UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8712
BOWATER INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 62-0721803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
(Address of principal executive offices) (Zip Code)
(864) 271-7733
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 7, 1997.
Class Outstanding at August 7, 1997
Common Stock, $1.00 Par Value 40,374,910 Shares
BOWATER INCORPORATED
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at June 30, 1997,
and December 31, 1996 3
Consolidated Statement of Operations for the Three
and Six Months Ended June 30, 1997, and
June 30, 1996 4
Consolidated Statement of Capital Accounts
for the Six Months Ended June 30, 1997 5
Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1997, and June
30, 1996 6
Notes to Consolidated Financial Statements 7-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders 15
6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
(2)
PART I
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
June 30, December 31,
1997 1996
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 95,103 $ 85,259
Marketable securities 258,283 345,398
Accounts receivable, net 177,273 185,724
Inventories (Note 2) 103,264 123,745
Other current assets 14,655 13,629
----------- -----------
Total current assets 648,578 753,755
----------- -----------
Timber and timberlands 396,334 395,675
Fixed assets, net 1,589,112 1,636,705
Other assets 79,362 79,409
=========== ===========
$ 2,713,386 $ 2,865,544
=========== ===========
LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt $ 1,604 $ 1,604
Accounts payable and accrued liabilities (Note 3) 182,396 216,328
Income taxes payable 1,583 6,057
Dividends payable (Note 4) 8,557 29,892
----------- -----------
Total current liabilities 194,140 253,881
----------- -----------
Long-term debt, net of current installments 758,178 759,029
Other long-term liabilities 169,757 171,651
Deferred income taxes 345,845 358,858
Minority interests in subsidiaries 125,608 126,246
Commitments and contingencies (Note 5) -- --
Redeemable LIBOR preferred stock (Note 6) -- 24,746
Shareholders' equity:
Series C cumulative preferred stock 25,465 25,465
Common stock (Note 7) 44,478 43,994
Additional paid-in capital 547,448 531,598
Retained earnings 687,360 698,301
Equity adjustments (12,762) (12,370)
Loan to ESOT (5,440) (6,324)
Treasury stock, at cost (Note 8) (166,691) (109,531)
----------- -----------
Total shareholders' equity 1,119,858 1,171,133
=========== ===========
$ 2,713,386 $ 2,865,544
=========== ===========
See accompanying notes to consolidated financial statements.
(3)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended Six Months Ended
------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Net sales $ 356,342 $ 453,951 $ 704,849 $ 922,834
Cost of sales 272,259 297,432 552,773 557,438
Depreciation, amortization and cost of
timber harvested 41,069 42,477 83,718 87,682
-------------- -------------- -------------- --------------
Gross profit 43,014 114,042 68,358 277,714
Selling and administrative expense 19,824 23,703 35,045 44,654
-------------- -------------- -------------- --------------
Operating income 23,190 90,339 33,313 233,060
Other expense / (income):
Interest income (4,853) (5,191) (10,146) (10,043)
Interest expense, net of capitalized interest 16,761 18,223 33,579 36,570
Gain on sale of timberlands (12) (1,838) (23) (76,701)
Other, net (770) (1,919) (495) (2,353)
-------------- -------------- -------------- --------------
11,126 9,275 22,915 (52,527)
-------------- -------------- -------------- --------------
Income before income taxes and minority interests 12,064 81,064 10,398 285,587
Provision for income taxes (Note 9) 4,465 29,994 3,848 105,668
Minority interests in net income of subsidiaries 503 6,727 (232) 22,671
-------------- -------------- -------------- --------------
Income before extraordinary charge 7,096 44,343 6,782 157,248
Extraordinary charge, net of taxes of $1,222 - (1,931) - (1,931)
-------------- -------------- -------------- --------------
Net income $ 7,096 $ 42,412 $ 6,782 $ 155,317
============== ============== ============== ==============
Earnings per common share - primary (Note 10):
Income before extraordinary charge $ 0.16 $ 1.03 $ 0.12 $ 3.63
Extraordinary charge - (0.05) - (0.05)
============== ============== ============== ==============
Net income $ 0.16 $ 0.98 $ 0.12 $ 3.58
============== ============== ============== ==============
Average common and common equivalent shares outstanding 40,677 42,273 40,497 42,781
============== ============== ============== ==============
Earnings per common share - fully diluted (Note 10):
Income before extraordinary charge $ 0.16 $ 1.00 $ 0.12 $ 3.54
Extraordinary charge - (0.04) - (0.04)
============== ============== ============== ==============
Net income $ 0.16 $ 0.96 $ 0.12 $ 3.50
============== ============== ============== ==============
Average common and common equivalent shares outstanding 40,707 43,154 40,551 43,662
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
(4)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Six Months Ended June 30, 1997
(Unaudited, in thousands except per share amounts)
Redeemable Series C
LIBOR Cumulative Additional
Preferred Preferred Common Paid in Retained Equity Loan to Treasury
Stock Stock Stock Capital Earnings Adjustments ESOT Stock
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 24,746 $ 25,465 $ 43,994 $ 531,598 $ 698,301 $ (12,370) $ (6,324) $(109,531)
Net income -- -- -- -- 6,782 -- -- --
Dividends on common stock ($.40
per share) -- -- -- -- (15,966) -- -- --
Dividends on preferred stock:
LIBOR ($.79 per share) -- -- -- -- (393) -- -- --
Series C ($4.20 per share) -- -- -- -- (1,110) -- -- --
Increase in stated value of LIBOR
preferred stock 254 -- -- -- (254) -- -- --
Redemption of LIBOR preferred stock
(Note 6 ) (25,000)
Common stock issued for exercise
of stock options -- -- 484 12,547 -- -- -- --
Tax benefit on exercise of stock
options 3,302
Reduction in loan to ESOT -- -- -- -- -- -- 884 --
Purchase of common stock (Note 8) -- -- -- -- -- -- -- (57,244)
Treasury stock used for employee
benefit and dividend reinvestment
plans -- -- -- 1 -- -- -- 84
Foreign currency translation -- -- -- -- -- (392) -- --
-------- --------- --------- --------- --------- ---------- --------- ---------
Balance at June 30, 1997 $ -- $ 25,465 $ 44,478 $ 547,448 $ 687,360 $ (12,762) $ (5,440) $(166,691)
========= ========= ========= ======== ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
(5)
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 6,782 $ 155,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 83,718 87,682
Deferred income taxes (319) 30,187
Minority interests (232) 22,671
Gain from sale of timberlands (23) (76,701)
Extraordinary charge, net of taxes -- 1,931
Change in working capital:
Accounts receivable, net 8,451 348
Inventories 20,481 (13,070)
Accounts payable and accrued liabilities (Note 3) (28,426) (5,203)
Income taxes payable (13,717) (68,436)
Other, net (2,482) 5,458
--------- ---------
Net cash from operating activities 74,233 140,184
--------- ---------
Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands (45,829) (34,893)
Disposition of fixed assets, timber and timberlands 2,342 116,999
Cash from sale of (invested in ) marketable securities 87,115 (191,016)
--------- ---------
Net cash provided by (used for) investing activities 43,628 (108,910)
--------- ---------
Cash flows from financing activities:
Cash dividends, including minority interests (38,805) (49,037)
Purchase of common stock (Note 8) (57,244) (81,433)
Purchases/payments of long-term debt (884) (32,599)
Stock options exercised 13,032 9,267
Redemption of LIBOR preferred stock ( Note 6) (25,000) --
Other 884 851
--------- ---------
Net cash used for financing activities (108,017) (152,951)
--------- ---------
Net increase (decrease) in cash and cash equivalents 9,844 (121,677)
Cash and cash equivalents at beginning of year 85,259 264,571
--------- ---------
Cash and cash equivalents at end of period $ 95,103 $ 142,894
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ (33,087) $ (37,447)
Income taxes $ (17,883) $(143,918)
See accompanying notes to consolidated financial statements.
(6)
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries (the Company). The consolidated
balance sheets, statements of operations, capital accounts and cash flows
are unaudited. However, in the opinion of Company management, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the interim financial statements have been made. The
results of the interim period ended June 30, 1997, are not necessarily
indicative of the results to be expected for the full year.
2. The composition of inventories at June 30, 1997, and December 31, 1996, was
as follows (in thousands):
June 30, 1997 December 31, 1996
-------------- ----------------
(Unaudited)
At lower of cost or market:
Raw materials $ 11,686 $ 17,990
Work in process 2,324 3,077
Finished goods 35,244 47,577
Mill stores and other supplies 65,834 66,925
-------- --------
115,088 135,569
-------- --------
Excess of current cost over
LIFO inventory value (11,824) (11,824)
======== ========
$103,264 $123,745
======== ========
3. During the first six months of 1997, the Company paid $25.4 million
pursuant to a long-term incentive compensation plan accrued for the three
year period ending December 31, 1996.
4. In December 1996, the Board of Directors of Calhoun Newsprint Company (CNC)
declared a $40.0 million dividend. As a result, $19.6 million was paid to
the minority shareholder in January 1997. In the first quarter of 1996, a
$29.4 million dividend was paid to the minority shareholder.
5. The Company is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims, and other matters. The Company's management believes
that the ultimate disposition of these matters will not have a material
adverse effect on the Company's operations or its financial condition taken
as a whole.
6. On May 12, 1997, the company redeemed for cash all of the remaining
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of
$50 per share.
7. On January 9, 1997, the Company converted all of the outstanding depositary
shares of its 7% PRIDES Series B Convertible Preferred Stock using Bowater
common stock at a conversion ratio of .82 of a common share for each
depositary share, resulting in the issuance of 4,012,765 common shares. The
Company reflected this transaction in the Consolidated Balance Sheet at
December 31, 1996.
(7)
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. During the first quarter of 1997, the Company purchased 1.4 million shares
of common stock at a cost of $57.2 million, completing the stock repurchase
program authorized in February 1996. Since the beginning of the program, 4
million shares were purchased at a total cost of $156 million. In the first
six months of 1996, 2.1 million shares were purchased at a cost of $81.4
million.
9. The effective tax rate for the second quarter of 1997 and 1996, and the
first six months of 1997 and 1996, was 37.0 percent.
10. The calculation of earnings per share for the three and six months ended
June 30, 1997, includes a deduction of $.8 million and $1.8 million ,
respectively, for the dividend requirements of the Company's LIBOR and
Series C preferred stock and the amortization of the difference between the
net proceeds from the LIBOR preferred stock and its mandatory redemption
value. For the three and six months ended June 30, 1996, the calculation of
earnings per share included a deduction of $ 1.2 million and $2.4 million,
respectively, for the same items.
(8)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary
The Company reported 1997 second quarter earnings of $7.1 million, or
$.16 per fully diluted share. This compares to net income of $42.4 million or
$.96 per fully diluted share in the second quarter of 1996 and a net loss of
$0.3 million, or $.03 per fully diluted share in the first quarter of 1997.
Included in net income for the second quarter of 1996 was an extraordinary
charge of $1.9 million, or $.04 per fully diluted share, resulting from the open
market purchase of outstanding debt. Second quarter 1997 net sales were $356.3
million, compared to $454.0 million for the second quarter of 1996 and $348.5
million for the first quarter of this year. Selling prices for most of the
Company's products, while rising, are still below the levels of a year ago. This
accounts for the majority of the lower sales and profitability compared to 1996
results.
PRODUCT LINE INFORMATION:
(Unaudited, $ in thousands)
Three Month Ended Six Months Ended
-------------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------------- ----------------- ----------- ----------------
Net sales:
Newsprint $ 178,153 $ 225,189 $ 345,264 $ 460,872
Coated groundwood 83,193 93,091 156,508 191,846
Directory paper 38,529 45,907 88,145 94,959
Market pulp 47,123 50,197 91,308 68,773
Uncoated groundwood specialties 11,647 8,135 23,167 18,866
Lumber and other wood products 26,687 21,050 60,645 49,432
Communication papers (1) -- 44,290 -- 95,263
Distribution costs (28,990) (33,908) (60,188) (57,177)
========= ========= ========= =========
$ 356,342 $ 453,951 $ 704,849 $ 922,834
========= ========= ========= =========
Operating income $ 23,190 $ 90,339 $ 33,313 $ 233,060
========= ========= ========= =========
(1) Star Forms Incorporated was sold in November 1996.
(9)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997, VERSUS JUNE 30, 1996
For the second quarter of 1997, the Company's operating income of $23.2
million decreased $67.1 million compared to the second quarter of 1996. Lower
average transaction prices for all of the Company's products except market pulp
and lumber caused operating income to decline significantly. The effect of the
lower transaction prices was partially offset by higher tonnage shipments and
lower operating costs.
PRODUCT LINE INFORMATION
Although all Company operations are grouped in a single segment, market
and operating trends are discussed by major product. In general, the Company's
products are globally traded commodities. Pricing and the level of shipments of
these products will continue to be influenced by the balance between supply and
demand as affected by global economic conditions, changes in consumption and
capacity, the level of customer and producer inventories as well as fluctuations
in exchange rates.
NEWSPRINT - The Company's newsprint average transaction price in the second
quarter of 1997 was 22 percent lower than the same period last year and 6
percent higher than the prior quarter. The significant decrease in prices versus
prior year was a result of lower consumption and higher consumer and producer
inventories during 1996, as newsprint consumers initiated conservation measures
in reaction to record high prices experienced in 1995. By the end of 1996,
however, market conditions began to improve as consumption increased and
inventories held by U. S. daily newspapers and North American producers declined
compared to levels earlier in the year. In the first quarter of 1997, the
Company announced a $75 per metric ton domestic price increase. This price
increase continues to be implemented in the third quarter. Favorable market
conditions continue. Ad lineage for U. S. daily newspapers increased in the
second quarter of 1997 compared to the second quarter of 1996, helping to
increase U. S. daily newspaper consumption by 5 percent comparing the same
periods.(1) Total U. S. consumption also increased by 5 percent comparing the
second quarter of 1997 to the second quarter of 1996 and to the first quarter of
1997.(2) Inventory levels at the end of the second quarter also improved. U. S.
daily newspaper publishers inventory decreased to a 37-day supply compared to a
44-day supply at the end of the second quarter of 1996;(3) North American mill
inventory levels, though still higher than normal, decreased 17 percent compared
to the second quarter of 1996 and decreased 10 percent compared to the first
quarter of 1997.(4) As a result of these improving market conditions, the
Company informed its customers of a price increase of $35 per metric ton
effective October 1, 1997.
COATED GROUNDWOOD - The Company's coated groundwood average transaction price
declined 26 percent comparing the second quarter of 1997 to the same period last
year, but increased 3 percent versus the prior quarter. The Company's shipments
during the second quarter increased 20 percent over the second quarter of last
year and 10 percent over the first quarter of this year. Throughout 1996, coated
groundwood selling prices declined while producer inventory levels surpassed
historical levels, as customers reduced their inventories which were built up
during 1995. Market conditions improved in the first quarter allowing the
Company to implement a price increase of up to $60 per ton for certain market
segments effective April 1. Improved market conditions continued in the second
quarter of 1997. Magazine advertising pages increased 6 percent(5) and catalog
mailing pieces increased 7 percent(6) in the second quarter compared to the same
period last year, while U. S. coated groundwood shipments increased 30
percent(7) comparing the same periods.
- -----------------
(1) Canadian Pulp and Paper Association (CPPA)
(2) CPPA
(3) Newspaper Association of America (NAA)
(4) CPPA
(5) Magazine Publishers Association
(6) U.S. Postal Service
(7) American Forest and Paper Association (AF&PA)
(10)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U. S. producer inventory levels also improved in the second quarter, decreasing
50 percent from the second quarter of 1996.(8) On July 1, 1997, the Company
announced another price increase between $50 and $80 per ton, depending upon
market segment, for all domestic and export customers.
DIRECTORY PAPER - The Company's average transaction price for directory paper
decreased 13 percent in the second quarter of 1997 compared to the second
quarter of 1996, and decreased 6 percent compared to the first quarter of 1997.
During 1996, demand in the directory paper market declined and prices decreased,
similar to the conditions and pricing in the newsprint market. Lower prices
continued through the second quarter of 1997, since a large portion of the
Company's directory sales were based on contracts, the pricing of which was
determined in the latter part of 1996. In addition, the Company sold lower
priced, higher basis weight directory paper in the second quarter of 1997
compared to the prior quarter. The Company's shipments during the second quarter
were similar to the second quarter of 1996; however, they were 17 percent lower
than shipments in the first quarter of 1997.
MARKET PULP - The Company's market pulp average transaction price for the second
quarter of 1997 increased 18 percent compared to the second quarter of last
year; however, the Company's shipments decreased 21 percent comparing the same
periods, which more than offset the price gains. The Company's shipments in the
second quarter of 1996 were higher than normal as pulp inventories were reduced
from abnormally high levels. NORSCAN (U.S., Canada, Finland, Norway and Sweden
producers) shipments of bleached softwood market pulp were relatively unchanged
in the second quarter of 1997 compared to the year ago period, while increasing
6 percent compared to the prior quarter.(9) NORSCAN inventory levels of
bleached softwood market pulp at the end of the second quarter were also
unchanged at 1.1 million metric tons compared to the end of the second quarter
of 1996; however, levels decreased from 1.4 million metric tons at the end of
the first quarter of 1997.(10) Based on the favorable market conditions, the
Company implemented price increases during the first seven months of 1997
causing its average transaction price to rise approximately $30 per metric ton,
since the end of 1996.
LUMBER - The average transaction price for the Company's lumber products
increased 20 percent in the second quarter of 1997 compared to the year ago
period and 4 percent over the prior quarter. The Company's shipment levels were
relatively unchanged in the second quarter compared to the same periods. Lumber
prices increased significantly during 1996 due primarily to record high housing
starts of 1.5 million. In 1997, prices continue to rise, but at a slower rate.
As of the end of the second quarter, the government estimate of U. S. housing
starts for the full year of 1997 stands at 1.4 million.
COST OF SALES AND OTHER INCOME AND EXPENSES
Cost of sales decreased 8 percent in the second quarter of 1997
compared to the second quarter of last year. The majority of this decrease was
due to the absence of product costs relating to the Company's subsidiary, Star
Forms Incorporated (Star Forms), which was sold in November of 1996. Comparing
the same periods, selling and administrative expenses decreased approximately
$3.9 million or 16 percent. The majority of this savings was also due to the
sale of Star Forms. Interest expense for the second quarter of 1997 was $1.5
million or 8 percent lower than the same period last year due to lower average
debt balances in 1997. Other income and expenses in the second quarter of 1997
were relatively unchanged from the year ago period.
- ---------------
(8) AF&PA
(9) AF&PA
(10) AF&PA
(11)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997, VERSUS JUNE 30, 1996
For the first six months of 1997, the Company's operating income was
$33.3 million, a decrease of $199.7 million compared to the first six months of
1996. This significant decrease is attributed to substantially lower average
transaction prices for all of the Company's products except market pulp and
lumber, partially offset by higher tonnage shipments.
PRODUCT LINE INFORMATION
NEWSPRINT - For the first six months of 1997, the Company's newsprint average
transaction price decreased 28 percent while shipments increased 4 percent
compared to the same period last year. During the second half of 1996, prices
decreased due to lower demand brought on by conservation measures taken by users
in reaction to the record high prices experienced in 1995. In 1997, however,
consumption increased as U. S. daily newspapers consumed more newsprint in each
of the first six months compared to the same months in 1996.(11) Both U. S.
daily newspaper inventory levels and North American mill inventory levels at the
end of June 1997 are lower than June 1996 levels.(12) In reaction to the
favorable market conditions, the Company announced a $75 per metric ton domestic
price increase in March of 1997. This price increase continues to be implemented
in the third quarter. The Company has also informed its customers of a price
increase of $35 per metric ton effective October 1, 1997.
COATED GROUNDWOOD - The Company's coated groundwood average transaction price
also decreased during the first half of 1997 compared to the year ago period by
31 percent, offset by higher shipments of 18 percent comparing the same periods.
In 1996, coated groundwood prices declined as customers reduced their excessive
inventory levels from 1995. In 1997, demand is increasing. U. S. coated
groundwood shipments increased 27 percent during the first six months of 1997
compared to the prior year period and U. S. producer inventory levels have
declined.(13) The Company implemented a price increase of up to $60 per ton for
certain market segments during the first half of 1997 and announced an
additional increase between $50 and $80 per ton, depending upon market segment,
for all domestic and export customers on July 1, 1997.
DIRECTORY PAPER - The Company's average transaction price for directory paper
decreased 12 percent in the first six months of 1997 compared to the first half
of 1996. A large portion of the Company's current directory paper sales were
based on contracts completed in the latter part of 1996, when prices had
decreased from the high levels of 1995.
MARKET PULP - The average transaction price for the Company's market pulp
increased in the first half of 1997 compared to the first half of 1996 by 9
percent. Like newsprint, the pulp market began to show signs of recovery during
the first six months of 1997. NORSCAN shipment levels increased during this
period compared to the same period last year, while inventory levels
dropped.(14) June 1997 marked the fourth month in a row in which NORSCAN
inventory levels declined.(15) As of July 31, 1997, the Company's average
transaction price increased approximmately $30 per metric ton, since the end
of 1996.
LUMBER - The Company's average transaction price for its lumber products
increased 29 percent comparing the first six months of 1997 to the first six
months of last year. The lumber market continued its healthy pace in the first
half of 1997 due to the high level of housing starts.
- ------------------
(11) Pulp and Paper Week
(12) NAA and CPPA
(13) AF&PA
(14) AF&PA
(15) AF&PA
(12)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF SALES AND OTHER INCOME AND EXPENSES
Cost of sales for the first six months of 1997 was slightly lower when
compared to the same period last year. The absence of product costs from the
sale of Star Forms was almost completely offset by additional costs associated
with selling approximately 45,000 more tons of product in 1997 than 1996.
Selling and administrative expenses decreased 22 percent comparing the first
half of 1997 to the first half of 1996. The majority of this decrease was also
due to the sale of Star Forms. Interest expense decreased comparing the same
periods due to lower average debt balances in 1997 versus 1996. In the first six
months of 1996, the Company sold timberlands resulting in a $76.7 million
pre-tax gain. Other income and expenses in the first six months of 1997 were
relatively the same compared to the year ago period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities balance
at June 30, 1997, totaled $353.4 million compared to $430.7 million at December
31, 1996, and $333.9 million at June 30, 1996. Aside from cash flow from
operations and capital expenditures, significant cash outflows since December
31, 1996, included the repurchase of 1.4 million common shares for $57.2
million, a $19.6 million dividend payment to the minority shareholder of CNC,
and the redemption of $25 million of the Company's remaining outstanding LIBOR
preferred stock.
During the first six months of 1997, the Company's operations generated
$74.2 million of cash compared to $140.2 million of cash during the first six
months of 1996, a decrease of $66 million. This decrease was primarily the
result of a decrease in operating income of $199.7 million, offset in part by a
decrease in tax payments of $126 million. Tax payments were higher in 1996 due
to the higher level of income and the payment of the Company's 1995 tax
liability in the first quarter of 1996.
Cash flow from investing activities in the first six months of 1997 of
$43.6 million was $152.5 million higher than the first six months of last year.
Capital expenditures for the first six months of 1997 were $10.9 million higher
compared to the first six months of 1996. The Company expects total capital
expenditures for 1997 to approximate $120 to $130 million, slightly higher than
1996 capital expenditures of $107 million. In the first six months of 1997,
$87.1 million of net cash flow was from the maturity of marketable securities
versus a net investment of $191 million in the first six months of 1996. Also in
the first six months of 1996, the Company sold timberlands resulting in proceeds
of $117 million.
Cash flow used for financing activities was $44.9 million lower in the
first six months of 1997 compared to the year ago period. Cash dividends for the
first six months of 1997 and 1996 included payments to the minority shareholder
of CNC totaling $19.6 million and $29.4 million, respectively. Also included in
the first six months of 1996 were cash dividends of $4 million on the Company's
7% PRIDES Series B Convertible Preferred Stock (PRIDES). On January 9, 1997, the
Company converted all of the outstanding depositary shares of the PRIDES using
Bowater common stock at a conversion ratio of .82 of a common share for each
depositary share, resulting in the issuance of 4,012,765 common shares.
(13)
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On May 12, 1997, the Company redeemed for cash the remaining 500,000
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of $50
per share, plus accrued and unpaid dividends. The LIBOR stock was subject to
mandatory redemption in 1998.
On February 10, 1997, the Company completed the repurchase of
approximately 10 percent of its outstanding common stock as part of a previously
announced stock repurchase program. In total, the Company purchased 4 million
shares at a cost of $156 million. During the first quarter of 1997, the Company
repurchased 1.4 million common shares at a cost of $57.2 million. In the first
six months of 1996, 2.1 million shares were purchased at a cost of $81.4
million. The Company continues to consider both internal and external investment
opportunities as well as additional debt reduction and common stock repurchases.
ORGANIZATION
On July 23, 1997, the Company announced the reorganization of its U. S.
and Canadian forest and wood products operations into a new division to be
called the Forest Products Division. The consolidation of these assets will
enable the Company to explore new opportunities to improve returns on its forest
products assets. In addition, the Company announced the consolidation of its
newsprint and directory paper businesses into one division to be called the
Newsprint and Directory Division. The combination of these businesses will
enhance the Company's opportunities to better serve its groundwood based
customers while developing strategies for improving financial returns.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." The
implementation of this standard in the fourth quarter of 1997 will not impact
the Company's results of operations, but will result in a different calculation
of basic earnings per share versus primary. Fully diluted earnings per share
will remain the same.
(14)
BOWATER INCORPORATED AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 21, 1997, at the Company's Annual Meeting of Shareholders, the
following matters were submitted to a vote of the shareholders:
A resolution electing the following class of directors for a term of
three years: Richard Barth (36,112,227 votes in favor; 202,314 votes withheld);
James L. Pate (36,112,780 votes in favor; 201,701 votes withheld); and Charles
J. Howard (36,089,212 votes in favor; 225,329 votes withheld). The names of each
other director whose term of office as a director continued after the meeting
are: Francis J. Aguilar, H. David Aycock, Kenneth M. Curtis, Donald R. Melville,
Arnold M. Nemirow, and John A. Rolls.
A proposal to approve the Bowater Incorporated 1997-1999 Long-Term
Incentive Plan under which the Company has granted and will grant units to key
employees of the Company and its subsidiaries. The proposal was approved by a
vote of 34,697,416 votes in favor; 1,503,575 votes against; and 113,550
abstentions.
A proposal to approve the Bowater Incorporated 1997 Stock Option Plan
which provides for the awards to key employees, officers and nonemployee
directors of stock options, restricted or nonrestricted stock awards, and stock
appreciation rights. The proposal was approved by a vote of 33,653,141 votes in
favor; 2,562,362 votes against; and 99,038 abstentions.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K):
Exhibit No. Description
10.1 Employment Agreement, dated as of May 21, 1997, by and between
the Company and Wendy C. Shiba.
10.2 Change in Control Agreement, dated as of May 21, 1997, by and
between the Company and Wendy C. Shiba.
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
None
(15)
BOWATER INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOWATER INCORPORATED
By /s/ David G. Maffucci
David G. Maffucci
Senior Vice President and
Chief Financial Officer
By /s/ Michael F. Nocito
Michael F. Nocito
Vice President and Controller
Dated: August 14, 1997
(16)
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Employment Agreement, dated as of May 21, 1997, by and between
the Company and Wendy C. Shiba.
10.2 Change in Control Agreement, dated as of May 21, 1997, by and
between the Company and Wendy C. Shiba.
27.1 Financial Data Schedule (electronic filing only).