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 MARCH 31, 1998
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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
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(Exact name of registrant as specified in its charter)
Delaware 62-0721803
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(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
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(Address of principal executive offices) (Zip Code)
(864) 271-7733
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(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 May 6, 1998.
Class Outstanding at May 6, 1998
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Common Stock, $1.00 Par Value 40,562,019 Shares
BOWATER INCORPORATED
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I N D E X
Page
Number
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PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at March 31, 1998,
and December 31, 1997 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 1998, and
March 31, 1997 4
Consolidated Statement of Capital Accounts
for the Three Months Ended March 31, 1998 5
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1998, and
March 31, 1997 6
Notes to Consolidated Financial Statements 7-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
March 31, December 31,
1998 1997
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 339,647 $ 228,688
Marketable securities 90,687 176,834
Accounts receivable, net 194,047 190,594
Inventories 114,118 105,514
Other current assets (Note 2) 34,608 16,745
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Total current assets 773,107 718,375
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Timber and timberlands 382,964 394,039
Fixed assets, net 1,543,673 1,554,529
Other assets 79,261 78,855
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$2,779,005 $2,745,798
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LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt $ 1,796 $ 1,800
Accounts payable and accrued liabilities 174,537 168,327
Income taxes payable 22,110 15,861
Dividends payable 8,634 8,663
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Total current liabilities 207,077 194,651
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Long-term debt, net of current installments 756,658 757,100
Other long-term liabilities 166,975 169,510
Deferred income taxes 351,937 345,166
Minority interests in subsidiaries (Note 3) 118,175 125,206
Commitments and contingencies (Note 4) - -
Shareholders' equity:
Series C cumulative preferred stock 25,465 25,465
Common stock 45,120 44,928
Additional paid-in capital 570,268 563,096
Retained earnings 733,115 716,961
Accumulated other comprehensive income (15,439) (15,449)
Loan to ESOT (4,075) (4,536)
Treasury stock, at cost (176,271) (176,300)
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Total shareholders' equity 1,178,183 1,154,165
--------------- ----------------
$2,779,005 $2,745,798
=============== ================
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
------------------------------------
March 31, March 31,
1998 1997
--------------- ---------------
Sales $ 411,690 $ 379,705
Distribution costs 28,516 31,198
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Net sales 383,174 348,507
Cost of sales 274,394 280,514
Depreciation, amortization and cost of timber harvested 45,152 42,649
--------------- ---------------
Gross profit 63,628 25,344
Selling and administrative expense 17,294 15,221
--------------- ---------------
Operating income 46,334 10,123
Other expense / (income):
Interest income (6,534) (5,293)
Interest expense, net of capitalized interest 16,584 16,818
Gain on sale of timberlands (Note 5) (21,019) (11)
Other, net (Note 2) 4,424 275
--------------- ---------------
(6,545) 11,789
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Income/(loss) before income taxes and minority interests 52,879 (1,666)
Provision for income taxes (Note 6) 20,094 (617)
Minority interests in net income/(loss) of subsidiaries 7,998 (735)
--------------- ---------------
Net income/(loss) 24,787 (314)
Other comprehensive income/(loss), net of tax: (Note 7)
Foreign currency translation adjustments 10 (590)
--------------- ---------------
Comprehensive income/(loss) $ 24,797 $ (904)
=============== ===============
Basic earnings/(loss) per common share (Note 8): $ 0.60 $ (0.03)
=============== ===============
Average common shares outstanding 40,401 40,278
=============== ===============
Diluted earnings/(loss) per common share (Note 8): $ 0.59 $ (0.03)
=============== ===============
Average common and common equivalent shares outstanding 41,034 40,278
=============== ===============
See accompanying notes to consolidated financial statements.
4
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Series C
Cumulative Additional
Preferred Common Paid in Retained
Stock Stock Capital Earnings
---------------------------------------------------------
Balance at December 31, 1997 $ 25,465 $ 44,928 $ 563,096 $ 716,961
Net income - - - 24,787
Dividends on common stock ($.20 per share) - - - (8,078)
Dividends on Series C preferred stock
($2.10 per share) - - - (555)
Common stock issued for exercise of stock options - 192 5,110 -
Tax benefit on exercise of stock options - - 2,061 -
Reduction in loan to ESOT - - - -
Treasury stock used for employee benefit
and dividend reinvestment plans - - 1 -
Foreign currency translation - - - -
=========================================================
Balance at March 31, 1998 $ 25,465 $ 45,120 $ 570,268 $ 733,115
=========================================================
Accumulated
Other
Comprehensive Loan to Treasury
Income ESOT Stock
----------------------------------------------
Balance at December 31, 1997 $ (15,449) $ (4,536) $ (176,300)
Net income - - -
Dividends on common stock ($.20 per share) - - -
Dividends on Series C preferred stock
($2.10 per share) - - -
Common stock issued for exercise of stock options - - -
Tax benefit on exercise of stock options - - -
Reduction in loan to ESOT - 461 -
Treasury stock used for employee benefit
and dividend reinvestment plans - - 29
Foreign currency translation 10 - -
==============================================
Balance at March 31, 1998 $ (15,439) $ (4,075) $ (176,271)
==============================================
See accompanying notes to consolidated financial statements.
5
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Three Months Ended
------------------------------
March 31, March 31,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income/(loss) $ 24,787 $ (314)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 45,152 42,649
Deferred income taxes 3,686 (184)
Minority interests 7,998 (735)
Gain from sale of timberlands (Note 5) (21,019) (11)
Change in working capital:
Accounts receivable, net (3,453) 12,657
Inventories (8,604) 6,554
Accounts payable and accrued liabilities (Note 9) 8,489 (35,016)
Income taxes payable 9,908 (1,630)
Other, net 5,509 (967)
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Net cash from operating activities 72,453 23,003
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Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands (37,103) (23,572)
Disposition of fixed assets, timber and timberlands (Note 5) 30,946 857
Maturities/(investments) of marketable securities and option contracts, net (Note 2) 63,409 106,652
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Net cash from investing activities 57,252 83,937
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Cash flows from financing activities:
Cash dividends, including minority interests (Note 3) (24,048) (29,840)
Purchase of common stock (Note 10) - (57,244)
Payments of long-term debt (461) (443)
Stock options exercised 5,302 6,558
Other 461 440
------------ ------------
Net cash used for financing activities (18,746) (80,529)
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Net increase in cash and cash equivalents 110,959 26,411
Cash and cash equivalents at beginning of year 228,688 85,259
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Cash and cash equivalents at end of period $ 339,647 $ 111,670
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of capitalized interest $ (12,998) $ (12,711)
Income taxes $ (6,500) $ (1,197)
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, and 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 March 31, 1998, are not necessarily
indicative of the results to be expected for the full year.
2. During the first quarter of 1998, the Company purchased options on the
Canadian dollar at a cost of $22.7 million to hedge its pending acquisition
of Avenor Inc. On March 31, 1998, the Company adjusted the cost to fair
market value resulting in a pre-tax charge of $4.3 million, or $.07 per
diluted share after tax.
3. During the first quarter of 1998, the Board of Directors of Calhoun
Newsprint Company (CNC) declared a $31.4 million dividend. As a result,
$15.4 million was paid to the minority shareholder. In the first quarter of
1997, $19.6 million was paid to the minority shareholder.
4. 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.
During the first quarter of 1998, the Company entered into several
significant asset acquisition transactions. See "Pending Transactions" on
page 12 of this Form 10-Q for information concerning these transactions.
5. During the first quarter of 1998, the Company sold approximately 26,000
acres of non-strategic timberlands resulting in a pre-tax gain of $21
million, or $.16 per diluted share, after tax and
minority interest.
6. The effective tax rates for the first quarter of 1998 and 1997 were 38 and
37 percent, respectively.
7. In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement requires the disclosure of comprehensive income items (which
include net income and certain changes in shareholders' equity) in the
Consolidated Statement of Operations. These additional disclosures do not
have an impact on the Company's results of operations or financial
condition.
8. The calculations of basic and diluted earnings per share for the three
months ended March 31, 1998, are based on net income and include a
deduction of $.6 million for Series C preferred stock dividends. In 1997,
the calculations included a deduction of $1.0 million 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.
7
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. During the first quarter of 1997, the Company paid $19.9 million of the
$25.4 million accrued for an incentive compensation plan established in
1994. The remainder was paid in the second quarter of 1997.
10 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 November 1997, under a new stock repurchase program, 220,000 shares of
common stock were purchased at a cost of $9.6 million.
8
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
SUMMARY
-------
The Company reported 1998 first quarter earnings of $25 million, or $.59 per
diluted share. This compares to a net loss of $.3 million, or $.03 per diluted
share in the first quarter of 1997 and net income of $30 million, or $.72 per
diluted share in the fourth quarter of 1997. Included in net income for the
first quarter of 1998 was a gain on the sale of timberlands of $7 million after
tax and minority interest, or $.16 per diluted share and an after-tax charge of
$3 million, or $.07 per diluted share, relating to the market value adjustment
of a currency hedge associated with the Company's pending acquisition of Avenor
Inc. ("Avenor"). First quarter 1998 net sales were $383 million, compared to
$349 million for the first quarter of 1997 and $401 million for the fourth
quarter of 1997.
PRODUCT LINE INFORMATION:
(Unaudited, $ in thousands)
Three Months Ended
--------------------------------
March 31, March 31,
1998 1997
-------------- -----------------
Net sales:
Newsprint $ 183,450 $ 167,111
Coated groundwood
97,298 73,315
Directory paper
43,814 49,616
Market pulp
42,675 44,185
Uncoated groundwood specialties
9,061 11,520
Lumber and other wood products
35,392 33,958
Distribution costs
(28,516) (31,198)
============== =================
$ 383,174 $ 348,507
============== =================
Operating income $ 46,334 $ 10,123
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9
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
Three Months Ended March 31, 1998, versus March 31, 1997
--------------------------------------------------------
For the first quarter of 1998, the Company's operating income of $46 million
increased $36 million compared to the first quarter of 1997. Higher average
transaction prices for the Company's newsprint and coated paper products,
partially offset by lower market pulp prices and lower newsprint shipments,
caused operating income to increase.
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, and fluctuations in
exchange rates.
The information provided in the following product line discussions
concerning market and industry conditions was obtained from the following
sources: the Newspaper Association of America; the Canadian Pulp and Paper
Association; the American Forest & Paper Association; and the Media Industry
Newsletter and Random Lengths Yardstick publications. This information is
provided to enhance the reader's understanding of the Company's financial
results and the conditions under which these results were achieved.
Newsprint - The Company's newsprint average transaction price in the first
quarter of 1998 was 15 percent higher than the same period last year, while
shipments were 5 percent lower. The increase in the average quarter price was
mainly a result of higher U.S. consumption throughout 1997, which allowed the
Company to implement two price increases during 1997. The decrease in shipments
was primarily in the export market, which was negatively affected by the weak
Asian economy. Comparing the first quarter of 1998 to the first quarter of 1997,
total U.S. newsprint consumption and consumption of newsprint by U.S. daily
newspapers increased. Ad lineage for U.S. daily newspapers also increased. At
the end of the first quarter of 1998, U.S. daily newspapers' newsprint inventory
increased compared to the same time last year, while North American mill
inventories decreased. Many newsprint consumers increased inventory in the first
quarter of 1998, anticipating further increases in newsprint prices. In the
first quarter of 1998, the Company announced a $40 per metric ton domestic price
increase effective April 1, based on the favorable market conditions. This price
increase is currently being implemented.
Coated Groundwood - The Company's coated groundwood average transaction price in
the first quarter of 1998 was 26 percent higher than the first quarter of 1997
and 9 percent higher than the prior quarter. Favorable market conditions in 1997
allowed the Company to increase prices several times during that year. Tonnage
shipments for the first quarter of 1998 also improved, increasing 5 percent
compared to the first quarter of 1997. In the first quarter of 1998, strong
consumption and moderate inventory levels continued from the previous year. U.S.
coated groundwood shipments were slightly lower in the first quarter of 1998
compared to the same period last year, while magazine advertising pages
increased. U.S. coated groundwood mill inventory levels also improved,
decreasing significantly from the first quarter of 1997. In the first quarter of
1998, the Company was able to implement a price increase of up to $60 per ton
due to the favorable supply/demand balance.
Directory Paper - The Company's average transaction price for directory paper
decreased 5 percent in the first quarter of 1998 compared to the first quarter
of 1997, and was relatively unchanged from the fourth quarter of 1997. Shipments
were lower comparing the first quarter periods. In 1997, consumption in the
directory paper market decreased due to conservation measures, which caused
prices to fall. In the first quarter of 1998, although conditions generally
remained the same, prices in the spot market increased slightly. The Company's
shipments are based on contracts, and as a result, spot market price increases
may not affect the Company's selling prices until future periods.
Market Pulp - The Company's market pulp average transaction price for the first
quarter of 1998 decreased 4 percent compared to the first quarter of last year,
while it declined 16 percent compared to the fourth quarter of last year. The
Company's shipments were relatively the same comparing the first quarter of this
year to the same period last year,
10
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
but were significantly higher compared to the fourth quarter of 1997. In the
fourth quarter of 1997, the devaluation of Asian currencies negatively affected
pulp consumption and pricing in the export market. This trend began to reverse
in the first quarter of 1998 as NORSCAN (U.S., Canada, Finland, Norway and
Sweden producers) inventory levels of market pulp decreased in each of the first
three months of 1998 compared to year-end 1997 levels. Levels at the end of the
first quarter of 1998 were also significantly lower compared to the end of the
first quarter of 1997. NORSCAN shipments of market pulp decreased slightly in
the first quarter of 1998 compared to the year ago period. Several U.S.
producers have announced an increase in export prices of $50 per metric ton
effective June 1.
Lumber - The average transaction price for the Company's lumber products
decreased 10 percent in the first quarter of 1998 compared to the year ago
period, while the Company's shipment levels were approximately the same. Lumber
prices decreased in the first quarter of 1998 compared to the latter half of
1997, as supply continued to outpace demand. In 1997, U.S. lumber production
exceeded orders, even though U.S. consumption was at record levels. In 1998,
U.S. lumber consumption is expected to decline from the high levels of 1997 due
to lower housing starts and a decline in the repair and remodeling markets.
Cost of Sales and Other Income and Expenses
-------------------------------------------
Cost of sales decreased $6 million or 2 percent in the first quarter of 1998
compared to the first quarter of last year. This decrease was due to lower
shipments of pulp and paper products in the first quarter of 1998, partially
offset by slightly higher manufacturing costs due to the weather and repairs.
Comparing the same periods, selling and administrative expenses increased $2
million or 14 percent, primarily due to higher professional and consulting fees
incurred in connection with the analyses of various acquisition opportunities.
Interest expense for the first quarter of 1998 compared to the same period last
year was approximately the same, while interest income increased due to higher
average investment balances. In the first quarter of 1998, the Company sold
approximately 26,000 acres of non-strategic timberlands resulting in a pre-tax
gain of $21 million. Also in the first quarter of 1998, the Company purchased
options on the Canadian dollar at a cost of $23 million to hedge its pending
acquisition of Avenor. On March 31, 1998, the Company adjusted the cost of the
option contracts to fair market value, which resulted in a pre-tax charge of $4
million. This amount is included on the line item entitled "Other, net" in the
Consolidated Statement of Operations. The net book value of $19 million is
included on the line item entitled "Other current assets" in the Consolidated
Balance Sheet.
The Company's effective tax rate for the first quarter of 1998 was 38
percent versus 37 percent in the prior year first quarter. This increase was due
to higher state and foreign taxes.
Liquidity and Capital Resources
-------------------------------
The Company's cash, cash equivalents, and marketable securities balance on March
31, 1998, totaled $430 million compared to $406 million on December 31, 1997,
and $350 million on March 31, 1997. Aside from cash flow from operations and
capital expenditures, the Company had three other significant cash transactions
since December 31, 1997. These included: the sale of 26,000 acres of
non-strategic timberlands with proceeds of $31 million, the purchase of currency
options on the Canadian dollar for $23 million to hedge the Company's pending
acquisition of Avenor, and a $15 million dividend payment to the minority
shareholder of CNC.
Cash from Operating Activities:
During the first three months of 1998, the Company's operations generated $72
million of cash compared to $23 million of cash during the first three months of
1997, an increase of $49 million. This increase was primarily the result of an
increase in operating income of $36 million, a favorable change in working
capital (excluding taxes) of $12 million, and higher interest income of $2
million (due to higher average investment balances outstanding in 1998). These
increases were partially offset by higher taxes paid of $5 million due to the
higher level of income in the first quarter of 1998 versus the first quarter of
1997.
Cash from Investing Activities:
Cash flow from investing activities in the first three months of 1998 of $57
million was $27 million lower than the first three months of last year. Capital
expenditures for the first three months of
11
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
1998 were $14 million higher compared to the first three months of 1997, due
mainly to the modernization of the Calhoun, Tenn., newsprint facility. The
Company expects total capital expenditures for 1998 to approximate $250 million,
without regard to the pending acquisition of Avenor.
In the first three months of 1998, the Company sold 26,000 acres of
non-strategic timberlands resulting in proceeds of $31 million. The Company's
Forest Products Division periodically reviews timberland holdings and makes
decisions to sell certain non-strategic tracts.
In the first three months of 1998, $63 million of net cash flow was from the
maturity of marketable securities versus $107 million in the first three months
of 1997. Included in the 1998 amount is a cash outflow of $23 million for the
purchase of currency options on the Canadian dollar to hedge the Company's
pending acquisition of Avenor.
Cash from Financing Activities:
Cash flow used for financing activities was $62 million lower in the first three
months of 1998 compared to the year ago period. The majority of this decrease
was due to the repurchase of 1.4 million common shares at a cost of $57 million
in the first quarter of 1997. In the first quarter of 1998, no common shares
were repurchased under the Company's new stock repurchase program, which was
announced in November 1997. Also in the first quarter of 1998, a $15 million
dividend was paid to the minority shareholder of CNC, while $20 million was paid
in the same period last year.
Pending Transactions
--------------------
On March 9, 1998, the Company signed a definitive agreement by which it
will acquire through its subsidiaries all of the outstanding shares of Avenor
common stock for approximately C$35 per share (U.S.$24.67 per share as of March
9). The purchase price, including assumed debt, is approximately C$3.5 billion
(U.S.$2.5 billion as of March 9). The combination has been approved by the
Boards of Directors of both companies and is subject to the approval of the
shareholders of Avenor and appropriate regulatory authorities. In addition, the
issuance of the Company's common stock in the transaction is subject to approval
of the Company's shareholders. If such approval by the Company's shareholders is
not obtained (and certain other conditions have not occurred), the Company has
agreed to pay Avenor a termination fee of C$70 million. In certain other
circumstances if the Avenor Board of Directors withdraws its recommendation of
the transaction or an alternate proposal to acquire Avenor has been made by a
third party and the transaction does not close, Avenor would be obligated to pay
the Company C$70 million.
The transaction will be financed through a combination of cash, additional
debt and common stock. The maximum number of shares of Avenor common stock that
may be exchanged for cash may not exceed 60 percent (subject to adjustment for
dissenting shares) and could be as low as 50 percent. Conversely, the maximum
number of shares of Avenor common stock that can be exchanged for equity could
be as much as 50 percent, but not less than 40 percent. The Company anticipates
using its existing cash reserves and a new $1 billion credit facility to fund
the cash portion of the transaction. The Company intends to sell Avenor's
uncoated freesheet mill and pulp mill in Dryden, Ontario, and expects to use a
substantial portion of the proceeds to repay debt.
Avenor is an international forest products company that manufactures
newsprint, pulp, uncoated freesheet paper and wood products. In 1997, its net
sales were C$2.0 billion, and at December 31, 1997, its total assets were C$2.7
billion. If the acquisition is consummated, the Company will double its annual
newsprint and groundwood paper making capacity and become a major producer of
market pulp, making it the second largest newsprint producer in the world and
the third largest market pulp producer in North America.
In January 1998, the company announced that it was in negotiations to
acquire a significant interest in the Daebul Newsprint Mill owned by Halla Pulp
& Paper Co. Ltd. ("Halla"), which is part of the Halla Group of Seoul, Korea.
The Korean mill, which is located on the southwest coast of South Korea, started
up in late 1996 and has an annual production capacity of approximately 250,000
metric tonnes of recycled newsprint for the Korean and other Asian markets. In
April 1998, the Company signed an agreement with Halla to acquire the Daebul
Newsprint Mill. Completion of the transaction is subject to the satisfaction of
several conditions, including the elimination of the mill's indebtedness and
approval by the shareholders of Halla and by appropriate Korean regulatory
12
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
authorities. The Company anticipates that the transaction will be completed
within two months and currently expects that the final purchase price will be in
the range of $205 million to $210 million.
Also in January 1998, the company announced its plan to invest
approximately $220 million to modernize its East Millinocket, Maine, pulp and
paper mill. The plan encompasses a new thermomechanical pulp mill facility,
modernization of two paper machines, which produce newsprint and directory
paper, and other improvements to the site's energy and electrical systems.
Although the project will not increase the company's paper making capacity, it
is expected to reduce operating costs and improve productivity. Construction is
anticipated to begin in early 1999 and take up to two years to complete. The
Company also announced its intention to seek a buyer for its Millinocket, Maine,
paper mill, which no longer meets the Company's long-term objectives. This
facility includes four paper machines and related assets. During the course of
marketing the Millinocket properties, Bowater received unsolicited expressions
of interest in purchasing all of Bowater's properties located in the State of
Maine (which includes the Millinocket mill, a mill located in East Millinocket,
a hydroelectric facility, a sawmill and two million acres of timberlands).
Bowater does not intend to enter into discussions with respect to these
inquiries during the pendency of the Avenor transaction.
Credit Facility
---------------
In March 1998, the Company received a commitment letter from the Chase Manhattan
Bank to provide and syndicate a new $1 billion credit facility. This new
facility will replace the Company's current $150 million credit facility and
will have two separate components; a $650 million, 364 day facility and a $350
million, five year facility. Borrowings under the facilities will incur interest
based, at the option of the Company, on specified market interest rates plus a
margin tied to the credit rating of the Company's long-term debt. The new
facility will be subject to customary terms and is expected to close in May
1998.
Year 2000 Compliance
--------------------
Since 1990, the Company has reengineered its major internally developed software
programs. During this effort, the Company examined potential problems arising
from the inability of certain application software programs to recognize the
year 2000. A formal review of all internally developed software was completed in
1997. No major problems were encountered.
In addition, all major third-party licensed application software programs
have been reviewed and are either compliant or have released a compliant version
to which the Company will migrate in 1998. The costs associated with these
projects are currently expected to be less than $1 million. The Company
continues to review all other manufacturing equipment systems, as well as third
parties with whom it contracts business. Although the results of these reviews
are not yet complete, the Company does not expect the costs associated with
these projects to have a material adverse effect on its results of operations or
financial condition.
Accounting Standards
--------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This standard requires a public company
to disclose financial information about its reportable operating segments.
Reportable operating segments are to be determined on a basis consistent with
that used for internal management reporting. The company will adopt this
standard for the year ended 1998. It will not have an impact on the company's
results of operations or financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." This standard revises the
required annual disclosures for pensions and other postretirement benefits. The
Company will adopt this standard for the year ended 1998. It will not have an
impact on the Company's results of operations or financial condition.
13
BOWATER INCORPORATED AND SUBSIDIARIES
PART II
-------
OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K):
Exhibit No. Description
----------- -----------
2.1 Amended and Restated Arrangement Agreement dated as
of March 9, 1998, by and
between the Company and Avenor Inc.
27.1 Financial Data Schedule (electronic filing only).
(b) The Company filed with the Securities and Exchange Commission a
Current Report on Form 8-K as follows:
On March 19, 1998, A Current Report on Form 8-K, reporting
under Item 5 (Other Events) the issuance of a press release
announcing the signing of the definitive arrangement agreement
between Bowater Incorporated and Avenor Inc.
14
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: May 15, 1998
15
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
2.1 Amended and Restated Arrangement Agreement dated as of March 9, 1998,
by and between the Company and Avenor Inc.
27.1 Financial Data Schedule (electronic filing only).