million).
Interest expense for the nine month period of 1999 was $86.4
million compared to $82.6 million in the same period of 1998,
reflecting higher borrowings.
Liquidity and Capital Resources
Repap Enterprises generated $15.7 million in cash from operations
in the nine months of 1999 compared to a cash generation of $44.0
million in the nine months of 1998. Non-cash working capital changes
generated cash of $5.2 million in the nine months of 1999 compared to
$14.7 million for the same period in 1998. The cash generated from
operations after working capital in the nine months of 1999 was used
primarily to finance capital expenditures of $18.5 million.
During the third quarter of 1999, the Company had total debt
servicing requirements of $16.5 million, of which $14.6 million was
interest and $1.9 million was principal related to repayable grants and
capital leases. During the fourth quarter of 1999, the Company has
debt servicing requirements of approximately $46.6 million, of which
$45.0 million is interest and $1.6 million is principal.
Coated Paper Outlook
Industry mill inventories of coated groundwood paper were at
approximately 159,000 tons at the end of August, down 16% from the
second quarter of 1999 and down 24% from a year ago.
Reported buyer inventories were at 599,000 tons at the end of
August 1999, down 12,000 tons from the prior month and down 20% from a
peak of 747,000 tons in July 1998.
While coated groundwood shipments from U.S. producers were down
1.2% through August versus the same period last year, recent activity
has strengthened with shipments for August and September up
significantly over the corresponding months of last year. Year-to-date
purchases are down 4.7% reflecting depletion of inventory, continued
grade substitution and market related downtime by several mills.
The Company's order book for the fourth quarter is essentially
full, as it enters a traditionally strong advertising season. Coated
paper prices, which have been declining for about one year, appear to
have bottomed in the third quarter. A price increase of US$50 per ton
was announced by major producers, including Repap, effective October 1,
1999 and, supported by a good market pulp environment, the coated
groundwood paper market outlook is favorable. There can be no
assurances that this price increase will be implemented nor that there
will be any decreases in the future.
Year 2000 Computer Issue
The Company, as well as its customers, suppliers, the financial
institutions and governmental entities with which it deals
(collectively, "third parties"), utilize information systems that will
be affected by the date change to the year 2000. Many of these
systems, if not modified or replaced, will be unable to properly
recognize and process date-sensitive information before, on and after
January 1, 2000.
State of Readiness
In 1997, the Company formalized its Year 2000 preparation efforts
by appointing a project team consisting of management, operations and
information systems personnel. Their mandate was to assess the impact
of Year 2000 issues on the Company's operations, develop plans to
address the issues and implement compliance. The project team also
developed plans to gather information to assess the Year 2000
compliance status and remediation efforts of major third parties.
Repap's information systems consist of business information and process
control systems. The business information systems support financial
and administrative processes such as customer order management and
product tracking, maintenance and materials management, personnel,
payroll, accounts payable, accounts receivable and general ledger. The
process control systems are used primarily in manufacturing operations;
they include information technology systems as well as embedded
technology, such as chips in various machine components. With respect
to the business information systems, the inventorying of computers and
the analysis of compliance have been completed. The Company has
elected to replace non-compliant information systems for customer order
management and process information history ("data historian"). The
customer order system became operational in July 1999 and the data
historian was completed in the third quarter. The programming and
testing of most other information systems has been completed. With
respect to the process control systems, Repap has completed the
inventorying of its control systems as well as remediation of its main
control systems. Repap expects to complete comprehensive testing to
confirm its remediation work by mid-November 1999. This schedule
assumes timely assistance by the vendors of certain systems in the
remediation of those systems. The vendors of those systems that are
essential to the Company's operations have provided or agreed to
provide the necessary assistance.
The Year 2000 issue also will impact the information systems of
third parties. The Company, through meetings in some cases and written
requests in others, is in the process of seeking to ascertain and
assess the progress of major third parties in identifying and
addressing problems with respect to Year 2000 issues. Many of these
third parties have indicated that they expect to successfully address
the issue in a timely fashion. Some others, however, have not yet
provided information regarding their state of readiness or have
provided responses deemed unsatisfactory by the Company. Repap will
continue to seek and to assess information regarding Year 2000
compliance by major third parties.
Estimated Cost of Remediation
Repap currently estimates total expenditures of approximately $6.0
million, most of which has been expended as of September, 1999, to make
the required Year 2000 modifications and replacements to its own
systems. All of these costs are being funded through internal cash
flow or vendor financing. The estimated total cost does not include
any expenditures that may be incurred in connection with the
implementation of contingency plans, discussed below.
Risks to the Company of Non-Compliance
The Company currently believes that it will be able to modify or
replace its own affected systems in a timely fashion so as to minimize
detrimental effects on its operations, subject to timely assistance by
the vendors of certain process control systems. Repap has received
written assurances regarding Year 2000 compliance from some, but not
all, third parties with respect to their own systems and is not in a
position to reliably predict whether third parties will experience
remediation problems. If the Company or major third parties fail to
successfully address the Year 2000 issue, there could be a material
adverse impact on the business and results of operations of the
Company. For example, while the Company self-generates approximately
31% of its electrical power requirements, it purchases the balance from
outside sources. If the electrical power grid is disrupted as a result
of Year 2000 systems failures, the Company might have to curtail
production until the grid is restored. If the Company or a major third
party fails to successfully address these issues the Company may have
to take steps that could adversely and temporarily impact its ability
to produce product, process orders and deliver finished products to
customers on a timely basis. In the event of Year 2000 disruptions in
the operations of the Company's customers, the Company may experience
increased levels of inventories and receivables.
Contingency Plans
To date, the Company's Year 2000 efforts have been devoted
primarily to the readiness program described above. Repap has not yet
finalized 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 during the fourth quarter of 1999.
Such plans may include, among other things, seeking alternative sources
of supply, stockpiling raw materials and increasing inventory levels.
Repap's Year 2000 program is an ongoing process. Estimates of
remediation costs and completion dates as well as projections of the
possible effects of any non-compliance are subject to change.
Forward-looking statements in this release are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that
could cause actual results and company plans and objectives to differ
materially from those expressed in the forward-looking statements.
Such risks and uncertainties include, but are not limited to, changes
in the United States and international economies; changes in worldwide
demand for the company's products; changes in worldwide production and
production capacity in the forest products industry; competitive
pricing pressures for the company's products; changes in raw material,
energy, and other costs; and currency fluctuations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Currency
The profitability level of Repap's Canadian operations is
sensitive to fluctuations in foreign exchange rates as most of their
revenues are derived in US dollars. A US$0.01 variation in exchange
rates affects Repap's cash flow by approximately $3.8 million. The
competitiveness of Repap's operations in world markets depends on the
relative strength of the currency in the countries of competitive
producers. Since the repayment in full of Repap New Brunswick's
operating credit facility in June 1999, the Company no longer has an
available foreign exchange hedging facility. Repap currently has no
outstanding forward exchange contracts outstanding.
At September 30, 1999, essentially all of Repap's consolidated
borrowings of approximately Cdn.$1.2 billion were in US dollars.
Repap is naturally hedged against the exchange risk associated
with holding US dollar debt because most of Repap's products are sold
in US dollars. Repap has chosen to issue primarily US dollar
denominated debt because of this natural hedge and to take advantage of
interest rates available on US dollar denominated debt which have, at
times, been significantly less than corresponding rates on Canadian
dollar-denominated debt.
Accordingly, effective July 1, 1992, Repap designated future US
dollar revenue streams as effective hedges against currency risks
related to US dollar debt borrowings. Designation of revenues as a
hedge results in exchange gains and losses on debt being deferred
without amortization until repayment. At maturity, any exchange
adjustment is included with revenues, recognizing that Repap has
realized equal and offsetting exchange adjustments in the period the
debt is repaid.
Revenues in the nine months ending September 30, 1999 were reduced
by $4.1 million as a result of the application of this accounting
method. As at December 31, 1998, approximately $43.4 million of hedged
currency exchange losses remained on the balance sheet, and are
expected to reduce revenues by the following non-cash currency exchange
adjustments:
Revenue reduction resulting from non-cash currency adjustments
Year (dollars in millions)
---- ---------------------
1999 $ 5.7
2000 22.4
Thereafter 15.3
Total $43.4
In April 1995, Repap and Repap New Brunswick refinanced the
majority of their US dollar long-term debt with US dollar denominated
senior secured notes issued by Repap New Brunswick. However, the
revenue streams which had been identified as an effective hedge in
connection with scheduled US dollar principal repayments on the old
debt continue to constitute an effective hedge against accumulated
exchange losses at the time of refinancing, as it remains highly likely
that such revenue streams will be earned as anticipated in the relevant
future periods.
Under generally accepted accounting principals in the United
States ("US GAAP"), any change in the currency fluctuations is
immediately recognized in income. The total amount of the above-
mentioned non-cash currency adjustments to future revenues has already
been charged to income under US GAAP. Accordingly, any reduction in
revenues and income of future years resulting from these currency
adjustments under Canadian GAAP will be added back in the
reconciliation of revenues and income under US GAAP. (See Note 22 to
the Company's Consolidated Financial Statements).
Interest Rates
The Company's variable-rate debt from continuing operations,
totaling US$120 million, is subject to fluctuations in Canadian, US and
LIBOR lending rates. A 1% change in interest rates affects Repap's
cash flow by approximately US$1.2 million.
Environmental Concerns and Regulations
The forest products industry is subject to evolving environmental
legislation, regulations and standards from various levels of
governments which impose effluent and emission standards and other
requirements on Repap's operations. Future capital investments may be
required to meet legislation, regulations and standards as they evolve.
In addition to regulatory pressure, market pressures may influence
product evolution. Repap's ability to continue to address changing
market needs could require additional capital investments as well as
additional investments in product and process development.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(1) F. Steven Berg against Repap Enterprises Inc.
Mr. F. Steven Berg was appointed a director and Chairman of the
Board of Directors of the Company in January, 1999. When the terms of
Mr. Berg's employment contract were subsequently developed and publicly
released in the spring of 1999, certain shareholders of the Company
expressed concern. In a notice to shareholders published in the
financial press on June 11, 1999, TD Asset Management Inc. and EQSF
Advisors, Inc., which acts as advisor to Third Avenue Value Fund and to
Third Avenue Small Cap Value Fund (the "dissident shareholders"),
advised of their intention to nominate and vote for an alternative slate
of directors at an annual and special meeting of the shareholders of
the Company originally scheduled for June 18, 1999.
On June 16, 1999, Mr. Berg filed a summons with the Supreme Court
of the State of New York in the County of New York seeking a
declaratory judgement that his employment agreement is a valid and
binding corporate obligation of the Company.
On June 23, 1999, the dissident shareholders received written
communication from the existing directors with the exception of Messrs.
Larson and Berg, indicating their willingness to resign in the event
that shareholders holding a significant number of shares of the Company
so desired. On June 25, 1999, the existing directors, with the
exception of Messrs. Larson and Berg, resigned in favor of nominees of
the dissident shareholders. The new Board of Directors then formed an
Independent Committee of the Board comprised of all directors with the
exception of Messrs. Berg and Larson. The mandate of the Independent
Committee was to investigate the circumstances surrounding the
negotiation and approval of Mr. Berg's employment agreement and to make
a recommendation to the Board of Directors with respect thereto. On
August 16, 1999, the Company's shareholders elected a board of directors
that did not include Mr. Berg.
During July, August and September 1999, members of the Independent
Committee of the Board of Directors met with Mr. Berg and his
representatives in an attempt to settle the matters raised by the
summons. The final proposal to settle Mr. Berg's claim made by the
Independent Committee in September was not accepted by Mr. Berg.
On September 27, 1999, Mr. Berg filed and served on the Company a
First Amended Complaint for Declaratory Judgment, Specific Performance
and Breach of Contract. On October 25, 1999 the Company filed a Motion
to Dismiss the First Amended Complaint claiming that, as a Canadian
company that does not do business in the State of New York, the Supreme
Court of the State of New York does not have jurisdiction over the
Company. Mr. Berg has not yet responded to the Company's motion.
If the Company's motion is not granted and the Supreme Court of
the State of New York determines that it has jurisdiction to hear the
First Amended Complaint, the Company intends to defend the action.
If, after the trial of the action and any appeals thereof, the
employment agreement is determined to be a valid and binding obligation
of the Company, or grounds do not exist to set it aside, or Mr. Berg is
not found to be in breach of the agreement, then the Company would
incur substantial financial obligations to Mr. Berg which would have
adverse financial consequences to the Company and which the Company may
not be able to satisfy.
(2) TD Asset Management Inc. vs F. Steven Berg, Clifford M. Sifton,
Stephen W. Phillips and Repap Enterprises Inc.
On October 25, 1999, the Company was served with Statement of
Claim filed in Ontario Superior Court of Justice against the Company
and three of its former directors, namely, F. Steven Berg, its former
Chairman, Stephen W. Phillips, a former member and Chairman of the
Company's Compensation Committee and Clifford M. Sifton, also a former
member of the Company's Compensation Committee.
The Ontario action claims (1) that the employment agreement
between the Company and its former Chairman, F. Steven Berg, is
oppressive or unfairly prejudicial to or unfairly disregards the
interests of the Company's shareholders, (2) and order setting that
employment agreement aside, (3) interim, interlocutory and permanent
injunctions restraining performance of the employment agreement and
associated grants of stock options, (4) damages against the personal
defendants and (5) costs of the action.
The Company is taking advice of counsel with respect to the
appropriate action to be taken in defense of this action but, in any
event, the Company does not intend to make any payments to Mr. Berg
until the respective rights of the Company and Mr. Berg can be
determined by a court of competent jurisdiction.
Item 2. Changes in Securities and Use of Proceeds.
No material changes to the constituent instruments defining the
rights of the holders of any class of registered securities have
occurred during the third quarter of fiscal 1999.
Item 3. Defaults Upon Senior Securities.
No material defaults upon senior securities have occurred during
the third quarter of fiscal 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during
the third quarter of fiscal 1999.
Item 5. Other Information.
N/A
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
No. Description
11.1 Statement re Computation of per Share Earnings
27 Financial Data Schedule
b) Reports on Form 8-K.
No current Report on Form 8-K was filed by the Company during
third quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
REPAP ENTERPRISES INC.
Registrant
Date: November 4, 1999 /s/ Michelle A. Cormier
Michelle A. Cormier
Vice President &
Chief Financial Officer
EXHIBIT INDEX
Exh. 11.1 Statement Re: Computation of per Share Earnings
Exh. 27 Financial Data Schedule
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(dollars in millions of Canadian dollars)
(shares in millions)
Nine Months ended
September 30,
-----------------
1999 1998
------ ------
BASIC
Average shares outstanding 743.5 742.5
Income (loss) from continuing operations (36.6) (61.4)
Net Income (loss) attributable to common
shareholders (36.6) (44.0)
Basic earnings (loss) from continuing
operations per share (0.05) (0.08)
Basic earnings (loss) per share (0.05) (0.06)
DILUTED (1)
Average shares outstanding 743.5 742.5
Stock options granted 52.2 63.2
Assumed conversion of convertible debentures -- --
- -----------------------------------------
(1) Diluted earnings per share are not computed as the effect of
the conversions of convertible debentures and the exercise of
stock options are antidilutive. The convertible debentures
are convertible at US$0.35 per common share.
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