UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8712
BOWATER INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 62-0721803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
(Address of principal executive offices) (Zip Code)
(864) 271-7733
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 6, 1997.
Class Outstanding at November 6, 1997
Common Stock, $1.00 Par Value 40,529,946 Shares
<PAGE>
BOWATER INCORPORATED
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at September 30, 1997,
and December 31, 1996 3
Consolidated Statement of Operations for the Three
and Nine Months Ended September 30, 1997, and
September 30, 1996 4
Consolidated Statement of Capital Accounts
for the Nine Months Ended September 30, 1997 5
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1997, and
September 30, 1996 6
Notes to Consolidated Financial Statements 7-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
PART I
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------- -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 105,549 $ 85,259
Marketable securities 276,558 345,398
Accounts receivable, net 189,635 185,724
Inventories (Note 2) 102,239 123,745
Other current assets 16,910 13,629
------------------- -------------------
Total current assets 690,891 753,755
------------------- -------------------
Timber and timberlands 396,372 395,675
Fixed assets, net 1,571,591 1,636,705
Other assets 78,834 79,409
=================== ===================
$ 2,737,688 $ 2,865,544
=================== ===================
LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt $ 1,604 $ 1,604
Accounts payable and accrued liabilities (Note 3) 192,313 216,328
Income taxes payable 382 6,057
Dividends payable (Note 4) 8,644 29,892
------------------- -------------------
Total current liabilities 202,943 253,881
------------------- -------------------
Long-term debt, net of current installments 757,742 759,029
Other long-term liabilities 164,569 171,651
Deferred income taxes 343,903 358,858
Minority interests in subsidiaries 125,483 126,246
Commitments and contingencies (Note 5) - -
Redeemable LIBOR preferred stock (Note 6) - 24,746
Shareholders' equity:
Series C cumulative preferred stock 25,465 25,465
Common stock (Note 7) 44,887 43,994
Additional paid-in capital 561,748 531,598
Retained earnings 695,501 698,301
Equity adjustments (12,858) (12,370)
Loan to ESOT (4,969) (6,324)
Treasury stock, at cost (Note 8) (166,726) (109,531)
------------------- -------------------
Total shareholders' equity 1,143,048 1,171,133
=================== ===================
$ 2,737,688 $ 2,865,544
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 378,631 $ 423,188 $ 1,083,480 $ 1,346,022
Cost of sales 276,950 296,270 829,723 853,708
Depreciation, amortization and cost of timber harvested 42,447 43,402 126,165 131,084
-------------- -------------- ------------- --------------
Gross profit 59,234 83,516 127,592 361,230
Selling and administrative expense 18,782 23,629 53,827 68,283
-------------- -------------- ------------- --------------
Operating income 40,452 59,887 73,765 292,947
Other expense / (income):
Interest income (5,518) (4,837) (15,664) (14,880)
Interest expense, net of capitalized interest 17,047 17,758 50,626 54,328
Gain on sale of timberlands (21) (1,152) (44) (77,853)
Other, net 428 (1,096) (67) (3,449)
-------------- -------------- ------------- --------------
11,936 10,673 34,851 (41,854)
-------------- -------------- ------------- --------------
Income before income taxes and minority interests 28,516 49,214 38,914 334,801
Provision for income taxes (Note 9) 10,551 18,209 14,399 123,877
Minority interests in net income of subsidiaries 1,180 2,738 948 25,409
-------------- -------------- ------------- --------------
Income before extraordinary charge 16,785 28,267 23,567 185,515
Extraordinary charge, net of taxes of $1,012 and
$2,234 , respectively. - (1,600) - (3,531)
-------------- -------------- ------------- --------------
Net income $ 16,785 $ 26,667 $ 23,567 $ 181,984
============== ============== ============= ==============
Earnings per common share - primary (Note 10):
Income before extraordinary charge $ 0.40 $ 0.65 $ 0.52 $ 4.28
Extraordinary charge - (0.04) - (0.08)
============== ============== ============= ==============
Net income $ 0.40 $ 0.61 $ 0.52 $ 4.20
============== ============== ============= ==============
Average common and common equivalent shares outstanding 41,012 41,756 40,659 42,463
============== ============== ============= ==============
Earnings per common share - fully diluted (Note 10):
Income before extraordinary charge $ 0.40 $ 0.64 $ 0.52 $ 4.19
Extraordinary charge - (0.04) - (0.08)
============== ============== ============= ==============
Net income $ 0.40 $ 0.60 $ 0.52 $ 4.11
============== ============== ============= ==============
Average common and common equivalent shares outstanding 41,012 42,714 40,733 43,356
============== ============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
Nine Months Ended September 30, 1997
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Redeemable Series C
LIBOR Cumulative Additional
Preferred Preferred Common Paid in Retained Equity Loan to Treasury
Stock Stock Stock Capital Earnings Adjustments ESOT Stock
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 24,746 $ 25,465 43,994 $ 531,598 $ 698,301 $ (12,370) $ (6,324)$(109,531)
Net income - - - - 23,567 - - -
Dividends on common stock ($.60 per share) - - - - (24,055) - - -
Dividends on preferred stock:
LIBOR ($ .79 per share) - - - - (393) - - -
Series C ($6.30 per share) - - - - (1,665) - - -
Increase in stated value of LIBOR preferred stock 254 - - - (254) - - -
Redemption of LIBOR preferred stock (Note 6 ) (25,000) - - - - - - -
Common stock issued for exercise of stock options - - 893 22,540 - - - -
Tax benefit on exercise of stock options - - - 7,603 - - - -
Reduction in loan to ESOT - - - - - - 1,355 -
Purchase of common stock (Note 8) - - - - - - - (57,244)
Treasury stock used for employee benefit
and dividend reinvestment plans - - - 7 - - - 49
Foreign currency translation - - - - - (488) - -
==================================================================================
Balance at September 30, 1997 $ - $ 25,465 44,887 $ 561,748 $ 695,501 $ (12,858) $ (4,969)$(166,726)
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, September 30,
1997 1996
-------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,567 $ 181,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 126,165 131,084
Deferred income taxes (1,556) 40,176
Minority interests 948 25,409
Gain from sale of timberlands (44) (77,853)
Extraordinary charge, net of taxes - 3,531
Change in working capital:
Accounts receivable, net (3,911) 31,460
Inventories 21,506 754
Accounts payable and accrued liabilities (23,030) (2,963)
Income taxes payable (11,379) (76,258)
Other, net (5,510) 3,154
-------------- ------------------
Net cash from operating activities 126,756 260,478
-------------- ------------------
Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands (70,643) (64,596)
Disposition of fixed assets, timber and timberlands 2,765 118,893
Cash from sale of (invested in ) marketable securities 68,840 (246,021)
-------------- ------------------
Net cash provided by (used for) investing activities 962 (191,724)
-------------- ------------------
Cash flows from financing activities:
Cash dividends, including minority interests (48,630) (59,668)
Purchase of common stock (Note 8) (57,244) (94,293)
Purchases/payments of long-term debt (1,342) (57,695)
Stock options exercised 23,433 11,185
Redemption of LIBOR preferred stock ( Note 6) (25,000) -
Other 1,355 1,280
-------------- ------------------
Net cash used for financing activities (107,428) (199,191)
-------------- ------------------
Net increase (decrease) in cash and cash equivalents 20,290 (130,437)
Cash and cash equivalents at beginning of year 85,259 264,571
-------------- ------------------
Cash and cash equivalents at end of period $105,549 $ 134,134
============== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ (46,025) $ (51,962)
Income taxes $ (27,333) $ (159,959)
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries (the Company). The consolidated
balance sheets, and statements of operations, capital accounts and cash
flows are unaudited. However, in the opinion of Company management, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the interim financial statements have been made. The
results of the interim period ended September 30, 1997, are not necessarily
indicative of the results to be expected for the full year.
2. The composition of inventories at September 30, 1997, and December 31,
1996, was as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------- ----------------
<S> <C> <C>
(Unaudited)
At lower of cost or market:
Raw materials $ 13,499 $ 17,990
Work in process 2,723
3,077
Finished goods
33,079 47,577
Mill stores and other supplies
64,762 66,925
------------- ---------------------
114,063 135,569
------------- ---------------------
Excess of current cost over
LIFO inventory value
(11,824) (11,824)
============= =====================
$ 102,239 $ 123,745
============= =====================
</TABLE>
3. During 1997, the Company paid $25.4 million pursuant to a long-term
incentive compensation plan accrued for the three year period ending
December 31, 1996.
4. In December 1996, the Board of Directors of Calhoun Newsprint Company (CNC)
declared a $40.0 million dividend. As a result, $19.6 million was paid to
the minority shareholder in January 1997. In the third quarter of 1997,
another dividend was paid in the amount of $1.3 million. In the first
quarter of 1996, a $29.4 million dividend was paid to the minority
shareholder.
5. The Company is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims, and other matters. The Company's management believes
that the ultimate disposition of these matters will not have a material
adverse effect on the Company's operations or its financial condition taken
as a whole.
6. On May 12, 1997, the company redeemed for cash all of the remaining
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of
$50 per share.
7. On January 9, 1997, the Company converted all of the outstanding depositary
shares of its 7% PRIDES Series B Convertible Preferred Stock using Bowater
common stock at a conversion ratio of .82 of a common share for each
depositary share, resulting in the issuance of 4,012,765 common shares. The
Company reflected this transaction in the Consolidated Balance Sheet at
December 31, 1996.
7
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. During the first quarter of 1997, the Company purchased 1.4 million shares
of common stock at a cost of $57.2 million, completing the stock repurchase
program authorized in February 1996. Since the beginning of the program, 4
million shares were purchased at a total cost of $156 million. In the first
nine months of 1996, 2.5 million shares were purchased at a cost of $94.3
million.
9. The effective tax rate for the second quarter of 1997 and 1996, and the
first nine months of 1997 and 1996, was 37.0 percent.
10. The calculation of earnings per share for the three and nine months ended
September 30, 1997, includes a deduction of $.5 million and $2.3 million,
respectively, for any dividend requirements of the Company's LIBOR and
Series C preferred stock and the amortization of the difference between the
net proceeds from the LIBOR preferred stock and its mandatory redemption
value. For the three and nine months ended September 30, 1996, the
calculation of earnings per share included a deduction of $1.2 million and
$3.6 million, respectively, for the same items.
8
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Summary
The Company reported 1997 third quarter earnings of $17 million, or $.40 per
fully diluted share. This compares to net income of $27 million, or $.60 per
fully diluted share in the third quarter of 1996 and net income of $7 million,
or $.16 per fully diluted share in the second quarter of 1997. Included in net
income for the third quarter of 1996 was an extraordinary charge of $2 million,
or $.04 per fully diluted share, resulting from the open market purchase of
outstanding debt. Third quarter 1997 net sales were $379 million, compared to
$423 million for the third quarter of 1996 and $356 million for the second
quarter of this year. Selling prices for most of the Company's products, while
rising, are still below the levels of a year ago. This accounts for the majority
of the lower sales and profitability compared to 1996 results.
Product Line Information:
(Unaudited, $ in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales:
Newsprint
$ 184,501 $ 201,413 $ 529,765 $ 662,285
Coated groundwood
83,725 84,053 240,233 275,899
Directory paper
43,678 45,497 131,823 140,456
Market pulp
47,260 46,098 138,568 114,871
Uncoated groundwood specialties
10,511 9,639 33,678 28,505
Lumber and other wood products
36,643 29,359 97,288 78,791
Communication papers (1)
- 40,393 - 135,656
Distribution costs
(27,687) (33,264) (87,875) (90,441)
================ ================= ================= ================
$ 378,631 $ 423,188 $ 1,083,480 $ 1,346,022
================ ================= ================= ================
Operating income
$ 40,452 $ 59,887 $ 73,765 $ 292,947
================ ================= ================= ================
</TABLE>
(1) Communication papers were produced by Star Forms Incorporated which was sold
in November 1996.
9
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Three Months Ended September 30, 1997, versus September 30, 1996
For the third quarter of 1997, the Company's operating income of $40 million
decreased $19 million compared to the third quarter of 1996. Lower average
transaction prices for all of the Company's products except market pulp and
lumber caused operating income to decline.
Product Line Information
Although all Company operations are grouped in a single segment, market and
operating trends are discussed by major product. In general, the Company's
products are globally traded commodities. Pricing and the level of shipments of
these products will continue to be influenced by the balance between supply and
demand as affected by global economic conditions, changes in consumption and
capacity, the level of customer and producer inventories as well as fluctuations
in exchange rates.
Newsprint - The Company's newsprint average transaction price in the third
quarter of 1997 was 8 percent lower than the same period last year and 3 percent
higher than the prior quarter. The decrease in prices versus prior year was a
result of lower consumption and higher consumer and producer inventories during
1996. By the end of 1996, however, market conditions began to improve as
consumption increased and inventories held by U. S. daily newspapers and North
American producers declined compared to levels earlier in the year. In the first
quarter of 1997, the Company announced a $75 per metric ton domestic price
increase. This price increase is fully implemented; however, the average amount
realized was less than announced due to customer mix and the effect of lower
export price increases. Favorable market conditions continued in the third
quarter. U. S. dailies' newsprint consumption and total U. S. newsprint
consumption increased in the third quarter of 1997 compared to the third quarter
of 1996. Inventory levels at the end of the third quarter also improved. U. S.
dailies' newsprint inventory decreased compared to the third quarter of 1996,
while North American mill inventory levels decreased compared to the same
quarter and the second quarter of 1997. On October 1, 1997, the Company began
implementing a second domestic price increase of $35 per metric ton. As with the
previous price increase, this price increase will be phased in over several
months.
- ----------------- ---------------- ----------------
3rd Qtr. 1997
vs. 1996
Newsprint Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
Canadian Pulp
and Paper
Total U. S. Association 2%
Consumption (CPPA)
- ----------------- ---------------- ----------------
U. S. Dailies'
Consumption CPPA 4%
- ----------------- ---------------- ----------------
Newspaper
U. S. Dailies' Association of
Inventory America (3)%
- ----------------- ---------------- ----------------
North American
Mill Inventories
CPPA (32)%
- ----------------- ---------------- ----------------
Coated Groundwood - The Company's coated groundwood average transaction price
declined 4 percent comparing the third quarter of 1997 to the same period last
year, but increased 9 percent versus the prior quarter. Tonnage shipments
increased slightly comparing the third quarter of 1997 to the third quarter of
1996. Throughout 1996, coated groundwood selling prices declined while producer
inventory levels surpassed historical levels, as customers reduced their
inventories from levels built up during 1995. Market conditions improved in the
first and second quarters of 1997 allowing the Company to implement two price
increases: up to $60 per ton for certain market segments effective April 1, and
between $50 and $80 per ton, depending upon market segment, for all domestic and
export customers effective July 1. Improved market conditions continued in the
third quarter of 1997. U. S. coated groundwood shipments and magazine
advertising pages increased in the third quarter compared to the same period
last year. U. S. coated groundwood mill inventory levels continued to improve in
the third quarter, decreasing significantly since the third quarter of 1996. On
October 1, 1997, the Company announced a third price increase of up to $40 per
ton for certain market segments, which it is currently implementing.
10
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- ----------------- ---------------- ----------------
3rd Qtr. 1997
vs. 1996
Coated Paper Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
American
Forest and
U. S. Coated Paper
Groundwood Association 14%
Shipments (AF&PA)
- ----------------- ---------------- ----------------
Media Industry
Magazine Ad Newsletter 5%
Pages
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood Mill
Inventories
AF&PA (57)%
- ----------------- ---------------- ----------------
Directory Paper - The Company's average transaction price for directory paper
decreased 12 percent in the third quarter of 1997 compared to the third quarter
of 1996, and decreased 5 percent compared to the second quarter of 1997. During
1996, demand in the directory paper market declined and prices decreased, with
conditions and pricing similar to those in the newsprint market. Lower prices
continued through the third quarter of 1997, since a large portion of the
Company's directory sales was based on contracts, the pricing of which was
determined during 1996. In addition, the Company sold lower priced, higher basis
weight directory paper in the third quarter of 1997 compared to the prior
quarter. The Company's shipments during the third quarter of 1997 increased 10
percent and 19 percent compared to the third quarter of 1996 and the second
quarter of 1997, respectively.
Market Pulp - The Company's market pulp average transaction price for the third
quarter of 1997 increased 11 percent compared to the third quarter of last year
and the second quarter of this year. NORSCAN (U.S., Canada, Finland, Norway and
Sweden producers) shipments of softwood pulp increased in the third quarter of
1997 compared to the year ago period. NORSCAN inventory levels of softwood pulp
at the end of the third quarter continued to decrease from levels earlier in the
year and compared to the end of September 1996. Favorable market conditions
enabled the Company to implement price increases during the first nine months of
1997, causing its average transaction price to rise approximately $35 per metric
ton since the end of 1996.
- -------------------- ----------- ------------------
3rd Qtr. 1997
Softwood vs. 1996
Market Pulp Increase/
Statistics Source (Decrease)
- -------------------- ----------- ------------------
NORSCAN Shipments
AF&PA 4%
- -------------------- ----------- ------------------
NORSCAN Inventories
AF&PA (7)%
- -------------------- ----------- ------------------
Lumber - The average transaction price for the Company's lumber products
increased 3 percent in the third quarter of 1997 compared to the year ago
period. The Company's shipment levels also increased slightly comparing the same
periods. Lumber prices increased significantly during 1996 due primarily to
record high U. S. housing starts of 1.5 million. The government estimate of U.
S. housing starts for the full year of 1997 stands at 1.4 million. In the first
half of 1997, prices continued to rise, but at a slower rate. In the third
quarter of 1997, prices in the U. S. lumber market began to decrease, as a slump
in the Japanese housing market forced producers to divert lumber to the U. S.
market, causing an oversupply.
Cost of Sales and Other Income and Expenses
Cost of sales decreased 7 percent in the third quarter of 1997 compared to the
third quarter of last year. This decrease was due to the absence of product
costs relating to the Company's subsidiary, Star Forms Incorporated (Star
Forms), which was sold in November of 1996, partially offset by higher costs
associated with planned maintenance. Comparing the same periods, selling and
administrative expenses decreased $5 million or 21 percent. This reduction was
also due to the sale of Star Forms. Interest expense for the third quarter of
1997 compared to the same period last year decreased due to lower average debt
balances, while interest income, comparing the same periods, increased due to
higher average investment balances. In the third quarter of 1996, the Company
sold approximately 1,700 acres of timberlands resulting in a pre-tax gain of $1
million.
11
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Nine Months Ended September 30, 1997, versus September 30, 1996
For the first nine months of 1997, the Company's operating income was $74
million, a decrease of $219 million compared to the first nine months of 1996.
This significant decrease is attributed to substantially lower average
transaction prices for all of the Company's products except market pulp and
lumber, partially offset by higher tonnage shipments.
Product Line Information
Newsprint - For the first nine months of 1997, the Company's newsprint average
transaction price decreased 22 percent compared to the same period last year.
During the second half of 1996, prices decreased due to lower demand brought on
by conservation measures taken by users in reaction to the record high prices
experienced in 1995. During the first nine months of 1997, however, total U. S.
newsprint consumption and U. S. dailies' newsprint consumption increased
compared to the same period in 1996. In addition, both U. S. dailies' newsprint
inventory and North American newsprint mill inventory levels at the end of
September 1997 were lower than September 1996 levels. These conditions enabled
the Company to announce two price increases in 1997, including an October price
increase of $35 per metric ton.
- ----------------- ---------------- ----------------
9 Mos. 1997
vs. 1996
Newsprint Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
Total U. S.
Consumption CPPA 5%
- ----------------- ---------------- ----------------
U. S. Dailies'
Consumption CPPA 4%
- ----------------- ---------------- ----------------
Newspaper
U. S. Dailies' Association of
Inventory America (3)%
- ----------------- ---------------- ----------------
North American
Mill Inventories
CPPA (32)%
- ----------------- ---------------- ----------------
Coated Groundwood - The Company's coated groundwood average transaction price
decreased 23 percent during the first nine months of 1997 compared to the year
ago period, offset by higher shipments of 13 percent. In 1996, coated groundwood
prices declined as customers reduced their excessive inventory levels from 1995.
In 1997, demand increased. U. S. coated groundwood shipments increased during
the first nine months of 1997 compared to the prior year period and U. S. coated
groundwood mill inventory levels declined significantly. Since the beginning of
1997, the Company implemented two price increases causing its average
transaction price to increase approximately $100 per ton. A third price increase
of $40 per ton is currently being implemented for certain market segments.
- ----------------- ---------------- ----------------
9 Mos. 1997
vs. 1996
Coated Paper Increase/
Statistics Source (Decrease)
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood
Shipments AF&PA 24%
- ----------------- ---------------- ----------------
Media Industry
Magazine Ad Newsletter 5%
Pages
- ----------------- ---------------- ----------------
U. S. Coated
Groundwood Mill
Inventories
AF&PA (57)%
- ----------------- ---------------- ----------------
Directory Paper - The Company's average transaction price for directory paper
decreased 12 percent in the first nine months of 1997 compared to the first nine
months of 1996, while shipments increased 7 percent. A large portion of the
Company's current directory paper sales was based on contracts completed in the
latter part of 1996, when prices had decreased from the high levels of 1995.
Market Pulp - The average transaction price for the Company's market pulp
increased 9 percent in the first nine months of 1997 compared to the first nine
months of 1996, while shipments increased 11 percent. NORSCAN softwood pulp
shipments also increased during this period compared to the same period last
year, while inventory levels decreased. As of September 30, 1997, the Company's
average transaction price increased approximately $30 per metric ton since the
end of 1996.
12
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------- ----------- ------------------
9 Mos. 1997 vs.
Softwood 1996
Market Pulp Increase/
Statistics Source (Decrease)
- -------------------- ----------- ------------------
- -------------------- ----------- ------------------
NORSCAN Shipments
AF&PA 8%
- -------------------- ----------- ------------------
- -------------------- ----------- ------------------
NORSCAN Inventories
AF&PA (7)%
- -------------------- ----------- ------------------
Lumber - The Company's average transaction price for its lumber products
increased 16 percent comparing the first nine months of 1997 to the first nine
months of last year. The lumber market continued its healthy pace from 1996 into
the first half of 1997, due to the high level of housing starts. In the third
quarter of 1997, however, prices began to decline as the supply of lumber
increased.
Cost of Sales and Other Income and Expenses
Cost of sales for the first nine months of 1997 was $24 million lower when
compared to the same period last year due to the absence of product costs
associated with Star Forms, offset by planned maintenance costs and higher
tonnage shipments. Selling and administrative expenses decreased $14 million
comparing the same periods. The majority of this decrease was also due to the
sale of Star Forms. Interest expense decreased comparing the same periods due to
lower average debt balances in 1997 versus 1996, while interest income increased
due to higher average investment balances. In the first nine months of 1996, the
Company sold 108,000 acres of timberlands resulting in a $78 million pre-tax
gain.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities balance at
September 30, 1997, totaled $382 million compared to $431 million at December
31, 1996, and $380 million at September 30, 1996. Aside from cash flow from
operations and capital expenditures, significant cash outflows since December
31, 1996, included the repurchase of 1.4 million common shares for $57 million,
three dividend payments to the minority shareholder of CNC totaling $21 million,
and the redemption of $25 million of the Company's remaining outstanding LIBOR
preferred stock. During the first nine months of 1997, the Company's operations
generated $127 million of cash compared to $260 million of cash during the first
nine months of 1996, a decrease of $133 million. This decrease was primarily the
result of a decrease in operating income of $219 million, offset in part by a
decrease in tax payments of $133 million. Tax payments were higher in 1996 due
to the higher level of income and the payment of the Company's 1995 tax
liability in the first quarter of 1996. In addition, other working capital needs
in 1997 were higher by $34 million, and payments for employee benefit
liabilities were higher by $12 million.
Cash flow from investing activities in the first nine months of 1997 of $1
million was $193 million higher than the first nine months of last year. Capital
expenditures for the first nine months of 1997 were $6 million higher compared
to the first nine months of 1996. The Company expects total capital expenditures
for 1997 to approximate $110 million, roughly the same as 1996 capital
expenditures of $107 million. In the first nine months of 1997, $69 million of
net cash flow was from the maturity of marketable securities versus a net
investment of $246 million in the first nine months of 1996. Also in the first
nine months of 1996, the Company sold timberlands resulting in proceeds of $119
million.
On September 17, 1997, the Company announced its plan to invest
approximately $180 million over the next two years to modernize its Calhoun,
Tennessee, newsprint facility. The plan calls for expansion of the Company's
thermomechanical pulp facility and conversion of an idle recovery boiler. Aside
from reducing operating costs, these changes will have a positive environmental
impact by utilizing old tires as fuel, which reduces landfill usage. The
Company's estimate of total capital expenditures for 1997 of $110 million
includes approximately $5 million relating to these two projects.
Cash flow used for financing activities was $92 million lower in the first
nine months of 1997 compared to the year ago period. The majority of this
decrease was due to debt repurchases in 1996 of approximately $55 million. Cash
dividends for the first nine months of 1997 and 1996 included payments to the
minority shareholder of CNC totaling $21 million and $29 million, respectively.
Also included in the first nine months of 1996 were cash dividends of $6 million
on the Company's 7%
13
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
PRIDES Series B Convertible Preferred Stock (PRIDES). On January 9, 1997, the
Company converted all of the outstanding depositary shares, each representing
one-fourth of a share of PRIDES, using Bowater common stock at a conversion
ratio of .82 of a common share for each depositary share. This resulted in the
issuance of 4,012,765 common shares.
On May 12, 1997, the Company redeemed for $25 million the remaining 500,000
outstanding shares of LIBOR Preferred Stock, Series A, at its par value of $50
per share, plus accrued and unpaid dividends. The LIBOR stock was subject to
mandatory redemption in 1998.
On February 10, 1997, the Company completed the repurchase of approximately
10 percent of its outstanding common stock as part of a previously announced
stock repurchase program. In total, the Company purchased 4 million shares at a
cost of $156 million. During the first quarter of 1997, the Company repurchased
1.4 million common shares at a cost of $57 million. In the first nine months of
1996, 2.5 million shares were purchased at a cost of $94 million. On November 6,
1997, the Company announced the adoption of a new stock repurchase program,
authorizing it to repurchase up to 10 percent of the company's outstanding
common stock in the open market subject to normal trading restrictions. The
Company continues to consider both internal and external investment
opportunities as well as additional debt reductions.
Organization
On July 23, 1997, the Company announced the reorganization of its U. S. and
Canadian forest and wood products operations into a new division called the
Forest Products Division. The consolidation of these operations will enable the
Company to explore new opportunities to improve returns on its forest products
assets. These opportunities include: optimizing the use of existing properties
by using wood to its highest value end-use; optimizing silviculture techniques
to match sustainable wood usage goals; selling certain non-strategic timberland
tracts, and studying organizational structures which could provide an enhanced
market valuation.
The Company also announced the consolidation of its newsprint and directory
paper businesses into one division called the Newsprint and Directory Division.
The combination of these businesses will enhance the Company's opportunities to
better serve its groundwood based customers while developing strategies for
improving financial returns.
Year 2000 Compliance
Since 1990, the Company has reengineered its major internally developed software
programs. During this effort, the Company examined potential problems arising
from the inability of certain application software programs to recognize the
year 2000. A formal review of all internally developed software is in progress
and will be completed by 1998. No major problems have been encountered to date.
In addition, all major third party licensed application software programs have
been reviewed and are either compliant or have released a compliant version to
which the Company will migrate in 1998. The costs associated with this project
are currently expected to be less than $1 million.
Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The implementation
of this standard in the fourth quarter of 1997 will not impact the Company's
results of operations, but will result in a different calculation of basic
earnings per share versus primary earnings per share. Fully diluted earnings per
share will remain the same.
14
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit No. Description
10.1 Employment Agreement, dated as of August 1, 1997, by and
between the Company and Arthur D. Fuller.
10.2 Change in Control Agreement, dated as of August 1, 1997, by
and between the Company and Arthur D. Fuller.
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
None
15
<PAGE>
BOWATER INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOWATER INCORPORATED
By /s/ David G. Maffucci
David G. Maffucci
Senior Vice President and
Chief Financial Officer
By /s/ Michael F. Nocito
Michael F. Nocito
Vice President and Controller
Dated: November 13, 1997
16
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Employment Agreement, dated as of August 1, 1997, by and
between the Company and Arthur D. Fuller.
10.2 Change in Control Agreement, dated as of August 1, 1997, by
and between the Company and Arthur D. Fuller.
27.1 Financial Data Schedule (electronic filing only).
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of this 1st day of August, 1997, by and
between BOWATER INCORPORATED, a Delaware corporation having a mailing address of
55 East Camperdown Way, Greenville, South Carolina 29601 (the "Corporation"),
and Arthur D. Fuller, 111 Rapid River Trail, Greenville, South Carolina 29615 (
the AExecutive@).
WHEREAS, the Corporation desires to employ the Executive as Executive
Vice President of the Corporation and as President of the Newsprint and
Directory Division; and
WHEREAS, the Executive is desirous of serving the Corporation in such
capacity;
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. During the term of this Agreement the Corporation agrees
to continue to employ the Executive, and the Executive agrees to continue in the
employ of the Corporation, in accordance with and subject to the provisions of
this Agreement.
2. Term.
(a) Subject to the provisions of subparagraphs (b) and
(c) of this Section 2, the term of this Agreement
shall begin on the Date hereof and shall continue
thereafter until terminated by either party by
written notice given to the other party at least
thirty (30) days prior to the effective date of any
such termination. The effective date of the
termination shall be the date stated in such notice,
provided that if the Corporation specifies an
effective date that is more than thirty
1
<PAGE>
(30) days following the date of such notice, the
Executive may, upon thirty (30) days= written notice
to the Corporation, accelerate the effective date of
such termination.
(b) Notwithstanding Section 2(a), upon the occurrence of
a Change in Control as defined in the Change in
Control Agreement of even date herewith between the
Corporation and the Executive (the "Change in Control
Agreement"), the term of this Agreement shall be
deemed to continue until terminated, but in any
event, for a period of not less than three (3) years
following the date of the Change in Control, unless
such termination shall be at the Executive's election
for other than "Good Reason" as that term is defined
in the Change in Control Agreement.
(c) Notwithstanding Section 2(a), the term of this
Agreement shall end upon:
(i) the death of the Executive;
(ii) the inability of the Executive to perform
his duties properly, whether by reason of
ill-health, accident or other cause, for a
period of one hundred and eighty (180)
consecutive days or for periods totaling one
hundred and eighty (180) days occurring
within any twelve (12) consecutive calendar
months; or
(iii) the executive's retirement on his early or
normal retirement date.
3. Position and Duties. Throughout the term hereof, the Executive shall
be employed as Executive Vice President of the Corporation and as President of
the Newsprint and Directory Division (Salary Grade 36), with the duties and
responsibilities customarily attendant to that office, provided that the
Executive shall undertake such other and further assignments and
responsibilities of at least comparable status as the Board of Directors may
direct. The Executive shall diligently and faithfully devote his full working
time and best efforts to the performance of the services under this Agreement
and to the furtherance of the best interests of the Corporation.
2
<PAGE>
4. Place of Employment. The Executive will be employed at the corporate
offices in the City of Greenville, South Carolina or at such other place as the
Corporation shall designate from time to time, provided, however, that if the
Executive is transferred to another place of employment, necessitating a change
in his residence, the Executive shall be entitled to financial assistance in
accordance with the terms of the Corporation's relocation policy then in effect.
5. Compensation and Benefits.
(a) Base Salary. The Corporation shall pay to the
Executive a base salary of $352,000 payable in
substantially equal periodic installments on the
Corporation's regular payroll dates. The Executive's
base salary shall be reviewed at least annually and
from time to time may be increased (or reduced, if
such reduction is effected pursuant to
across-the-board salary reductions similarly
affecting all management personnel of the
Corporation).
(b) Bonus Plan. In addition to his base salary, the
Executive shall be entitled to receive a bonus under
the Corporation's bonus plan in effect from time to
time determined in the manner, at the time, and in
the amounts set forth under such plan.
(c) Benefit Plans. The Corporation shall make
contributions on the Executive's behalf to the
various benefit plans and programs of the Corporation
in which the Executive is eligible to participate in
accordance with the provisions thereof as in effect
from time to time.
(d) Vacations. The Executive shall be entitled to paid
vacation, in keeping with the Corporate policy as in
effect from time to time, to be taken at such time or
times as may be approved by the Corporation.
(e) Expenses. The Corporation shall reimburse the
Executive for all reasonable expenses properly
incurred, and appropriately documented, by the
Executive in connection with the business of the
Corporation.
(f) Perquisites. The Corporation shall make available to
the Executive all perquisites to which he is entitled
by virtue of his position.
3
<PAGE>
6. Nondisclosure. During and after the term of this Agreement, the
Executive shall not, without the written consent of the Board of Directors of
the Corporation, disclose or use directly or indirectly, (except in the course
of employment hereunder and in furtherance of the business of the Corporation or
any of its subsidiaries and affiliates) any of the trade secrets or other
confidential information or proprietary data of the Corporation or its
subsidiaries or affiliates; provided, however, that confidential information
shall not include any information known generally to the public (other than as a
result of unauthorized disclosure by the Executive) or any information of a type
not otherwise considered confidential by persons engaged in the same or similar
businesses.
7. Noncompetition. During the term of this Agreement, and for a period
of one (1) year after the date the Executive's employment terminates, the
Executive shall not, without the prior approval of the Board of Directors of the
Corporation in the same or a similar capacity engage in or invest in, or aid or
assist anyone else in the conduct of any business (other than the businesses of
the Corporation and its subsidiaries and affiliates) which directly competes
with the business of the Corporation and its subsidiaries and affiliates as
conducted during the term hereof. If any court of competent jurisdiction shall
determine that any of the provisions of this Section 7 shall not be enforceable
because of the duration or scope thereof, the parties hereto agree that said
court shall have the power to reduce the duration and scope of such provision to
the extent necessary to make it enforceable and this Agreement in its reduced
form shall be valid and enforceable to the extent permitted by law. The
Executive acknowledges that the Corporation's remedy at law for a breach by the
Executive of the provisions of this Section 7 will be inadequate. Accordingly,
in the event of the breach or threatened breach by the Executive of this Section
7, the Corporation shall be entitled to injunctive relief in addition to any
other remedy it may have.
8. Severance Pay. If the Executive's employment hereunder is
involuntarily terminated for any reason other than those set forth in Section
2(c) hereof, then unless the Corporation shall have terminated the Executive for
"Cause", the Corporation shall pay the Executive severance pay in an amount
equal to twenty-four (24) months of the Executive's base salary on the effective
date of the termination, plus 1/12 of the amount of the last bonus paid to the
Executive under the Corporation's bonus plan applicable to the Executive for
each month in the period beginning on January 1 of the year in which the date of
the termination occurs and ending on the date of the termination and for each
months' base salary to which the Executive is entitled under this Section 8,
provided, however, that any amount paid to the Executive by the Corporation for
services rendered subsequent to the thirtieth (30th) day following the
communication to the Executive of notice of termination shall be deducted from
the severance pay otherwise due hereunder. Such payment shall be made in a lump
sum within ten (10) business days following the
4
<PAGE>
effective date of the termination. The severance pay shall be in lieu of all
other compensation or payments of any kind relating to the termination of the
Executive's employment hereunder; provided that the Executive's entitlement to
compensation or payments under the Corporation's retirement plans, stock option
or incentive plans, savings plans or bonus plans attributable to service
rendered prior to the effective date of the termination shall not be affected by
this clause and shall continue to be governed by the applicable provisions of
such plans; and further provided that in lieu hereof, at his election, the
Executive shall be entitled to the benefits of the Change in Control Agreement
of even date hereof between the Corporation and the Executive, if termination
occurs in a manner and at a time when such Change in Control Agreement is
applicable. For purposes of this Agreement, the term for "Cause" shall mean
because of gross negligence or willful misconduct by the Executive either in the
course of his employment hereunder or which has a material adverse effect on the
Corporation or the Executive's ability to perform adequately and effectively his
duties hereunder.
9. Notices. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered or mailed, by registered or certified mail, return receipt requested
to the respective addresses of the parties set forth above, or to such other
address as any party hereto shall designate to the other party in writing
pursuant to the terms of this Section 9.
10. Severability. The provisions of this Agreement are severable, and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of any other provision.
11. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the substantive laws of the State of Delaware.
12. Supersedure. This Agreement shall cancel and supersede all prior
agreements relating to employment between the Executive and the Corporation,
except the Change in Control Agreement.
13. Waiver of Breach. The waiver by a party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
prior or subsequent breach by any of the parties hereto.
5
<PAGE>
14. Binding Effect. The terms of this Agreement shall be binding upon
and inure to the benefit of the successors and assigns of the Corporation and
the heirs, executors, administrators and successors of the Executive, but this
Agreement may not be assigned by the Executive.
IN WITNESS WHEREOF, the Corporation and the Executive have executed this
Agreement as of the day and year first above written.
BOWATER INCORPORATED
By /s/ Arnold M. Nemirow /s/ Arthur D. Fuller
--------------------------------- -----------------------------
Arnold M. Nemirow Arthur D. Fuller
Chairman, President and
Chief Executive Officer
6
<PAGE>
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, made as of the 1st day of August, 1997, by and between
Bowater Incorporated, a Delaware corporation having a mailing address of 55 East
Camperdown Way, Greenville, South Carolina 29601 (the "Corporation"), and Arthur
D. Fuller of 111 Rapid River Trail, Greenville, SC 29615 (the "Executive").
WHEREAS, the Corporation considers it essential to the best interests
of its stockholders to foster the continued employment of key management
personnel; and
WHEREAS, the uncertainty attendant to a change in control of the
Corporation may result in the departure or distraction of management personnel
to the detriment of the Corporation and its stockholders; and
WHEREAS, the Board of Directors of the Corporation (the "Board") has
determined that appropriate steps should be taken to reinforce and encourage the
continued attention and dedication of members of the Corporation's management,
including Executive, to their assigned duties in the event of a change in
control of the Corporation.
NOW THEREFORE, it is hereby agreed as follows:
1. DEFINITIONS
The following terms when used herein shall have the meanings assigned
to them below. Whenever applicable throughout this Agreement, the
masculine pronoun shall include the feminine pronoun and the singular
shall include the plural.
(a) "Acquiring Person" shall mean any Person who is or becomes a
beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") of
securities of the Corporation representing twenty percent
(20%) or more of the combined voting power of the
Corporation's then outstanding voting securities, unless such
Person has filed Schedule 13G and all required amendments
<PAGE>
-2-
thereto with respect to its holdings and continues to hold
such securities for investment in a manner qualifying such
Person to utilize Schedule 13G for reporting of ownership.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act, as in effect on the date
hereof.
(c) "Cause" shall mean and be limited to the Executive's gross
negligence, willful misconduct or conviction of a felony,
which negligence, misconduct or conviction has a demonstrable
and material adverse effect upon the Corporation, provided
that, to the extent that the Corporation contends that Cause
exists by virtue of Executive's gross negligence or willful
misconduct, and such gross negligence or willful misconduct is
capable of being cured, the Corporation shall have given the
Executive written notice of the alleged negligence or
misconduct and the Executive shall have failed to cure such
negligence or misconduct within thirty (30) days after his
receipt of such notice. The Executive shall be deemed to have
been terminated for Cause effective upon the effective date
stated in a written notice of such termination delivered by
the Corporation to the Executive (which notice shall not be
delivered before the end of the thirty (30) day period
described in the preceding sentence, if applicable) and
accompanied by a resolution duly adopted by the affirmative
vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board (after
reasonable notice to the Executive and an opportunity for the
Executive, with his counsel present, to be heard before the
Board) finding that, in the good faith opinion of the Board,
the Executive was guilty of conduct constituting Cause
hereunder and setting forth in reasonable detail the facts and
circumstances claimed to provide the basis for the Executive's
termination, provided that the effective date shall not be
less than thirty (30) days from the date such notice is given.
(d) "Change in Control" of the Corporation shall be deemed to have
occurred if:
(i) any Person is or becomes an Acquiring Person;
(ii) less than two-thirds (2/3) of the total membership of
the Board shall be Continuing Directors; or
(iii) the stockholders of the Corporation shall approve a
merger or consolidation of the Corporation or a plan
of complete liquidation of the Corporation or an
agreement for the sale or disposition by the
Corporation of all or substantially all of the
Corporation's assets.
<PAGE>
-3-
(e) "Commencement Date" shall mean the date of this Agreement,
which shall be the beginning date of the term of this
Agreement.
(f) "Continuing Directors" shall mean any member of the Board who
was a member of the Board immediately prior to the date
hereof, and any successor of a Continuing Director while such
successor is a member of the Board who is not an Acquiring
Person or an Affiliate or Associate of an Acquiring Person or
of any such Affiliate or Associate and is recommended or
elected to succeed the Continuing Director by a majority of
the Continuing Directors.
(g) "Disability" shall mean the Executive's total and permanent
disability as defined in the Corporation's long term
disability insurance policy covering the Executive immediately
prior to the Change in Control.
(h) "Good Reason" shall mean:
(i) an adverse change in the Executive's status, duties
or responsibilities as an executive of the
Corporation as in effect immediately prior to the
Change in Control, provided that the Executive shall
have given the Corporation written notice of the
alleged adverse change and the Corporation shall have
failed to cure such change within thirty (30) days
after its receipt of such notice;
(ii) failure of the Corporation to pay or provide the
Executive in a timely fashion the salary or benefits
to which he is entitled under any Employment
Agreement between the Corporation and the Executive
in effect on the date of the Change in Control, or
under any benefit plans or policies in which the
Executive was participating at the time of the Change
in Control (including, without limitation, any
incentive, bonus, stock option, restricted stock,
health, accident, disability, life insurance, thrift,
vacation pay, deferred compensation and retirement
plans or policies);
(iii) the reduction of the Executive's salary as in effect
on the date of the Change in Control;
(iv) the taking of any action by the Corporation
(including the elimination of a plan without
providing substitutes therefor, the reduction of the
Executive's awards thereunder or failure to continue
the Executive's participation therein) that would
substantially diminish the aggregate projected value
of the
<PAGE>
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Executive's awards or benefits under the
Corporation's benefit plans or policies described in
Section 1(h)(ii) in which the Executive was
participating at the time of the Change in Control;
(v) a failure by the Corporation to obtain from any
successor the assent to this Agreement contemplated
by Section 5 hereof; or
(vi) the relocation of the principal office at which the
Executive is to perform his services on behalf of the
Corporation to a location more than thirty-five (35)
miles from its location immediately prior to the
Change in Control or a substantial increase in the
Executive's business travel obligations subsequent to
the Change in Control.
Any circumstance described in this Section 1(h) shall
constitute Good Reason even if such circumstance would not
constitute a breach by the Corporation of the terms of the
Employment Agreement between the Corporation and the Executive
in effect on the date of the Change in Control. The Executive
shall be deemed to have terminated his employment for Good
Reason effective upon the effective date stated in a written
notice of such termination given by him to the Corporation
(which notice shall not be given, in circumstances described
in Section 1(h)(i), before the end of the thirty (30) day
period described therein) setting forth in reasonable detail
the facts and circumstances claimed to provide the basis for
termination, provided that the effective date may not precede,
nor be more than sixty (60) days from, the date such notice is
given. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to,
any circumstances constituting Good Reason hereunder.
(i) "Normal Retirement Date" shall have the meaning given to such
term in the Corporation's basic qualified pension plan in
which the Executive is a participant as in effect on the date
hereof or any successor or substitute plan adopted prior to a
Change in Control.
(j) "Person" shall mean any individual, corporation,
partnership, group, association or other "person" as such term
is used in Section 13(d) and 14(d) of the Exchange Act.
2. TERM OF AGREEMENT
(a) The term of this Agreement shall initially be for the period
beginning on the Commencement Date and ending on the day
before the third anniversary of the Commencement Date. The
term of this Agreement shall automatically be extended on the
first anniversary of the Commencement Date until the day
before the fourth anniversary of the Commencement Date without
further action
<PAGE>
-5-
by the parties, and shall be automatically
extended by an additional year on each succeeding anniversary
of the Commencement Date, unless either the Corporation or the
Executive shall have served notice upon the other party prior
to such anniversary of its or his intention either that the
term of this Agreement shall not be extended, or that the
Executive's Employment Agreement is terminated, provided,
however, that if a Change in Control of the Corporation shall
occur during the term of this Agreement, this Agreement shall
continue in effect until it expires in accordance with the
foregoing, but in any event for a period of not less than
three (3) years from the date of the Change in Control.
(b) Notwithstanding Section 2(a), the term of this Agreement shall
end upon the termination of the Executive's employment if,
prior to a Change in Control of the Corporation, the
Executive's employment with the Corporation shall have
terminated under the provisions of any Employment Agreement
between the Corporation and the Executive then in effect.
3. COMPENSATION UPON CHANGE IN CONTROL FOLLOWED BY A TERMINATION
If a Change in Control of the Corporation shall have occurred and,
thereafter and during the term of this Agreement, the Executive's
employment by the Corporation is terminated for any reason other than
his death, his Disability, his retirement on his Normal Retirement
Date, by the Corporation for Cause, or by the Executive without Good
Reason, the Executive shall be under no further obligation to perform
services for the Corporation and shall be entitled to receive the
following payments:
(a) The Corporation shall pay to the Executive his full base
salary through the effective date of the termination within
five (5) business days thereafter and all benefits and awards
(including both the cash and stock components) to which the
Executive is entitled under any benefit plans or policies in
which the Executive was a participant prior to the Change in
Control (or, if more favorable, at the effective date of
termination), at the time such payments are due pursuant to
the terms of such benefit plans or policies as in effect
immediately prior to the Change in Control (or, if more
favorable, at the effective date of termination).
(b) At the election of the Executive, in addition to the
entitlements set forth in Section 3(a) but in lieu of any
payment to the Executive of any salary or severance payments
or benefits to which the Executive would be entitled under the
provisions of any Employment Agreement between the Corporation
and the Executive then in effect (if any), the Corporation
shall pay to the Executive, in a lump sum not later than ten
(10) business days following the effective date of the
termination:
<PAGE>
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(i) an amount equal to three (3) times the
Executive's annual base salary on the effective date
of the termination or, if higher, immediately prior
to the Change in Control;
(ii) an amount equal to three (3) times the greater of (x)
the highest amount of the actual bonus awarded to the
Executive in the five (5) fiscal years immediately
preceding the year in which the Change in Control
occurred and (y) an amount equal to the amount the
Executive would have been awarded under the
Corporation's bonus plan in effect immediately prior
to the Change in Control for the fiscal year in which
the Change in Control occurred had the Executive
continued to render services to the Corporation at
the same level of performance, at the same level of
salary, and in the same position as immediately prior
to the Change in Control;
(iii) an amount equal to three (3) times the greater of (x)
the largest annual contribution made by the
Corporation to the Corporation's Savings Plan on the
Executive's behalf during the five (5) fiscal years
immediately preceding the year in which the Change in
Control occurred and (y) an amount equal to the
contribution the Corporation would have made to said
Plan on the Executive's behalf for the fiscal year in
which the Change in Control occurred had he
participated in said Plan for the entire fiscal year,
received a base salary equal to the salary he was
receiving immediately prior to the Change in Control
and had he elected to contribute to the Plan the same
percentage of his base salary as he was contributing
on said date;
(iv) an amount equal to thirty percent (30%)
of the Executive's annual base salary on the
effective date of the termination or, if higher,
immediately prior to the Change in Control (as
compensation for medical, life insurance and other
benefits lost as a result of termination of the
Executive's employment); and
(v) For each full or partial month in the period
beginning on January 1st of the year in which the
date of the termination occurs and ending on the date
of the termination, one-twelfth of the greater of (x)
the highest amount of the actual bonus awarded to the
Executive in the five (5) fiscal years immediately
preceding the year in which the Change in Control
occurred and (y) an amount equal to the amount the
Executive would have been awarded under the
Corporation's bonus plan in effect immediately prior
to the Change in Control for the fiscal year in which
the Change in Control occurred had the Executive
continued to render services to the Corporation at
the same level of performance, at the same level of
salary, and in the same position as immediately prior
to the Change in Control.
<PAGE>
-7-
(vi) If a payment may be increased by reference to an
alternate calculation which cannot be made by the
time the payment is due, payment of the lesser, known
amount shall be made when due, and if any additional
amount becomes due, such additional amount shall be
paid within ten (10) days after the information upon
which calculation of such payment is dependent first
becomes available.
The amount of all payments due to the Executive pursuant to
this Section 3(b) shall be reduced by 1/36 for each full
calendar month by which the date which is three (3) years from
the effective date of the Executive's termination extends
beyond the Executive's Normal Retirement Date.
Upon entering into this Agreement and for a period of fourteen
(14) days following each anniversary of the date hereof (the
"Election Period"), the Executive may, in writing, direct the
Corporation to pay any amounts to which he is entitled under
this Section 3(b) in equal annual installments (not to exceed
ten (10) annual installments), with the first such installment
payable within ten (10) business days of the effective date of
the termination and each successive installment payable on the
anniversary of the effective date of the termination or the
next following business day if such date is not a business day
(the ADeferred Payment Election@). A Deferred Payment
Election, once made, cannot be revoked except during an
Election Period; provided, however, no Deferred Payment
Election can be made or revoked by the Executive during an
Election Period that occurs after a Change in Control or at a
time when, in the judgment of the Corporation, a Change in
Control may occur within sixty (60) days of such Election
Period.
(c) The Corporation shall pay or provide to the Executive or
his surviving spouse or children, as the case may be, such
amounts and benefits as may be required so that the pension
and other post-retirement benefits paid or made available to
the Executive, his surviving spouse, and his children are
equal to those, if any, which would have been paid under the
Corporation's Basic and Supplemental Pension (Benefit) Plans
in effect immediately prior to the Change in Control, assuming
the Executive continued in the employ of the Corporation at
the same compensation until the third anniversary of the
effective date of the termination of the Executive's
employment or until his Normal Retirement Date, whichever is
earlier. Notwithstanding any conflicting restrictions in the
Plans or the fact of the termination of the Executive's
employment, until the Executive's Normal Retirement Date, the
Executive or his surviving spouse and his children shall
maintain a continuing right to receive the pension and other
benefits under the above Plans with payments to begin upon
retirement and to elect an imputed retirement on the
Executive's 50th birthdate or any of his birthdates thereafter
until his Normal Retirement Date, such election to be made by
so notifying the Corporation within one (1) year after
termination of his employment.
<PAGE>
-8-
(d) The Corporation shall pay for or provide the Executive
individual out-placement assistance as offered by a member
firm of the Association of Out-Placement Consulting Firms.
(e) If any payment or benefit to or for the benefit of the
Executive in connection with a Change in Control of the
Corporation or termination of the Executive's employment
following a Change in Control of the Corporation (whether
pursuant to the terms of this Agreement, or any other plan or
arrangement or agreement with the Corporation, any Person
whose actions result in a Change in Control of the Corporation
or any Affiliate or Associate of the Corporation or any such
Person) is subject to the Excise Tax (as hereinafter defined),
the Corporation shall pay to the Executive an additional
amount such that the total amount of all such payments and
benefits (including payments made pursuant to this Section
3(e) net of the Excise Tax and all other applicable federal,
state and local taxes) shall equal the total amount of all
such payments and benefits to which the Executive would have
been entitled, but for this Section 3(e), net of all
applicable federal, state and local taxes except the Excise
Tax. For purposes of this Section 3(e), the term "Excise Tax"
shall mean the tax imposed by Section 4999 of the Internal
Revenue Code of 1986 (the "Code") and any similar tax that may
hereafter be imposed.
The amount of the payment to the Executive under this Section
3(e) shall be estimated by a nationally recognized firm of
certified public accountants, which firm may not have provided
services to the Corporation or any Affiliate of the
Corporation within the previous three years and shall not
provide services thereto in the following three years, based
upon the following assumptions:
(i) all payments and benefits to or for the benefit of
the Executive in connection with a Change in Control
of the Corporation or termination of the Executive's
employment following a Change in Control of the
Corporation shall be deemed to be "parachute
payments" within the meaning of Section 280G(b)(2) of
the Code, and all "excess parachute payments" shall
be deemed to be subject to the Excise Tax except to
the extent that, in the opinion of tax counsel
selected by the firm of certified public accountants
charged with estimating the payment to the Executive
under this Section 3(e), such payments or benefits
are not subject to the Excise Tax; and
(ii) the Executive shall be deemed to pay federal, state
and local taxes at the highest marginal rate of
taxation for the applicable calendar year.
The estimated amount of the payment due the Executive pursuant
to this Section 3(e) shall be paid to the Executive in a lump
sum not later than thirty (30) business days following the
effective date of the termination. In the event that
<PAGE>
the amount of the estimated payment is less than the amount
actually due to the Executive under this Section 3(e), the
amount of any such shortfall shall be paid to the Executive
within ten (10) days after the existence of the shortfall is
discovered.
(f) The Executive shall not be required to mitigate the amount of
any payment provided in this Section 3, nor shall any payment
or benefit provided for in this Section 3 be offset by any
compensation earned by the Executive as the result of
employment by another employer, by retirement benefits, or by
offset against any amount claimed to be owed by the Executive
to the Corporation, or otherwise.
(g) If any payment to the Executive required by this Section 3 is
not made within the time for such payment specified herein,
the Corporation shall pay to the Executive interest on such
payment at the legal rate payable from time to time upon
judgments in the State of Delaware from the date such payment
is payable under terms hereof until paid.
4. EXECUTIVE'S EXPENSES
The Corporation shall pay or reimburse the Executive for all costs,
including reasonable attorney's fees and expenses of either litigation
or arbitration, incurred by the Executive in contesting or disputing
any termination of his employment following a Change in Control or in
seeking to obtain or enforce any right or benefit provided by this
Agreement.
5. BINDING AGREEMENT
This Agreement shall inure to the benefit of and be enforceable by the
Executive, his heirs, executors, administrators, successors and
assigns. This Agreement shall be binding upon the Corporation, its
successors and assigns. The Corporation shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of
the Corporation expressly to assume and agree to perform this Agreement
in accordance with its terms. The Corporation shall obtain such
assumption and agreement prior to the effectiveness of any such
succession.
6. NOTICE
Any notices and all other communications provided for herein shall be
in writing and shall be deemed to have been duly given when delivered
or mailed, by certified or registered mail, return receipt requested,
postage prepaid addressed to the respective
<PAGE>
-10-
addresses set forth on the first page of this Agreement or to such
other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt. All notices to the
Corporation shall be addressed to the attention of the Board with a
copy to each of the General Counsel, the Vice President-Human Resources
and the Secretary of the Corporation.
7. AMENDMENTS; WAIVERS
No provision of this Agreement may be modified, waived or discharged
except in a writing specifically referring to such provision and signed
by the party against which enforcement of such modification, waiver or
discharge is sought. No waiver by either party hereto of the breach of
any condition or provision of this Agreement shall be deemed a waiver
of any other condition or provision at the same or any other time.
8. GOVERNING LAW
The validity, interpretation, construction and performance of this
Agreement shall be governed by the substantive laws of the State of
Delaware.
9 VALIDITY
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. ARBITRATION
If the Executive so elects, any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by
arbitration in the city nearest to the Executive's principal residence
(or, at the Executive's election, in the city within the state in which
the Executive's principal residence is located nearest to such
principal residence) which has an office of the American Arbitration
Association by one arbitrator in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. The
Corporation hereby waives its right to contest the personal
jurisdiction or venue of any court, federal or state, in an action
brought to enforce this Agreement or any award of an arbitrator
hereunder which action is brought in the jurisdiction in which such
arbitration was conducted, or, if no arbitration was elected, in which
arbitration could have been conducted pursuant to this provision.
<PAGE>
-11-
11. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. SUPERSEDURE
This Agreement shall cancel and supersede any and all prior agreements
between the Executive and the Corporation entitled "Severance
Agreement" or "Change in Control Agreement".
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
BOWATER INCORPORATED
By /s/ Arnold M. Nemirow /s/ Arthur D. Fuller
--------------------------------- ------------------------------
Arnold M. Nemirow Arthur D. Fuller
Its: Chairman, President and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 105,549
<SECURITIES> 276,558
<RECEIVABLES> 189,635
<ALLOWANCES> 0
<INVENTORY> 102,239
<CURRENT-ASSETS> 690,891
<PP&E> 3,028,841
<DEPRECIATION> 1,457,250
<TOTAL-ASSETS> 2,737,688
<CURRENT-LIABILITIES> 202,943
<BONDS> 757,742
0
25,465
<COMMON> 44,887
<OTHER-SE> 1,072,696
<TOTAL-LIABILITY-AND-EQUITY> 2,737,688
<SALES> 1,083,480
<TOTAL-REVENUES> 1,083,480
<CGS> 829,723
<TOTAL-COSTS> 955,888
<OTHER-EXPENSES> (15,775)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,626
<INCOME-PRETAX> 38,914
<INCOME-TAX> 14,399
<INCOME-CONTINUING> 23,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,567
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<PAGE>
</TABLE>
