<PAGE>
P R O S P E C T U S
3,000,000 DEPOSITARY SHARES
[company logo goes here, see appendix]
EACH REPRESENTING A ONE-FOURTH INTEREST IN A SHARE OF
8.40% SERIES C CUMULATIVE PREFERRED STOCK
PAR VALUE $1 PER SHARE
Each of the 3,000,000 Depositary Shares offered hereby (the Depositary
Shares) represents a one-fourth interest in a share of 8.40% Series C Cumulative
Preferred Stock, par value $1 per share (Series C Preferred Stock), of Bowater
Incorporated (the Company) to be deposited with Trust Company Bank, as the
Depositary, and entitles its holder to that proportion of the rights and
preferences of the Series C Preferred Stock (including dividend, voting, and
liquidation rights) represented thereby. The proportionate dividend per annum
and liquidation preference of each Depositary Share are $2.10 and $25,
respectively. The Depositary Shares are evidenced by the Depositary Receipts (as
defined herein). See Description of Depositary Shares.
Dividends on the Series C Preferred Stock are cumulative from the date of
initial issuance and are payable quarterly on January 15, April 15, July 15 and
October 15 of each year, commencing April 15, 1994. See Description of Series C
Preferred Stock -- Dividends.
The Series C Preferred Stock will not be redeemable prior to February 8,
1999. On or after that date, the Series C Preferred Stock will be redeemable at
the option of the Company, in whole or in part, at $100 per share (equivalent to
$25 per Depositary Share) plus accrued and unpaid dividends (whether or not
declared) to the redemption date. The Series C Preferred Stock has no stated
maturity and will not be subject to any sinking fund or mandatory redemption and
will not be convertible into any other securities of the Company. See
Description of Series C Preferred Stock -- Optional Redemption. See Certain
Investment Considerations for certain considerations relevant to the Depositary
Shares offered hereby.
The offering of Series C Preferred Stock is being conducted at
approximately the same time as an offering of $101,050,000 of 7% PRIDES, Series
B Convertible Preferred Stock, par value $1 per share (the Series B Convertible
Preferred Stock). The closings of the two offerings are not contingent upon each
other. The Series C Preferred Stock will rank, as to payment of dividends and
distribution of assets upon liquidation, PARI PASSU with the Company's LIBOR
Preferred Stock, Series A, and the Series B Convertible Preferred Stock. The
Depositary Shares have been approved for listing on the New York Stock Exchange
(NYSE). The Series C Preferred Stock will not be so listed, and the Company does
not expect that there will be any trading market for the Series C Preferred
Stock except as represented by the Depositary Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) COMPANY (1)(3)
<S> <C> <C> <C>
Per Depositary Share.................................. $25.00 $.7875 $24.2125
Total (4)............................................. $75,000,000 $2,362,500 $72,637,500
</TABLE>
(1) Plus one-fourth of accrued dividends, if any, on the shares of Series C
Preferred Stock from the date of initial issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See Underwriting.
(3) Before deducting expenses payable by the Company estimated to be
approximately $262,000.
(4) The Company has granted to the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to an additional 400,000
Depositary Shares at the price to public, less the underwriting discount,
solely to cover over-allotments, if any. If such option is exercised in
full, the Price to Public, Underwriting Discount, and Proceeds to Company
will be $85,000,000, $2,677,500 and $82,322,500, respectively. See
Underwriting.
The Depositary Shares are offered by the Underwriters, as specified herein,
subject to prior sale when, as and if delivered to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Depositary Receipts evidencing the Depositary Shares
offered hereby will be made in New York, New York, on or about February 8, 1994.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
KIDDER, PEABODY & CO.
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY SHEARSON INC.
This Prospectus is printed on recycled paper manufactured by the Company.
The date of this Prospectus is February 1, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEPOSITARY
SHARES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Bowater Incorporated (the Company) is currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the 1934 Act), and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the Commission).
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained upon
written request addressed to the Securities and Exchange Commission, Public
Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, such reports, proxy statements and
other information can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005 and the Pacific Stock
Exchange Incorporated, 301 Pine Street, San Francisco, California 94104.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits, the Registration Statement)
under the Securities Act of 1933, as amended (the Securities Act), in connection
with this offering. In accordance with the relevant rules and regulations of the
Commission, this Prospectus, which forms a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement.
Statements contained herein concerning provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference. For further information, reference is hereby made to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference into this Prospectus, and made a
part hereof, the following documents previously filed with the Commission
pursuant to the 1934 Act (Commission File No. 1-8712):
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
2. The Company's Amendment to Annual Report on Form 8, dated April 12,
1993.
3. The Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended April 3, 1993, July 3, 1993, and October 2, 1993.
4. The Company's Current Report on Form 8-K, dated January 18, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of the offering of the Depositary Shares made hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the respective dates of filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner of Depositary Shares, to whom a copy of this
Prospectus has been delivered, upon written or oral request, a copy of all the
documents referred to above that have been or will be incorporated in this
Prospectus by reference, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be directed to Ms. SuAnne B. Aune,
Director -- Investor Relations, Bowater Incorporated, 55 East Camperdown Way,
Post Office Box 1028, Greenville, South Carolina 29602 (telephone (803)
271-7733).
2
<PAGE>
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WITH RESPECT TO THE DEPOSITARY SHARES
WILL NOT BE EXERCISED AND THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN
CONNECTION WITH THE OFFERING OF THE SERIES B CONVERTIBLE PREFERRED STOCK TO
ACQUIRE UP TO 148,404 ADDITIONAL SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
WILL NOT BE EXERCISED. ALL TONNAGE INFORMATION IN THIS PROSPECTUS IS BASED ON
THE SHORT TON UNIT OF WEIGHT (EQUIVALENT TO 2,000 POUNDS). EXCEPT AS OTHERWISE
INDICATED, ALL REFERENCES TO THE COMPANY INCLUDE REFERENCES TO THE COMPANY AND
ITS CONSOLIDATED SUBSIDIARIES. FOR THE DEFINITION OF CERTAIN TECHNICAL TERMS
USED HEREIN, SEE TECHNICAL GLOSSARY.
THE COMPANY
The Company is a major producer of world-traded wood fiber products,
including virgin and recycled content printing papers. The Company is:
(bullet) the largest United States and third largest North American manufacturer
of newsprint, having produced approximately 1.6 million tons of
newsprint in 1992,
(bullet) a major producer of coated and uncoated groundwood specialty paper for
magazines, catalogs, printed promotional pieces, directories and other
similar uses, having produced approximately 642,000 tons of coated and
uncoated groundwood specialty paper in 1992,
(bullet) a leading converter of paper into communication papers used in
computers and other business applications, having converted paper
into approximately 204,000 tons of business forms in 1992, and
(bullet) a supplier of market pulp and lumber products, having produced
approximately 331,000 tons of market pulp and 191.6 million board feet
of lumber in 1992.
Approximately 82 percent of the Company's 1992 sales were made in the
United States, with the balance made in export markets. Generally the Company
markets and distributes its products in the United States through its own sales
force and in the export markets through independent agents.
The Company's objective is to become the leading worldwide supplier of a
broad range of groundwood based paper products. To achieve this objective, the
Company focuses on product quality, customer service and costs. The Company
strives to remain a low cost producer and distributor in each of its product
categories and believes that its abundant fiber base, stable and well-trained
work force and strategic mill locations support this goal. The Company believes
that its attention to quality and commitment to customer service and
satisfaction have made it a preferred supplier in many of its market segments.
Recently, the Company has sought to enhance its margins by increasing the
percentage of higher value-added products in its product base and by introducing
new products. The Company has redirected some of its newsprint manufacturing
capacity to the manufacture of directory and other uncoated groundwood specialty
papers, which typically generate higher margins than newsprint. The Company also
manufactures a significant portion of the uncoated groundwood specialty paper
used in its communication papers converting business.
The Company is a leader in utilizing post-consumer wastepaper in the
manufacture of certain of its products. Due to new legislation and consumer
preference, the demand for newsprint and uncoated groundwood specialty paper
containing recycled fiber has increased significantly in recent years. The
Company believes that its ability to produce paper with recycled content has
become an important competitive factor.
The Company operates four paper mills and two sawmills in the United States
and one paper mill and one sawmill in Canada. These operations are fully
integrated and are supported by approximately 4.0 million acres of timberlands
(almost all of which are owned by the Company). The Company has invested
approximately $1.1 billion in its facilities since 1988, principally to improve
their efficiency and to add production and recycling capacity. As of June 1993,
five of the Company's nine newsprint machines were ranked among the top twelve
most efficient in the industry. As a result, the Company believes it is well
positioned to take advantage of improvements in its primary markets when and if
they occur.
The Company was incorporated in Delaware in 1964. The Company's principal
executive offices are located at 55 East Camperdown Way, Greenville, South
Carolina 29601 (telephone (803) 271-7733).
3
<PAGE>
RECENT DEVELOPMENTS
On January 18, 1994, the Company reported net income for the fourth quarter
of 1993 of $4.9 million, or $.12 per share, on net sales (meaning sales net of
distribution costs) of $340.4 million. Included in the quarter's results were a
pre-tax gain of $48.9 million ($30.6 million, or $.84 per share, after tax) on
the sale of approximately 68,000 acres of non-strategic real property holdings
and a charge of $10.0 million before tax ($6.3 million, or $.17 per share, after
tax) for costs related to companywide personnel reductions. This compares to a
net loss for the fourth quarter of 1992 of $20.9 million, or $.59 per share, on
net sales of $363.2 million. The Company's operating loss for the fourth quarter
of 1993 was $19.8 million, as compared with an operating loss of $12.5 million
for the fourth quarter of 1992.
For the twelve months ended December 31, 1993, the Company incurred a net
loss of $64.5 million, or $1.84 per share, on net sales of $1.35 billion. This
compares to a loss before accounting changes of $92.9 million, or $2.64 per
share, on net sales of $1.36 billion for 1992. The Company's operating loss was
$63.3 million for the twelve months ended December 31, 1993 (which included
$20.0 million of restructuring charges), as compared with an operating loss of
$74.1 million in 1992 (which included $5.0 million of restructuring charges).
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Depositary Shares,
after deducting expenses estimated to be approximately $262,000, will be
$72,375,500 ($82,060,500 if the Underwriters' over-allotment option is exercised
in full). The offering of the Depositary Shares is being conducted at
approximately the same time as an offering of $101,050,000 of the Company's
Series B Convertible Preferred Stock, from which the Company estimates the net
proceeds to the Company to be $97,895,000. The closings of the two offerings are
not contingent upon each other.
The Company intends to use the net proceeds from the two offerings to fund
capital expenditures and other costs in the following order of priority: (i)
approximately $105 million for the construction of a recovery boiler at its
Calhoun, Tennessee, mill, expected to be completed and funded in the second
quarter of 1994; (ii) approximately $32 million to fund capital expenditures and
other costs incurred in connection with the previously announced closure of
certain obsolete facilities at its Millinocket, Maine, facility; and (iii)
approximately $10 million to fund the costs associated with its recently
announced reduction in personnel. Any remaining net proceeds will be used for
general corporate purposes. Pending these applications, the Company plans to
invest the proceeds from the offerings in short-term, investment-grade
securities.
If the sale of Series B Convertible Preferred Stock does not occur, or if
the proceeds from this offering of Depositary Shares and the anticipated sale of
Series B Convertible Preferred Stock are inadequate to fund the above items in
full, then the Company plans to use its other sources of available liquidity to
fund the capital expenditures and costs set forth above. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
4
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE
PURCHASING THE DEPOSITARY SHARES OFFERED HEREBY.
INDUSTRY CONDITIONS AND COMPETITION
The Company's operating results reflect the general cyclical pattern of the
pulp and paper industry. Most of the Company's products are world-traded
commodity products. Consequently, the Company, like other suppliers to this
market, has little direct influence over the timing and extent of price changes.
Product pricing is significantly affected by the relationship between industry
supply and demand, with the former influenced primarily by fluctuations in
available manufacturing capacity and the latter by the health of the economy in
general and the strength of print media in particular. See Business.
The markets for the Company's products are highly competitive, with a
number of major companies competing in each market. Certain of the Company's
competitors may have greater financial resources than the Company. In addition,
some of the Company's competitors are currently lower cost producers in some of
the businesses in which the Company operates, including newsprint. The Company
competes with Canadian, European and United States producers in most of its
product lines. Variations in the exchange rate between the United States dollar
and other currencies, particularly those of Canada, Sweden, and Finland,
significantly affect the relative competitive position of the Company as
compared to many of its competitors. See Business -- Competition.
Trends in electronic data transmission and storage could adversely impact
traditional print media, including products of the Company's customers; however,
neither the timing nor extent of these trends can be predicted with certainty.
Industry reports indicate that the Company's newspaper publishing customers in
North America have experienced some loss in market share to other forms of media
and advertising, such as direct mailings and newspaper inserts (both of which
are end uses for other selected Company products) and cable television. These
customers are also facing a decline in newspaper readership, circulation and
advertising lineage. The Company does not believe that this is the case in most
overseas markets.
RECENT OPERATING RESULTS
The Company reported a net loss of $82 million in 1992, its first net loss
since becoming an independent, publicly traded company in 1984. This loss
followed record and near record net income years in 1988 and 1989 of $164
million and $145 million, respectively. Losses have continued in 1993 with the
Company reporting a net loss for the first nine months of $69 million. In
response to these results, the Company has adopted an ongoing program to
maximize cash flow that involves: (i) improving the manner in which the Company
markets and sells its products; (ii) increasing operating efficiencies and
productivity to reduce costs; (iii) eliminating certain high-cost operations and
reducing personnel; (iv) reducing non-essential capital spending; (v) selling
non-strategic assets; and (vi) reducing the Company's Common Stock dividend by
50 percent. See Business and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company's financial condition and results of operations will continue
to be sensitive to prevailing economic conditions and other factors beyond the
Company's control, such as the level of pricing, demand for its products,
interest rates, and currency exchange rates.
INDEBTEDNESS; LIMITATIONS ON ABILITY TO DECLARE DIVIDENDS
At October 2, 1993, the Company had approximately $1.1 billion of long-term
debt outstanding. The Company could, subject to compliance with the covenants
contained in its debt instruments, incur other indebtedness in the future.
For the nine-month period ended on October 2, 1993, the Company's earnings
before interest, taxes, depreciation and amortization (EBITDA) were $78.3
million. For the same period, the Company's interest expense, net of capitalized
interest, was $73.6 million and dividend payments on its LIBOR Preferred Stock,
Series A, were $1.7 million. If the Depositary Shares and Series B Convertible
Preferred Stock had been outstanding, an additional $10.0 million in dividends
would have accrued during that period. See Capitalization and Selected Financial
and Operating Data. In addition, the Company could incur interest on its future
borrowings, if any.
The Company's ability to pay dividends on any of its Preferred Stock,
including the shares of Series C Preferred Stock, and on its Common Stock will
depend on its maintaining adequate net worth and compliance with the required
ratio of total debt to total capital as defined in and required by the Company's
current credit agreement (the Credit Agreement). The Credit Agreement requires
the Company to maintain a minimum net worth (generally defined therein as common
shareholders' equity plus any outstanding Preferred Stock) of $750 million. In
addition, the Credit Agreement imposes a maximum 60
5
<PAGE>
percent ratio of total debt to total capital (defined therein as total debt plus
net worth). At October 2, 1993, the net worth of the Company and the ratio of
total debt to total capital were $806.6 million and 58 percent, respectively.
The Company's net worth and the ratio of total debt to total capital will
improve as a result of the sale of the Depositary Shares and, if it occurs, the
sale of the Series B Convertible Preferred Stock.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources.
LIQUIDITY
Since becoming an independent, publicly traded company in 1984, the Company
has relied upon both internal and external sources of funds. Beginning in 1990,
however, deteriorating economic conditions in the Company's major markets have
adversely affected operating cash flows. These conditions, when combined with
the costs associated with the acquisition of Great Northern Paper, Inc. (GNP),
at year-end 1991, have prompted the Company to place more emphasis upon external
sources of funds for its operating, financial and capital requirements.
The Company's Credit Agreement, under which no amounts were borrowed as of
December 31, 1993, expires in December 1995 and is used to meet working capital
requirements. The Company's ability to borrow under the Credit Agreement is
dependent upon compliance with the covenants therein. One of these covenants
requires a 12-month ratio of EBITDA to interest expense of not less than 1.0.
The Company's 12-month ratio of EBITDA to interest expense was approximately 1.0
for the year ended December 31, 1993. The Company has entered into an amendment
to the Credit Agreement that waives compliance with this covenant to, but not
including, December 31, 1994, at which time the covenant will be reinstated. The
Company's ability to comply with the interest coverage covenant when reinstated
on December 31, 1994, will substantially depend upon the Company's ability to
maintain approximately the same level of EBITDA the Company achieved through the
first nine months of 1993. There are no assurances that the Company will be able
to maintain or enhance such levels of EBITDA or that the Company will be able to
comply with the covenants contained in the Credit Agreement in the future. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
In anticipation of raising additional equity capital through the sale of
the Depositary Shares and the Series B Convertible Preferred Stock being offered
at approximately the same time, the Company determined that it would not need
the full $250 million credit line currently provided by the Credit Agreement.
Therefore, at the Company's request, the Credit Agreement amendment further
provides that such credit line will automatically be reduced from $250 to $200
million on March 31, 1994, if the Company shall have received by that time at
least $150 million of net cash proceeds from the issuance by the Company of
capital stock.
ENVIRONMENTAL REGULATION
The Company and its operations are subject to a wide range of general and
industry-specific environmental laws and regulations relating to, among other
matters, air emissions, wastewater discharges, waste management and landfill
sites. Compliance with these laws and regulations is an important factor in the
Company's business. The Company will continue to incur capital and operating
expenditures to maintain compliance with applicable environmental laws and to
meet new regulatory requirements, including proposed regulations announced on
November 1, 1993, by the United States Environmental Protection Agency (the
EPA). The regulations, if adopted as currently proposed, will require compliance
by 1998 and incurrence by the Company of an estimated $150 million in capital
expenditures through 1998. The ultimate financial impact of the proposed
regulations on the Company will depend upon the nature of the final regulations,
the timing of required implementation, the cost of available technology, the
development of new technology, and the determination by the Company as to
whether to maintain certain production levels or operate certain equipment.
Management believes that the Company is in substantial compliance with all
current regulations governing air emissions, wastewater discharges, waste
management and landfill sites. Expenditures to comply with proposed and future
laws and regulations could have an adverse effect on the Company's business and
financial condition.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Environmental Matters and -- Legal Proceedings.
6
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization at October 2,
1993, on an historical basis and as adjusted to give effect to (i) the sale of
the Depositary Shares and (ii) the sale of the Series B Convertible Preferred
Stock as if these sales had occurred on such date. See Use of Proceeds.
<TABLE>
<CAPTION>
OCTOBER 2, 1993
ACTUAL AS ADJUSTED
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Total debt, including current installments...................................................... $1,133,136 $ 1,133,136
Deferred income taxes........................................................................... 269,482 269,482
Minority interests in subsidiaries.............................................................. 146,960 146,960
LIBOR Preferred Stock, Series A, par value $1 per share, 1,500,000 shares outstanding,
$75,000,000 aggregate liquidation value....................................................... 74,341 74,341
Shareholders' equity:
8.40% Series C Cumulative Preferred Stock, par value $1 per share, 750,000 shares outstanding,
$75,000,000 aggregate liquidation value offered hereby........................................ -- 72,376
7% PRIDES, Series B Convertible Preferred Stock, par value $1 per share, 1,075,000 shares
outstanding, $101,050,000 aggregate liquidation value (1)..................................... -- 97,895
Common Stock, par value $1 per share, 36,908,172 shares issued (2)............................ 36,908 36,908
Additional paid-in capital.................................................................... 332,553 332,553
Retained earnings............................................................................. 390,116 390,116
Equity adjustment from foreign currency translation........................................... (1,614) (1,614)
Loan to ESOT.................................................................................. (11,648) (11,648)
Treasury stock, at cost....................................................................... (14,054) (14,054)
Total shareholders' equity................................................................. 732,261 902,532
Total capitalization.................................................................. $2,356,180 $ 2,526,451
</TABLE>
(1) The Series B Convertible Preferred Stock has not yet been issued. Issuance
is expected to occur at approximately the same time as the issuance of
shares of Series C Preferred Stock, but the offering of Depositary Shares
and the offering of Series B Convertible Preferred Stock are not contingent
on each other. Any issuance of the Series B Convertible Preferred Stock will
be subject to certain closing conditions and there can be no assurance that
the Series B Convertible Preferred Stock will be issued, if at all, at the
time, in the amount or on the terms shown.
(2) Excludes shares reserved for issuance upon the exercise of options.
7
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SELECTED FINANCIAL AND OPERATING DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended December 31, 1992, are derived from
the Company's consolidated financial statements, which have been audited by KPMG
Peat Marwick, independent certified public accountants. The Company's
consolidated financial statements for each of the years in the three-year period
ended December 31, 1992, and the report thereon are incorporated by reference
into this Prospectus. The unaudited selected financial data presented below for
the nine-month periods ended October 2, 1993, and September 26, 1992, and as of
October 2, 1993, and September 26, 1992, are derived from the Company's
unaudited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting only of normal, recurring adjustments)
necessary to state fairly the information included therein in accordance with
generally accepted accounting principles. The Company's unaudited consolidated
financial statements as of October 2, 1993, and for the nine-month periods ended
October 2, 1993, and September 26, 1992, are incorporated by reference into this
Prospectus. The results of operations for the nine-month period ended October 2,
1993, are not necessarily indicative of the results to be expected for the full
year.
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 26, YEAR ENDED DECEMBER 31,
1993 (1) 1992 (1) 1992 (1) 1991 (1) 1990 1989
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Sales:
Pulp, paper and related products
Newsprint............................ $ 459.5 $ 479.4 $ 662.2 $ 601.4 $ 617.2 $ 645.3
Directory and uncoated specialties... 154.8 92.3 124.7 -- -- --
Coated paper......................... 236.3 217.7 296.1 259.9 279.0 279.2
Pulp................................. 70.8 100.2 136.4 138.0 170.7 182.6
Lumber, stumpage and other products.. 72.0 57.6 79.5 34.3 32.6 32.7
Total pulp, paper and related
products.......................... 993.4 947.2 1,298.9 1,033.6 1,099.5 1,139.8
Communication papers................... 145.9 155.2 207.5 254.9 280.9 310.2
Eliminations........................... (17.5) (7.4) (12.5) -- -- --
Total sales....................... $1,121.8 $ 1,095.0 $1,493.9 $1,288.5 $1,380.4 $1,450.0
Operating income (loss):
Pulp, paper and related products....... $ (20.4)(2) $ (38.9) $ (46.1) $ 108.4 $ 183.0 $ 284.6
Communication papers................... (7.0) (2.3) (2.3) 14.4 11.4 17.5
Corporate expenses..................... (16.1) (20.4)(3) (25.7)(3) (19.1) (19.5) (21.6)
Total operating income (loss)........ $ (43.5) $ (61.6) $ (74.1) $ 103.7 $ 174.9 $ 280.5
Interest expense, net of capitalized
interest............................... $ 73.6 $ 55.0 $ 78.2 $ 42.0 $ 41.3 $ 22.3
Provision for income taxes............... (37.5) (49.5) (63.6) 25.4 52.3 93.9
Net income (loss)........................ (69.4) (61.1) (82.0) 45.6 78.4 144.6
Fully diluted earnings (loss) per
share.................................. $ (1.96) $ (1.75) $ (2.34) $ 1.15 $ 2.05 $ 3.86
Ratio of earnings to combined fixed
charges and preferred dividends (4).... N/M N/M N/M 2.0x 3.1x 4.9x
BALANCE SHEET DATA:
Working capital.......................... $ 153.2 $ (41.5)(5) $ 193.3 $ 103.7 $ 59.7 $ 111.8
Timber and timberlands................... 441.6 437.4 432.6 414.1 297.9 285.7
Total assets............................. 2,747.5 2,702.9 2,881.6 2,780.0 2,297.9 2,284.2
Total debt............................... 1,133.1 933.9 1,134.3 864.5 498.2 532.4
LIBOR Preferred Stock, Series A.......... 74.3 74.2 74.3 74.2 74.1 74.0
Common shareholders' equity.............. 732.3 850.5 818.0 942.6 935.5 907.1
<CAPTION>
1988
<S> <C>
INCOME STATEMENT DATA:
Sales:
Pulp, paper and related products
Newsprint............................ $ 671.3
Directory and uncoated specialties... --
Coated paper......................... 269.7
Pulp................................. 153.2
Lumber, stumpage and other products.. 37.2
Total pulp, paper and related
products.......................... 1,131.4
Communication papers................... 279.0
Eliminations........................... --
Total sales....................... $1,410.4
Operating income (loss):
Pulp, paper and related products....... $ 345.0
Communication papers................... 9.7
Corporate expenses..................... (20.6)
Total operating income (loss)........ $ 334.1
Interest expense, net of capitalized
interest............................... $ 32.8
Provision for income taxes............... 110.1
Net income (loss)........................ 164.3
Fully diluted earnings (loss) per
share.................................. $ 4.37
Ratio of earnings to combined fixed
charges and preferred dividends (4).... 7.0x
BALANCE SHEET DATA:
Working capital.......................... $ 68.1
Timber and timberlands................... 273.5
Total assets............................. 1,880.5
Total debt............................... 293.2
LIBOR Preferred Stock, Series A.......... 73.9
Common shareholders' equity.............. 826.9
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 2, SEPTEMBER 26, YEAR ENDED DECEMBER 31,
1993 (1) 1992 (1) 1992 (1) 1991 (1) 1990 1989
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OTHER DATA:
Depreciation, amortization and cost
of timber harvested.................... $ 121.8 $ 118.4 $ 161.9 $ 132.0 $ 117.5 $ 106.7
Cash flow from operations................ (43.0)(6) 78.1(6) 109.5(6) 156.6 238.4 327.3
Capital expenditures, including
timberlands............................ 88.0 104.9(7) 156.0(7) 465.1(7) 214.1 423.4
Common shareholders' equity per share.... $ 20.12 $ 23.50 $ 22.55 $ 26.21 $ 26.24 $ 25.37
Cash dividends declared per share of
Common Stock........................... $ .45 $ .90 $ 1.20 $ 1.20 $ 1.20 $ 1.14
Shipments (thousands of short tons):
Newsprint.............................. 1,073 1,190 1,631 1,244 1,266 1,278
Directory and uncoated specialties..... 252 142 191 -- -- --
Coated paper........................... 339 328 447 346 352 343
Pulp................................... 216 233 318 317 300 261
<CAPTION>
1988
<S> <C>
OTHER DATA:
Depreciation, amortization and cost
of timber harvested.................... $ 98.0
Cash flow from operations................ 324.3
Capital expenditures, including
timberlands............................ 214.3
Common shareholders' equity per share.... $ 23.07
Cash dividends declared per share of
Common Stock........................... $ .97
Shipments (thousands of short tons):
Newsprint.............................. 1,233
Directory and uncoated specialties..... --
Coated paper........................... 337
Pulp................................... 250
</TABLE>
(1) Income statement and cash flow data include the results of GNP for the 1993
and 1992 periods only. Balance sheet data at December 31, 1992, December 31,
1991, October 2, 1993, and September 26, 1992, include the accounts of GNP.
(2) Includes $10.0 million pre-tax restructuring charge for the Millinocket,
Maine, mill.
(3) Includes $5.0 million pre-tax restructuring charge for relocation of the
Company's corporate office.
(4) In computing the ratio of earnings to combined fixed charges and preferred
dividends, earnings include income before income taxes, minority interests,
cumulative effect of changes in accounting principles and extraordinary
charges plus fixed charges, other than capitalized interest and preferred
stock dividend requirements, plus amortization of capitalized interest.
Fixed charges include gross interest expense, amortization of deferred
financing expenses, preferred stock dividend requirements and an amount
equivalent to interest included in rental charges. Due to the losses
incurred for the nine month periods ended October 2, 1993, and September 26,
1992, and for the 1992 fiscal year, earnings were deficient by $117.0,
$135.8 and $175.7 million, respectively, to cover fixed charges.
(5) During this period, the Company classified $150.0 million of commercial
paper and other short-term borrowings as current liabilities under the terms
of a previous credit agreement. In prior periods, such indebtedness was
classified as long-term debt.
(6) In the third quarter of 1992, the Company sold $74.0 million of accounts
receivable pursuant to an asset securitization program. During the first
quarter of 1993, the Company discontinued selling receivables under this
program.
(7) $305.5 million was incurred in 1991 for the acquisition of 80 percent of the
stock of GNP and $16.5 million was incurred in 1992 in connection with the
acquisition of the remaining 20 percent of the stock of GNP (of which $9.8
million was incurred in the first nine months of 1992).
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- NINE MONTHS ENDED OCTOBER 2, 1993, AS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 26, 1992
For the first nine months of 1993, the Company incurred a net loss of $69.4
million, or $1.96 per share, on sales of $1.12 billion. Included in 1993's nine
month net loss was a $6.2 million after-tax ($10.0 million pre-tax)
restructuring charge for costs relating to the closure of obsolete facilities at
the Company's wholly-owned subsidiary, GNP. Also included was a $6.0 million
charge for additional deferred taxes relating to the recent increase in the
Federal corporate income tax rate from 34 to 35 percent. This loss for the first
nine months of 1993 compares to a loss before accounting changes of $72.0
million, or $2.05 per share, on sales of $1.1 billion for the same period in
1992. After the cumulative effect of adopting two new accounting standards
covering post-retirement benefits and income taxes, the net loss for the first
nine months of 1992 was $61.1 million, or $1.75 per share.
PULP, PAPER AND RELATED PRODUCTS
This segment includes the Company's uncoated groundwood paper (newsprint,
directory paper and specialties), lightweight coated groundwood paper (LWC),
hardwood and softwood market pulp, timber and lumber products. For the first
nine months of 1993, sales of pulp, paper and related products were $993.4
million, an increase from $947.2 million in the same period in 1992. For the
first nine months of 1993, the operating loss for this segment was $20.4 million
(after the $10.0 million pre-tax restructuring charge) versus an operating loss
of $38.9 million for the same period last year. The majority of improvement was
from the Company's newsprint product line. Below is a review of all the
Company's major product lines in this segment.
NEWSPRINT
Newsprint sales decreased 4.2 percent to $459.5 million in the first nine
months of 1993 from $479.4 million during the first nine months of 1992. United
States newsprint consumption for the first nine months of 1993 was essentially
unchanged compared to the first nine months of 1992. The Company's newsprint
tonnage sales decreased 9.9 percent during the first nine months of 1993 versus
the same period last year, as the Company decreased its annual newsprint
manufacturing capacity by 264,500 tons through permanent elimination of
production capacity and the redirection of capacity to higher value-added
products. For the first nine months of 1993, newsprint's operating results
improved compared to the first nine months of 1992 as average transaction prices
for the period increased 6.4 percent. This improvement is a result of the
reductions in the level of discounting from list prices which occurred during
the latter part of 1992 and early 1993, although average transaction prices have
decreased since mid-year 1993. Excess capacity, weak demand, and the continued
devaluation of Canadian, Swedish and Finnish currencies were major factors in
the Company's inability to effect higher selling prices and therefore
profitability. Improvements in the newsprint market are largely dependent upon a
recovery in print advertising demand and the rate of economic recovery
worldwide.
UNCOATED GROUNDWOOD PAPERS (DIRECTORY AND OTHER SPECIALTY PAPERS)
Sales in the directory and uncoated groundwood specialties product line
increased 67.7 percent to $154.8 million for the first nine months of 1993 from
$92.3 million for the first nine months of 1992. With regard to directory paper,
tonnage sales increased 68.9 percent during the first nine months of 1993
compared to the same period last year as the Company redirected 103,000 tons of
annual newsprint manufacturing capacity to directory grades. Average transaction
prices for directory paper decreased 3.7 percent during the first nine months of
1993 versus the same period in 1992 due to increased competition from new
producers entering the marketplace.
COATED PAPER
Coated paper sales increased 8.5 percent to $236.3 million for the first
nine months of 1993 from $217.7 million for the comparable period in 1992. The
Company's coated groundwood paper tonnage shipments for the first nine months of
1993 increased 3.4 percent over the same period in 1992. The Company announced a
7.0 percent coated paper price increase on July 1, 1993, and average transaction
prices were 5.0 percent higher for the first nine months of 1993 compared to the
first nine months of 1992. Since this announcement, however, there has been
substantial price discounting due to an increase in imports and a decrease in
demand for magazine advertising, eroding the majority of the price increase.
10
<PAGE>
PULP
For the first nine months of 1993, pulp sales decreased 29.3 percent to
$70.8 million from $100.2 million during the first nine months of 1992. Due to
global capacity additions and the slow-paced recovery of world economies, the
pulp market experienced severe overcapacity. As a result, market pulp selling
prices are at extremely low levels. Although major producers of market pulp have
announced price increases effective early in 1994, the future profitability of
market pulp remains uncertain and dependent upon the pace of economic recovery
in world markets.
COMMUNICATION PAPERS
For the first nine months of 1993, sales of communication papers (which
include stock computer forms and other business papers) decreased 6.0 percent to
$145.9 million from $155.2 million for the first nine months of 1992. This
segment experienced an operating loss of $7.0 million for the first nine months
of 1993 as compared to a loss of $2.3 million for the same period in 1992.
Average transaction prices were 6.4 percent lower during the first nine months
of 1993 versus 1992, as the weak economy failed to stimulate demand. Operating
costs for this segment during the first nine months of 1993 were 3.3 percent
lower than during the first nine months of 1992, due to lower base paper costs,
despite a price increase in this raw material on April 1, 1993. The Company
continues to focus in this segment on cost reductions and new product
developments through the vertical integration of a portion of its paper
manufacturing capacity.
INTEREST EXPENSE
Total interest expense for the first nine months of 1993 was $19.8 million
higher than in the same period last year due to the higher average level of
borrowings outstanding. In the first nine months of 1993, $2.0 million of
interest was capitalized versus $0.8 million in 1992.
INCOME TAXES
The Company recorded an income tax benefit for the first nine months of
1993 and 1992 due to the pre-tax loss incurred in both years. During the third
quarter of 1993, the Company recorded a $6.0 million tax provision reflecting
higher deferred tax liabilities due to the recent increase in the Federal
corporate income tax rate from 34 to 35 percent. As a result, the effective tax
rate for the first nine months of 1993 was 32.8 percent compared to 37.0 percent
in the prior year.
RESULTS OF OPERATIONS -- FISCAL YEARS 1992, 1991 AND 1990
Financial results in 1992 include the operations of GNP (80 percent of the
stock of which was acquired at the end of 1991) and, as a result, are not
directly comparable with those of 1991.
The Company incurred a net loss in 1992 of $82.0 million, or $2.34 per
share, on sales of $1.49 billion versus net income in 1991 of $45.6 million, or
$1.15 per share, on sales of $1.29 billion. During 1992, the Company took
non-recurring after-tax charges against income totaling $32.3 million. These
consisted of $7.7 million for a write-off of non-operating equipment, $3.2
million for a corporate restructuring involving the headquarters' move to
Greenville, South Carolina, and $21.4 million for the adoption of accounting
standard SFAS No. 106, which covers anticipated post-retirement benefits, mainly
healthcare. Also adopted in 1992 was accounting standard SFAS No. 109 relating
to deferred taxes, which had the effect of adding $32.3 million to the net
results.
In 1992, the weak economy affected both domestic and overseas markets.
Consumer hesitancy and business caution held back print advertising in
newspapers and magazines, as well as production of inserts and other promotional
materials. With demand weak in key product lines and excess capacity, prices
dropped even further from 1991's depressed levels, resulting in an operating
loss. Some production curtailments were necessary in newsprint early in the
year. Although newsprint prices turned up slightly in the second half of 1992
and coated paper prices firmed modestly in September and October 1992, pulp
prices declined and stock computer forms continued to sell at uneconomic price
levels. Results also were affected by higher than anticipated costs at the newly
acquired GNP operations.
Sales in 1991 represented a decline of 6.7 percent from the $1.38 billion
recorded in 1990, while net income of $45.6 million dropped 41.8 percent from
the $78.4 million earned in 1990. The 1990 net income was after an extraordinary
charge of $9 million to retire debt. Results in 1991 were adversely affected by
the persistent economic downturn. With industry overcapacity, there was severe
price competition in key product categories. Sales in 1990 declined 4.8 percent
from strong sales of $1.45 billion in 1989. Income before the extraordinary
charge fell 39.5 percent from the $144.6 million earned in 1989, reflecting the
softening economy in 1990 and unexpectedly high startup costs at two new pulp
mills.
11
<PAGE>
PULP, PAPER AND RELATED PRODUCTS
In 1992, sales in the pulp, paper and related products segment increased
25.7 percent to $1.30 billion from $1.03 billion in 1991, which was a 6.0
percent decrease from sales of $1.10 billion in 1990. Operating results for this
segment were a loss of $46.1 million in 1992 as compared to income of $108.4
million in 1991 and $183.0 million in 1990. With the acquisition of GNP at
year-end 1991, the Company's grade mix was markedly changed, and the traditional
segmented financial comparisons were no longer meaningful. Consequently,
beginning in 1992, all pulp, paper and related products have been grouped into a
single segment for financial reporting purposes. Within this segment, however,
market and operating trends will be discussed by major product categories.
NEWSPRINT
Newsprint sales in 1992 increased 10.1 percent to $662.2 million from
$601.4 million in 1991. Newsprint sales were $617.2 million in 1990 and $645.3
million in 1989. Newsprint traditionally has been a cyclical product, affected
by changes in worldwide economic conditions and the availability of capacity
relative to fluctuating demand. Since 1989, the market has endured a long
downturn. While 1989 consumption remained relatively strong, prices began to
weaken in response to impending capacity increases. In 1990, consumption was
essentially unchanged, while the impact of new capacity was softened by strikes
and other factors. In addition, prices in 1990 were erratic and down overall
from the previous year. By 1991, the deepening recession, along with significant
overcapacity, reduced prices further. United States consumption declined 6.0
percent, and North American newsprint producers increased price discounts to try
to maintain market share.
This situation continued well into 1992. The recession caused retailers to
curtail further their print advertising programs. Domestic newsprint consumption
began improving in the second quarter and ended the year 2.4 percent ahead of
1991. In August 1992 a modest price increase took effect; however, pricing at
December 31, 1992, remained well below that of two years earlier.
During this period, the Company focused on productivity, quality and strict
cost containment. Machine production records were achieved at each location, and
higher customer quality standards were met. This was particularly helpful in
export markets, where the Company's long-term strategy to build a growing
overseas customer base was highly successful in 1992, doubling its 1991 volume.
Export strength enabled the Company to keep newsprint downtime to a minimum.
Finally, the Company's ability to supply substantial tonnages of
high-quality newsprint having as much as 20 percent recycled fiber content
improved its competitive position.
UNCOATED GROUNDWOOD PAPERS (DIRECTORY AND OTHER SPECIALTY PAPERS)
Sales in the directory and uncoated specialties product line were $124.7
million in 1992. The GNP acquisition provided the capacity to produce directory
papers typically used in telephone books and yellow-page directories. These
papers generally have a higher added value than newsprint. Since the
acquisition, the Company has successfully re-established GNP as a premier
supplier of directory paper. The Company resolved quality and service problems
and aggressively sought to restore domestic customer loyalty and to develop new
markets overseas. A three-year purchase contract was signed late in 1992 for
purchases by Nippon Telephone and Telegraph, and groundwork was laid for a
presence in world markets in 1993 and beyond.
Uncoated groundwood specialty papers are produced on GNP's smaller
machines, as well as at the Company's Calhoun, Tennessee facility. These
products are used in a variety of applications such as television listings,
newspaper inserts and school supplies. During 1992, these products suffered in
very competitive markets.
COATED PAPER
Some signs of recovery in LWC were felt in the second half of 1992 after a
recession-induced decline. Coated paper sales increased 13.9 percent to $296.1
million from $259.9 million in 1991. The Company experienced relatively flat
sales in 1990 of $279.0 million versus sales in 1989 of $279.2 million.
Beginning in 1989, prices for LWC eroded in anticipation of large new
capacity additions. Even though industry and Company shipments continued to grow
through 1990, margins were lower as a result of intensifying price pressures.
Import competition became an important factor, and in 1991, the combination of
worldwide overcapacity and a weakening United States economy had an even more
severe impact. Shipments for magazines and catalogs were down sharply, and
prices declined further along with the Company's margins. These trends continued
into mid-1992, exacerbated by competition from price-reduced coated freesheet
grades that normally serve only higher end uses and were in excess supply. The
second half of
12
<PAGE>
the year saw some indications of recovery in demand. Magazine advertising page
counts also improved. Catalog merchandisers, who had suffered from higher postal
costs and a more competitive market, reworked formats and marketing strategies,
revitalizing their business. The market for newspaper advertising inserts and
coupons strengthened. At year-end 1992, although LWC prices had stabilized, they
remained at low levels.
With the GNP acquisition, the Company not only increased its coated
groundwood paper capacity by 37 percent, but broadened its line to include
lighter weight grades that cannot be made at the Catawba, South Carolina, mill.
The northern wood fiber available from GNP's 2.1 million acres will provide the
appropriate fiber resource for new coated paper capacity at this site when the
Company finds it opportune and prudent to move ahead with such a project.
The Company integrated the marketing of GNP's lines with its own coated
grades during 1992 and improved product quality, rebuilding customer
relationships. Despite the challenging conditions in 1992, the Company remained
profitable in this product category.
PULP
The Company produces bleached kraft market pulp in both softwood and
hardwood grades. About 70 to 80 percent of its production is exported. Pulp
sales in 1992 were flat at $136.4 million as compared to sales in 1991 of $138.0
million. Pulp sales in 1991 decreased 19.2 percent from pulp sales of $170.7
million in 1990.
The years 1990 through 1992 witnessed a sharp cyclical downturn in market
pulp. The market peaked in 1989 after four years of growth. Then, new capacity
additions came on stream in 1990 as the world economy was weakening, causing
sharp price declines. This continued for much of 1991, but prices rose
temporarily toward year-end 1991 and into mid-1992. Canadian and Scandinavian
producers took substantial down-time, and customers built inventories in
anticipation of a strike in British Columbia, which eventually kept
approximately 480,000 tons out of the market before the strike was settled in
July 1992. When the European currency crisis occurred in the fall of 1992 and
the economies in many of these countries weakened, the pulp market deteriorated.
At the same time, approximately 882,000 tons of low cost new capacity entered
the market from Chile and Brazil -- all this against a background of continued
weak world demand for paper, the principal end product. Prices fell in the
fourth quarter of 1992.
While market pulp remained profitable for 1992, the Company's operating
margins at December 31, 1992, were as low as they had been for some time. In the
near term, the Company faces European and Japanese economies that have slowed
down, some new capacity remains to come on stream and traditional customers,
such as those in Germany, are demanding chlorine-free pulps that much of the
industry, including the Company, cannot supply.
COMMUNICATION PAPERS
The Company's communication papers group was hard hit in 1992 by a
recession-induced decline in basic demand for stock computer forms as well as
relentless price competition. Both unit sales and price realizations eroded,
causing a decline in dollar sales of 18.6 percent, to $207.5 million, and an
operating loss. Sales decreased in 1991 by approximately 9.3 percent from sales
in 1990 of $280.9 million. Operating results for this segment were a loss of
$2.3 million in 1992 as compared to income of $14.4 million in 1991 and $11.4
million in 1990.
This segment's business since 1989 has been erratic. The communication
papers group achieved record results in 1989 because of strong demand and
favorable cost-price balances. In 1990, the reverse occurred as the United
States slid toward recession, demand softened and selling prices dropped while
raw material costs were still rising. Demand eased further in 1991, as did
selling prices. Because raw material costs declined even faster, however, the
group recorded an improvement in operating income.
The Company's communication papers group is one of the nation's leading
suppliers of stock computer forms and other communication papers. The group
sells directly to major corporate, government and institutional users. It also
reaches other businesses and offices, as well as individual consumers, through
resellers and mass merchandising outlets. Even though the Company's converting
and distribution costs have been regularly reduced, the market is considered
mature. The cost of forms bond paper remains a major factor in the profitability
of the converted products made from it.
Given this environment, the Company's strategic focus is to differentiate
itself from others in the marketplace by developing new products to gain the
benefits of vertical integration, using the capabilities of its primary pulp and
paper mills. The recycling plants in Tennessee and Maine afford the opportunity
for such developments. Working with the Calhoun mill, which developed the base
paper, the communication papers group introduced Environmental Bond EB-20(TM)
and Environmental White EW-20(TM), computer forms papers that contain 20
percent post-consumer or comparable recycled fiber. EB-20
13
<PAGE>
and EW-20 have enjoyed success in all markets, particularly with major
corporations, because of their cost effectiveness and suitability for large data
center applications. Similar products for all segments of the computer forms
market are under development.
RECYCLING CAPABILITY
The Company has focused its efforts in recent years on meeting the demand
for recycled content paper products -- an environmental benefit in reducing
solid waste landfill deposits and a marketing imperative for publishers and
other customers trying to meet recycled content standards.
The Company broke ground for its first recycling plant in 1990 at Calhoun,
Tennessee. The mill has been successful since its startup in 1991. Taking a
mixture of 70 percent used newspapers and 30 percent used magazines, the plant
utilizes advanced mechanical and chemical processes to produce high quality
pulp. When up to 20 percent of this mixture is combined with virgin fiber, the
resulting product is comparable in quality to paper produced with 100 percent
virgin fiber pulp. Substantial tonnages of recycled content paper have been made
available to newsprint customers, while increasing quantities of EB-20 and EW-20
have been shipped to the Company's communication papers group for conversion to
computer forms.
The first major project at GNP since the acquisition has been the
construction of a similar recycling plant to provide recycled fiber for
newsprint, directory papers and other groundwood papers at that location. When
this second facility reaches full production, expected in the fourth quarter of
1994, the Company will have a combined capacity to supply over 250,000 tons per
year of recycled fiber pulp to its paper mills.
LIQUIDITY AND CAPITAL RESOURCES
Since becoming an independent, publicly traded company in 1984, the Company
has relied upon both internal and external sources of funds. Beginning in 1990,
however, deteriorating economic conditions in the Company's major markets have
adversely affected operating cash flows. These conditions, when combined with
the costs associated with the acquisition of GNP at year-end 1991, have prompted
the Company to place more emphasis upon external sources of funds for its
operating, financial and capital requirements.
For the first nine months of 1993, the Company's operations used $43.0
million of cash compared to generating $78.1 million of cash in the same period
of 1992. The decline in operating cash flow resulted primarily from the
Company's decision to discontinue the sale of receivables under an asset
securitization program, thereby increasing receivables and decreasing cash by
$74 million. In addition, the Company received $19.8 million in tax refunds,
realized a lower operating loss ($18.1 million decrease) but paid higher
interest costs ($12.1 million increase) during the first nine months of 1993
compared to the same period in 1992. The higher interest costs resulted from
fourth quarter 1992 financings.
Capital expenditures for the first nine months of 1993 decreased $16.9
million from the first nine months of 1992. Included in 1992's expenditures was
a $9.8 million cash payment for the acquisition of the remaining 20 percent
interest in GNP. The Company's capital expenditures total approximately $120
million in 1993. Excluding the cost of the recovery boiler described under Use
of Proceeds, the Company anticipates spending approximately $150 million on
capital expenditures in 1994.
Cash generated from operations in 1992 fell to $109.5 million, a 30.1
percent decrease from the $156.6 million generated in 1991, which was itself a
34.3 percent decrease from 1990. This steady drop was caused by a three year
decline in operating income, resulting in an operating loss for 1992, compounded
by significantly higher interest payments due to increased debt levels.
Included in 1992's cash flow from operations was a sale of $74 million of
receivables in August 1992 under the asset securitization program. The net cash
proceeds from this sale were used to retire commercial paper. The accounts
receivable sale was reflected as a reduction of receivables in the Consolidated
Balance Sheet at December 31, 1992. Under the terms of the agreement relating to
this program, the maximum amount of the purchaser's investment in the Company's
receivables at any one time is $80 million.
Due to the reduced level of cash generated from operations, the Company
took a number of steps in 1992 to conserve cash. Foremost among these steps was
a curtailment in capital expenditures. Cash invested in capital projects
(excluding the acquisition costs for GNP) totaled $139.5 million in 1992,
compared to $159.7 million and $214.1 million in 1991 and 1990, respectively.
Investments in 1992 were primarily for routine maintenance at the Company's
mills, but include expenditures
14
<PAGE>
for a new $62 million newsprint recycling plant at the East Millinocket, Maine,
mill. This plant is similar in design to the $66.6 million recycling facility
completed in 1991 at the Company's Calhoun, Tennessee, mill.
Borrowings in 1991 included $200 million of 8 1/2% Notes due 2001 and $200
million of 9 3/8% Debentures due 2021, incurred primarily to finance the
acquisition of GNP. In 1991, the Company also borrowed $30 million in proceeds
of tax-exempt 7 5/8% pollution control bonds issued by McMinn County, Tennessee,
partially financing the construction of the Calhoun recycling plant. An
additional $16.4 million in proceeds of McMinn County and York County, South
Carolina, tax-exempt pollution control refunding bonds, with interest rates
varying from 6.85 percent to 7.40 percent, were borrowed in 1991 to refund
outstanding higher cost bonds.
In October 1992, the Company sold $125 million of 8 1/4% Notes due 1999 and
$125 million of 9 1/2% Debentures due 2012. Approximately $150 million of the
net proceeds were used to repay revolving credit obligations and other
short-term borrowings. The remaining proceeds were invested in high-grade
marketable securities pending application to general corporate purposes.
Also in October 1992, the Company borrowed $62 million in proceeds of
tax-exempt 7 3/4% revenue bonds due 2022, through the Finance Authority of
Maine, and in December 1992 borrowed $39.5 million in proceeds of tax-exempt
7.40% revenue bonds through McMinn County. Proceeds from these issues were used
to fund the construction and completion of the recycling facilities at East
Millinocket and Calhoun, respectively.
As the Company secured the long-term financing in the capital markets
described above, its reliance on other credit facilities has decreased.
Accordingly, the Company has from time to time sought and put in place more
appropriately sized credit facilities.
Prior to 1992, the Company's general liquidity needs were met by a $400
million multiple option credit facility and a $350 million revolving credit
agreement. The Company replaced these facilities in the first quarter of 1992
with a $500 million credit agreement (the 1992 Credit Agreement). By the fourth
quarter of 1992, the Company believed that compliance with certain financial
covenants in the 1992 Credit Agreement was not assured, due to the increased
operating losses discussed above and the Company's increased indebtedness. In
December 1992, after reassessing the Company's liquidity needs, the Company
requested and received a $250 million, three-year revolving credit facility
provided by the Credit Agreement. All financial obligations outstanding under
the 1992 Credit Agreement were repaid as of December 31, 1992.
The new Credit Agreement, under which no amounts were borrowed as of
October 2, 1993, expires in December 1995 and is used to meet working capital
requirements. The Company's ability to borrow under the Credit Agreement is
dependent upon compliance with the covenants contained in the Credit Agreement.
One of these covenants requires a 12-month ratio of EBITDA to interest expense
of not less than 1.0. The Company's 12-month ratio of EBITDA to interest expense
was approximately 1.0 for the year ended December 31, 1993. The Company has
entered into an amendment to the Credit Agreement that waives compliance with
this covenant to, but not including, December 31, 1994, at which time the
covenant will be reinstated. The Company's ability to comply with the interest
coverage covenant when reinstated on December 31, 1994, will substantially
depend upon the Company's ability to maintain approximately the same level of
EBITDA the Company achieved through the first nine months of 1993. There are no
assurances that the Company will be able to maintain or enhance such levels of
EBITDA or that the Company will be able to comply with the covenants contained
in the Credit Agreement in the future.
In anticipation of raising additional equity capital through the sale of
the Depositary Shares and the Series B Convertible Preferred Stock being offered
at approximately the same time, the Company determined that it would not need
the full $250 million credit line currently provided by the Credit Agreement.
Therefore, at the Company's request, the Credit Agreement amendment further
provides that such credit line will automatically be reduced from $250 to $200
million on March 31, 1994, if the Company shall have received by that time at
least $150 million of net cash proceeds from the issuance by the Company of
capital stock.
The Company's ability to pay dividends on its Common Stock or any of its
Preferred Stock, including the shares of Series C Preferred Stock, will depend
on its maintaining adequate net worth and compliance with the required ratio of
total debt to total capital, as defined in and required by the Credit Agreement.
The Credit Agreement requires the Company to maintain a minimum net worth
(generally defined therein as common shareholders' equity plus any outstanding
Preferred Stock) of $750 million. In addition, the Credit Agreement imposes a
maximum 60 percent ratio of total debt to total capital (defined therein as
total debt plus net worth). At October 2, 1993, the net worth of the Company and
ratio of total debt to total capital were $806.6 million and 58 percent,
respectively. The Company's net worth and the ratio of the Company's total debt
15
<PAGE>
to total capital will improve upon the sale of the Depositary Shares and, if it
occurs, the sale of the Series B Convertible Preferred Stock being offered at
approximately the same time as the Depositary Shares.
In August 1992, Standard and Poor's Corporation (S&P) lowered its rating of
the Company, and those of several other pulp and paper companies, as a result of
deteriorating conditions in the pulp and paper industry. In November 1993, S&P
lowered the Company's senior debt and Preferred Stock ratings and changed the
Company's outlook from negative to stable. S&P confirmed its rating on the
Company's commercial paper. The Company's senior debt rating was reduced from
BBB to BBB-, and its LIBOR Preferred Stock, Series A rating was reduced from
BBB-to BB+. The new S&P ratings may raise the cost of any future financings the
Company may undertake and will increase the cost of borrowing under the Credit
Agreement. Moody's Investors Service (Moody's) rates the Company's senior debt
as Baa1, the LIBOR Preferred Stock, Series A, as Baa1 and the Company's
commercial paper as P-2. These ratings are not a recommendation to buy, sell or
hold securities of the Company (including the securities offered hereby) and may
be subject to revision or withdrawal at any time by the assigning rating agency.
Each agency's rating should be independently evaluated.
Due to the prevailing poor market conditions, the Company's management is
continually reviewing all aspects of the Company's operations in an effort to
reduce losses and improve cash flow. As part of these activities, the Company
has closed the Darien, Connecticut, corporate office, consolidating it with
other operations in Greenville, South Carolina. Commencing with the dividend
paid April 1, 1993, the Board of Directors reduced the dividend per share of
Common Stock to $.15 per share from $.30 per share.
In August 1993, the Company announced the closure of certain obsolete
facilities at the Millinocket, Maine, mill and the resulting elimination of
approximately 200 jobs. In November 1993, the Company announced the additional
elimination of approximately 450 positions companywide to be completed by the
end of 1994. Savings associated with both of these moves are estimated to be
approximately $40 million per year. The personnel reductions will be achieved
through attrition, early retirements and terminations, and, when completed, will
represent a total reduction of approximately 10 percent of the Company's work
force. The Company recorded pre-tax charges totaling $20 million in 1993 as
a result of these actions (of which $10 million was recorded in the third
quarter and $10 million was recorded for the fourth quarter).
In the fourth quarter of 1993, the Company sold approximately 68,000 acres
of non-strategic real property holdings in Alabama, Georgia, Mississippi, Ohio
and South Carolina. Proceeds from these transactions total approximately $69
million, resulting in pre-tax income of $48.9 million ($30.6 million, or $.84
per share, after-tax).
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and provincial
environmental and pollution control laws and regulations in all jurisdictions in
which it operates. The Company believes that all of its operations are currently
in substantial compliance with all applicable environmental laws and
regulations.
New Canadian federal regulations governing the discharge of pulp and paper
mill effluents were promulgated on May 20, 1992. These regulations will impose
new restrictions on the effluent of the Mersey mill that will require the
installation of a wastewater treatment facility at a cost of approximately $22
million, spread over 1994-95. The Company has obtained an extension to December
31, 1995, of the effective date of compliance with these new regulations, which
the Company believes will give it sufficient time to install the necessary
equipment.
Dioxins and other chlorinated organics are contained in the effluents of
bleached kraft pulp mills. Both the South Carolina and Tennessee facilities,
which have bleached kraft pulp mills, have received discharge permits with
dioxin limitations. Currently, the effluents of both mills are well below the
respective current discharge limits for dioxin. On November 1, 1993, the EPA
proposed regulations that would impose new air and water quality standards aimed
at further reductions of pollutants. Final promulgation of these regulations is
due by the fall of 1995. The regulations, if adopted, will require compliance by
1998. If adopted as proposed, these new rules will require capital expenditures
at all of the Company's United States facilities, but most significantly at its
Catawba, South Carolina, facility. The Company has a number of options in
complying with the new regulations, and the amount of required capital
expenditures will depend upon which of several alternative courses of action the
Company undertakes consistent with the regulations. The Company believes that
these alternatives would require aggregate capital expenditures by the Company
of approximately $150 million through 1998. The ultimate financial impact to the
Company of compliance will depend upon the nature of the final regulations, the
timing of required implementation, the cost of available technology, the
development of new technology, and the determination of the Company as to
whether to maintain certain production levels or operate certain equipment.
16
<PAGE>
Other than capital expenditures needed to comply with the new Canadian
federal regulations and the EPA's proposed regulations described above, the
Company anticipates that continued upgrading of its facilities to maintain
environmental compliance should require capital expenditures of approximately
$10 million to $15 million per year for the foreseeable future.
The Company has been identified as a potentially responsible party under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (CERCLA or Superfund), for the cleanup of contamination at five
Superfund sites. Based upon its percentage share in each proceeding and the
amount of capital expenditures, deferred charges or charges to income involved,
the Company believes that such matters will not result in liabilities that will
have a material adverse effect on the Company's financial condition or future
results of operations.
While it is difficult to predict with certainty the nature of future
environmental regulations, the Company believes that, as compared to many of its
North American competitors, it will not be at a competitive disadvantage in
meeting future United States or Canadian standards.
LEGAL PROCEEDINGS
In January 1994, the Company settled for an aggregate sum of approximately
$10.5 million all pending lawsuits naming the Company and other parties as
defendants in the State Circuit Courts of Hamilton County, Knox County and
McMinn County, Tennessee, and in the United States District Court for the
Eastern District of Tennessee, that claimed compensatory and punitive damages
for wrongful death, personal injury and/or property damage arising out of a
series of vehicular accidents that occurred on December 11, 1990, in fog on
Highway I-75, which passes in the general area of the Company's Calhoun,
Tennessee, mill property. The plaintiffs in these actions had sought to make the
Company liable on the theory that the mill's operations created the fog or
contributed to its density.
The Company's excess insurers reserved rights with respect to coverage of
the plaintiffs' claims on various grounds including their assertion that
coverage is not available for pollution claims, for consequences expected or
intended by the Company or for any punitive damages. On November 22, 1993, the
Company filed a complaint in the United States District Court for the Eastern
District of Tennessee against its first excess insurer, National Union Fire
Insurance Company, which seeks a declaratory judgment in favor of the Company on
the issues in dispute with that insurer.
The settlements will be funded by the Company's insurance carriers,
subject, in the case of approximately $9.5 million funded by the Company's first
excess insurer, to subsequent determination of ultimate coverage responsibility
in the pending insurance coverage lawsuit. Although no assurance can be
provided, the Company believes that it should prevail on the insurance coverage
issue.
The Company is also involved in various litigation relating to contracts,
commercial disputes, tax, environmental, workers' compensation and other
matters. The Company's management is of the opinion 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.
17
<PAGE>
BUSINESS
GENERAL
The Company is a major producer of world-traded wood fiber products,
including virgin and recycled content printing papers. The Company is:
(bullet) the largest United States and third largest North American
manufacturer of newsprint, having produced approximately 1.6 million
tons of newsprint in 1992,
(bullet) a major producer of coated and uncoated groundwood specialty paper for
magazines, catalogs, printed promotional pieces, directories and other
similar uses, having produced approximately 642,000 tons of coated and
uncoated groundwood specialty paper in 1992,
(bullet) a leading converter of paper into communication papers used in
computers and other business applications, having converted paper into
approximately 204,000 tons of business forms in 1992, and
(bullet) a supplier of market pulp and lumber products, having produced
approximately 331,000 tons of market pulp and 191.6 million board
feet of lumber in 1992.
Approximately 82 percent of the Company's 1992 sales were made in the
United States, with the balance made in export markets. Generally the Company
markets and distributes its products in the United States through its own sales
force and in the export markets through independent agents.
The Company's objective is to become the leading worldwide supplier of a
broad range of groundwood based paper products. To achieve this objective the
Company focuses on quality, customer service and costs. The Company strives to
remain a low cost producer and distributor in each of its product categories and
believes that its abundant fiber base, stable and well-trained work force and
strategic mill locations support this goal. The Company believes that its
attention to quality and commitment to customer service and satisfaction have
made it a preferred supplier in many of its market segments.
Recently, the Company has sought to enhance its margins by increasing the
percentage of higher value-added products in its product base and by introducing
new products. The Company has redirected some of its newsprint manufacturing
capacity to the manufacture of directory and other uncoated groundwood specialty
papers, which typically generate higher margins than newsprint. The Company also
manufactures a significant portion of the uncoated groundwood specialty paper
used in its communication papers converting business.
The Company is a leader in utilizing post-consumer wastepaper in the
manufacture of certain of its products. Due to new legislation and consumer
preference, the demand for newsprint and uncoated groundwood specialty paper
containing recycled fiber has increased significantly in recent years. The
Company believes that its ability to produce paper with recycled content has
become an important competitive factor.
The Company operates four paper mills and two sawmills in the United States
and one paper mill and one sawmill in Canada. These operations are fully
integrated and are supported by approximately 4.0 million acres of timberlands
(almost all of which are owned by the Company). The Company has invested
approximately $1.1 billion in its facilities since 1988, principally to improve
their efficiency and to add production and recycling capacity. As of June 1993,
five of the Company's nine newsprint machines were ranked among the top twelve
most efficient in the industry. As a result, the Company believes it is well
positioned to take advantage of improvements in its primary markets when and if
they occur.
PULP AND PAPER PRODUCTS SEGMENT
OVERVIEW
Newsprint is a basic type of printing paper used primarily in the
publication of newspapers with much of the remaining production going to
commercial printers for preprinted newspaper inserts and government printing
jobs. The highly capital intensive newsprint industry is global and
characterized by periods of supply and demand imbalance, primarily in the North
American, Western European and Asian markets. The demand for newsprint is most
heavily influenced by newspaper advertising and circulation and tends to track
general economic cycles. Increases in supply are mostly influenced by the
addition of large new newsprint machines which take approximately two years to
construct and place in service. Capacity additions may be announced and
implemented at similar times by several independent producers, which can
contribute to periods of oversupply.
18
<PAGE>
Uncoated groundwood specialty papers are generally of higher quality and
command higher prices than newsprint. These papers are manufactured using
production processes similar to those used for newsprint but typically have
significantly better printing characteristics, giving them a broader variety of
printing and advertising uses. These printing papers are used in a variety of
products, such as catalogs, directories, newspaper inserts, periodicals and
business papers.
Coated paper is a higher quality printing paper than uncoated groundwood
paper. Coated papers are typically categorized into a variety of types depending
on their ultimate end use. These varieties range from those suited for use in
annual reports and expensive advertising and marketing pieces to coated paper
used in mass market magazines, catalogs, coupons and newspaper inserts. The
manufacture of coated paper is more technically demanding than that of newsprint
or other uncoated groundwood papers.
The uncoated specialty and coated groundwood papers businesses also tend to
be cyclical and are significantly influenced by global competitive factors.
Prices for the various grades of uncoated groundwood specialty and coated
groundwood papers generally follow the price trends for newsprint and coated
freesheet papers, respectively, which in periods of oversupply may substitute
for these groundwood papers.
Pulp is produced by reducing wood into its component parts. Market pulp is
generally sold to other paper manufacturers. Because pulp is used in paper
products, demand for market pulp tends to track that for groundwood and
freesheet paper products.
NEWSPRINT
INDUSTRY OVERVIEW
Worldwide newsprint consumption in 1992 was approximately 35.5 million
tons, of which approximately 14.0 million tons or 39 percent were consumed in
North America, 8.8 million tons or 25 percent were consumed in Western Europe,
7.9 million tons or 22 percent were consumed in Asia and 4.8 million tons or 14
percent were consumed in the rest of the world.
Approximately 77 percent of the United States newsprint market is used by
daily newspapers and the remaining 23 percent goes into weekly newspapers,
pre-printed newspaper inserts, paperback books and similar uses. Of the 17.2
million tons of newsprint shipped by the North American newsprint industry in
1992, 12.8 million tons were shipped to the United States, 1.1 million tons were
shipped to Canada and 3.3 million tons were shipped to offshore markets,
principally Europe, Asia and Latin America. Approximately 40 percent of all
newsprint sold in the United States is sold to 10 major publishers.
The following table sets forth North American shipments, capacity, industry
operating rates, net exports and United States consumption for newsprint, as
reported by the American Forest and Paper Association (AFPA), and average
eastern United States transaction prices per ton, as reported by Resource
Information Services, Inc. (RISI).
NORTH AMERICAN NEWSPRINT
(THOUSANDS OF TONS, EXCEPT PERCENTAGES AND DOLLAR AMOUNTS)
<TABLE>
<CAPTION>
FIRST TEN
MONTHS OF
1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments.......................... 14,395 17,202 16,402 16,624 16,668 16,705 16,565 15,795 15,240
Capacity........................... 15,159(1) 18,413 18,392 17,926 17,341 17,077 16,870 16,661 16,562
Industry operating rate (2)........ 96% 92% 91% 93% 96% 99% 98% 95% 92%
Net exports (3).................... 2,592 3,202 2,701 2,027 2,201 1,830 1,560 1,635 1,362
U.S. consumption................... 10,611 12,824 12,545 13,365 13,493 13,498 13,562 13,088 12,684
Average eastern United States
transaction prices (United States
$) (4)........................... $415 $399 $481 $502 $512 $545 $497 $445 $454
<CAPTION>
1984 1983
<S> <C> <C>
Shipments.......................... 15,418 14,376
Capacity........................... 16,554 16,670
Industry operating rate (2)........ 93% 87%
Net exports (3).................... 1,574 1,801
U.S. consumption................... 12,510 11,606
Average eastern United States
transaction prices (United States
$) (4)........................... $450 $422
</TABLE>
(1) 10/12 of 1993 reported capacity.
(2) Calculated as the ratio of production to capacity.
(3) Total exports less total imports. Import data for the first ten months of
1993 were estimated.
(4) Transaction prices reflect an estimate of average delivered transaction
prices per ton for major contract buyers in the eastern United States.
Approximately 2.8 million tons of newsprint capacity were added in North
America from 1989 through 1991. These increases were accomplished through
expansions and improvements of existing facilities, resulting in twelve new
machines (five in the United States and seven in Canada) in operation. However,
United States newsprint consumption declined 5.4 percent between its peak in
1987 and 1992. This drop in consumption, coupled with the increase in new and
upgraded capacity, led to market oversupply and a drop in newsprint prices from
their high in 1988 of $545 per ton to $399 per ton in
19
<PAGE>
1992. The Company believes that this drop in prices resulted in operating losses
for most newsprint producers including the Company.
Faced with unprofitable machines and excess supply, some North American
producers either shut down or converted approximately 1.4 million tons of
newsprint capacity during 1989-1992. In addition, several North American
newsprint producers have announced closures and conversions to higher grades of
paper that would effectively remove approximately 330,000 tons of newsprint from
the market during 1993. Certain industry observers believe that the increasing
costs of compliance with environmental legislation could result in additional
closures of newsprint machines in North America. As of the date of this
Prospectus, the Company is aware of no significant announced North American
newsprint capacity increases and therefore believes that newsprint production
capacity increases by its North American competitors over the next two to three
years should be negligible. The Company is also aware, however, that
approximately 550,000 tons of industry newsprint capacity will be added in
Europe over the 1994-1996 time period.
The Company believes that four factors worked to pressure newsprint prices
in 1993. First, demand was essentially unchanged. Second, an anticipated strike
in eastern Canada did not materialize. These two factors contibuted to
substantially larger inventories than normal. Third, Canadian newsprint
producers became more cost competitive against United States producers due to
weakening in Canada's currency and cost reduction efforts. Finally, the
opportunity for North American newsprint producers to export was hurt by the
devaluation of Swedish and Finnish currencies in late 1992. Prices have weakened
steadily from the first half of 1993, eliminating the increase in transaction
prices that was achieved in March 1993.
North American newsprint operating rates and inventories have approached
levels that prompted numerous east coast industry producers (including the
Company) to announce a 7 percent reduction in price discounts effective March 1,
1994. No assurance can be given, however, that any price increase can be
achieved.
RECYCLED FIBER CONTENT IN NEWSPRINT
Since the late 1980's, demand for newsprint with recycled content has
increased significantly as a result of two principal factors: (i) existing and
anticipated legislation requiring the use of newsprint with minimum levels of
recycled fiber content and (ii) increasing public preference for products
perceived to be more environmentally friendly.
The technology of producing recycled pulp has improved substantially as
demand for paper containing recycled fiber has increased. The technology used by
the Company to produce recycled pulp is state-of-the-art and permits the Company
to provide recycled content papers with qualities comparable to virgin
wood-based papers.
COMPANY OPERATIONS
The Company is the largest United States manufacturer of newsprint and is
the third largest newsprint manufacturer in North America. Its newsprint
production for the nine months ended October 2, 1993, was approximately 1.1
million tons, representing approximately 8.4 percent of total North American
newsprint production for the same period.
The Company manufactures newsprint in a variety of basis weights. The
Company's newsprint production is sold directly by the Company, primarily to
newspaper publishers and commercial printers, through regional sales offices
located in major metropolitan areas of the eastern half of the United States. In
1992, Advance Publications, Inc., and The Washington Post (which separately have
an investment with a minority voting interest in certain production facilities
at two of the Company's mills) collectively accounted for approximately 8.1
percent of the Company's consolidated sales and 18.2 percent of the Company's
newsprint sales. Virtually all of the Company's newsprint customers buy from
several suppliers. The Company is a major exporter of newsprint, selling between
approximately 20 percent and 25 percent of its total newsprint production
abroad, and has exported into the European, South American and Asian markets for
many years. The geographic locations of the Company's newsprint mills permit
distribution of their products by rail, truck, ship or barge.
During the recent period of economic downturn, the Company has continued to
invest in its mills to maintain modern, productive and cost-effective
facilities. The Company has focused on productivity, quality and cost
containment, achieving Company production records at each location, while at the
same time meeting strict customer quality standards.
The Company's ability to supply substantial quantities of high-quality
newsprint having as much as 20 percent recycled fiber content has given the
Company a competitive advantage in the newsprint industry.
20
<PAGE>
UNCOATED GROUNDWOOD SPECIALTY PAPERS (DIRECTORY AND OTHER SPECIALTY PAPERS)
INDUSTRY OVERVIEW
Worldwide uncoated groundwood specialty paper consumption in 1992 was
approximately 12.0 million tons, of which approximately 3.8 million tons or 32
percent were consumed in North America, 3.8 million tons or 32 percent were
consumed in Western Europe, and 4.4 million tons or 36 percent were consumed in
the rest of the world.
Directory paper is used primarily in publications such as telephone books,
while other groundwood specialty papers are used in newspaper inserts, direct
mail advertisements, catalogs, school supplies and similar kinds of
applications. Prices for uncoated groundwood specialty papers are generally
higher than for newsprint. These prices, however, are influenced by prices for
newsprint and for coated groundwood papers, as those papers may, at times, be
cost-effective substitutes for uncoated groundwood specialty papers.
The marketing and sale of uncoated groundwood specialty papers is different
from that of newsprint in a number of significant respects. Uncoated groundwood
specialty papers comprise a wider range of specifications such as weight,
brightness, smoothness and thickness and are generally purchased by a broader
variety of customers for a number of more specialized uses. As a result, a more
complex marketing effort generally is required to reach the customers in this
market and marketing efforts and production of paper must be more carefully
suited to the needs of particular customers. Consequently, service and
responsiveness are important in obtaining and retaining customers. Most
customers for uncoated groundwood specialty papers purchase from more than one
supplier.
North American producers shipped approximately 3.5 million tons of uncoated
groundwood specialty papers in 1992, of which approximately 3.3 million tons
went to customers in the United States and Canada. The North American market for
uncoated groundwood specialty papers was approximately 3.8 million tons in 1992,
of which the United States market was by far the largest, accounting for
approximately 3.5 million tons. Within the United States market, Canadian
producers supplied 45 percent of uncoated groundwood specialty papers, and the
United States producers supplied 42 percent of the requirements of that market,
with the balance primarily supplied by producers of various Western European
countries.
Demand for uncoated groundwood specialty papers in North America grew over
the last ten years at an average annual rate of 4.1 percent, a much faster
growth rate than for newsprint. The latest economic downcycle has offset this
trend somewhat and from 1991 to 1992 demand for uncoated groundwood specialty
papers fell. North American demand for uncoated groundwood specialty papers was
strong in the first nine months of 1993. Imports, however, increased during this
period due to devaluation of the Swedish and Finnish currencies in late 1992.
The increase in imports contributed to a lack of improvement in prices.
The following table shows North American shipments, capacity, industry
operating rates and net imports for uncoated groundwood specialty paper as
reported by AFPA, and North American consumption as reported by RISI.
NORTH AMERICAN UNCOATED GROUNDWOOD SPECIALTY PAPERS
(THOUSANDS OF TONS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
FIRST TEN
MONTHS OF
1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments.......................... 3,214 3,471 3,706 3,762 3,583 3,398 3,013 2,979 2,774
Capacity........................... 3,355(1) 4,052 4,465 4,018 3,906 3,574 3,204 3,170 2,961
Industry operating rate (2)........ 96% 86% 83% 94% 92% 95% 94% 94% 94%
Net imports (3).................... 334 314 155 270 313 413 509 422 412
North American consumption (4)..... 3,529 3,785 3,861 4,032 3,897 3,812 3,523 3,401 3,186
<CAPTION>
1984 1983
<S> <C> <C>
Shipments.......................... 2,673 2,437
Capacity........................... 2,828 2,670
Industry operating rate (2)........ 95% 91%
Net imports (3).................... 462 208
North American consumption (4)..... 3,136 2,640
</TABLE>
(1) 10/12 of reported capacity.
(2) Calculated as the ratio of shipments to capacity.
(3) Total imports less total exports. Data for ten months were estimated.
(4) Total shipments plus imports less exports. Data for ten months were
estimated.
RECYCLED FIBER CONTENT IN DIRECTORY AND OTHER UNCOATED GROUNDWOOD SPECIALTY
PAPERS
Generally, the proportion of recycled fiber is lower in uncoated groundwood
specialty papers than in newsprint, in large part because there has been limited
legislative activity with respect to recycled content in uncoated groundwood
specialties. Several states have nonetheless adopted legislation requiring
recycled content in certain uncoated groundwood paper grades. The Yellow Pages
Publishers Association, which represents telephone directory publishers
principally in the United States,
21
<PAGE>
has adopted recommended guidelines for minimum recycled content for directory
papers. In addition, in response to consumer demand for recycled products, many
regional telephone companies have set minimum recycled content requirements for
their purchases of directory paper.
COMPANY OPERATIONS
The Company is the largest United States and the fourth largest North
American producer of directory and other uncoated groundwood specialty papers.
With the acquisition of GNP on December 31, 1991, the Company gained the ability
to manufacture directory papers and increased its capacity to produce other
uncoated groundwood specialty paper grades. The Company's directory and other
uncoated groundwood specialty production for the nine months ended October 2,
1993, was approximately 248,000 tons. The Company's major customers for
directory papers are telephone companies, while its primary customers for its
other uncoated groundwood specialty papers are commercial printers.
The Company, like certain of its competitors, has begun to redirect some of
its newsprint manufacturing capacity to the manufacture of directory and other
uncoated groundwood specialty papers to capture the generally higher margins for
this product line. With the commencement in late May 1993 of operations at GNP's
new recycling plant, the Company is able to include post-consumer wastepaper in
its directory paper. In addition, the Company is focusing efforts on expanding
its presence in the export markets, and, in late 1992, entered into a three-year
contract for purchases by Nippon Telephone and Telegraph. With this contract,
the Company's 1993 exports were approximately 22 percent of its directory and
other uncoated groundwood specialty paper production. In addition, the Company
is manufacturing a significant portion of the uncoated groundwood specialty
paper used in its communication papers converting business. See
Business -- Communication Papers.
COATED GROUNDWOOD PAPER
INDUSTRY OVERVIEW
Worldwide coated groundwood paper consumption in 1992 was approximately
12.5 million tons, of which approximately 4.4 million tons or 35 percent were
consumed in North America, 5.7 million tons or 46 percent were consumed in
Western Europe, and 2.4 million tons or 19 percent were consumed in the rest of
the world.
Coated paper grades range from the premium grades found in annual reports
and expensive advertising pieces (requiring higher brightness and more expensive
pulps and coating materials) to those found in mass market magazines, catalogs,
coupons and newspaper inserts. The latter (referred to in the industry as No. 5
or LWC) is generally of a lower basis weight and lower brightness but currently
makes up approximately 45 percent of the total coated paper market.
The following chart sets forth North American shipments, capacity, industry
operating rates, net imports and United States purchases for coated groundwood
paper as reported by AFPA and the Canadian Pulp and Paper Association.
NORTH AMERICAN COATED GROUNDWOOD PAPERS
(THOUSANDS OF TONS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
FIRST TEN
MONTHS OF
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Shipments................................................ 4,086(1) 4,912 4,543 4,723 4,429
Capacity................................................. 4,501(2) 5,171 4,971 4,960 4,760
Industry operating rates (3)............................. 91% 95% 91% 95% 93%
Net imports (4).......................................... 311 125 148 282 299
U.S. purchases........................................... 4,168 4,787 4,470 4,761 4,481
</TABLE>
(1) Data for ten months were estimated.
(2) 10/12 of the 1993 reported capacity.
(3) Calculated as the ratio of shipments to capacity.
(4) Total imports less total exports. Data for ten months were
estimated.
The coated groundwood paper market has experienced a decline similar to,
although less severe than, that in the newsprint market. Increases in capacity,
particularly in Europe, created downward pressure on prices in the early 1990's.
Prices continued to decrease through mid-1992, due to the ailing United States
economy and the resulting weakness in the demand for advertising. Coated
groundwood paper demand in the United States was relatively flat in the first
nine months of 1993 versus the first nine months of 1992. The Company, along
with a number of other major producers of coated paper, implemented coated paper
price increases in the third quarter of 1993. Since then, there has been
substantial discounting due to an
22
<PAGE>
increase in imports and a decrease in magazine advertising demand, eroding the
majority of this price increase. The pace of any further market improvement will
depend upon growth in United States consumption and upon a rebound of the
European markets to absorb the excess capacity of European producers. The
Company believes that any improvement in demand in 1994 is likely to translate
into improved industry operating rates because capacity growth is only expected
to increase in 1994 by approximately 1 percent.
COMPANY OPERATIONS
The Company is the fifth largest producer in the United States and the
sixth largest North American producer of coated paper. Its coated paper
production for the nine months ended October 2, 1993, was approximately 344,000
tons. The Company's tonnage shipments have increased 3.4 percent for the first
nine months of 1993, compared with the same period in 1992. The Company's coated
paper production consists of LWC which is used primarily in mail order catalogs,
magazines, coupons and advertising pieces. Substantially all of the Company's
coated paper production is sold in the United States.
The Company sells coated paper to numerous printers, publishers, mail order
houses and paper merchants. Coated paper is distributed by truck and rail from
the Company's Catawba, South Carolina, and Millinocket, Maine, mill sites, which
are strategically located to supply the southeastern and northeastern United
States, respectively, as well as jointly serving the midwestern market.
MARKET PULP
Worldwide market pulp consumption in 1992 was approximately 30.2 million
tons, of which approximately 6.3 million tons or 21 percent were consumed in
North America, 13.8 million tons or 46 percent were consumed in Western Europe,
8.1 million tons or 27 percent were consumed in Asia and Africa and 2.0 million
tons or 6 percent were consumed in the rest of the world.
Market pulp is generally defined as pulp produced for sale in the open
market and is a globally traded commodity product. Since 1989, market pulp has
experienced significant weakening in demand and increases in new capacity. New
lower cost capacity from South America and Swedish and Finnish currency
devaluations have put further pressure on prices. These developments have caused
a significant decline in prices since 1989, from an average price per ton
realized by the Company of $699 in 1989 to $320 in November 1993. Moreover, the
Company, along with several of its competitors, faces significant problems in
selling market pulp into Germany and certain other European markets because it
does not produce total chlorine free or elemental chlorine free pulp. The
bleached kraft market is also facing some competition from recycled pulp.
The Company is a relatively small participant in the global pulp market,
producing approximately 330,000 tons annually. The Company sells its production
primarily in the export market to numerous manufacturers of fine paper, tissues
and other paper products. Most of the Company's market pulp is fully bleached,
but small amounts of semi-bleached kraft grades are sold. In recent years, 70
percent to 80 percent of the Company's pulp sales have been to the export
market, where the product is typically sold through agents. United States sales
are made directly by the Company.
The depressed state of the world pulp market has led to numerous mill
closures and temporary production curtailments. Currently, the Company estimates
that world transaction prices are below sustainable levels and that inventory
levels are low relative to normal levels. Accordingly, the Company believes that
pulp producers worldwide are raising prices by between $40 and $60 per ton
effective in the December 1993 to March 1994 time period. No assurances can be
given, however, that any price increase will be maintained.
PULP AND PAPER MANUFACTURING FACILITIES
The Company manufactures paper or pulp at five locations. Both the
Company's Southern Division and Calhoun Newsprint Company (CNC) (of which stock
with approximately 51 percent voting power is held by the Company and stock with
approximately 49 percent voting power is held by Advance Publications, Inc.) are
located at Calhoun, Tennessee. The Company's Carolina Division is located at
Catawba, South Carolina. GNP owns the two mills located in Maine. Bowater Mersey
Paper Company (Mersey) (which is owned 51 percent by the Company and 49 percent
by The Washington Post Company) is located at Liverpool, Nova Scotia.
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<PAGE>
The following table sets forth certain information concerning these
manufacturing sites. The Company's facilities generally ran at or near capacity
during 1992 and the first nine months of 1993.
<TABLE>
<CAPTION>
NUMBER OF 1992
PAPER FURNISH PRODUCTION
PRODUCT AND FACILITY MACHINES TYPE (AMOUNTS IN TONS)
<S> <C> <C> <C>
Newsprint and other uncoated groundwood papers
Calhoun, Tennessee 5 TMP, Kraft, 837,076
Groundwood,
Recycled
Catawba, South Carolina 1 TMP, Kraft 260,342
Liverpool, Nova Scotia 2 TMP 252,602
Millinocket, Maine 2 Sulfite, Groundwood 152,291
E. Millinocket, Maine 2 Groundwood, 297,120
Recycled, Purchased
Kraft
TOTAL 12 1,799,431
Coated paper
Catawba, South Carolina 2 Kraft, TMP 335,588
Millinocket, Maine 3 Sulfite, Groundwood 110,955
TOTAL 5 446,543
Market pulp
Catawba, South Carolina Softwood 264,549
Calhoun, Tennessee Hardwood 66,787
TOTAL 331,336
</TABLE>
CALHOUN, TENNESSEE (SOUTHERN DIVISION AND CNC)
This facility is located on the Hiwassee River in Tennessee and is the
largest newsprint mill in North America. The site is shared by the Company and
CNC. Advance Publications, Inc., is the Company's largest customer, purchasing
the equivalent of CNC's entire annual output (which was approximately 240,000
tons in 1992).
At this facility, the Southern Division operates four paper machines that
produce newsprint and uncoated groundwood specialty papers. Also located at this
facility is CNC's newsprint machine, the largest on the site. Although the
Southern Division manages and operates the entire Calhoun facility, CNC owns
68.4 percent of the site's thermomechanical pulp (TMP) mill and 100 percent of
the site's recycled fiber plant completed in August 1991. The Southern Division
owns the remaining 31.6 percent of the TMP mill and 100 percent of the other
facilities at this location. These other facilities include kraft and groundwood
pulp mills, a power plant, water treatment facilities, and other support
equipment necessary to produce the finished product. Recent significant capital
improvements in the Southern Division have included the rebuilding and updating
of four paper machines with new twin wire formers that have contributed to
increased production and higher quality. The continuing modernization of the
Southern Division's facilities has substantially improved product quality and
supported its position as one of the most productive in the industry. In
addition, the Calhoun mill has created a process whereby post-consumer recycled
pulp and virgin pulps are used in paper sold to the Company's communication
papers group.
Approximately 20 percent of the Company's market pulp production comes from
the Southern Division, where the capability to produce hardwood pulp has opened
new market channels for the Company. The Company replaced a smaller 34-year old
kraft pulp mill at Calhoun in early 1990 with a new bleached kraft pulp mill
that has the capacity to produce 900 tons of pulp per day. This new mill
utilizes the most up-to-date technology and has provided increased capacity,
improved pulp quality, reduced energy consumption, and an improved environmental
impact. In addition to supplying the chemical pulp portion of the newsprint
furnish, the new kraft mill, during its third year of operation in 1992, also
produced 66,787 tons of fully bleached market pulp for sale to customers.
In 1994, the Southern Division will replace its present recovery boilers,
which are 27 and 39 years old, with a new recovery boiler currently under
construction. A recovery boiler is an essential part of the kraft pulping
process. The new recovery boiler will enable the Company to realize significant
cost reductions and meet currently proposed environmental
24
<PAGE>
regulations. The acquisition of this recovery boiler will be financed in part
with the proceeds of the sale of the Depositary Shares. See Use of Proceeds.
The Company believes that its Calhoun mill is a modern, highly efficient
operation meeting customer demands for paper with both wastepaper and virgin
pulp content.
CATAWBA, SOUTH CAROLINA (CAROLINA DIVISION)
This facility's newsprint machine is one of the largest and most productive
newsprint machines in the industry. In 1988, the Company installed a twin wire
former and other ancillary equipment that have enhanced this machine's capacity
and permitted it to produce a higher quality product.
The Carolina Division manufactures a variety of coated grades on two coated
paper machines. Since 1985, the Company has made continuous improvements in the
quality of its coated paper and the number of grades offered.
In addition to furnishing its internal pulp requirements, the Carolina
Division supplies bleached softwood kraft market pulp to paper manufacturers. In
1992, approximately 80 percent of the Company's market pulp production came from
its Carolina Division.
The Company believes that its Catawba mill is among the most
cost-competitive and productive mills in the industry.
LIVERPOOL, NOVA SCOTIA (MERSEY)
Mersey is jointly owned by the Company and The Washington Post Company,
which annually purchases approximately 80,000 tons of newsprint from the
Company. The Mersey mill is located on an ice-free port providing access to
ports along the eastern seaboard of the United States and throughout the world.
Its two paper machines, built in 1929, were completely rebuilt between 1983 and
1985. The mill also operates support facilities required to produce the finished
product. A new TMP mill was started up in late 1989 and it now supplies 100
percent of the pulp to the two newsprint machines. This change has resulted in
significant improvements in product quality.
The Company believes that its Mersey facilities are highly competitive in
product quality and machine efficiency and that the productivity of the facility
falls in the mid-range of Canadian producers.
EAST MILLINOCKET AND MILLINOCKET, MAINE (GNP)
The Company's acquisition of GNP has increased the Company's ability to
produce additional grades of lighter weight papers demanded by many publishers,
printers and paper merchants. Since the GNP acquisition, the Company has
undertaken a number of capital improvements at GNP to increase production
efficiencies and improve product quality.
The East Millinocket mill is located on the West Branch of the Penobscot
River in northern Maine. East Millinocket's two paper machines were built in
1954 and completely rebuilt in 1985. These two machines produce newsprint,
directory paper and other uncoated groundwood specialties. The East Millinocket
mill also operates a groundwood pulp mill and other support facilities required
to produce the finished products. Sulfite pulp is pumped through a pipeline from
the Millinocket mill for use at the East Millinocket mill. The mill's recycling
facility, which began operation in late May of 1993, will enable the Company to
meet widespread customer demand for directory and newsprint paper containing
post-consumer wastepaper.
The Company believes that the paper machines at the East Millinocket
facility are highly competitive and provide customers with excellent quality
newsprint and directory paper.
The Millinocket mill is located eight miles from the East Millinocket mill
and produces newsprint, directory papers and uncoated groundwood specialties.
The Company also manufactures a variety of coated grades on three coated paper
machines at this mill site. During the third quarter of 1993, the Company
announced the phased closure of certain older, higher cost operations located at
the Millinocket mill. The phaseout will involve the shutdown of the mill's
woodyard, groundwood pulping facilities and a small paper machine that produces
uncoated groundwood specialties. Approximately 200 positions will be eliminated
throughout the mill's operations over a 12 month period as a result of this
closure. The Company believes that these changes will significantly improve the
mill's cost competitiveness.
COMMUNICATION PAPERS
Throughout the 1990's, the business forms industry has faced weak demand
and excess industry capacity. The dollar value of United States sales of
continuous stock computer forms reached a high in 1990 of $1.97 billion and has
declined
25
<PAGE>
each year since then. In 1993, such industry sales volume has remained
essentially unchanged as compared to 1992. Industry capacity utilization rates
during the past three years have averaged between 59 percent and 62 percent.
The cost of forms bond paper, the principal raw material for many business
papers, remains the determining factor in the profitability of the product
converted from it. Since substantial overcapacity continues in this paper grade,
costs have been dropping steadily since 1991. Due to intense competition, prices
and margins have followed the same downward trend.
The Company believes that the market for continuous stock forms will remain
highly competitive, and the Company does not expect total demand to increase.
The Company's subsidiary, Bowater Communication Papers Inc. (BCPI),
converts paper into continuous stock computer forms at eight plants in the
United States. BCPI markets this product and other business communication papers
through its two divisions, Bowater Computer Forms (BCF) and Star Forms, which
use a network of 30 distribution centers to service customers in major
metropolitan areas throughout the United States. BCF specializes in direct sales
to numerous large-volume end-users, such as banks and governmental entities,
while Star Forms concentrates on sales to smaller businesses and individuals
through sales to numerous business forms distributors, paper merchants, office
product dealers, computer stores and other outlets.
Demand for continuous stock computer forms increased during the late
1980's, in part because of the popularity of home computers. In the early
1990's, as the United States economy weakened, demand softened, selling prices
dropped and raw material costs rose. As a result, the profitability of these
products declined in the early 1990's. Intense competition, excess industry
capacity and weak demand have hindered the recovery of selling prices.
Given this environment, the Company's strategic focus has been to
differentiate itself from others in the marketplace by developing new products,
including forms with recycled content such as EW-20(TM) and EB-20(TW), and by
gaining the benefits of more vertical integration, using the capabilities of
its paper mills. Paper is the primary cost of this business, and the Company
is moving toward providing more of BCPI's paper needs internally to the extent
consistent with customer product requirements. This vertical integration has
provided the Company generally with higher margins than the products previously
produced on its uncoated groundwood paper machines. The Company provided
approximately 23 percent of BCPI's total paper requirements in 1993, and
expects to provide substantially more of BCPI's total paper requirements in
1994. The Company believes that, notwithstanding the increase in use of
business machines using higher grades of paper, customers that generate
high volumes of internal documents will continue to demand groundwood based
continuous stock computer forms.
TIMBERLANDS AND LUMBER PRODUCTS
The Company currently owns approximately 3.9 million acres and manages
under lease approximately .1 million acres of timberlands throughout eight
states and Nova Scotia. These timberlands supply approximately half of the
Company's wood requirements. Approximately 2.1 million acres of these
timberlands were acquired in the GNP acquisition and are located in the State of
Maine. The balance of the United States acreage (approximately 1.1 million
acres) is located in the southeastern United States and approximately .8 million
acres are located in Nova Scotia. The Company also maintains two nurseries from
which it supplies seedlings to replace trees harvested from its timberlands,
generally planting three trees for each one that is cut.
The Company operates three sawmills that produce construction grade lumber.
The sawmill at Albertville, Alabama, produced 92.0 million board feet of lumber
in 1992. This lumber is sold in the southern and midwestern United States.
Mersey operates a small sawmill in Oak Hill, Nova Scotia, the products of which
are sold to customers in eastern Canada and the United Kingdom. The Oak Hill
sawmill produced 19.9 million board feet of lumber in 1992. The Company's
Pinkham Lumber sawmill in Ashland, Maine, produced 79.7 million board feet of
lumber in 1992, with the majority of this product being sold to customers in New
England.
COMPETITION
Newsprint and bleached market pulp are consumed in virtually every country
of the world and produced in nearly all countries with adequate indigenous fiber
sources. No proprietary process is employed in either their manufacture or use,
and the Company does not spend a material amount on research and development.
There are approximately 20 major producers of newsprint with which the Company
competes. The Company is not a major producer in the market pulp industry, which
includes numerous suppliers worldwide. Price, quality and service are important
competitive determinants.
26
<PAGE>
Over half of the United States consumption of directory and other uncoated
groundwood specialty papers is currently met by imports. The Company uses price,
quality and service to compete with other producers.
The coated paper market is also highly competitive. Price, quality and
service are important competitive determinants, but a degree of proprietary
knowledge is required in both the manufacture and use of this product, which
encourages close supplier-customer relationships.
The Company believes that it has the second largest United States market
share in the sale of continuous stock computer forms at approximately 11
percent. Nonetheless, this business faces considerable competition. The
Company's competitive efforts are focused on price, quality, customer service
and the introduction of new products, including products with post-consumer
wastepaper recycled content.
As with other globally manufactured and sold commodities, the Company's
competitive position, particularly with respect to its paper and pulp products,
is significantly affected by the volatility of currency exchange rates. Since
several of the Company's primary competitors are located in Canada, Sweden and
Finland, the relative rates of exchange between those countries' currencies and
the United States dollar can have a substantial effect on the Company's ability
to compete. Recently, the Company's competitive position has been adversely
affected by the relative strength of the United States dollar against these
currencies.
In addition, the degree to which the Company competes with foreign
producers depends in part on the level of demand abroad. Shipping costs
generally cause producers to prefer to sell in local markets when the demand is
sufficient in those markets.
Trends in electronic data transmission and storage could adversely affect
traditional print media, including products of the Company's customers; however,
neither the timing nor the extent of those trends can be predicted with
certainty. Industry reports indicate that the Company's newspaper publishing
customers in North America have experienced some loss of market share to other
forms of media and advertising, such as direct mailings and newspaper inserts
(both of which are end uses for selected Company products) and cable television.
These customers are also facing a decline in newspaper readership, circulation
and advertising lineage. The Company does not believe that this is the case in
most overseas markets.
Part of the Company's competitive strategy is to be a low cost producer of
its products while maintaining strict quality standards and being responsive on
environmental issues. The Company believes that its large woodland base,
relative to its paper production, provides it with a competitive advantage in
controlling costs and that its two recycling facilities have further enhanced
its competitive position. The Company believes that the cost advantage of these
recycling facilities, as compared to the more traditional methods of paper
production, should continue until the price for wastepaper significantly rises.
RAW MATERIALS
The manufacture of pulp and paper requires significant amounts of wood
fiber and energy. Approximately 3.0 million cords of wood were consumed by the
Company during 1992 for pulp and paper production. Wood harvested from Company-
owned or Company-leased properties supplies approximately 50 percent of the
Company's total wood fiber requirements. The balance of the Company's virgin
wood requirements are purchased, primarily under contract, from local wood
producers, private landowners and sawmills (in the form of chips) at market
prices. Wastepaper (in the form of old newspapers and magazines) is purchased
from suppliers in the regions of the Company's two recycling plants. These
suppliers collect, sort and bale the material before selling it to the Company,
primarily under long-term contracts.
Steam and electrical power are the primary forms of energy used in pulp and
paper production. In 1992, the Company internally generated approximately 21
percent of its total electrical power requirements. Over time, the Company has
reduced its dependence upon oil and natural gas by increasing its ability to
burn wood wastes and coal. Process steam is produced in boilers at the various
mill sites from a variety of fuel sources, including waste products. Internally
generated electrical power at the Calhoun and Catawba facilities supplements
purchased electrical power. The Company has long-term contracts in place with
the electric utilities that serve its Catawba, Calhoun and Mersey facilities.
The Company's paper operations in Maine are substantially self-sufficient
electrically with six hydroelectric facilities located on the West Branch of the
Penobscot River (containing 31 hydroelectric generators) and seven steam turbine
generators located in the mill power plants.
The Company operates its Maine hydroelectric facilities pursuant to
long-term licenses granted by the Federal Energy Regulatory Commission (FERC) or
its predecessor, the Federal Power Commission. The existing licenses for certain
dams expired on December 31, 1993. The Company is currently engaged in the
multi-year relicensing process to obtain new 30-
27
<PAGE>
year licenses. The relicensing proceedings have not yet concluded; however,
annual extensions are expected to be granted while FERC proceeds with
preparation of an environmental impact statement now scheduled to be issued in
the third quarter of 1994. In connection with the relicensing process, various
groups have intervened and raised objections that are now being considered by
FERC. Although there can be no assurances, the Company believes that,
notwithstanding these objections, new licenses will be issued and that such
licenses will contain terms and conditions that will allow the Company to
maintain most of the benefits that are provided under the existing licenses. In
the interim period, the Company will continue to operate under the existing
licenses or such annual licenses as FERC issues prior to the conclusion of the
pending relicensing proceedings.
EMPLOYEES
Along with wood fiber and energy, labor constitutes a significant component
of the cost of paper and pulp production. As of December 31, 1993, the Company
employed approximately 6,600 people, of whom approximately 4,300 were
represented by bargaining units. For a discussion of recent personnel
reductions, see Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources. The labor agreement at
the Company's Catawba mill covering all of the plant's hourly employees was
recently extended for four years beginning April 19, 1993. A 1991 labor contract
at the Calhoun mill with most of the plant's hourly employees lasts until July
1996. Negotiations are under way for the renewal of the labor contract at the
Mersey mill, which expired in May 1993. Contracts covering the large majority of
unionized employees of GNP expire in August 1995. All plant facilities are
situated in areas where an adequate labor pool exists and relations with
employees are considered good by the Company. The Company's employment efforts
are focused on training and safety.
TRADEMARKS AND NAME
The Company currently possesses the exclusive worldwide right to use the
trademarked Company logo and, in the western hemisphere, the exclusive right to
use the trade name Bowater. The Company considers these rights to be valuable
and necessary to the conduct of the Company's business.
28
<PAGE>
TECHNICAL GLOSSARY
BASIS WEIGHT: unit of measurement of paper consisting of its weight divided
by a specific surface area, commonly denominated in North America in pounds/ream
and elsewhere in grams/square meter.
COATED PAPER: paper treated with certain additives, mainly inorganic
pigments, latex, starch and other chemicals to obtain certain characteristics
necessary to achieve high quality printing.
DIRECTORY PAPERS: lightweight uncoated groundwood specialty papers used for
telephone and other directories and catalogs.
FREESHEET PAPER: paper made from fibers manufactured from a chemical
pulping process (kraft) as opposed to a mechanical pulping process (groundwood
or thermomechanical pulp).
FURNISH: a blend of different types of pulps and additives that are
provided to the paper machine for making paper.
LIGHTWEIGHT COATED GROUNDWOOD PAPER (LWC): coated groundwood paper
typically having a basis weight ranging between 25 and 50 pounds.
NEWSPRINT: a printing paper classified as newsprint by virtue of its
characteristics of weight, brightness, smoothness and thickness, made largely
from groundwood, mechanical or recycled pulp, usually reinforced to varying
degrees with chemical pulp.
OPERATING RATE: the ratio of actual production to the capacity of a machine
or mill.
PULP: a fibrous material produced mechanically or chemically by reducing
woody plants into their component parts. Pulp can result from a variety of
processes including cooking, refining, grinding or the processing and cleaning
of wastepaper. Pulp can be either in a wet or dry state. Types of pulp include:
KRAFT PULP -- pulp obtained by cooking wood in solutions of various
chemicals. The principal chemical processes are sulphite and sulphate.
RECYCLED PULP -- pulp produced from recycling and de-inking old
newspapers, directories and magazines.
GROUNDWOOD PULP -- pulp produced mechanically by grinding logs.
THERMOMECHANICAL PULP (TMP) -- groundwood pulp produced through a
process involving the mechanical refining of wood chips under high
temperature and pressure.
RECYCLING: a process to remove inks and other non-fiber contaminants from
repulped wastepaper for the purpose of obtaining clean fiber suitable for
manufacturing printing paper. The principal technique used by the Company to
remove ink and other non-fibrous contaminants is based on flotation and washing
technology.
TWIN WIRE FORMER: a manufacturing technique allowing drainage from two
supporting surfaces (wires), providing paper with better dimensional stability,
less two-sidedness and better overall printing characteristics than paper
manufactured from traditional single wire formers.
UNCOATED GROUNDWOOD SPECIALTY PAPERS: uncoated papers of higher quality
than newsprint but lower quality than fine paper in terms of weight, brightness,
smoothness and thickness. It is made largely from groundwood pulp, but also
contains varying proportions of chemical pulp.
VIRGIN FIBER: pulp fiber derived from fiber sources not previously
processed into paper.
29
<PAGE>
DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF THE COMPANY'S CAPITAL STOCK
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
ALL OF THE PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND
BYLAWS.
The Company is authorized to issue 100,000,000 shares of Common Stock, $1
par value (Common Stock), and 10,000,000 shares of Serial Preferred Stock, $1
par value (Preferred Stock). As of January 27, 1994, there were approximately
7,251 holders of record of the Company's Common Stock.
COMMON STOCK
DIVIDENDS. Subject to the prior rights of the Preferred Stock, each
outstanding share of Common Stock is entitled to such dividends as may be
declared from time to time by the Board of Directors consistent with the
provisions of the Company's Restated Certificate of Incorporation, the Company's
Bylaws and applicable law.
VOTING. Each outstanding share of Common Stock is entitled to one vote on
all matters submitted to a vote of holders of the Common Stock. Removal of
directors can be for cause only and requires a 75 percent vote of the
outstanding shares entitled to vote at an election of directors. A vote of 75
percent of the outstanding shares entitled to vote for the election of directors
is required in order to approve certain business combinations involving certain
stockholders beneficially owning more than 5 percent of the outstanding shares
entitled to vote for the election of directors, unless the Board of Directors
recommends the transaction prior to the acquisition by such stockholders of more
than 5 percent of the voting power of the outstanding shares entitled to vote
for the election of directors, or unless a majority of the continuing directors
approves the transaction, in each of which cases the shareholder vote, if any,
that is required by law will suffice. A vote of 75 percent of the voting power
of the outstanding shares is required to amend certain provisions in the
Restated Certificate of Incorporation or, in certain circumstances, various
provisions of the Bylaws. Stockholders of the Company are not permitted to act
by written consent but are required to act through a sufficient vote at a duly
convened stockholders meeting. The Board of Directors is classified into three
classes, with staggered terms of three years each. The Company's Common Stock
does not possess cumulative voting rights.
LIQUIDATION. Subject to the prior rights of the Preferred Stock, in the
event of any liquidation or dissolution of the Company, holders of the Common
Stock are entitled to receive pro rata any assets of the Company remaining after
provision for payment of creditors.
TRANSFER AGENTS AND REGISTRARS. The transfer agent and registrar of the
Common Stock in the United States is The Bank of New York; the transfer agent
and registrar of the Common Stock in the United Kingdom is the R-M Trust Co.
OTHER. Holders of Common Stock have no conversion rights or preemptive
rights to purchase or subscribe for securities of the Company. The Common Stock
is not subject to further calls or to assessments.
RIGHTS PLAN
The following summary of certain provisions of the Company's Rights Plan
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Rights Agreement dated as of April 22, 1986, as
amended, between the Company and the Bank of New York as successor Rights Agent
to Morgan Guaranty Trust Company of New York. Capitalized terms used in this
summary and not otherwise defined in this Prospectus shall have the meanings
ascribed to them in the Rights Agreement.
RIGHTS. Effective May 2, 1986, the Company initiated a rights plan (the
Rights Plan) and declared a dividend of one right (a Right) for each share of
Common Stock outstanding on that date. Each certificate for shares of Common
Stock issued after May 2, 1986 and before the Distribution Date (defined below)
shall be deemed also to be a certificate for the same number of Rights. Each
Right entitles the holder to purchase one one-hundredth of a share of Junior
Participating Preferred Stock, Series A (Junior Preferred Stock), at the
Purchase Price (defined below) at any time after the Distribution Date. Until
the Distribution Date, the Rights are evidenced by the certificates for Common
Stock and are transferable only in connection with the transfer of Common Stock,
with the surrender for transfer of any certificates for Common Stock
constituting a transfer of the Rights associated with such Common Stock. As soon
as practicable after the Distribution Date, separate certificates evidencing the
Rights will be mailed to holders of record of the Common Stock as of the close
of business on the Distribution Date. Until a Right is exercised, such Right
confers no rights as a stockholder of the Company, including without limitation
the right to vote or to receive dividends.
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DISTRIBUTION DATE. The Distribution Date is the earlier of (1) ten days
after the announced date (Stock Acquisition Date) that a person (Acquiring
Person), together with affiliates and associates, becomes the beneficial owner
of 20 percent or more of the Common Stock or (2) ten days after the date of
commencement or public announcement by a person (other than the Company),
together with affiliates and associates, of a tender offer for 30 percent or
more of the Common Stock.
PURCHASE PRICE. Each Right is exercisable at an initial Purchase Price of
$90. The Purchase Price is payable, at the holder's option, in cash or shares of
Common Stock having a market value equal to the Purchase Price. The Purchase
Price, and the number of shares of Junior Preferred Stock or other securities
issuable upon exercise of the Rights, are subject to adjustment to prevent
dilution arising from certain events enumerated in the Rights Plan, and the
securities issuable upon exercise of the Rights are subject to further
adjustment upon the occurrence of a Triggering Event (defined below).
TRIGGERING EVENT. A Triggering Event occurs at any time:
(1) an Acquiring Person or any affiliate or associate of an Acquiring
Person (a) merges into the Company or any subsidiary of which the Company owns a
majority of any class of capital stock and the Common Stock remains outstanding
and unchanged, (b) transfers assets to the Company in exchange for, or otherwise
obtains, securities of the Company other than in a pro rata distribution, (c)
effects a transaction in the assets of the Company or any such subsidiary having
an aggregate fair market value of more than $3 million, (d) effects a
transaction in the assets of the Company or any such subsidiary on terms less
favorable than arm's-length, (e) receives compensation from the Company or any
such subsidiary other than for full-time employment, or (f) receives the benefit
of credit assistance or tax advantages provided by the Company;
(2) there is an Acquiring Person and any transaction involving the
securities of the Company or any subsidiary results in the increase by more than
1 percent of the proportionate share of any security of the Company held by the
Acquiring Person or any affiliate or associate;
(3) a person (other than the Company or certain controlled entities)
becomes the beneficial owner of 30 percent or more of the Common Stock; or
(4) after the Distribution Date that the Company merges into or combines
with another person, any person merges or combines with the Company and the
Common Stock is exchanged for securities of another person, or the Company or
any such subsidiary sells more than 50 percent of its assets or earning power.
EFFECTS OF TRIGGERING EVENT. Upon the occurrence of a Triggering Event, the
Rights held by an Acquiring Person, and any affiliate, associate, and certain
transferees of the Acquiring Person, become void, and exercise of a valid Right
and tender of the Purchase Price by any other holder entitles the holder to
receive, in lieu of Junior Preferred Stock, (a) two times the number of shares
of Common Stock that could otherwise be purchased for the Purchase Price at the
then fair market value of the Common Stock, or (b) at the option of the
Continuing Directors, any combination of cash, property, Common Stock or other
securities of the Company equal in value to such number of shares of Common
Stock, or (c) in the case of a Triggering Event described in clause (4) of the
preceding paragraph, two times the number of shares of common stock of the
resulting or surviving corporation that could otherwise be purchased for the
Purchase Price at the fair market value of such common stock.
REDEMPTION AND TERMINATION. At any time on or prior to the earlier of the
10th day following the Stock Acquisition Date and May 2, 1996 (the expiration
date of the Rights), the Company may redeem the Rights for $.01 per Right. The
Company's Board of Directors has stated that, without shareholder approval, the
Rights Plan will not be renewed upon its expiration.
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the Board of
Directors (without stockholder approval), among other things, to issue series of
Preferred Stock with such powers, designations, preferences and rights, and
qualifications, limitations or restrictions, as the Board of Directors shall
determine.
The Company currently has one series of Preferred Stock outstanding,
consisting of 1,500,000 shares of LIBOR Preferred Stock, Series A (the LIBOR
Preferred Stock), which has a stated involuntary liquidation preference of
$50.00 per share. The dividend rate on the LIBOR Preferred Stock, 2.8924 percent
for the 12-month period ended October 2, 1993, is reset quarterly based on the
London Interbank offered rates for three month United States dollar deposits.
The transfer agent and registrar of the LIBOR Preferred Stock is Mellon
Securities Trust Company.
As described above under Rights Plan, Rights holders are entitled to
purchase shares of Junior Preferred Stock subject to certain terms and
conditions. No share of Junior Preferred Stock is currently outstanding.
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At approximately the same time as the offering of the Depositary Shares,
the Company is offering $101,050,000 stated liquidation amount of the Company's
Series B Convertible Preferred Stock. The two closings are not contingent upon
one another. The dividend rate on the Series B Convertible Preferred Stock, if
issued, will be 7% per annum.
Certain provisions of the Company's Restated Certificate of Incorporation
or Bylaws may have the effect of delaying, deferring or preventing a change in
control of the Company. These provisions include: those regarding a classified
Board of Directors; the supermajority shareholder or special director voting
requirements for approval of certain business combinations and for filling
vacancies on the Board of Directors under certain circumstances; the requirement
that the stockholders may act only through a stockholders meeting, coupled with
the provision that only the Board of Directors or certain executive officers can
call special stockholders meetings; the ability of the Board of Directors to
issue Preferred Stock issued serially without prior approval of the stockholders
and which may have various voting rights designated by the directors, including
a separate right to approve a merger or sale of substantially all of the assets
of the Company; and the supermajority voting requirements to amend certain
provisions of the Restated Certificate of Incorporation or, in certain
circumstances, various provisions of the Bylaws. The Rights Plan may also have
the effect of making the acquisition of control of the Company more difficult.
See Description of Capital Stock -- Rights Plan. Certain provisions in the
Company's employment contracts, stock option plans, severance pay plans, and
qualified and nonqualified benefit plans, in the Credit Agreement, and in the
indenture relating to the Company's 9% Debentures due 2009 in the principal
amount of $300 million may also have the effect of inhibiting a change of
control of the Company.
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DESCRIPTION OF SERIES C PREFERRED STOCK
THE SUMMARY CONTAINED HEREIN OF THE TERMS OF SHARES OF SERIES C PREFERRED
STOCK, INCLUDING THOSE TERMS APPLICABLE TO THE SHARES OF PREFERRED STOCK OF THE
COMPANY OF ALL SERIES (THE PREFERRED STOCK), DOES NOT PURPORT TO BE COMPLETE AND
IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ALL OF THE
PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND FORM OF
CERTIFICATE OF DESIGNATIONS RELATING TO THE SHARES OF SERIES C PREFERRED STOCK
(THE CERTIFICATE OF DESIGNATIONS), A COPY OF EACH OF WHICH HAS BEEN FILED AS AN
EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
Each of the Depositary Shares represents beneficial ownership of one-fourth
of a share of Series C Preferred Stock and entitles the owner to that proportion
of all the rights, preferences and privileges of the share of Series C Preferred
Stock represented thereby. See Description of Depositary Shares. The Series C
Preferred Stock will not be listed on any exchange, and the Company does not
expect that there will be any trading market for the shares of Series C
Preferred Stock except as represented by the Depositary Shares.
DIVIDENDS
Holders of record of the shares of Series C Preferred Stock (and thereby
holders of Depositary Shares) shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available therefor, cash
dividends from the date of initial issuance of shares of Series C Preferred
Stock at the rate of 8.40 percent of the stated liquidation preference per annum
(equivalent to $2.10 per annum or $.525 per quarter for each Depositary Share),
payable quarterly in arrears on the fifteenth day of January, April, July and
October or, if any such date is not a business day, on the next succeeding
business day. The first dividend period will be from the date of initial
issuance of the shares of Series C Preferred Stock to, but excluding, April 15,
1994, and will be payable on April 15, 1994. Dividends will cease to accrue on
the shares of Series C Preferred Stock on the date of their redemption.
Dividends will be payable to holders of record of shares of Series C Preferred
Stock as they appear on the stock register of the Company on such record dates,
not less than 15 nor more than 60 days preceding the payment date thereof, as
shall be fixed by the Board of Directors. Dividends payable on shares of Series
C Preferred Stock for any period less than a full quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed in any period of less than one month.
Dividends on shares of Series C Preferred Stock shall accrue whether or not
there are funds legally available for the payment of such dividends and whether
or not such dividends are declared. Accrued but unpaid dividends on shares of
Series C Preferred Stock shall cumulate as of the dividend payment date on which
they first become payable, but no interest shall accrue on accumulated but
unpaid dividends on shares of Series C Preferred Stock.
The shares of Series C Preferred Stock will rank on a parity, both as to
payment of dividends and distribution of assets upon liquidation, with the
Company's LIBOR Preferred Stock, Series A, and the shares of Series B
Convertible Preferred Stock (expected to be issued at approximately the same
time as the shares of Series C Preferred Stock), as well as any Preferred Stock
issued in the future by the Company that by its terms ranks PARI PASSU with the
shares of Series C Preferred Stock.
As long as any shares of Series C Preferred Stock are outstanding, no
dividends (other than dividends payable in shares of, or warrants, rights or
options exercisable for or convertible into shares of, any capital stock,
including without limitation the Common Stock, of the Company ranking junior to
the shares of Series C Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation (collectively Junior Stock) and cash in
lieu of fractional shares in connection with any such dividend) will be paid or
declared in cash or otherwise, nor will any other distribution be made (other
than a distribution payable in Junior Stock and cash in lieu of fractional
shares in connection with any such distribution), on any Junior Stock unless:
(i) full dividends on Preferred Stock that does not constitute Junior Stock
(Parity Preferred Stock) have been paid, or declared and set aside for payment,
for all dividend periods terminating on or prior to the date of such Junior
Stock dividend or distribution payment to the extent such dividends are
cumulative; (ii) dividends in full for the current quarterly dividend period
have been paid, or declared and set aside for payment, on all Parity Preferred
Stock to the extent such dividends are cumulative; (iii) the Company has paid or
set aside all amounts, if any, then or theretofore required to be paid or set
aside for all purchase, retirement, and sinking funds, if any, for any Parity
Preferred Stock; and (iv) the Company is not in default on any of its
obligations to redeem any Parity Preferred Stock.
In addition, as long as any shares of Series C Preferred Stock are
outstanding, no shares of any Junior Stock may be purchased, redeemed, or
otherwise acquired by the Company or any of its subsidiaries (except in
connection with a reclassification or exchange of any Junior Stock through the
issuance of other Junior Stock (and cash in lieu of fractional shares in
connection therewith) or the purchase, redemption, or other acquisition of any
Junior Stock with any Junior Stock (and cash
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in lieu of fractional shares in connection therewith)) nor may any funds be set
aside or made available for any sinking fund for the purchase, redemption or
acquisition of any Junior Stock unless: (i) full dividends on Parity Preferred
Stock have been paid, or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such purchase, redemption,
acquisition, setting aside or making available to the extent such dividends are
cumulative; (ii) dividends in full for the current quarterly dividend period
have been paid, or declared and set aside for payment, on all Parity Preferred
Stock to the extent such dividends are cumulative; (iii) the Company has paid or
set aside all amounts, if any, then or theretofore required to be paid or set
aside for all purchase, retirement, and sinking funds, if any, for any Parity
Preferred Stock; and (iv) the Company is not in default on any of its
obligations to redeem any Parity Preferred Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property, or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or otherwise
acquired by the Company or any of its subsidiaries, and funds may be set aside
or made available for that purpose, from time to time. In the event of the
declaration and payment of any such dividends or other distributions, the
holders of such Junior Stock will be entitled, to the exclusion of holders of
Parity Preferred Stock, to share therein according to their respective
interests.
As long as any shares of Series C Preferred Stock are outstanding,
dividends or other distributions may not be declared or paid on any Parity
Preferred Stock (other than dividends or other distributions payable in Junior
Stock and cash in lieu of fractional shares in connection therewith), and the
Company may not purchase, redeem or otherwise acquire any Parity Preferred Stock
(except with any Junior Stock and cash in lieu of fractional shares in
connection therewith and except with the right, subject to clause (b) of this
paragraph and any similar requirement of any other Preferred Stock, to receive
accrued and unpaid dividends), unless either: (a)(i) full dividends on Parity
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Parity Preferred
Stock dividend, distribution, redemption, purchase or acquisition payment to the
extent such dividends are cumulative; (ii) dividends in full for the current
quarterly dividend period have been paid, or declared and set aside for payment,
on all Parity Preferred Stock to the extent such dividends are cumulative; (iii)
the Company has paid or set aside all amounts, if any, then or theretofore
required to be paid or set aside for all purchase, retirement, and sinking
funds, if any, for any Parity Preferred Stock; and (iv) the Company is not in
default on any of its obligations to redeem any Parity Preferred Stock; or (b)
with respect to the declaration and payment of dividends only, any such
dividends are declared and paid pro rata so that the amounts of any dividends
declared and paid per share of Series C Preferred Stock and each other share of
Parity Preferred Stock will in all cases bear to each other the same ratio that
accrued and unpaid dividends (including any accumulation with respect to unpaid
dividends for prior dividend periods, if such dividends are cumulative) per
share of Series C Preferred Stock and the other share of Parity Preferred Stock
bear to each other.
OPTIONAL REDEMPTION
Shares of Series C Preferred Stock (and thereby the Depositary Shares) are
not redeemable by the Company prior to February 8, 1999. At any time and from
time to time on or after that date, the Company will have the right to redeem,
in whole or in part, the outstanding shares of Series C Preferred Stock (and
thereby the related Depositary Shares), for $100 per share (equivalent to $25
per Depositary Share) plus accrued and unpaid dividends (whether or not
declared) to, but not including, the date fixed for redemption (other than
previously declared dividends payable to a holder of record as of a prior date).
Dividends will cease to accrue on the shares of Series C Preferred Stock on the
date fixed for their redemption.
If fewer than all the outstanding shares of Series C Preferred Stock are to
be called for redemption, shares of Series C Preferred Stock to be called will
be selected by the Company from outstanding shares of Series C Preferred Stock
not previously called by lot or pro rata (as nearly as may be) or by any other
method determined by the Board of Directors in its sole discretion to be
equitable.
The Company will provide notice of any call for redemption of shares of
Series C Preferred Stock to holders of record of the shares of Series C
Preferred Stock to be called for redemption not less than 30 nor more than 60
days prior to the date fixed for redemption. Any such notice will be provided by
mail, sent to the holders of record of the shares of Series C Preferred Stock to
be called for redemption at such holder's address as it appears on the stock
register of the Company, first class postage paid; PROVIDED, HOWEVER, that
failure to give such notice or any defect therein shall not affect the validity
of the proceeding for redemption of any shares of Series C Preferred Stock to be
redeemed except as to the holder to whom the Company has failed to give said
notice or whose notice was defective. On and after the redemption date, all
rights of the
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holders of the shares of Series C Preferred Stock called for redemption shall
terminate except the right to receive the redemption price (unless the Company
defaults on payment of the redemption price). A public announcement of any call
for redemption will be made by the Company prior to, or at the time of, the
mailing of such notice of redemption.
Each holder of shares of Series C Preferred Stock called for redemption
must surrender the certificates evidencing such shares of Series C Preferred
Stock to the Company at the place and in the manner designated in the notice of
redemption and will thereupon be entitled to receive the redemption price.
There is no mandatory redemption or sinking fund obligation with respect to
the Series C Preferred Stock.
The Company will not redeem the Series C Preferred Stock if advised in
advance by Moody's Investor's Service, Inc. or Standard & Poor's Corporation
that to do so would result in a lowering of the Company's credit ratings from
then existing levels.
The Depositary Shares are subject to call upon substantially identical
terms and conditions (including those as to notice to the owners of Depositary
Shares) as the shares of Series C Preferred Stock, adjusted to reflect the fact
that four Depositary Shares are the equivalent of one share of Series C
Preferred Stock. See Description of Depositary Shares -- Redemption of
Depositary Shares.
CONVERSION RIGHTS
The Series C Preferred Stock is not convertible into shares of any other
class or series of capital stock of the Company.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, and subject to the rights of holders of any other
series of Preferred Stock, the holders of outstanding shares of Series C
Preferred Stock are entitled to receive $100 per share (equivalent to $25 for
each Depositary Share), plus accrued and unpaid dividends thereon, out of the
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Junior Stock upon liquidation,
dissolution, or winding up.
If upon any voluntary or involuntary liquidation, dissolution, or winding
up of the Company, the assets of the Company are insufficient to permit the
payment of the full preferential amounts payable with respect to shares of
Series C Preferred Stock and all other series of Parity Preferred Stock, the
holders of shares of Series C Preferred Stock and of all other series of Parity
Preferred Stock will share ratably in any distribution of assets of the Company
in proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Series C Preferred Stock will
not be entitled to any further participation in any distribution of assets by
the Company. A consolidation or merger of the Company with one or more
corporations or a sale or transfer of substantially all of the assets of the
Company shall not be deemed to be a liquidation, dissolution, or winding up of
the Company.
VOTING RIGHTS
Except for the voting rights described below and except as otherwise
provided by law, the holders of shares of Series C Preferred Stock shall not be
entitled to vote on any matter or to receive notice of, or to participate in,
any meeting of shareholders of the Company.
In the event that dividends on the shares of Series C Preferred Stock or
any other series of Preferred Stock shall be in arrears and unpaid for six
quarterly dividend periods, or if any other series of Preferred Stock shall be
entitled for any other reason to exercise voting rights, separate from the
Common Stock, to elect any Directors of the Company (Preferred Stock Directors),
the holders of the shares of Series C Preferred Stock (voting separately as a
class with holders of all other series of Preferred Stock upon which like voting
rights have been conferred and are exercisable), with each share of Series C
Preferred Stock entitled to one vote (equivalent to 1/4 of a vote for each
Depositary Share) on this and other matters in which Preferred Stock votes as a
group, will be entitled to vote for the election of two Preferred Stock
Directors, such Directors to be in addition to the number of Directors
constituting the Board of Directors immediately prior to the accrual of such
right. Such right, when vested, shall continue until all dividends in arrears on
the shares of Series C Preferred Stock and such other series of Preferred Stock
shall have been paid in full and the right of any other series of Preferred
Stock to exercise voting rights, separate from the Common Stock, to elect any
Preferred Stock Directors shall terminate or have terminated, and, when so paid
and such termination occurs or has occurred, such right of the holders of the
shares of Series C Preferred Stock shall cease. Upon the termination of the
aforesaid voting right, subject to the requirements of the Delaware corporation
law and the
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Restated Certificate of Incorporation of the Company, such Preferred Stock
Directors shall cease to be Directors of the Company and shall resign.
The Company will not, without the approval of the holders of at least
66 2/3 percent of all the shares of Series C Preferred Stock then outstanding:
(i) amend, alter, or repeal any of the provisions of the Restated Certificate of
Incorporation or the Bylaws of the Company so as to affect adversely the powers,
preferences, or rights of the holders of the shares of Series C Preferred Stock
then outstanding or reduce the minimum time required for any notice to which
only the holders of the shares of Series C Preferred Stock then outstanding may
be entitled (an amendment of the Restated Certificate of Incorporation to
authorize or create, or to increase the authorized amount of, Junior Stock,
Preferred Stock or any stock of any class ranking on a parity with the shares of
Series C Preferred Stock shall be deemed not to affect adversely the powers,
preferences, or rights of the holders of the shares of Series C Preferred
Stock); (ii) create any series of Preferred Stock ranking prior to the shares of
Series C Preferred Stock as to payment of dividends or the distribution of
assets upon liquidation; (iii) authorize or create, or increase the authorized
amount of, any capital stock, or any security convertible into capital stock, of
any class ranking prior to the Series C Preferred Stock as to payment of
dividends or the distribution of assets upon liquidation; or (iv) merge or
consolidate with or into any other corporation, unless each holder of the Series
C Preferred Stock immediately preceding such merger or consolidation shall
receive or continue to hold in the resulting corporation the same number of
shares, with substantially the same rights and preferences, as correspond to the
Series C Preferred Stock so held.
As long as any shares of Series C Preferred Stock are outstanding, the
Company will not, without the approval of the holders of at least a majority of
the shares of Parity Preferred Stock then outstanding: (i) increase the
authorized amount of the Preferred Stock or (ii) create any class or classes of
capital stock ranking on a parity with the Parity Preferred Stock, either as to
payment of dividends or the distribution of assets upon liquidation, and not
existing on the date of the Certificate of Designations, or create any stock, or
other security, convertible into or exchangeable for or evidencing the right to
purchase any stock of such other class of capital stock ranking on a parity with
the Parity Preferred Stock, or increase the authorized number of shares of any
such other class of capital stock or amount of such other stock or security.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of the shares of
Series C Preferred Stock shall be required if, at or prior to the time when such
amendment, alteration, or repeal is to take effect or when the authorization,
creation or increase of any such prior or parity stock or such other stock or
security is to be made, or when such consolidation or merger is to take effect,
as the case may be, provision is made for the redemption of all shares of Series
C Preferred Stock at the time outstanding.
TRANSFER AGENT AND REGISTRAR
Trust Company Bank, Atlanta, Georgia, will act as transfer agent and
registrar for, and paying agent for the payment of dividends on, shares of
Series C Preferred Stock and the Depositary Shares. Trust Company Bank maintains
a New York drop facility.
MISCELLANEOUS
Upon issuance, the shares of Series C Preferred Stock will be fully paid
and nonassessable. Holders of shares of Series C Preferred Stock have no
preemptive rights. Shares of Series C Preferred Stock redeemed or otherwise
acquired by the Company shall resume the status of authorized and unissued
shares of Preferred Stock, undesignated as to series, and shall be available for
subsequent issuance.
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DESCRIPTION OF DEPOSITARY SHARES
THE FOLLOWING SUMMARY OF THE TERMS AND PROVISIONS OF THE DEPOSITARY SHARES
DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY
BY, THE DEPOSIT AGREEMENT, AS DEFINED BELOW (WHICH CONTAINS THE FORM OF THE
DEPOSITARY RECEIPT, AS DEFINED BELOW).
Each Depositary Share represents one-fourth of a share of Series C
Preferred Stock deposited under the Deposit Agreement, dated as of February 1,
1994 (the Deposit Agreement), among the Company, Trust Company Bank, as
depositary (including any successor, the Depositary), and the holders from time
to time of depositary receipts executed and delivered thereunder (the Depositary
Receipts). Subject to the terms of the Deposit Agreement, each owner of a
Depositary Share is entitled, proportionately, to all the rights, preferences
and privileges of the Series C Preferred Stock represented thereby (including
dividend, voting and liquidation rights), and subject to all of the limitations
of the Series C Preferred Stock represented thereby, contained in the
Certificate of Designations and summarized under Description of Series C
Preferred Stock. The principal executive office of Trust Company Bank is located
at One Park Place, Atlanta, Georgia 30302.
The Depositary Shares are evidenced by Depositary Receipts. Copies of the
Deposit Agreement, the form of which is filed as an exhibit to the Registration
Statement, are available for inspection at the Corporate Office (as defined in
the Deposit Agreement) of the Depositary.
EXECUTION AND DELIVERY OF DEPOSITARY RECEIPTS
Immediately following the issuance of the Series C Preferred Stock by the
Company to the Underwriters, the shares of Series C Preferred Stock will be
deposited by the Underwriters, or on their behalf, with the Depositary, which
will then execute and deliver the Depositary Receipts to the Underwriters.
Depositary Receipts will be executed and delivered evidencing only whole
Depositary Shares.
WITHDRAWAL OF SERIES C PREFERRED STOCK
Upon surrender of Depositary Receipts at the Corporate Office of the
Depositary, the owner of the Depositary Shares evidenced thereby is entitled to
delivery at such office of certificates evidencing the number of shares of
Series C Preferred Stock (but only in whole shares of Series C Preferred Stock)
represented by such Depositary Receipts. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of whole shares of Series C Preferred
Stock to be withdrawn, the Depositary will at the same time deliver to such
holder a new Depositary Receipt or Receipts evidencing such excess number of
Depositary Shares. The Company does not expect that there will be any public
trading market for the Series C Preferred Stock except as represented by the
Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
The Depositary Shares will be redeemed, upon no less than 30 nor more than
60 days' notice, from the cash received by the Depositary resulting from the
redemption, in whole or in part, at the Company's option, but subject to the
terms and conditions applicable thereto, of the shares of Series C Preferred
Stock held by the Depositary. The redemption price per Depositary Share will be
equal to one-fourth of the redemption price per share payable with respect to a
share of the Series C Preferred Stock. See Description of Series C Preferred
Stock -- Optional Redemption. Whenever the Company redeems shares of the Series
C Preferred Stock from the Depositary, the Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the shares of the
Series C Preferred Stock so redeemed.
If fewer than all of the Depositary Shares are to be redeemed, the
Depositary Shares to be redeemed shall be selected by lot or pro rata or by any
other equitable method determined by the Depositary to be consistent with the
method determined by the Board of Directors with respect to the Series C
Preferred Stock. If fewer than all of the Depositary Shares evidenced by a
Receipt are called for redemption, the Depositary will deliver to the holder of
such Depositary Receipt upon its surrender to the Depositary, together with the
redemption payment, a new Depositary Receipt evidencing the Depositary Shares
evidenced by such prior Depositary Receipt and not called for redemption.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of such Depositary Shares will cease, except the right to receive the
amounts payable on such redemption and any money or other property to which the
holders of such Depositary Shares were entitled upon such redemption, upon
surrender to the Depositary of the Depositary Receipt or Receipts evidencing
such Depositary Shares.
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DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions in respect of the Series C Preferred Stock to the record holders
of Depositary Receipts in proportion, insofar as practicable, to the number of
Depositary Shares owned by such holders.
In the event of a distribution other than cash in respect of the Series C
Preferred Stock, the Depositary will distribute property received by it to the
record holders of Depositary Receipts in proportion, insofar as practicable, to
the number of Depositary Shares owned by such holders, unless the Depositary
determines that it is not feasible to make such distribution, in which case the
Depositary may, with the approval of the Company, adopt such method as it deems
equitable and practicable for the purpose of effecting such distribution,
including sale (at public or private sale) of such property and distribution of
the net proceeds from such sale to such holders.
The amount distributed in any of the foregoing cases will be reduced by any
amount required to be withheld by the Company or the Depositary on account of
taxes.
RECORD DATE
Whenever (i) any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall be offered with respect to the Series C
Preferred Stock, or (ii) the Depositary shall receive notice of any meeting at
which holders of Series C Preferred Stock are entitled to vote or of which
holders of Series C Preferred Stock are entitled to notice, or of any election
on the part of the Company to call for redemption any shares of Series C
Preferred Stock, the Depositary shall in each such instance fix a record date
(which shall be the same date as the record date for the Series C Preferred
Stock) for the determination of the holders of Depositary Receipts (x) who shall
be entitled to receive such dividend, distribution, rights, preferences or
privileges or the net proceeds of the sale thereof, (y) who shall be entitled to
give instructions for the exercise of voting rights at any such meeting or to
receive notice of such meeting, or (z) who shall be subject to such redemption,
subject to the provisions of the Deposit Agreement.
VOTING OF SERIES C PREFERRED STOCK
Upon receipt of notice of any meeting at which holders of Series C
Preferred Stock are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of Depositary
Receipts. Each record holder of Depositary Receipts on the record date (which
will be the same date as the record date for the Series C Preferred Stock) will
be entitled to instruct the Depositary as to the exercise of the voting rights
pertaining to the number of shares of Series C Preferred Stock represented by
such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the number of shares of Series C Preferred Stock
represented by such Depositary Shares in accordance with such instructions, and
the Company has agreed to take all reasonable action which may be deemed
necessary by the Depositary in order to enable the Depositary to do so. The
Depositary will abstain from voting shares of Series C Preferred Stock to the
extent it does not receive specific written voting instructions from the holders
of Depositary Receipts representing such shares of Series C Preferred Stock.
TAXATION
The Company believes that owners of the Depositary Shares will be treated
for Federal income tax purposes as if they were owners of the Series C Preferred
Stock represented by such Depositary Shares and accordingly, will be entitled to
take into account for Federal income tax purposes income and deductions to which
they would be entitled if they were holders of shares of such Series C Preferred
Stock. In addition, (i) no gain or loss will be recognized for Federal income
tax purposes upon the withdrawal of Series C Preferred Stock in exchange for
Depositary Shares as provided in the Deposit Agreement, (ii) the tax basis of
each share of Series C Preferred Stock to an exchanging owner of Depositary
Shares will, upon such exchange, be the same as the aggregate tax basis of the
Depositary Shares exchanged therefor, and (iii) the holding period for shares of
Series C Preferred Stock in the hands of an exchanging owner of Depositary
Shares will include the period during which such person owned such Depositary
Shares.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The form of Depositary Receipts and any provision of the Deposit Agreement
may at any time be amended by agreement between the Company and the Depositary.
However, any amendment that imposes any fees, taxes or other charges payable by
holders of Depositary Receipts (other than taxes and other governmental charges,
fees and other expenses payable by such holders as stated under Charges of
Depositary), or that otherwise prejudices any substantial existing right of
38
<PAGE>
holders of Depositary Receipts, will not take effect as to outstanding
Depositary Receipts until the expiration of 90 days after notice of such
amendment has been mailed to the record holders of outstanding Depositary
Receipts. Every holder of Depositary Receipts at the time any such amendment
becomes effective shall be deemed to consent and agree to such amendment and to
be bound by the Deposit Agreement, as so amended. In no event may any amendment
impair the right of any owner of Depositary Shares, subject to the conditions
specified in the Deposit Agreement, upon surrender of the Depositary Receipts
evidencing such Depositary Shares to receive shares of Series C Preferred Stock
and any money or other property represented thereby, except in order to comply
with mandatory provisions of applicable law.
Whenever so directed by the Company, the Depositary will terminate the
Deposit Agreement after mailing notice of such termination to the record holders
of all Depositary Receipts then outstanding at least 30 days prior to the date
fixed in such notice for such termination. The Depositary may likewise terminate
the Deposit Agreement if at any time 45 days shall have expired after the
Depositary shall have delivered to the Company a written notice of its election
to resign and a successor depositary shall not have been appointed and accepted
its appointment. If any Depositary Receipts remain outstanding after the date of
termination, the Depositary thereafter will discontinue the transfer of
Depositary Receipts, will suspend the distribution of dividends to the holders
thereof, and will not give any further notices (other than notice of such
termination) or perform any further acts under the Deposit Agreement except as
provided below and except that the Depositary will continue (i) to collect
dividends on the Series C Preferred Stock and any other distributions with
respect thereto and (ii) to deliver the shares of Series C Preferred Stock
together with such dividends and distributions and the net proceeds of any sales
of rights, preferences, privileges or other property, without liability for
interest thereon, in exchange for Depositary Receipts surrendered. At any time
after the expiration of two years from the date of termination, the Depositary
may sell the shares of Series C Preferred Stock then held by it at public or
private sale, at such place or places and upon such terms as it deems proper and
may thereafter hold the net proceeds of any such sale, together with any money
and other property then held by it, without liability for interest thereon, for
the pro rata benefit of the holders of Depositary Receipts which have not been
surrendered. The Company does not intend to terminate the Deposit Agreement or
to permit the resignation of the Depositary without appointing a successor
depositary. In the event the Deposit Agreement is terminated and a sufficient
number of shares of Series C Preferred Stock remain outstanding, the Company
will use its best efforts to list the shares of Series C Preferred Stock on the
NYSE (unless the holders of a majority of the outstanding shares of the Series C
Preferred Stock shall consent to the Company not effecting such listing).
CHARGES OF DEPOSITARY
The Company will pay all charges of the Depositary including charges in
connection with the initial deposit of the Series C Preferred Stock, the initial
execution and delivery of the Depositary Receipts, the distribution of
information to the holders of Depositary Receipts with respect to matters on
which shares of Series C Preferred Stock are entitled to vote, withdrawals of
the Series C Preferred Stock by the holders of Depositary Receipts or redemption
of the Series C Preferred Stock, except for taxes (including transfer taxes, if
any) and other governmental charges and such other charges as are provided in
the Deposit Agreement to be at the expense of holders of Depositary Receipts or
persons depositing shares of Series C Preferred Stock.
GENERAL
The Depositary will make available for inspection by holders of Depositary
Receipts at its Corporate Office all reports and communications from the Company
that are delivered to the Depositary and made generally available to the holders
of Series C Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control from or in performing its
obligations under the Deposit Agreement.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
Purchase Agreement) between the Company and each of the underwriters named below
(the Underwriters), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Brothers Inc, Kidder, Peabody & Co. Incorporated, Prudential Securities
Incorporated, and Smith Barney Shearson Inc. are acting as representatives (the
Representatives), the Company has agreed to sell to the Underwriters, and each
of the Underwriters severally has agreed to purchase from the Company, the
number of Depositary Shares set forth opposite each Underwriter's name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER DEPOSITARY SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................ 600,000
Salomon Brothers Inc................................................................ 600,000
Kidder, Peabody & Co. Incorporated.................................................. 600,000
Prudential Securities Incorporated.................................................. 600,000
Smith Barney Shearson Inc. ......................................................... 600,000
Total............................................................................... 3,000,000
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Depositary
Shares being sold pursuant to the Purchase Agreement if any of the shares being
sold pursuant to the Purchase Agreement are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased.
The Representatives have advised the Company that they propose initially to
offer the Depositary Shares to the public at the public offering price set forth
on the cover page of the Prospectus and to certain dealers at such price less a
concession not in excess of $.50 per share. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $.35 per share on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to 400,000 Depositary
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of Depositary Shares offered hereby. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage of
such shares as the number of Depositary Shares to be purchased by each
Underwriter shown in the foregoing table bears to the total number of shares
initially offered hereby.
The Company and certain of its executive officers have agreed, for a period
of 90 days after the date of this Prospectus, to not, without the prior written
consent of the Representatives, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, any shares of its
capital stock or securities convertible into or exchangeable for capital stock
of the Company other than to the Representatives pursuant to the Purchase
Agreement, the Series B Convertible Preferred Stock, the Junior Participating
Preferred Stock, Series A, shares of Common Stock pursuant to the Rights Plan
and other than shares of Common Stock or options for shares of Common Stock
issued pursuant to or sold in connection with qualified employee benefit,
dividend reinvestment and stock option and stock purchase plans and shares of
Common Stock issuable upon conversion of securities or exercise of stock options
or currently outstanding warrants.
Prior to this Offering, there has been no public market for the Depositary
Shares. There can be no assurance that an active trading market will develop for
the Depositary Shares or that the Depositary Shares will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, and to contribute to payments that the Underwriters and their controlling
persons may be required to make in respect thereof.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
40
<PAGE>
LEGAL MATTERS
Certain aspects of the legality of the Depositary Shares and the shares of
Series C Preferred Stock offered hereby will be passed upon for the Company by
Wendy C. Shiba, Esq., Secretary and Assistant General Counsel for the Company,
who will rely as to certain matters of Delaware law on the opinion of Richards,
Layton & Finger, Wilmington, Delaware. Certain legal matters with respect to the
Depositary Shares and the shares of Series C Preferred Stock offered hereby will
be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New
York. Ms. Shiba owns no shares of stock of the Company, but has been granted
options to purchase an aggregate of 9,000 shares of Common Stock of the Company
pursuant to the Company's 1992 Stock Incentive Plan. Such options are not
currently exercisable.
EXPERTS
The consolidated financial statements and schedules of Bowater Incorporated
and Subsidiaries as of December 31, 1992 and 1991, and for each of the years in
the three-year period ended December 31, 1992, incorporated by reference herein
and elsewhere in the Registration Statement, have been incorporated by reference
herein and in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick covering the December 31, 1992
financial statements refers to accounting changes regarding the Company's
adoption of the provisions of the Financial Accounting Standards Board's
Statement on Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and Statement on Financial
Accounting Standards No. 109, Accounting for Income Taxes, in 1992.
41
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................................ 2
Incorporation of Certain Documents by
Reference.......................................... 2
The Company.......................................... 3
Recent Developments.................................. 4
Use of Proceeds...................................... 4
Certain Investment Considerations.................... 5
Capitalization....................................... 7
Selected Financial and Operating Data................ 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
Business............................................. 18
Technical Glossary................................... 29
Description of Capital Stock......................... 30
Description of Series C Preferred Stock.............. 33
Description of Depositary Shares..................... 37
Underwriting......................................... 40
Legal Matters........................................ 41
Experts.............................................. 41
</TABLE>
3,000,000 DEPOSITARY SHARES
[company logo goes here, see appendix]
EACH REPRESENTING A ONE-FOURTH INTEREST IN A SHARE OF
8.40% SERIES C
CUMULATIVE PREFERRED STOCK,
PAR VALUE $1 PER SHARE
P R O S P E C T U S
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
KIDDER, PEABODY & CO.
INCORPORATED
PRUDENTIAL SECURITIES
INCORPORATED
SMITH BARNEY SHEARSON INC.
FEBRUARY 1, 1994
****************************************************************************
APPENDIX
On the Prospectus Cover a Bowater logo appears where indicated.
On the Back Cover a Bowater logo appears where indicated.
