1
BOWATER
Incorporated
[LOGO]
1999 ANNUAL REPORT
2
FINANCIAL HIGHLIGHTS
(In millions, except per-share amounts) 1999 1998(1)
- --------------------------------------------------------------------------------------------
Net sales $ 2,134.7 $ 1,995.0
Operating income(2) 244.0 162.1
Net income (loss) 78.7 (18.5)
Diluted earnings (loss) per common share $ 1.41 $ ( 0.44)
Average common and common equivalent
shares outstanding(3) 55.0 47.6
Dividends declared per common share $ 0.80 $ 0.80
Total assets 4,552.2 5,092.0
Total shareholders' equity 1,770.8 1,777.0
Percent return on average common equity 4.5% (1.4)%
Total debt $ 1,505.1 $ 1,830.8
Total debt as a percentage of total capitalization (4) 42.1% 46.3%
Current ratio 1.34x 0.90x
Capital expenditures, including timberlands 198.5 223.2
Registered shareholders 5,200 5,600
Common stock price range $ 37.13-59.94 $ 32.81-59.56
- --------------------------------------------------------------------------------------------
(1) Amounts include Avenor Inc. and the South Korean newsprint mill from the
dates of acquisition in July 1998.
(2) Operating income includes net gain on sale of assets of $225.4 million and
$21.1 million and impairment charges of $92.0 million and $119.6 million for
1999 and 1998, respectively.
(3) The average shares include 16.1 million of Bowater common and exchangeable
shares issued in conjunction with the Avenor acquisition, net of 2.4 million
shares repurchased.
(4) This ratio excludes the revaluation of Avenor's debt totaling $128.6 million
and $190.6 million for 1999 and 1998, respectively.
NET SALES in millions
99 $2,134.7
98 $1,995.0
97 $1,484.5
96 $1,718.3
95 $2,001.1
RETURN ON AVERAGE
COMMON EQUITY
99 4.5%
98 (1.4)%
97 4.5%
96 18.6%
95 27.5%
NET INCOME in millions
99 $ 78.7
98 $ (18.5)
97 $ 53.7
96 $ 200.2
95 $ 246.9
TOTAL DEBT AS A % OF
TOTAL CAPITALIZATION
99 42.1%
98 46.3%
97 37.2%
96 36.5%
95 38.7%
3
ABOUT BOWATER
BOWATER INCORPORATED, headquartered in Greenville, South Carolina, is a global
leader in newsprint. In addition, we make virgin and recycled-content coated
and uncoated groundwood papers, bleached kraft pulp and lumber products.
Bowater has eight pulp and paper facilities in the United States, Canada and
South Korea. The company also owns and operates a coating facility in Michigan
and three sawmills that produce softwood dimension lumber. These operations are
supported by 1.8 million acres of timberlands owned or leased in the United
States and Canada and 14.2 million acres of timber cutting rights in Canada.
The company is one of the world's largest consumers of recycled newspapers and
magazines. We have sales offices located throughout North America and in
Brazil, England, Japan, Singapore and South Korea. Bowater employs
approximately 6,400 people.
NEWSPRINT DIVISION
This Division operates seven manufacturing facilities in the United States,
Canada and South Korea. The principal product at these mills is newsprint, but
market pulp and uncoated groundwood specialties are also produced. The Division
is responsible for the worldwide marketing and sales of newsprint and uncoated
groundwood specialties and the operation of its manufacturing facilities.
PULP DIVISION
This Division sells approximately 1 million metric tons of market pulp produced
at the Calhoun, Tennessee; Catawba, South Carolina; and Thunder Bay, Ontario,
mills. Bowater's market pulp product line includes northern and southern
softwood and hardwood pulp, giving it one of the broadest pulp product lines in
North America.
COATED PAPER DIVISION
This Division operates two manufacturing facilities in the United States. The
largest is a mill at Catawba, South Carolina, which produces coated groundwood
paper, newsprint, market pulp and uncoated groundwood specialties. The Division
also operates a coating facility in Benton Harbor, Michigan. The Division is
responsible for the marketing and sales of coated groundwood paper and the
operation of the Catawba and Benton Harbor sites.
FOREST PRODUCTS DIVISION
This Division manages 1.8 million acres of timberland owned or leased in the
United States and Canada and 14.2 million acres of timber cutting rights in
Canada. The Division markets and sells timber and lumber in North America,
operates three softwood sawmills and is a supplier of wood fiber to Bowater's
pulp and paper production facilities.
[PHOTOGRAPH OF ROLLED SHEET OF NEWSPRINT.]
[PHOTOGRAPH OF ROLLS OF COATED PAPER.]
[PHOTOGRAPH OF SHEETS OF MARKET PULP.]
[PHOTOGRAPH OF LUMBER AND WOOD CHIPS.]
TABLE OF CONTENTS
About Bowater ................................................... 1
Letter to Shareholders .......................................... 2
Newsprint Division .............................................. 6
Coated Paper Division ........................................... 7
Pulp Division ................................................... 8
Forest Products Division ........................................ 9
The Environment ................................................. 10
Business and Financial Review ................................... 11
Consolidated Financial Statements ............................... 22
Notes to Consolidated Financial Statements ...................... 27
Management's Statement of Responsibility ........................ 46
Independent Auditors' Report .................................... 47
Financial and Operating Record .................................. 48
Board of Directors .............................................. 51
Officers ........................................................ 52
Shareholder Information .............................INSIDE BACK COVER
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BOWATER 1999 ANNUAL REPORT
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FELLOW SHAREHOLDERS
[PHOTOGRAPH OF ARNOLD M. NEMIROW.]
Arnold M. Nemirow
Chairman, President and
Chief Executive Officer
Fellow Shareholders:
The markets for most of Bowater's major products presented difficult challenges
in 1999. Despite those challenges, we maintained our strong financial condition
through prudent capital investments and divestitures, disciplined spending and
a relentless emphasis on cost reduction. We also completed the integration of
our 1998 acquisitions of Avenor Inc. and a recycled newsprint mill in South
Korea. Your company has been significantly restructured since 1995, the result
of which is that Bowater's productive capacity has increased by approximately
70%, the number of shares of common stock has increased only 21% and debt
ratios are at a healthy 42%. With cash operating costs down over 20%, I believe
that our new earnings per share potential is very powerful over the cycle.
FINANCIAL AND OPERATING PERFORMANCE
Net income for the full year of 1999 was $78.7 million, or $1.41 per diluted
share, which includes gains on the sale of assets, net of impairment charges,
of $72.8 million, or $1.32 per diluted share, primarily attributable to the
completed sale of Bowater's wholly owned subsidiary in Maine, Great Northern
Paper, Inc. (GNP). For 1998, the company had a net loss of $18.5 million, or
$.44 per diluted share, which included a charge for the impairment of GNP
assets of $73.0 million, or $1.53 per diluted share. Netting out the gains and
charges related to the sale of GNP, our 1999 results, compared with 1998, were
dampened by lower product prices and approximately 200,000 metric tons of
market downtime.
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BOWATER 1999 ANNUAL REPORT
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Over the past year, Bowater made significant progress in building a more
competitive company. In addition to integrating our acquisitions, several other
major events in '99 are worth noting:
- - Our total return to shareholders was 33%, compared with 21% for the S&P 500
and 5% for the S&P Mid-Cap Paper Index.
- - We achieved annualized synergies of $120 million from the Avenor acquisition,
well in excess of our initial $75 million target.
- - We sold GNP and its timberlands in Maine during the year for approximately
$620 million. This sale not only relieved us of our highest cost operations but
avoided a permanent mill closure and a $220 to $250 million capital investment.
As a key part of the GNP sale, the purchaser has committed to converting
170,000 metric tons of newsprint capacity to other grades of paper, improving
the fundamentals of the North American newsprint market.
- - We purchased a unique off-site coating operation in Benton Harbor, Michigan,
which converts newsprint to higher value grades of paper, while further
improving the newsprint fundamentals.
- - We upgraded our asset base by completing high-return projects such as the
modernization of the thermomechanical pulp mill, recovery boiler and woodyard
at our mill in Calhoun, Tennessee.
- - We sold 140,000 acres of timberland in the Southern United States for $173
million.
- - We permanently closed the unprofitable pulp mill in Gold River, British
Columbia, which was part of the Avenor acquisition.
- - We used proceeds from the sale of non-strategic assets and operating cash
flow to help reduce debt by $326 million during the year, restoring strength to
our balance sheet.
- - We continued to repurchase our common shares during the year. In 1999, we
repurchased 2.4 million shares. Over the past four years, we have repurchased
9.1 million shares, or approximately 15% of the out-standing stock of the
company.
- - We were named the "1999 Company of the Year" by the Paper Industry Management
Association's North American Papermaker magazine, and one of "The World's 100
Best-Managed Companies" by IndustryWeek magazine for the second time, the only
company in he forest products industry to be so honored.
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BOWATER 1999 ANNUAL REPORT
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MARKET CONDITIONS
The pricing environment for most of our major products was weak in the first
half of 1999, but began to improve in the second half. Bowater implemented
price increases for newsprint, uncoated specialties, coated paper and pulp
during the latter part of 1999. We also announced a $50 per metric ton price
increase for newsprint effective April 1, 2000, and market pulp price increases
of $30 and $40 per metric ton effective January 1, 2000 and April 1, 2000,
respectively.
The supply and demand outlook is positive for the longer term as well. The
Asian economic crisis significantly reduced new supply by forcing the
cancellation of planned newsprint projects. Based on information from the
Canadian Pulp and Paper Association and other estimates, we expect modest
worldwide capacity growth in the near term. In addition, market downtime and
permanent closures have removed additional excess supply. At the same time, the
demand picture is encouraging. World demand for newsprint is expected to exceed
capacity increases primarily due to growth in Asia, Latin America and Europe.
Newspaper advertising linage has increased steadily as the economy continues to
show sustained strength. Sales of newsprint and coated paper have been
bolstered by an increase in newspaper and magazine advertising for dot.com
businesses. Contrary to predictions about the impact of the Internet on print
communications, the demand for news and information is expanding, enabling
newsprint and coated paper markets to continue to grow along with this new
medium. Our focus on global, low-cost operations enables us to adapt to this
rapidly evolving business environment.
The coated paper market gained considerable strength late in 1999, fueled by
strong demand from the magazine and catalog industry, reduced European imports
during the first half of 1999 and limited capacity growth. Magazine ad pages
grew by over 3%, and catalog mailings were also up during the year.
The fundamentals for market pulp staged a significant recovery in 1999. A
decrease in over 3 million metric tons of capacity through closures and
conversions, combined with improving worldwide demand, generated favorable
market conditions for pulp.
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BOWATER 1999 ANNUAL REPORT
7
Overall, the market for timber sales held steady in 1999, despite pockets of
weakness. Lumber prices rose sharply through the first half of the year. By
year-end, prices stabilized after declining from the highs of July. The forecast
for United States housing starts in year 2000 is below the 1999 pace, but is
still at a very robust level.
STRATEGIC DIRECTION
The accomplishments of the past few years have set the stage for Bowater's
further growth. Our strategy for improving long-term profitability over the
cycle is:
- - continuous cost reduction
- - disciplined capital and balance sheet management
- - pursuit of growth opportunities in core markets
Growth in our earnings over the cycle comes from the expansion of our underlying
businesses as well as improvement in our operations. Therefore, we have
positioned our company to capitalize on appropriate acquisitions in our major
product lines. However, whether or not growth through acquisition is achieved,
we will continue to improve operating costs, manage production rates
effectively and convert capacity, where feasible, to more profitable grades.
We believe that our strategies can provide superior returns to shareholders.
Our management structure remains lean and ready to act as we continue to focus
on increasing the value of our company in partnership with our customers and
employees.
Sincerely,
/s/Arnold M. Nemirow
- -----------------------------------------------
Arnold M. Nemirow
Chairman, President and Chief Executive Officer
March 15, 2000
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BOWATER 1999 ANNUAL REPORT
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NEWSPRINT DIVISION
[PHOTOGRAPH OF ROLLED SHEET OF NEWSPRINT.]
The Newsprint Division operates seven mills in the United States, Canada and
South Korea. The principal product at the mills is newsprint, but market pulp
and uncoated groundwood specialties are also produced. We are the largest
manufacturer of newsprint in the United States and the second largest in North
America, and we are strategically located to sell to newspaper publishers
throughout the world.
[PHOTOGRAPH OF WOMAN READING A NEWSPAPER.]
We continually look for opportunities to improve our manufacturing facilities.
Our Calhoun, Tennessee, mill modernization was completed in 1999. This $180
million project added a new thermomechanical pulping mill, waste fired boiler
and two new woodyards, which replaced obsolete facilities. These high-return
projects substantially reduced wood usage, labor and maintenance costs while
improving product quality. The consolidation of five newsprint mills acquired
in 1998 is complete, and in all respects their performance has exceeded our
expectations.
Bowater is the preferred supplier in most of our customers' pressrooms. Our
customers maintain a steadfast loyalty to the Bowater brand year after year
and, in some cases, decade after decade, because we deliver the best
combination of product quality and service.
1999 Shipments by Mill in metric tons
Calhoun (Tennessee) 660,000
Thunder Bay (Ontario) 520,000
Gatineau (Quebec) 420,000
Ponderay (Washington) 247,000
Mokpo (South Korea) 246,000
Catawba (South Carolina) 224,000
Mersey (Nova Scotia) 223,000
GNP (Maine) 203,000(*)
Dalhousie (New Brunswick) 200,000
(*) Reflects newsprint and directory shipments from January to August 1999.
Shipments by Destination
in metric tons
International North American
99 636,000(*) 2,307,000(*)
98 727,000 2,454,000
97 251,000 1,301,000
96 243,000 1,261,000
95 204,000 1,276,000
(*) Reflects newsprint and directory shipments from January to August 1999
for GNP.
Operating Income (loss)(*)
in millions
99 $ (98.0)
98 $ 32.4
97 $ 30.0
(*) Includes financial results for the production and sale of market pulp.
Includes gains and losses on the sale of assets and impairment charges.
World Market Share
99 7.5%(*)
98 8.4%
97 4.1%
96 4.2%
95 4.0%
(*) Reflects newsprint and directory shipments from January to August 1999
for GNP.
Net Sales(*)
in millions
99 $1,524.0
98 $1,356.6
97 $ 886.8
(*) Includes financial results for the sale of market pulp.
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BOWATER 1999 ANNUAL REPORT
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COATED PAPER DIVISION
[PHOTOGRAPH OF ROLLS OF COATED PAPER.]
Bowater's Coated Paper Division occupies a unique position in the North
American coated paper market by using southern fiber to produce high-quality
coated groundwood paper products on which a vast array of magazines, catalogs,
coupons, inserts and other promotional materials are printed. Our largest
coated paper facility is a mill located at Catawba, South Carolina, where
Bowater also produces newsprint and market pulp. A coating operation is located
in Benton Harbor, Michigan.
[PHOTOGRAPH OF WOMAN READING A MAGAZINE.]
Throughout 1999, Catawba's mill optimization program improved both
manufacturing efficiencies and product quality. The two coated machines set
production and speed records. The pulp dryer also set a production record. We
are recognized by our customers for consistently exceeding their quality and
service expectations. The Catawba mill is extremely competitive and a first
quartile, low-cost mill.
In 1999, we pursued strategically significant opportunities to broaden our
product line and to offer more products targeted at growth markets. The
acquisition of the Benton Harbor coating operation provides Bowater with two
competitive advantages. We will now be able to redeploy newsprint to a more
profitable, value-added coated product. In addition, this acquisition moves
coated paper production closer to our publisher and printing customers.
1999 Shipments by Mill(*) in short tons
Catawba (South Carolina) 365,000
Millinocket (Maine) 81,000
Benton Harbor (Michigan) 11,000
(*) Reflects a partial year for Maine (January to August) and Michigan
(July to December). Also includes uncoated groundwood specialties from
South Carolina and Maine.
Shipments by Destination in short tons
International North American
99 6,000(*) 451,000(*)
98 6,000 481,000
97 11,000 468,000
96 24,000 409,000
95 6,000 470,000
(*) Reflects a partial year for Maine (January to August) and Michigan
(July to December). Also includes uncoated groundwood specialties from
South Carolina and Maine.
Operating Income(*)
in millions
99 $ 72.2
98 $ 107.4
97 $ 91.2
(*) Includes financial results for the production and sale of market pulp.
North American Market Share
99 8.5%(*)
98 8.8%
97 9.1%
96 8.8%
95 9.4%
(*) Reflects a partial year for Maine (January to August) and Michigan
(July to December).
Net Sales(*)
in millions
99 $ 467.0
98 $ 474.1
97 $ 458.4
(*)Includes financial results for the sale of market pulp.
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BOWATER 1999 ANNUAL REPORT
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PULP DIVISION
[Photograph of sheets of market pulp.]
Bowater is the market pulp producer with the leading North American market
share. The Pulp Division sells pulp produced at our three fully integrated
mills in Tennessee, South Carolina and Ontario. The economies of scale from
this integrated mill structure give us a competitive edge in purchasing,
management and maintenance compared to stand-alone market pulp mills. We are
the only North American producer who can supply our customers with all four
major grades of pulp - northern and southern softwood and hardwood pulp.
[Photograph of products containing pulp.]
In 1999, Bowater strengthened its competitive position and reduced its costs.
New capital appropriations in 1999 will allow significant gains in pulp quality
as well as cost reductions. Through management discipline, Bowater has
optimized its customer portfolio to take advantage of its geographic and
product diversity to improve margins.
The pulp market staged a recovery in 1999 as a result of improving supply and
demand fundamentals. Permanent closures and forward integration removed almost
3 million tons of capacity. Worldwide demand improved. Strong exports, in
combination with increased demand in North America, generated very favorable
market conditions.
1999 Shipments by Mill in metric tons
Thunder Bay (Ontario) 521,000
Catawba (South Carolina) 261,000
Calhoun (Tennessee) 139,000
Shipments by Destination
in metric tons
International North American
99 213,000 708,000
98 337,000 690,000
97 209,000 160,000
96 253,000 102,000
95 154,000 140,000
North American Market Share
99 9.6%
98 9.5%
97 2.0%
96 1.5%
95 1.9%
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BOWATER 1999 ANNUAL REPORT
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FOREST PRODUCTS DIVISION
[Photograph of lumber and wood chips.]
The Forest Products Division manages 1.8 million acres of timberland owned or
leased in the United States and Canada and 14.2 million acres of timber cutting
rights in Canada. The Division markets and sells timber and lumber in North
America, operates three softwood sawmills that produce lumber and is a supplier
of wood fiber to Bowater's pulp and paper production facilities.
[Photograph of building being framed with lumber.]
Bowater has made significant progress in improving the profitability of its
timberlands and sawmills. We have implemented more intensive forest management
practices that will enhance growth rates and lead to better realization of
value from our timberlands. More aggressive marketing of low-value species in
combination with plantation thinning resulted in a more than 32% year-to-year
increase in timber harvest volumes per acre. At the same time, we remained
focused on sustainable management of our forests and on the use of these
forests for multiple purposes.
The Oakhill Sawmill in Bridgewater, Nova Scotia, achieved a major increase in
productivity without a significant infusion of capital. At the Maniwaki,
Quebec, sawmill, we integrated our timberlands and sawmill management teams to
achieve substantial improvements in wood costs and productivity. In addition to
gains from this more highly focused management team, several high-return
investments have allowed us to increase lumber recovery and access a larger
market with a higher-value product at the Maniwaki sawmill. These and other
similar changes have contributed to an almost 10% reduction in manufacturing
costs at the three sawmills.
1999 Lumber Shipments by Mill
in thousands of board feet
Bowater Lumber (Alabama) 97,000
Pinkham Lumber (Maine) 15,000(*)
Manifor Inc. (Quebec) 69,000
Oakhill Sawmill (Nova Scotia) 52,000
(*)Reflects shipments from January to March 1999.
Operating Income(*)
in millions
99 $ 320.9
98 $ 67.0
97 $ 58.2
(*) Includes gains and losses on the sale of assets.
1999 Timber Sales Volume
in thousands of short tons
Calhoun Woodlands (Tennessee) 2,139
Catawba Woodlands (S.C.) 1,989
GNP Woodlands (Maine) 634(*)
Dalhousie Woodlands (N.B.) 387
Mersey Woodlands (Nova Scotia) 364
(*) Reflects shipments from January to August 1999.
Net Sales
in millions
99 $ 141.4
98 $ 147.1
97 $ 139.8
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BOWATER 1999 ANNUAL REPORT
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THE ENVIRONMENT
[PHOTOGRAPH OF TREES BORDERING LAKE.]
Bowater values its natural resources and continually fosters environmental
stewardship. We are implementing environmental management systems at all of our
mills to improve our environmental performance and to make more efficient use of
natural resources, chemicals and energy. For example, at our Catawba, South
Carolina, mill, we conserved river water by reducing our average daily water
consumption by 34% in 1999. Bowater also annually recycles 1 million tons of old
newspapers and magazines and converts more than 2.1 million tons of tires, bark,
wood waste and sludge into energy, which significantly reduces landfill
disposal.
In the United States, we support the American Forest & Paper Association
Sustainable Forestry Initiative(SM). We are also committed to achieving
third-party verification of sustainable forest management practices at all of
our Canadian sites. We expect to achieve ISO 14001 certification of the
environmental management systems employed at our Upsalquitch Forest License in
New Brunswick before the end of 2000. We plan to pursue certification on all of
the land we manage in Canada.
[PHOTOGRAPH OF PEOPLE WALKING ON TRAIL IN FOREST.]
At Bowater, environmental leadership is a business imperative. Our corporate
policy of environmental protection and sustainability is an integral part of our
decision-making process, and we continually monitor our performance.
Environmental best practices and process technologies are rapidly and
continually identified and shared across the company.
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BOWATER 1999 ANNUAL REPORT
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BUSINESS AND FINANCIAL REVIEW
OVERVIEW
Bowater is organized into four divisions: the Newsprint Division, the Coated
Paper Division, the Pulp Division and the Forest Products Division. Except for
the Pulp Division, each division is responsible for the sales and marketing of
distinct product lines and the operation of certain manufacturing sites. The
Pulp Division is primarily a marketing and distribution division. Therefore,
Bowater's financial results are collected, analyzed and reported through the
Newsprint, Coated Paper and Forest Products Divisions.
NEWSPRINT DIVISION (FORMERLY NEWSPRINT & DIRECTORY DIVISION):
This Division operates seven manufacturing sites in the United States, Canada
and South Korea. The principal product line at these sites is newsprint, but the
sites also produce market pulp and uncoated groundwood specialties. The Division
is responsible for the worldwide marketing and sales of newsprint and uncoated
groundwood specialties.
COATED PAPER DIVISION:
This Division operates a manufacturing site in Catawba, South Carolina, which
produces coated groundwood paper, newsprint, market pulp and uncoated groundwood
specialties and operates a coating facility in Benton Harbor, Michigan. This
Division is responsible for the marketing and sales of coated groundwood paper.
PULP DIVISION:
This Division markets and distributes market pulp produced at the Calhoun,
Tennessee; Catawba, South Carolina; and Thunder Bay, Ontario, sites. Financial
results for the production and sale of market pulp are included in the Newsprint
Division and the Coated Paper Division. Previously, the Division operated a
market pulp manufacturing site in British Columbia. This site was permanently
closed in February 1999.
FOREST PRODUCTS DIVISION:
This Division manages 1.8 million acres of timberland owned or leased in the
United States and Canada and 14.2 million acres of Crown-owned land in Canada on
which Bowater has cutting rights. The Division also operates three softwood
sawmills, supplies wood fiber to Bowater's pulp and paper production sites and
markets timber and lumber in North America.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. They include, for example,
statements about our business outlook, assessment of market conditions,
strategies, future plans, future sales, prices for our major products, inventory
levels, capital spending and tax rates. These forward-looking statements are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. The risks and uncertainties relating to the
forward-looking statements in this report include those described under the
caption "Cautionary Statement Regarding Forward-Looking Information" in
Bowater's annual report on Form 10-K for the year ended December 31, 1999, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.
OPERATING INCOME IN MILLIONS
99 $244
98 $162
97 $137
96 $399
95 $521
NEWSPRINT
Average
Transaction Shipments
Price (thousands
(per metric ton) of metric tons)
99 $496 2583
98 $566 1960
97 $543 1345
96 $644 1312
95 $662 1272
COATED GROUNDWOOD
Average
Transaction Shipments
Price (thousands
(per short ton) of short tons)
99 $721 433
98 $804 486
97 $705 479
96 $824 432
95 $975 476
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BOWATER 1999 ANNUAL REPORT
14
BUSINESS AND FINANCIAL REVIEW
RESULTS OF OPERATIONS:
1999 COMPARED WITH 1998
Bowater's net income for 1999 was $78.7 million, or $1.41 per diluted share,
compared with a net loss of $18.5 million, or $0.44 per diluted share, in 1998.
Included in net income for 1999 and 1998 were the following items:
(In millions, except per-share amounts) 1999 1998
- -------------------------------------------------------------------------------
After-tax Per After-tax Per
Income/ Diluted Income/ Diluted
Description (Expense) Share (Expense) Share
- -------------------------------------------------------------------------------
Gain on sale of timberlands $ 160.9 $ 2.92 $ 6.7 $ 0.14
Impairment charge -
Great Northern Paper (56.1) (1.02) (73.0) (1.53)
Loss on sale of Great
Northern Paper (32.0) (.58) -- --
- -------------------------------------------------------------------------------
Total $ 72.8 $ 1.32 $ (66.3) $ (1.39)
===============================================================================
MARKET PULP
Average
Transaction Shipments
Price (thousands
(per metric ton) of metric tons)
99 $471 921
98 $445 612
97 $467 370
96 $433 356
95 $791 295
CAPITAL EXPENDITURES in millions
99 $199
98 $223
97 $100
96 $107
95 $ 96
In 1999, Bowater began reporting "Net gain on sale of assets" and capital tax
expense as components of operating income. Operating income in 1998 was adjusted
to conform to the 1999 presentation. Operating income in 1999 was $244.0 million
on net sales of $2.1 billion, compared with $162.1 million on net sales of $2.0
billion in 1998. The increase in 1999 operating income compared to 1998 was due
to higher net gains on the sale of timberlands in 1999, partially offset by
lower transaction prices for newsprint and coated groundwood paper products and
lower coated groundwood paper shipments. Our operating costs were also lower in
1999 compared with 1998, due to the benefit of having the higher cost GNP mills
out of our mix for a portion of the year and realizing certain
acquisition-related synergies, partially offset by higher costs due to the
impact of market-related downtime.
Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported Divisions.
PRODUCT LINE INFORMATION:
Newsprint For most of 1999 and 1998, the newsprint market was affected by an
imbalance in supply and demand, caused in part by the financial and economic
problems in Asia, which lowered demand from this region. North American
shipments to this region decreased while, at the same time, Asian imports
increased, creating an over-supply of newsprint in North America. As a result,
Bowater's newsprint prices declined precipitously through the third quarter of
1999. We also reduced newsprint production by approximately 200,000 metric tons
to correct an order book imbalance and to lower inventories. Later in the year,
Asian demand increased and North American exports of newsprint for 1999 improved
8% above 1998 levels. In addition to this, total United States demand and
consumption of newsprint improved in 1999 compared with 1998. As a result of
more favorable market
12
BOWATER 1999 ANNUAL REPORT
15
conditions, effective October 1999, Bowater implemented a United States price
increase and announced an additional increase of $50 per metric ton, effective
April 1, 2000. We also increased export prices for newsprint in certain regions,
effective January 1, 2000. Our shipments were 32% higher in 1999 versus 1998 as
a result of the acquisitions in July 1998 of Avenor Inc. and a newsprint mill in
South Korea. Our inventory of newsprint at the end of 1999 was lower than at the
end of 1998.
Coated Groundwood During the first half of 1999, the market for coated ground-
wood paper was negatively impacted by an increased supply of competing printing
and writing papers. Bowater's 1999 average transaction price for coated
groundwood paper was 10% lower than in 1998. United States coated groundwood
shipments increased during the second half of 1999 and were up strongly in the
fourth quarter when compared with the fourth quarter of 1998. End-use markets
continued to show strength with magazine advertising pages and catalog mailings
(measured by standard A mail weight) increasing over 1998 levels. Inventories of
the United States coated groundwood producers declined significantly in the
second half of 1999. With improving market conditions, Bowater implemented price
increases in the third quarter and an additional price increase of $60 per short
ton effective October 1, 1999. Our shipments for 1999 were 11% lower compared
with 1998 shipments, primarily as a result of the sale of GNP in August 1999.
Our inventory of coated groundwood paper was slightly lower than 1998 levels.
Directory Paper Directory paper prices generally change similarly to newsprint
pricing, but with a lag due to the contract nature of the directory business.
Bowater's average transaction price for directory paper decreased 7% in 1999
compared with 1998. Shipments of our directory paper decreased 45% as a result
of the sale of GNP in August 1999. Subsequent to the sale of GNP, we no longer
produce or market directory paper.
Market Pulp World pulp markets continued to improve throughout the year,
reflecting tight supply conditions and improved demand. NORSCAN (United States,
Canada, Finland, Norway and Sweden) shipments of market pulp for 1999 increased
7% compared with 1998, and inventories declined to 1.1 million metric tons, or a
17-day supply. As a result of these strong market conditions, Bowater
implemented several market pulp price increases throughout 1999 and announced
additional price increases of $30 per metric ton effective January 1, 2000 and
$40 per metric ton effective April 1, 2000. The average transaction price for
our market pulp increased 6% compared with 1998. Our shipments increased 51% in
1999 compared with last year, primarily due to the acquisition of Avenor in July
1998. Our market pulp inventories declined significantly at the end of 1999
compared with the end of 1998.
Lumber United States demand for lumber was robust in 1999. Lumber pricing peaked
at midyear, supported by 1999 housing starts of approximately 1.7 million units,
the highest level since 1986. Prices stabilized in the fourth quarter, returning
to beginning of year levels by the end of 1999. Bowater's average transaction
price for lumber in 1999 was 4% higher than in 1998. Our shipments of lumber
declined slightly, due primarily to the sale of the Pinkham Lumber Company in
March 1999. This decrease was partially offset by higher production rates at our
sawmills and the inclusion of production from the Avenor sawmill acquired in
July 1998.
Timber Demand was mixed across Bowater's timber operations. Despite an increase
in higher-value sawtimber, average transaction prices declined 8% compared with
1998 prices due to lower demand in the southeast United States timber markets
and our sale of timberlands in the state of Maine. Shipments of our timber
products increased 10% in 1999 compared with 1998, due to benefits from an
increased focus on external sales and productivity gains through more intensive
forest management practices.
13
BOWATER 1999 ANNUAL REPORT
16
BUSINESS AND FINANCIAL REVIEW
Divisional Performance:
Net Sales by Division(1):
(In millions) 1999 1998
- ------------------------------------------------
Newsprint $1,524.0 $1,356.6
Coated Paper 467.0 474.1
Forest Products 141.4 147.1
Corporate/
other eliminations 2.3 17.2
- ------------------------------------------------
Total net sales $2,134.7 $1,995.0
================================================
Operating Income (Loss) by Division(1):
(In millions) 1999 1998
- -----------------------------------------------
Newsprint $ (98.0) $ 32.4
Coated Paper 72.2 107.4
Forest Products 320.9 67.0
Corporate/
other eliminations (51.1) (44.7)
- -----------------------------------------------
Total operating
income $ 244.0 $ 162.1
===============================================
(1) Financial results for the production and sale of market pulp are included
in the Newsprint Division and the Coated Paper Division. The Pulp Division
is responsible for the marketing and distribution of the product and its
administrative expenses are included in "Corporate/other eliminations."
Newsprint Division Net sales for the Division increased during the year, from
$1.4 billion to $1.5 billion, primarily as a result of the acquisition of
Avenor and a South Korean newsprint mill in July 1998. This increase was mostly
offset by lower transaction prices for newsprint and the sale of GNP in August
1999. See the previous discussions of the newsprint, directory paper and market
pulp product line results. Operating income in 1999 decreased $130.4 million
from $32.4 million in 1998 to a loss of $98.0 million. During 1999, the
Division recorded a pre-tax impairment charge of $92.0 million and a pre-tax
loss of $47.1 million on the sale of GNP. Included in the 1998 results was a
pre-tax impairment charge of $119.6 million. Without these charges, operating
income decreased $110.9 million. This decrease was due to lower transaction
prices for newsprint and directory paper and higher operating costs as a result
of market-related downtime, which were partially offset by higher transaction
prices for market pulp and the realization of acquisition synergies.
Coated Paper Division Net sales decreased $7.1 million in 1999 compared with
1998, from $474.1 million to $467.0 million, primarily the result of lower
transaction prices for newsprint and coated groundwood paper. This decrease was
partially offset by higher average prices for market pulp and increased sales
volume. See the previous discussions of the newsprint, coated groundwood and
market pulp product line results. Operating income for the Division decreased
$35.2 million, from $107.4 million to $72.2 million, primarily the result of
lower transaction prices for newsprint and coated groundwood, partially offset
by higher average transaction prices for market pulp and increased sales
volume.
Forest Products Division Net sales for the Division in 1999 decreased $5.7
million compared with 1998, from $147.1 million to $141.4 million. This
decrease was due primarily to the sale of Pinkham Lumber and timberlands in the
states of Maine, North Carolina and South Carolina. See the previous
discussions of the lumber and timber product line results. Comparing the same
periods, operating income increased $253.9 million. Operating income for 1999
includes pre-tax gains on land sales of $272.5 million compared with a pre-tax
gain of $21.1 million for 1998. Excluding the land sale gains, operating income
increased $2.4 million. This increase was due primarily to higher transaction
prices for lumber, offset partially by lower transaction prices for timber.
Corporate/Other Eliminations Included in this category are general and
administrative expenses, as well as limited market pulp sales from the Gold
River pulp mill, which was permanently closed in February 1999. General and
administrative expenses for 1999 increased $6.4 million compared with 1998,
primarily due to the inclusion of the Pulp Division and other administration
expenses resulting from the purchase of Avenor in July 1998.
Interest and Other Income and Expenses:
Interest expense increased 29% in 1999, from $98.4 million to $126.7 million,
due to the increase in debt related to the Avenor acquisition. Interest income
decreased from $17.5 million in 1998 to $7.7 million in 1999, due to lower
average investment balances in 1999.
During 1999, Bowater incurred pre-tax foreign exchange gains of $33.4 million
compared with $29.7 million of foreign exchange losses in 1998. These gains
primarily relate to marking to market foreign exchange contracts in our Canadian
dollar hedging program during 1999 as the Canadian dollar strengthened against
the United States dollar. In 1998, we recorded a net pre-tax charge of $20.1
million related to currency options and forward contracts on the Canadian
dollar and Korean won and recorded a charge of $15.0 million for a reserve
against a long-term note receivable. All of these amounts are included on the
line titled "Other, net" in the Consolidated Statement of Operations.
14
BOWATER 1999 ANNUAL REPORT
17
Provision for Income Taxes:
The effective tax rate in 1999 was 46%. This rate is lower compared with 1998
due to the lower level of profits in 1998. In 1999 and 1998, the effective tax
rates were higher compared with prior years due to adjustments made to the tax
provisions to reflect the non-deductibility of certain charges and allowances
for tax benefits not expected to be realized.
Fourth Quarter of 1999:
Net income in the fourth quarter of 1999 was $20.4 million, or $0.38 per diluted
share, on net sales of $525.0 million. This compares with net income in the
fourth quarter of 1998 of $25.9 million, or $0.45 per diluted share, on net
sales of $639.2 million.
In 1999, Bowater began reporting "Net gain on sale of assets" and capital tax
expense as components of operating income. Operating income in 1998 was
adjusted to conform to the 1999 presentation. Operating income for the fourth
quarter of 1999 was $73.5 million, which included net gains on the sale of
assets of $27.0 million. In the fourth quarter of 1999, Calhoun Newsprint
Company (CNC), a majority-owned subsidiary of Bowater, sold approximately
140,000 acres of timberlands in North Carolina and South Carolina for $173.2
million (before expenses of $1.1 million). Bowater received $26.2 million in
cash and $145.9 million in notes. We recorded the transaction as an installment
sale and as of December 31, 1999, recorded a pre-tax gain of $17.4 million.
Other timberland sales during the quarter resulted in an additional pre-tax
gain of $1.4 million. Also in the fourth quarter, we recorded closing
adjustments on the sale of GNP, resulting in a reduction of $8.1 million to the
pre-tax loss previously recorded. Excluding these gains, operating income for
the fourth quarter of 1999 was $46.5 million compared with $76.1 million in the
fourth quarter of 1998. The decrease in operating income was due to a 10%
decrease in the average transaction price of newsprint and lower shipments of
newsprint, market pulp and coated groundwood paper in the fourth quarter of
1999. Our cost of sales was lower in the fourth quarter of 1999, reflecting
the lower shipments.
Liquidity and Capital Resources: 1999 Compared with 1998
Bowater's cash, cash equivalents and marketable securities balance at year-end
1999 was $26.8 million, a decrease of $32.7 million from $59.5 million at
year-end 1998.
Cash and cash equivalents decreased $33.6 million, from $58.3 million at
year-end 1998 to $24.7 million at year-end 1999. Bowater generated $147.0
million of cash from operations and $258.7 million of cash from investing
activities, while it used $439.3 million for financing activities. Aside from
cash flow from operations, capital expenditures and changes in investments and
borrowings, Bowater had several other significant cash transactions during 1999.
Cash proceeds include $382.2 million from the sale of 1.8 million acres of
timberlands in Maine, North Carolina and South Carolina and $108.0 million from
the sale of GNP. Cash payments were made for the following purposes: (1) $37.4
million on the maturity of Canadian currency hedging contracts; (2) $15.9
million for quarterly dividends to the minority shareholder of CNC; (3) $65.9
million for the redemption of the 7.50% Convertible Unsecured Subordinated
Debentures; (4) $26.4 million for the redemption of the remaining shares of
8.40% Series C Preferred Stock; and (5) $109.2 million for common stock
purchases.
Cash from Operating Activities:
Bowater generated cash of $147.0 million from operating activities in 1999,
compared with $274.1 million in 1998. The decrease of $127.1 million in 1999
reflects lower operating income (excluding the gains from the sale of
timberlands) in 1999 due to lower transaction prices for our newsprint and
coated groundwood paper products. Working capital needs were also higher in 1999
by $46.9 million.
Cash from Investing Activities:
Cash from investing activities in 1999 was $258.7 million versus a cash outflow
of $408.0 million in 1998. Bowater had significantly different investing
activities in 1999 versus 1998. In 1998, we acquired Avenor and a South Korean
newsprint mill for a total cash outflow of $876.0 million and sold the Dryden
white paper mill for proceeds of $532.5 million shortly after the Avenor
acquisition. In 1999, we sold GNP, resulting in cash proceeds of $108.0
million, and 1.6 million acres of timberlands in the state of Maine for net
proceeds of $356.0 million. An additional 140,000 acres of timberlands were
sold in North Carolina and South Carolina for $173.2 million (before expenses
of $1.1 million). We received cash of $26.2 million and recorded notes
receivable of $145.9 million. In 1998, we sold 26,000 acres of timberlands
resulting in proceeds of $30.9 million. Capital expenditures in 1999 totaled
$198.5 million, $24.7 million lower than 1998 capital expenditures of $223.2
million. Capital expenditures were higher in 1998 due to the modernization of
the Calhoun, Tennessee, newsprint facility. We anticipate capital spending of
approximately $250.0 million in 2000. Cash paid on the maturity of hedging
contracts in our Canadian dollar hedging program totaled $37.4 million in 1999
versus $27.9 million in 1998. Also in 1998, we purchased Canadian dollar option
contracts for the
15
BOWATER 1999 ANNUAL REPORT
18
Business and Financial Review
pending acquisition of Avenor for $22.7 million. Cash invested in marketable
securities in 1999 was $10.6 million compared with $41.9 million in 1998, while
cash from the maturity of marketable securities in 1999 was $9.7 million
compared with $217.4 million in 1998.
Several years ago, Bowater undertook an initiative to eliminate non-strategic
assets, including non-strategic timberland tracts. Since 1996, we have sold
approximately 2.2 million acres of timberlands throughout the United States and
Canada, with cash proceeds totaling approximately $415.0 million. Currently, we
own or lease 1.8 million acres of timberlands in the United States and Canada
and have timber cutting rights on an additional 14.2 million acres in Canada.
Our Forest Products Division periodically reviews timberland holdings and sells
timberlands considered to be non-strategic tracts.
Cash from Financing Activities:
Cash flow used for financing activities was $439.3 million in 1999, $402.8
million higher than the amount spent in 1998. During 1999, Bowater made net
payments of $195.0 million on its short-term credit facility while, in 1998, we
had net borrowings of $206.3 million, which were used to partially fund the
Avenor and South Korean newsprint mill acquisitions. In 1999, we also reduced
our long-term borrowings by $27.6 million, which included a payment of $8.0
million on our 8.25% Notes and a repurchase of $13.9 million (including premium
and accrued interest) of our 9.25% Debentures. In January 2000, we repurchased
an additional $19.8 million of our 9.25% Debentures. In 1998, we repaid $91.1
million of our long-term borrowings, which included $75.9 million on our 10.25%
Debentures. During 1999, we received cash proceeds of $32.8 million from
revenue bonds issued by the Industrial Development Board of the County of
McMinn, Tennessee, in conjunction with the modernization of our Calhoun,
Tennessee, newsprint facility. Cash dividends in 1999 of $60.6 million were
slightly lower than 1998.
In April 1999, Bowater completed its 1997 stock repurchase program, purchasing
a total of 4.1 million shares at a cost of $165.1 million. Of this total, 1.4
million shares were purchased during 1999 at a cost of $57.4 million. In May
1999, the Board of Directors authorized a new stock repurchase program,
allowing us to repurchase up to an additional 5.5 million shares. As of
December 31, 1999, we purchased 1.0 million shares at a total cost of $51.8
million. In 1998, we purchased 2.4 million shares of our common stock at a
total cost of $98.1 million under the previous stock repurchase program.
In February 1999, Bowater redeemed for $26.4 million in cash all of the
remaining outstanding shares (and related 1.06 million depositary shares) of its
8.40% Series C Cumulative Preferred Stock, par value $1 per share. The Series C
Stock was redeemed for cash of $100.56 per share of Series C Stock ($25.14 per
depositary share), which is equal to $100 per share of Series C Stock ($25.00
per depositary share) plus accrued and unpaid dividends to, but not including,
the redemption date.
Also in February 1999, Bowater Pulp and Paper Canada Inc. (BPPCI) redeemed for
cash all of its outstanding 7.50% Convertible Unsecured Subordinated
Debentures, due February 8, 2004. Prior to redemption and at the option of each
holder, each C$100 principal amount of the Debentures was convertible into
either (1) 2.191 exchangeable shares of Bowater Canada Inc. (BCI, an indirect
wholly owned subsidiary of Bowater) or (2) C$79.54 together with 1.0955 of the
exchangeable shares. As a result of the redemption and conversions immediately
prior to the redemption, BPPCI paid $65.9 million in cash, and BCI issued 1.4
million exchangeable shares.
We continually consider various options for the use of our cash, including
internal capital investments, share repurchases, investments to grow our
primary product lines and additional debt reductions.
Dispositions
In March 1999, Bowater completed the sale of 981,000 acres of timberlands in
the state of Maine and Pinkham Lumber for $216.5 million. In April 1999, we
completed the sale of 650,000 acres of timberland in the state of Maine for
$150.0 million. We recorded a pre-tax gain on these transactions of $253.7
million, or $2.81 per diluted share after tax.
In August 1999, we completed the sale of GNP for $250.0 million, consisting of
cash ($108.0 million, net of expenses), a note ($10.0 million) and the
assumption of certain liabilities ($130.0 million). We recorded a pre-tax loss
of $47.1 million, or $0.58 per diluted share after tax on the sale.
In November 1999, CNC sold 140,000 acres of timberlands in North Carolina and
South Carolina for $173.2 million (before expenses of $1.1 million). We
received $26.2 million in cash and $145.9 million in notes. We recorded the
transaction as an installment sale and as of December 31, 1999, recorded a
pre-tax gain of $17.4 million, or $.09 per diluted share after tax and minority
interest.
Environmental Items
Bowater is subject to a variety of federal, state and provincial environmental
laws and regulations in the jurisdictions in which it operates. We believe our
operations are in substantial compliance with current applicable environmental
laws and regulations.
16
BOWATER 1999 ANNUAL REPORT
19
In April 1998, the United States Environmental Protection Agency (EPA)
promulgated new air and water quality regulations for the paper industry. These
regulations, known as the "Cluster Rule," are aimed at further reductions of
certain environmental emissions. Programs are underway to bring Bowater's
facilities at Calhoun, Tennessee, and Catawba, South Carolina, into compliance
with these future regulations. We anticipate spending approximately $150 to $200
million over the next five years to comply with the new air quality standards
and the new effluent guidelines, with the majority of this capital expected to
be spent at our Catawba facility. We are considering an expanded project at
Catawba to include additional capital for the modernization of a major portion
of its kraft mill. This expanded project would allow the mill to comply with the
new regulations as well as improve its overall operating efficiencies. Although
cost estimates for the expanded project are not yet final, the amount that will
be spent to comply with environmental regulations for the new air and water
standards at this site is included in the above estimate of approximately $150
to $200 million.
Bowater recently approved an expenditure of approximately $88.0 million to
install a new kraft recovery boiler at our Thunder Bay, Ontario, facility. When
this recovery boiler is operational in mid-2001, it will improve the facility's
rate of discharge for both air and particulate emissions, as well as improve
mill operating efficiencies. This amount is not included in the estimate above.
In addition to the projects mentioned above, we anticipate spending
approximately $15.0 to $20.0 million of capital per year for all of our
facilities for the foreseeable future to maintain compliance with existing
environmental regulations. While it is difficult to predict with certainty the
nature of future environmental regulations, we believe that we will not be at a
competitive disadvantage in meeting future United States, Canadian or Korean
standards.
Bowater is not involved in any proceeding under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that it believes
will result in liabilities that will have a material adverse effect on future
cash flow, financial condition or results of operations.
Year 2000 Compliance
During the past three years, Bowater concentrated its efforts on defining and
minimizing risks associated with its computerized systems in anticipation of the
year 2000. Comprehensive reviews of our business systems, manufacturing
systems, safety and environmental related systems, business partners, customers
and suppliers were completed during 1999. This included testing and
implementing corrective measures. During 1999, we also developed and tested
contingency plans covering all significant business functions and sites for use
in 2000 and beyond in the event any aspect of our year 2000 compliance program
proves to be ineffective in resolving year 2000 compliance issues. As of March
1, 2000, we have not experienced any year 2000 transition problems. The total
amount spent on year 2000 remediation was approximately $7.9 million, excluding
internal costs such as payroll costs for our information systems group.
Adoption of Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires a public company to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
We are required to adopt this standard by the first quarter of 2001. We have not
yet assessed the impact this standard will have on our financial condition or
results of operations at the time of adoption; however, the impact will
ultimately depend on the amount and type of derivative instruments we hold at
the time of adoption.
Historical Reference: Results of Operations 1998 Compared with 1997
Bowater's net loss for 1998 was $18.5 million, or $0.44 per diluted share,
compared with net income of $53.7 million, or $1.25 per diluted share, in 1997.
Included in the net loss for 1998 were after-tax non-operating charges of $88.0
million, or $1.85 per diluted share, to reduce the book value of assets at our
Millinocket, Maine, mill in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long- Lived Assets to Be Disposed Of," and
to record a reserve against a long-term note receivable. Operating income was
$162.1 million in 1998 on net sales of $2.0 billion, compared with $136.5
million on net sales of $1.5 billion in 1997. The increases in operating income
and net sales were primarily due to the inclusion of two newly acquired
operations for a portion of the year. We acquired Avenor on July 24, 1998, and
a South Korean newsprint mill on July 15, 1998.
Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions.
Product Line Information:
Newsprint In 1998, conditions in the newsprint market were affected by labor
strikes in Canada and financial and economic difficulties in key Asian markets.
Approximately 1.0 million metric tons of newsprint capacity were impacted in
1998 by labor strikes at two large Canadian newsprint producers. The reduction
in supply caused
17
BOWATER 1999 Annual Report
20
BUSINESS AND FINANCIAL REVIEW
by these strikes was offset by the economic problems that plagued Asia
throughout the year. This resulted in North American newsprint exports that were
down 22% for the year and newsprint imports to the United States that were more
than double the 1997 level as United States producers for the Asian market
redirected their tonnage to other regions. Total United States demand for
newsprint and United States consumption increased in 1998 compared with 1997.
Despite this, North American newsprint producer inventories at year-end also
increased when compared with the end of 1997, while year-end inventories at
United States daily newspapers decreased slightly. Bowater announced a newsprint
price increase for April 1998 and then postponed it to later in the year.
Although partially implemented by the fourth quarter, we rescinded it after
settlement of the labor strikes at our competitors' mills in Canada. Our average
newsprint transaction price in 1998 was 4% higher than in 1997, reflecting a
full year of the price increases that we implemented in 1997. Our shipments were
46% higher in 1998 versus 1997, and our inventories were also higher due to the
inclusion, beginning in the third quarter, of Avenor and the South Korean
newsprint mill.
Coated Groundwood In the first half of 1998, the coated groundwood paper market
continued to benefit from the improved environment of 1997. During the year,
end-use markets grew with the catalog segment increasing 6% (measured by
standard A mail weight) and magazine publishers increasing advertising pages by
2%. The second half of 1998, however, was marked by declines in coated
groundwood paper pricing as the supply of coated groundwood paper outpaced
demand due to a higher volume of coated groundwood paper imports and increased
capacity among producers of competing printing and writing papers. Comparing
the full year of 1998 with 1997, United States coated groundwood shipments for
the industry decreased 3% while United States coated groundwood producer
inventory levels increased an average of 4%. In January 1998, Bowater
successfully implemented a $60 per ton price increase. Our quarterly average
coated groundwood transaction price for the first three quarters of 1998 was
relatively unchanged following the January price increase, while the fourth
quarter average price declined due to the higher supply versus demand. Compared
with 1997, our average transaction price for 1998 was 14% higher, while
shipments increased slightly. Our coated groundwood inventory at the end of
1998 was at its lowest level since 1992.
Directory Paper Sales of Bowater's directory products in 1998 were at
essentially the same levels as in 1997. Our average directory paper transaction
price decreased 2% compared with 1997, reflecting the relatively stable market
environment for directory papers in 1998. Directory prices generally trend
similarly to newsprint pricing, but with a lag due to the contractual nature of
the directory business.
Market Pulp World pulp markets experienced difficult conditions during 1998 as
the effect of the Asian economic crisis impacted operating rates, shipments and
prices. During the first quarter, demand for market pulp was unchanged compared
to the first quarter of 1997. In the second and third quarters, the full impact
of the Asian crisis reduced demand, as NORSCAN (United States, Canada, Finland,
Norway and Sweden) shipments to the Asian region decreased approximately 30%
compared with the respective quarters in 1997. Despite reduced industry
operating rates of 87% during the second and third quarters of 1998, inventories
at the end of the third quarter increased by 230,000 metric tons compared with
the third quarter of 1997. In the fourth quarter, demand from the Asian region
increased; however, this demand did not make up the shortfall created in the
previous quarters. NORSCAN shipments for 1998 decreased 4% compared with 1997,
with the majority of the decrease coming from the Asian region. NORSCAN
inventories ended the year at 1.6 million metric tons, or a 27-day supply, down
from a 31-day supply in December 1997. As a result of these market conditions,
Bowater's market pulp average transaction price in 1998 decreased 5% compared
with 1997. Our shipments increased 66% in 1998, compared with last year,
primarily due to the Avenor acquisition.
Lumber United States lumber prices declined throughout 1998 as supply outpaced
demand. Indicators for the United States market were positive, with 1998
housing starts increasing to 1.6 million units from 1.4 million units in 1997,
and expenditures for the repair and remodeling markets also increasing in 1998.
These positive indicators were offset by a steep decline in Japanese housing
construction caused by the Asian economic crisis. This decrease in export
demand resulted in a 36% reduction in exports through the first 10 months of
1998 compared to the year ago period and a reduction in export lumber prices as
well. United States consumption in 1998, although strong, was not able to
absorb the excess supply. Bowater's average lumber transaction price declined
throughout the year and was 18% lower in 1998 than in 1997. Our shipments were
17% higher in 1998 versus 1997, primarily due to the inclusion of lumber from
the newly acquired Canadian operations and higher production rates.
18
BOWATER 1999 ANNUAL REPORT
21
Timber Demand for Bowater's timber products remained strong in 1998. Average
transaction prices for our primary species of southern pine and spruce-fir
increased compared with 1997. This increase was partially offset by a change in
mix that caused 1998 pricing in total to be only slightly higher than 1997. Our
shipments in 1998 also increased compared with 1997, mainly from the inclusion
of timber products from the Avenor acquisition and the application of intensive
forest management practices. Our operating income per acre increased 14% in
1998 compared with 1997.
Divisional Performance:
Net Sales by Division(1):
(In millions) 1998 1997
- -----------------------------------------------------------------------
Newsprint &
Directory $ 1,356.6 $ 886.8
Coated Paper 474.1 458.4
Forest Products 147.1 139.8
Corporate/
other eliminations 17.2 (0.5)
----------------------------------------------------------------------
Total net sales $ 1,995.0 $ 1,484.5
======================================================================
Operating Income (Loss) by Division(1):
(In millions) 1998 1997
- -----------------------------------------------------------------------
Newsprint &
Directory $ 32.4 $ 30.0
Coated Paper 107.4 91.2
Forest Products 67.0 58.2
Corporate/
other eliminations (44.7) (42.9)
- -----------------------------------------------------------------------
Total operating
income $ 162.1 $ 136.5
=======================================================================
(1) Financial results for the production and sale of market pulp are included
in the Newsprint & Directory Division and the Coated Paper Division. The
Pulp Division is responsible for the marketing and distribution of the
product and its administrative expenses are included in "Corporate/other
eliminations."
Newsprint & Directory Division In July 1998, this Division added five new
manufacturing sites with the acquisitions of Avenor and a South Korean
newsprint mill. Net sales for the Division increased 53% during the year, from
$886.8 million in 1997 to $1.4 billion in 1998, primarily as a result of adding
the new sites, aided by slightly higher average prices for newsprint and coated
groundwood paper and offset by slightly lower average prices for market pulp
and directory paper. See the previous discussion of product line results.
Operating costs in 1998 increased from $856.8 million in 1997 to $1.3 billion,
primarily as a result of adding the new sites. Operating income in 1998
increased 8% from $30.0 million in 1997 to $32.4 million, primarily as a result
of increased shipments of newsprint and market pulp from the acquisitions,
offset by a $119.6 million pre-tax charge to reduce the book value of assets at
the Division's Millinocket, Maine, mill.
Coated Paper Division Net sales increased by 3% in 1998 compared with 1997,
from $458.4 million to $474.1 million, primarily the result of marginally
higher average prices for newsprint and coated groundwood paper and offset by
lower average prices for market pulp. See the previous discussion of product
line results. Comparing the same periods, operating costs decreased slightly,
while operating income increased 18% from $91.2 million to $107.4 million,
primarily as a result of higher average coated groundwood paper prices.
Forest Products Division This Division was formed in mid-1997. Financial results
for 1997 have been restated on a pro forma basis for comparative purposes.
Prior to 1997, the woodlands operations were part of the other Divisions. In
July 1998, the Avenor acquisition added approximately 475,000 acres of freehold
timberland, three sawmills and over 18 million acres of cutting rights in
Canada. In the third quarter of 1998, a white paper mill and two sawmills were
sold along with 4.3 million acres of cutting rights. In the fourth quarter of
1998, the Division entered into contracts to sell approximately 1.6 million
acres of land and a sawmill in Maine for $366.5 million. These sales were
completed in the first quarter of 1999. Net sales for the Division in 1998
increased 5% compared with 1997, from $139.8 million to $147.1 million. See the
previous discussion of product line results. Comparing the same periods,
operating costs increased primarily due to the inclusion of the Avenor
operations. Operating income increased 15% in 1998 compared with 1997, from
$58.2 million to $67.0 million, primarily due to a 1998 gain on the sale of
timberlands of $21.1 million, partially offset by lower sawmill profitability.
19
BOWATER 1999 ANNUAL REPORT
22
BUSINESS AND FINANCIAL REVIEW
Corporate/Other Eliminations Included in this category are general and
administrative expenses as well as market pulp sales from the Gold River pulp
mill, which was permanently closed in February 1999. Losses on the sales of
market pulp were partially offset by lower general and administrative expenses.
Interest and Other Income
and Expenses:
Interest expense increased 46% in 1998, from $67.5 million to $98.4 million,
due to the increase in debt related to the Avenor acquisition. Interest income
decreased from $21.6 million in 1997 to $17.5 million in 1998, due to lower
average investment balances in 1998. The cash from the maturity of marketable
securities was used to partially fund the acquisitions of Avenor and a South
Korean newsprint mill.
During 1998, Bowater incurred pre-tax foreign exchange losses of $29.7 million
compared with $2.1 million in 1997. This loss primarily relates to marking to
market foreign exchange contracts that were acquired upon the acquisition of
Avenor. Also in 1998, we recorded a net pre-tax charge of $20.1 million related
to currency options and forward contracts on the Canadian dollar and Korean won
that were purchased to hedge a substantial portion of the acquisition prices of
Avenor and a South Korean newsprint mill. Both of these charges are included in
"Other, net" in the Consolidated Statement of Operations along with a charge of
$15.0 million for a reserve against a long-term note receivable.
Provision for Income Taxes:
The effective tax rate in 1997 was 37%. In 1998, the effective tax rate was
much higher due to adjustments made to the tax provision to reflect the
non-deductibility of certain charges and allowances for tax benefits not
currently expected to be realized.
Liquidity and Capital Resources: 1998 Compared with 1997
Bowater's cash, cash equivalents and marketable securities balance at year-end
1998 was $59.5 million, a decrease of $346.0 million from $405.5 million at
year-end 1997.
Cash and cash equivalents decreased to $58.3 million at year-end 1998, from
$228.7 million at year-end 1997, a decrease of $170.4 million. Bowater
generated $274.1 million of cash from operations while we used $408.0 million
for investing activities and $36.5 million for financing activities. Aside from
cash flow from operations, capital expenditures and changes in investments and
borrowings, we had several other significant cash transactions since December
31, 1997. These transactions include: cash paid of $675.0 million for the
purchase of Avenor; cash paid of $201.0 million for the purchase of a South
Korean newsprint mill; the sale of a white paper mill and related assets
(formerly owned by Avenor) with cash proceeds of $532.5 million; the sale of
26,000 acres of non-strategic timberlands with cash proceeds of $30.9 million;
the purchase of currency options on the Canadian dollar for $22.7 million to
hedge our acquisition of Avenor; cash of $27.9 million paid on the maturity of
hedging contracts; cash of $24.3 million for quarterly dividend payments to the
minority shareholder of CNC; cash of $75.9 million for the tender offer of the
10.25% Debentures; and common stock purchases requiring cash of $98.1 million.
Cash from Operating Activities:
Bowater generated cash of $274.1 million from operating activities in 1998,
compared with $195.6 million in 1997. The increase of $78.5 million reflects the
additional volumes of product sold as a result of the acquisitions, offset by
$25.5 million of higher working capital needs.
Cash from Investing Activities:
Cash used for investing activities in 1998 was $408.0 million versus a cash
inflow of $72.7 million in 1997. Excluding the acquisition of Avenor and a South
Korean newsprint mill, capital expenditures in 1998 totaled $223.2 million.
This was significantly higher than the year ago spending of $99.6 million,
primarily due to the modernization of the Calhoun, Tennessee, newsprint
facility. In July 1998, we acquired Avenor and a South Korean newsprint mill,
requiring total cash outflows of $876.0 million. During the third quarter, we
sold the white paper mill and related assets formerly owned by Avenor for
$532.5 million. Earlier in the year, we also sold 26,000 acres of non-strategic
timberlands resulting in proceeds of $30.9 million. In 1998, we realized a net
cash flow of $175.5 million from the maturity of marketable securities compared
with $168.6 million in 1997. Offsetting this was a cash outflow of $22.7 million
for the purchase of currency options on the Canadian dollar to hedge our
acquisition of Avenor and $27.9 million of cash paid upon the maturity of
hedging contracts with a nominal value of $359.0 million, which were part of a
$1.6 billion hedging program maintained by Avenor prior to the acquisition.
Several years ago, Bowater undertook an initiative to eliminate non-strategic
assets, including non-strategic timberland tracts. From 1995 through 1998, we
sold 148,000 acres of timberlands throughout the United States and Canada with
gross proceeds totaling approximately $153.9 million. Our Forest Products
Division periodically reviews timberland holdings and sells timberlands
considered to be non-strategic tracts.
Cash from Financing Activities:
Cash flow used for financing activities was $36.5 million in 1998, $88.4 million
lower than the amount spent in 1997. During 1998, Bowater borrowed $766.3
million, net of financing fees, from its $1.0 billion credit
20
BOWATER 1999 ANNUAL REPORT
23
facility mainly to fund the acquisition of Avenor. During the year, we repaid
$560.0 million of the borrowing. On December 31, 1998, the amount outstanding
on the credit facility totaled $210.0 million. Cash dividends in 1998 of $62.1
million were slightly higher than 1997. In November 1997, we announced the
adoption of a new stock repurchase program, authorizing us to repurchase up to
4.1 million shares of our outstanding common stock in the open market or in
privately negotiated transactions subject to normal trading restrictions. As of
December 31, 1998, we had purchased 2.6 million shares at a total cost of $107.7
million, of which 2.4 million shares were purchased at a cost of $98.1 million
in 1998. As of March 1, 1999, an additional 622,700 shares were purchased at a
cost of $24.8 million. In 1997, we purchased a total of 1.6 million shares at a
cost of $66.8 million. Cash received from the exercise of stock options in 1998
was $17.7 million lower than in 1997. Also in 1997, we redeemed for cash the
remaining 500,000 outstanding shares of LIBOR Preferred Stock at a cost of $25.0
million. Bowater continues to consider the most effective use of its cash to be
for internal capital investments, share repurchases, investments to grow the
company's primary product lines and additional debt reductions.
During 1998, Bowater repaid $91.1 million of its long-term borrowings versus
$1.8 million in 1997. On December 18, 1998, BPPCI completed an offer to
purchase its outstanding 10.25% Debentures due 2003 and accepted for purchase
approximately $65.0 million of the $72.0 million principal amount of Debentures
previously outstanding, for an aggregate purchase price of $75.9 million
($1,169.31 per $1,000 principal amount, plus accrued interest). Additionally,
BPPCI received the required number of consents of holders of the remaining
outstanding Debentures to execute an amendment that eliminates a covenant that
limited BPPCI's ability to pay cash dividends. BPPCI has executed a
supplemental indenture effecting the elimination of this covenant. These
actions will allow for more flexible management of cash across the entire
Bowater organization.
In February 1999, Bowater redeemed for $26.6 million in cash all of the
remaining outstanding shares (and related 1.06 million depositary shares) of
its 8.40% Series C Cumulative Preferred Stock, par value $1 per share. The
Series C Stock was redeemed for cash of $100.56 per share of Series C Stock
($25.14 per depositary share), which is equal to $100 per share of Series C
Stock ($25.00 per depositary share) plus accrued and unpaid dividends to, but
not including, February 8, 1999.
Also in February 1999, BPPCI redeemed for cash all of its outstanding 7.50%
Convertible Unsecured Subordinated Debentures, due February 8, 2004 (originally
issued in the aggregate principal amount of C$125.4 million). BPPCI will benefit
from the reduction of interest expense associated with the Debentures. Prior to
redemption and at the option of each holder, each C$100 principal amount of the
Debentures was convertible into either (1) 2.191 exchangeable shares of BCI or
(2) C$79.54 together with 1.0955 of the exchangeable shares. As a result of the
redemption and conversions immediately prior to the redemption, BPPCI paid
$65.9 million in cash, and BCI issued 1.4 million exchangeable shares.
Acquisitions and Dispositions in 1998
On July 15, 1998, Bowater completed the acquisition of a newsprint mill located
on the southwest coast of South Korea. Using our existing cash reserves, we
purchased the production assets of the mill for $201.0 million and prepaid the
majority of the current accounts payable for $22.0 million as required by the
court in the seller's bankruptcy proceedings. Upon acquisition, the South
Korean newsprint mill was free and clear of all indebtedness.
On July 24, 1998, we completed the acquisition of Avenor. The purchase price,
including assumed debt, totaled $2.37 billion (C$3.54 billion), or $23.46
(C$35.00) per Avenor common share. We utilized approximately $168.0 million of
our existing cash reserves and approximately $625.0 million of our new $1.0
billion credit facility to fund the cash portion of the transaction. In
addition, we issued 12.3 million common shares, and our indirect wholly owned
subsidiary, BCI, issued 3.8 million exchangeable shares to fund the equity
portion of the transaction. Exchangeable shares are exchangeable on a
one-for-one basis for Bowater Incorporated common stock.
On September 30, 1998, Bowater sold the white paper mill and related assets in
Dryden, Ontario, which were acquired as part of the acquisition of Avenor. A
substantial portion of the proceeds of $532.5 million was used to repay our
borrowings under the $1.0 billion credit facility.
In October 1998, Bowater announced that its Gold River pulp mill in British
Columbia, which had been shut down since August 1998 due to market conditions,
would be permanently closed effective February 16, 1999. The costs associated
with closing this facility ($40.0 million after tax), which was acquired as
part of the Avenor acquisition, were recorded as an adjustment to the cost of
the acquisition by increasing goodwill.
21
BOWATER 1999 ANNUAL REPORT
24
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per-share amounts)
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Sales $ 2,311.7 $ 2,142.7 $ 1,598.9
Distribution costs 177.0 147.7 114.4
- ----------------------------------------------------------------------------------------------------------
NET SALES 2,134.7 1,995.0 1,484.5
Cost of sales 1,625.2 1,422.2 1,106.8
Depreciation, amortization and cost of timber harvested 300.2 229.6 169.8
Selling and administrative expense 98.7 82.6 72.2
Impairment of assets 92.0 119.6 --
Net gain on sale of assets 225.4 21.1 0.8
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME 244.0 162.1 136.5
Other expense (income):
Interest income (7.7) (17.5) (21.6)
Interest expense, net of capitalized interest 126.7 98.4 67.5
Other, net (30.8) 65.6 1.1
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 155.8 15.6 89.5
Provision for income tax expense 71.5 25.9 33.1
Minority interests in net income of subsidiaries 5.6 8.2 2.7
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 78.7 (18.5) 53.7
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 2.8 (4.1) (2.5)
Minimum pension liability adjustments,
net of taxes of $5.0, $6.0 and $0.4, respectively 7.8 (9.3) (0.6)
- ----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 89.3 $ (31.9) $ 50.6
- ----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic earnings per common share:
Net income (loss) $ 1.43 $ (0.44) $ 1.26
- ----------------------------------------------------------------------------------------------------------
Average common shares outstanding 54.2 47.6 40.3
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Net income (loss) $ 1.41 $ (0.44) $ 1.25
- ----------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding 55.0 47.6 40.8
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
BOWATER 1999 ANNUAL REPORT
25
CONSOLIDATED BALANCE SHEET
(In millions, except share amounts)
At December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24.7 $ 58.3
Marketable securities 2.1 1.2
Accounts receivable, net 314.3 372.4
Inventories 145.4 186.3
Other current assets 46.0 77.8
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 532.5 696.0
- -------------------------------------------------------------------------------------------------------------------------
Timber and timberlands 283.2 472.8
Fixed assets, net 2,581.3 2,885.2
Notes receivable 146.0 --
Goodwill 870.6 921.7
Other assets 138.6 116.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,552.2 $ 5,092.0
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ 35.5 $ 86.2
Short-term bank debt 15.0 210.0
Accounts payable and accrued liabilities 336.4 465.0
Dividends payable 10.9 11.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 397.8 773.1
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current installments 1,454.6 1,534.6
Other long-term liabilities 326.1 356.3
Deferred income taxes 481.4 522.2
Minority interests in subsidiaries 121.5 128.8
Commitments and contingencies (See note 17) -- --
SHAREHOLDERS' EQUITY:
Cumulative preferred stock, $1 par value. Issued, 8.40% Series C,
264,318 shares at December 31, 1998 -- 25.5
Common stock, $1 par value. Authorized 100,000,000 shares; issued 60,828,440
and 58,981,998 shares at December 31, 1999 and 1998, respectively 60.8 59.0
Exchangeable shares, no par value. Unlimited shares authorized; outstanding and held by
non-affiliates, 2,164,377 and 2,270,525 at December 31, 1999 and 1998, respectively 105.4 110.8
Additional paid-in capital 1,315.4 1,230.2
Retained earnings 691.8 657.4
Accumulated other comprehensive income (loss) (18.3) (28.9)
Loan to ESOT (0.7) (2.6)
Treasury stock at cost, 9,512,499 and 7,046,397 shares at December 31, 1999
and 1998, respectively (383.6) (274.4)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,770.8 1,777.0
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,552.2 $ 5,092.0
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
BOWATER 1999 ANNUAL REPORT
26
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Series C
LIBOR Cumulative
Preferred Preferred Common
(In millions, except per-share amounts) Stock Stock Stock
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $24.7 $25.5 $44.0
Net income -- -- --
Dividends on:
Common ($0.80 per share) -- -- --
LIBOR ($0.79 per share) -- -- --
Series C ($8.40 per share) -- -- --
Increase in stated value of LIBOR preferred stock 0.3 -- --
Reduction in loan to ESOT -- -- --
Foreign currency translation -- -- --
Stock options exercised -- -- 0.9
Tax benefit on exercise of stock options -- -- --
Redemption of LIBOR preferred stock (25.0) -- --
Pension plan additional minimum liability, net of tax benefit of $0.4 -- -- --
Purchase of common stock -- -- --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ -- $25.5 $44.9
Net loss -- -- --
New issuance of stock -- -- 12.3
Retraction of exchangeable shares -- -- 1.5
Debt conversions to exchangeable shares -- -- --
Dividends on:
Common ($0.80 per share) -- -- --
Series C ($8.40 per share) -- -- --
Reduction in loan to ESOT -- -- --
Foreign currency translation -- -- --
Stock options exercised -- -- 0.3
Tax benefit on exercise of stock options -- -- --
Pension plan additional minimum liability, net of tax benefit of $6.0 -- -- --
Purchase of common stock -- -- --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ -- $25.5 $59.0
Net income -- -- --
New issuance of exchangeable shares -- -- --
Retraction of exchangeable shares -- -- 1.5
Redemption of Series C preferred stock -- (25.5) --
Dividends on:
Common ($0.80 per share) -- -- --
Series C ($0.56 per share) -- -- --
Reduction in loan to ESOT -- -- --
Foreign currency translation -- -- --
Stock options exercised -- -- 0.3
Tax benefit on exercise of stock options -- -- --
Pension plan additional minimum liability, net of taxes of $5.0 -- -- --
Purchase of common stock -- -- --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ -- $ -- $60.8
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
BOWATER 1999 ANNUAL REPORT
27
Accumulated
Additional Other
Exchangeable Paid-in Retained Comprehensive Loan to Treasury
Shares Capital Earnings Income (Loss) ESOT Stock
- ----------------------------------------------------------------------------------------------------------
$ -- $ 531.6 $698.4 $(12.4) $(6.3) $(109.5)
-- -- 53.7 -- -- --
-- -- (32.2) -- -- --
-- -- (0.4) -- -- --
-- -- (2.2) -- -- --
-- -- (0.3) -- -- --
-- -- -- -- 1.8 --
-- -- -- (2.5) -- --
-- 23.6 -- -- -- --
-- 7.9 -- -- -- --
- - - - - -
-- -- -- (0.6) -- --
-- -- -- -- -- (66.8)
- ----------------------------------------------------------------------------------------------------------
$ -- $ 563.1 $717.0 $(15.5) $(4.5) $(176.3)
-- -- (18.5) -- -- --
183.6 586.4 -- -- -- --
(73.1) 71.6 -- -- -- --
0.3 -- -- -- -- --
-- -- (38.9) -- -- --
-- -- (2.2) -- -- --
-- -- -- -- 1.9 --
-- -- -- (4.1) -- --
-- 6.5 -- -- -- --
-- 2.6 -- -- -- --
-- -- -- (9.3) -- --
-- -- -- -- -- (98.1)
- ----------------------------------------------------------------------------------------------------------
$110.8 $1,230.2 $657.4 $(28.9) $(2.6) $(274.4)
-- -- 78.7 -- -- --
66.2 -- -- -- -- --
(71.6) 70.1 -- -- -- --
-- -- (0.9) -- -- --
-- -- (43.3) -- -- --
-- -- (0.1) -- -- --
-- -- -- -- 1.9 --
-- -- -- 2.8 -- --
-- 10.4 -- -- -- --
-- 4.7 -- -- -- --
-- -- -- 7.8 -- --
-- -- -- -- -- (109.2)
- ----------------------------------------------------------------------------------------------------------
$105.4 $1,315.4 $691.8 $(18.3) $(0.7) $(383.6)
- ----------------------------------------------------------------------------------------------------------
25
BOWATER 1999 ANNUAL REPORT
28
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
Years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 78.7 $ (18.5) $ 53.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and cost of timber harvested 300.2 229.6 169.8
Deferred income taxes 5.5 (33.3) (3.3)
Minority interests in net income of subsidiaries 5.6 8.2 2.7
Net gain on sale of assets (225.4) (21.1) (0.8)
Write-down of assets due to impairment 92.0 119.6 --
Write-down of option contracts -- 22.7 --
Reserve for long-term note receivable -- 15.0 --
Changes in working capital:
Accounts receivable, net 12.8 5.2 (4.9)
Inventories 5.9 13.8 18.2
Accounts payable and accrued liabilities (110.8) (39.3) (42.7)
Income taxes payable (3.0) (27.9) 6.1
Other, net (14.5) 0.1 (3.2)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 147.0 274.1 195.6
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Avenor, net of cash acquired of $118.0 -- (675.0) --
Acquisition of South Korean newsprint mill -- (201.0) --
Cash invested in fixed assets, timber and timberlands (198.5) (223.2) (99.6)
Disposition of fixed assets, timber and timberlands 387.5 33.8 3.7
Disposition of Dryden white paper mill -- 532.5 --
Disposition of Great Northern Paper 108.0 -- --
Cash invested in option contracts -- (22.7) --
Cash paid on maturity of hedging contracts (37.4) (27.9) --
Cash invested in marketable securities (10.6) (41.9) (291.0)
Cash from maturity of marketable securities 9.7 217.4 459.6
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES 258.7 (408.0) 72.7
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests (60.6) (62.1) (57.6)
Purchase of common stock (109.2) (98.1) (66.8)
Short-term financing 284.1 766.3 --
Short-term financing repayments (479.1) (560.0) --
Long-term financing 32.8 -- --
Purchases/payments of long-term debt (27.6) (91.1) (1.8)
Stock options exercised 10.7 6.8 24.5
Redemption of Series C and LIBOR preferred stock (26.4) -- (25.0)
Redemption of 7.50% Convertible Unsecured Subordinated Debentures (65.9) -- --
Other 1.9 1.7 1.8
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (439.3) (36.5) (124.9)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33.6) (170.4) 143.4
CASH AND CASH EQUIVALENTS:
Beginning of year 58.3 228.7 85.3
- ---------------------------------------------------------------------------------------------------------------------------
End of year $ 24.7 $ 58.3 $ 228.7
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $4.9, $4.5 and $0.6 $ (133.6) $ (82.1) $ (66.5)
Income taxes $ (51.8) $ (61.6) $ (30.3)
Noncash investing and financing activity:
Conversion of 7.50% Convertible Unsecured Subordinated Debentures
into exchangeable shares $ 66.2 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
BOWATER 1999 ANNUAL REPORT
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries (Bowater). These financial statements are
expressed in United States dollars except where noted and have been prepared in
accordance with United States generally accepted accounting principles. All
consolidated subsidiaries are wholly owned with the exception of the following:
------------------------------------------------------------
Percent
Ownership
------------------------------------------------------------
Bowater Maritimes Inc. 67
Calhoun Newsprint Company (CNC) 51
Bowater Mersey Paper Company, Ltd. (Mersey) 51
------------------------------------------------------------
All significant intercompany transactions and balances have been eliminated.
Bowater also has a 40% interest in an unconsolidated entity, Ponderay Newsprint
Company, which is accounted for using the equity method.
CASH EQUIVALENTS
Cash equivalents generally consist of direct obligations of the United States
and Canadian governments and their agencies, investment-grade commercial paper
and other short-term investment-grade securities with original maturities of
three months or less. These investments are stated at cost, which approximates
market value.
MARKETABLE SECURITIES
Marketable securities generally consist of direct obligations of the United
States and Canadian governments and their agencies, investment-grade commercial
paper and other short-term investment-grade securities with original maturities
of greater than three months, but less than one year. These investments are
considered to be held-to-maturity securities and are, therefore, stated at cost,
which approximates market value.
DERIVATIVE FINANCIAL INSTRUMENTS
Bowater manages certain foreign currency risks through the use of derivative
financial instruments that may include forward exchange contracts and currency
options. For derivative instruments designated as hedges and having a high
correlation with the underlying exposures, gains and losses from changes in
derivative fair values are deferred. Gains or losses upon settlement of
derivative positions when the underlying transaction occurs are recognized in
the Consolidated Statement of Operations. For derivative instruments lacking
high correlation characteristics necessary to qualify as hedges, gains and
losses from changes in derivative fair values are recognized in the Consolidated
Statement of Operations upon remeasurement at the close of each reporting
period. Amounts receivable or payable from derivative financial instruments
would be reported as "Other assets," or "Accounts payable and accrued
liabilities" and "Other long-term liabilities" in the Consolidated Balance
Sheet. Bowater's derivatives have various terms, none of which exceeds two
years. We do not use derivatives for trading purposes.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Bowater is required to adopt this standard
by the first quarter of 2001.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
using the average cost and last-in, first-out (LIFO) methods.
TIMBER AND TIMBERLANDS
The acquisition cost of land and timber as well as real estate taxes, lease
payments, site preparation and other costs related to the planting and growing
of timber are capitalized. Such costs, excluding land, are charged against
revenue at the time the timber is harvested.
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation. Depreciation is
computed generally on the straight-line basis. Repairs and maintenance are
charged to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Bowater accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less cost to sell.
27
BOWATER 1999 ANNUAL REPORT
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over 40 years, which is
the expected period to be benefited. Bowater assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future net cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting our average cost of funds.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the Consolidated Statement of Operations in the period that includes the
enactment date. Bowater has not provided income taxes on the undistributed
earnings of certain of its subsidiaries, as it has specific plans for
reinvestment of such earnings.
FOREIGN OPERATIONS
Financial statements of the majority of Bowater's Canadian and Korean operations
are prepared using the United States dollar as their functional currency.
Translation of the Canadian and Korean operations, as well as gains and losses
from non-United States dollar foreign currency transactions, such as those
resulting from the settlement of foreign receivables or payables, are reported
in the Consolidated Statement of Operations.
Translation of other foreign operations to United States dollars occurs using
the current exchange rate for balance sheet accounts and an average exchange
rate for results of operations. Translation gains or losses are recognized as a
component of equity in "Accumulated other comprehensive income (loss)."
STOCK OPTIONS
Bowater records stock option compensation on an intrinsic value basis in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." We also provide pro forma disclosures of stock
option compensation recorded on a fair value basis in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation."
PENSION, SAVINGS AND OTHER POSTRETIREMENT PLANS
Bowater has contributory and noncontributory pension plans that cover
substantially all employees. Our cash contributions to the plans are sufficient
to provide pension benefits to participants and meet the funding requirements of
ERISA and applicable Pension Benefits Acts in Canada. We also sponsor defined
benefit health care and life insurance plans for retirees at certain locations.
Net periodic costs are recognized as employees render the services necessary to
earn post-retirement benefits.
In addition to the pension plans, Bowater sponsors savings plans for
substantially all employees. Our contributions to these defined contribution
plans are expensed as incurred.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and presentation of comprehensive income and its components in a full
set of financial statements. This statement requires additional disclosures in
the consolidated financial statements and does not affect Bowater's financial
position or results of operations. Comprehensive income (loss) consists of net
income (loss), foreign currency translation adjustments and pension plan
additional minimum liability adjustments and is presented in the Consolidated
Statement of Operations. At December 31, 1999, "Accumulated other comprehensive
income (loss)" includes $(19.5) million for pension plan additional minimum
liabilities, $(6.4) million for foreign currency translation and $7.6 million
for taxes.
REVENUE RECOGNITION
Bowater ships all products directly from its manufacturing sites to a customer's
location or to a customer-designated site. We recognize revenue from product
sales upon shipment to our customers and when they assume risk of ownership.
BASIC AND DILUTED EARNINGS PER SHARE
Bowater calculates earnings per share in accordance with SFAS No. 128, "Earnings
Per Share." This statement requires the presentation of basic and diluted
earnings per common share. Basic earnings per common share is calculated
assuming no dilution. Diluted earnings per common share is computed using the
weighted average number of outstanding common shares adjusted for the
incremental shares attributed to dilutive common share equivalents (stock
options and convertible debt).
28
BOWATER 1999 ANNUAL REPORT
31
ENVIRONMENTAL COSTS
Bowater expenses environmental costs related to existing conditions resulting
from past or current operations and from which no current or future benefit is
discernible. Expenditures that extend the life of the related property are
capitalized. We determine our liability on a site-by-site basis and record a
liability at the time it is probable and can be reasonably estimated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. In addition, they affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates and assumptions.
RECLASSIFICATIONS
Certain prior-year amounts in the financial statements and the notes have been
reclassified to conform to the 1999 presentation.
2. ACQUISITIONS
On July 24, 1998, Bowater completed its acquisition of Avenor Inc., a Canadian
pulp and paper company. The total purchase price, including assumed debt of
approximately $800.0 million, totaled $2.37 billion (C$3.54 billion). The
purchase was made using existing cash reserves of $168.0 million and $625.0
million of a $1.0 billion credit facility. We also issued 12.3 million common
shares and 3.8 million exchangeable shares (See Note 20). At the option of the
holder, the exchangeable shares may be exchanged for Bowater common stock on a
one-for-one basis. We accounted for the transaction using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired business
were included in the Consolidated Balance Sheet and the operating results were
included in the Consolidated Statement of Operations beginning July 1998.
The purchase price to Avenor shareholders of $1,575.2 million was calculated as
follows:
-------------------------------------------------------------------------
(In millions)
-------------------------------------------------------------------------
Cash from cash and cash equivalents $ 168.0
Proceeds from $1.0 billion short-term credit facility 625.0
Issuance of 12.3 million Bowater shares at
$48.66 per share 598.6
Issuance of 3.8 million exchangeable shares
exchangeable into Bowater shares
at $48.66 per share 183.6
-------------------------------------------------------------------------
$ 1,575.2
=========================================================================
The purchase price to Avenor shareholders, plus transaction costs and other
accrued liabilities, the excess of fair value of liabilities assumed over the
historical book value and the deferred tax effect of applying purchase
accounting at July 24, 1998, over the historical net assets of Avenor was
calculated as follows:
-------------------------------------------------------------------------
(In millions)
-------------------------------------------------------------------------
Purchase price to Avenor shareholders $ 1,575.2
Transaction costs 27.5
Additional accrued liabilities 119.8
Excess of fair value of long-term debt assumed
over historical value 154.3
Excess of fair value of convertible debt over
historical value 49.7
Deferred tax effect of applying purchase accounting 141.4
Less historical net assets (539.3)
-------------------------------------------------------------------------
$ 1,528.6
=========================================================================
As of July 24, 1999, the excess purchase price was finalized and allocated as
follows:
-------------------------------------------------------------------------
(In millions)
-------------------------------------------------------------------------
Timber and timberlands $ 62.8
Fixed assets 432.4
Other assets 21.4
Assets held for sale, net of taxes of $61.5 100.5
Goodwill 911.5
-------------------------------------------------------------------------
$ 1,528.6
=========================================================================
29
BOWATER 1999 ANNUAL REPORT
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fixed assets and other assets are being depreciated over 20 years. The
timber and timberlands costs are being amortized as timber is harvested. The
goodwill is being amortized on a straight-line basis over 40 years.
On September 30, 1998, we completed the sale of our Dryden white paper mill and
related assets, which were part of the Avenor acquisition, for $532.5 million.
Upon acquisition, the Dryden assets were accounted for as assets held for sale.
Therefore, no gain or loss was recorded upon the sale of such assets.
In October 1998, we announced that our Gold River pulp mill, which was acquired
as part of the Avenor acquisition and had been shut down due to market
conditions, would be permanently closed in the first quarter of 1999. The costs
associated with closing this facility totaled $65.0 million before tax and were
recorded as an adjustment to the cost of the acquisition by increasing goodwill.
These costs included asset impairment charges, employee termination costs and
environmental obligations.
Also, in July 1998, we completed the purchase of a South Korean newsprint mill
for approximately $201.0 million and prepaid a majority of the current accounts
payable for approximately $22.0 million. We utilized our existing cash reserves
to fund the acquisition. The investment was recorded at cost.
Assuming the acquisitions and divestiture had occurred on January 1, 1998,
unaudited pro forma financial results for the year ended December 31, 1998,
would have been as follows: net sales of $2,509.2 million, a net loss of $109.5
million and a diluted loss per share of $2.00.
3. IMPAIRMENT OF ASSETS
Great Northern Paper, Inc. (GNP) is composed of the East Millinocket mill, the
Millinocket mill, timberlands and hydro facilities. In January 1998, Bowater
decided to put its Millinocket mill up for sale along with certain related
assets, including related timberlands. In October 1998, we announced that we
would separately pursue monetization of timberland holdings in Maine. This
change in strategy prompted a reevaluation of the Millinocket mill assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." We determined fair value
using undiscounted future net cash flows. Accordingly, in the third quarter of
1998, we recorded a pre-tax impairment charge in our newsprint segment totaling
$119.6 million, consisting of a write-down of fixed assets of $108.8 million, a
mill stores inventory reserve of $7.0 million and an increase to other long-term
liabilities of $3.8 million.
During the second quarter of 1999, we signed an agreement with Inexcon Maine,
Inc. for the purchase of all of our assets at GNP. This agreement prompted an
evaluation of all the assets at GNP in accordance with SFAS No. 121. Based on
the proposed sale, the assets were written down to fair value, and we recorded a
pre-tax impairment charge in our newsprint segment of $92.0 million. In August
1999, we completed the sale of GNP.
4. NET GAIN ON SALE OF ASSETS
------------------------------------------------------------------------
(In millions) 1999 1998 1997
------------------------------------------------------------------------
Gain on sale of timberlands $ 272.5 $ 21.1 $ 0.8
Loss on sale of GNP (47.1) -- --
------------------------------------------------------------------------
$ 225.4 $ 21.1 $ 0.8
========================================================================
In the first quarter of 1999, Bowater sold approximately 981,000 acres of
timberlands and Pinkham Lumber Company in Maine for gross proceeds of $216.5
million. We recorded a pre-tax gain of $145.4 million.
In the second quarter of 1999, we sold approximately 650,000 acres of
timberlands in Maine for gross proceeds of $150.0 million. We recorded a pre-tax
gain of $108.3 million. As part of the sale, approximately $56.0 million of the
proceeds was received in the form of a long-term note. This note was monetized
through a qualified special purpose entity, and the cash proceeds of
approximately $51.0 million from the monetization are included in "Disposition
of fixed assets, timber and timberlands" in the Consolidated Statement of Cash
Flows. We have guaranteed a portion of the debt of the qualified special purpose
entity totaling approximately $12.7 million.
In the fourth quarter of 1999, CNC, a majority-owned subsidiary of Bowater, sold
approximately 140,000 acres of timberlands in North Carolina and South Carolina
for proceeds of $173.2 million (before expenses of $1.1 million). Bowater
received $26.2 million in cash and $145.9 million in notes. We recorded the
transaction as an installment sale and as of December 31, 1999, recorded a
pre-tax gain of $17.4 million. We have deferred pre-tax gains of approximately
$95.0 million on this transaction that will be realized in future periods. Other
timberland sales during the year resulted in additional pre-tax gains of $1.4
million.
30
BOWATER 1999 ANNUAL REPORT
33
In August 1999, we sold GNP for $250.0 million. The proceeds consisted of cash
of $108.0 million (net of expenses), a note receivable of $10.0 million and the
assumption of certain employee-related liabilities totaling $130.0 million. We
recorded a pre-tax loss of $47.1 million. The note receivable plus accrued
interest is payable in full one year from the date of sale and is included on
the line titled "Other current assets" in the Consolidated Balance Sheet.
The following table shows GNP's net sales and operating income (loss) included
in the Consolidated Statement of Operations for the 12 months ended December
31, 1999 and 1998:
(In millions) 1999 1998
------------- ---- ----
Net sales $ 199.8 $ 425.0
-------- --------
Operating income (loss)(1) $ (11.4) $ 41.7
======== ========
- ---------
(1) Operating income (loss) excludes asset impairment charges of $92.0 million
and $119.6 million in 1999 and 1998, respectively, and gains from
timberland sales totaling $253.7 million in 1999.
During 1998, we sold 26,000 acres of timberlands primarily in South Carolina
for gross proceeds of $30.9 million. We recorded a pre-tax gain of $21.1
million. During 1997, we sold 1,000 acres of timberlands, primarily in North
Carolina and South Carolina. The proceeds from these sales were $1.3 million,
resulting in a pre-tax gain of $0.8 million.
5. OTHER EXPENSE (INCOME)
Other expense (income) includes non-operating items. The breakdown of the
components of "Other, net" in the Consolidated Statement of Operations for the
three years ended December 31, 1999, 1998 and 1997 is as follows:
(In millions) 1999 1998 1997
- ------------- ---- ---- ----
Foreign exchange loss (gain) $ (33.4) $ 29.7 $ 2.1
Loss on Canadian
dollar option contracts -- 22.7 --
Reserve for a long-term
note receivable financing -- 15.0 --
Other 2.6 (1.8) (1.0)
------- ------- ------
$ (30.8) $ 65.6 $ 1.1
======= ======= ======
6. EARNINGS PER SHARE
Bowater adopted SFAS No. 128, "Earnings per Share," in December 1997. Basic
earnings per common share is calculated assuming no dilution. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
The reconciliation between basic and diluted earnings per common share for "NET
INCOME (LOSS)" is as follows:
(In millions, except
per-share amounts) 1999 1998 1997
- ------------------ ---- ---- ----
Basic computation:
Net income (loss) $ 78.7 $(18.5) $ 53.7
Less:
LIBOR dividends
and accretion -- -- (0.7)
Series C dividends (0.1) (2.2) (2.2)
Series C deferred
issuance costs (1.0) -- --
------ ------ ------
Basic income (loss) available
to common shareholders $ 77.6 $(20.7) $ 50.8
------ ------ ------
Basic weighted average
shares outstanding 54.2 47.6 40.3
------ ------ ------
Basic earnings (loss) per
common share $ 1.43 $(0.44) $ 1.26
====== ====== ======
Diluted computation:
Basic income (loss) available to
common shareholders $ 77.6 $(20.7) $ 50.8
Effect of dilutive securities: -- -- --
------ ------ ------
Diluted income (loss) available
to common shareholders $ 77.6 $(20.7) $ 50.8
------ ------ ------
Basic weighted average
shares outstanding 54.2 47.6 40.3
Effect of dilutive securities:
Options 0.8 -- 0.5
------ ------ ------
Diluted weighted average
shares outstanding 55.0 47.6 40.8
------ ------ ------
Diluted earnings (loss) per
common share $ 1.41 $(0.44) $ 1.25
====== ====== ======
The dilutive effect of options outstanding is computed using the treasury stock
method. In 1999 and 1997, all options were included in the calculation of
diluted earnings per share. Due to the net loss incurred for the year ended
December 31, 1998, all common stock equivalents were excluded to prevent
antidilution. Included in the common stock equivalents at December 31, 1998,
were exchangeable shares that Bowater issued in February 1999 due to the
redemption of its 7.50% Convertible Unsecured Subordinated Debentures.
31
BOWATER 1999 ANNUAL REPORT
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES
(In millions) 1999 1998
------------- ---- ----
At lower of cost or market:
Raw materials $ 30.1 $ 39.5
Work in process 3.6 3.8
Finished goods 31.8 56.8
Mill stores and other supplies 88.4 95.6
------ ------
153.9 195.7
Excess of current cost over LIFO
inventory value (8.5) (9.4)
------ ------
$145.4 $186.3
====== ======
Inventories valued using the LIFO method comprised 6.5% and 16.4%,
respectively, of total inventories at December 31, 1999 and 1998.
8. FIXED ASSETS
Range of
Estimated
Useful
Lives
(In millions) 1999 1998 In Years
------------- ---- ---- --------
Land and land improvements $ 34.9 $ 51.4 10-20
Buildings 301.0 359.6 20-40
Machinery and equipment 3,899.3 4,033.3 5-20
Leasehold improvements 2.7 3.8 10-20
Construction in progress 66.6 131.4 --
-------- --------
4,304.5 4,579.5
Less accumulated depreciation
and amortization 1,723.2 1,694.3
-------- --------
$2,581.3 $2,885.2
======== ========
9. GOODWILL
Goodwill includes the goodwill recorded with the acquisition of Avenor in July
1998. This goodwill is being amortized on a straight-line basis over 40 years.
Bowater recorded amortization of $22.5 million in 1999 and $9.8 million in
1998.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(In millions) 1999 1998
------------- ---- ----
Trade accounts payable $ 158.2 $ 196.4
Payroll, bonuses and severance 36.6 65.2
Accrued interest 22.1 25.0
Employee benefits 20.4 27.0
Amounts payable under GNP
sales agreement (1) 20.0 -
Avenor acquisition/divestiture-related
liabilities (See Note 11) 19.1 43.4
Unrealized losses on hedging contracts 19.0 54.3
Property and franchise taxes payable 13.2 11.7
Other 27.8 42.0
------- -------
$ 336.4 $ 465.0
======= =======
- ---------
(1) Relates to tax sharing provisions
11. AVENOR ACQUISITION/DIVESTITURE-RELATED LIABILITIES
In connection with the acquisition of Avenor during the third quarter of 1998,
Bowater recorded merger-related liabilities totaling $17.8 million. These
liabilities consisted primarily of Avenor employee termination costs, Avenor
facility closures and Avenor lease commitments.
Also in the third quarter of 1998, we recorded liabilities of $65.0 million for
the closure of our Gold River pulp mill (acquired as part of the Avenor
acquisition). These accruals included asset impairment charges, employee
termination costs and environmental obligations.
During the fourth quarter of 1998, in conjunction with the sale of our Dryden
white paper mill (acquired as part of the Avenor acquisition), liabilities were
recorded to cover employee termination costs and other costs that we retained
as part of the sales agreement. We recorded liabilities totaling $14.8 million
related to this transaction.
The total amount of Avenor acquisition/divestiture-related liabilities of $97.6
million was recorded as part of the cost of the acquisition.
As of December 31, 1999, the remaining accrual for the above items is $26.0
million. Of this remaining accrual, $19.1 million is included in "Accounts
payable and accrued liabilities" and $6.9 million is included in "Other
long-term liabilities" in the Consolidated Balance Sheet. As of December 31,
1999, the cash requirements related to these liabilities are expected to be
$15.5 million in 2000 and $6.9 million related to environmental matters in 2001
and beyond.
32
BOWATER 1999 ANNUAL REPORT
35
The following table summarizes the activity for the liabilities described on the
previous page:
Write-offs &
Payments Increase
Balance, Adjust Against (Decrease) Foreign Balance,
(In millions) 12/31/98 Goodwill Reserve Reserve Exchange 12/31/99
- ------------- -------- -------- ------- ------- -------- --------
Employee termination costs $30.5 $(2.7) $(22.6) $(3.7) $ 1.8 $ 3.3
Facility closures 5.2 (1.1) (0.5) -- 0.3 3.9
Asset impairments/disposals 8.1 -- (4.8) -- 0.3 3.6
Environmental 15.7 -- (3.8) 2.5 0.8 15.2
----- ----- ------ ----- ----- -----
Totals $59.5 $(3.8) $(31.7) $(1.2) $ 3.2 $26.0
===== ===== ====== ===== ===== =====
Write-offs &
Payments Increase
Balance, Establish Against (Decrease) Foreign Balance,
(In millions) 12/31/97 Reserve Reserve Reserve Exchange 12/31/98
- ------------- -------- --------- ------- ------- -------- --------
Employee termination costs $ -- $39.9 $ (9.5) $ -- $ 0.1 $30.5
Facility closures -- 5.1 -- -- 0.1 5.2
Asset impairments/disposals -- 36.9 (29.0) -- 0.2 8.1
Environmental -- 15.7 -- -- -- 15.7
----- ----- ------ ----- ----- -----
Totals $ -- $97.6 $(38.5) $ -- $ 0.4 $59.5
===== ===== ====== ===== ===== =====
33
BOWATER 1999 ANNUAL REPORT
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT, NET OF CURRENT INSTALLMENTS
In connection with the purchase of Avenor in July 1998, Bowater assumed
approximately $800.0 million of debt. As required in the purchase accounting
for this transaction, we recorded the debt at fair value using current interest
rate assumptions as of the acquisition date. The revaluation component of the
outstanding debt balance is being amortized over the remaining life of the
related debt securities. The table below sets forth both the historical and
revalued debt balances as of December 31, 1999 and 1998:
1999 1998
------------------------------------ -----------------------------------
Revaluation Revaluation
Due to Due to
Avenor Avenor
Acquisition, Acquisition,
Historical Net of Revalued Historical Net of Revalued
(In millions) Value Amortization Balance Value Amortization Balance
- -------------------------------------------------------------------------------------------------------------------------------
Unsecured:
9.00% Debentures due 2009 $250.0 $ -- $ 250.0 $250.0 $ -- $250.0
9.38% Debentures due 2021, net
of unamortized discount of $1.0
in 1999 and $1.1 in 1998 198.9 -- 198.9 198.8 -- 198.8
10.62% Notes due 2010 98.0 30.6 128.6 98.0 32.3 130.3
10.50% Notes due at various dates
from 2001 to 2010 102.0 23.7 125.7 102.0 25.1 127.1
9.50% Debentures due in 2012,
net of unamortized discount of
$0.3 in 1999 and $0.3 in 1998 124.7 -- 124.7 124.7 -- 124.7
10.85% Debentures due 2014 86.0 34.1 120.1 81.5 34.5 116.0
9.25% Debentures due 2002 59.0 5.0 64.0 92.1 9.6 101.7
9.86% Notes due 2001 87.2 5.9 93.1 87.2 8.0 95.2
10.60% Notes due 2011 70.0 22.4 92.4 70.0 23.5 93.5
7.50% Convertible Subordinated Debentures -- -- -- 40.4 28.3 68.7
7.75% recycling facilities revenue bonds
due 2022 62.0 -- 62.0 62.0 -- 62.0
7.40% recycling facilities revenue bonds
due 2022 39.5 -- 39.5 39.5 -- 39.5
7.62% recycling facilities revenue bonds
due 2016 30.0 -- 30.0 30.0 -- 30.0
10.26% Notes due at various dates from
2001 to 2011 22.0 5.2 27.2 22.0 5.5 27.5
Pollution control revenue bonds due at various
dates from 2001 to 2010 with interest at
varying rates from 6.85% to 7.62% 23.3 -- 23.3 23.3 -- 23.3
Industrial revenue bonds due 2029 with interest
at floating rates 33.5 -- 33.5 -- -- --
8.50% Notes due 2001 18.1 -- 18.1 18.1 -- 18.1
Bank term loan at floating rates due 2001 12.0 -- 12.0 15.2 -- 15.2
10.25% Debentures due 2003 7.4 -- 7.4 7.4 -- 7.4
11.00% Subordinated debt due 2003 4.1 -- 4.1 3.9 -- 3.9
ESOT Note due 2000 -- -- -- 0.9 -- 0.9
Other -- -- -- 0.8 -- 0.8
- --------------------------------------------------------------------------------------------------------------------------------
$1327.7 $126.9 $1,454.6 $1,367.8 $166.8 $1534.6
================================================================================================================================
34
BOWATER 1999 ANNUAL REPORT
37
Long-term debt maturities for the next five years are as follows:
(In millions)
2000 $ 35.5
2001 $ 137.4
2002 $ 91.3
2003 $ 23.9
2004 $ 12.4
During 1999, Bowater received proceeds totaling $32.8 million from revenue
bonds issued by the Industrial Development Board of the County of McMinn,
Tennessee, in conjunction with the modernization of its Calhoun, Tennessee,
newsprint facility. The total amount of debt we are obligated to repay is $33.5
million. At December 31, 1999, the remaining principal amount of $0.7 million
was held by the trustee, to be received in the first quarter of 2000. The bonds
are variable rate (5.6% at December 31, 1999) and mature in June 2029.
In December 1999, we repaid $13.3 million of our 9.25% Debentures due 2002. The
cash price paid was approximately $13.9 million, including premium and accrued
interest. In January 2000, we repaid $19.8 million of our 9.25% Debentures due
2002. The cash price paid was approximately $20.8 million, including premium
and accrued interest. The principal amount was included on the line titled
"Current installments of long-term debt" in the Consolidated Balance Sheet at
December 31, 1999.
In February 1999, we redeemed all of our outstanding 7.50% Convertible Unsecured
Subordinated Debentures due 2004. In connection with the redemption, we paid
cash of approximately $65.9 million, and Bowater Canada Inc. issued 1,359,620
exchangeable shares.
In 1998, we entered into a $1.0 billion syndicated credit facility consisting
of two separate components: i) a $650.0 million, 364-day facility; and ii) a
$350.0 million, five-year facility. Borrowings under the facility incur
interest based, at our option, on specified market interest rates plus a margin
tied to the credit rating of our long-term debt. At December 31, 1998, the
balance outstanding on this facility was $210.0 million (at 6.0%). In 1999, we
entered into a $150.0 million, 364-day credit facility that replaced the $650.0
million facility entered into during 1998. Borrowings under the facility will
incur interest based, at our option, on specified market interest rates plus a
margin tied to the credit rating of our long-term debt. As of December 31,
1999, $15.0 million (at 6.8%) was outstanding under this facility, and there
was no balance outstanding under our $350.0 million facility.
During 1998, we repaid approximately $65.0 million of the $72.0 million
principal amount of our 10.25% Debentures due 2003. The cash price paid was
approximately $75.9 million, including premium and accrued interest.
Bowater guarantees certain payments of debt related to its unconsolidated
entities. The amounts were approximately $62.7 million at December 31, 1999,
and $50.0 million at December 31, 1998.
13. FINANCIAL INSTRUMENTS
At December 31, 1999, Bowater had foreign currency forward and range forward
contracts with a notional value of $640.8 million maturing through 2001. The
notional amount of these contracts represents the amount of foreign currencies
to be purchased or sold at maturity and does not represent our exposure on
these contracts. The majority of these contracts were acquired in July 1998
with the acquisition of Avenor. The contracts serve as economic hedges against
our Canadian operations; however, because the costs hedged are not firm
commitments, these contracts are marked to market, with gains and losses
recognized in the Consolidated Statement of Operations. For contracts that meet
the requirements for hedge accounting, the gains and losses are deferred and
recognized as a part of the hedged transaction.
35
BOWATER 1999 ANNUAL REPORT
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of our short-term financial assets and liabilities
(excluding derivatives) approximate fair value. We estimate the fair value of
our long-term debt using rates currently available for debt with similar terms
and remaining maturities. The fair value of derivative financial instruments is
based on current termination values or quoted market prices of comparable
contracts. A summary of our derivative financial instruments and long-term debt
at December 31, 1999 and 1998 follows:
1999 1998
------------------------------------ ---------------------------------------
Asset (Liability) Asset (Liability)
Notional --------------------- Notional ---------------------
Amount of Carrying Fair Amount of Carrying Fair
(In millions) Derivatives Amount Value Derivatives Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
Foreign currency exchange agreements:
Buy currency:
Canadian dollar
Due in 1999 $ -- $ -- $ -- $ 647.1 $ (54.3) $ (54.3)
Due in 2000 457.8 (19.0) (19.0) 457.8 (42.1) (42.1)
Due in 2001 183.0 (0.7) (0.7) 183.0 (8.7) (8.7)
Sell currency:
British pound -- -- -- 1.9 -- --
French franc -- -- -- 1.3 -- --
Italian lira -- -- -- 2.7 -- --
Other -- -- -- 0.2 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate swap $ -- $ -- $ -- $ 100.0 $ (4.4) $ (4.4)
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of
current installments $ -- $(1,454.6) $(1,454.6) $ -- $(1,534.6) $(1,603.3)
================================================================================================================================
The counterparties to our derivative financial instruments are substantial and
creditworthy multi-national financial institutions. Therefore, the risk of
counterparty nonperformance is considered to be remote.
14. PENSION AND OTHER NONPENSION POSTRETIREMENT BENEFITS
Bowater has multiple defined benefit pension plans and other nonpension
postretirement plans (the Plan(s)) covering substantially all employees.
Benefits are based on years of service and, depending on the Plan, average
compensation earned by employees either during their last years of employment
or over their careers.
The following tables include both foreign and domestic plans at December 31,
1999 and 1998. The benefit obligations of the Plans outside the United States
are significant relative to the total benefit obligation; however, the
assumptions used to measure the obligations of those Plans are not
significantly different from those used for the United States Plans.
36
BOWATER 1999 ANNUAL REPORT
39
- ------------------------------------------------------------------------------------------------------------------------
PENSION PLANS OTHER POSTRETIREMENT PLANS
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 1,208.0 $ 501.3 $ 181.6 $ 134.6
Acquisition -- 627.2 -- 33.6
Divestiture 27.8 -- (101.5) --
Service cost 23.8 18.1 2.9 3.5
Interest cost 78.8 51.5 9.5 10.2
Amendments 3.9 -- 1.2 (0.9)
Special termination benefits 1.6 -- -- --
Actuarial (gain) loss (61.7) 48.8 2.9 8.4
Participant contributions 4.7 1.9 0.8 0.9
Benefits paid (90.7) (34.8) (9.1) (8.7)
Effect of foreign currency exchange rate changes 22.7 (6.0) 1.5 --
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,218.9 1,208.0 89.8 181.6
========================================================================================================================
CHANGE IN PLAN ASSETS:
Fair value of Plan assets at beginning of year 1,073.2 569.4 -- --
Acquisition -- 568.4 -- --
Actual return on Plan assets 174.7 (32.5) -- --
Employer contributions 18.3 8.2 8.3 7.7
Participant contributions 4.7 1.9 0.8 0.9
Benefits paid (90.7) (34.8) (9.1) (8.6)
Effect of foreign currency exchange rate changes 18.7 (7.4) -- --
- ------------------------------------------------------------------------------------------------------------------------
Fair value of Plan assets at end of year 1,198.9 1,073.2 -- --
========================================================================================================================
RECONCILIATION OF FUNDED STATUS:
Funded status (20.0) (134.8) (89.8) (181.6)
Unrecognized actuarial (gain) loss (7.0) 127.4 3.7 22.9
Unrecognized transition amount (5.0) (8.2) -- --
Unrecognized prior service cost 1.7 5.3 1.4 4.0
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized (30.3) (10.3) (84.7) (154.7)
========================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Prepaid benefit cost 68.6 61.9 -- --
Accrued benefit liability (119.5) (109.1) (84.7) (154.7)
Intangible asset 1.1 4.6 -- --
Accumulated other comprehensive loss (income) 19.5 32.3 -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (30.3) $ (10.3) $ (84.7) $ (154.7)
========================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 7.0% 6.5% 7.0% 6.5%
Expected return on Plan assets 9.2% 9.2% -- --
Rate of compensation increase 4.1% 4.0% 4.1% 4.0%
- ------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost net of employee contributions $ 23.8 $ 18.1 $ 2.9 $ 3.5
Interest cost 78.8 51.5 9.5 10.2
Expected return on Plan assets (80.1) (65.5) -- --
Amortization of transition amount (3.4) (3.4) -- --
Amortization of prior service cost 0.5 0.6 0.2 0.3
Recognized net actuarial (gain) loss (15.2) 2.6 0.6 0.4
Curtailment and special termination benefits 27.3 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 31.7 $ 3.9 $ 13.2 $ 14.4
========================================================================================================================
37
BOWATER 1999 ANNUAL REPORT
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1999, Bowater completed the sale of GNP. We recorded a curtailment
loss of $26.1 million as a result of the sale that is included on the line
titled "Net gain on sale of assets" in the Consolidated Statement of
Operations. In addition, liabilities totaling approximately $70.6 million for
nonpension postretirement benefits were assumed by the buyer as part of the
sale of GNP.
As of December 31, 1999, Bowater increased the Plans' weighted average discount
rate from 6.5% to 7.0% to more closely approximate interest rates on
high-quality long-term obligations on the measurement date. In 1999, the
assumed inflationary health care cost trend rate used to determine cost was
8.3% decreasing to 7.8% in 2000 and gradually decreasing to an ultimate rate of
5.8% in 2004. The rate used to determine 1998 cost was 7.5%, gradually
decreasing to an ultimate rate of 5.0% in 2004. Variations in this health care
cost trend rate can have a significant effect on the amounts reported. An
increase of 1% in this assumption would increase the accumulated postretirement
benefit obligation (APBO) by approximately $11.3 million, or 13%, and would
increase the annual service cost and interest cost by approximately $1.2
million, or 9%. A decrease of 1% in this assumption would decrease the APBO by
approximately $8.7 million, or 10%, and would decrease the annual service cost
and interest cost by approximately $1.1 million, or 9%.
The sum of the projected benefit obligations and the sum of the fair value of
Plan assets for pension Plans with projected benefit obligations in excess of
Plan assets were $518.7 million and $392.9 million, respectively, as of
December 31, 1999, and were $858.6 million and $713.0 million, respectively, as
of December 31, 1998. The sum of the accumulated benefit obligations and the
sum of the fair value of Plan assets for pension Plans with accumulated benefit
obligations in excess of Plan assets were $341.0 million and $252.6 million,
respectively, as of December 31, 1999, and were $444.7 million and $351.1
million, respectively, as of December 31, 1998.
The provisions of SFAS No. 87, "Employees' Accounting for Pensions," required
Bowater to record an additional minimum liability of $20.6 million and $36.9
million at December 31, 1999 and 1998, respectively. This liability represents
the amount by which the accumulated benefit obligation exceeds the sum of the
fair market value of Plan assets and accrued amounts previously recorded. The
additional liability may be offset by an intangible asset to the extent of
previously unrecognized prior service cost. The intangible assets of $1.1
million and $4.6 million at December 31, 1999 and 1998, respectively, are
included on the line titled "Other assets" in the Consolidated Balance Sheet.
The remaining amounts of $11.9 million and $19.7 million, net of related tax
benefits, are recorded as a component of shareholders' equity on the line
titled "Accumulated other comprehensive income (loss)" in the Consolidated
Balance Sheet at December 31, 1999 and 1998, respectively.
In addition to the previously described pension and nonpension postretirement
Plans, we also sponsor defined contribution Plans within the United States and
for certain sites outside of the United States. Employees are allowed to
contribute to the Plans, and we make a matching contribution between 3.6% and
7.2% of the employees' compensation. Our expense for the defined contribution
Plans totaled $7.2 million in 1999, $7.0 million in 1998 and $7.3 million in
1997.
15. INCOME TAXES
The components of "Income before income taxes and minority interests" consist
of United States income (loss) of $129.1 million, $(17.1) million and $95.8
million, and foreign income (loss) of $26.7 million, $32.7 million and $(6.3)
million, in 1999, 1998 and 1997, respectively.
The provision for income tax expense consists of:
- -----------------------------------------------------------------------
(In millions) 1999 1998 1997
- -----------------------------------------------------------------------
Federal:
Current $ 45.4 $ 42.3 $ 30.4
Deferred (.3) (49.6) 2.2
- -----------------------------------------------------------------------
45.1 (7.3) 32.6
- -----------------------------------------------------------------------
State:
Current 9.2 10.5 5.2
Deferred (1.5) (6.4) (1.9)
- -----------------------------------------------------------------------
7.7 4.1 3.3
- -----------------------------------------------------------------------
Foreign:
Current 11.4 6.4 0.8
Deferred 7.3 22.7 (3.6)
- -----------------------------------------------------------------------
18.7 29.1 (2.8)
- -----------------------------------------------------------------------
Total:
Current 66.0 59.2 36.4
Deferred 5.5 (33.3) (3.3)
- -----------------------------------------------------------------------
$ 71.5 $ 25.9 $ 33.1
- -----------------------------------------------------------------------
38
BOWATER 1999 ANNUAL REPORT
41
The components of deferred income taxes at December 31, 1999 and 1998, in the
accompanying Consolidated Balance Sheet are as follows:
- ------------------------------------------------------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Timber and timberlands (1) $ (88.5) $ (65.1)
Fixed assets, net (583.2) (691.6)
Other assets (2.5) (5.8)
- ------------------------------------------------------------------------------
Deferred tax liabilities $ (674.2) $ (762.5)
- ------------------------------------------------------------------------------
Current assets (2) $ 2.9 $ 3.3
Current liabilities (2) 20.8 59.0
Employee benefits and other
long-term liabilities 110.9 130.0
United States tax credit carryforwards 33.1 24.4
Canadian investment tax credit carryforwards 21.0 20.3
Ordinary loss carryforwards 32.2 77.1
Capital loss carryforwards -- 3.0
Valuation allowance (4.4) (14.5)
- ------------------------------------------------------------------------------
Deferred tax assets 216.5 302.6
- ------------------------------------------------------------------------------
Net deferred tax liability $ (457.7) $ (459.9)
==============================================================================
(1) Includes the deferred tax impact of the capitalization of lease payments,
management fees and property taxes of approximately $113.1 million and
$120.4 million at December 31, 1999 and 1998, respectively.
(2) Included in "Other current assets" in the accompanying Consolidated Balance
Sheet.
The net change in the valuation allowance during 1999 was a decrease of $10.1
million of which $8.5 million reduced the goodwill recorded upon the
acquisition of Avenor. During 1998, we increased the valuation allowance by
$10.8 million from the balance of $3.7 million at December 31, 1997 and 1996,
due to the acquisition.
The following is a reconciliation of the United States federal statutory and
effective tax rates as a percentage of income before income taxes and minority
interests:
- ---------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
United States federal statutory
income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.2 17.3 2.4
Foreign taxes 0.9 87.8 (0.7)
Goodwill 5.1 24.4 --
Other, net 1.7 1.5 0.3
- ---------------------------------------------------------------------------------
Effective income tax rate 45.9% 166.0% 37.0%
- ---------------------------------------------------------------------------------
At December 31, 1999, we had Canadian federal and provincial net operating loss
carryforwards of $62.3 million ($14.5 million, after tax) and $183.5 million
($17.7 million, after tax), respectively. In addition, $21.0 million of
Canadian investment tax credit carryforwards and $33.1 million of United States
tax credit carryforwards were available to reduce future income taxes. The
Canadian noncapital loss and investment tax credit carryforwards expire at
various dates between 2000 and 2007. We have United States alternative minimum
tax credit carryforwards that have no expiration. We believe that deferred tax
assets, net of the existing valuation allowance of $4.4 million at December 31,
1999, will be ultimately realized. A future reduction in the existing valuation
allowance will reduce goodwill.
The cumulative amount of CNC's undistributed earnings through 1992, on which we
have not provided income taxes, was $55.4 million as of December 31, 1999.
Distribution of these earnings would qualify for the 80% dividend exclusion. We
have also not provided deferred income taxes on the cumulative amount of
undistributed earnings related to our foreign subsidiaries since those
investments are considered permanent in duration and determination of such
liability is not practicable.
16. DIVIDENDS TO MINORITY INTEREST SHAREHOLDER
The Board of Directors of CNC declared dividends of $32.4 million in 1999 and
$49.6 million in 1998. As a result, $15.9 million was paid in 1999 and $24.3
million was paid in 1998 to the minority shareholder. In 1997, the Board of
Directors of CNC declared dividends of $3.2 million, resulting in payments of
$1.6 million to the minority shareholder.
In January 2000, the Board of Directors of CNC declared a dividend of $12.5
million, resulting in a payment of $6.1 million to the minority shareholder.
17. COMMITMENTS AND CONTINGENCIES
Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims and other matters. We periodically review the status of
these proceedings with both inside and outside counsel. Our management believes
that the ultimate disposition of these matters will not have a material adverse
effect on our operations or our financial condition taken as a whole.
39
BOWATER 1999 ANNUAL REPORT
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. CUMULATIVE AND REDEEMABLE PREFERRED STOCK
In 1994, Bowater sold 3.4 million depositary shares, priced at $25.00 per
share, each representing one-fourth of a share of 8.40% Series C Cumulative
Preferred Stock. The Series C Cumulative Preferred Stock had a liquidation
value of $25.00 per depositary share. In 1995, we repurchased 585,682 shares of
the Series C Cumulative Preferred Stock leaving a balance of 264,318 preferred
shares. In February 1999, we redeemed all of the remaining outstanding shares
for $26.6 million, including accrued dividends.
In 1985, we sold $75.0 million principal amount of redeemable preferred stock
with cumulative quarterly dividends equal to 85% of the arithmetic mean of
three-month LIBOR for United States dollar deposits. We were required to redeem
500,000 shares per year from 1996 through 1998 at a redemption price of $50.00
per share plus any accrued and unpaid dividends. In 1995 and 1996, we redeemed
1.0 million shares for $50.6 million, including accrued dividends. In 1997, we
redeemed the remaining 500,000 shares for $25.1 million, including accrued
dividends. We are authorized to issue 10.0 million shares of Serial Preferred
Stock, $1 par value, of which the LIBOR Preferred Stock constituted Series A.
19. STOCK OPTION PLANS
Bowater has three stock option plans - 1988, 1992 and 1997. These plans
authorized the grant of up to 6.0 million shares of our common stock in the
form of incentive stock options, non-qualified stock options, stock
appreciation rights, performance stock and restricted stock awards. The option
price for options granted under the 1988 and 1992 plans was based on the fair
market value of our common stock on the date of grant, or the average fair
market value of our common stock for the 20 business days immediately preceding
the date of grant. The option price for options granted under the 1997 plan was
based on the fair market value of our common stock on the date of grant.
All options granted through December 31, 1997, were exercisable at December 31,
1999. Options granted in 1999 and 1998 generally become exercisable over a
period of two years. Unless terminated earlier in accordance with their terms,
all options expire 10 years from the date of grant. The plans provide that any
outstanding options will become immediately exercisable upon a change in
control of Bowater.
In such event, grantees of options have the right to require us to purchase
such options for cash in lieu of the issuance of common stock. We received
$10.7 million in 1999, $6.8 million in 1998 and $24.5 million in 1997 from the
exercise of stock options. The exercise of stock options also generated tax
benefits for us of $4.7 million in 1999, $2.6 million in 1998 and $7.9 million
in 1997.
We record compensation expense resulting from stock option grants based on
intrinsic value in accordance with APB Opinion No. 25. In accordance with SFAS
No. 123, the following pro forma disclosures present the effects on income had
the fair value-based method been chosen. These disclosures are shown below for
1999, 1998 and 1997 and have no impact on our reported financial position or
results of operations.
- ---------------------------------------------------------------------------------------
(In millions,
except per-share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Net income (loss):
As reported $ 78.7 $ (18.5) $ 53.7
Pro forma 75.9 (22.0) 50.8
Earnings (loss) per share - basic:
As reported 1.43 (0.44) 1.26
Pro forma 1.38 (0.51) 1.19
Earnings (loss) per share - diluted:
As reported 1.41 (0.44) 1.25
Pro forma $ 1.36 $ (0.51) $ 1.17
=======================================================================================
The pro forma net income effects of SFAS No. 123 in 1999, 1998 and 1997 may not
be representative of the pro forma net income effects in future years due to
changes in assumptions and the number of options granted in future years.
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
- -----------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
Assumptions:
Dividend yield 2.0% 1.6% 1.9%
Expected volatility 30.0% 29.1% 29.5%
Risk-free interest rate 4.8% 5.6% 6.4%
Expected option lives 5.6 years 5.6 years 5.5 years
- -----------------------------------------------------------------------------------
Weighted average fair value
of each option $ 12.34 $ 15.68 $ 13.65
===================================================================================
40
BOWATER 1999 ANNUAL REPORT
43
Information with respect to options granted under the stock option plans is as
follows:
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares (000s) Price Shares (000s) Price Shares (000s) Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,040 $ 35 1,907 $ 31 2,477 $ 27
Granted during the year 245 $ 41 388 $ 49 404 $ 42
Exercised during the year (387) $ 28 (250) $ 27 (934) $ 26
Canceled during the year (14) $ 24 (5) $ 42 (40) $ 35
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,884 $ 37 2,040 $ 35 1,907 $ 31
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 1,455 $ 35 1,470 $ 30 1,371 $ 26
=============================================================================================================================
- ----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
at December 31, 1999 at December 31, 1999
- ----------------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number of Exercise
Range of Exercise Prices Shares (000s) Price Life (years) Shares (000s) Price
- ----------------------------------------------------------------------------------------------------------
$21 to $30 609 $ 26 4.1 609 $ 26
$30 to $40 329 $ 35 5.9 329 $ 35
$40 to $50 946 $ 44 7.9 517 $ 44
- ----------------------------------------------------------------------------------------------------------
1,884 $ 37 6.3 1,455 $ 35
==========================================================================================================
20. EXCHANGEABLE SHARES
In conjunction with the 1998 acquisition of Avenor, Bowater's indirect wholly
owned subsidiary, Bowater Canada Inc. (BCI), issued 3,773,547 shares ($183.6
million) of no par value exchangeable shares. Since 1998, BCI has issued an
additional 1,359,620 exchangeable shares ($66.2 million) upon the redemption of
its 7.50% Convertible Unsecured Subordinated Debentures and 5,505 exchangeable
shares ($0.3 million) for conversions prior to the redemption. The exchangeable
shares are exchangeable at any time, at the option of the holder, on a
one-for-one basis for shares of Bowater common stock. As of December 31, 1999,
2,974,295 exchangeable shares ($144.7 million) were exchanged for the same
number of Bowater common shares. Holders of exchangeable shares have voting
rights substantially equivalent to holders of Bowater common stock and are
entitled to receive dividends equivalent, on a per-share basis, to dividends
paid by Bowater on shares of Bowater common stock. On December 31, 1999,
2,164,377 exchangeable shares ($105.4 million) were outstanding and held by
non-affiliates.
21. EMPLOYEE STOCK OWNERSHIP PLAN
Bowater has an Employee Stock Ownership Plan (ESOP) as a component of its
Salaried Employees' Savings Plan. The ESOP was funded by a $17.5 million loan,
the proceeds of which were lent to an Employee Stock Ownership Trust (ESOT).
The ESOT purchased 574,160 shares of our common stock at an average purchase
price of $30.59. As of December 31, 1999, 556,800 shares have been distributed
to participants' accounts. The loan balance of $0.7 million is due April 30,
2000 and is reflected in "Current installments of long-term debt" on the
Consolidated Balance Sheet. The remaining shares serve as security for the loan
balance.
41
BOWATER 1999 ANNUAL REPORT
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. TREASURY STOCK
In May 1999, the Board of Directors authorized the repurchase of up to 5.5
million shares of Bowater's common stock in the open market, subject to normal
trading restrictions. Under the new program, we purchased 1,030,069 shares of
common stock at a cost of $51.8 million during 1999.
In addition, we completed a previously announced repurchase program in 1999.
Under the previous program, we purchased 1,451,900 shares of common stock at a
cost of $57.4 million in 1999, 2,441,100 shares of common stock at a cost of
$98.1 million in 1998 and 220,000 shares of common stock at a cost of $9.6
million in 1997. We purchased a total of 4,113,000 shares of common stock, or
10% of the outstanding shares, at a cost of $165.1 million. In February 1997,
we completed another stock repurchase program, purchasing 1,408,300 shares of
common stock at a cost of $57.2 million.
Currently, we use shares of treasury stock to pay employee/director benefits
and to fund our Dividend Reinvestment Plan.
23. TIMBERLAND LEASES AND OPERATING LEASES
Bowater controls timberlands under long-term leases expiring 2000 to 2058, for
which aggregate lease payments were $0.7 million in 1999, $0.7 million in 1998
and $0.7 million in 1997. In addition, we lease certain office premises, office
equipment and transportation equipment under operating leases. Total rental
expense for these operating leases was $11.0 million in 1999, $8.5 million in
1998 and $5.5 million in 1997.
At December 31, 1999, the future minimum rental payments under timberland
leases and operating leases are:
- --------------------------------------------
Timberland Operating
Lease Leases,
(In millions) Payments Net
- --------------------------------------------
2000 $ 0.7 $ 10.8
2001 0.7 9.2
2002 0.7 8.7
2003 0.6 7.7
2004 0.6 7.4
Thereafter 18.5 15.5
- --------------------------------------------
$ 21.8 $ 59.3
============================================
In conjunction with the 1998 Avenor acquisition, we manage 14.2 million acres
of Crown-owned land in Canada on which we have cutting rights. We make payments
to various Canadian provinces based on the amount of timber harvested. There
are no minimum rental payments associated with the cutting rights.
24. SEGMENT INFORMATION
Description of the types of products and services from which each reportable
segment derives its revenues:
Bowater has three reportable segments: the Newsprint Division, the Coated Paper
Division and the Forest Products Division. The Newsprint Division is
responsible for the manufacturing operations of seven sites in the United
States, Canada and South Korea. It is also responsible for the worldwide
marketing of newsprint and uncoated groundwood specialties. The Coated Paper
Division is responsible for one manufacturing site that produces coated
groundwood paper, newsprint, market pulp and uncoated groundwood specialties
and operates a coating facility, both in the United States. This Division is
responsible for the worldwide marketing and sales of coated groundwood paper.
The Forest Products Division operates three sawmills and manages 1.8 million
acres of owned and leased timberlands in the United States and Canada as well
as 14.2 million acres of Crown-owned land in Canada on which we have cutting
rights. This division sells wood fiber to the Newsprint and Coated Paper
Divisions, as well as markets and sells timber and lumber to third parties in
North America. The Pulp Division has marketing and sales responsibility for all
of our market pulp products; however, the financial results from these sales
are included in both the Newsprint Division and the Coated Paper Division.
Their administrative expenses are included in "Corporate/other eliminations."
Accordingly, no results are reported for the Pulp Division.
Factors management used to identify our segments: Bowater's reportable segments
are business units responsible for the marketing and sales of different
products. They are managed separately because of the different products that
they are responsible for manufacturing and distributing.
42
BOWATER 1999 ANNUAL REPORT
45
The following tables summarize information about segment profit and loss and
segment assets for the three years ended December 31, 1999, 1998 and 1997:
Coated Forest Corporate/
Newsprint Paper Products Other
1999 (In millions) Division Division Division Eliminations Total
- -------------------------------------------------------------------------------------------------------------------
Net sales - including internal sales $ 1,528.2 $ 467.0 $ 489.3 $ 2.3 $ 2,486.8
Eliminations of intersegment sales (4.2) -- (347.9) -- (352.1)
- -------------------------------------------------------------------------------------------------------------------
Net sales - external customers $ 1,524.0 $ 467.0 $ 141.4 $ 2.3(1) $ 2,134.7
- -------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and cost of
timber harvested $ 221.2 $ 55.5 $ 21.2 $ 2.3 $ 300.2
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (98.0)(2) $ 72.2 $ 320.9(3) $ (51.1)(1) $ 244.0
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 3,243.8 $ 492.1 $ 665.0 $ 151.3(1) $ 4,552.2
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 141.1 $ 42.1 $ 13.9 $ 1.4 $ 198.5
- -------------------------------------------------------------------------------------------------------------------
Newsprint Coated Forest Corporate/
& Directory Paper Products Other
1998 (In millions) Division Division Division Eliminations Total
- -------------------------------------------------------------------------------------------------------------------
Net sales - including internal sales $ 1,356.6 $ 474.1 $ 517.4 $ 17.2 $ 2,365.3
Eliminations of intersegment sales -- -- (370.3) -- (370.3)
- -------------------------------------------------------------------------------------------------------------------
Net sales - external customers $ 1,356.6 $ 474.1 $ 147.1 $ 17.2(1) $ 1,995.0
- -------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and cost of
timber harvested $ 154.9 $ 51.0 $ 21.7 $ 2.0 $ 229.6
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 32.4(2) $ 107.4 $ 67.0(3) $ (44.7)(1) $ 162.1
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 3,869.3 $ 488.3 $ 590.4 $ 144.0(1) $ 5,092.0
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 170.8 $ 29.6 $ 17.0 $ 5.8 $ 223.2
- -------------------------------------------------------------------------------------------------------------------
Newsprint Coated Forest Corporate/
& Directory Paper Products Other
1997 (In millions) Division Division Division(4) Eliminations Total
- -------------------------------------------------------------------------------------------------------------------
Net sales - including internal sales $ 886.8 $ 458.4 $ 428.0 $ (0.5) $ 1,772.7
Eliminations of intersegment sales -- -- (288.2) -- (288.2)
- -------------------------------------------------------------------------------------------------------------------
Net sales - external customers $ 886.8 $ 458.4 $ 139.8 $ (0.5) $ 1,484.5
- -------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and cost of
timber harvested $ 98.6 $ 51.3 $ 18.5 $ 1.4 $ 169.8
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 30.0 $ 91.2 $ 58.2(3) $ (42.9) $ 136.5
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,198.7 $ 496.3 $ 572.2 $ 478.6 $ 2,745.8
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 52.4 $ 23.0 $ 22.4 $ 1.8 $ 99.6
- -------------------------------------------------------------------------------------------------------------------
(1) Amounts for 1999 include the Gold River pulp mill, closed in 1998, with net
sales, operating loss and total assets of $2.3 million, $5.1 million and
$5.7 million, respectively. Gold River pulp mill amounts included in 1998
for net sales, operating loss and total assets are $17.0 million, $4.6
million and $28.3 million, respectively. Also included in operating income
(loss) are capital taxes of $3.5 million in 1999 and $0.8 million in 1998.
(2) Operating income (loss) for the Newsprint Division includes impairment
charges and capital taxes of $92.0 million and $0.7 million, respectively,
in 1999 and $119.6 million and $0.4 million, respectively, in 1998.
Operating income (loss) for 1999 also includes a loss on sale of assets of
$47.1 million.
(3) Operating income (loss) for the Forest Products Division includes gain on
sale of assets of $272.5 million in 1999, $21.1 million in 1998 and $0.8
million in 1997.
(4) Segment information for the Forest Products Division, established in
mid-1997, has been restated on a pro forma basis for comparative purposes
only for the full year 1997.
43
BOWATER 1999 ANNUAL REPORT
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Sales by Product
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------
Newsprint $ 1,282.2 $ 1,108.8 $ 730.8
Market pulp 434.2 272.1 172.7
Coated groundwood 311.8 391.0 337.7
Directory paper 89.4 173.5 178.9
Uncoated groundwood specialties 52.1 49.3 44.0
Lumber and other wood products 142.0 148.0 134.8
Less: distribution costs (177.0) (147.7) (114.4)
- ------------------------------------------------------------------------
$ 2,134.7 $ 1,995.0 $ 1,484.5
========================================================================
Net Sales by Country(1)
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------
United States $ 1,649.1 $ 1,750.6 $ 1,331.3
Canada 170.8 28.1 20.2
Korea 102.1 44.1 18.8
Japan 39.6 44.6 21.5
Brazil 39.0 37.0 37.4
Italy 32.5 31.9 26.0
United Kingdom 38.3 22.9 9.1
Mexico 58.7 10.7 5.6
Other countries (2) 181.6 172.8 129.0
Less: distribution costs (177.0) (147.7) (114.4)
- ------------------------------------------------------------------------
$ 2,134.7 $ 1,995.0 $ 1,484.5
========================================================================
Long-Lived Assets by Country
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------
United States $ 1,343.9 $ 1,773.1 $ 1,790.7
Canada 1,379.8 1,412.8 157.7
Korea 182.0 195.3 0.1
- ------------------------------------------------------------------------
$ 2,905.7 $ 3,381.2 $ 1,948.5
========================================================================
(1) Revenues are attributed to countries based on the location of the customer.
No one customer represented 10% or more of consolidated net sales.
(2) No country in this group exceeded 10% of consolidated net sales.
44
BOWATER 1999 ANNUAL REPORT
47
25. QUARTERLY INFORMATION (UNAUDITED)
(In millions, except per-share amounts)
-----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 First Second Third Fourth Year
-----------------------------------------------------------------------------------------------------
Net sales $ 571.3 $ 527.4 $ 511.0 $ 525.0 $ 2,134.7
Operating income (loss) (1) 194.9 27.8 (52.2) 73.5 244.0
Net income (loss) 106.5 5.2 (53.4) 20.4 78.7
Basic earnings (loss) per common share 1.93 0.10 (0.98) 0.38 1.43
Diluted earnings (loss) per common share $ 1.89 $ 0.10 $ (0.98) $ 0.38 $ 1.41
-----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------------------------------
Net sales $ 383.1 $ 395.8 $ 576.9 $ 639.2 $ 1,995.0
Operating income (loss) (1) 67.3 58.6 (39.9) 76.1 162.1
Net income (loss) 24.8 18.9 (88.1) 25.9 (18.5)
Basic earnings (loss) per common share 0.60 0.45 (1.69) 0.46 (0.44)
Diluted earnings (loss) per common share $ 0.59 $ 0.44 $ (1.69) $ 0.45 $ (0.44)
-----------------------------------------------------------------------------------------------------
(1) Operating income (loss) includes net gain on sale of assets and capital tax
expense.
45
BOWATER 1999 ANNUAL REPORT
48
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The management of Bowater is responsible for the information contained in the
financial statements and in the other parts of this report. The accompanying
consolidated financial statements of Bowater Incorporated and Subsidiaries have
been prepared in accordance with generally accepted accounting principles. In
preparing these statements, management has made judgments based upon available
information. To ensure that this information will be as accurate and factual as
possible, management has communicated to all appropriate employees the
requirements for accurate recordkeeping and accounting.
We maintain a system of internal accounting controls designed to provide
reasonable assurances for the safeguarding of assets and the reliability of
financial records. The system is subject to continuous review through a
corporatewide internal audit program with appropriate management follow-up
action. Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, we have an effective and responsive system of internal accounting
controls.
Our independent auditors, KPMG LLP, are responsible for conducting an audit of
our consolidated financial statements in accordance with generally accepted
auditing standards and for expressing their opinion as to whether these
consolidated financial statements present fairly, in all material respects, the
financial position, results of operations and cash flows of the company and its
subsidiaries in conformity with generally accepted accounting principles. Their
report appears on this page.
There is an Audit Committee of the Board of Directors composed of three
nonemployee directors who meet regularly with management, the internal auditors
and KPMG LLP to discuss specific accounting, reporting and internal control
matters. Both the independent auditors and internal auditors have full and free
access to the Audit Committee.
46
BOWATER 1999 ANNUAL REPORT
49
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Bowater Incorporated:
We have audited the accompanying consolidated balance sheet of Bowater
Incorporated and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, capital accounts and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
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 the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bowater Incorporated
and Subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Greenville, South Carolina
February 11, 2000
47
BOWATER 1999 ANNUAL REPORT
50
FINANCIAL AND OPERATING RECORD(*)
(In millions, except per-share amounts) 1999 (1) 1998 (1) 1997
- ----------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net sales $ 2,134.7 $ 1,995.0 $ 1,484.5
Operating income (loss) (2) 244.0 162.1 136.5
Income (loss) from continuing operations before cumulative effect
of changes in accounting principles and extraordinary charge (3) 78.7 (18.5) 53.7
Net income (loss) 78.7 (18.5) 53.7
Diluted earnings (loss) per common share 1.41 (0.44) 1.25
Dividends declared per common share (4) 0.80 0.80 0.80
- ----------------------------------------------------------------------------------------------------------------------
PRODUCT SALES INFORMATION
Newsprint $ 1,282.2 $ 1,108.8 $ 730.8
Coated groundwood 311.8 391.0 337.7
Directory paper 89.4 173.5 178.9
Market pulp 434.2 272.1 172.7
Uncoated groundwood specialties 52.1 49.3 44.0
Lumber and other wood products 142.0 148.0 134.8
Communication papers -- -- --
Distribution costs (177.0) (147.7) (114.4)
- ----------------------------------------------------------------------------------------------------------------------
$ 2,134.7 $ 1,995.0 $ 1,484.5
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Timber and timberlands $ 283.2 $ 472.8 $ 394.0
Fixed assets, net 2,581.3 2,885.2 1,554.5
Total assets 4,552.2 5,092.0 2,745.8
Total debt 1,505.1 1,830.8 758.9
Total debt and redeemable preferred stock 1,505.1 1,830.8 758.9
Total capitalization (5) 3,397.4 3,736.6 2,038.3
- ----------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Percent return on average common equity 4.5% (1.4)% 4.5%
Income from continuing operations as a percentage of net sales 3.7% (0.9)% 3.6%
Total debt as a percentage of total capitalization (6) 42.1% 46.3% 37.2%
Total debt and redeemable preferred stock as
a percentage of shareholders' equity 85.0% 92.3% 65.8%
Effective tax rate 45.9% 166.0% 37.0%
Cash flow from (used for) operations $ 147.0 $ 274.1 $ 195.6
Cash invested in fixed assets, timber and timberlands $ 198.5 $ 223.2 $ 99.6
Book value - common shareholders' equity per common share $ 33.10 $ 32.31 $ 27.99
Common stock price range $37.13-59.94 $32.81-59.56 $37.00-55.62
Sales (thousands of short tons)
Newsprint (7) 2,847 2,160 1,482
Coated groundwood 433 486 479
Directory paper 125 226 228
Market pulp 1,015 674 407
Uncoated groundwood specialties 102 90 83
Registered shareholders 5,200 5,600 5,200
Employees 6,400 8,300 5,000
- ----------------------------------------------------------------------------------------------------------------------
(*) This table should be used in conjunction with the financial statements and
notes to the financial statements.
(1) In 1999, Bowater sold GNP. In 1998, we acquired Avenor Inc. and a South
Korean newsprint mill. In 1996, we sold Star Forms. In 1991, we acquired
GNP.
(2) Net gain (loss) on sale of assets and capital taxes have been classified in
operating income.
48
BOWATER 1999 ANNUAL REPORT
51
- --------------------------------------------------------------------------------------------------------------------------------
1996 (1) 1995 1994 1993 1992 1991 (1) 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,718.3 $ 2,001.1 $ 1,359.0 $ 1,353.7 $ 1,360.8 $ 1,190.4 $ 1,289.1 $ 1,361.0
399.3 521.4 85.2 (11.1) (86.3) 103.7 174.9 280.5
204.1 258.2 (4.8) (64.5) (92.9) 45.6 87.4 144.6
200.2 246.9 (4.8) (64.5) (82.0) 45.6 78.4 144.6
4.55 5.22 (0.59) (1.84) (2.34) 1.15 2.05 3.86
0.80 0.60 0.60 0.60 1.20 1.20 1.20 1.14
- --------------------------------------------------------------------------------------------------------------------------------
$ 845.3 $ 841.6 $ 604.0 $ 607.6 $ 649.6 $ 601.4 $ 617.2 $ 645.3
356.3 463.8 307.0 316.2 296.1 259.9 279.0 279.2
183.9 162.4 128.6 138.6 90.2 -- -- --
154.3 233.3 130.6 98.9 136.4 138.0 170.7 182.6
38.0 41.2 37.3 39.9 34.5 -- -- --
108.0 116.8 87.9 103.1 79.5 34.3 32.6 32.7
153.4 248.9 190.7 191.8 207.5 254.9 280.9 310.2
(120.9) (106.9) (127.1) (142.4) (133.0) (98.1) (91.3) (89.0)
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,718.3 $ 2,001.1 $ 1,359.0 $ 1,353.7 $ 1,360.8 $ 1,190.4 $ 1,289.1 $ 1,361.0
- --------------------------------------------------------------------------------------------------------------------------------
$ 395.7 $ 430.4 $ 426.4 $ 422.5 $ 432.6 $ 414.1 $ 297.9 $ 285.7
1,636.7 1,711.0 1,785.0 1,750.7 1,821.7 1,858.8 1,604.7 1,529.5
2,865.5 2,908.2 2,851.4 2,726.2 2,881.6 2,780.0 2,297.9 2,284.2
760.6 818.1 1,118.5 1,120.2 1,134.3 864.5 498.2 532.4
785.4 867.8 1,193.0 1,194.6 1,208.5 938.6 572.2 606.4
2,082.8 2,113.9 2,222.5 2,071.8 2,186.4 2,061.7 1,694.5 1,700.5
- --------------------------------------------------------------------------------------------------------------------------------
18.6% 27.5% (3.0)% (8.6)% (9.6)% 4.4% 7.9% 16.0%
11.9% 12.9% (0.4)% (4.8)% (6.8)% 3.8% 6.8% 10.6%
36.5% 38.7% 50.3% 54.1% 51.9% 41.9% 29.4% 31.3%
67.1% 79.2% 134.4% 163.1% 147.7% 99.6% 61.2% 66.9%
35.2% 39.4% 70.0% 32.0% 37.0% 37.0% 37.0% 36.0%
$ 336.2 $ 607.7 $ 80.9 $ (30.6) $ 109.5 $ 156.6 $ 238.4 $ 327.3
$ 106.9 $ 96.0 $ 216.1 $ 121.8 $ 139.5 $ 159.7 $ 214.1 $ 423.4
$ 27.97 $ 24.52 $ 18.92 $ 20.10 $ 22.55 $ 26.21 $ 26.24 $ 25.37
$31.75-41.25 $26.50-53.50 $20.50-29.38 $18.00-24.63 $17.63-27.25 $18.63-30.38 $16.13-28.50 $25.75-34.13
1,446 1,402 1,460 1,437 1,604 1,244 1,266 1,278
432 476 453 454 447 346 352 343
211 229 189 202 126 -- -- --
393 325 300 312 318 317 300 261
64 60 76 76 65 -- -- --
5,600 5,900 6,600 7,300 8,200 9,500 14,000 15,600
5,000 5,500 6,000 6,600 6,900 7,200 5,100 5,100
- --------------------------------------------------------------------------------------------------------------------------------
(3) Extraordinary charge relates to debt retirements in 1996, 1995 and
1990. The changes in accounting principles relate to the adoption of
SFAS No. 106 and SFAS No. 109 in 1992.
(4) Dividends are declared quarterly.
(5) Total capitalization includes total debt, minority interests in
subsidiaries, redeemable preferred stock and shareholders' equity.
(6) In 1999 and 1998, this ratio excludes the revaluation of Avenor's debt
totaling $128.6 million and $190.6 million, respectively.
(7) Newsprint sales do not include shipments from the Ponderay Newsprint
Company, an unconsolidated entity.
49
BOWATER 1999 ANNUAL REPORT
52
NOMINAL ANNUAL CAPACITY AND PRODUCTION
BY PRODUCT LINE AND MILL
- ----------------------------------------------------------------------------------------------------------
Annual 1999
(In short tons) Capacity PRODUCTION
- ----------------------------------------------------------------------------------------------------------
Newsprint, directory and uncoated groundwood specialties
Calhoun, Tennessee 853,500 806,014
Catawba, South Carolina 260,500 247,251
Liverpool, Nova Scotia 267,800 240,474
Millinocket, Maine (1) 140,000 74,209
East Millinocket, Maine (1) 304,000 167,323
Thunder Bay, Ontario 604,000 583,309
Gatineau, Quebec 500,600 454,713
Dalhousie, New Brunswick 250,200 225,735
Usk, Washington (2) 278,500 273,255
Mokpo, Korea 303,800 268,890
Coated groundwood paper
Catawba, South Carolina 356,000 352,184
Benton Harbor, Michigan (3) 60,000 11,853
Millinocket, Maine (1) 127,700 71,785
Market pulp
Catawba, South Carolina 269,500 269,394
Calhoun, Tennessee 219,000 146,969
Thunder Bay, Ontario 606,300 549,261
Lumber (4) (5) 239,400 233,843
- ----------------------------------------------------------------------------------------------------------
(1) The Millinocket and East Millinocket, Maine, facilities were sold in
August 1999.
(2) Represents the Ponderay Newsprint Company, which is 40% owned. Capacity
and production are shown at 100%.
(3) The Benton Harbor, Michigan, facility was acquired in July 1999.
(4) The Pinkham Lumber Company was sold in March 1999.
(5) Figures are in MBF (thousands of board feet).
50
BOWATER 1999 ANNUAL REPORT
53
BOARD OF DIRECTORS
Arnold M. Nemirow (1) Richard Barth (2, 3, 5) James L. Pate (3, 4)
Chairman, President and Chief Executive Retired Chairman, President and Chairman and Chief Executive Officer
Officer of the Company Chief Executive Officer Pennzoil-Quaker State Company
Director since 1994 Ciba-Geigy Corporation Consumer Products
Age: 56 Diversified Chemical Products Director since 1996
Director since 1991 Age: 64
Francis J. Aguilar (1, 2, 4) Age: 68
Professor Emeritus John A. Rolls (3, 5)
Harvard University Graduate School of Kenneth M. Curtis (5) President and Chief Executive Officer
Business Attorney At Law and Senior Member Thermion Systems International
Director since 1984 Curtis Thaxter Stevens Broder & Micoleau, Aerospace and Industrial Heating Systems
Age: 67 Limited Liability Company, P.A. Director since 1990
Director since 1993 Age: 58
H. David Aycock (1, 4) Age: 69
Chairman, Chief Executive Officer and Arthur R. Sawchuk (5)
President Charles J. Howard (2) Chairman
Nucor Corporation Chairman The Manufacturers Life Insurance Company
Steel and Steel Products Howard, Barclay & Associates Ltd. Insurance and Financial Services
Director since 1987 Investment Counseling Director since 1998
Age: 69 Director since 1997 Age: 64
Age: 57
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Human Resources and Compensation Committee
(5) Nominating and Governance Committee
51
BOWATER 1999 ANNUAL REPORT
54
OFFICERS
CORPORATE OFFICERS
Arnold M. Nemirow
Chairman, President and
Chief Executive Officer
Arthur D. Fuller
Executive Vice President and President -
Newsprint Division
E. Patrick Duffy
Senior Vice President and President - Coated
Paper Division
Richard K. Hamilton
Vice President and President - Forest
Products Division
David J. Steuart
Vice President and President - Pulp Division
Anthony H. Barash
Senior Vice President - Corporate
Affairs and General Counsel
James H. Dorton
Vice President - Corporate Development
and Strategy
Jerry R. Gilmore
Vice President - United States and Korean
Newsprint Operations
William G. Harvey
Vice President and Treasurer
Steven G. Lanzl
Vice President - Information Technology
David G. Maffucci
Senior Vice President and Chief Financial Officer
Robert A. Moran
Vice President - Manufacturing Services
R. Donald Newman
Vice President - Canadian Newsprint
Operations
Michael F. Nocito
Vice President and Controller
Wendy C. Shiba
Vice President, Secretary and Assistant
General Counsel
James T. Wright
Vice President - Human Resources
DIVISION OFFICERS
NEWSPRINT DIVISION
Arthur D. Fuller
President - Newsprint Division
Jerry R. Gilmore
Vice President - United States and Korean
Newsprint Operations
S. Y. Han
President - Bowater-Halla
Paper Company Ltd.
Howard G. Johnson
Vice President and Resident Manager -
Calhoun Operations
William G. Meany
Vice President and Resident Manager -
Ponderay Operations
R. Donald Newman
Vice President - Canadian Newsprint
Operations
Edward J. Broadhurst
Vice President - Operations Technology
Don P. Campbell
Vice President and Resident Manager -
Thunder Bay Operations
Patrice Cayouette
Vice President and Resident Manager -
Gatineau Operations
Richard G. Gilbert
Vice President and Resident Manager -
Mersey Operations
Luc Lachapelle
Vice President and Resident Manager -
Dalhousie Operations
Marc Regnier
Vice President and General Counsel -
Canadian Newsprint Operations
C. Randy Ellington
Vice President- North American Newsprint
Sales
Larry G. Green
Vice President - Purchasing and Transportation
William C. Morris
Vice President - International Newsprint Sales
Craig B. Stevens
Vice President - Administration and Planning
Donald L. Wheeler
Vice President - Human Resources
COATED PAPER DIVISION
E. Patrick Duffy
President - Coated Paper Division
Daniel B. Haight
Vice President - Coated Paper Sales
Gaynor L. "Bud" Nash
Vice President and Resident Manager -
Catawba Operations
Denis Tontodonato
Vice President - Administration and Planning
PULP DIVISION
David J. Steuart
President - Pulp Division
John C. Adams
Vice President - North American Sales
FOREST PRODUCTS DIVISION
Richard K. Hamilton
President - Forest Products Division
Roger Barber
Vice President - Ontario and New Brunswick
Woodlands Operations
Jean Beaulieu
Vice President - Lumber and Quebec
Woodlands Operations
J. Frank Pickle
Vice President - Southern Woodlands Operations
Jon M. Porter
Vice President - Mersey Woodlands Operations
Colin R. Wolfe
Vice President - Administration and Planning
52
BOWATER 1999 ANNUAL REPORT
55
SHAREHOLDER INFORMATION
ANNUAL MEETING
Bowater's annual meeting of shareholders will be held on Wednesday, May 10,
2000, at 11 a.m. at The Gunter Theatre of the Peace Center for the Performing
Arts, Greenville, South Carolina.
STOCK LISTINGS
Bowater Incorporated common stock is listed on the New York Stock Exchange
(stock symbol BOW), U.S. regional exchanges and the London Stock Exchange. A
special class of stock exchange into Bowater common stock is listed on the
Toronto Stock Exchange (stock symbol BWX).
COMMON STOCK REGISTRARS AND TRANSFER AGENTS (BOW)
The Bank of New York
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
888-269-8845
e-mail: Shareowner-svcs@bankofny.com
Website: http://stock.bankofny.com
CIBC Mellon Trust Company
Balfour House
390 High Road
Ilford, Essex, 1G1 1NQ England
081-478-1888
EXCHANGEABLE SHARE STOCK REGISTRAR AND TRANSFER AGENT (BWX)
Montreal Trust
1800 McGill College Avenue
Montreal, Quebec H3A 3K9 Canada
800-564-6253
INVESTOR INFORMATION
Investor inquiries about Bowater should be directed to the Investor Relations
Department at Bowater's headquarters.
10-K REPORT
Bowater files an annual report on Form 10-K with the Securities and Exchange
Commission. A free copy (without exhibits) may be obtained by writing to the
Investor Relations Department at Bowater's headquarters.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Bowater has a Dividend Reinvestment and Stock Purchase Plan. Information is
available from the Bank of New York.
INDEPENDENT AUDITORS
KPMG LLP
55 Beattie Place
Suite 600
Greenville, SC 29601
864-250-2600
COMMON STOCK PRICES
Price ranges of the company's common stock during 1999 and 1998 as reported on
the New York Stock Exchange were:
- -------------------------------------------------------------
1999 1998
HIGH LOW HIGH LOW
First quarter $46.00 $37.13 $56.44 $41.56
Second quarter $55.94 $39.00 $59.56 $46.75
Third quarter $59.94 $47.88 $49.75 $35.62
Fourth quarter $56.19 $46.88 $43.50 $32.81
- -------------------------------------------------------------
56
[LOGO] BOWATER
Incorporated
CORPORATE DIVISION SALES OFFICES Bowater S. America Ltda. COATED PAPER DIVISION
HEADQUARTERS Rua Engenheiro Carlos
NEWSPRINT DIVISION Estevenson, #80 11440 Carmel Commons
Bowater Incorporated Sala #51 Lyon Office Center Boulevard
55 East Camperdown Way 2000 Regency Parkway Nova Campinas, Sao Paulo Suite 201
P.O. Box 1028 Suite 380 Brazil CEP 13092310 Charlotte, NC
Greenville, SC Cary NC 5519-251-9088 28226
29602 27511 704-540-2667
864-271-7733 919-467-6422 300 March Road
864-282-9482 (FAX) Suite 444 650 Warrenville Road
http://www.bowater.com 547 West Jackson Boulevard Kanata, ON K2K 2E2 Suite 410
Suite 1505 Canada Lisle, IL
DIVISION HEADQUARTERS Chicago, Il 888-333-9933 60532
60661 630-960-9797
Newsprint Division 312-588-2301 Bowater Europe Limited
55 East Camperdown Way Carolyn House Park 80 West, Plaza 1
P.O. Box 1028 100 Merchant Street 26 Dingwall Road 3rd Floor
Greenville, SC Suite 195 Croydon, Surrey CRO 9XF Saddle Brook, NJ
29602 Cincinnati, OH England 07663
864-271-7733 45246 44-208-667-0303 201-368-3611
513-772-2744
Coated Paper Division Bowater Japan Limited PULP DIVISION
11440 Carmel Commons 3155 Route 10, Suite 101 Imperial Hotel Main
Boulevard Denville, NJ Building 5F, Room 504 11440 Carmel Commons
Suite 201 07834 1-1-1 Uchisaiwai-cho Boulevard
Charlotte, NC 973-537-1070 Chiyoda-ku, Tokyo Suite 201
28226 100-8558 Charlotte, NC
704-540-2667 55 East Camperdown Way Japan 28226
P.O. Box 1028 81-3-5521-2560 877-236-5837
Pulp Division Greenville, SC
5420 North Service Road 29602 Bowater-Halla Paper CANADIAN NEWSPRINT
Burlington, ON L7L 6C7 864-271-7733 Company Ltd. OPERATIONS
Canada 11F Hong Woo Building
800-205-PULP 5068 West Plano Parkway 945-1 Daechi-Dong 1250 Rene-Levesque
Suite 300 Kangnam-Gu, Seoul Boulevard West
Forest Products Division Plano, TX Korea Montreal, Quebec H3B 4Y3
5020 Highway 11 South 75093 822-567 1576 Canada
Calhoun, TN 972-381-4260 514-846-4811
37309 Bowater Asia Pte Ltd
423-336-7195 2033 Sixth Avenue 260 Orchard Road, #08-09
Suite 320 The Heeren
Seattle, WA Singapore 238855
98121 65-835-0488
206-728-0175
15310 Amberly Drive
Suite 250-50
Tampa, FL
33647
813-977-4945
(c) Bowater Incorporated
Printed in U.S.A.
Bowater Incorporated is an equal opportunity employer
[LOGO] is a registered trademark of Bowater Incorporated
Ce rapport est disponible en version francaise.
This report is available in English and French at http://www.bowater.com