<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
BOWATER INCORPORATED
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Shares ("Avenor Common Shares") of Avenor Inc. ("Avenor")
(2) Aggregate number of securities to which transaction applies:
66,842,000, being the number of Avenor Common Shares expected to be
acquired in the transaction.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee of $322,513 is calculated in accordance with Rule
0-11(c)(1) under the Securities Exchange Act of 1934 (the "Exchange
Act") as follows: one-fiftieth of one percent of $1,612,563,250, which
is the sum of (a) the amount of cash to be paid, (b) the value of the
common stock, par value $1 per share ("Bowater Common Stock"), of
Bowater Incorporated to be issued and (c) the value of the exchangeable
shares (the "Exchangeable Shares") of Bowater Canada Inc. to be issued,
to holders of Avenor Common Shares in the transaction. The cash to be
paid, $990,391,590, was calculated as (x) the product of: (a) C$35, (b)
66,842,000, the aggregate number of outstanding Avenor Common Shares
assuming the exercise of all Avenor stock options and (c) .60 divided
by (y) 1.4173, the value in Canadian dollars of one U.S. dollar at the
rate of exchange equal to the Bank of Canada's noon spot exchange rate
for such currencies on April 1, 1998. The value of the Bowater Common
Stock and the value of the Exchangeable Shares were determined in
accordance with Rule 0-11(a)(4) under the Exchange Act based on the
value of the Avenor Common Shares to be acquired by Bowater in the
transaction. The value of the Avenor Common Shares to be acquired in
exchange for the Bowater Common Stock and Exchangeable Shares is
$622,171,660, calculated as (x) the product of (a) $24.125, the average
of the high and low sales prices per share of Avenor Common Shares on
April 2, 1998, as reported on the New York Stock Exchange, multiplied
by (b) 66,842,000; reduced by (y) $990,391,590, the amount of cash to
be paid.
(4) Proposed maximum aggregate value of transaction:
$1,612,563,250
(5) Total fee paid:
$322,513
[X] Fee paid previously with preliminary materials:
$322,513 (Fee paid by wire transfer on April 3, 1998.)
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(BOWATER LOGO)
55 East Camperdown Way
Post Office Box 1028
Greenville, SC 29602
June 18, 1998
Dear Shareholders:
You are cordially invited to attend a special meeting of shareholders of
Bowater Incorporated ("Bowater"), which will be held at 55 East Camperdown Way,
Greenville, South Carolina, on Tuesday, July 21, 1998, at 11:00 a.m. local time.
At the special meeting, Bowater will ask for your approval of a transaction
by which Bowater will acquire the business of Avenor Inc. ("Avenor"), a
corporation incorporated under the laws of Canada. We believe that this
combination will offer significant and compelling opportunities for our
shareholders, as more fully described in the attached Joint Management
Information Circular and Proxy Statement (the "Joint Proxy Statement").
We believe that the transaction will create a premier North American forest
products company with an enhanced ability to serve the major newsprint markets.
Further, we believe that the transaction adds complementary, cost-competitive
mills to Bowater's current asset base. Over the past ten years, the Avenor mills
generally have had significant capital investments, including extensive upgrades
to both pulp and paper manufacturing facilities, making them productive and
efficient assets. By increasing the geographic diversity of Bowater's
operations, we expect that the combination should create significant advantages
in delivery and service optimization for our customers. As a result of the
integration of Avenor with Bowater, we foresee significant opportunities for
cost reductions and operating efficiencies as discussed in the Joint Proxy
Statement under the captions "The Transaction--Bowater's Reasons for the
Transaction; Recommendation of the Bowater Board" and "Risk Factors".
Specifically, at this special meeting you will be asked to consider a
proposal to approve the issuance of shares of common stock, par value $1 per
share, of Bowater pursuant to the Amended and Restated Arrangement Agreement
dated as of March 9, 1998 (the "Arrangement Agreement"), between Avenor and
Bowater, and the transactions related thereto. Pursuant to the Arrangement
Agreement, Bowater and Avenor agreed to engage in a transaction that has the
economic effect of Bowater acquiring Avenor pursuant to a plan of arrangement
(the "Arrangement") involving Avenor and its shareholders under Canadian law.
THE BOARD OF DIRECTORS OF BOWATER HAS UNANIMOUSLY APPROVED THE TERMS OF THE
ARRANGEMENT AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF SHARES OF BOWATER COMMON STOCK AT
THE SPECIAL MEETING.
Under the Arrangement, each holder of Avenor Common Shares (other than
holders who exercise and perfect their dissent rights) may elect to receive for
each such share, subject to proration as discussed below, (i) C$35 in cash,
without interest thereon, (ii) a number of shares of Bowater Common Stock equal
to the Exchange Ratio, (iii) a number of Exchangeable Shares (described below)
equal to the Exchange Ratio, or (iv) a combination of the foregoing. The
"Exchange Ratio" will equal C$35 divided by the product of the weighted average
trading price of shares of Bowater Common Stock on the New York Stock Exchange
for the 20 trading days ending on the third business day prior to the effective
date of the Arrangement (but not more
<PAGE> 3
than US$55.6187 or less than US$45.5062) multiplied by the value in Canadian
dollars of one U.S. dollar on the last of such trading days. The maximum
aggregate number of Avenor Common Shares that may be exchanged for cash may not
exceed 60% of the total number of outstanding Avenor Common Shares. The maximum
aggregate number of Avenor Common Shares that may be exchanged for shares of
Bowater Common Stock and/or Exchangeable Shares may not exceed 50% of the total
number of outstanding Avenor Common Shares.
The Exchangeable Shares will be issued by a newly-incorporated Canadian
subsidiary of Bowater and will be exchangeable, at any time at the option of the
holder, on a one-for-one basis for shares of Bowater Common Stock. Pursuant to a
Voting and Exchange Trust Agreement, a trustee will be appointed who will be the
holder of one share of a new class of special voting stock of Bowater that will
entitle the trustee to a number of votes on all matters on which holders of
shares of Bowater Common Stock are entitled to vote equal to the number of
Exchangeable Shares outstanding from time to time (other than those held by
Bowater or its affiliates). By furnishing instructions to the trustee, holders
of Exchangeable Shares will be able to exercise voting rights equivalent to
those they would have after the exchange of their Exchangeable Shares for shares
of Bowater Common Stock. Holders of Exchangeable Shares will also be entitled to
receive dividends paid by Bowater's Canadian subsidiary equivalent on a per
share basis to any dividends paid on shares of Bowater Common Stock as described
in the attached Joint Proxy Statement.
The Board of Directors of Avenor has also unanimously approved the terms of
the Arrangement Agreement and the transactions contemplated thereby and has
unanimously recommended to Avenor's shareholders that they vote in favor of a
special resolution approving the Arrangement.
The Arrangement is conditioned on the approval by the holders of Bowater
Common Stock of the issuance of shares of Bowater Common Stock in connection
with the Arrangement. Accordingly, whether or not you plan to attend the special
meeting, please complete, sign and date the enclosed proxy card and return it in
the enclosed postage-paid envelope to ensure that your shares will be
represented at the special meeting.
Sincerely yours,
/s/ Arnold M. Nemirow
ARNOLD M. NEMIROW
Chairman of the Board,
President and Chief Executive Officer
2
<PAGE> 4
BOWATER INCORPORATED
55 EAST CAMPERDOWN WAY
POST OFFICE BOX 1028
GREENVILLE, SC 29602
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 21, 1998
TO THE SHAREHOLDERS
OF BOWATER INCORPORATED:
Notice is hereby given that a special meeting of shareholders of Bowater
Incorporated ("Bowater") will be held at 55 East Camperdown Way, Greenville,
South Carolina, on Tuesday, July 21, 1998, at 11:00 a.m. local time (together
with any and all adjournments or postponements thereof, the "Bowater Meeting"),
for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of
shares of common stock ("Bowater Common Stock"), par value US$1 per share,
of Bowater pursuant to the Amended and Restated Arrangement Agreement (the
"Arrangement Agreement"), dated as of March 9, 1998, between Avenor Inc.
("Avenor"), a corporation incorporated under the laws of Canada, and
Bowater, and pursuant to the transactions related to the Arrangement
Agreement. Under the Arrangement Agreement, Bowater and Avenor agreed to
engage in a transaction that has the economic effect of Bowater acquiring
Avenor. Pursuant to the Arrangement Agreement, Avenor will apply to the
Ontario Court of Justice for an order for an arrangement (the
"Arrangement"), pursuant to which Bowater, through two newly-incorporated
Canadian subsidiaries, will acquire outstanding common shares of Avenor
("Avenor Common Shares"), other than the shares of holders who exercise and
perfect their dissent rights, and each holder of Avenor Common Shares will
be entitled to elect to receive for each such share, subject to proration
as described below, (i) C$35 in cash, without interest thereon, (ii) a
number of shares of Bowater Common Stock equal to the Exchange Ratio, (iii)
a number of exchangeable shares (the "Exchangeable Shares") of one of the
newly-incorporated subsidiaries of Bowater equal to the Exchange Ratio, or
(iv) a combination of the foregoing. The "Exchange Ratio" will equal C$35
divided by the product of the weighted average trading price of shares of
Bowater Common Stock on the New York Stock Exchange for the 20 trading days
ending on the third business day prior to the effective date of the
Arrangement (but not more than US$55.6187 or less than US$45.5062)
multiplied by the value in Canadian dollars of one U.S. dollar on the last
of such trading days. The maximum aggregate number of Avenor Common Shares
that may be exchanged for cash may not exceed 60% of the total number of
outstanding Avenor Common Shares. The maximum aggregate number of Avenor
Common Shares that may be exchanged for shares of Bowater Common Stock
and/or Exchangeable Shares may not exceed 50% of the total number of
outstanding Avenor Common Shares; and
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The Board of Directors of Bowater has fixed the close of business on June
8, 1998, as the record date for determining the shareholders entitled to notice
of, and to vote at, the Bowater Meeting. Each share of Bowater Common Stock will
entitle the holder to one vote at the Bowater Meeting.
<PAGE> 5
WHETHER OR NOT YOU PLAN TO ATTEND THE BOWATER MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE BOWATER
MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THE ATTACHED JOINT MANAGEMENT
INFORMATION CIRCULAR AND PROXY STATEMENT.
By Order of the Board of Directors,
/s/ WENDY C. SHIBA
WENDY C. SHIBA
Vice President,
Secretary and Assistant General
Counsel
Greenville, South Carolina
June 18, 1998
2
<PAGE> 6
(AVENOR LETTERHEAD)
June 18, 1998
Dear Shareholder:
You are cordially invited to attend the annual and special meeting of
shareholders (the "Avenor Meeting") of Avenor Inc. ("Avenor"), which will be
held in the West Ballroom of the Sheraton Centre Hotel, 1201 Rene-Levesque
Boulevard West, Montreal, Quebec, on Tuesday, July 21, 1998, at 11:00 a.m.
Montreal time.
At the Avenor Meeting, you will be asked to approve a proposed plan of
arrangement (the "Arrangement") under Canadian law involving Avenor and its
shareholders pursuant to an Amended and Restated Arrangement Agreement (the
"Arrangement Agreement") dated as of March 9, 1998, between Avenor and Bowater
Incorporated, a Delaware corporation ("Bowater"). Under the Arrangement
Agreement, Bowater and Avenor agreed to engage in a transaction that has the
economic effect of Bowater acquiring Avenor.
THE BOARD OF DIRECTORS OF AVENOR HAS UNANIMOUSLY APPROVED THE TERMS OF THE
ARRANGEMENT AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE IN FAVOUR OF THE ARRANGEMENT RESOLUTION AND THE
SHAREHOLDER RIGHTS PLAN RESOLUTION DESCRIBED BELOW.
The Board of Directors of Bowater has also unanimously approved the terms
of the Arrangement Agreement and the transactions contemplated thereby and has
unanimously recommended to its shareholders that they approve the issuance of
shares of Bowater Common Stock in connection with the Arrangement.
Under the Arrangement, each holder of Avenor Common Shares (other than
holders who exercise and perfect their dissent rights) may elect to receive for
each such share, subject to proration as discussed below, (i) C$35 in cash,
without interest thereon, (ii) a number of shares of Bowater Common Stock equal
to the Exchange Ratio (described below), (iii) a number of Exchangeable Shares
(described below) equal to the Exchange Ratio, or (iv) a combination of the
foregoing. The "Exchange Ratio" will equal C$35 divided by the product of the
weighted average trading price of shares of Bowater Common Stock on the New York
Stock Exchange for the 20 trading days ending on the third business day prior to
the effective date of the Arrangement (but not more than US$55.6187 or less than
US$45.5062, pursuant to the Arrangement Agreement) multiplied by the value in
Canadian dollars of one U.S. dollar on the last of such trading days. The
maximum aggregate number of Avenor Common Shares that may be exchanged for cash
may not exceed 60% of the total number of outstanding Avenor Common Shares. The
maximum aggregate number of Avenor Common Shares that may be exchanged for
shares of Bowater Common Stock and/or Exchangeable Shares may not exceed 50% of
the total number of outstanding Avenor Common Shares.
The Exchangeable Shares will be issued by a newly-incorporated Canadian
subsidiary of Bowater and will be exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of Bowater Common Stock. Pursuant to
a Voting and Exchange Trust Agreement, a trustee will be appointed who will be
the holder of one share of a new class of special voting stock of Bowater that
will entitle the trustee to a number of votes on all matters on which holders of
shares of Bowater Common Stock are entitled to vote equal to the number of
Exchangeable Shares outstanding from time to time, other than those held by
Bowater
<PAGE> 7
or its affiliates. By furnishing instructions to the trustee, holders of
Exchangeable Shares will be able to exercise voting rights equivalent to those
they would have after the exchange of their Exchangeable Shares for shares of
Bowater Common Stock. Holders of Exchangeable Shares will also be entitled to
receive dividends paid by Bowater's Canadian subsidiary equivalent on a per
share basis to any dividends paid on shares of Bowater Common Stock. The
Exchangeable Shares provide an opportunity for certain shareholders of Avenor to
achieve Canadian tax deferral in certain circumstances and will be an eligible
investment under certain Canadian statutes, as described in the attached Joint
Management Information Circular and Proxy Statement (the "Joint Proxy
Statement").
At the Avenor Meeting, you will be asked to vote on a special resolution to
approve the Arrangement (the "Arrangement Resolution"). The Arrangement
Resolution must be approved by not less than two-thirds of the votes cast by
shareholders on such resolution at the Avenor Meeting, either in person or by
proxy. In addition, you will be asked to vote on a resolution to approve the
waiving of the application of Avenor's Shareholder Rights Plan Agreement dated
as of October 20, 1995, between Avenor and Montreal Trust Company, as rights
agent, in respect of the Arrangement (the "Shareholder Rights Plan Resolution").
The Shareholder Rights Plan Resolution must be approved by a majority of the
votes cast by shareholders at the Avenor Meeting, either in person or by proxy.
You will also be asked to elect the directors of Avenor and to appoint the
auditors of Avenor and authorize the directors to fix the remuneration of the
auditors, both of which must be approved by a majority of the votes cast by
shareholders at the Avenor Meeting.
The Joint Proxy Statement accompanying this letter contains a detailed
description of the background and mechanics of the Arrangement and the
businesses of Avenor and Bowater, as well as historical financial information of
both Avenor and Bowater. Please give this material your careful consideration
and, if you require assistance, consult your financial, income tax or other
professional advisors.
The Arrangement is conditional on approval by the holders of Avenor Common
Shares of the Arrangement Resolution and the Shareholder Rights Plan Resolution.
Accordingly, whether or not you plan to attend the Avenor Meeting, please
complete, sign and date the enclosed proxy card and return it in the enclosed
postage-paid envelope or by facsimile to ensure that your shares will be
represented at the meeting.
A Letter of Transmittal and Election Form and a Notice of Guaranteed
Delivery are being mailed together with the Joint Proxy Statement to each person
who was a holder of Avenor Common Shares on the June 12, 1998 record date. Each
such holder (and each holder of record of Avenor Common Shares on or prior to
July 20, 1998) will have the right to submit a Letter of Transmittal and
Election Form specifying the number of Avenor Common Shares that such person
desires to have exchanged for cash, Exchangeable Shares or shares of Bowater
Common Stock, or a combination of the foregoing, subject to proration.
Shareholders who do not make an election will be deemed to have elected to
receive Exchangeable Shares under the Arrangement. Accordingly, whether or not
you plan to attend the Avenor Meeting, please complete, sign and date the
enclosed Letter of Transmittal and Election Form and return it in the enclosed
postage-paid envelope.
Yours very truly,
/s/ ARTHUR R. SAWCHUK
ARTHUR R. SAWCHUK
President and Chief Executive Officer
2
<PAGE> 8
AVENOR INC.
1250 Rene-Levesque Blvd. West
Montreal, Quebec H3B 4Y3
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 21, 1998
To the Shareholders of Avenor Inc.:
NOTICE IS HEREBY GIVEN that the annual and special meeting of shareholders
of Avenor Inc. ("Avenor") will be held in the West Ballroom of the Sheraton
Centre Hotel, 1201 Rene-Levesque Boulevard West, Montreal, Quebec on Tuesday,
July 21, 1998, at 11:00 a.m. (Montreal time) for the following purposes:
1. pursuant to an interim order dated June 16, 1998 of the Ontario
Court of Justice (General Division), to consider and, if deemed
advisable, to approve, with or without amendment, a special
resolution to approve a plan of arrangement (the "Arrangement")
under section 192 of the Canada Business Corporations Act, which
will involve, among other things, certain transactions resulting in
Bowater Incorporated ("Bowater") holding indirectly all the issued
and outstanding common shares of Avenor;
2. to consider and, if deemed advisable, to approve, with or without
amendment, a resolution to approve the waiving in respect of the
Arrangement of the application of Avenor's shareholder rights plan
agreement dated as of October 20, 1995, between Avenor and Montreal
Trust Company;
3. to receive and consider the consolidated financial statements of
Avenor and its subsidiaries for the fiscal year ended December 31,
1997, and the auditors' report thereon;
4. to elect directors;
5. to appoint auditors and authorize the directors to fix the
auditors' remuneration; and
6. to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The Board of Directors of Avenor has fixed the close of business on June
12, 1998, as the record date for determining shareholders entitled to notice of,
and to vote at, the meeting.
A copy of the special resolution referred to in item 1 and the resolution
referred to in item 2 are attached to the Joint Management Information Circular
and Proxy Statement as Annex A and Annex B, respectively.
DATED at Montreal, Quebec this 18th day of June, 1998.
By Order of the Board of Directors,
/s/ MARC REGNIER
MARC REGNIER
Senior Vice President,
General Counsel and Secretary
- ---------------
Notes:
(1) Shareholders who are unable to be present in person at the meeting are
requested to sign and return the accompanying form of proxy for use at the
meeting in the envelope provided for that purpose. To be effective, proxies
must be deposited with Montreal Trust Company of Canada, Proxy Department,
6th Floor, 1800 McGill College Avenue, Montreal, Quebec H3A 3K9, or by
facsimile to Montreal Trust Company of Canada at (514) 982-7635 by 10:00
a.m. (Montreal time) on the day of the meeting or any adjournment or
postponement thereof.
(2) Only holders of Avenor Common Shares of record at the close of business on
June 12, 1998, will be entitled to vote at the meeting, except to the extent
that the person has transferred any of such shares after that date and the
transferee of such shares establishes proper ownership and requests before
10:00 a.m. on the day of the meeting (or any adjournment or postponement
thereof) that the transferee's name be included in the list of shareholders
for the meeting.
<PAGE> 9
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BOWATER INCORPORATED AVENOR INC.
55 East Camperdown Way 1250 Rene-Levesque Blvd. West
P.O. Box 1028 Montreal, Quebec
Greenville, South Carolina 29602 H3B 4Y3
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JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT
This Joint Management Information Circular and Proxy Statement (the "Joint
Proxy Statement") is being furnished to holders of shares of common stock, par
value US$1 per share ("Bowater Common Stock"), of Bowater Incorporated, a
Delaware corporation ("Bowater"), in connection with the solicitation of proxies
by the Board of Directors of Bowater (the "Bowater Board") for use at the
special meeting of Bowater shareholders to be held on July 21, 1998, and any
adjournment or postponement thereof (the "Bowater Meeting").
This Joint Proxy Statement is also being furnished to holders of common
shares ("Avenor Common Shares") of Avenor Inc., a corporation incorporated under
the laws of Canada ("Avenor"), in connection with the solicitation of proxies by
the management of Avenor for use at the annual and special meeting of Avenor
shareholders to be held on July 21, 1998, and any adjournment or postponement
thereof (the "Avenor Meeting", and together with the Bowater Meeting, the
"Meetings").
At the Bowater Meeting, holders of shares of Bowater Common Stock will be
asked to consider and vote upon a proposal to approve the issuance of shares
(the "Share Issuance") of Bowater Common Stock pursuant to the Amended and
Restated Arrangement Agreement dated as of March 9, 1998, between Bowater and
Avenor (the "Arrangement Agreement") and pursuant to the transactions related
thereto (collectively, the "Transaction"). At the Avenor Meeting, holders of
Avenor Common Shares will be asked to consider and vote upon, among other
things, a special resolution (the "Arrangement Resolution") to approve the plan
of arrangement (the "Arrangement") contemplated by the Arrangement Agreement and
a resolution (the "Shareholder Rights Plan Resolution") to approve the waiving
of the application of Avenor's shareholder rights plan agreement (the
"Shareholder Rights Plan") dated as of October 20, 1995, between Avenor and
Montreal Trust Company, as rights agent, in respect of the Arrangement.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR CERTAIN CONSIDERATIONS RELEVANT
TO APPROVAL OF THE MATTERS REFERRED TO ABOVE AND AN INVESTMENT IN THE SECURITIES
REFERRED TO HEREIN.
(Continued on next page)
---------------------
This Joint Proxy Statement and the accompanying forms of proxy are first
being mailed to shareholders of Bowater and Avenor on or about June 22, 1998.
THE SECURITIES TO BE ISSUED IN THE TRANSACTION HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Joint Proxy Statement is June 18, 1998.
<PAGE> 10
(Continued from previous page)
Pursuant to the Arrangement Agreement, Avenor will apply to the Ontario
Court of Justice (General Division) (the "Ontario Court") for an order for the
Arrangement under the provisions of section 192 of the Canada Business
Corporations Act (the "CBCA"), pursuant to which Bowater, through Bowater
Canadian Holdings Incorporated ("Bowater Holdings") and Bowater Canada Inc.
("Bowater Canada"), two newly-incorporated Canadian subsidiaries of Bowater,
will acquire outstanding Avenor Common Shares and each holder of Avenor Common
Shares (other than holders who exercise and perfect their dissent rights) will
be entitled to elect to receive for each such share, subject to proration (as
discussed below), (i) C$35 in cash, without interest thereon, (ii) a number of
shares of Bowater Common Stock equal to the Exchange Ratio, or (iii) a number of
exchangeable shares ("Exchangeable Shares") of Bowater Canada equal to the
Exchange Ratio, or (iv) a combination of the foregoing. The "Exchange Ratio"
will equal C$35 divided by the product of the weighted average trading price of
shares of Bowater Common Stock on the New York Stock Exchange (the "NYSE") for
the 20 trading days ending on the third business day prior to the effective date
of the Arrangement (but not more than US$55.6187 or less than US$45.5062)
multiplied by the value in Canadian dollars of one U.S. dollar on the last of
such trading days. The maximum aggregate number of Avenor Common Shares that may
be exchanged for cash may not exceed 60% of the total number of outstanding
Avenor Common Shares. The maximum aggregate number of Avenor Common Shares that
may be exchanged for shares of Bowater Common Stock and/or Exchangeable Shares
may not exceed 50% of the total number of outstanding Avenor Common Shares. See
"Summary--The Transaction--Proration" and "The Transaction--Transaction
Mechanics and Description of Exchangeable Shares--Proration".
The Exchangeable Shares will be issued by Bowater Canada and will be
exchangeable, at any time at the option of the holder, on a one-for-one basis
for shares of Bowater Common Stock. Pursuant to a Voting and Exchange Trust
Agreement (the "Voting and Exchange Trust Agreement") to be entered into between
Bowater, Bowater Holdings, Bowater Canada and Montreal Trust Company of Canada
(together with its successors, the "Trustee"), the Trustee thereunder will be
the holder of one share of a new class of special voting stock of Bowater (the
"Special Voting Stock") that will entitle the Trustee to a number of votes on
all matters on which holders of shares of Bowater Common Stock are entitled to
vote equal to the number of Exchangeable Shares outstanding from time to time
(other than those held by Bowater or its affiliates) for which the Trustee has
timely received voting instructions from the holders of Exchangeable Shares. By
furnishing instructions to the Trustee, holders of Exchangeable Shares will be
able to exercise voting rights equivalent to those they would have after the
exchange of their Exchangeable Shares for shares of Bowater Common Stock.
Holders of Exchangeable Shares will also be entitled to receive dividends paid
by Bowater Canada equivalent on a per share basis to any dividends paid on
shares of Bowater Common Stock.
All information in this Joint Proxy Statement relating to Bowater has been
supplied by Bowater, and all information relating to Avenor has been supplied by
Avenor.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH SOLICITATION OR
OFFERING MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT NOR ANY DISTRIBUTION OF
SECURITIES REFERRED TO IN THIS JOINT PROXY STATEMENT SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF BOWATER OR AVENOR SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
ii
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GLOSSARY.................................................... vi
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES.............. xiii
CURRENCY EXCHANGE RATES..................................... xiii
SUMMARY..................................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 22
RISK FACTORS................................................ 23
Risks Related to the Transaction.......................... 23
Risks Related to Operations after the Transaction......... 25
COMPARATIVE MARKET PRICE DATA............................... 28
THE BOWATER MEETING......................................... 29
THE AVENOR MEETING.......................................... 30
THE TRANSACTION............................................. 33
Background of the Transaction............................. 33
Bowater's Reasons for the Transaction; Recommendation of
the Bowater Board...................................... 36
Opinions of Bowater's Financial Advisors.................. 38
Avenor's Reasons for the Transaction; Recommendation of
the Avenor Board....................................... 43
Opinion of Avenor's Financial Advisor..................... 45
Plans and Proposals....................................... 48
Interests of Certain Persons in the Transaction........... 49
Transaction Mechanics and Description of Exchangeable
Shares................................................. 50
Court Approval of the Arrangement and Completion of the
Transaction............................................ 55
Election Procedures....................................... 55
Exchange Procedures....................................... 56
Stock Exchange Listings................................... 59
Accounting Treatment...................................... 59
Plan of Financing......................................... 59
Eligibility for Investment in Canada...................... 60
Resale of Exchangeable Shares and Bowater Common Stock
Received in the Transaction............................ 60
Ongoing Canadian Reporting Obligations.................... 61
OTHER TERMS OF THE ARRANGEMENT AGREEMENT.................... 62
Representations and Warranties............................ 62
Conduct of Business Pending the Arrangement............... 62
Non-Solicitation.......................................... 66
Mutual Standstill......................................... 68
Employment Agreements..................................... 68
Conditions to Closing..................................... 68
Amendment and Waiver...................................... 71
Termination and Termination Fees.......................... 71
Expenses.................................................. 72
REGULATORY MATTERS.......................................... 72
Hart-Scott-Rodino Act..................................... 72
Competition Act (Canada).................................. 72
Investment Canada Act..................................... 73
INCOME TAX CONSIDERATIONS................................... 74
Canadian Federal Income Tax Considerations for Avenor
Shareholders........................................... 74
Shareholders Resident in Canada........................... 75
Shareholders Not Resident in Canada....................... 81
United States Federal Income Tax Considerations for
Bowater Shareholders................................... 82
United States Federal Income Tax Considerations for Avenor
Shareholders........................................... 83
</TABLE>
iii
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DESCRIPTION OF CAPITAL STOCK................................ 90
Principal Holders of Securities........................... 90
Bowater Capital Stock..................................... 90
Bowater Holdings Share Capital............................ 92
Bowater Canada Share Capital.............................. 92
Avenor Share Capital...................................... 95
Voting and Exchange Trust Agreement....................... 96
Support Agreement......................................... 97
Registration and Listing of Bowater Common Stock.......... 98
Avenor Convertible Debentures............................. 98
Transfer Agents and Registrars............................ 98
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 99
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 103
AVENOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 109
INFORMATION CONCERNING AVENOR............................... 123
Incorporation and History................................. 123
Subsidiaries and Interests in Partnerships................ 124
General Development of the Business....................... 124
Business and Properties................................... 125
Manufacturing Facilities.................................. 127
Investment in Ponderay Partnership........................ 129
Capital Expenditures...................................... 129
Fibre Supply.............................................. 129
Major Developments........................................ 131
Competition and Business Environment...................... 132
Transportation............................................ 133
Energy.................................................... 133
Research and Development.................................. 133
Environmental Matters..................................... 133
Human Resources........................................... 134
Share Capital of Avenor................................... 134
Principal Holders of Avenor Common Shares................. 135
Directors and Officers.................................... 135
Executive Compensation.................................... 139
Report on Executive Compensation.......................... 142
Indebtedness of Directors and Officers.................... 143
Statement of Corporate Governance Practices............... 144
Performance Graph......................................... 146
Interest of Management and Others in Material
Transactions........................................... 146
Debt...................................................... 146
Legal Proceedings......................................... 147
Dividend Record........................................... 147
BOWATER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 148
INFORMATION CONCERNING BOWATER.............................. 160
Business.................................................. 160
Properties................................................ 165
Legal Proceedings......................................... 166
</TABLE>
iv
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Executive Officers and Directors.......................... 166
Board and Committee Meetings.............................. 169
Director Compensation..................................... 169
Security Ownership of Certain Beneficial Owners and
Management............................................. 170
Human Resources and Compensation Committee Report on
Executive Compensation................................. 173
Executive Compensation.................................... 176
Shareholder Return Performance Presentation............... 181
Certain Relationships and Related Transactions............ 181
INFORMATION CONCERNING BOWATER CANADA....................... 182
Business.................................................. 182
Share Capital............................................. 182
Directors and Officers.................................... 182
COMPARISON OF SHAREHOLDER RIGHTS............................ 183
Vote Required for Extraordinary Transactions.............. 183
Amendment to Governing Documents.......................... 184
Dissenters' Rights........................................ 184
Oppression Remedy......................................... 185
Derivative Action......................................... 185
Shareholder Consent in Lieu of Meeting.................... 186
Director Qualifications................................... 186
Fiduciary Duties of Directors............................. 186
Indemnification of Officers and Directors................. 186
Director Liability........................................ 187
Anti-Takeover Provisions and Interested Stockholder
Transactions........................................... 187
DISSENTING SHAREHOLDERS' RIGHTS............................. 189
Avenor.................................................... 189
Bowater................................................... 190
ADDITIONAL MATTERS FOR CONSIDERATION OF AVENOR
SHAREHOLDERS.............................................. 191
Election of Directors..................................... 191
Appointment of Auditors................................... 191
PROPOSALS BY BOWATER SHAREHOLDERS........................... 191
ACCOUNTANTS................................................. 192
AVAILABLE INFORMATION....................................... 192
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 192
APPROVAL OF PROXY STATEMENT BY AVENOR BOARD OF DIRECTORS.... 194
INDEX TO BOWATER CONSOLIDATED FINANCIAL STATEMENTS.......... FS-1
INDEX TO AVENOR CONSOLIDATED FINANCIAL STATEMENTS........... FS-1
ANNEX A -- Form of Arrangement Resolution................... A-1
ANNEX B -- Form of Shareholder Rights Plan Resolution....... B-1
ANNEX C -- Notice of Application............................ C-1
ANNEX D -- Arrangement Agreement............................ D-1
ANNEX E -- Plan of Arrangement Including Exchangeable Share
Provisions....................................... E-1
ANNEX F -- Form of Voting and Exchange Trust Agreement...... F-1
ANNEX G -- Form of Support Agreement........................ G-1
ANNEX H -- Opinion of Goldman, Sachs & Co................... H-1
ANNEX I -- Opinion of TD Securities Inc..................... I-1
ANNEX J -- Opinion of RBC Dominion Securities Inc........... J-1
ANNEX K -- Section 190 of the CBCA.......................... K-1
</TABLE>
v
<PAGE> 14
GLOSSARY
Unless the context otherwise requires, the following terms shall have the
following meanings when used in this Joint Proxy Statement:
"Acquisition Proposal" means any merger, amalgamation, take-over bid, sale
of material assets (or any lease, long-term supply agreement or other
arrangement having the same economic effect as a sale), any material sale of
shares or rights or interests therein or thereto or similar transactions
involving Avenor or Bowater or any material subsidiaries (as defined in the
Arrangement Agreement) of Avenor or Bowater, or a proposal to do so, excluding
the Arrangement and transactions permitted in Avenor's covenants under the
Arrangement Agreement.
"Ancillary Rights" means, collectively, the Voting Rights and the Exchange
Rights.
"Antitrust Division" means the Antitrust Division of the United States
Department of Justice.
"ARC" means an advance ruling certificate issued under section 102 of the
Competition Act.
"Arrangement" means the proposed arrangement involving Avenor and its
shareholders under section 192 of the CBCA, pursuant to the Plan of Arrangement.
"Arrangement Agreement" means the Amended and Restated Arrangement
Agreement dated as of March 9, 1998, between Avenor and Bowater, a copy of which
is attached to this Joint Proxy Statement as Annex D.
"Arrangement Resolution" means the special resolution of Avenor
Shareholders approving the Arrangement in the form attached to this Joint Proxy
Statement as Annex A.
"Articles of Arrangement" means the Articles of Arrangement to be filed by
Avenor under the CBCA to give effect to the Arrangement.
"Available Cash Elected Shares" means, in the event the Requested Cash
Amount exceeds the Cash Cap, the number of a holder's Cash Elected Shares
reduced to the product of the Cash Proration Factor and the number of Cash
Elected Shares of such holder.
"Available Share Elected Shares" means, in the event the Requested Share
Amount exceeds the Share Cap, the number of a holder's Deemed Share Elected
Shares reduced to the product of the Share Proration Factor and the number of
Deemed Share Elected Shares of such holder.
"Avenor" means Avenor Inc., a corporation incorporated under the CBCA.
"Avenor Articles" means the articles of amalgamation of Avenor dated
January 1, 1989, as amended.
"Avenor Board" means the Board of Directors of Avenor.
"Avenor By-laws" means Avenor's By-laws, as amended from time to time.
"Avenor Common Shares" means the common shares in the capital of Avenor.
"Avenor Convertible Debentures" means the 7.5% Convertible Debentures of
Avenor issued on February 8, 1994.
"Avenor KESOP" means Avenor's Key Employee Stock Option Plan providing for
the issuance of Avenor Options and Avenor SARs.
"Avenor Management Nominees" means the persons named in the form of proxy
mailed to Avenor Shareholders.
"Avenor Meeting" means the annual and special meeting of Avenor
Shareholders to be held on July 21, 1998, and any adjournment or postponement
thereof, to be held with respect to, among other things, the approval by Avenor
Shareholders of the Arrangement Resolution, the Shareholder Rights Plan
Resolution, the election of directors and the appointment of auditors.
vi
<PAGE> 15
"Avenor Options" means stock options of Avenor issued under the Avenor
KESOP.
"Avenor Record Date" means June 12, 1998.
"Avenor SARs" means stock appreciation rights of Avenor issued under the
Avenor KESOP.
"Avenor Shareholders" means holders of Avenor Common Shares.
"Bowater" means Bowater Incorporated, a Delaware corporation.
"Bowater Average Trading Price" means the weighted average trading price of
shares of Bowater Common Stock on the NYSE for the 20 trading days ending on the
third business day prior to the Effective Date.
"Bowater Board" means the Board of Directors of Bowater.
"Bowater Bylaws" means Bowater's Bylaws, as amended from time to time.
"Bowater Canada" means Bowater Canada Inc., a subsidiary of Bowater
Holdings incorporated under the CBCA.
"Bowater Canada Common Shares" means common shares in the capital of
Bowater Canada.
"Bowater Canada Insolvency Event" means the institution by Bowater Canada
of any proceeding to be adjudicated a bankrupt or insolvent or to be wound up,
or the consent of Bowater Canada to the institution of bankruptcy, insolvency or
winding-up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding-up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies Creditors'
Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the
failure by Bowater Canada to contest in good faith any such proceedings
commenced in respect of Bowater Canada within 30 days of becoming aware thereof,
or the consent by Bowater Canada to the filing of any such petition or to the
appointment of a receiver, or the making by Bowater Canada of a general
assignment for the benefit of creditors, or the admission in writing by Bowater
Canada of its inability to pay its debts generally as they become due, or
Bowater Canada not being permitted, pursuant to solvency requirements of
applicable law, to redeem any Exchangeable Shares in connection with a
Retraction Request.
"Bowater Canada Preferred Shares" means non-voting preferred shares in the
capital of Bowater Canada.
"Bowater Certificate" means Bowater's Restated Certificate of
Incorporation, as amended.
"Bowater Common Stock" means the common stock, par value US$1 per share, of
Bowater.
"Bowater Depositary Shares" means the Depositary Shares of Bowater, each of
which represents a one-fourth interest in a share of Bowater Series C Preferred
Stock.
"Bowater Elected Share" means an Avenor Common Share for which an effective
election to receive shares of Bowater Common Stock is made or is deemed to be
made as a result of proration.
"Bowater Holdings" means Bowater Canadian Holdings Incorporated, a
subsidiary of Bowater incorporated under the Companies Act (Nova Scotia).
"Bowater Holdings Call Notice" means notification in writing provided to
Bowater Canada by Bowater Holdings in order to exercise the Retraction Call
Right.
"Bowater Holdings Common Shares" means common shares in the capital of
Bowater Holdings.
"Bowater Holdings Preferred Shares" means non-voting preferred shares in
the capital of Bowater Holdings.
"Bowater Liquidation Event" means any determination by the Bowater Board to
institute voluntary liquidation, dissolution or winding-up proceedings with
respect to Bowater or to effect any other distribution of assets of Bowater
among its shareholders for the purpose of winding up its affairs or the receipt
by Bowater of notice of, or Bowater otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of Bowater or to effect any
vii
<PAGE> 16
other distribution of assets of Bowater among its shareholders for the purpose
of winding up its affairs, in each case where Bowater has failed to contest in
good faith any such proceeding commenced in respect of Bowater within 30 days of
becoming aware thereof.
"Bowater Meeting" means the special meeting of Bowater Shareholders to be
held on July 21, 1998, and any adjournment or postponement thereof, to be held
with respect to, among other things, approval by Bowater Shareholders of the
Share Issuance.
"Bowater Record Date" means June 8, 1998.
"Bowater Series C Preferred Stock" means 8.4% Series C Cumulative Preferred
Stock, par value US$1 per share, of Bowater.
"Bowater Shareholders" means holders of shares of Bowater Common Stock.
"C$" means Canadian dollars.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
"Cash Cap" means the maximum aggregate amount of cash that may be paid to
holders of Avenor Common Shares pursuant to the Arrangement.
"Cash Elected Share" means an Avenor Common Share for which an effective
election to receive cash is made or is deemed to be made as a result of
proration.
"Cash Proration Factor" means the cash proration factor determined by
dividing the Cash Cap by the Requested Cash Amount.
"CBCA" means the Canada Business Corporations Act.
"Certificate of Arrangement" means the Certificate of Arrangement to be
issued by the Director giving effect to the Arrangement.
"Chase" means The Chase Manhattan Bank.
"Competition Act" means the Competition Act (Canada), as amended.
"Competition Director" means the Director of Investigation and Research
appointed under the Competition Act.
"Credit Facility" means an unsecured credit facility in an amount of up to
US$1 billion which Chase has committed to provide to Bowater and with respect to
which CSI has committed to act as exclusive advisor and arranger.
"CSI" means Chase Securities Inc.
"Currency Exchange Rate" means the noon spot rate of exchange for one U.S.
dollar (expressed in Canadian dollars) on the last trading day used to calculate
the Bowater Average Trading Price based on information provided by the Bank of
Canada.
"Deemed Share Elected Shares" means the difference between (i) the number
of outstanding Avenor Common Shares immediately prior to the Effective Time
(other than shares of holders who have delivered a notice of dissent in
accordance with the CBCA) and (ii) the aggregate number of Cash Elected Shares.
"Depositary" means The Trust Company of Bank of Montreal.
"Depositary Receipts" means those depositary receipts that evidence the
Bowater Depositary Shares.
"DGCL" means the Delaware General Corporation Law.
viii
<PAGE> 17
"Director" means the Director appointed under the CBCA.
"Director of Investments" means the Director of Investments appointed under
the Investment Canada Act.
"Dissent Notice" means a written objection to the Arrangement sent by an
Avenor Shareholder to Avenor as described under "Dissenting Shareholders'
Rights".
"Effective Date" means the date when the Arrangement will become effective,
being the date shown on the Certificate of Arrangement issued by the Director.
"Effective Time" means 12:01 a.m. (Montreal time) on the Effective Date.
"Election Date" means July 20, 1998.
"EPA" means the United States Environmental Protection Agency.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"Exchange Ratio" means C$35 divided by the product of the Bowater Average
Trading Price (but not more than US$55.6187 or less than US$45.5062), multiplied
by the Currency Exchange Rate.
"Exchange Rights" means, collectively, the optional exchange right granted
to the Trustee for the use and benefit of the holders of the Exchangeable Shares
pursuant to the Voting and Exchange Trust Agreement to require Bowater, upon the
occurrence of a Bowater Canada Insolvency Event, to exchange Exchangeable Shares
for shares of Bowater Common Stock and the right of holders of Exchangeable
Shares to have their shares purchased by Bowater upon the occurrence of a
Bowater Liquidation Event.
"Exchangeable Share Elected Share" means an Avenor Common Share for which
an effective election to receive Exchangeable Shares is made or is deemed to be
made by reason of the failure to make a timely election or as a result of
proration.
"Exchangeable Share Provisions" means the provisions attaching to the
Exchangeable Shares, which provisions are set forth in Exhibit I to the Plan of
Arrangement, which is attached to this Joint Proxy Statement as Annex E.
"Exchangeable Shares" means the exchangeable shares in the capital of
Bowater Canada.
"Final Order" means the final order of the Ontario Court approving the
Arrangement.
"Flip-In Event" means a flip-in event under the Shareholder Rights Plan.
"FTC" means the United States Federal Trade Commission and all successors
thereto.
"Goldman Sachs" means Goldman, Sachs & Co., one of the financial advisors
to Bowater.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Interim Order" means the interim order of the Ontario Court providing for
the calling and holding of the Avenor Meeting and other procedural matters.
"Joint Proxy Statement" means this joint management information circular
and proxy statement relating to the Avenor Meeting and the Bowater Meeting.
"Letter of Transmittal and Election Form" means the letter of transmittal
and election form delivered to Avenor Shareholders which, when duly completed
and forwarded to the Depositary or the U.S. Forwarding Agent with a certificate
for Avenor Common Shares, will enable the Avenor Shareholder to exchange such
shares for cash, Exchangeable Shares, shares of Bowater Common Stock or a
combination of the foregoing.
"Liquidation Amount" means the amount per Exchangeable Share that a holder
of Exchangeable Shares is entitled to receive on the liquidation, dissolution or
winding-up of Bowater Canada or other distribution of
ix
<PAGE> 18
the assets of Bowater Canada among its shareholders for the purpose of winding
up its affairs, as described in the Exchangeable Share Provisions, to be
satisfied by the delivery of one share of Bowater Common Stock.
"Liquidation Call Right" means the overriding right of Bowater Holdings, in
the event of a proposed liquidation, dissolution or winding-up of Bowater Canada
or any other distribution of the assets of Bowater Canada among its shareholders
for the purpose of winding up its affairs, to purchase all but not less than all
of the outstanding Exchangeable Shares from the holders thereof on the
Liquidation Date in exchange for the Liquidation Amount.
"Liquidation Date" means the effective date of any liquidation, dissolution
or winding-up of Bowater Canada or any other distribution of the assets of
Bowater Canada among its shareholders for the purpose of winding up its affairs.
"ME" means the Montreal Exchange.
"Notice of Guaranteed Delivery" means the notice of guaranteed delivery
delivered to Avenor Shareholders to be used to deposit Avenor Common Shares
under the Arrangement by Avenor Shareholders whose Avenor Common Share
certificate(s) are not immediately available or who cannot cause their Avenor
Common Share certificate(s) and all other required documents to be delivered to
the Depositary or the U.S. Forwarding Agent at or prior to 5:00 p.m. (Montreal
time) on July 20, 1998.
"NYSE" means the New York Stock Exchange, Inc.
"Ontario Court" means the Ontario Court of Justice (General Division).
"OSC" means the Ontario Securities Commission.
"Plan of Arrangement" means the plan of arrangement relating to the
Arrangement in the form attached to this Joint Proxy Statement as Annex E.
"Proposed Amendments" means the proposals to amend the Canadian Tax Act and
the regulations thereunder publicly announced by or on behalf of the Minister of
Finance (Canada) prior to the date hereof.
"RBC DS" means RBC Dominion Securities Inc., the financial advisor to
Avenor.
"Redemption Call Right" means the overriding right of Bowater Holdings to
purchase all but not less than all of the outstanding Exchangeable Shares from
the holders thereof on the Redemption Date in exchange for the Redemption Price.
"Redemption Date" means the date fixed by the Board of Directors of Bowater
Canada for the redemption of the Exchangeable Shares, which date will not be
earlier than June 30, 2008 (except as described in "The Transaction--Transaction
Mechanics and Description of Exchangeable Shares").
"Redemption Price" means the amount per Exchangeable Share that a holder of
Exchangeable Shares is entitled to receive on a redemption of the Exchangeable
Shares, as described in the Exchangeable Share Provisions, to be satisfied by
the delivery of one share of Bowater Common Stock.
"Requested Cash Amount" means the product of (a) the aggregate number of
Cash Elected Shares and (b) C$35.
"Requested Share Amount" means the product of the Deemed Share Elected
Shares and the Exchange Ratio.
"Retracted Shares" means the Exchangeable Shares to be redeemed by Bowater
Canada, as specified in a Retraction Request.
"Retraction Call Right" means the overriding right of Bowater Holdings, in
the event of a Retraction Request, to purchase all but not less than all of the
Retracted Shares of a holder in exchange for the Retraction Price.
"Retraction Date" means the business day on which a holder of Retracted
Shares desires to have Bowater Canada redeem such Retracted Shares or, when such
day is not specified in the Retraction Request, the fifteenth business day after
the Retraction Request is received by Bowater Canada.
x
<PAGE> 19
"Retraction Price" means the amount per Exchangeable Share that a holder of
Exchangeable Shares is entitled to receive on a retraction of the Exchangeable
Shares, as described in the Exchangeable Share Provisions, to be satisfied by
the delivery of one share of Bowater Common Stock.
"Retraction Request" means a duly executed retraction request given to
Bowater Canada by a holder of Exchangeable Shares in the form of Schedule A to
the Exchangeable Share Provisions, or in such other form as may be acceptable to
Bowater Canada.
"Right" means a right issued pursuant to the Shareholder Rights Plan and
attached to an Avenor Common Share.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Share Cap" means the maximum aggregate number of Exchangeable Shares and
shares of Bowater Common Stock that may be issued to holders of Avenor Common
Shares pursuant to the Arrangement.
"Share Issuance" means the issuance of shares of Bowater Common Stock
pursuant to the Arrangement Agreement and the transactions related thereto.
"Share Proration Factor" means the share proration factor determined by
dividing the Share Cap by the Requested Share Amount.
"Shareholder Rights Plan" means the shareholder rights plan agreement dated
as of October 20, 1995, as amended, between Avenor and Montreal Trust Company,
as rights agent.
"Shareholder Rights Plan Resolution" means the resolution approving the
waiving of the application of the Shareholder Rights Plan to the Arrangement in
the form attached to this Joint Proxy Statement as Annex B.
"Special Voting Stock" means the special voting stock, par value US$1 per
share, of Bowater, one share of which will be issued by Bowater and deposited
with the Trustee pursuant to the Voting and Exchange Trust Agreement.
"Superior Proposal" means any unsolicited, bona fide written Acquisition
Proposal that the Avenor Board determines in good faith, after consultation with
financial advisors and after receiving an opinion of outside counsel to the
effect that the Avenor Board is required to take such action in order to
discharge properly its fiduciary duties, would, if consummated in accordance
with its terms, result in a transaction more favorable to Avenor Shareholders
than the Transaction.
"Support Agreement" means the Support Agreement to be entered into between
Bowater, Bowater Holdings and Bowater Canada, in substantially the form attached
to this Joint Proxy Statement as Annex G.
"Tax Treaty" means the Canada-United States Income Tax Convention.
"TD Securities" means TD Securities Inc., one of the financial advisors to
Bowater.
"Transaction" means the Arrangement and the other transactions related to
the Arrangement Agreement.
"Trustee" means Montreal Trust Company of Canada, together with successors
thereto, in its capacity as trustee under the Voting and Exchange Trust
Agreement.
"TSE" means The Toronto Stock Exchange.
"US$" means United States dollars.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. Forwarding Agent" means Harris Trust Company of New York.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"Voting and Exchange Trust Agreement" means the voting and exchange trust
agreement to be entered into between Bowater, Bowater Holdings, Bowater Canada
and the Trustee, in substantially the form attached to this Joint Proxy
Statement as Annex F.
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<PAGE> 20
"Voting Rights" means the rights of the holders of Exchangeable Shares
other than Bowater or its affiliates to direct the votes attached to the share
of Special Voting Stock in accordance with the Voting and Exchange Trust
Agreement.
xii
<PAGE> 21
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The consolidated financial statements and pro forma financial statements
of, and the summaries of historical and pro forma financial information
concerning, Bowater contained in this Joint Proxy Statement are reported in U.S.
dollars and have been prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP").
The consolidated financial statements of, and the summaries of historical
consolidated financial information concerning, Avenor contained in this Joint
Proxy Statement are reported in Canadian dollars and have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"), except where indicated that conversion to U.S. GAAP has been made.
Canadian GAAP differs in certain respects from U.S. GAAP. See Note 19 of
the notes to the consolidated financial statements of Avenor included elsewhere
in this Joint Proxy Statement. For a discussion of the conversion of Avenor's
historical financial statements for the purposes of the Pro Forma Condensed
Combined Financial Statements included elsewhere in this Joint Proxy Statement,
see Note 2 to such pro forma financial statements.
CURRENCY EXCHANGE RATES
In this Joint Proxy Statement, dollar amounts are expressed either in U.S.
dollars ("US$") or Canadian dollars ("C$").
The following table sets forth, for each period indicated, the high and low
exchange rates for one Canadian dollar expressed in U.S. dollars, the average
noon spot rate (the "Noon Spot Rate") of such exchange rates during such period,
and the exchange rate at the end of such period, based upon information provided
by the Bank of Canada:
<TABLE>
<CAPTION>
QUARTER
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
High......................... 0.7123 0.7493 0.7526 0.7533 0.7642 0.8065
Low.......................... 0.6810 0.6945 0.7212 0.7009 0.7097 0.7416
Average...................... 0.6991 0.7223 0.7334 0.7285 0.7321 0.7753
Period End................... 0.7043 0.6991 0.7296 0.7331 0.7134 0.7566
</TABLE>
On June 17, 1998, the exchange rate for one Canadian dollar expressed in
U.S. dollars was 0.6833 based on the Noon Spot Rate.
The following table sets forth, for each period indicated, the high and low
exchange rates for one U.S. dollar expressed in Canadian dollars, the average
Noon Spot Rate of such exchange rates during such period, and the exchange rate
at the end of such period, based upon information provided by the Bank of
Canada:
<TABLE>
<CAPTION>
QUARTER
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
High......................... 1.4685 1.4399 1.3865 1.4267 1.4090 1.3484
Low.......................... 1.4040 1.3345 1.3287 1.3275 1.3085 1.2400
Average...................... 1.4304 1.3844 1.3636 1.3726 1.3659 1.2898
Period End................... 1.4198 1.4305 1.3706 1.3640 1.4018 1.3217
</TABLE>
On June 17, 1998, the exchange rate for one U.S. dollar expressed in
Canadian dollars was 1.4634, based on the Noon Spot Rate.
xiii
<PAGE> 22
SUMMARY
The following is a summary of certain information including more detailed
information contained elsewhere in this Joint Proxy Statement. Reference is made
to, and this summary is qualified in its entirety by, the more detailed
information contained in this Joint Proxy Statement, in the attached Annexes and
in the documents incorporated herein by reference. Bowater Shareholders and
Avenor Shareholders are encouraged to read carefully this Joint Proxy Statement
and the attached Annexes in their entirety. References in this Joint Proxy
Statement to "US$" are to United States dollars and references to "C$" are to
Canadian dollars. Unless otherwise indicated, the operational and financial data
contained in this Joint Proxy Statement are presented as of December 31, 1997.
THE COMPANIES
Bowater
Bowater is engaged in the manufacture, sale and distribution of newsprint,
directory paper, uncoated groundwood specialties, coated groundwood paper,
market pulp and lumber. Bowater owns and operates five papermills, four in the
United States and one in Canada, and three sawmills, two in the United States
and one in Canada. As of December 31, 1997, Bowater managed and controlled
approximately 3.5 million acres of timberlands to support these facilities.
Bowater markets and distributes its various products in North America, Latin
America, Europe, Asia and the Pacific Rim. Bowater's principal executive offices
are located at 55 East Camperdown Way, Greenville, South Carolina 29601, and its
telephone number at that address is (864) 271-7733. Bowater Holdings, a
subsidiary of Bowater, was incorporated under the Companies Act (Nova Scotia)
and Bowater Canada, a subsidiary of Bowater Holdings, was incorporated under the
CBCA, both for the purpose of implementing the Arrangement Agreement. Bowater
Holdings' registered office address is 1959 Upper Water Street, Halifax, Nova
Scotia B3J 2X2. Bowater Canada's registered office address is Suite 4100, 1
First Canadian Place, 100 King Street West, Toronto, Ontario M5X 1B2.
Avenor
Avenor is a manufacturer of newsprint, pulp, white paper and wood products.
Avenor owns and operates three newsprint mills in Canada which supply printers
and publishers around the world and, in its capacity as managing partner in the
Ponderay Newsprint Company, operates one newsprint mill at Usk in the State of
Washington. Avenor also operates three mills which manufacture market pulp, one
white paper mill and three sawmills, all located in Canada. Avenor's primary
mills are located in the Provinces of New Brunswick, Quebec, Ontario and British
Columbia. Avenor is a major forest land owner/manager and holds substantial
timber rights in Canada. Avenor's principal executive offices are located at
1250 Rene-Levesque Boulevard West, Montreal, Quebec H3B 4Y3, and its telephone
number at that address is (514) 846-4811. Avenor's registered office is Suite
4200, 40 King Street West, Toronto, Ontario M5H 3Y4.
THE MEETINGS
Time, Date and Place
The Bowater Meeting will be held at 55 East Camperdown Way, Greenville,
South Carolina, on Tuesday, July 21, 1998, at 11:00 a.m. local time.
The Avenor Meeting will be held in the West Ballroom of the Sheraton Centre
Hotel, 1201 Rene-Levesque Boulevard West, Montreal, Quebec, on Tuesday, July 21,
1998, at 11:00 a.m. Montreal time.
Record Dates and Shares Entitled to Vote
Holders of shares of Bowater Common Stock ("Bowater Shareholders") of
record at the close of business on June 8, 1998 (the "Bowater Record Date"), are
entitled to notice of and to vote at the Bowater Meeting. At the close of
business on the Bowater Record Date, there were outstanding and entitled to vote
40,562,019 shares of Bowater Common Stock, each of which will be entitled to one
vote on each matter to be acted upon.
1
<PAGE> 23
Holders of Avenor Common Shares ("Avenor Shareholders") of record at the
close of business on June 12, 1998 (the "Avenor Record Date"), are entitled to
notice of and to vote at the Avenor Meeting. At the close of business on the
Avenor Record Date, there were outstanding and entitled to vote 65,788,413
Avenor Common Shares, each of which will be entitled to one vote on each matter
to be acted upon.
Matters to be Considered at the Meetings
At the Bowater Meeting, the Bowater Shareholders will consider and vote
upon: (i) approval of the Share Issuance and (ii) such other business as may
properly come before the Bowater Meeting. Whether or not Bowater Shareholders
are personally able to attend the Bowater Meeting, they are urged to complete,
sign and date the enclosed Bowater proxy card and return it in the enclosed
postage-paid envelope, as soon as possible.
At the Avenor Meeting, the Avenor Shareholders will consider and vote upon:
(i) the Arrangement Resolution, (ii) the Shareholder Rights Plan Resolution,
(iii) the election of the directors of Avenor, (iv) the appointment of the
auditors of Avenor and authorizing the Board of Directors of Avenor (the "Avenor
Board") to fix the auditors' remuneration, and (v) such other business as may
properly come before the Avenor Meeting. Avenor Shareholders who are unable to
attend the Avenor Meeting are urged to complete, sign and date the enclosed
Avenor proxy card and return it in the enclosed postage-paid envelope, or by
facsimile, as soon as possible.
Votes Required
Approval of the Share Issuance will require the affirmative vote of the
holders of a majority of the shares of Bowater Common Stock voted thereon at the
Bowater Meeting, provided that the holders of a majority of the outstanding
shares of Bowater Common Stock are present, in person or by proxy, and vote on
the Share Issuance; provided further that under the terms of Bowater's Bylaws,
as amended from time to time (the "Bowater Bylaws"), approval of the Share
Issuance requires the affirmative vote of holders of Bowater Common Stock
entitled to cast at least a majority of the votes that all holders of Bowater
Common Stock present in person or by proxy at the Bowater Meeting are entitled
to cast thereon.
The Arrangement Resolution will require the affirmative vote of not less
than two-thirds of the votes cast by the Avenor Shareholders who vote in respect
of the Arrangement Resolution, in person or by proxy, at the Avenor Meeting. The
Shareholder Rights Plan Resolution will require the affirmative vote of not less
than a majority of the votes cast thereon at the Avenor Meeting. The election of
the directors of Avenor, the appointment of the auditors of Avenor and the
authorization of the Avenor Board to fix the auditors' remuneration will require
the affirmative vote of not less than a majority of the votes cast thereon at
the Avenor Meeting.
Recommendations of the Boards of Directors
THE BOWATER BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE ARRANGEMENT
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT BOWATER SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE SHARE ISSUANCE AT
THE BOWATER MEETING.
THE AVENOR BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE ARRANGEMENT
AGREEMENT AND THE TRANSACTION AND UNANIMOUSLY RECOMMENDS THAT AVENOR
SHAREHOLDERS VOTE IN FAVOUR OF THE ARRANGEMENT RESOLUTION AND THE SHAREHOLDER
RIGHTS PLAN RESOLUTION AT THE AVENOR MEETING.
Dissenting Shareholders' Rights
Under the Delaware General Corporation Law (the "DGCL"), Bowater
Shareholders who object to the Share Issuance will not be entitled to demand
appraisal of, or receive payment for, their shares of Bowater Common Stock.
Avenor Shareholders are entitled to dissent from the Arrangement Resolution
in the manner provided in section 190 of the CBCA. See "Dissenting Shareholders'
Rights". Section 190 of the CBCA is reprinted in its entirety and attached to
this Joint Proxy Statement as Annex K. Avenor Shareholders are not entitled to
dissent with respect to the Shareholder Rights Plan Resolution.
2
<PAGE> 24
THE TRANSACTION
Bowater's Reasons for the Transaction
Bowater believes that the Transaction adds complementary, cost-competitive
mills to Bowater's current asset base. In addition, the Avenor mills generally
have had significant capital investments over the past ten years, including
extensive upgrades to both pulp and paper manufacturing facilities, making them
productive and efficient assets. Bowater also expects that the combination
should create significant advantages in delivery and service optimization for
its customers by increasing the geographic diversity of Bowater's operations.
As part of its analyses of the Transaction, Bowater's management developed
assumptions, prepared financial projections and performed analyses to determine
the financial benefit of the Transaction to Bowater. Bowater believes that the
Transaction presents significant opportunities for cost reductions and operating
efficiencies. Bowater estimates the cost reductions and operational efficiencies
arising from the Transaction to be US$75 million per year. Bowater anticipates
that approximately half of these could be implemented in 1998 and the full
amount could be achieved by the end of 1999. These estimates did not include any
one-time charges associated with attaining such savings or other charges
incurred in connection with other matters that might arise out of the
Transaction in 1998. Based on Bowater's analyses and underlying assumptions,
Bowater expects that the Transaction will be slightly accretive to earnings per
share in 1998, significantly accretive to earnings per share in 1999, and
significantly accretive to cash flow per share in both 1998 and 1999. Although
Bowater's ratio of total debt to total capitalization is expected to exceed 50%
immediately after the Transaction, the application of all or a substantial
portion of the proceeds from the planned sale of Avenor's Dryden, Ontario mill
and projected cash flow from operations should enable Bowater to improve its
debt to capital ratio. Although Bowater's management is experienced in achieving
cost reductions and operating efficiencies, there can be no assurance that any
specified level of cost reductions or other synergies will be fully achieved or
will be achieved within the time periods contemplated, nor can there be any
assurance as to the effect of the Transaction on Bowater's results of
operations. See "Risk Factors--Risks Related to the Transaction--Uncertainties
in Integrating Business Operations and Achieving Cost Reductions"; "--Risks
Related to Operations after the Transaction"; "The Transaction--Bowater's
Reasons for the Transaction; Recommendation of the Bowater Board".
Avenor's Reasons for the Transaction
In reaching its conclusions that the Arrangement is fair to and in the best
interests of Avenor Shareholders and its recommendation that Avenor Shareholders
vote in favour of the Arrangement Resolution and the Shareholder Rights Plan
Resolution, the Avenor Board considered information with respect to the business
and affairs of Avenor and Bowater as well as the following factors:
(i) the unsolicited take-over bid announced by Abitibi-Consolidated
Inc. ("Abitibi-Consolidated") on February 25, 1998, for all of the
outstanding Avenor Common Shares at a price of C$28 per share in cash or
1.422 Abitibi-Consolidated common shares plus C$0.05 (the "Abitibi Offer")
was considered by the Avenor Board to be inadequate;
(ii) the consideration of C$35 per Avenor Common Share offered by
Bowater was significantly higher than the consideration offered under the
Abitibi Offer and the trading prices of the Avenor Common Shares, both
prior to the announcement of the Abitibi Offer and after such announcement;
(iii) the presentations of RBC Dominion Securities Inc. ("RBC DS") to
the Avenor Board and financial analyses provided by and the opinion of RBC
DS that the Arrangement is fair from a financial point of view to Avenor
Shareholders;
(iv) the combination of Bowater and Avenor will create the second
largest producer of newsprint in the world and the third largest producer
of pulp in North America, operating eight newsprint mills and five market
pulp mills which will enable Avenor to continue to participate in the
further consolidation of the forest products industry;
3
<PAGE> 25
(v) Avenor Shareholders have flexibility in deciding whether to
receive cash, Exchangeable Shares, shares of Bowater Common Stock or a
combination of the foregoing, within the limits imposed under the
Arrangement;
(vi) the Arrangement provides Avenor Shareholders with an opportunity
to receive a substantial proportion of their consideration in the form of
Exchangeable Shares or shares of Bowater Common Stock. To the extent that
Avenor Shareholders receive Exchangeable Shares or shares of Bowater Common
Stock, they will continue to participate in the forest products industry
through Bowater, which will have a significantly larger market
capitalization and liquidity than Avenor alone;
(vii) certain Avenor Shareholders who hold their Avenor Common Shares
as capital property and file a joint election with Bowater Canada will
generally be able to exchange their Avenor Common Shares for Exchangeable
Shares under the Arrangement on a tax-deferred basis under Canadian federal
income tax legislation (see "Income Tax Considerations--Canadian Federal
Income Tax Considerations for Avenor Shareholders"); and
(viii) under the terms of the Arrangement Agreement, the Avenor Board
is able to respond, if required in accordance with its fiduciary duties, to
unsolicited proposals by third parties that would, if consummated in
accordance with their terms, result in a transaction that would be superior
to the transactions with Bowater contemplated by the Arrangement. See
"Other Terms of the Arrangement Agreement--Non-Solicitation".
General
Pursuant to the Arrangement Agreement, Avenor will apply to the Ontario
Court for an order for the Arrangement under the provisions of section 192 of
the CBCA, pursuant to which Bowater, through Bowater Holdings and Bowater
Canada, will acquire outstanding Avenor Common Shares and each Avenor
Shareholder (other than holders who exercise and perfect their dissent rights)
will be entitled to receive, subject to the terms of the Arrangement Agreement,
C$35 for each Avenor Common Share held by such holder, payable, at the election
of such holder and subject to proration as described below, in cash,
Exchangeable Shares, shares of Bowater Common Stock, or a combination of the
foregoing.
Each Avenor Common Share for which an effective election to receive cash is
made (a "Cash Elected Share") will be purchased by Bowater Canada for cash in an
amount equal to C$35, without interest thereon (subject to proration). Each
Avenor Common Share for which an effective election to receive Exchangeable
Shares is made (an "Exchangeable Share Elected Share") will be exchanged with
Bowater Canada for a number of Exchangeable Shares equal to the Exchange Ratio
(subject to proration). Each Avenor Common Share for which an effective election
to receive shares of Bowater Common Stock is made (a "Bowater Elected Share")
will be exchanged with Bowater Holdings for a number of shares of Bowater Common
Stock equal to the Exchange Ratio (subject to proration). As used herein, the
"Exchange Ratio" means C$35 divided by the product of the weighted average
trading price of shares of Bowater Common Stock on the NYSE for the 20 trading
days ending on the third business day prior to the effective date of the
Arrangement (the "Bowater Average Trading Price") (but not more than US$55.6187
or less than US$45.5062, pursuant to the terms of the Arrangement Agreement)
multiplied by the value in Canadian dollars of one U.S. dollar at the rate of
exchange equal to the Bank of Canada's noon spot exchange rate for such
currencies on the last of such trading days (the "Currency Exchange Rate"). If
an Avenor Shareholder fails to make an effective election with respect to an
Avenor Common Share, such holder will be deemed to have elected to exchange such
Avenor Common Share for Exchangeable Shares (subject to proration).
Assuming (i) a Currency Exchange Rate of 1.45, (ii) that there are
66,842,000 outstanding Avenor Common Shares (assuming that all outstanding
options are exercised but that no 7.5% Convertible Debentures of Avenor (the
"Avenor Convertible Debentures") are converted), (iii) that Avenor Shareholders
elect (or are deemed to elect) to exchange 50% of the outstanding Avenor Common
Shares for shares of Bowater Common Stock and/or Exchangeable Shares and (iv)
that no Avenor Shareholders exercise dissent rights, Bowater and Bowater Canada
may issue in the aggregate as many as 17,727,000, or as few as 14,505,000,
shares of Bowater Common Stock and/or Exchangeable Shares, and the aggregate
amount of
4
<PAGE> 26
cash to be paid to Avenor Shareholders will be approximately C$1,170,000,000.
Assuming (i) a Currency Exchange Rate of 1.45, (ii) that there are 66,842,000
outstanding Avenor Common Shares (assuming that all outstanding options are
exercised but that no Avenor Convertible Debentures are converted), (iii) that
Avenor Shareholders elect (or are deemed to elect) to exchange 40% of the
outstanding Avenor Common Shares for shares of Bowater Common Stock and/or
Exchangeable Shares and (iv) that no Avenor Shareholders exercise dissent
rights, Bowater and Bowater Canada may issue in the aggregate as many as
14,181,000, or as few as 11,604,000, shares of Bowater Common Stock and/or
Exchangeable Shares, and the aggregate amount of cash to be paid to Avenor
Shareholders will be approximately C$1,404,000,000. If the actual Currency
Exchange Rate is higher than the assumed Currency Exchange Rate (i.e., if the
Canadian dollar depreciates against the U.S. dollar), then the number of shares
of Bowater Common Stock and/or Exchangeable Shares to be issued will be less
than the numbers shown above, and if the actual Currency Exchange Rate is lower
than the assumed Currency Exchange Rate (i.e., if the Canadian dollar
appreciates against the U.S. dollar), then the number of shares of Bowater
Common Stock and/or Exchangeable Shares to be issued will be greater than the
numbers shown above. Because the Bowater Average Trading Price may in no event
be more than US$55.6187 or less than US$45.5062 (and because the Exchangeable
Shares may have a trading value that differs from the value indicated by the
Bowater Average Trading Price), there can be no assurance that the actual value
of the consideration received by the Avenor Shareholders will equal C$35 per
Avenor Common Share. If the consideration in fact has a value of C$35 per Avenor
Common Share, the value of the total consideration to be received by Avenor
Shareholders will be approximately C$2,339,470,000.
Following the consummation of the Arrangement, former Avenor Shareholders
will own as much as approximately 30%, or as little as 0%, of the outstanding
shares of Bowater Common Stock (excluding the Exchangeable Shares, which are
exchangeable at any time for shares of Bowater Common Stock) depending upon the
Exchange Ratio (which in turn is affected by the Bowater Average Trading Price
and the Currency Exchange Rate), the percentage of Avenor Shareholders who elect
to receive cash consideration for their Avenor Common Shares and, as among the
Avenor Shareholders who elect to receive shares of Bowater Common Stock and/or
Exchangeable Shares, the number of such shareholders who elect to receive shares
of Bowater Common Stock. Although holders of Exchangeable Shares will not be
holders of Bowater Common Stock and as such will not have the direct right to
vote together with holders of Bowater Common Stock, such holders, by furnishing
instructions to the Trustee as described below under "--The Exchangeable
Shares", will be entitled to exercise voting rights equivalent to those they
would have after the exchange of their Exchangeable Shares for shares of Bowater
Common Stock. The total voting power with respect to Bowater that former Avenor
Shareholders will be able to exercise after giving effect to the Transaction
(taking together such shareholders' interest in shares of Bowater Common Stock
and Exchangeable Shares) will vary based on the factors described above and
could range from as much as approximately 30% to as little as approximately 22%
of such voting power.
5
<PAGE> 27
The following table illustrates ranges of possible percentages of the total
voting power with respect to Bowater that former Avenor Shareholders will be
able to exercise following the consummation of the Arrangement at various
assumed Exchange Ratios:
PRO FORMA PERCENTAGE VOTING POWER THAT
FORMER AVENOR SHAREHOLDERS WILL BE ABLE TO EXERCISE
<TABLE>
<CAPTION>
BOWATER AVERAGE 50% DEEMED 40% DEEMED
TRADING PRICE (IN US$) EXCHANGE RATIO(1) SHARE ELECTION(2) SHARE ELECTION(3)
- ---------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
58.00 0.4340 26.3% 22.2%
57.75 0.4340 26.3 22.2
57.50 0.4340 26.3 22.2
57.25 0.4340 26.3 22.2
57.00 0.4340 26.3 22.2
56.75 0.4340 26.3 22.2
56.50 0.4340 26.3 22.2
56.25 0.4340 26.3 22.2
56.00 0.4340 26.3 22.2
55.75 0.4340 26.3 22.2
- ----------------------------------------------------------------------------------
55.62 0.4340 26.3 22.2
54.50 0.4429 26.7 22.6
53.50 0.4512 27.1 22.9
52.50 0.4598 27.5 23.3
51.50 0.4687 27.9 23.6
50.50 0.4780 28.3 24.0
49.50 0.4876 28.7 24.3
48.50 0.4977 29.1 24.7
47.50 0.5082 29.5 25.1
46.50 0.5191 30.0 25.5
45.51 0.5304 30.4 25.9
- ----------------------------------------------------------------------------------
45.25 0.5304 30.4 25.9
45.00 0.5304 30.4 25.9
44.75 0.5304 30.4 25.9
44.50 0.5304 30.4 25.9
44.25 0.5304 30.4 25.9
44.00 0.5304 30.4 25.9
43.75 0.5304 30.4 25.9
43.50 0.5304 30.4 25.9
43.25 0.5304 30.4 25.9
43.00 0.5304 30.4 25.9
</TABLE>
- ---------------
Notes:
(1) Assumes a Currency Exchange Rate of 1.45.
(2) Assumes that Avenor Shareholders elect (or are deemed to have elected) to
exchange 50% of the outstanding Avenor Common Shares for shares of Bowater
Common Stock and/or Exchangeable Shares.
(3) Assumes that Avenor Shareholders elect (or are deemed to have elected) to
exchange 40% of the outstanding Avenor Common Shares for shares of Bowater
Common Stock and/or Exchangeable Shares.
6
<PAGE> 28
The following chart shows the structural corporate relationship between
Bowater and Avenor immediately following the consummation of the Arrangement:
[Corporate Relationship Chart]
7
<PAGE> 29
The following table illustrates the applicable Exchange Ratio at various
assumed Bowater Average Trading Prices and the corresponding value of a number
of shares of Bowater Common Stock or Exchangeable Shares equal to the Exchange
Ratio (assuming the value of either a share of Bowater Common Stock or an
Exchangeable Share is equal to the Bowater Average Trading Price):
<TABLE>
<CAPTION>
VALUE OF THE SHARE VALUE OF THE SHARE
CONSIDERATION PER CONSIDERATION PER
BOWATER AVERAGE EXCHANGE AVENOR COMMON SHARE AVENOR COMMON SHARE
TRADING PRICE (IN US$) RATIO(1) (IN US$)(2) (IN C$)(2)
- ----------------------- --------------- ------------------- ------------------------
<S> <C> <C> <C>
58.00 0.4340 25.17 36.50
57.75 0.4340 25.06 36.34
57.50 0.4340 24.96 36.19
57.25 0.4340 24.85 36.03
57.00 0.4340 24.74 35.87
56.75 0.4340 24.63 35.71
56.50 0.4340 24.52 35.55
56.25 0.4340 24.41 35.39
56.00 0.4340 24.30 35.24
55.75 0.4340 24.20 35.09
- ------------------------------------------------------------------------------------------
55.62 0.4340 24.14 35.00
54.50 0.4429 24.14 35.00
53.50 0.4512 24.14 35.00
52.50 0.4598 24.14 35.00
51.50 0.4687 24.14 35.00
50.50 0.4780 24.14 35.00
49.50 0.4876 24.14 35.00
48.50 0.4977 24.14 35.00
47.50 0.5082 24.14 35.00
46.50 0.5191 24.14 35.00
45.51 0.5304 24.14 35.00
- ------------------------------------------------------------------------------------------
45.25 0.5304 24.00 34.80
45.00 0.5304 23.87 34.61
44.75 0.5304 23.74 34.42
44.50 0.5304 23.60 34.22
44.25 0.5304 23.47 34.03
44.00 0.5304 23.34 33.84
43.75 0.5304 23.21 33.65
43.50 0.5304 23.07 33.45
43.25 0.5304 22.94 33.26
43.00 0.5304 22.81 33.07
</TABLE>
- ---------------
Notes:
(1) Assumes a Currency Exchange Rate of 1.45.
(2) The cash consideration has a fixed value of C$35 per share. Accordingly, if
an Avenor Shareholder receives under the Arrangement a combination of cash,
on the one hand, and Bowater Common Stock and/or Exchangeable Shares, on the
other hand, either because the holder makes a cash election with respect to
some but not all the shares held by such holder or because of proration, the
blended value such holder will receive in respect of each Avenor Common
Share will be (i) less than the amounts shown (but more than C$35) if the
Bowater Average Trading Price is greater than US$55.6187 or (ii) greater
than the amounts shown (but less than C$35) if the Bowater Average Trading
Price is less than US$45.5062.
See "Risk Factors--Risks Related to the Transaction--Relationship Between
the Exchange Ratio, Stock Prices and Currency Exchange Rates".
8
<PAGE> 30
Proration
The total amount of cash consideration and the total amount of share
consideration available to Avenor Shareholders under the Arrangement is limited
pursuant to the proration provisions of the Arrangement discussed in detail
under "The Transaction--Transaction Mechanics and Description of Exchangeable
Shares" below. The maximum aggregate number of Avenor Common Shares that may be
exchanged for cash may not exceed 60%, and the maximum aggregate number of
Avenor Common Shares that may be exchanged for shares of Bowater Common Stock
and/or Exchangeable Shares may not exceed 50%, of the total number of
outstanding Avenor Common Shares. Subject to the terms of the Arrangement
Agreement, the number of Avenor Common Shares that may be exchanged for cash
will be reduced to the extent that Avenor Shareholders exercise dissent rights.
The proration will take place without any action by the Avenor Shareholders.
Because of possible proration, (i) Avenor Shareholders who elect to receive
cash may actually receive a combination of cash, on the one hand, and shares of
Bowater Common Stock or Exchangeable Shares, on the other hand, instead of all
cash and (ii) Avenor Shareholders who elect to receive shares of Bowater Common
Stock or Exchangeable Shares may receive a combination of cash and shares of
Bowater Common Stock or Exchangeable Shares instead of all stock. If Avenor
Shareholders elect to receive cash with respect to more than 60% of the
outstanding Avenor Common Shares, Avenor Common Shares for which an election to
receive cash is made will be converted into the right to receive a prorated
amount of cash and shares of Bowater Common Stock or Exchangeable Shares. If
Avenor Shareholders elect to receive shares of Bowater Common Stock and/or
Exchangeable Shares with respect to more than 50% of the outstanding Avenor
Common Shares, then Avenor Common Shares for which an election to receive shares
of Bowater Common Stock or Exchangeable Shares is made will be converted into
the right to receive a prorated amount of shares of Bowater Common Stock or
Exchangeable Shares, as the case may be, and cash. See "The
Transaction--Transaction Mechanics and Description of Exchangeable Shares" and
"The Transaction--Election Procedures".
The following tables set forth the effect of the proration provisions on
the form of consideration to be received by Avenor Shareholders (assuming that
no Avenor Shareholders exercise dissent rights).
OPERATION OF THE PRORATION MECHANISM ON CASH ELECTIONS
<TABLE>
<CAPTION>
PERCENT OF EACH
AVENOR
PERCENT OF TOTAL SHAREHOLDER'S
PERCENT OF TOTAL OUTSTANDING AVENOR COMMON
OUTSTANDING PERCENT OF TOTAL COMMON SHARES SHARES WITH RESPECT
AVENOR COMMON OUTSTANDING ACTUALLY EXCHANGED TO WHICH A CASH
SHARES WITH AVENOR COMMON FOR BOWATER ELECTION IS MADE THAT
RESPECT TO WHICH A SHARES ACTUALLY COMMON ARE ACTUALLY
CASH ELECTION IS EXCHANGED STOCK AND/OR EXCHANGED
MADE FOR CASH EXCHANGEABLE SHARES FOR CASH
------------------ ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
100 60 40 60
Cash is Prorated 90 60 40 67
80 60 40 75
70 60 40 86
-----------------------------------------------------------------------------------
60 60 40 100
No Proration 50 50 50 100
-----------------------------------------------------------------------------------
40 50 50 (1)
30 50 50 (1)
Stock is Prorated 20 50 50 (1)
10 50 50 (1)
0 50 50 -
</TABLE>
- ---------------
Note:
(1) Under these circumstances, Avenor Shareholders who elect to receive cash for
some shares and stock for some shares will receive more cash and less stock
than requested (and shareholders who requested all cash will receive all
cash).
9
<PAGE> 31
OPERATION OF THE PRORATION MECHANISM ON SHARE ELECTIONS
<TABLE>
<CAPTION>
PERCENT OF EACH
AVENOR
SHAREHOLDER'S
PERCENT OF TOTAL COMMON SHARES
OUTSTANDING PERCENT OF TOTAL PERCENT OF TOTAL WITH RESPECT TO
AVENOR COMMON OUTSTANDING OUTSTANDING AVENOR WHICH A SHARE
SHARES WITH AVENOR COMMON COMMON SHARES ELECTION IS DEEMED
RESPECT TO WHICH A SHARES ACTUALLY ACTUALLY MADE THAT ARE
SHARE ELECTION IS EXCHANGED EXCHANGED FOR ACTUALLY EXCHANGED
DEEMED MADE FOR STOCK CASH FOR STOCK
------------------ ---------------- ------------------ --------------------
<S> <C> <C> <C> <C>
100 50 50 50
90 50 50 56
Stock is Prorated 80 50 50 63
70 50 50 71
60 50 50 83
---------------------------------------------------------------------------------
No Proration 50 50 50 100
40 40 60 100
---------------------------------------------------------------------------------
30 40 60 (1)
Cash is Prorated 20 40 60 (1)
10 40 60 (1)
0 40 60 -
</TABLE>
- ---------------
Note:
(1) Under these circumstances, Avenor Shareholders who elect to receive stock
for some shares and cash for some shares will receive more stock and less
cash than requested (and shareholders who requested all stock will receive
all stock).
Rights Under Avenor's Shareholder Rights Plan
Pursuant to the Shareholder Rights Plan, the Avenor Board previously
authorized the issuance of one right (a "Right") in respect of each Avenor
Common Share. The Shareholder Rights Plan provides that prior to the time (the
"Separation Time") the Rights separate from the Avenor Common Shares, each Right
is transferable only together with the associated Avenor Common Share. On March
8, 1998, the Avenor Board passed a resolution to defer the Separation Time that
would otherwise have occurred as a result of the announcement of the
Transaction. As a result, each Avenor Shareholder who disposes of Avenor Common
Shares under the Arrangement also will be disposing of the Rights associated
with such Avenor Common Shares at the same time.
The Exchangeable Shares
The Exchangeable Shares will be exchangeable at any time at the option of
the holder, on a one-for-one basis, for shares of Bowater Common Stock. Pursuant
to the Voting and Exchange Trust Agreement, the Trustee will be the holder of
one share of Special Voting Stock that will entitle the Trustee to a number of
votes on all matters on which holders of Bowater Common Stock are entitled to
vote equal to the number of Exchangeable Shares outstanding from time to time
(except those held by Bowater or its affiliates) with respect to which
instructions are received. By furnishing instructions to the Trustee, the
holders of Exchangeable Shares will be able to exercise voting rights equivalent
to those they would have after exchange of their Exchangeable Shares for shares
of Bowater Common Stock.
Holders of Exchangeable Shares will also be entitled to receive dividends
from Bowater Canada on a per-share basis equivalent to any dividends paid on
shares of Bowater Common Stock. The Support Agreement (the "Support Agreement")
to be entered into between Bowater, Bowater Holdings and Bowater Canada will
restrict Bowater from paying dividends on shares of Bowater Common Stock unless
equivalent dividends are paid on the Exchangeable Shares. Holders of
Exchangeable Shares will also be entitled, pursuant to the Voting and Exchange
Trust Agreement, to participate in any liquidation of Bowater on the same basis
as holders of shares of Bowater Common Stock.
See "The Transaction--Transaction Mechanics and Description of Exchangeable
Shares".
10
<PAGE> 32
The Exchangeable Shares are included as part of the Arrangement to enable
certain Avenor Shareholders, by virtue of the various redemption and exchange
rights attaching to the Exchangeable Shares and the provisions of the Voting and
Exchange Trust Agreement, to acquire a security of a Canadian issuer having
economic and voting rights that are, as nearly as practicable, equivalent to
those of a share of Bowater Common Stock. The Exchangeable Shares permit certain
shareholders to take advantage of a tax deferral available under the Canadian
Tax Act. See "Income Tax Considerations--Canadian Federal Income Tax
Considerations for Avenor Shareholders". Also, the Exchangeable Shares, if
listed on a prescribed stock exchange in Canada (which currently includes The
Toronto Stock Exchange (the "TSE") and the Montreal Exchange (the "ME")), will
not be foreign property for certain Canadian tax purposes. See "The
Transaction--Eligibility for Investment in Canada". For the above reasons,
Avenor Shareholders may want to elect to receive Exchangeable Shares rather than
cash or shares of Bowater Common Stock. Such an election, however, may be
subject to proration. See "The Transaction--Transaction Mechanics and
Description of Exchangeable Shares--Proration". A disadvantage of holding
Exchangeable Shares is the possibility of there being a limited or no active
trading market for the shares. See "Risk Factors--Risks Related to the
Transaction--Market for Exchangeable Shares". Moreover, if Bowater Holdings'
call rights are not exercised on redemption of the Exchangeable Shares by
Bowater Canada, a holder of Exchangeable Shares may realize a dividend for
Canadian tax purposes that may exceed the holder's economic gain. See "Income
Tax Considerations--Canadian Federal Income Tax Considerations for Avenor
Shareholders".
Exchange of Exchangeable Shares for Shares of Bowater Common Stock
Holders of Exchangeable Shares will be entitled at any time, upon delivery
of a certificate representing such Exchangeable Shares and a duly executed
retraction request (a "Retraction Request"), to require Bowater Canada to redeem
such Exchangeable Shares. The retraction price per share will be the amount per
Exchangeable Share that a holder of Exchangeable Shares is entitled to receive
on a retraction of the Exchangeable Shares, as described in the provisions
attaching to the Exchangeable Shares (the "Exchangeable Share Provisions"), to
be satisfied by the delivery of one share of Bowater Common Stock (the
"Retraction Price"). However, Bowater Canada must deliver all such Retraction
Requests to Bowater and Bowater Holdings, whereupon Bowater Holdings, instead of
Bowater Canada, will have the right (the "Retraction Call Right"), but not the
obligation, to purchase for the Retraction Price the Exchangeable Shares that
are the subject of the Retraction Request. If the Retraction Call Right is not
exercised by Bowater Holdings, Bowater Canada is required to effect the
requested redemption.
On or at any time after June 30, 2008, subject to acceleration in certain
circumstances described in this Joint Proxy Statement, Bowater Canada may, but
is not obligated to, redeem all the outstanding Exchangeable Shares. The
redemption price per share will be the amount per Exchangeable Share that a
holder of Exchangeable Shares is entitled to receive on a redemption of
Exchangeable Shares, as described in the Exchangeable Share Provisions, to be
satisfied by the delivery of one share of Bowater Common Stock (the "Redemption
Price"). In such event, Bowater Holdings will have the overriding right (the
"Redemption Call Right"), but not the obligation, to acquire the outstanding
Exchangeable Shares in exchange for the Redemption Price on the date (the
"Redemption Date") fixed by the Board of Directors of Bowater Canada for
redemption of the Exchangeable Shares. If Bowater Holdings exercises the
Redemption Call Right, Bowater Canada's obligation to redeem the Exchangeable
Shares will terminate. The Support Agreement provides that Bowater will enable
Bowater Canada to cause to be delivered Bowater Common Stock to satisfy a
Retraction Request or a redemption.
Any Canadian tax deferral obtained by an Avenor Shareholder who receives
Exchangeable Shares under the Arrangement will end on the exchange or redemption
of Exchangeable Shares for shares of Bowater Common Stock. See "Risk
Factors--Risks Related to the Transaction--Canadian Tax Consequences of
Redemption or Exchange of Exchangeable Shares". The exchange or redemption will
also result in the security held after the exchange (i.e., the shares of Bowater
Common Stock) being foreign property for certain Canadian tax purposes. See "The
Transaction--Eligibility for Investment in Canada".
11
<PAGE> 33
Election and Exchange Procedures
A Letter of Transmittal and Election Form and a Notice of Guaranteed
Delivery are being mailed with this Joint Proxy Statement to each person who was
a holder of Avenor Common Shares on the Avenor Record Date. Each such holder
(and each holder of record of Avenor Common Shares on or prior to the business
day immediately preceding the Avenor Meeting) will have the right to submit a
Letter of Transmittal and Election Form to The Trust Company of Bank of Montreal
("the Depositary") or Harris Trust Company of New York (the "U.S. Forwarding
Agent") specifying the number of Avenor Common Shares that such person desires
to have exchanged for cash, Exchangeable Shares, or shares of Bowater Common
Stock, or a combination of the foregoing, subject to proration. Holders of
Avenor Common Shares who do not make an election will be deemed to have elected
to receive Exchangeable Shares under the Arrangement. Avenor Shareholders whose
Avenor Common Share certificate(s) are not immediately available or who cannot
cause their Avenor Common Share certificate(s) and all other required documents
to be delivered to the Depositary or the U.S. Forwarding Agent at or prior to
5:00 p.m. (Montreal time) on July 20, 1998, must deliver their Avenor Common
Shares according to the guaranteed delivery procedures set forth in Instruction
2 to the Letter of Transmittal and Election Form. See "The Transaction--Election
Procedures".
Opinions of Financial Advisors
Opinion of Goldman, Sachs & Co. On March 8, 1998, Goldman, Sachs & Co.
("Goldman Sachs") delivered its oral opinion to the Bowater Board, which was
confirmed in writing on March 9, 1998, to the effect that, as of such dates, the
cash consideration and stock consideration (collectively, the "Aggregate
Consideration") to be paid by Bowater pursuant to the Arrangement Agreement was
fair from a financial point of view to Bowater. The full text of the written
opinion of Goldman Sachs, which sets forth assumptions made, matters considered
and limitations on the review undertaken in connection with the opinion, is
attached to this Joint Proxy Statement as Annex H and is incorporated herein by
reference. The opinion of Goldman Sachs referred to herein was provided for the
information and assistance of the Bowater Board in connection with its
consideration of the Transaction, and such opinion does not constitute a
recommendation as to how any holder of Bowater Common Stock should vote with
respect to the Share Issuance. BOWATER SHAREHOLDERS ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY. See "The Transaction--Opinions of Bowater's
Financial Advisors--Opinion of Goldman Sachs".
Opinion of TD Securities Inc. On March 8, 1998, TD Securities Inc. ("TD
Securities") delivered its oral opinion to the Bowater Board, which was
confirmed in writing on March 9, 1998, to the effect that, as of such dates, the
Aggregate Consideration to be paid by Bowater pursuant to the Arrangement was
fair from a financial point of view to Bowater. The full text of the written
opinion of TD Securities, which sets forth assumptions made, matters considered
and limitations on the review undertaken in connection with the opinion, is
attached to this Joint Proxy Statement as Annex I and is incorporated herein by
reference. The opinion of TD Securities referred to herein was provided for the
information and assistance of the Bowater Board in connection with its
consideration of the Transaction and such opinion does not constitute a
recommendation as to how any holder of Bowater Common Stock should vote with
respect to the Share Issuance. BOWATER SHAREHOLDERS ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY. See "The Transaction--Opinions of Bowater's
Financial Advisors--Opinion of TD Securities".
Opinion of RBC Dominion Securities Inc. On March 8, 1998, RBC DS provided
the Avenor Board with a verbal opinion that the Arrangement is fair from a
financial point of view to the Avenor Shareholders. In addition, RBC DS
delivered a written opinion to the Avenor Board, dated as of March 9, 1998,
confirming in writing the March 8, 1998 verbal opinion. A copy of the opinion of
RBC DS dated June 18, 1998, is attached to this Joint Proxy Statement as Annex J
and is incorporated herein by reference. The opinion of RBC DS addresses only
the fairness of the Arrangement from a financial point of view and does not
constitute a recommendation to any Avenor Shareholder as to how to vote at the
Avenor Meeting. AVENOR SHAREHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION
IN ITS ENTIRETY. See "The Transaction--Opinion of Avenor's Financial Advisor".
12
<PAGE> 34
Effective Time of the Arrangement
Upon the satisfaction or waiver of the conditions to the Arrangement,
including the approval of the Share Issuance at the Bowater Meeting, the
approval of the Arrangement Resolution and the Shareholder Rights Plan
Resolution at the Avenor Meeting and the receipt of the final order of the
Ontario Court (the "Final Order") approving the Arrangement, Avenor will file
articles of arrangement ("Articles of Arrangement") with the Director appointed
under the CBCA (the "Director"). The Arrangement will become effective upon the
date (the "Effective Date") of the certificate of arrangement (the "Certificate
of Arrangement") issued by the Director giving effect to the Arrangement. It is
currently anticipated that the Effective Date will be on or about July 24, 1998.
The effective time (the "Effective Time") of the Arrangement will be deemed to
be 12:01 a.m. (Montreal time) on the Effective Date. See "The
Transaction--Transaction Mechanics and Description of Exchangeable Shares".
Conditions to the Transaction
The obligations of Avenor and Bowater to consummate the Transaction are
subject to the satisfaction of certain conditions, including the approval of the
Arrangement by the Ontario Court, approval of the Share Issuance by the Bowater
Shareholders at the Bowater Meeting, approval of the Arrangement Resolution and
the Shareholder Rights Plan Resolution by the Avenor Shareholders at the Avenor
Meeting, expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), either the expiration of the applicable waiting period or the issuance of
an advance ruling certificate (an "ARC") under the Competition Act (Canada) (the
"Competition Act"), the receipt of the necessary approval under the Investment
Canada Act (the "Investment Canada Act"), and the accuracy of representations
and warranties. The waiting period under the HSR Act has expired and an ARC has
been issued under the Competition Act. See "Regulatory Matters".
Non-Solicitation
Avenor has agreed that it will not, directly or indirectly, through any
director, officer, employee, representative or agent, solicit, initiate or
knowingly encourage the initiation of any inquiries or proposals regarding any
Acquisition Proposal (as defined below), participate in any discussions or
negotiations regarding an Acquisition Proposal, withdraw or modify in a manner
adverse to Bowater the approval of the Avenor Board of the Transaction, approve
or recommend any Acquisition Proposal or cause Avenor to enter into any
agreement relating to any Acquisition Proposal; provided, however, that, subject
to Avenor's obligations described below, nothing will prevent the Avenor Board
from considering, negotiating, approving, recommending to its shareholders or
entering into an agreement in respect of an unsolicited bona fide written
Acquisition Proposal that the Avenor Board determines in good faith, after
consultation with financial advisors and after receiving an opinion of outside
counsel to the effect that the Avenor Board is required to take such action in
order to discharge properly its fiduciary duties, would, if consummated in
accordance with its terms, result in a transaction more favorable to the Avenor
Shareholders than the Transaction (any such Acquisition Proposal being referred
to herein as a "Superior Proposal"). An "Acquisition Proposal" means any merger,
amalgamation, take-over bid, sale of material assets (or any lease, long-term
supply agreement or other arrangement having the same economic effect as a
sale), any material sale of shares or rights or interests therein or thereto or
similar transactions involving Avenor or Bowater or any material subsidiaries of
Avenor or Bowater, or a proposal to do so, excluding the Arrangement and certain
transactions permitted pursuant to the Arrangement Agreement.
Bowater has agreed that it will not, directly or indirectly, through any
officer, director, employee, representative or agent of Bowater or any of its
subsidiaries, solicit, initiate or knowingly encourage the initiation of any
inquiries or proposals regarding an Acquisition Proposal; provided, however,
that nothing will prevent the Bowater Board from considering, negotiating,
approving, recommending to its shareholders or entering into an agreement in
respect of an unsolicited bona fide written Acquisition Proposal if the Bowater
Board determines in good faith, after consultation with its financial advisors
and after receiving an opinion from outside counsel, that it is required to do
so in order to discharge properly its fiduciary duties.
Avenor has agreed that it will not accept, approve, recommend or enter into
any agreement in respect of an Acquisition Proposal (other than a
confidentiality agreement) on the basis that it would constitute a
13
<PAGE> 35
Superior Proposal until five business days have elapsed from the date it has
provided Bowater with a copy of the Acquisition Proposal. During the five
business day period, Bowater will have the opportunity, but not the obligation,
to offer to amend the terms of the Arrangement Agreement or the Arrangement. The
Avenor Board will review any such offer in good faith to determine, in its
discretion in the exercise of its fiduciary duties, whether Bowater's amended
offer, upon acceptance by Avenor, would result in the Acquisition Proposal not
being a Superior Proposal. If the Avenor Board so determines, it will enter into
an amended agreement with Bowater. Otherwise, it will pay Bowater the
termination fee described below.
See "Other Terms of the Arrangement Agreement--Non-Solicitation".
Termination
The Arrangement Agreement may be terminated at any time prior to the
Effective Time by mutual written consent of Avenor and Bowater, or by either
Avenor or Bowater, subject to the other party's right to cure in certain
circumstances, if the conditions to the Arrangement have not been waived or
satisfied on or before September 30, 1998. In addition, either Bowater or Avenor
may terminate the Arrangement Agreement if an event occurs that causes the other
party to be obligated to pay a termination fee as described below. Avenor may
also terminate the Arrangement Agreement upon any determination by Avenor in
accordance with the terms of the Arrangement Agreement that an Acquisition
Proposal constitutes a Superior Proposal, subject to its obligation to pay a
termination fee as described below. See "Other Terms of the Arrangement
Agreement--Termination and Termination Fees".
Termination Fees
If the Bowater Shareholders do not approve the Share Issuance (an "Avenor
Termination Fee Event") at the Bowater Meeting, then Bowater must pay Avenor
C$70 million; provided, however, that the Avenor Shareholders have not
disapproved the Arrangement Resolution and the Arrangement Agreement has not
been duly terminated prior to the occurrence of such Avenor Termination Fee
Event.
If (i) the Avenor Board has withdrawn or modified in a manner adverse to
Bowater its approval or recommendation of the Arrangement, or approved or
recommended any Superior Proposal, or determined that any Acquisition Proposal
is a Superior Proposal, or resolved to take any such action, or (ii) an
Acquisition Proposal has been made known to Avenor or has been made directly to
the Avenor Shareholders or any person has publicly announced an intention to
make an Acquisition Proposal and after such Acquisition Proposal has been made
known, made or announced (a) the Avenor Shareholders do not approve the
Arrangement Resolution at the Avenor Meeting or (b) the Arrangement Resolution
is not, prior to September 30, 1998, submitted for shareholders' approval (each
of the events described in clauses (i) and (ii) being a "Bowater Termination Fee
Event"), then Avenor must pay Bowater C$70 million; provided, however, that in
the case of clause (ii), the Bowater Shareholders have not disapproved the Share
Issuance; and in the case of both clauses (i) and (ii), the Arrangement
Agreement has not been duly terminated prior to the occurrence of such Bowater
Termination Fee Event.
See "Other Terms of the Arrangement Agreement--Termination and Termination
Fees".
Interests of Certain Persons in the Transaction
Avenor Shareholders should be aware that certain directors or officers of
Avenor may have interests in the Transaction that are different than Avenor
Shareholders generally, including the following:
Indemnification of Avenor's Directors and Officers. The Arrangement
Agreement provides that Bowater will ensure that the provisions in Avenor's
By-laws (the "Avenor By-laws") relating to indemnification of Avenor's
directors, officers, employees or agents immediately prior to the Effective Date
will survive the Arrangement and will not be modified for a period of six years
from the Effective Date in a manner that would adversely affect the rights of
such individuals thereunder. Bowater has agreed, subject to certain limitations,
to maintain insurance for Avenor's present and former directors and officers
equivalent to Avenor's current directors' and officers' liability insurance for
at least six years after the Effective Date. See "The Transaction--Interests of
Certain Persons in the Transaction--Indemnification and Insurance".
14
<PAGE> 36
Change in Control Agreements. Avenor has entered into severance agreements
with certain of its senior officers in the normal course of its business. The
severance agreements, the majority of which were entered into in September 1993,
provide for the payment of certain severance benefits if a change in control of
Avenor occurs and, within the three-year period following such change in
control, the individual's employment is terminated by Avenor other than for
cause, disability, retirement or death, or by the individual for certain defined
reasons such as a change in responsibilities or reduction in salary or benefits.
The Transaction will result in a change in control of Avenor for the purposes of
such severance agreements. See "Information Concerning Avenor--Directors and
Officers--Termination of Employment, Change in Responsibilities and Employment
Contracts" and "The Transaction--Interests of Certain Persons in the
Transaction--Change in Control Agreements".
Vesting of Options and SARs. Certain directors, officers, employees and
former employees of Avenor have outstanding stock options ("Avenor Options") and
stock appreciation rights ("Avenor SARs") pursuant to Avenor's Key Employee
Stock Option Plan (the "Avenor KESOP"). The Avenor KESOP provides for the
acceleration of the vesting of the Avenor Options and Avenor SARs upon the
occurrence of a change in control of Avenor. In connection with the Transaction,
Avenor has received the approval of the TSE and the ME to make technical
amendments to the Avenor KESOP to provide for the vesting of all outstanding
Avenor Options and Avenor SARs immediately prior to the Effective Time, in order
to allow such directors, officers, employees and former employees to participate
in the Arrangement. Certain of the outstanding Avenor Options and Avenor SARs
have an exercise price that exceeds C$35. In connection with the Transaction,
Avenor intends to purchase such securities from the holders thereof. It is
currently anticipated that all such securities will be acquired by Avenor at a
cost of less than C$45,000. Any Avenor Options or Avenor SARs that are not
exercised prior to the Effective Time will be terminated as of the Effective
Time. See "The Transaction--Interests of Certain Persons in the
Transaction--Vesting of Options".
Accounting Treatment
The Transaction will be treated as a "purchase" for financial reporting and
accounting purposes, in accordance with U.S. GAAP.
Income Tax Considerations for Avenor Shareholders
Certain Canadian Federal Income Tax Considerations. A Canadian tax
deferral may be available to certain Avenor Shareholders who receive
Exchangeable Shares in exchange for at least a portion of their Avenor Common
Shares and file the appropriate tax elections, for so long as they hold
Exchangeable Shares. Such shareholders generally will recognize a capital gain
or a capital loss for Canadian federal income tax purposes upon the exchange of
their Exchangeable Shares for Bowater Common Stock or upon the sale of their
Exchangeable Shares. Where the exchange is made with Bowater Canada (on a
redemption or retraction), such shareholders will also realize a deemed
dividend. There are certain conditions and limitations on qualifying for
Canadian tax deferral including filing a tax election. Avenor Shareholders who
hold their Avenor Common Shares as capital property and who receive cash or
shares of Bowater Common Stock for their Avenor Common Shares generally will
recognize a capital gain or a capital loss on the disposition of their Avenor
Common Shares. See "Income Tax Considerations--Canadian Federal Income Tax
Considerations for Avenor Shareholders". AVENOR SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS.
Certain United States Federal Income Tax Considerations. A non-United
States Holder (as defined in this Joint Proxy Statement) will generally not
recognize gain or loss for United States federal income tax purposes in
connection with the Arrangement, except as discussed below. The exchange by a
United States Holder (as defined in this Joint Proxy Statement) of Avenor Common
Shares for shares of Bowater Common Stock or a combination of shares of Bowater
Common Stock and cash, will be fully taxable for United States federal income
tax purposes. Although it is not free from doubt, the exchange by a United
States Holder of Avenor Common Shares for Exchangeable Shares, or Exchangeable
Shares and shares of Bowater Common Stock, cash or both, generally should be
fully taxable for United States federal income tax purposes. See "Income Tax
Considerations--United States Federal Income Tax Considerations for Avenor
Shareholders". AVENOR SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS.
15
<PAGE> 37
Income Tax Considerations for Bowater Shareholders
In the opinion of Cravath, Swaine & Moore, special United States counsel to
Bowater, Bowater Shareholders will not recognize gain or loss for United States
federal income tax purposes as a result of the consummation of the Arrangement,
except by reason of their ownership of Avenor Common Shares, if any. See "Income
Tax Considerations--United States Federal Income Tax Considerations for Bowater
Shareholders". For a discussion of the United States federal income tax
consequences of the Arrangement to a Bowater Shareholder who also owns Avenor
Common Shares, see "Income Tax Considerations--United States Federal Income Tax
Considerations for Avenor Shareholders". BOWATER SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS.
Eligibility for Investment in Canada of Exchangeable Shares
Provided the Exchangeable Shares are listed on a prescribed stock exchange
in Canada (which currently includes the TSE and the ME), such shares will be
qualified investments under the Income Tax Act (Canada) (the "Canadian Tax Act")
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans and will not be
foreign property under the Canadian Tax Act or the proposals to amend the
Canadian Tax Act and the regulations thereunder publicly announced by or on
behalf of the Minister of Finance (Canada) prior to the date hereof (the
"Proposed Amendments"), for trusts governed by registered retirement savings
plans, registered retirement income funds and deferred profit sharing plans, for
registered pension plans or for certain other persons to whom Part XI of the
Canadian Tax Act applies. See "The Transaction--Eligibility for Investment in
Canada".
Stock Exchange Listings
The TSE and the ME have conditionally approved the listing of the
Exchangeable Shares. Such listings are subject to Bowater Canada fulfilling all
of the requirements of the TSE and the ME, including distribution of the
Exchangeable Shares to a minimum number of public shareholders. There is no
current intention to list the Exchangeable Shares on any other stock exchange
(including the NYSE).
The Bowater Common Stock is listed on the NYSE, U.S. regional exchanges,
the London Stock Exchange and the Swiss Stock Exchange. An application will be
made by Bowater to each of the NYSE and the Pacific Exchange, Inc. to list the
additional shares of Bowater Common Stock issuable in connection with the
Arrangement or upon the exchange of Exchangeable Shares. There is no current
intention to list the Bowater Common Stock on any other stock exchange. Bowater
is in the process of delisting the Bowater Common Stock from the Swiss Stock
Exchange.
16
<PAGE> 38
BOWATER SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data presented for, and as of the end of,
each of the years in the five-year period ended December 31, 1997, are derived
from the consolidated financial statements of Bowater, which consolidated
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The selected consolidated financial data for the
three-month periods ended March 31, 1998 and 1997, were derived from unaudited
condensed consolidated financial statements of Bowater. The consolidated
financial statements of Bowater as of December 31, 1997 and 1996, and for each
of the years in the three-year period ended December 31, 1997, and the report
thereon are included in this Joint Proxy Statement and reference should be made
to these financial statements, including the notes thereto. The condensed
consolidated financial statements of Bowater as of March 31, 1998, and for the
three-month periods ended March 31, 1998 and 1997, are included in this Joint
Proxy Statement and reference should be made to these financial statements,
including notes thereto. See "Index to Bowater Consolidated Financial
Statements".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED AND AT
MARCH 31, YEAR ENDED AND AT DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............. $ 383.2 $ 348.5 $1,484.5 $1,718.3 $2,001.1 $1,359.0 $1,353.7
Gross profit.......... 63.6 25.3 207.9 394.3 643.0 118.2 8.5
Operating income
(loss).............. 46.3 10.1 135.7 301.2 549.3 42.1 (63.3)
Income (loss) from
continuing
operations before
extraordinary
charge(1)........... 24.8 (0.3) 53.7 204.1 258.2 (4.8) (64.5)
Net income (loss)..... 24.8 (0.3) 53.7 200.2 246.9 (4.8) (64.5)
Basic earnings (loss)
per common share.... .60 (.03) 1.26 4.97 5.76 (.59) (1.84)
Diluted earnings
(loss) per common
share............... .59 (.03) 1.25 4.55 5.22 (.59) (1.84)
Dividends declared per
common share(2)..... .20 .20 .80 .80 .60 .60 .60
BALANCE SHEET DATA(3):
Timber and
timberlands......... 383.0 394.2 394.0 395.7 430.4 426.4 422.5
Fixed assets, net..... 1,543.7 1,608.6 1,554.5 1,636.7 1,711.0 1,785.0 1,750.7
Total assets.......... 2,779.0 2,736.8 2,745.8 2,865.5 2,908.2 2,851.4 2,726.2
Total debt............ 758.5 760.2 758.9 760.6 818.1 1,118.5 1,120.2
Total debt and
redeemable preferred
stock............... 758.5 785.1 758.9 785.4 867.8 1,193.0 1,194.6
Total
capitalization(4)... 2,054.8 2,022.3 2,038.3 2,082.8 2,113.9 2,222.5 2,071.8
CASH FLOW DATA:
Cash flow from (used
for) operations..... 72.5 23.0 195.7 336.2 607.7 80.9 (30.6)
Cash invested in fixed
assets, timber and
timberlands......... 37.1 23.6 99.6 107.0 96.0 216.1 121.8
</TABLE>
- ---------------
Notes:
(1) Extraordinary charges relate to debt retirements in 1996 and 1995.
(2) Dividends are declared quarterly.
(3) In 1996, Bowater sold its wholly owned subsidiary, Star Forms Incorporated.
(4) Total capitalization includes total debt, minority interests in
subsidiaries, redeemable preferred stock and shareholders' equity.
17
<PAGE> 39
AVENOR SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data presented for, and as of the end of,
each of the years in the five-year period ended December 31, 1997, are derived
from the consolidated financial statements of Avenor, which consolidated
financial statements have been audited by Price Waterhouse, Chartered
Accountants. The selected consolidated financial data for the three-month
periods ended March 31, 1998 and 1997, were derived from unaudited consolidated
financial statements of Avenor. The consolidated financial statements of Avenor
as of December 31, 1997, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1997, and the report thereon are included
in this Joint Proxy Statement and reference should be made to these financial
statements, including the notes thereto. The consolidated financial statements
of Avenor as of March 31, 1998, and for the three-month periods ended March 31,
1998 and 1997, are included in this Joint Proxy Statement and reference should
be made to these financial statements. See "Index to Avenor Consolidated
Financial Statements".
<TABLE>
<CAPTION>
THREE MONTHS ENDED AND AT
MARCH 31, YEAR ENDED AND AT DECEMBER 31,
------------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- --------- --------- --------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
INFORMATION
Net sales............ C$450.6 C$444.9 C$1,991.7 C$2,061.3 C$2,612.3 C$1,821.7 C$1,508.1
Depreciation and
amortization....... 36.0 44.9 181.1 164.6 157.7 152.4 178.7
Gross profit
(loss)............. 78.5 (2.3) 176.4 257.3 808.5 147.2 (104.0)
Operating earnings
(loss) before
unusual items...... 68.6 (19.3) 98.6 180.0 728.7 84.5 (156.1)
Unusual items(1)..... -- (48.2) (287.8) -- 24.8 (15.5) (158.8)
Operating earnings
(loss)............. 68.6 (67.5) (189.2) 180.0 753.5 69.0 (314.9)
Gain from sale of a
subsidiary(2)...... -- -- 186.2 -- -- -- --
Gain from the issue
of equity by a
subsidiary(3)...... -- -- -- -- -- -- 68.1
Interest expense,
net................ 25.0 31.4 125.2 111.4 118.5 150.3 155.6
Earnings (loss) from
continuing
operations(4)...... 28.5 (93.7) (212.5) 11.3 348.1 (91.2) (273.3)
Net earnings (loss).. 28.5 (93.7) (212.5) 11.3 348.1 (67.6) (285.6)
Net earnings (loss)
applicable to
common shares...... 27.2 (94.9) (217.4) 6.7 343.8 (71.3) (285.6)
PER SHARE DATA
Earnings (loss) from
continuing
operations......... 0.42 (1.45) (3.32) 0.10 5.12 (1.43) (4.67)
Net earnings (loss)
applicable to
common shares:
Basic.............. 0.42 (1.45) (3.32) 0.10 5.12 (1.07) (4.88)
Fully diluted...... 0.40 (1.45) (3.32) 0.10 4.75 (1.07) (4.88)
Dividends declared... 0.12 -- 0.36 0.48 0.24 -- --
</TABLE>
18
<PAGE> 40
<TABLE>
<CAPTION>
THREE MONTHS ENDED AND AT
MARCH 31, YEAR ENDED AND AT DECEMBER 31,
------------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- --------- --------- --------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
INFORMATION
Cash and temporary
investments........ 137.9 14.4 185.4 28.4 344.8 117.4 16.0
Cash held in
escrow(4).......... -- -- -- -- -- 247.5 --
Funds held in a
segregated
account(5)......... -- 263.7 -- 325.8 263.3 -- --
Capital assets....... 1,866.9 2,243.5 1,877.0 2,266.2 2,136.0 2,042.5 2,130.0
Total assets......... 2,654.9 3,294.1 2,718.0 3,397.8 3,573.2 3,204.9 3,030.9
Current portion of
long-term debt..... 15.0 13.1 76.3 11.9 89.1 31.1 31.5
Long-term debt....... 1,055.0 1,389.3 1,056.7 1,432.5 1,438.0 1,714.4 1,604.8
Non-controlling
interest........... 34.2 132.6 34.7 132.7 119.6 89.7 161.5
Shareholders'
equity............. 1,080.3 1,192.8 1,054.5 1,285.5 1,341.3 1,005.5 860.2
</TABLE>
- ---------------
Notes:
(1) In 1993, Unusual items included a provision of C$146.8 million for Avenor's
total investment in the Gold River Newsprint Limited Partnership and other
related closure costs. The remaining balance of C$12.0 million related to
other restructuring costs. In 1994, additional closure costs of C$15.5
million relating to the partnership were recorded. In 1995, certain
newsprint assets of the partnership were sold to a third party and the
outstanding indebtedness of the partnership to its third party lenders was
extinguished. As a result certain provisions relating to Avenor's interest
in the partnership were reversed in 1995 and an amount of C$24.8 million was
recorded. In 1997, Unusual items consisted of C$225.2 million related to
asset write-downs. C$57.5 million (C$48.2 million in the three-month period
ended March 31, 1997) related to the implementation of a workforce reduction
program and C$5.1 million related to the costs of modifying internal use
computer software to be Year 2000 compliant.
(2) In 1997, a gain of C$186.2 million was recognized from the sale of Avenor's
53% interest in Pacific Forest Products Limited.
(3) In 1993, a gain of C$68.1 million was recognized as a result of the issue of
equity by Avenor's subsidiary, Pacific Forest Products Limited.
(4) In 1993 and 1994, the results of the paperboard business were reclassified
as discontinued operations. The gross proceeds received from the sale of
this business were held in escrow until June 1995.
(5) In 1995, Avenor created a segregated account dedicated to debt reduction. In
1997, all the funds were used to repay long-term debt and the segregated
account was closed.
19
<PAGE> 41
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth selected unaudited pro forma combined
financial data for Bowater for the one-year period ended December 31, 1997, and
as of and for the three-month period ended March 31, 1998, which are presented
to reflect the estimated impact of the Transaction on the historical
consolidated financial statements of Bowater. The Transaction is accounted for
as a purchase and assumes the use of approximately US$500 million in cash and
marketable securities, additional debt of US$324 million and the issuance of
approximately 15.0 million shares of either Bowater Common Stock or Exchangeable
Shares. The income statement data assume that the Transaction had been
consummated on January 1, 1997, and the balance sheet data assume that the
Transaction had been consummated on March 31, 1998. The unaudited pro forma
combined financial data do not reflect any cost savings and other synergies
anticipated by Bowater management as a result of the Transaction and are not
necessarily indicative of the results of operations or the financial position
that would have occurred had the Transaction been consummated on January 1,
1997, or March 31, 1998, nor are they necessarily indicative of Bowater's future
results of operations or financial position. The unaudited pro forma combined
data should be read in conjunction with the historical consolidated financial
statements of Bowater and Avenor and the Unaudited Pro Forma Condensed Combined
Financial Statements, including the notes thereto, appearing elsewhere in this
Joint Proxy Statement. See "Index to Bowater Consolidated Financial Statements",
"Index to Avenor Consolidated Financial Statements" and "Unaudited Pro Forma
Condensed Combined Financial Statements".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 DECEMBER 31, 1997
------------ -----------------
(IN MILLIONS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................... $ 684.5 $2,869.8
Gross profit................................................ 102.5 52.8
Operating income (loss)..................................... 78.3 (75.5)
Income (loss) before extraordinary charges.................. 42.5 (165.1)
Basic income (loss) before extraordinary charges per
share..................................................... .76 (3.04)
Diluted income (loss) before extraordinary charges per
share..................................................... .73 (3.04)
BALANCE SHEET DATA (AT PERIOD END):
Timber and timberlands...................................... 477.1
Fixed assets................................................ 3,595.6
Total assets................................................ 5,589.3
Total debt(1)............................................... 2,062.2
Total debt and redeemable preferred stock................... 2,062.2
Total capitalization(2)..................................... 4,207.4
</TABLE>
- ---------------
Notes:
(1) Total debt consists of short-term borrowings and total long-term debt
(including current installments).
(2) Total capitalization includes total debt, minority interests in subsidiaries
and shareholders' equity.
20
<PAGE> 42
COMPARATIVE PER SHARE DATA FOR BOWATER AND AVENOR
The following table sets forth certain earnings, dividend and book value
per share data for Bowater and Avenor on historical and pro forma bases. The pro
forma data are derived from the Unaudited Pro Forma Condensed Combined Financial
Statements appearing elsewhere in this Joint Proxy Statement, which give effect
to the Transaction as a purchase. The pro forma dividend data assume dividend
payments consistent with Bowater's historical payments. Book value data for all
pro forma presentations are based upon the number of outstanding shares of
Bowater Common Stock as of March 31, 1998, adjusted to include shares of Bowater
Common Stock or Exchangeable Shares to be issued in connection with the
Transaction. The information set forth below should be read in conjunction with
the historical consolidated financial statements of Bowater and Avenor and the
Unaudited Pro Forma Condensed Combined Financial Statements, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement. See "Index to
Bowater Consolidated Financial Statements", "Index to Avenor Consolidated
Financial Statements" and "Unaudited Pro Forma Condensed Combined Financial
Statements".
The pro forma data do not reflect any cost savings and other synergies
anticipated by Bowater management as a result of the Transaction and are not
necessarily indicative of the results of operations or the financial position
that would have occurred had the Transaction been consummated on January 1,
1997, or March 31, 1998, nor are they necessarily indicative of Bowater's future
results of operations or financial position.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL COMBINED
Three months ended March 31, 1998: ---------- ----------------
<S> <C> <C>
BOWATER
Basic earnings per share before extraordinary
charges.............................................. US$.60 US$.76
Diluted earnings per share before extraordinary
charges.............................................. .59 .73
Cash dividends per share............................... .20 .20
Book value per common share at period end.............. 29.16 36.15
</TABLE>
<TABLE>
<CAPTION>
AVENOR PRO FORMA
HISTORICAL(1) EQUIVALENT(2)
------------- ----------------
<S> <C> <C>
AVENOR
Basic earnings per share before extraordinary
charges.............................................. C$.75 C$.48
Diluted earnings per share before extraordinary
charges.............................................. .70 .48
Cash dividends per share............................... .12 .13
Book value per common share at period end.............. 13.15 23.00
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL COMBINED
Year ended December 31, 1997: ---------- ----------------
<S> <C> <C>
BOWATER
Basic earnings (loss) per share before extraordinary
charges.............................................. US$1.26 US$(3.04)
Diluted earnings (loss) per share before extraordinary
charges.............................................. 1.25 (3.04)
Cash dividends per share............................... .80 .80
</TABLE>
<TABLE>
<CAPTION>
AVENOR PRO FORMA
HISTORICAL(1) EQUIVALENT(2)
------------- ----------------
<S> <C> <C>
AVENOR
Basic earnings (loss) per share before extraordinary
charges.............................................. C$(3.26) C$(1.93)
Diluted earnings (loss) per share before extraordinary
charges.............................................. (3.26) (1.93)
Cash dividends per share............................... .36 .51
</TABLE>
- ---------------
Note:
(1) The Avenor historical financial results per share and book value per common
share were calculated using U.S. GAAP.
(2) The Avenor pro forma equivalent represents the pro forma combined book
value, dividends and earnings (loss) per common share multiplied by an
assumed Exchange Ratio of .4486 and a currency conversion rate of 1.4184.
See Note 1, Major Assumptions, in the Notes to Pro Forma Condensed Combined
Financial Statements. The actual Exchange Ratio and currency conversion rate
may be different. See "The Transaction--Transaction Mechanics and
Description of Exchangeable Shares".
21
<PAGE> 43
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement includes "forward-looking statements" within the
meaning of various provisions of the Securities Act of 1933, as amended (the
"Securities Act") and the United States Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements, other than statements of
historical facts, included in this Joint Proxy Statement that address
activities, events or developments that Bowater or Avenor expects or anticipates
will or may occur in the future, including such things as future cost savings or
capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of Bowater's, Avenor's and their respective subsidiaries'
businesses and operations, plans, references to future success and other such
matters are forward-looking statements. When used in this Joint Proxy Statement,
the words "estimate", "project", "anticipate", "expect", "intend", "believe" and
similar expressions are intended to identify forward-looking statements.
These forward-looking statements are based on certain assumptions and
analyses made by Bowater and Avenor in light of their experience and their
perception of historical trends, current conditions and expected future
developments as well as other factors they believe are appropriate in the
circumstances. However, whether actual future results and developments will
conform with their expectations and predictions is subject to a number of risks
and uncertainties, including the significant considerations discussed in this
Joint Proxy Statement, and particularly the "Risk Factors" section beginning on
page 23 hereof. The forward-looking statements in this Joint Proxy Statement are
based on Bowater's or Avenor's management's expectations and involve a number of
business risks and uncertainties, any of which could cause actual results to
differ materially from the forward-looking statements. These factors include,
but are not limited to: increases or decreases in production capacity; changes
in market prices; industry cyclicality; cost of raw materials; general economic,
market and business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by Bowater, Avenor and their respective subsidiaries;
competitive actions by other forest products companies; changes in laws or
regulations, including, without limitation, those respecting environmental
compliance; and other factors, many of which are beyond the control of Bowater,
Avenor and their respective subsidiaries. Consequently, all of the
forward-looking statements made in this Joint Proxy Statement are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by Bowater or Avenor will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on Bowater, Avenor and their respective subsidiaries or their
respective businesses or operations.
The cautionary statements contained or referred to in this section should
be considered in connection with any written or oral forward-looking statements
that may subsequently be issued by Bowater or Avenor or persons authorized to
act on their behalf. Neither Bowater nor Avenor undertakes any obligation to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
22
<PAGE> 44
RISK FACTORS
The following risk factors should be considered by Bowater Shareholders and
Avenor Shareholders in evaluating whether to approve the Share Issuance, in the
case of Bowater Shareholders, and the Arrangement Resolution in the case of
Avenor Shareholders. Some of these risk factors relate directly to the
Transaction while others relate to the business and properties of Bowater and/or
Avenor and their respective affiliates, independent of the Transaction. These
risk factors should be considered in conjunction with the other information
included in this Joint Proxy Statement. Bowater Shareholders and Avenor
Shareholders are urged to read this section in its entirety.
RISKS RELATED TO THE TRANSACTION
Uncertainties in Integrating Business Operations and Achieving Cost Reductions
The value of shares of Bowater Common Stock following the Transaction may
be affected by the ability of the management of Bowater to achieve the cost
reductions from operating and administrative efficiencies and other synergies
expected to result from the consummation of the Transaction. The consolidation
of functions and the integration of departments, systems and procedures present
significant management challenges. Although Bowater's management is experienced
in achieving cost reductions and operating efficiencies, there can be no
assurance that any specified level of cost savings or other synergies will be
fully achieved or will be achieved within the time periods contemplated, nor can
there be any assurance as to the effect of the Transaction on Bowater's results
of operations. See "The Transaction--Plans and Proposals".
Relationship Between the Exchange Ratio, Stock Prices and Currency Exchange
Rates
The Exchange Ratio will be equal to C$35 divided by the product of the
Bowater Average Trading Price, which will be the weighted average trading price
of Bowater Common Stock on the NYSE for the 20 trading days ending on the third
business day prior to the Effective Date (but not less than US$45.5062 or more
than US$55.6187, pursuant to the Arrangement Agreement), multiplied by the
Currency Exchange Rate. The Bowater Average Trading Price may vary from the
price of shares of Bowater Common Stock at the date of this Joint Proxy
Statement. Such variations may be the result of changes in the business,
operations or prospects of Bowater or Avenor, market assessments of the
likelihood that the Transaction will be consummated and the timing thereof,
regulatory considerations, general market and economic conditions and other
factors. Because the Effective Date will occur at a date later than the date of
the Meetings, there can be no assurance that the price of shares of Bowater
Common Stock on the date of the Meetings will be indicative of the Bowater
Average Trading Price.
The actual Exchange Ratio also will depend on the actual Currency Exchange
Rate, which may vary from the exchange rate as of the date of this Joint Proxy
Statement. The degree of such variation depends on economic and political events
and on the supply and demand for Canadian and U.S. dollars, factors that are
beyond the control of either Bowater or Avenor. Because the Effective Date will
occur on a date later than the date of the Meetings, there can be no assurance
that the exchange rate on the date of the Meetings will be indicative of the
actual Currency Exchange Rate. Depreciation of the Canadian dollar with respect
to the U.S. dollar between the date of the Meetings and the Effective Date,
reflected in an increased Currency Exchange Rate, would have the effect of
reducing the number of Exchangeable Shares or shares of Bowater Common Stock, as
the case may be, to be received by Avenor Shareholders pursuant to the
Arrangement. Appreciation of the Canadian dollar would have the effect of
increasing the number of such shares to be issued by Bowater and Bowater Canada.
Bowater has entered into currency hedge contracts for the Transaction covering a
substantial portion of the risk of appreciation in the value of the Canadian
dollar.
Furthermore, for the purposes of determining the Exchange Ratio, the
Bowater Average Trading Price cannot be less than US$45.5062 or greater than
US$55.6187. If the actual Bowater Average Trading Price is greater than
US$55.6187, Avenor Shareholders who have not elected to receive cash, or who
have elected to receive cash but are subject to the proration provisions
described in "The Transaction--Transaction Mechanics and Description of
Exchangeable Shares--Proration", will be entitled to receive for each Avenor
23
<PAGE> 45
Common Share held by them a fraction of an Exchangeable Share or a share of
Bowater Common Stock (depending on the election) that is likely to have an
initial value that is greater than C$35. If the actual Bowater Average Trading
Price is less than US$45.5062, such Avenor Shareholders will be entitled to
receive for each Avenor Common Share held by them a fraction of an Exchangeable
Share or share of Bowater Common Stock (depending on the election) that is
likely to have an initial value that is less than C$35. There is no minimum or
maximum initial value, and the terms of the Arrangement Agreement do not permit
Bowater to terminate the Arrangement Agreement in the event such initial value
is above C$35 or permit Avenor to terminate in the event such initial value is
below C$35.
The actual Exchange Ratio and the number of Exchangeable Shares and/or
shares of Bowater Common Stock to be issued to an Avenor Shareholder in exchange
for an Avenor Common Share pursuant to the Arrangement Agreement will not be
determined until three business days prior to the Effective Date.
Potentially Adverse U.S. Income Tax Consequences to Avenor Shareholders
No statutory, judicial or administrative authority exists that directly
addresses certain of the U.S. federal income tax consequences of the issuance
and ownership of instruments and rights comparable to the Exchangeable Shares,
the Ancillary Rights granted to the Avenor Shareholders and the Call Rights.
Consequently, the U.S. federal income tax consequences of the issuance and
ownership of the Exchangeable Shares, the Ancillary Rights and the Call Rights
are subject to significant uncertainty.
In particular, Bowater Canada and Bowater intend to treat dividends
received by a non-United States Holder on the Exchangeable Shares as dividends
from Bowater Canada rather than from Bowater and therefore not subject to United
States withholding tax, and Bowater Canada and Bowater do not intend that
Bowater Canada or Bowater will withhold any amounts in respect of such tax from
such dividend. There is some possibility, however, that the United States
Internal Revenue Service (the "Service") may assert that United States
withholding tax is payable with respect to any dividends paid on the
Exchangeable Shares to non-United States Holders. See "Income Tax
Considerations--United States Federal Income Tax Considerations for Avenor
Shareholders".
Canadian Tax Consequences of Redemption or Exchange of Exchangeable Shares
The Transaction provides the opportunity for a tax deferral to certain
holders of Avenor Common Shares who receive Exchangeable Shares pursuant to the
Arrangement and file the appropriate election. However, such shareholders will
generally only be able to obtain Canadian tax deferral for as long as they hold
the Exchangeable Shares. If the number of outstanding Exchangeable Shares (other
than shares held by Bowater or its affiliates) is fewer than 500,000 or there is
an acquisition of Control of Bowater (as defined in the Exchangeable Share
Provisions), and in any event on or at any time after June 30, 2008, Bowater
Canada may, at its option, redeem the Exchangeable Shares for shares of Bowater
Common Stock. Moreover, if Bowater Holdings' call rights are not exercised on
redemption of the Exchangeable Shares by Bowater Canada, a holder of
Exchangeable Shares may realize a dividend for Canadian tax purposes that may
exceed the holder's economic gain. See "Description of Capital Stock--Avenor
Share Capital" and "Income Tax Considerations--Canadian Federal Income Tax
Considerations for Avenor Shareholders".
Market for Exchangeable Shares
Although the economic value of the Exchangeable Shares is expected to be
closely linked to the trading value of shares of Bowater Common Stock due to the
right to exchange at any time Exchangeable Shares for shares of Bowater Common
Stock, there can be no assurance that an active trading market in the
Exchangeable Shares will develop or be sustained or that the Exchangeable Shares
will continue to meet the listing requirements of the TSE and the ME. There is
no current intention to list the Exchangeable Shares on any other stock exchange
(including the NYSE).
24
<PAGE> 46
RISKS RELATED TO OPERATIONS AFTER THE TRANSACTION
Industry Conditions and Competition
Bowater's and Avenor's operating results reflect the general cyclical
pattern of the pulp and paper industry. Most of Bowater's and Avenor's products
are world-traded commodity products. Consequently, Bowater and Avenor, like
other participants in this industry, have 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.
The markets for Bowater's and Avenor's products are highly competitive,
with a number of major companies competing in each market. Certain of Bowater's
and Avenor's competitors may have greater financial resources than Bowater and
Avenor. In addition, some of Bowater's and Avenor's competitors are currently
lower cost producers in some of the businesses in which Bowater and Avenor
operate, including newsprint. Bowater and Avenor compete with North American,
European, and Asian producers in most of their product lines. Variations in the
exchange rate between the United States dollar and other currencies,
particularly those of Sweden, Finland, and certain Asian countries,
significantly affect the relative competitive position of Bowater and Avenor as
compared to many of their competitors.
A significant portion of Bowater's revenues after the Transaction will be
represented by newsprint sales. Any material decline in newsprint prices or any
other adverse development in the market for newsprint could have a material
adverse effect on Bowater after the Transaction.
Sales of market pulp are expected to constitute the second largest source
of revenues of Bowater after the Transaction. Market pulp prices historically
have been volatile. Significant declines in market pulp prices or any other
adverse development in the market for market pulp could have a material adverse
effect on Bowater after the Transaction.
Trends in electronic data transmission and storage could adversely affect
traditional print media, including products of Bowater's and Avenor's customers;
however, neither the timing nor extent of these trends can be predicted with
certainty. Industry reports indicate that Bowater'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 several of Bowater's products), cable television
and the Internet. Some of these customers are also facing a decline in newspaper
readership, circulation and advertising lineage. Bowater does not believe that
this is the case in most overseas markets. Bowater's magazine and catalog
publishing customers have also been affected by the use of electronic media for
merchandising products, while benefiting from the increase in magazine and
catalog publications dealing with electronic media, especially computer hardware
and software.
Environmental Regulation and Significant Environmental Expenditures
Each of Bowater and Avenor is subject to a variety of federal, state and
provincial environmental laws and regulations in the jurisdictions in which it
operates. Bowater and Avenor each believe its operations are currently in
substantial compliance with applicable environmental laws and regulations.
In late 1993, the U.S. Environmental Protection Agency (the "EPA") proposed
regulations that would impose new air and water quality standards aimed at
further reductions of pollutants. Known as the "Cluster Rule", these regulations
were issued in final form by the EPA in November 1997. Bowater's compliance
period begins in the first quarter of 1998 and extends until the year 2006;
however, the majority of the compliance requirements must be met by 2001. These
new rules will require capital expenditures at all of Bowater's U.S. paper
mills.
Bowater anticipates spending approximately US$60 million to US$75 million
to enable its present facilities to comply with the new effluent guidelines,
with the majority to be spent at Bowater's Catawba, South Carolina, location.
Additional capital expenditures will also be required to meet the new air
quality standards. Engineering studies are currently under way to define this
additional cost, which is expected to be in
25
<PAGE> 47
the same range as the requirement for the effluent guideline expenditure.
Bowater's capital spending plan for 1998 (without giving effect to the
Transaction) includes amounts relating to this study and implementation of the
new effluent quality regulations. Other than the Cluster Rule regulations
described above, Bowater anticipates approximately US$10 million to US$15
million of capital expenditures per year for the foreseeable future to maintain
the compliance of its existing operations with environmental regulations. In
addition to these capital expenditures, Avenor has currently projected
environmental capital expenditures of C$20 million over the period 1998 to 2000
to allow its facilities to meet the requirements of current environmental laws
and regulations applicable to it.
Regulations adopted in British Columbia have an additional objective to be
met before the end of 2002 with respect to the reduction of adsorbable organic
halogens (AOX) to non-detectable levels, which could require Avenor and Bowater
to undertake significant further capital expenditures. Currently, it is unclear
what action would be required to meet this objective in its present form and,
therefore, the cost of additional capital expenditures cannot be estimated.
Unforeseen expenditures required to allow Avenor or Bowater to remain in
compliance with laws and regulations governing air emissions, wastewater
discharge, waste management and landfill sites, including site or other
remediation costs, or unforeseen environmental liabilities, could have an
adverse effect on Avenor's and Bowater's business and financial condition. There
can be no assurance that internally generated funds or other sources of
liquidity will be sufficient for Avenor's and Bowater's requirements with
respect to unforeseen environmental compliance expenditures. Additionally, there
can be no assurance that changes in the substance or enforcement of
environmental laws and regulations or their application will not require further
significant expenditures.
Increased Exposure to Currency Fluctuations
Most of Bowater's sales and costs are denominated in U.S. dollars. Most of
Avenor's sales are also denominated in U.S. dollars, but many of its costs are
denominated in Canadian dollars. After giving effect to the Transaction, Bowater
will have increased exposure to fluctuations in the Canadian dollar. As a
result, Bowater's earnings will be affected to a greater extent than in the past
by increases or decreases in the value of the Canadian dollar. Increases in the
value of the Canadian dollar versus the U.S. dollar would tend to reduce
reported earnings in U.S. dollar terms, and decreases in the value of the
Canadian dollar would tend to increase reported earnings.
Increased Leverage
Bowater expects to finance the cash consideration to be paid in connection
with the Arrangement and related fees and expenses through the use of existing
cash and marketable securities and borrowings under a committed US$1 billion
unsecured credit facility, a substantial portion of which will be unused after
giving effect to the Transaction. As a result of the new borrowings and addition
of Avenor's existing debt, Bowater's indebtedness as a percentage of total
capitalization will be higher than in recent years. Bowater anticipates repaying
a substantial portion of indebtedness through the planned sale of Avenor's
Dryden, Ontario mill. However, there can be no assurance as to the timing of any
such sale or the amount of the proceeds to be received therefrom. If Bowater is
unsuccessful in completing the sale of the Dryden, Ontario mill, Bowater's
leverage will remain at a higher than normal level for a longer period than if
the sale were completed. While such higher leverage would not be above
reasonable levels within the forest products industry, such leverage would
increase Bowater's financial risk by: (i) increasing the cost of additional
financing for working capital, capital expenditures, and other purposes and (ii)
increasing the amount of cash flow dedicated to the payment of interest and
principal.
Effect of Weak Asian Markets
Asian demand for paper and pulp products has declined as a result of weak
economic conditions and financial market turmoil, leading to downward pricing
pressure and a reduction of shipments into the region.
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<PAGE> 48
In addition, producers for the Asian markets have redirected their tonnage to
other regions, thereby creating a downward pressure on prices elsewhere. Neither
Bowater nor Avenor currently has production facilities located in Asia, although
Bowater has signed an agreement for the purchase of a mill in Korea. Completion
of the purchase, which is expected within two months, is subject to satisfaction
of several conditions as described in "Bowater Management's Discussion and
Analysis of Financial Condition and Results of Operations--Three Months Ended
March 31, 1998, versus March 31, 1997--Pending Transactions".
In 1997, Bowater and Avenor had export sales to Asia totaling 6% and 21%,
respectively, of total net revenues, compared with 8% and 22% in 1996. Since
late 1997, tonnage that Bowater and Avenor otherwise would have shipped to Asia
has in general been shifted to markets that are experiencing stronger demand
such as the United States, Latin America and Europe. This stronger demand has
substantially offset the effect of the Asian weakness on the total volume of
shipments by Bowater and Avenor. There can be no assurance that non-Asian
markets will continue to absorb reduced Asian demand.
Following completion of the Transaction, weak market conditions in Asia may
continue to have an adverse effect on the level of worldwide demand for pulp and
paper products as producers for the Asian markets may redirect their tonnage to
other regions. Significant future weakness in Asian markets could erode
world-wide pricing for the companies' products, thereby adversely affecting
financial results for the combined company. In addition, Asian producers may use
their depreciated currencies to increase exports. Any significant
destabilization of one or more major Asian trading currencies could further
erode prices for commodity-grade products such as those produced by Bowater and
Avenor.
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<PAGE> 49
COMPARATIVE MARKET PRICE DATA
Shares of Bowater Common Stock are traded under the symbol "BOW" on the
NYSE, U.S. regional exchanges, the London Stock Exchange and the Swiss Stock
Exchange. Avenor Common Shares are traded under the symbol "AVR" on the TSE and
the ME and under the symbol "ANR" on the NYSE. Avenor Common Shares began
trading on the NYSE on March 19, 1997.
The following table sets forth the high and low sales prices of Avenor
Common Shares on the TSE and NYSE and of shares of Bowater Common Stock on the
NYSE and the quarterly cash dividends per share paid on Bowater Common Stock and
Avenor Common Shares for the periods indicated. The quotations are as reported
in published financial sources. TSE quotations are expressed in C$; NYSE
quotations are expressed in US$.
<TABLE>
<CAPTION>
BOWATER
COMMON STOCK AVENOR COMMON SHARES CASH CASH
----------------- ------------------------------------- DIVIDENDS DIVIDENDS
NYSE TSE NYSE ON BOWATER ON AVENOR
----------------- ----------------- ----------------- COMMON COMMON
HIGH LOW HIGH LOW HIGH LOW STOCK SHARES
------- ------- ------- ------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR 1996
First Quarter....... $41.500 $33.000 $25.500 $18.875 -- -- US$0.20 C$0.12
Second Quarter...... 41.625 35.375 24.500 19.125 -- -- 0.20 0.12
Third Quarter....... 38.750 31.500 24.500 21.500 -- -- 0.20 0.12
Fourth Quarter...... 39.500 33.000 24.000 18.400 -- -- 0.20 0.12
CALENDAR 1997
First Quarter....... $43.375 $36.875 $24.000 $19.500 $17.375 $15.625 US$0.20 --
Second Quarter...... 50.500 37.500 28.000 22.000 20.125 16.000 0.20 C$0.12
Third Quarter....... 57.000 46.000 29.700 24.500 21.125 18.000 0.20 0.12
Fourth Quarter...... 52.375 41.500 25.500 20.000 18.625 14.000 0.20 0.12
CALENDAR 1998
First Quarter....... $56.500 $40.875 $34.300 $18.550 $24.250 $13.375 US$0.20 C$0.12
Second Quarter
(through June 17,
1998)............ 60.500 47.000 35.450 33.750 24.625 23.063 -- --
</TABLE>
The following table sets forth the last reported sales prices of shares of
Bowater Common Stock and Avenor Common Shares on March 6, 1998, the last trading
day before the announcement of the Arrangement Agreement, and on June 17, 1998,
the last trading day prior to the date of this Joint Proxy Statement:
<TABLE>
<CAPTION>
BOWATER AVENOR
COMMON STOCK COMMON SHARES
------------ ----------------
NYSE TSE NYSE
------------ ------ -------
<S> <C> <C> <C>
March 6, 1998............................................... $50.6875 $30.95 $21.938
June 17, 1998............................................... 48.750 34.250 23.375
</TABLE>
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR SHARES OF
BOWATER COMMON STOCK AND AVENOR COMMON SHARES.
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<PAGE> 50
THE BOWATER MEETING
DATE, TIME AND PLACE
The Bowater Meeting will be held at 55 East Camperdown Way, Greenville,
South Carolina, on Tuesday, July 21, 1998, at 11:00 a.m. local time.
PURPOSE
This Joint Proxy Statement is being furnished to the holders of shares of
Bowater Common Stock in connection with the solicitation of proxies by the
Bowater Board for use at the Bowater Meeting. At the Bowater Meeting, the
Bowater Shareholders will consider and vote upon a proposal to approve the Share
Issuance and any other business that may properly be brought before the Bowater
Meeting.
It is a condition of the consummation of the Arrangement that the Bowater
Shareholders approve the Share Issuance at the Bowater Meeting.
THE BOWATER BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE ARRANGEMENT
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT THE BOWATER SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE SHARE
ISSUANCE AT THE BOWATER MEETING. SEE "THE TRANSACTION--BACKGROUND OF THE
TRANSACTION" AND "--BOWATER'S REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE
BOWATER BOARD".
BOWATER RECORD DATE; VOTING RIGHTS; REQUIRED VOTE
Only holders of record of shares of Bowater Common Stock at the close of
business on the Bowater Record Date, June 8, 1998, are entitled to receive
notice of and to vote at the Bowater Meeting. At the close of business on the
Bowater Record Date, there were 40,562,019 shares of Bowater Common Stock
outstanding, each of which entitles the registered holder thereof to one vote.
The Share Issuance is being submitted for the approval of the holders of
shares of Bowater Common Stock pursuant to the requirements applicable to
companies whose securities are listed on the NYSE. Pursuant to these
requirements, approval of the Share Issuance will require the affirmative vote
of the holders of a majority of the shares of Bowater Common Stock voted thereon
at the Bowater Meeting; provided that holders of a majority of the outstanding
shares of Bowater Common Stock are present, in person or by proxy, at the
Bowater Meeting and vote on the Share Issuance; provided further that under the
terms of the Bowater Bylaws, approval of the Share Issuance requires the
affirmative vote of holders of Bowater Common Stock entitled to cast at least a
majority of the votes that all holders of Bowater Common Stock present in person
or by proxy at the Bowater Meeting are entitled to cast thereon. An abstention
by a Bowater Shareholder who is present in person or by proxy at the Bowater
Meeting will have the same effect as a vote against approval of the Share
Issuance. Brokers who hold shares of Bowater Common Stock as nominees will not
have discretionary authority to vote such shares in the absence of instructions
from the beneficial owners thereof. Any shares that are not voted because the
nominee-broker lacks such discretionary authority will not be counted as having
voted upon the Share Issuance.
The presence at the Bowater Meeting, in person or by properly executed
proxy, of holders of one-third of the outstanding shares of Bowater Common Stock
entitled to vote at the Bowater Meeting will constitute a quorum at such
meeting. Shares of Bowater Common Stock represented by proxies that are marked
"abstain" will be counted as shares present for purposes of determining the
presence of a quorum, as will shares of Bowater Common Stock that are
represented by proxies that are executed by any broker, fiduciary or other
nominee on behalf of the beneficial owner(s) thereof, regardless of whether
authority to vote is withheld by such broker, fiduciary or nominee on one or
more matters.
STOCK OWNERSHIP OF MANAGEMENT
At the close of business on the Bowater Record Date, directors and
executive officers of Bowater and their affiliates were the beneficial owners of
an aggregate of approximately 806,418 shares of Bowater
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<PAGE> 51
Common Stock, or approximately 1.95% of the voting power of the outstanding
shares of Bowater Common Stock. All such directors have indicated their
intention to vote their shares at the Bowater Meeting for approval of the Share
Issuance.
VOTING AND REVOCATION OF PROXIES
All shares of Bowater Common Stock represented by properly executed proxies
in the enclosed form that are received in time for the Bowater Meeting and have
not been revoked will be voted in accordance with the instructions indicated in
such proxies. If no instructions are indicated, shares represented by properly
executed proxies will be voted FOR approval of the Share Issuance.
Bowater does not know of any matter not described in the Notice of Special
Meeting of Shareholders that is expected to come before the Bowater Meeting. If,
however, any other matters are properly presented for action at the Bowater
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authority is withheld.
Execution of the enclosed proxy will not affect a shareholder's right to
attend the Bowater Meeting and vote in person. Any shareholder giving a proxy
has the right to revoke it by giving written notice of revocation to the
Secretary of Bowater at any time before the proxy is voted, or by executing and
delivering to Bowater a later-dated proxy at any time before the earlier proxy
is voted, or by attending the Bowater Meeting and voting his or her shares in
person (although attendance at the Bowater Meeting will not, in and of itself,
constitute revocation of a proxy). No such notice of revocation or later-dated
proxy, however, will be effective until received by the Secretary of Bowater at
or prior to the Bowater Meeting.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Bowater Board. The cost
of proxy solicitation for the Bowater Meeting, including the reasonable expenses
of brokers, fiduciaries and other nominees in forwarding solicitation material
to beneficial owners, will be borne by Bowater. In addition to the use of the
mail, solicitation may be made by telephone or otherwise by officers and regular
employees of Bowater. Such officers and employees will not be additionally
compensated for such solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. If undertaken, the expense of such
solicitation by officers and employees would be nominal. Bowater has retained
Morrow & Company to aid in the solicitation of proxies from its stockholders.
The fees of such firm are estimated to be US$10,000, plus reimbursement of
out-of-pocket expenses.
THE AVENOR MEETING
THIS JOINT PROXY STATEMENT ACCOMPANIES THE NOTICE OF THE AVENOR MEETING
(THE "AVENOR NOTICE OF MEETING") TO BE HELD IN THE WEST BALLROOM OF THE SHERATON
CENTRE HOTEL, 1201 RENE-LEVESQUE BOULEVARD WEST, MONTREAL, QUEBEC, ON TUESDAY,
JULY 21, 1998, AT THE HOUR OF 11:00 A.M. (MONTREAL TIME) AND ANY ADJOURNMENT OR
POSTPONEMENT THEREOF AND IS FURNISHED IN CONNECTION WITH THE SOLICITATION OF
PROXIES BY THE MANAGEMENT OF AVENOR (THE "AVENOR MANAGEMENT") FOR USE AT THE
AVENOR MEETING. The solicitation of proxies will be primarily by mail but
proxies may also be solicited by regular employees of Avenor. Avenor will
provide proxy materials to brokers, custodians, nominees and fiduciaries and
request that such materials be promptly forwarded to the beneficial owners of
Avenor Common Shares registered in the names of such brokers, custodians,
nominees and fiduciaries. The cost of such solicitation will be borne by Avenor.
The persons named in the form of proxy mailed to Avenor Shareholders are
directors of Avenor (the "Avenor Management Nominees"). A HOLDER OF AVENOR
COMMON SHARES DESIRING TO APPOINT SOME OTHER PERSON TO REPRESENT HIM OR HER AT
THE AVENOR MEETING MAY DO SO. To exercise that right, a holder of Avenor Common
Shares may either insert such other person's name in the blank space in the
accompanying proxy form and return the same to Montreal Trust Company of Canada
or the Secretary of Avenor or submit another appropriate proxy prior to the
Avenor Meeting. A person acting as a proxy holder need not be an
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<PAGE> 52
Avenor Shareholder. Avenor Common Shares represented by properly executed Avenor
proxies in the enclosed form deposited with Montreal Trust Company of Canada,
Proxy Department, 6th Floor, 1800 McGill College Avenue, Montreal, Quebec H3A
3K9 or sent by facsimile to Montreal Trust Company of Canada at (514) 982-7635
at any time up to 10:00 a.m. (Montreal time) on the day of the Avenor Meeting,
or any adjournment or postponement thereof, will be voted for or against or
withheld from voting in accordance with the instructions of the shareholder on
the proxy on any ballot that may be called for. In the absence of any
instructions on the proxy, such Avenor Common Shares will be voted at the Avenor
Meeting:
(i) FOR the approval of the Arrangement Resolution (as described
below);
(ii) FOR the approval of the Shareholder Rights Plan Resolution (as
described below);
(iii) FOR the election as directors of Avenor of persons listed under
the heading "Additional Matters for Consideration of Avenor
Shareholders--Election of Directors"; and
(iv) FOR the appointment of Price Waterhouse, Chartered Accountants,
as auditors of Avenor and to authorize the Avenor Board to fix the
auditors' remuneration.
MATTERS TO BE CONSIDERED BY AVENOR SHAREHOLDERS
Arrangement Resolution
At the Avenor Meeting, Avenor Shareholders will be asked to approve the
Arrangement Resolution. Pursuant to the Arrangement Agreement, Bowater and
Avenor agreed to engage in a transaction that has the economic effect of Bowater
acquiring Avenor. Avenor will apply to the Ontario Court for an order for the
Arrangement pursuant to which Bowater, through Bowater Holdings and Bowater
Canada, will acquire outstanding Avenor Common Shares and each Avenor
Shareholder (other than holders who exercise and perfect their dissent rights)
will be entitled to receive C$35 for each Avenor Common Share held by such
holder, payable, at the election of such holder and subject to proration and
subject to the minimum and maximum Exchange Ratio, in cash, Exchangeable Shares,
shares of Bowater Common Stock, or a combination of the foregoing. See "The
Transaction".
It is a condition of the consummation of the Arrangement that the
Arrangement Resolution be approved by the Avenor Shareholders at the Avenor
Meeting.
THE AVENOR BOARD UNANIMOUSLY RECOMMENDS THAT AVENOR SHAREHOLDERS VOTE IN
FAVOUR OF THE ARRANGEMENT RESOLUTION ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX A.
Shareholder Rights Plan Resolution
At the Avenor Meeting, Avenor Shareholders will be asked to approve the
Shareholder Rights Plan Resolution. Pursuant to the Shareholder Rights Plan, the
Avenor Board previously authorized the issuance of a Right in respect of each
Avenor Common Share. The Shareholder Rights Plan provides that prior to the
Separation Time, each Right is transferable only together with the associated
Avenor Common Share. On March 8, 1998, the Avenor Board passed a resolution to
defer the Separation Time that would otherwise have occurred as a result of the
announcement of the Transaction.
On the Effective Date of the Arrangement, Bowater will become an "Acquiring
Person" as defined under the Shareholder Rights Plan because Bowater will be the
beneficial owner of more than 20% of the outstanding Avenor Common Shares. As a
result of Bowater becoming an "Acquiring Person", a flip-in event (a "Flip-In
Event") under the Shareholder Rights Plan will occur. Upon the occurrence of a
Flip-In Event, the Rights (other than those beneficially owned by Bowater) will
become exercisable to purchase Avenor Common Shares. In order for the
Arrangement to be implemented, it is necessary that the waiver of the
application of the Shareholder Rights Plan in respect of the Flip-In Event that
would otherwise occur as a result of the Transaction be approved by Avenor
Shareholders pursuant to Section 6.1 of the Shareholder Rights Plan.
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<PAGE> 53
It is a condition of the consummation of the Arrangement that the
Shareholder Rights Plan Resolution be approved by the Avenor Shareholders at the
Avenor Meeting.
THE AVENOR BOARD UNANIMOUSLY RECOMMENDS THAT AVENOR SHAREHOLDERS VOTE IN
FAVOUR OF THE SHAREHOLDER RIGHTS PLAN RESOLUTION ATTACHED TO THIS JOINT PROXY
STATEMENT AS ANNEX B.
Election of Directors
The articles of amalgamation of Avenor (the "Avenor Articles") provide that
the Avenor Board shall consist of not less than three and not more than
twenty-five directors to be elected annually. It is proposed that the eight
directors who currently comprise the Avenor Board be re-elected at the Avenor
Meeting. See "Information Concerning Avenor--Directors and Officers" for
information relating to such individuals. Each director elected will hold office
until the close of the next annual meeting of Avenor Shareholders or until his
or her successor is duly elected or appointed, unless his or her office is
vacated earlier. However, if the Transaction is completed, it is anticipated
that each of the directors of Avenor will resign in favour of nominees of
Bowater.
THE AVENOR MANAGEMENT NOMINEES INTEND TO VOTE FOR THE RE-ELECTION OF THE
CURRENT DIRECTORS OF AVENOR. AVENOR MANAGEMENT DOES NOT CONTEMPLATE THAT ANY OF
SUCH DIRECTOR NOMINEES WILL BE UNABLE TO SERVE AS A DIRECTOR, BUT, IF SUCH EVENT
SHOULD OCCUR FOR ANY REASON PRIOR TO THE AVENOR MEETING, THE AVENOR MANAGEMENT
NOMINEES RESERVE THE RIGHT TO VOTE IN THEIR DISCRETION FOR ANOTHER NOMINEE
UNLESS AN AVENOR SHAREHOLDER HAS SPECIFIED IN HIS OR HER PROXY THAT HIS OR HER
AVENOR COMMON SHARES ARE TO BE WITHHELD FROM VOTING IN RESPECT OF THE ELECTION
OF DIRECTORS.
Appointment of Auditors
The Avenor Management Nominees intend to vote for the re-appointment of
Price Waterhouse, Chartered Accountants, as auditors of Avenor and authorize the
Avenor Board to fix the auditors' remuneration unless an Avenor Shareholder has
specified in his or her proxy that his or her shares are to be withheld from
voting on this matter.
SHARE OWNERSHIP
At June 12, 1998, there were 65,788,413 outstanding Avenor Common Shares
entitled to vote at the Avenor Meeting. Each Avenor Shareholder is entitled to
one vote on all matters to come before the Avenor Meeting for each Avenor Common
Share registered in the shareholder's name on the list of holders of Avenor
Common Shares prepared as of the Avenor Record Date, unless a person has
transferred shares after such date and the new holder of such shares establishes
proper ownership and makes a request not later than 10:00 a.m. (Montreal time)
on the day of the Avenor Meeting to the Secretary of Avenor to be included on
the list of holders of Avenor Common Shares eligible to vote at the Avenor
Meeting.
To the knowledge of the directors and officers of Avenor, no one
beneficially owns or exercises control or direction over more than 10% of the
outstanding Avenor Common Shares.
At the close of business on the Avenor Record Date, directors and executive
officers of Avenor and their affiliates were the beneficial owners of an
aggregate of approximately 35,258 Avenor Common Shares, or approximately 0.05%
of the voting power of the outstanding Avenor Common Shares. All such directors
have indicated their intention to vote their Avenor Common Shares at the Avenor
Meeting in favour of the Arrangement Resolution and the Shareholder Rights Plan
Resolution.
AVENOR RECORD DATE AND QUORUM
The holders of Avenor Common Shares whose names appear on the list of
shareholders prepared as of the close of business on the Avenor Record Date,
June 12, 1998, will be entitled to vote at the Avenor Meeting if present or
represented by proxy thereat. A transferee of Avenor Common Shares acquired
after the Avenor Record Date is entitled to vote those shares at the Avenor
Meeting, if he or she properly produces his or her share certificates for such
Avenor Common Shares or if he or she otherwise establishes that he or she owns
the
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<PAGE> 54
shares and demands, not later than 10:00 a.m. (Montreal time) on the day of the
Avenor Meeting, that his or her name be included on the list of Avenor
Shareholders entitled to receive notice of the Avenor Meeting, such list having
been prepared as of the Avenor Record Date.
The presence at the Avenor Meeting of two persons, each being an Avenor
Shareholder or a duly appointed proxyholder, holding or representing in the
aggregate not less than 20% of the outstanding Avenor Common Shares, will
constitute a quorum.
VOTING AND PROXIES
The Avenor form of proxy confers discretionary authority with respect to
amendments or variations to the matters identified in the Notice of the Avenor
Meeting and other matters that may properly come before the Avenor Meeting.
An Avenor Shareholder who has given a proxy may revoke it by an instrument
in writing, including another proxy, executed by the shareholder or by the
shareholder's attorney authorized in writing and deposited at the executive
offices of Avenor at 1250 Rene-Levesque Boulevard West, Montreal, Quebec H3B 4Y3
at any time up to 10:00 a.m. on the day of the Avenor Meeting or with the
Chairman at the Avenor Meeting.
The Arrangement Resolution must be approved by the affirmative vote of not
less than two-thirds of the votes cast by the Avenor Shareholders who vote in
respect of the Arrangement Resolution at the Avenor Meeting. The Shareholder
Rights Plan Resolution must be approved by the affirmative vote of not less than
a majority of the votes cast thereon at the Avenor Meeting. The directors of
Avenor must be elected by the affirmative vote of a majority of the votes cast
on the resolution relating thereto at the Avenor Meeting. The appointment of
Price Waterhouse, Chartered Accountants, as auditors of Avenor at a remuneration
to be fixed by the Avenor Board, must be approved by the affirmative vote of a
majority of the votes cast on the resolution relating thereto at the Avenor
Meeting.
Avenor Management knows of no other matters to come before the Avenor
Meeting other than the matters referred to in the Avenor Notice of Meeting.
However, if any other matters which are not now known to Avenor Management
should properly come before the Avenor Meeting, the Avenor Common Shares
represented by proxies in favour of the Avenor Management Nominees will be voted
on such matters in accordance with the best judgment of the Avenor Management
Nominee.
Avenor's Annual Report, including financial statements for the year ended
December 31, 1997, accompanies the proxy material being mailed to Avenor
Shareholders who have not previously been sent a copy of the Annual Report. The
Annual Report is not part of the proxy solicitation material.
THE TRANSACTION
The description of the Transaction contained in this Joint Proxy Statement
describes all material elements of the Transaction, the Arrangement Agreement,
the Plan of Arrangement, the Voting and Exchange Trust Agreement and the Support
Agreement. The full texts of the Arrangement Agreement, the Plan of Arrangement,
the Voting and Exchange Trust Agreement and the Support Agreement are attached
hereto as Annex D, Annex E, Annex F and Annex G, respectively.
BACKGROUND OF THE TRANSACTION
In April 1997, following the termination of Avenor's agreement to acquire
Repap Enterprises Inc., Arnold M. Nemirow, the Chairman, President and Chief
Executive Officer of Bowater, contacted Paul Gagne, then the President and Chief
Executive Officer of Avenor, to discuss the possibility of a combination of
Bowater and Avenor. At the time, Bowater had been studying various acquisition
opportunities consistent with its previously announced strategies to grow
through acquisition and increase its market share in one or more of its primary
product lines, expand its presence in overseas markets and generate additional
shareholder value. Avenor was a good candidate because of the complementary fit
between the companies' core newsprint
33
<PAGE> 55
and market pulp product lines and their respective asset bases. It also
presented the opportunity for Bowater to acquire low cost, well-maintained and
strategically located mills. The two companies subsequently executed a mutual
confidentiality agreement dated April 10, 1997. On April 17, 1997, Mr. Nemirow,
David G. Maffucci, the Senior Vice President and Chief Financial Officer of
Bowater, and H. Gordon MacNeill, then a Bowater director, met with Mr. Gagne and
Norman W. Lord, Avenor's then Vice President, Corporate Development and
Logistics, to discuss further a possible combination of Bowater and Avenor. At
that meeting, the parties determined that the idea of a combination warranted
further exploration and a working group was created with representatives from
each company to determine the synergies that might be achievable from such a
combination. During April, May and early June of 1997, discussions continued
with respect to synergies and with respect to the structure and general terms of
a transaction.
In May 1997, as a result of the approach from Bowater and other interested
parties and to ensure preparedness in the event of a take-over bid for Avenor,
the Avenor Board formed a special committee of independent directors to explore
and evaluate various strategic alternatives available to Avenor. The special
committee's mandate consisted of, among other things, examining Avenor's
position in the industry to assess the likelihood of a take-over bid being made,
adopting formal procedures for responding to a take-over bid in the event that
one was made, profiling strategic alternatives to a take-over bid, analyzing
Avenor's business to be in a position to evaluate a take-over bid, and
considering appropriate defensive measures to give the Avenor Board an
appropriate amount of time to evaluate a take-over bid and any alternatives. The
specific alternatives considered by the special committee are described in the
eighth succeeding paragraph below.
On June 6, 1997, the Avenor Board reviewed the status of the discussions
with respect to a possible transaction with Bowater, and determined that
Avenor's interests would be best served by terminating the discussions at that
time. The Avenor Board determined that the shareholder value that would result
from a transaction with Bowater on the general terms then being discussed would
not be materially superior to the value that could be achieved by other means.
The Avenor Board concluded that greater shareholder value could be achieved
through the sale of certain assets and the implementation of cost saving
measures through Avenor's Operational Excellence Program.
On November 6, 1997, Mr. Gagne left the employ of Avenor. On November 10,
1997, the Avenor Board appointed Arthur R. Sawchuk, one of the members of the
Avenor Board, as acting President and Chief Executive Officer of Avenor.
Over the next several weeks, representatives of TD Securities, co-financial
advisor to Bowater, contacted Mr. Sawchuk to arrange a meeting to explore the
possibility of reopening discussions regarding a possible transaction. Five
months had passed since the prior discussions with Bowater. Mr. Sawchuk, the new
acting President and Chief Executive Officer of Avenor, was amenable to
revisiting discussions with Bowater to determine whether a transaction on
favourable terms could be negotiated, and agreed to a meeting. On December 17,
1997, at Bowater's request, representatives of TD Securities met with Lino J.
Celeste, the Chairman of Avenor, and Mr. Sawchuk. Following that meeting,
discussions continued between representatives of TD Securities and Avenor, and
on January 20, 1998, Mr. Nemirow and representatives of Goldman Sachs,
co-financial advisor to Bowater, and TD Securities met with Mr. Celeste, Mr.
Sawchuk and Frederic V. Salerno, the Chairman of the special committee of
Avenor, to clarify the terms under which a transaction could be effected. On
January 28, 1998, at a regularly-scheduled meeting of the Bowater Board,
management of Bowater reviewed with the Bowater Board the progress of the
discussions with Avenor.
On February 13, 1998, the Avenor Board instructed Avenor's senior
management and RBC DS, the financial advisor to Avenor, to pursue discussions
with Bowater regarding a possible transaction between the two companies. On
February 18, 1998, representatives of RBC DS met with representatives of Goldman
Sachs and TD Securities to discuss the possibility of a transaction between
Bowater and Avenor.
On February 25, 1998, Abitibi-Consolidated announced the Abitibi Offer for
all the outstanding Avenor Common Shares at a price of C$28 per share in cash or
1.422 Abitibi-Consolidated common shares plus C$0.05 in cash. On February 25,
1998, Avenor issued a press release stating that Avenor considered the Abitibi
Offer to be grossly inadequate. Avenor believed it was grossly inadequate
because Bowater had already indicated that it would be willing to offer a higher
price and because greater shareholder value could be
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achieved through the sale of certain assets and the Operational Excellence
Program. On February 25, 1998, after the issuance of Avenor's press release, Mr.
Nemirow spoke with Mr. Sawchuk and confirmed Bowater's willingness to enter into
a transaction with a higher value to Avenor Shareholders than under the Abitibi
Offer.
On February 26, 1998, at a regularly scheduled planning conference of the
Bowater Board, management reported on the status of the discussions with Avenor.
TD Securities and Goldman Sachs made presentations to the Bowater Board with
respect to the financial aspects of a transaction with Avenor. Later that day,
Mr. Sawchuk and Francois R. Roy, the Executive Vice President and Chief
Financial Officer of Avenor, and a representative of RBC DS, called Mr. Nemirow
to inform him that Bowater's new proposal was not acceptable. Although Bowater's
proposal was superior to the Abitibi Offer, the price was not sufficiently
compelling to cause the Avenor Board to enter into exclusive negotiations with
Bowater without considering potential offers from other interested parties.
On February 27, 1998, at its regularly scheduled meeting, the Bowater Board
authorized management to continue discussions with Avenor to attempt to reach an
agreement.
Prior to the Abitibi Offer, the Avenor special committee described above
had established a process whereby over a period of several months the
desirability of strategic alternatives available to Avenor was considered. The
primary alternatives considered by the special committee were (i) a sale to or
merger with a forest products company, including Bowater, (ii) a share
recapitalization, by means of a share buy-back or special dividend, conditional
on the sale of certain assets, particularly the sale of Avenor's Dryden, Ontario
mill, and (iii) remaining independent and enhancing shareholder value through
the Operational Excellence Program.
The Abitibi Offer accelerated the Avenor Board's evaluation of strategic
alternatives. The Avenor Board concluded that, if a sale or merger transaction
with a forest products company could be negotiated on favourable terms and
conditions, including price, entering into such a transaction with a third party
could result in higher and more immediate shareholder value than the potential
shareholder value that might result through a share recapitalization or the
Operational Excellence Program.
Following the announcement of the Abitibi Offer, Avenor was approached by
several parties who expressed interest in acquiring Avenor or certain of its
assets. Based upon the expressions of interest of Bowater and others, Avenor
decided that it would request selected interested parties to submit their offers
to acquire Avenor.
On March 4, 1998, Mr. Sawchuk called Mr. Nemirow to inform him that Avenor
was receiving from interested parties offers to acquire Avenor and that the
deadline for receipt of an offer from Bowater, together with evidence of the
availability of financing for the offer, was 5:00 p.m. on March 5, 1998.
On March 5, 1998, Bowater submitted its offer to acquire all outstanding
Avenor Common Shares, together with a commitment letter from The Chase Manhattan
Bank with respect to the financing required to complete the offer.
Although a number of parties other than Bowater had inquired about
transactions involving Avenor, including transactions involving the sale of the
Dryden, Ontario mill, only one other formal offer resulted from those
discussions. That offer, received on March 5, 1998, from a company in the forest
products industry was a cash offer for all the Avenor Common Shares at a lower
price than the Bowater offer.
On March 6, 1998, the Avenor Board held a meeting to consider the Bowater
offer and the offer from the other bidder. After considering the terms of such
offers, including the conditions of the offers and the price and type of
consideration offered, and after consulting with its financial and legal
advisors, the Avenor Board decided to continue discussions with Bowater.
Subsequently, these discussions resulted in a preliminary agreement on the
basic terms of a transaction, subject to the negotiation and execution of
definitive agreements and to the approval of the Bowater Board and the Avenor
Board. The agreement provided that Bowater would offer C$35 per Avenor Common
Share, payable, at the election of Avenor Shareholders and subject to proration,
up to 60% in cash, with the value of
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the non-cash consideration to be fixed pursuant to a "collar" arrangement at
Bowater Common Stock prices up to 10% above or below the March 5, 1998, closing
price.
On March 7 and 8, 1998, the terms of the definitive documentation were
negotiated by Bowater and Avenor and their legal and financial advisors and
Bowater and Avenor exchanged due diligence information.
On March 8, 1998, the Bowater Board held a special meeting to consider the
proposed transaction. Mr. Nemirow updated the Bowater Board on the negotiations
with Avenor, and members of senior management briefed the Bowater Board on the
results of Bowater's due diligence review. The Bowater Board then reviewed with
Bowater's general counsel the terms of the definitive documentation and related
legal issues and received the opinions of TD Securities and Goldman Sachs as to
the fairness to Bowater of the consideration to be paid by Bowater in the
transaction from a financial point of view. After discussion, the Bowater Board
unanimously approved the Arrangement Agreement.
On March 8, 1998, the Avenor Board held a meeting to consider the proposed
transaction with Bowater. Members of senior management of Avenor and Avenor's
financial and legal advisors updated the Avenor Board as to the status of the
discussions with Bowater and the terms of the agreement proposed to be entered
into with Bowater. The Avenor Board received an opinion from RBC DS that the
transaction with Bowater was fair from a financial point of view to Avenor
Shareholders. After discussion, the Avenor Board unanimously approved the
Arrangement Agreement. See also "Avenor's Reasons for the Transaction;
Recommendation of the Avenor Board".
On March 9, 1998, Bowater and Avenor executed the Arrangement Agreement and
publicly announced the Transaction.
BOWATER'S REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE BOWATER BOARD
THE BOWATER BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE ARRANGEMENT
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT THE BOWATER SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE SHARE
ISSUANCE AT THE BOWATER MEETING.
Bowater believes that the Transaction will create a premier North American
forest products company with an enhanced ability to serve the major newsprint
markets. After the Transaction, Bowater will be a leading global producer of
newsprint and the third largest producer of market pulp in North America,
operating eight newsprint mills and five market pulp mills.
Bowater believes that the Transaction adds complementary, cost-competitive
mills to Bowater's current asset base. In addition, the Avenor mills generally
have had significant capital investments over the past ten years, including
extensive upgrades to both pulp and paper manufacturing facilities, making them
productive and efficient assets.
Bowater also expects that the combination should create significant
advantages in delivery and service optimization for its customers by increasing
the geographic diversity of Bowater's operations. Bowater's existing mills in
Calhoun, Tennessee, and Catawba, South Carolina, would be able to focus on
serving the expanding markets in the United States South and Southwest and
Avenor's Canadian newsprint mills would augment market presence and customer
focus throughout North America by filling gaps in Bowater's United States
Northeast operations, increasing its presence in the Midwest and establishing a
United States West Coast presence. In addition, the combination, under one sales
management team, of Bowater's Liverpool, Nova Scotia mill and Avenor's
Dalhousie, New Brunswick mill, should better position Bowater to accelerate its
strategy for growth in Latin America, Europe and Asia.
As part of its analyses of the Transaction, Bowater's management developed
assumptions, prepared financial projections and performed analyses to determine
the financial benefits of the Transaction for Bowater. In order to confirm
certain of the assumptions underlying such projections and analyses, Bowater
performed a due diligence investigation of Avenor during the period immediately
preceding the signing of the
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Arrangement Agreement. The assumptions underlying Bowater's analyses include the
sale of Avenor's Dryden, Ontario mill.
Bowater believes that the Transaction presents significant opportunities
for cost reductions and operating efficiencies. Bowater estimates the cost
reductions and operational efficiencies arising from the Transaction to be US$75
million per year. Bowater anticipates that approximately half of these could be
implemented in 1998, and the full amount could be achieved by the end of 1999.
These cost reductions can be achieved primarily in the areas of distribution and
sales optimization, purchasing economies of scale, and selling, general and
administrative expenses. These estimates did not include any one-time charges
associated with attaining these savings or other charges incurred in connection
with other matters that might arise out of the Transaction in 1998. Based on
Bowater's analyses and underlying assumptions, Bowater expects that the
Transaction will be slightly accretive to earnings per share in 1998,
significantly accretive to earnings per share in 1999 and significantly
accretive to cash flow per share in both 1998 and 1999. In considering the
effect of the Transaction on earnings per share, the Bowater Board placed less
weight on Avenor's 1997 historical results because of their unusual nature. In
1997, Avenor recognized approximately US$210 million in restructuring and
impairment charges and pricing for its major products reached cyclical lows.
Although Bowater's ratio of total debt to total capitalization is expected to
exceed 50% immediately after the Transaction, the application of all or a
substantial portion of the proceeds from the planned sale of the Dryden, Ontario
mill and projected cash flow from operations should enable Bowater to improve
its debt to capital ratio. Although Bowater's management is experienced in
achieving cost reductions and operating efficiencies, there can be no assurance
that any specified level of cost reductions or other synergies will be fully
achieved or will be achieved within the time periods contemplated, nor can there
be any assurance as to the effect of the Transaction on Bowater's results of
operations. See "Risk Factors--Risks Related to the Transaction--Uncertainties
in Integrating Business Operations and Achieving Cost Reductions" and "--Risks
Related to Operations after the Transaction".
For the foregoing reasons, the Bowater Board believes that the terms of the
Arrangement Agreement and the transactions contemplated thereby are in the best
interests of Bowater and its shareholders. In reaching its conclusion, the
Bowater Board considered, among other things, (i) the judgment, advice and
analyses of its management, (ii) the judgment and advice of, and the analyses
prepared by, Goldman Sachs and TD Securities, (iii) the financial condition,
results of operations and cash flows of each of Bowater and Avenor, both on a
historical and a prospective basis, (iv) the synergies, cost reductions and
operating efficiencies that are currently expected to be available to the
combined enterprise as a result of the Transaction, (v) the anticipated
challenges associated with successfully integrating the businesses of two major
corporations, (vi) the expected strategic benefits of the Transaction, including
the significant worldwide enhancement of the market position of the combined
enterprise, (vii) the current and anticipated environment in the industry and
the other strategic alternatives available or that might become available to
Bowater, (viii) the terms and conditions of the Arrangement Agreement, (ix)
historical market prices and trading information with respect to Bowater Common
Stock and Avenor Common Shares, (x) the expected likelihood of receiving
regulatory clearance for the Transaction, (xi) the business and financial
information received by Bowater from Avenor, (xii) current industry, economic
and market conditions and (xiii) the potential variation in the Exchange Ratio
based upon possible changes in the price of Bowater Common Stock.
The foregoing discussion of the information and factors considered by the
Bowater Board is not intended to be exhaustive but is believed to include all
the material factors considered by the Bowater Board. In view of the variety of
factors considered in connection with its evaluation of the proposed
Transaction, the Bowater Board did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination.
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OPINIONS OF BOWATER'S FINANCIAL ADVISORS
Opinion of Goldman Sachs
On March 8, 1998, Goldman Sachs delivered its oral opinion to the Bowater
Board, which was confirmed in writing as of March 9, 1998, to the effect that,
as of such dates, the Aggregate Consideration to be paid by Bowater pursuant to
the Arrangement was fair from a financial point of view to Bowater.
THE FULL TEXT OF THE MARCH 9, 1998, WRITTEN OPINION OF GOLDMAN SACHS, WHICH
SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED TO THIS JOINT PROXY
STATEMENT AS ANNEX H AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF BOWATER
COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Arrangement Agreement; (ii) Annual Reports to Shareholders and Annual
Reports on Form 10-K of Bowater for the five years ended December 31, 1996;
(iii) Annual Reports to Shareholders and Annual Reports on Form 40-F of Avenor
for the five years ended December 31, 1996; (iv) audited financial statements
for the year ended December 31, 1997, for Avenor and Bowater; (v) certain
interim reports to shareholders and Quarterly Reports on Form 10-Q of Bowater;
(vi) certain interim reports to shareholders of Avenor; (vii) certain other
communications from Bowater and Avenor to their respective shareholders; (viii)
certain internal financial analyses and forecasts for Avenor prepared by the
management of Avenor; and (ix) certain internal financial analyses and forecasts
for Bowater and Avenor prepared by the management of Bowater. Goldman Sachs also
held discussions with members of the senior management of Bowater and Avenor
regarding the strategic rationale for, and the potential benefits of, the
Transaction and the past and current business operations, financial condition
and future prospects of their respective companies. In addition, Goldman Sachs
reviewed the reported price and trading activity for the Bowater Common Stock
and the Avenor Common Shares, compared certain financial and stock market
information for Bowater and Avenor with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the paper and forest products
industry specifically and in other industries generally and performed such other
studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In that regard, Goldman
Sachs assumed, with Bowater's consent, that the financial forecasts for Bowater
and Avenor, including without limitation, the projected cost savings and
operating synergies expected to result from the transaction contemplated by the
Arrangement Agreement had been reasonably prepared on a basis reflecting the
best currently available judgments of Bowater and that such forecasts will be
realized in the amounts and the times contemplated thereby. Goldman Sachs did
not make an independent evaluation or appraisal of the assets and liabilities of
Bowater or Avenor or any of their respective subsidiaries and was not furnished
with any such evaluation or appraisal. Goldman Sachs' advisory services and the
opinion referred to herein were provided for the information and assistance of
the Bowater Board in connection with its consideration of the transaction
contemplated by the Arrangement Agreement and such opinion does not constitute a
recommendation as to how any holder of Bowater Common Stock should vote with
respect to such transaction.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion to the Bowater Board.
(i) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to Avenor and Bowater to
corresponding financial information, ratios and public market multiples
(with certain data points not being meaningful) for nine publicly traded
Canadian corporations (the "Selected Canadian Companies") and fourteen
publicly traded U.S. corporations (the "Selected U.S. Companies" and,
together with the Selected Canadian Companies, the "Selected Companies").
The Selected Canadian Companies consisted of Abitibi-Consolidated, Alliance
Forest Products Inc., Domtar Inc., Donohue Inc., Fletcher Challenge Canada
Ltd., MacMillan Bloedel Ltd., Noranda Forest Inc., St. Laurent Paperboard
Inc. and West Fraser Timber Co. Ltd. The Selected U.S. Companies consisted
of Boise Cascade Corporation, Champion International Corporation, Georgia-
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Pacific Corporation, International Paper Company, Jefferson Smurfit
Corporation, Longview Fibre Company, The Mead Corporation, Rayonier Inc.,
Stone Container Corporation, Temple-Inland Inc., Union Camp Corporation,
Westvaco Corporation, Willamette Industries, Inc. and Weyerhaeuser Company.
The Selected Companies were chosen because they are publicly traded
companies with operations that for purposes of analysis may be considered
similar to certain operations of Avenor and Bowater. The multiples and
ratios for each of the Selected Companies were based on the most recent
publicly available information, including estimates for 1998 from Goldman
Sachs' equity research department and stock prices as of March 4, 1998.
With respect to the Selected Companies, Goldman Sachs considered the
enterprise value (i.e., market value of common equity plus net debt) as a
multiple of earnings before interest, taxes, depreciation and amortization
("EBITDA") and as a multiple of sales, in each of 1995 (the "Peak Year"),
1997 and 1998. Such analyses indicated that enterprise value as a multiple
of Peak Year EBITDA ranged from 3.1x to 12.8x for the Selected Canadian
Companies and 3.4x to 7.1x for the Selected U.S. Companies; enterprise
value as a multiple of 1997 EBITDA ranged from 5.7x to 24.5x for the
Selected Canadian Companies and 5.3x to 23.0x for the Selected U.S.
Companies; and enterprise value as a multiple of 1998 estimated EBITDA
ranged from 5.6x to 8.2x for the Selected Canadian Companies and 4.7x to
9.7x for the Selected U.S. Companies. Goldman Sachs' analysis of the
Selected Companies indicated that enterprise value as a multiple of Peak
Year sales ranged from 0.6x to 4.0x for the Selected Canadian Companies and
0.6x to 1.8x for the Selected U.S. Companies; enterprise value as a
multiple of 1997 sales ranged from 0.8x to 3.0x for the Selected Canadian
Companies and 0.7x to 1.8x for the Selected U.S. Companies; and enterprise
value as a multiple of 1998 estimated sales ranged from 0.7x to 1.9x for
the Selected Canadian Companies and 0.6x to 1.7x for the Selected U.S.
Companies.
Goldman Sachs also considered for the Selected Companies Peak Year
price/earnings ("P/E") ratios which ranged from 5.1x to 20.6x for the
Selected Canadian Companies and 2.9x to 12.2x for the Selected U.S.
Companies; 1997 P/E ratios which ranged from 14.0x to 36.0x for the
Selected Canadian Companies and 16.4x to 60.9x for the Selected U.S.
Companies; and 1998 estimated P/E ratios which ranged from 11.8x to 47.4x
for the Selected Canadian Companies and 16.0x to 47.0x for the Selected
U.S. Companies. In addition, Goldman Sachs' analysis indicated price
multiples of book value ranging from 1.0x to 2.2x for the Selected Canadian
Companies and 1.2x to 4.4x for the Selected U.S. Companies, and dividend
yields in 1997 ranging from 1.1% to 4.3% for the Selected Canadian
Companies and 0.4% to 5.0% for the Selected U.S. Companies.
(ii) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the paper and forest
products industry since July 1984 (the "Selected Paper and Forest Products
Transactions"), and certain information relating to selected transactions
in the newsprint industry since July 1994 (the "Selected Newsprint
Transactions"). Such analysis indicated that, among other things, for the
Selected Paper and Forest Products Transactions and the Selected Newsprint
Transactions, levered aggregate consideration, (i) as a multiple of latest
twelve months ("LTM") sales ranged from 0.6x to 3.6x and 1.0x to 1.5x,
respectively, compared to a levered multiple of 1997 revenue of 1.8x at a
purchase price of C$35.00 per Avenor Common Share, and (ii) as a multiple
of LTM EBITDA ranged from 3.6x to 28.4x and 3.6x to 10.2x, respectively,
compared to a levered multiple of 1997 EBITDA of 12.6x at a purchase price
of C$35.00 per Avenor Common Share.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a
discounted cash flow ("DCF") analysis for Avenor based on Avenor's
projections for 1998 and Bowater's assumptions for Avenor for the years
1999 through 2001 under the following two scenarios: (a) excluding
estimated synergies projected by Bowater (the "DCF Status Quo Case") and
(b) including synergies of US$75 million based on Bowater's projections
(the "DCF Management Expectation Case"). Goldman Sachs calculated a net
present value of free cash flows for the years 1998 through 2001 using
discount rates ranging from 11% to 13%, and terminal value normalized
EBITDA multiples ranging from 5.0x to 7.0x discounted from the end of 2001.
Based on this analysis, the implied value per Avenor Common Share ranged
from C$24.90 to C$39.60 in the DCF Status Quo Case and C$30.10 to C$46.40
in the DCF Management Expectation Case.
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(iv) Summary Transaction Analysis. Goldman Sachs performed a summary
merger analysis (assuming a transaction structure of 60% cash/40% stock
(the "60/40 Case") and a transaction structure of 50% cash/50% stock (the
"50/50 Case")) that indicated, among other things, the following impacts of
the Arrangement on pro forma earnings per share ("EPS") under the following
four scenarios at a purchase price of C$35.00 per Avenor Common Share: (a)
using Bowater's 1998 and 1999 EPS estimates for both Bowater and Avenor and
excluding Bowater's projected synergies estimates of US$75 million in 1998
and 1999: accretive in 1998 and 1999; (b) using Bowater's 1998 and 1999 EPS
estimates for both Bowater and Avenor and Bowater's projected synergies
estimates of US$75 million in 1998 and 1999: accretive in 1998 and 1999;
(c) using Institutional Brokers Estimate System ("IBES") 1998 and 1999 EPS
estimates for both Avenor and Bowater and excluding Bowater's projected
synergies estimates of US$75 million in 1998 and 1999: dilutive in 1998 and
accretive in 1999 (with the 50/50 case being mildly accretive); and (d)
using IBES 1998 and 1999 EPS estimates for both Avenor and Bowater and
Bowater's synergies estimates of US$75 million in each of 1998 and 1999:
mildly accretive in the 60/40 case and neutral in the 50/50 case in 1998
and accretive in 1999 in each case.
(v) Contribution Analysis. Goldman Sachs reviewed certain historical
and estimated future operating and financial information including, among
other things, sales, EBITDA, earnings before interest and taxes ("EBIT"),
equity market capitalization and levered market capitalization for Avenor,
Bowater and the pro forma combined entity resulting from the Arrangement
based on estimates and projections provided by their respective
managements. This analysis indicated among other things that, based on
estimates of their respective managements, in 1998 Avenor and Bowater would
contribute to the combined entity: 48.1% and 51.9%, respectively, to sales;
43.4% and 56.6%, respectively, to EBITDA; 45.8% and 54.2%, respectively, to
EBIT; 46.1% and 53.9%, respectively, to equity market capitalization; and
50.3% and 49.7%, respectively, to levered market capitalization.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Bowater or Avenor or the Arrangement. The analyses were prepared solely for
purposes of Goldman Sachs' providing its opinion to the Bowater Board as to the
fairness from a financial point of view of the Aggregate Consideration to be
paid by Bowater pursuant to the Arrangement and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of Bowater, Avenor,
Goldman Sachs or any other person assumes responsibility if future results are
materially different from those forecast. As described above, Goldman Sachs'
opinion to the Bowater Board was one of many factors taken into consideration by
the Bowater Board in making its determination to approve the Arrangement
Agreement.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs provides
a full range of financial advisory and securities services and, in the course of
its normal trading activities, may from time to time effect transactions and
hold positions in the securities or options on securities of Bowater and/or
Avenor for its own account and for the accounts of customers. Bowater selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions similar
to this one.
Pursuant to an engagement letter dated January 9, 1998, Bowater engaged
Goldman Sachs to act as its financial advisor in connection with a potential
business combination with Avenor. Pursuant to the terms of the engagement
letter, Bowater has agreed to pay Goldman Sachs a fee of 0.21% of the aggregate
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consideration (as described in such engagement letter) less fees already paid.
Bowater has also agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorney's fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
Opinion of TD Securities
On March 8, 1998, TD Securities delivered its oral opinion to the Bowater
Board, which was confirmed in writing as of March 9, 1998, to the effect that,
as of such date, the Aggregate Consideration to be paid by Bowater pursuant to
the Arrangement was fair, from a financial point of view, to Bowater.
THE FULL TEXT OF THE MARCH 9, 1998, WRITTEN OPINION OF TD SECURITIES, WHICH
SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED TO THIS JOINT PROXY
STATEMENT AS ANNEX I AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF BOWATER
COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY.
In preparing the opinion, TD Securities relied upon, among other things,
(i) the terms of the Arrangement Agreement; (ii) the audited financial
statements of Bowater for the four years ended December 31, 1997; (iii) the
Annual Reports and Form 10-K of Bowater for the three years ended December 31,
1996, and other public disclosure materials of Bowater; (iv) other financial
information obtained from management of Bowater, including internal management
forecasts, projections, strategic plans and budgets; (v) discussions with senior
management of Bowater with respect to the information referred to above, among
other things; (vi) representations obtained from senior management of Bowater as
to matters of fact relevant to its engagement; (vii) discussions with the
auditors and legal counsel of Bowater; (viii) the audited financial statements
of Avenor for five years ended December 31, 1997; (ix) the Annual Reports,
Annual Information Form and Form 40-F for Avenor for the four years ended
December 31, 1996; (x) other financial information obtained from management of
Avenor, including historical internal financial statements and 1998 budget; (xi)
the trust indenture for the Avenor Convertible Debentures; (xii) discussions
with senior management of Avenor during due diligence sessions; (xiii)
discussions with RBC DS, Avenor's financial advisor, and Davies, Ward & Beck,
Avenor's legal counsel; (xiv) certain generally available financial performance
data and relevant stock market and other trading information relating to the
Bowater Common Stock, Avenor Common Shares, and the convertible debentures of
Avenor and securities of certain other publicly traded companies that it
considered to be relevant; (xv) generally available statistics on certain
transactions that it considered to be relevant; (xvi) generally available
information regarding the forest products industry; (xvii) tax matters related
to or arising from the Arrangement; and (xviii) such other information,
investigations and analyses as it considered necessary or appropriate in the
circumstances.
TD Securities relied upon, without independent verification, all financial
and other information that was obtained by and from public sources and that was
provided to TD Securities by Bowater, Avenor, their respective advisors, or
otherwise. TD Securities assumed that this information was complete and accurate
and did not omit to state any material fact or any fact necessary to be stated
to make that information not misleading. TD Securities' opinion is conditional
upon such completeness and accuracy. With respect to the budgets, financial
forecasts and projections provided to TD Securities and used in the analysis, TD
Securities assumed that they were reasonably prepared on bases reflecting the
best currently available estimates and judgments of management of Bowater and
Avenor as to the matters covered thereby, and in rendering the opinion TD
Securities expressed no view as to the reasonableness of such budgets, forecasts
or projections or the assumptions on which they were based. The opinion of TD
Securities referred to herein was provided for the information and assistance of
the Bowater Board in connection with its consideration of the transaction
contemplated by the Arrangement Agreement, and such opinion does not constitute
a recommendation as to how any holder of Bowater Common Stock should vote with
respect to such transaction.
The following is a summary of the material financial analyses used by TD
Securities in connection with providing its opinion to the Bowater Board.
(i) Selected Comparable Companies Analysis. TD Securities reviewed
and compared certain financial information relating to Avenor and Bowater
to corresponding financial information, ratios and
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public market multiples (with certain data points not being meaningful) for
six publicly traded Canadian corporations ("Comparable Companies")
comprised of Abitibi-Consolidated, Alliance Forest Products Inc., Domtar
Inc., Donohue Inc., MacMillan Bloedel Ltd. and Noranda Forest Inc. The
Comparable Companies were chosen because they are publicly traded companies
with operations that for purposes of analysis may be considered similar to
certain operations of Avenor and Bowater. The multiples and ratios for each
of the Comparable Companies were based on the most recent publicly
available information, including estimates for 1998 from TD Securities'
equity research department and stock prices as of March 4, 1998.
With respect to the Comparable Companies, TD Securities considered the
enterprise value (i.e., market value of common equity plus net debt) as a
multiple of EBITDA, in each of 1995 (the "Peak Year"), 1997 and 1998. Such
analyses indicated that enterprise value as a multiple of peak year EBITDA
ranged from 3.9x to 8.0x for the Comparable Companies; enterprise value as
a multiple of 1997 EBITDA ranged from 6.8x to 26.3x; and enterprise value
as a multiple of 1998 estimated EBITDA ranged from 5.7x to 9.8x for the
Comparable Companies. The enterprise to EBITDA multiples for the Comparable
Companies compare to the Avenor 1995, 1997 and 1998 EBITDA multiples of
3.9x, 11.0x and 7.9x, respectively, adjusted for 1997 realized Avenor cost
savings, at a purchase price of C$35.00 per Avenor Common Share.
(ii) Selected Transaction Analysis. TD Securities analyzed certain
information with respect to selected transactions in the paper and forest
products sector, but most importantly relied on transactions in the
newsprint industry since August 1995 (the "Selected Transactions"). Such
analysis indicated that, among other things, aggregate consideration, (i)
as a multiple of 1995 EBITDA ranged from 4.1x to 5.6x compared to, in the
case of Avenor, a multiple of 4.2x at a purchase price of C$35.00 per
Avenor Common Share and (ii) as a multiple of annual unit newsprint
capacity ranged from C$1,287 per tonne to C$1,587 per tonne compared to, in
the case of Avenor, C$1,358 per tonne, at a purchase price of C$35.00 per
Avenor Common Share. In arriving at both aggregate consideration to 1995
EBITDA and aggregate consideration to annual unit newsprint capacity for
Avenor at C$35.00 per Avenor Common Share, aggregate consideration was
reduced by value estimates for Avenor's pulp, white paper and lumber
businesses.
(iii) Discounted Cash Flow Analysis. TD Securities performed a DCF
analysis for Avenor based on Avenor's projections for 1998 and Bowater's
assumptions for Avenor for the years 1999 to 2001 under two pricing
scenarios: (a) Bowater pricing assumptions and (b) TD Securities' pricing
assumptions as provided by TD Securities' equity research department. For
each of these pricing scenarios, TD Securities performed a DCF analyses on
Avenor assuming no synergies from the transaction ("DCF Stand Alone
Scenario"), and with US$75 million of synergies from the transaction as
estimated by Bowater ("DCF Management Scenario"). TD Securities calculated
a net present value of free cash flows for the years 1998 through 2001
using discount rates ranging from 10.0% to 12.0% and terminal value average
EBITDA multiples ranging from 5.0x to 8.0x discounted from the end of 2001.
Based on this analysis, the implied value per Avenor Common Share under the
DCF Stand Alone Scenario ranged from C$21.85 to C$38.97 under Bowater
pricing assumptions, and C$27.78 to C$48.00 under the TD Securities pricing
assumptions. The implied value per Avenor Common Share under the DCF
Management Scenario ranged from C$29.14 to C$49.62 under the Bowater
pricing assumptions, and C$35.07 to C$58.65 under the TD Securities pricing
assumptions.
(iv) Summary Transaction Analysis. TD Securities performed a summary
analysis (assuming consideration paid of 60% in cash and 40% in stock) that
indicated, among other things, the following impacts of the Arrangement on
pro forma EPS under the following four scenarios at a purchase price of
C$35.00 per Avenor Common Share: (a) using Bowater's 1998 and 1999 EPS
estimates for both Bowater and Avenor and excluding Bowater's projected
synergies estimates: accretive in 1998 and 1999; (b) using Bowater's 1998
and 1999 EPS estimates for both Bowater and Avenor and Bowater's projected
synergies estimates of US$75 million in each of 1998 and 1999: accretive in
1998 and 1999; (c) using IBES 1998 and 1999 EPS estimates for both Avenor
and Bowater and excluding Bowater's projected synergies estimates: dilutive
in 1998 and accretive in 1999; and (d) using IBES 1998 and 1999 EPS
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estimates for both Avenor and Bowater and Bowater's synergies estimates of
US$75 million in each of 1998 and 1999: accretive in 1998 and 1999.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying TD Securities' opinion. In arriving at its fairness determination, TD
Securities considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Bowater or Avenor or the Arrangement. The analyses were prepared solely for
purposes of TD Securities' providing its opinion to the Bowater Board as to the
fairness from a financial point of view of the Aggregate Consideration to be
paid by Bowater pursuant to the Arrangement and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of Bowater, Avenor, TD
Securities or any other person assumes responsibility if future results are
materially different from those forecast. As described above, TD Securities'
opinion to the Bowater Board was one of many factors taken into consideration by
the Bowater Board in making its determination to approve the Arrangement
Agreement.
TD Securities, a wholly-owned subsidiary of The Toronto-Dominion Bank, is a
Canadian investment banking firm with operations in a broad range of investment
banking activities, including corporate and government finance, mergers and
acquisitions, sales and trading of fixed income instruments and equities, and
investment management. In the course of its normal trading activities, TD
Securities may, from time to time, effect transactions and hold positions in the
securities or options on securities of Bowater and/or Avenor for its own account
and for the accounts of its customers. Bowater selected TD Securities as its
financial advisor because it is a nationally recognized investment banking firm
in Canada that has substantial experience in transactions similar to this one.
Pursuant to a letter agreement dated January 22, 1998 (the "TD Securities
Letter"), Bowater engaged TD Securities to provide financial advisory services
and to act as non-exclusive agent to Bowater in connection with the proposed
acquisition of Avenor. Pursuant to the terms of the TD Securities Letter,
Bowater has agreed to pay a fee of 0.25% of the total consideration (as
described in the TD Securities Letter) paid by Bowater less fees already paid.
Bowater has also agreed to reimburse TD Securities for its reasonable out-of-
pocket expenses, including attorney's fees, and to indemnify TD Securities
against certain liabilities.
AVENOR'S REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE AVENOR BOARD
THE AVENOR BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE ARRANGEMENT
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE AVENOR BOARD BELIEVES
THAT THE ARRANGEMENT IS FAIR TO, AND IN THE BEST INTERESTS OF, AVENOR AND THE
AVENOR SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT AVENOR SHAREHOLDERS VOTE IN
FAVOUR OF THE ARRANGEMENT RESOLUTION AND THE SHAREHOLDER RIGHTS PLAN RESOLUTION
AT THE AVENOR MEETING.
In reaching its conclusions that the Arrangement is fair to, and in the
best interests of, Avenor and the Avenor Shareholders and its recommendation
that Avenor Shareholders vote in favour of the Arrangement Resolution and the
Shareholder Rights Plan Resolution, the Avenor Board considered information with
respect to the business and affairs of Avenor and Bowater, as well as the
following factors:
(i) the unsolicited Abitibi Offer announced on February 25, 1998, for
all of the outstanding Avenor Common Shares at a price of C$28 per share in
cash or 1.422 Abitibi-Consolidated common shares plus C$0.05 was considered
by the Avenor Board to be inadequate;
(ii) the consideration of C$35 per Avenor Common Share offered by
Bowater was significantly higher than the consideration offered under the
Abitibi Offer and the trading prices of the Avenor Common Shares, both
prior to the announcement of the Abitibi Offer and after such announcement;
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(iii) the presentations and financial analyses provided by RBC DS to
the Avenor Board and the opinion of RBC DS that the Arrangement is fair
from a financial point of view to Avenor Shareholders;
(iv) the combination of Bowater and Avenor will create the second
largest producer of newsprint in the world and the third largest producer
of pulp in North America, operating eight newsprint mills and five market
pulp mills which will enable Avenor to continue to participate in the
further consolidation of the forest products industry;
(v) Avenor Shareholders have flexibility in deciding whether to
receive cash, Exchangeable Shares, shares of Bowater Common Stock, or a
combination of the foregoing, within the limits imposed under the
Arrangement;
(vi) the Arrangement provides Avenor Shareholders with an opportunity
to receive a substantial proportion of their consideration in the form of
Exchangeable Shares or shares of Bowater Common Stock. To the extent that
Avenor Shareholders receive Exchangeable Shares or shares of Bowater Common
Stock, they will continue to participate in the forest products industry
through Bowater, which will have a significantly larger market
capitalization and liquidity than Avenor alone;
(vii) certain Avenor Shareholders who hold their Avenor Common Shares
as capital property and file a joint election with Bowater Canada will
generally be able to exchange their Avenor Common Shares for Exchangeable
Shares under the Arrangement on a tax-deferred basis under Canadian federal
income tax legislation (see "Income Tax Considerations--Canadian Federal
Income Tax Considerations for Avenor Shareholders"); and
(viii) under the terms of the Arrangement Agreement, the Avenor Board
is able to respond, if required in accordance with its fiduciary duties, to
unsolicited proposals by third parties that would, if consummated in
accordance with their terms, result in a transaction that would be superior
to the transactions with Bowater contemplated by the Arrangement. See
"Other Terms of the Arrangement Agreement--Non-Solicitation".
In reaching its determination, the Avenor Board also considered and
evaluated, among other things: (i) other strategic alternatives with other
bidders that may have been available to Avenor in light of the Abitibi Offer as
described in "--Background of the Transaction"; (ii) alternatives referred to in
"--Background of the Transaction" involving a share recapitalization and
continuing the Operational Excellence Program; (iii) the terms of the
Arrangement, including the potential variation in the Exchange Ratio based upon
possible changes in the price of the Bowater Common Stock; (iv) the structure of
the Transaction; (v) the tax consequences of the Transaction; (vi) the judicial
and regulatory approval requirements, including approval by the Ontario Court;
(vii) the right of Avenor Shareholders to dissent under the CBCA; (viii) current
economic, industry and market conditions affecting Avenor and Bowater; and (ix)
historical market prices and trading information with respect to Avenor Common
Shares and shares of Bowater Common Stock.
This discussion of the information and factors considered and given weight
by the Avenor Board is not intended to be exhaustive but is believed to include
all material factors considered by the Avenor Board. In addition, in reaching
the determination to approve and recommend the Arrangement Agreement and the
transactions contemplated thereby, the Avenor Board did not assign any relative
or specific weights to the foregoing factors which were considered, and
individual directors may have given differing weights to different factors. The
Avenor Board is, however, unanimous in its recommendation to the Avenor
Shareholders that the Arrangement Resolution and the Shareholder Rights Plan
Resolution be approved at the Avenor Meeting.
The Avenor Board realizes that there are certain risks associated with the
Transaction, including the risks set forth in this Joint Proxy Statement under
"Risk Factors". However, the Avenor Board believes that the positive factors
should outweigh any risks, although there can be no assurances in this regard.
The Avenor Board unanimously recommends that Avenor Shareholders vote in
favour of the Arrangement Resolution attached to this Joint Proxy Statement as
Annex A to approve the Arrangement and in favour of the Shareholder Rights Plan
Resolution attached to this Joint Proxy Statement as Annex B to
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approve the waiving of the Shareholder Rights Plan in respect of the Flip-In
Event that would otherwise occur as a result of the Transaction.
OPINION OF AVENOR'S FINANCIAL ADVISOR
Avenor retained RBC DS to act as its financial advisor in connection with
evaluating Avenor's stand-alone and strategic transaction alternatives
(including the Transaction) and to provide an opinion with respect to the
fairness of a transaction from a financial point of view to the Avenor
Shareholders. RBC DS verbally advised the Avenor Board on March 8, 1998, which
opinion was confirmed in writing as at March 9, 1998, that the terms of the
Transaction between Bowater and Avenor contemplated by the Arrangement Agreement
were fair to the Avenor Shareholders from a financial point of view. RBC DS has
delivered to the Avenor Board its written opinion dated June 18, 1998 (the "RBC
DS Opinion").
THE FULL TEXT OF THE RBC DS OPINION WHICH SETS FORTH ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH
THE OPINION, IS ATTACHED TO THIS JOINT PROXY STATEMENT AS ANNEX J AND IS
INCORPORATED HEREIN BY REFERENCE. AVENOR SHAREHOLDERS ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY.
The RBC DS Opinion addresses only the fairness of the Arrangement from a
financial point of view and does not constitute a recommendation to any Avenor
Shareholder as to how to vote at the Avenor Meeting.
In connection with rendering its opinion, RBC DS reviewed and relied upon,
among other things: (i) the Arrangement Agreement; (ii) the Joint Proxy
Statement; (iii) the unaudited interim report of Avenor for the quarterly period
ended March 31, 1998; (iv) audited financial statements of Avenor for each of
the three years ended December 31, 1995, 1996 and 1997; (v) annual reports of
Avenor for each of the two years ended December 31, 1995 and 1996; (vi) first
three quarterly reports of Avenor for 1996 and 1997; (vii) the Notice of Annual
Meeting of Shareholders and Management Proxy Circular of Avenor for each of the
two years ended December 31, 1995 and 1996; (viii) annual information forms of
Avenor for each of the two years ended December 31, 1996 and 1997; (ix) internal
management budget of Avenor for the year ending December 31, 1998; (x) other
internal documents of Avenor including historical financial information by mill,
terms of long-term debt and credit facilities, and material supply agreements;
(xi) projected financial statements for Avenor for the years ending December 31,
1998 through December 31, 2000; (xii) discussions with senior management of
Avenor; (xiii) discussions with Avenor's outside legal counsel; (xiv) site
visits to certain of Avenor's facilities; (xv) the unaudited interim report of
Bowater for the quarterly period ended March 31, 1998; (xvi) audited financial
statements of Bowater for each of the two years ended December 31, 1996 and
1997; (xvii) annual reports of Bowater for each of the two years ended December
31, 1996 and 1997; (xviii) first three quarterly reports of Bowater for 1996 and
1997; (xix) the Notice of Annual Meeting of Shareholders and Proxy Statement of
Bowater for each of the two years ended December 31, 1996 and 1997; (xx) the
Form 10-K of Bowater for each of the two years ended December 31, 1996 and 1997;
(xxi) due diligence with senior management of Bowater; (xxii) public information
relating to the business, operations, financial performance and stock trading
history of Avenor, Bowater and other selected public companies considered by RBC
DS to be relevant; (xxiii) public information with respect to other transactions
of a comparable nature considered by RBC DS to be relevant; (xxiv)
representations contained in a certificate addressed to RBC DS, dated as of the
date of the RBC DS Opinion, from senior officers of Avenor as to the
completeness and accuracy of the information upon which the RBC DS Opinion is
based; and (xxv) such other corporate, industry and financial market information
investigations and analyses as RBC DS considered necessary or appropriate in the
circumstances.
RBC DS was not, to the best of its knowledge, denied access by Avenor to
any information requested by RBC DS. RBC DS' access to Bowater was limited to a
review of publicly available information only and verbal due diligence sessions
with certain members of Bowater's senior management team. RBC DS was not, to the
best of its knowledge, denied any information or access which was requested at
such sessions.
RBC DS relied upon and assumed the completeness, accuracy and fair
presentation of all of the financial and other information obtained by it from
public sources and provided by senior management of Avenor, Bowater and their
respective consultants and advisors. The RBC DS Opinion is conditional upon the
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completeness, accuracy and fair presentation of such information. RBC DS has not
attempted to verify independently the completeness, accuracy or fair
presentation of such information. The RBC DS Opinion is rendered on the basis of
securities markets, economic, financial and general business conditions
prevailing as at the date of the RBC DS Opinion and the condition and prospects,
financial and otherwise, of Avenor, Bowater and their respective subsidiaries
and affiliates, as they were reflected in the information and documents reviewed
and as they were represented to RBC DS in discussions with the management of
Avenor and Bowater. In its analyses and in preparing the RBC DS Opinion, RBC DS
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of RBC DS or any party involved in the Arrangement.
The following is a summary of the material financial analyses used by RBC
DS in connection with providing its opinion to the Avenor Board.
(i) Discounted Cash Flow Analysis. RBC DS performed a DCF analysis of
Avenor for the years 1998 to 2000 based upon Avenor's business plan for
1998 and projections for 1999 and 2000 based upon consensus commodity price
forecasts derived from estimates from certain equity research analysts. In
addition, RBC DS assumed full realization of C$140 million in operating
savings in 1999 and 2000 as part of Avenor's Operational Excellence Program
that was announced in April 1997. RBC DS calculated a terminal value for
Avenor's projected free cash flows using a terminal EBITDA (earnings before
interest, taxes, depreciation and amortization) multiple approach. In
deriving a terminal value based upon the EBITDA multiple approach, RBC DS
applied a range of 5.0x to 6.0x to Avenor's projected three-year average
EBITDA for 1998 to 2000. RBC DS calculated a net present value of Avenor's
projected free cash flows for the years 1998 to 2000 using a discount rate
of 10.0% and terminal value EBITDA multiples ranging from 5.0x to 6.0x.
Based upon this analysis and taking into account certain sensitivity
analyses, including, among other things, changes in commodity price
forecasts and Canadian/U.S. exchange rate fluctuations, the implied value
per Avenor Common Share ranged from C$34.00 per share to C$40.00 per share.
The DCF analysis generates results that are consistent with the price per
Avenor Common Share proposed under the Arrangement.
(ii) Net Asset Value Analysis. RBC DS prepared a net asset value
analysis of Avenor based upon estimated realizable values per unit of
capacity derived from selected precedent transactions in the paper and
forest products industry involving newsprint, uncoated freesheet, market
pulp and lumber assets in North America from 1988 to present. Such analysis
indicated that, among other things, for: (a) newsprint transactions, the
enterprise value paid per tonne of capacity ranged from C$848 per tonne to
C$1,512 per tonne; (b) uncoated freesheet transactions, the enterprise
value paid per ton of capacity ranged from C$1,145 per ton to C$1,875 per
ton; (c) market pulp transactions, the enterprise value paid per tonne of
capacity ranged from C$534 per tonne to C$1,512 per tonne; and (d) lumber
assets, the cost allocated to fixed assets ranged from C$216 per thousand
board feet to C$757 per thousand board feet and the price paid per cubic
meter of annual allowable cut ranged from C$57 per cubic meter of annual
allowable cut to C$164 per cubic meter of annual allowable cut. Based upon
the above transactions values, RBC DS employed the following capacity value
ranges for: (a) newsprint, C$1,100 per tonne to C$1,500 per tonne; (b)
uncoated freesheet, C$1,600 per ton to C$1,800 per ton; (c) market pulp,
C$1,100 per tonne to C$1,300 per tonne; and (d) lumber, C$300 per thousand
board feet to C$350 per thousand board feet for lumber capacity and C$70
per cubic meter to C$100 per cubic meter of annual allowable cut. Based
upon these estimated realizable values per unit of capacity, RBC DS
calculated a net asset value per Avenor Common Share in the range of
C$31.00 per share to C$36.00 per share. The net asset value analysis
generates results that are consistent with the price per Avenor Common
Share proposed under the Arrangement.
(iii) Precedent Transaction Multiples Analysis. RBC DS analyzed
certain information with respect to two specific precedent transactions in
the newsprint industry -- Donohue Inc.'s acquisition of QUNO Corporation in
February 1996 and Stone-Consolidated Corporation's acquisition of Rainy
River Forest Products Inc. in November 1995. Such analysis indicated that,
among other things: (i) equity value per share, (a) as a multiple of
earnings per share ranged from 9.9x to 15.2x and (b) as a multiple of cash
flow per share ranged from 4.6x to 8.4x; and (ii) enterprise value as a
multiple of EBITDA ranged
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from 4.7x to 6.0x. Based upon these precedent transaction multiples, RBC DS
calculated an implied equity value per Avenor Common Share in the range of
C$25.00 per share to C$35.50 per share. The precedent transaction multiples
analysis generates results that are consistent with the price per Avenor
Common Share proposed under the Arrangement. RBC DS also reviewed these two
precedent transactions based upon enterprise value as a multiple of annual
unit newsprint capacity, which ranged from C$1,236 per tonne to C$1,417 per
tonne compared to, in the case of Avenor, C$1,624 per tonne, at a purchase
price of C$35.00 per Avenor Common Share. In arriving at enterprise value
as a multiple of annual unit newsprint capacity for Avenor at C$35.00 per
Avenor Common Share, enterprise value was reduced by value estimates for
Avenor's uncoated freesheet, market pulp, fibre and lumber businesses.
(iv) Comparable Public Company Analysis. RBC DS reviewed Avenor's
public market trading level compared to other North American paper and
forest product companies. RBC DS grouped these companies into the following
product categories: (a) newsprint producers -- Abitibi-Consolidated,
Alliance Forest Products Inc., Bowater, Donohue Inc. and Fletcher Challenge
Canada Ltd.; (b) coated and uncoated paper producers -- Champion
International Corporation, Consolidated Papers, Inc., Domtar Inc.,
International Paper Company, The Mead Corporation, P.H. Glatfelter Company,
Potlatch Corporation, Repap Enterprises Inc., Wausau Paper Mills Company
and Westvaco Corporation; and (c) diversified forest products
companies -- Georgia-Pacific Corporation, Fort James Corporation, MacMillan
Bloedel Ltd., Noranda Forest Inc., Union Camp Corporation, Weyerhaeuser
Company and Willamette Industries, Inc. RBC DS relied primarily upon the
market trading multiples derived from the newsprint producers as the five
companies in this group were deemed to have, for the purposes of RBC DS'
analysis, operations similar to those of Avenor. With respect to the five
newsprint companies (the "Newsprint Comparables"), RBC DS considered the
equity value per share as a multiple of both earnings per share and cash
flow per share, and the enterprise value as a multiple of EBITDA for 1995
(the "peak year"), the 12 months ended March 31, 1998 (the "LTM period")
and estimated 1998. Such analysis indicated that: (i) the equity value per
share, (a) as a multiple of peak year earnings per share ranged from 5.1x
to 8.4x, (b) as a multiple of the LTM period earnings per share ranged from
15.9x to 35.6x, and (c) as a multiple of 1998 estimated earnings per share
ranged from 13.5x to 17.3x; (ii) the equity value per share, (a) as a
multiple of peak year cash flow per share ranged from 3.2x to 5.4x, (b) as
a multiple of the LTM period cash flow per share ranged from 6.6x to 9.4x,
and (c) as a multiple of 1998 estimated cash flow per share ranged from
5.7x to 6.7x; and (iii) the enterprise value, (a) as a multiple of peak
year EBITDA ranged from 3.4x to 5.8x, (b) as a multiple of the LTM period
EBITDA ranged from 6.5x to 9.9x, and (c) as a multiple of 1998 estimated
EBITDA ranged from 6.1x to 7.9x. The equity value per share as a multiple
of earnings per share for the Newsprint Comparables compares to the Avenor
peak year and 1998 earnings multiples of 7.4x and 21.9x, respectively, at a
purchase price of C$35.00 per Avenor Common Share. The equity value per
share as a multiple of cash flow per share for the Newsprint Comparables
compares to the Avenor peak year, LTM period and 1998 cash flow multiples
of 3.7x, 18.1x, and 8.1x, respectively, at a purchase price of C$35.00 per
Avenor Common Share. The enterprise value as a multiple of EBITDA for the
Newsprint Comparables compares to the Avenor peak year, LTM period and 1998
EBITDA multiples of 3.9x, 9.2x, and 7.2x, respectively, at a purchase price
of C$35.00 per Avenor Common Share.
(v) Recent Trading Levels of Avenor Common Shares. The price per
Avenor Common Share under the Arrangement of C$35.00 represents a premium
of 51.5% to the C$23.10 closing market price of the Avenor Common Shares on
the TSE on February 24, 1998, the last trading day immediately prior to the
announcement by Abitibi-Consolidated of its unsolicited take-over bid for
100% of the Avenor Common Shares at a price of C$28.00 per share. RBC DS
noted that this premium is above the average premium for similar
transactions in the paper and forest products industry.
(vi) Review of Non-Cash Consideration. Under the Arrangement, the
non-cash consideration will be based upon the volume weighted average
trading price of the shares of Bowater Common Stock on the NYSE for the 20
trading days ending on the third business day prior to the Effective Date.
RBC DS noted that the 20-day volume weighted average trading price of the
shares of Bowater Common Stock ending June 17, 1998 of US$50.51 per share
is not inconsistent with their recent trading levels.
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(vii) Liquidity Analysis of Shares of Bowater Common Stock. RBC DS
considered the liquidity of the shares of Bowater Common Stock. Over the
253 trading days during the one-year period ended on February 24, 1998,
54,466,200 shares of Bowater Common Stock have traded on the NYSE
representing an average daily volume of 215,281 shares of Bowater Common
Stock. RBC DS noted that over this same timeframe, 48,867,825 Avenor Common
Shares have traded on the TSE, representing an average daily volume of
193,153 Avenor Common Shares. RBC DS also measured the liquidity of the
shares of Bowater Common Stock based upon the number of trading days
required to trade US$100 million, and noted that for Bowater such time
period was approximately three times shorter than for Avenor. In addition,
RBC DS calculated the number of trading days required to trade either the
minimum or maximum number of shares of Bowater Common Stock to be issued
pursuant to the Arrangement, and noted that such time periods ranged from
approximately 33 days to 60 days, and 40 days to 73 days, respectively.
RBC DS believes that its analyses must be considered as a whole and that
selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of
the process underlying the RBC DS Opinion. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to partial analysis or
summary description. Any attempt to do so could lead to undue emphasis on any
particular factor or analysis. The RBC DS Opinion is not to be construed as a
recommendation to Avenor Shareholders as to how to vote at the Avenor Meeting.
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales, and trading and investment research. The RBC DS
Opinion represents the opinion of RBC DS and the form and content thereof have
been approved for release by a committee of its directors, each of whom is
experienced in merger, acquisition, divestiture and fairness opinion matters.
Avenor selected RBC DS as its financial advisor because it is a nationally
recognized investment banking firm in Canada, has substantial expertise in
mergers and acquisitions in the forest products sector, and has extensive
knowledge of Avenor and Avenor's business.
RBC DS was initially contacted by the Avenor Board on November 28, 1997,
and was formally engaged by Avenor pursuant to the terms of an engagement
agreement dated February 13, 1998. The terms of the engagement agreement provide
that RBC DS is to be paid a fee of approximately C$13 million for its services
as financial advisor if the Arrangement is completed. In addition, Avenor agreed
to reimburse RBC DS for any reasonable out-of-pocket expenses, including the
fees and disbursements of legal counsel, and to indemnify RBC DS and certain
related persons against certain liabilities in certain circumstances.
PLANS AND PROPOSALS
Following the consummation of the Arrangement, Bowater intends to execute
the strategy described under "--Bowater's Reasons for the Transaction;
Recommendation of the Bowater Board".
Bowater has no plans to close any of Avenor's or Bowater's mills. It is
intended that, immediately following the Arrangement, Avenor's facility in
Dryden, Ontario, will be made available for sale as uncoated freesheet does not
represent a core business for Bowater. Most of the proceeds of any sale of this
mill would be used to pay down debt. It is expected that a sale of this mill
could be completed by the end of 1998. As previously announced, Bowater is
seeking a buyer for its Millinocket, Maine, paper mill, which no longer meets
Bowater's long-term objectives. This facility includes four paper machines and
related assets. During the course of marketing the Millinocket properties,
Bowater received unsolicited expressions of interest in purchasing all of
Bowater's properties located in the State of Maine (which include the
Millinocket mill, a mill located in East Millinocket, a hydroelectric facility,
a sawmill and two million acres of timberlands). Bowater does not intend to
enter into discussions with respect to these inquiries pending completion of the
Transaction. During 1997, Avenor's Gold River, British Columbia, mill was closed
for a total of 53 days of scheduled maintenance and market-related downtime. It
was closed in late December 1997 and reopened in late March 1998. Bowater has
not yet made a decision as to whether to continue to operate or otherwise
dispose of the mill.
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It is currently anticipated that the headquarters of Bowater will remain in
Greenville, South Carolina. Bowater intends to maintain a presence in Montreal,
Quebec. Bowater anticipates that, in terms of overall employment, there will be
redundancies which will likely be in administrative and management positions.
Bowater has not yet made a determination as to how many positions may be
eliminated, or as to the amount and timing of any restructuring charge.
Bowater estimates that the capital spending for the combined companies in
each of 1998 and 1999 will approximate US$300 million, which amounts include the
major modernization programs at the mills in Calhoun, Tennessee and East
Millinocket, Maine (which is a separate facility from the Millinocket properties
held for sale). Bowater expects that, in a capital intensive industry, Bowater
will have adequate resources from which it will be able to fund capital
requirements.
Bowater believes that the Transaction presents significant opportunities
for cost reductions and operating efficiencies. Bowater estimates the cost
reductions and operational efficiencies arising from the Transaction to be US$75
million per year. Bowater anticipates that approximately half of these could be
implemented in 1998 and the full amount could be achieved by the end of 1999.
These cost reductions are anticipated to be achieved primarily in the areas of
distribution and sales optimization, purchasing economics of scale and selling,
general and administrative costs. These estimates did not include any one-time
charges associated with attaining those savings or other charges incurred in
connection with other matters that might arise out of the Transaction in 1998.
The anticipated cost reductions represent management's best estimate and there
can be no assurance that such improvements will be fully realized, or fully
realized in the indicated time frame.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Avenor Board with respect to the
Transaction, Avenor Shareholders should be aware that certain officers and
directors of Avenor have interests in the Transaction, including those referred
to below, that may be different from those of Avenor Shareholders generally.
Indemnification and Insurance
Bowater will ensure that the Avenor By-laws or of any corporation
continuing following the amalgamation, merger, plan of arrangement,
consolidation or winding-up of Avenor with or into one or more other persons (a
"Surviving Corporation") will contain the provisions with respect to
indemnification now set forth in section 5.02 of the Avenor By-laws (or as
provided in Article Eleventh of the Restated Certificate of Incorporation of
Bowater (the "Bowater Certificate")) which provision will not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would adversely affect the rights thereunder of individuals
who, immediately prior to the Effective Time, were directors, officers,
employees or agents of Avenor, unless required by law, and Bowater will ensure
that the obligations of Avenor under any indemnification agreements between
Avenor and its directors and certain officers are assumed by the Surviving
Corporation.
Bowater has also agreed that from the Effective Time until the sixth
anniversary of the Effective Time it will maintain or cause Avenor or any
Surviving Corporation to maintain Avenor's current directors' and officers'
insurance or another policy or "discovery" endorsement, on terms and conditions
which are no less advantageous to the directors and officers of Avenor and
providing no less coverage than Avenor's existing directors' and officers'
insurance, for all present and former directors and officers of Avenor, covering
claims made prior to or within such period of time. At the election of Bowater
and upon reasonable notice to Avenor, Avenor will acquire the insurance through
a "discovery" endorsement prior to the Effective Date. Avenor has agreed that it
will not, and will use its commercially reasonable efforts to cause the insured
persons under such directors' and officers' insurance policies not to, take any
actions which might impair the coverage thereunder.
Change in Control Agreements
Avenor has entered into severance agreements with certain of its senior
officers in the normal course of business. The severance agreements, the
majority of which were entered into in September 1993, provide for
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the payment of certain severance benefits if a change in control of Avenor
occurs and, within the three-year period following the change in control, the
individual's employment is terminated by Avenor other than for cause,
disability, retirement or death, or by the individual for certain defined
reasons such as a change in his position, reporting relationship, in the nature
or status of his responsibilities or reduction in salary or benefits. The
agreements provide that the executive officer would receive a lump sum severance
payment equal to the base salary and the target bonus payable under Avenor's
Short-Term Incentive Plan (the "STIP") that would have been earned through the
end of the severance period (36 months) based on the individual's highest
monthly rate of base salary during the preceding 36-month period. In addition to
the lump sum severance payment, the agreements provide that the executive
officer is entitled to the continuation of benefits and certain perquisites
under Avenor's benefit plans through the end of the severance period, including
the continuation of certain insurance plan benefits and a lump sum payment equal
to the actuarial present-day value of pension arrangements under Avenor's
Supplementary Executive Retirement Plan (the "SERP") taking into account
pensionable service and earnings during the severance period. The severance
benefits provided for in the severance agreements would be the only benefits
provided to an individual in the event of the termination of his employment
following a change in control. The Transaction will result in a change in
control of Avenor for the purposes of such severance agreements. See
"Information Concerning Avenor--Directors and Officers--Termination of
Employment, Change in Responsibilities and Employment Contracts".
Vesting of Options
Certain directors, officers, employees and former employees of Avenor have
outstanding Avenor Options and Avenor SARs pursuant to the Avenor KESOP. The
Avenor KESOP provides for the acceleration of the vesting of the Avenor Options
and Avenor SARs upon the occurrence of a change in control of Avenor. In
connection with the Transaction, Avenor has received the approval of the TSE and
the ME to make technical amendments to the Avenor KESOP to provide for the
vesting of all outstanding Avenor Options and Avenor SARs immediately prior to
the Effective Time in order to allow such directors and officers to participate
in the Arrangement. Certain of the outstanding Avenor Options and Avenor SARs
have an exercise price that exceeds C$35. In connection with the Transaction,
Avenor intends to purchase such securities from the approximately 33 holders
thereof, consisting of current and former employees of Avenor. The purchase
price to be paid by Avenor for such securities has been determined by Avenor
with the assistance of RBC DS, taking into account, among other things, the
exercise price and the expiry date of each security. It is currently anticipated
that all such securities will be acquired by Avenor at a cost of less than
C$45,000. Any Avenor Options and Avenor SARs that are not exercised prior to the
Effective Time will be terminated as at the Effective Time.
TRANSACTION MECHANICS AND DESCRIPTION OF EXCHANGEABLE SHARES
General
Pursuant to the Arrangement Agreement, Avenor will apply to the Ontario
Court for the Final Order for the Arrangement under the provisions of section
192 of the CBCA, pursuant to which Bowater, through Bowater Holdings and Bowater
Canada, will acquire outstanding Avenor Common Shares and each Avenor
Shareholder (other than holders who exercise and perfect their dissent rights)
will be entitled to receive, subject to the terms of the Arrangement Agreement,
C$35 for each Avenor Common Share held by such holder, payable, at the election
of such holder and subject to proration, in cash, Exchangeable Shares, shares of
Bowater Common Stock, or a combination of the foregoing. Each holder of an
Avenor Common Share at any time up to 5:00 p.m., Montreal time, on July 20,
1998, the business day immediately preceding the Avenor Meeting, will have an
opportunity to make an election on the Letter of Transmittal and Election Form
to receive cash, Exchangeable Shares, shares of Bowater Common Stock or a
combination of the foregoing with respect to the Avenor Common Shares held by
such holder (subject to proration).
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The Arrangement
Pursuant to the terms of the Plan of Arrangement, commencing at the
Effective Time, the following will occur and will be deemed to occur in the
following order without any further act or formality:
(a) subject to the proration provisions described below under
"--Proration", each Bowater Elected Share will be transferred by the holder
thereof to Bowater Holdings in exchange for that number of shares of
Bowater Common Stock equal to the Exchange Ratio, and the name of each such
holder will be removed from the register of holders of Avenor Common Shares
and added to the register of holders of shares of Bowater Common Stock and
Bowater Holdings will be added to the register of holders of Avenor Common
Shares accordingly;
(b) Bowater Holdings will transfer to Bowater Canada all the Avenor
Common Shares then owned by Bowater Holdings and, as consideration
therefor, Bowater Canada will issue an equivalent number of common shares
in the capital of Bowater Canada to Bowater Holdings, and Bowater Holdings
will be removed from the register of holders of Avenor Common Shares and
Bowater Canada will be added to the register of holders of Avenor Common
Shares accordingly;
(c) subject to the proration provisions described below under
"--Proration", each Cash Elected Share and Exchangeable Share Elected Share
will be transferred by the holder thereof to Bowater Canada in exchange for
(i) in the case of a Cash Elected Share, cash equal to C$35, without
interest thereon, and (ii) in the case of an Exchangeable Share Elected
Share, that number of Exchangeable Shares equal to the Exchange Ratio, and
each holder who receives cash will be removed from the register of holders
of Avenor Common Shares and each holder who receives Exchangeable Shares
will be removed from the register of holders of Avenor Common Shares and
added to the register of holders of Exchangeable Shares and Bowater Canada
shall be recorded as the registered holder of such Avenor Common Shares so
exchanged; provided, however, that where a holder receives both cash and
Exchangeable Shares, each Avenor Common Share transferred to Bowater Canada
by the holder thereof will be deemed to have been transferred to Bowater
Canada for a combination of cash and Exchangeable Shares, with the cash
portion of such consideration received by such holder for such share being
equal to the aggregate cash consideration received by such holder divided
by the number of Avenor Common Shares so transferred;
(d) subject to the proration provisions described below under
"--Proration", each Avenor Common Share in respect of which an effective
election has not been made (other than the shares of holders who exercise
and perfect their dissent rights) will be deemed to be an Exchangeable
Share Elected Share and will be transferred to Bowater Canada in exchange
for Exchangeable Shares in accordance with the provisions described in
paragraph (c) above, and each such holder will be removed from the register
of holders of Avenor Common Shares and added to the register of holders of
Exchangeable Shares and Bowater Canada shall be recorded as the registered
holder of such Avenor Common Shares so exchanged; and
(e) all outstanding Avenor Options and Avenor SARs will be terminated.
See "Summary--The Transaction--General" for a table illustrating, for
various assumed Bowater Average Trading Prices, the applicable Exchange Ratio
and the corresponding value of the fraction of a share of Bowater Common Stock
or Exchangeable Share equal to such Exchange Ratio.
Proration
Notwithstanding the provisions described above under "--The Arrangement",
the maximum aggregate amount of cash that may be paid to holders of Avenor
Common Shares pursuant to the Arrangement (the "Cash Cap") will be equal to the
difference between (A) the product of (i) C$35, (ii) the number of outstanding
Avenor Common Shares immediately prior to the Effective Time and (iii) 0.60 and
(B) the lesser of (i) the product of the number of Avenor Common Shares in
respect of which a notice of dissent has been delivered by Avenor Shareholders
in accordance with the CBCA and C$21 and (ii) C$65 million.
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If the product of (i) the aggregate number of Cash Elected Shares and (ii)
C$35 (such product, the "Requested Cash Amount"), exceeds the Cash Cap, then a
cash proration factor (the "Cash Proration Factor") will be determined by
dividing the Cash Cap by the Requested Cash Amount and the number of Cash
Elected Shares of each holder thereof will be reduced to the product of (x) the
Cash Proration Factor and (y) the number of Cash Elected Shares of such holder
(the "Available Cash Elected Shares"), and the difference between such holder's
Cash Elected Shares and such holder's Available Cash Elected Shares will be
deemed to be Exchangeable Share Elected Shares of such holder; provided,
however, that if such holder has made an effective election to have Cash Elected
Shares that are subject to this provision be deemed to be Bowater Elected
Shares, such Cash Elected Shares will be deemed to be Bowater Elected Shares.
Notwithstanding the provisions described above, the maximum aggregate
number of Exchangeable Shares and shares of Bowater Common Stock that may be
issued to or received by holders of Avenor Common Shares pursuant to the
Arrangement (the "Share Cap") will be equal to the product of (x) the Exchange
Ratio, (y) the number of outstanding Avenor Common Shares immediately prior to
the Effective Time and (z) 0.50.
If the product (the "Requested Share Amount") of (w) the difference between
(A) the number of outstanding Avenor Common Shares immediately prior to the
Effective Time (other than shares of holders who have delivered a notice of
dissent in accordance with the CBCA), and (B) the aggregate number of Cash
Elected Shares (such difference, the "Deemed Share Elected Shares") and (x) the
Exchange Ratio, exceeds the Share Cap, then a share proration factor (the "Share
Proration Factor") will be determined by dividing the Share Cap by the Requested
Share Amount and the number of Deemed Share Elected Shares of each holder
thereof will be reduced to the product of (y) the Share Proration Factor and (z)
the number of Deemed Share Elected Shares of such holder (the "Available Share
Elected Shares") and the difference between such holder's Deemed Share Elected
Shares and such holder's Available Share Elected Shares will be deemed to be
Cash Elected Shares of such holder. If the number of Deemed Share Elected Shares
is reduced as described in this provision, such reduction will be made pro rata
as between the Exchangeable Share Elected Shares and the Bowater Share Elected
Shares of such holder.
Retraction and Redemption of Exchangeable Shares and Call Rights
Holders of Exchangeable Shares will be entitled at any time following the
Effective Time to retract (i.e., to require Bowater Canada to redeem) any or all
Exchangeable Shares owned by them and to receive the Retraction Price therefor,
subject to the Retraction Call Right of Bowater Holdings described below.
Holders of Exchangeable Shares may effect such retraction by presenting to
Bowater Canada or its transfer agent a certificate or certificates representing
the Exchangeable Shares the holder desires to have Bowater Canada redeem,
together with such other documents and instruments as may be required under the
CBCA or the by-laws of Bowater Canada or by the transfer agent, and a duly
executed Retraction Request (i) specifying that the holder desires to have all
or any number specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by Bowater Canada,
(ii) stating the business day on which the holder desires to have Bowater Canada
redeem the Retracted Shares (the "Retraction Date"), provided that the
Retraction Date is not less than ten business days nor more than 15 business
days after the date on which the Retraction Request is received by Bowater
Canada and further provided that, in the event that no such business day is
specified by the holder in the Retraction Request, the Retraction Date will be
deemed to be the fifteenth business day after the date on which the Retraction
Request is received by Bowater Canada, and (iii) acknowledging the Retraction
Call Right of Bowater Holdings to purchase all but not less than all the
Retracted Shares directly from the holder and that the Retraction Request will
be deemed to be a revocable offer by the holder to sell the Retracted Shares to
Bowater Holdings in accordance with the Retraction Call Right on the terms and
conditions described below.
Upon receipt by Bowater Canada of a Retraction Request, Bowater Canada will
promptly notify Bowater and Bowater Holdings of the Retraction Request. In order
to exercise the Retraction Call Right, Bowater Holdings must notify Bowater
Canada of its determination to do so (the "Bowater Holdings Call Notice") within
five business days of notification to Bowater Holdings by Bowater Canada of the
receipt by Bowater Canada of the Retraction Request. If Bowater Holdings
delivers the Bowater Holdings Call Notice within
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such five business days time period, and provided that the Retraction Request is
not revoked by the holder in the manner described below, Bowater Canada will not
redeem the Retracted Shares and Bowater Holdings will purchase from such holder
and such holder will sell to Bowater Holdings on the Retraction Date the
Retracted Shares for the Retraction Price. In the event that Bowater Holdings
does not deliver a Bowater Holdings Call Notice within such five business day
period, and provided that the Retraction Request is not revoked by the holder in
the manner described below, Bowater Canada will redeem the Retracted Shares on
the Retraction Date for the Retraction Price.
A holder of Retracted Shares may, by notice in writing given by the holder
to Bowater Canada before the close of business on the business day immediately
preceding the Retraction Date, withdraw its Retraction Request, in which event
such Retraction Request will be null and void and the revocable offer
constituted by the Retraction Request to sell the Retracted Shares to Bowater
Holdings will be deemed to have been revoked.
Subject to applicable law, and provided that Bowater Holdings has not
exercised the Redemption Call Right, on the Redemption Date, if any, established
by the Board of Directors of Bowater Canada, which date will not be earlier than
June 30, 2008 (except as described in the following sentence), Bowater Canada
may, at its option and (except in the case of an acquisition of Control of
Bowater, in which case, in the event the Board of Directors of Bowater Canada
elects to redeem the Exchangeable Shares, the notice will be provided the number
of days prior to the Redemption Date as the Board of Directors of Bowater Canada
determines to be reasonably practicable under the circumstances), upon at least
60 days prior notice to the holders of the Exchangeable Shares, redeem the whole
of the then outstanding Exchangeable Shares by delivery of the Redemption Price
to each holder thereof. The Redemption Date may be earlier than June 30, 2008,
if earlier than such date there are fewer than 500,000 Exchangeable Shares
outstanding (other than Exchangeable Shares held by Bowater or its affiliates
and subject to necessary adjustments to such number of shares to reflect
permitted changes to Exchangeable Shares) or a transaction is proposed that will
result in an acquisition of Control of Bowater. In the event that a transaction
is proposed that will result in Control of Bowater being acquired by any person
and the Board of Directors of Bowater Canada elects to redeem the Exchangeable
Shares, the Redemption Date will be the date immediately prior to the date the
acquisition of Control of Bowater occurs pursuant to such transaction. Notice of
such redemption will at the same time be sent to Bowater and Bowater Holdings
and, notwithstanding any proposed redemption of the Exchangeable Shares, Bowater
Holdings will have the Redemption Call Right to purchase all, but not less than
all, of the outstanding Exchangeable Shares on the Redemption Date by delivery
of the Redemption Price to each holder thereof. To exercise the Redemption Call
Right, Bowater Holdings must notify Bowater Canada of Bowater Holding's
intention to exercise such right at least five business days before the
Redemption Date or on or before the Redemption Date in the event of an
acquisition of Control of Bowater as described above.
Any Canadian tax deferral obtained by an Avenor Shareholder who receives
Exchangeable Shares under the Arrangement will end on the exchange or redemption
of Exchangeable Shares for shares of Bowater Common Stock. Moreover, if Bowater
Holdings' call rights are not exercised on redemption of the Exchangeable Shares
by Bowater Canada, a holder of Exchangeable Shares may realize a dividend for
Canadian tax purposes that may exceed the holder's economic gain. See "Risk
Factors--Risks Related to the Transaction--Canadian Tax Consequences of
Redemption or Exchange of Exchangeable Shares" and "Income Tax
Considerations--Canadian Federal Income Tax Considerations for Avenor
Shareholders". The exchange will also result in the security held after the
exchange (i.e. the shares of Bowater Common Stock) being foreign property for
certain Canadian tax purposes. See "The Transaction--Eligibility for Investment
in Canada".
Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares
Prior to the Effective Time, Bowater, Bowater Holdings, Bowater Canada and
the Trustee will enter into the Voting and Exchange Trust Agreement in
substantially the form attached to this Joint Proxy Statement as Annex F.
Pursuant to the terms of the Voting and Exchange Trust Agreement, on the
Effective Date Bowater will deposit with the Trustee the share of Special Voting
Stock, which will entitle the Trustee to a number of votes equal to the number
of Exchangeable Shares outstanding from time to time (other than those held by
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Bowater or its affiliates) and for which timely voting instructions have been
received by the Trustee from the holders of Exchangeable Shares. With respect to
any matter as to which holders of shares of Bowater Common Stock are entitled to
vote, each holder of an Exchangeable Share will have the right (the "Voting
Right") to instruct the Trustee as to the manner of voting for one of the votes
attached to the share of Special Voting Stock for each Exchangeable Share owned
by such holder.
In the event of the liquidation, dissolution or winding-up of Bowater
Canada or any other proposed distribution of the assets of Bowater Canada among
its shareholders for the purpose of winding up its affairs, holders of the
Exchangeable Shares will have preferential rights to receive the Liquidation
Amount from the assets of Bowater Canada on the effective date of such
liquidation, dissolution or winding-up (the "Liquidation Date"). In the event of
such proposed liquidation, dissolution or winding-up of Bowater Canada, Bowater
Holdings will have the right (the "Liquidation Call Right") to purchase all, but
not less than all, the outstanding Exchangeable Shares from the holders thereof
on the Liquidation Date by delivery of one share of Bowater Common Stock (the
"Liquidation Amount") to each holder thereof.
Upon the occurrence of a Bowater Canada Insolvency Event (as defined
below), the Trustee on behalf of the holders of Exchangeable Shares will have
the right to require Bowater to purchase any Exchangeable Share then outstanding
(other than Exchangeable Shares held by Bowater or its affiliates) for a
purchase price to be satisfied by the delivery of one share of Bowater Common
Stock for each Exchangeable Share purchased. As used herein, a "Bowater Canada
Insolvency Event" means the institution by Bowater Canada of any proceeding to
be adjudicated a bankrupt or insolvent or to be wound up, or the consent of
Bowater Canada to the institution of bankruptcy, insolvency or winding-up
proceedings against it, or the filing of a petition, answer or consent seeking
dissolution or winding-up under any bankruptcy, insolvency or analogous laws,
including without limitation the Companies Creditors' Arrangement Act (Canada)
and the Bankruptcy and Insolvency Act (Canada), and the failure by Bowater
Canada to contest in good faith any such proceedings commenced in respect of
Bowater Canada within 30 days of becoming aware thereof, or the consent by
Bowater Canada to the filing of any such petition or to the appointment of a
receiver, or the making by Bowater Canada of a general assignment for the
benefit of creditors, or the admission in writing by Bowater Canada of its
inability to pay its debts generally as they become due, or Bowater Canada not
being permitted, pursuant to solvency requirements of applicable law, to redeem
any Exchangeable Shares in connection with a Retraction Request.
Upon the occurrence of a Bowater Liquidation Event (as defined below), in
order for the holders of the Exchangeable Shares to participate on a pro rata
basis with the holders of shares of Bowater Common Stock, on the fifth business
day prior to the effective date of a Bowater Liquidation Event, Bowater will
purchase each outstanding Exchangeable Share (other than Exchangeable Shares
held by Bowater or its affiliates) on such date for a purchase price to be
satisfied by the delivery of one share of Bowater Common Stock. As used herein,
a "Bowater Liquidation Event" means any determination by the Bowater Board to
institute voluntary liquidation, dissolution or winding-up proceedings with
respect to Bowater or to effect any other distribution of assets of Bowater
among its shareholders for the purpose of winding up its affairs or the receipt
by Bowater of notice of, or Bowater otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of Bowater or to effect any
other distribution of assets of Bowater among its shareholders for the purpose
of winding up its affairs, where Bowater has failed to contest in good faith any
such proceeding within 30 days of becoming aware thereof.
The optional exchange right of holders of Exchangeable Shares in respect of
a Bowater Canada Insolvency Event and the right of such holders to have their
Exchangeable Shares purchased by Bowater upon a Bowater Liquidation Event are
collectively referred to as the "Exchange Rights" which, together with the
Voting Rights, are referred to as the "Ancillary Rights". See also "Description
of Capital Stock--Voting and Exchange Trust Agreement".
Support Agreement
Prior to the Effective Time, Bowater, Bowater Holdings and Bowater Canada
will enter into the Support Agreement in substantially the form attached to the
Joint Proxy Statement as Annex G. Pursuant to the
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Support Agreement, Bowater will make the following covenants in favor of Bowater
Canada regarding the Exchangeable Shares: (i) Bowater will not declare or pay
dividends on the Bowater Common Stock unless (a) Bowater Canada immediately
thereafter declares or pays, as the case may be, an equivalent dividend on the
Exchangeable Shares and (b) Bowater Canada has sufficient money or other assets
or authorized but unissued securities available to enable the due declaration
and the due and punctual payment, in accordance with applicable law, of an
equivalent dividend on the Exchangeable Shares; (ii) Bowater will advise Bowater
Canada in advance of the declaration of any dividend on the shares of Bowater
Common Stock and ensure that the declaration date, record date and payment date
for dividends on the Exchangeable Shares are the same as that for corresponding
dividends on the shares of Bowater Common Stock; (iii) Bowater will take other
actions reasonably necessary to ensure that the record date for any dividend
declared on the shares of Bowater Common Stock is not less than 10 business days
after the declaration date of such dividend; and (iv) Bowater will take all
actions and do all things that are reasonably necessary or desirable to enable
and permit Bowater Canada, in accordance with applicable law, to pay the
Liquidation Amount, the Retraction Price or the Redemption Price to the holders
of the Exchangeable Shares in the event of a liquidation, dissolution or
winding-up of Bowater Canada, a Retraction Request by a holder of Exchangeable
Shares or a redemption of Exchangeable Shares by Bowater Canada, as the case may
be. See "Description of Capital Stock--Support Agreement".
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION
The Arrangement requires approval by the Ontario Court and the approval of
the Avenor Shareholders at the Avenor Meeting. Prior to the mailing of this
Joint Proxy Statement, Avenor obtained the Interim Order providing for the
calling and holding of the Avenor Meeting and other procedural matters. A copy
of the Interim Order is attached to this Joint Proxy Statement as Annex C.
Subject to the approval of the Arrangement Resolution by the Avenor
Shareholders at the Avenor Meeting, the hearing in respect of the Final Order is
scheduled to take place on July 23, 1998 at 10:00 a.m. (Toronto time) in the
Ontario Court at 393 University Avenue, Toronto, Ontario. All Avenor
Shareholders who wish to participate or be represented or to present evidence or
arguments at that hearing must serve and file a notice of appearance as set out
in the Notice of Motion for the Final Order and satisfy any other requirements.
At the hearing of the motion in respect of the Final Order, the Ontario Court
will consider, among other things, the fairness and reasonableness of the
Arrangement. The Ontario Court may approve the Arrangement as proposed or as
amended in any manner the Ontario Court may direct, subject to compliance with
such terms and conditions, if any, as the Ontario Court deems fit.
Assuming the Final Order is granted and other conditions to the Arrangement
Agreement are satisfied or waived, it is anticipated that the following will
occur substantially simultaneously: the Support Agreement and the Voting and
Exchange Trust Agreement will be executed and delivered; Articles of Arrangement
will be filed with the Director under the CBCA to give effect to the
Arrangement; and the various other documents necessary to consummate the
transactions contemplated under the Arrangement Agreement will be executed and
delivered.
Subject to the foregoing, it is currently anticipated that the Effective
Date will occur on or about July 24, 1998.
ELECTION PROCEDURES
A Letter of Transmittal and Election Form and Notice of Guaranteed Delivery
are being mailed together with this Joint Proxy Statement to each person who was
a holder of Avenor Common Shares on the Avenor Record Date. Each such holder
(and each holder of record of Avenor Common Shares on or prior to the business
day immediately preceding the date of the Avenor Meeting (the "Election Date")),
will have the right to submit a Letter of Transmittal and Election Form to the
Depositary or the U.S. Forwarding Agent specifying the whole number of Avenor
Common Shares that such person desires to have exchanged for cash, Exchangeable
Shares, shares of Bowater Common Stock, or a combination of the foregoing,
subject to proration. The Letter of Transmittal and Election Form also allows
Avenor Shareholders to indicate whether,
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in the event the Avenor Shareholders are to receive shares as a result of
proration, they wish to receive either Exchangeable Shares or shares of Bowater
Common Stock.
ANY ELECTION WILL HAVE BEEN PROPERLY MADE ONLY IF THE DEPOSITARY OR THE
U.S. FORWARDING AGENT HAS RECEIVED AT THEIR RESPECTIVE DESIGNATED OFFICES (AS
SET FORTH IN THE LETTER OF TRANSMITTAL AND ELECTION FORM ENCLOSED HEREWITH), BY
5:00 P.M., MONTREAL TIME, ON THE ELECTION DATE, A LETTER OF TRANSMITTAL AND
ELECTION FORM PROPERLY COMPLETED AND SIGNED AND ACCOMPANIED BY THE CERTIFICATES
FOR THE AVENOR COMMON SHARES TO WHICH THE LETTER OF TRANSMITTAL AND ELECTION
FORM RELATES, PROPERLY ENDORSED OR OTHERWISE IN PROPER FORM FOR TRANSFER. AVENOR
SHAREHOLDERS WHOSE AVENOR COMMON SHARE CERTIFICATE(S) ARE NOT IMMEDIATELY
AVAILABLE OR WHO CANNOT CAUSE THEIR AVENOR COMMON SHARE CERTIFICATE(S) AND ALL
OTHER REQUIRED DOCUMENTS TO BE DELIVERED TO THE DEPOSITARY OR THE U.S.
FORWARDING AGENT AT OR PRIOR TO 5:00 P.M., MONTREAL TIME, ON THE ELECTION DATE
MUST DELIVER TO THE DEPOSITARY A NOTICE OF GUARANTEED DELIVERY IN ACCORDANCE
WITH INSTRUCTION 2 OF THE LETTER OF TRANSMITTAL AND ELECTION FORM, PROVIDED THE
CERTIFICATE(S) ARE IN FACT DELIVERED TO THE DEPOSITARY WITHIN THREE TSE TRADING
DAYS AFTER THE ELECTION DATE.
Any holder of Avenor Common Shares who has made an election by submitting a
Letter of Transmittal and Election Form to the Depositary or the U.S. Forwarding
Agent or a Notice of Guaranteed Delivery to the Depositary may revoke such
election by written notice or by filing a later dated Letter of Transmittal and
Election Form received by the Depositary or the U.S. Forwarding Agent or a later
dated Notice of Guaranteed Delivery to the Depositary in each case prior to 5:00
p.m., Montreal time, on the Election Date. In addition, all Letters of
Transmittal and Election Forms and Notices of Guaranteed Delivery will be
automatically revoked if the Depositary is notified in writing by Bowater and
Avenor that the Arrangement Agreement has been terminated. If a Letter of
Transmittal and Election Form is revoked, the certificate or certificates for
the Avenor Common Shares to which the Letter of Transmittal and Election Form
relates will be promptly returned to the holder of Avenor Common Shares
submitting the same to the Depositary or the U.S. Forwarding Agent.
The determination of the Depositary as to whether elections have been
properly made or revoked and when elections and revocations were received by it
will be binding. If no Letter of Transmittal and Election Form or Notice of
Guaranteed Delivery is received with respect to Avenor Common Shares, or if the
Depositary determines that any election was not properly made with respect to
any Avenor Common Shares, such shares will be deemed to be Exchangeable Share
Elected Shares and will be exchanged for Exchangeable Shares, subject to
proration as described in "--Transaction Mechanics and Description of
Exchangeable Shares--The Arrangement" and "--Transaction Mechanics and
Description of Exchangeable Shares--Proration". The Depositary will also make
all computations as to the proration contemplated by the Arrangement and any
such computation will be conclusive and binding. The Depositary may, with the
mutual agreement of Bowater and Avenor, make such rules as are consistent with
the Arrangement for the implementation of the elections contemplated by the
Arrangement and as are necessary or desirable fully to effect such elections.
The Letter of Transmittal and Election Form will also permit certain Avenor
Shareholders who elect to receive Exchangeable Shares or are deemed to have
elected to receive Exchangeable Shares under the Arrangement to ask for a Tax
Election Filing Package in order to make a joint election with Bowater Canada.
See "Income Tax Considerations--Canadian Federal Income Tax Considerations for
Avenor Shareholders".
The instructions for making elections, exchanging certificates representing
Avenor Common Shares, depositing such share certificates with the Depositary or
the U.S. Forwarding Agent, and requesting a Tax Election Filing Package, are set
out in the Letter of Transmittal and Election Form.
EXCHANGE PROCEDURES
At or promptly after the Effective Time, Bowater Holdings will deposit with
the Depositary, for the benefit of the holders of Bowater Elected Shares,
certificates representing the required number of shares of Bowater Common Stock
to satisfy the payment to the holders of the Bowater Elected Shares under the
Arrangement, and Bowater Canada will deposit with the Depositary cash and
certificates representing the required number of Exchangeable Shares to satisfy
the payments to the holders of the Cash Elected Shares
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and the Exchangeable Share Elected Shares under the Arrangement. All cash
deposited with the Depositary will be held in an interest-bearing account, and
any interest earned thereon will be for the account of Bowater Canada. Upon
surrender to the Depositary for cancelation of a certificate that immediately
prior to the Effective Time represented one or more Avenor Common Shares,
together with such other documents and instruments as would have been required
to effect the transfer of the shares formerly represented by such certificate
under the CBCA and the Avenor By-laws and such additional documents and
instruments as the Depositary may reasonably require, the holder of such
surrendered certificate will be entitled to receive in exchange therefor, and
the Depositary will deliver to such holder, as applicable, a certificate
representing that number (rounded down to the nearest whole number) of
Exchangeable Shares or shares of Bowater Common Stock, and/or cash, or a
combination thereof, that such holder has the right to receive (together with
any dividends or distributions with respect thereto and any cash in lieu of
fractional shares) pursuant to the Arrangement, and the surrendered certificate
will be canceled.
In the event of a transfer of ownership of Avenor Common Shares that is not
registered in the transfer records of Avenor, a certificate representing the
proper number of Exchangeable Shares or shares of Bowater Common Stock may be
issued, and cash may be paid, to the transferee if the certificate representing
such Avenor Common Shares is presented to the Depositary, accompanied by all
documents required to evidence and effect such transfer.
Until surrendered, each certificate that immediately prior to the Effective
Time represented Avenor Common Shares will be deemed, at any time after the
Effective Time, to represent only the right to receive upon such surrender the
certificates representing Exchangeable Shares or shares of Bowater Common Stock
and any cash (including cash in lieu of fractional shares or pursuant to
proration or dividends or distributions with a record date after the Effective
Time theretofore paid or payable with respect to Exchangeable Shares or shares
of Bowater Common Stock) that the holder thereof has the right to receive in
respect of the certificate pursuant to the Arrangement.
No dividends or other distributions declared or made after the Effective
Time with respect to Exchangeable Shares or shares of Bowater Common Stock with
a record date after the Effective Time will be paid to the holder of any
unsurrendered certificate that immediately prior to the Effective Time
represented outstanding Avenor Common Shares that were exchanged pursuant to the
Arrangement, and no cash payment in lieu of fractional shares will be paid to
any such holder, unless and until the holder of record of such certificate
surrenders such certificate. Subject to applicable law, at the time of such
surrender of any such certificate, there will be paid to the holder of record of
the certificates representing whole Exchangeable Shares or shares of Bowater
Common Stock, as the case may be, without interest (i) the amount of any cash
payable in lieu of a fractional Exchangeable Share or share of Bowater Common
Stock to which such holder is entitled, (ii) the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole Exchangeable Share or share of Bowater Common Stock, as
the case may be, and (iii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole Exchangeable Share or share of Bowater Common Stock, as
the case may be.
No certificates or scrip representing fractional Exchangeable Shares or
fractional shares of Bowater Common Stock will be issued upon the surrender for
exchange of certificates and, subject to the last sentence of this paragraph, no
dividend, stock split or other change in the capital structure of Bowater Canada
or Bowater will relate to any such fractional security and such fractional
interests will not entitle the owner thereof to vote or to exercise any rights
as a security holder of Bowater Canada or Bowater. In lieu of any such
fractional securities, each person otherwise entitled to a fractional interest
in an Exchangeable Share or a share of Bowater Common Stock will receive a cash
payment equal to such person's pro rata portion of the net proceeds after
expenses received by the Depositary upon the sale of whole shares representing
an accumulation of all fractional interests in Exchangeable Shares or shares of
Bowater Common Stock, as the case may be, to which all such persons would
otherwise be entitled. The Depositary will sell such Exchangeable Shares
involved by private sale or on any stock exchange upon which they are listed and
will sell such shares of Bowater Common Stock on the NYSE, as soon as reasonably
practicable following the Effective Time. The
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aggregate net proceeds after expenses of such sale will be distributed by the
Depositary, pro rata in relation to the respective fractions, among the persons
otherwise entitled to receive fractional interests in Exchangeable Shares or
shares of Bowater Common Stock, as the case may be.
If any certificate that immediately prior to the Effective Time represented
one or more outstanding Avenor Common Shares has been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed, the Depositary will issue in
exchange for such lost, stolen or destroyed certificate, cash and/or one or more
certificates representing one or more Exchangeable Shares or shares of Bowater
Common Stock (and any dividends or distributions with respect thereto and any
cash) deliverable in respect thereof in accordance with such holder's Letter of
Transmittal and Election Form, subject to proration, as determined in accordance
with the Arrangement. When authorizing such payment in exchange for any lost,
stolen or destroyed certificate, the person to whom certificates representing
Exchangeable Shares or shares of Bowater Common Stock are to be issued must, as
a condition precedent to the issuance thereof, give a bond satisfactory to
Bowater Holdings or Bowater Canada, as the case may be, in such sum as Bowater
Holdings or Bowater Canada may, acting reasonably, direct or otherwise indemnify
Bowater Holdings or Bowater Canada in a manner satisfactory to Bowater Holdings
or Bowater Canada, acting reasonably, against any claim that may be made against
Bowater Holdings or Bowater Canada with respect to the certificate alleged to
have been lost, stolen or destroyed.
Any certificate which immediately prior to the Effective Time represented
outstanding Avenor Common Shares that were exchanged pursuant to the Arrangement
and which has not been deposited with the Depositary, together with all other
instruments required by the exchange procedures referred to above, on or prior
to the third anniversary of the Effective Date, shall cease to represent a claim
or interest of any kind or nature as a shareholder of Bowater Canada or Bowater.
On such date, the Exchangeable Shares or shares of Bowater Common Stock to which
the former registered holder of the certificate referred to in the preceding
sentence was ultimately entitled shall be deemed to have been surrendered to
Bowater Canada or Bowater, as the case may be, together with all entitlements to
dividends, distributions and interest thereon held for such former registered
holder.
Bowater, Bowater Holdings, Bowater Canada and the Depositary are entitled
to deduct and withhold from any dividend or consideration otherwise payable
under the Arrangement to any holder of Avenor Common Shares, shares of Bowater
Common Stock or Exchangeable Shares such amounts as Bowater, Bowater Holdings,
Bowater Canada or the Depositary is required or permitted to deduct and withhold
with respect to such payment under the Canadian Tax Act, U.S. Code or any
provision of provincial, state, local or foreign tax law, in each case as
amended. To the extent that amounts are so withheld, such withheld amounts will
be treated for all purposes hereof as having been paid to the holder of the
shares in respect of which such deduction and withholding was made, provided
that such withheld amounts are actually remitted to the appropriate taxing
authority. To the extent that the amount so required or permitted to be deducted
or withheld from any payment to a holder exceeds the cash portion of the
consideration otherwise payable to the holder, Bowater, Bowater Holdings,
Bowater Canada and the Depositary are authorized to sell or otherwise dispose of
such portion of the consideration as is necessary to provide sufficient funds to
Bowater, Bowater Holdings, Bowater Canada or the Depositary, as the case may be,
to enable it to comply with such deduction or withholding requirement and
Bowater, Bowater Holdings, Bowater Canada or the Depositary will notify the
holder thereof and remit any unapplied balance of the net proceeds of such sale.
It is not intended that any United States or Canadian federal income tax will be
deducted or withheld from any consideration payable under the Arrangement to any
holder of Avenor Common Shares (except with respect to certain holders who
exercise and perfect their dissent rights under the CBCA).
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STOCK EXCHANGE LISTINGS
Exchangeable Shares
The TSE and the ME have conditionally approved the listing of the
Exchangeable Shares. Such listings are subject to Bowater Canada fulfilling all
of the requirements of the TSE and the ME, including distribution of the
Exchangeable Shares to a minimum number of public shareholders. There is no
current intention to list the Exchangeable Shares on any other stock exchange
(including the NYSE).
Bowater Common Stock
The Bowater Common Stock is listed on the NYSE, U.S. regional exchanges,
the London Stock Exchange and the Swiss Stock Exchange. An application will be
made by Bowater to each of the NYSE and the Pacific Exchange, Inc. to list the
shares of Bowater Common Stock issued pursuant to the Arrangement or issuable
from time to time in exchange for the Exchangeable Shares. There is no current
intention to list the Bowater Common Stock on any other stock exchange. Bowater
is in the process of delisting the Bowater Common Stock from the Swiss Stock
Exchange.
ACCOUNTING TREATMENT
The Transaction will be treated as a "purchase" for financial reporting and
accounting purposes, in accordance with U.S. GAAP. For a presentation of certain
anticipated effects of the accounting treatment on the combined financial
position and results of operations of Bowater after giving effect to the
purchase of Avenor by Bowater, see "Unaudited Pro Forma Condensed Combined
Financial Statements". Although management plans to sell Avenor's Dryden,
Ontario, mill upon completion of the Transaction, the Unaudited Pro Forma
Condensed Combined Financial Statements do not give effect to the planned sale.
Upon completion of the Transaction, Bowater will account for the Dryden, Ontario
mill as an "asset held for sale". As such, the cost to finance the purchase of
the Dryden mill along with any operating earnings, including depreciation,
generated by this mill will not be reflected in Bowater's future results from
operations. The portion of the excess purchase price estimated to be allocated
to the Dryden mill, net of deferred taxes, and therefore not allocated to
depreciable assets would be US$266.2 million, or US$13.3 million annually. In
addition, the per share amount of pro forma diluted loss before extraordinary
charges would be US$2.86 for the year ended December 31, 1997.
PLAN OF FINANCING
The aggregate cash consideration to be paid in connection with the
Arrangement, together with fees and expenses and the other cash costs of the
Transaction, estimated to be US$854.7 million (if 50% of the aggregate
consideration is paid in cash), will be financed through existing cash and
marketable securities and borrowings by Bowater under two unsecured credit
facilities in an aggregate amount of up to US$1 billion (collectively, the
"Credit Facility"), a substantial portion of which will be unused after giving
effect to the Transaction. The Credit Facility will consist of a $650 million
364-day facility and a $350 million five-year facility. The Credit Facility is
expected to be partially repaid out of the proceeds of the anticipated sale of
Avenor's Dryden, Ontario mill. Pursuant to a commitment letter dated April 29,
1998, Chase Securities Inc. ("CSI") agreed to structure, arrange and syndicate,
and The Chase Manhattan Bank ("Chase") committed to provide the entire principal
amount of, the Credit Facility. Chase will serve as administrative agent for the
Credit Facility and CSI will serve as exclusive advisor and arranger for the
Credit Facility. Chase's and CSI's intention is to syndicate the Credit Facility
to a group of financial institutions identified by Chase and CSI in consultation
with Bowater.
Chase's commitment under the commitment letter and CSI's agreement to
perform the services described in the commitment letter are subject to: (a) the
negotiation, execution and delivery of definitive documentation, in form
mutually satisfactory to Bowater, Chase and CSI; (b) there not having occurred
any material adverse change in the assets, results of operations or financial
condition of Bowater and its subsidiaries (taken as a whole), or Avenor and its
subsidiaries (taken as a whole); (c) there not having occurred any change or
disruption of financial or capital market conditions that, in the judgment of
Chase and
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CSI, could materially and adversely affect the satisfactory arrangements and
syndication of the Credit Facility; (d) the terms and conditions of the
Arrangement Agreement being satisfactory to Chase and CSI, and the Arrangement
Agreement being consummated in all material respects in accordance with such
terms and conditions; (e) Chase and CSI's satisfaction that prior to and during
the syndication of the Credit Facility there shall be no competing offering,
placement or arrangement of any debt securities or bank financing by or on
behalf of Bowater, Avenor or any of their affiliates; and (f) other customary
conditions.
The obligations of Bowater and Avenor to complete the Transaction are not
subject to Bowater's obtaining financing under the contemplated Credit Facility
or otherwise.
ELIGIBILITY FOR INVESTMENT IN CANADA
Eligibility for Investment -- Qualified Investments. Provided the
Exchangeable Shares are listed on a prescribed stock exchange in Canada (which
currently includes the TSE and the ME), based on the law as of the date hereof,
the Exchangeable Shares will be a qualified investment under the Canadian Tax
Act for trusts governed by registered retirement savings plan, registered
retirement income funds and deferred profit sharing plans. Similarly, shares of
Bowater Common Stock will be a qualified investment under the Canadian Tax Act
for such plans provided such shares remain listed on the NYSE (or are listed on
certain other stock exchanges). The Ancillary Rights will not be qualified
investments under the Canadian Tax Act for such plans. However, each of Bowater
and Bowater Canada is of the view that the fair market value of these rights is
nominal.
Eligibility for Investment -- Foreign Property. Provided the Exchangeable
Shares are listed on a prescribed stock exchange in Canada (which currently
includes the TSE and the ME), the Exchangeable Shares will not be foreign
property under the Canadian Tax Act and the Proposed Amendments for trusts
governed by registered retirement savings plans, registered retirement income
funds and deferred profit sharing plans, for registered pension plans or for
certain other persons to whom Part XI of the Canadian Tax Act applies. The
Ancillary Rights will be foreign property under the Canadian Tax Act. However,
each of Bowater and Bowater Canada is of the view that the fair market value of
these rights is nominal. Shares of Bowater Common Stock will be foreign property
under the Canadian Tax Act.
RESALE OF EXCHANGEABLE SHARES AND BOWATER COMMON STOCK RECEIVED IN THE
TRANSACTION
United States
The issuance of Exchangeable Shares and shares of Bowater Common Stock to
holders of Avenor Common Shares will not be registered under the Securities Act.
Such shares will instead be issued in reliance upon the exemption provided by
Section 3(a)(10) of the Securities Act. Section 3(a)(10) exempts from the
general requirement of registration securities issued in exchange for one or
more outstanding securities where the terms and conditions of the issuance and
exchange of such securities have been approved by any court of competent
jurisdiction, after a hearing upon the fairness of the terms and conditions of
the issuance and exchange at which all persons to whom such securities will be
issued have the right to appear. The Ontario Court is authorized to conduct a
hearing to determine the fairness of the terms and conditions of the
Arrangement, including the proposed issuance of securities in exchange for other
outstanding securities. See "--Court Approval of the Arrangement and Completion
of the Transaction".
The Exchangeable Shares and shares of Bowater Common Stock received in
exchange for Avenor Common Shares in the Arrangement will be freely transferable
under U.S. federal securities laws, except Exchangeable Shares and shares of
Bowater Common Stock held by certain affiliates of Avenor. Persons who may be
deemed to be affiliates of an issuer generally include individuals or entities
that control, are controlled by, or are under common control with, such issuer
and may include certain officers and directors of such issuer as well as
principal shareholders of such issuer.
The shares of Bowater Common Stock to be issued from time to time upon the
exchange of Exchangeable Shares for such shares of Bowater Common Stock will be
registered under the Securities Act prior to the Effective Time. Accordingly,
such shares of Bowater Common Stock will be freely tradeable
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under U.S. federal securities laws, except for restrictions on resale of shares
of Bowater Common Stock held by certain affiliates of Bowater.
Canada
Bowater, Bowater Holdings and Bowater Canada have applied for rulings or
orders from the Ontario Securities Commission ("OSC") and the other provincial
securities regulatory authorities in Canada to permit, as applicable, the
issuance to Avenor Shareholders of Exchangeable Shares and shares of Bowater
Common Stock and certain related securities and to permit the resale thereof in
such provinces without restriction on an Avenor Shareholder other than a
"control person", provided that no unusual effort is made to prepare the market
for any such resale or to create a demand for the securities that are the
subject of any such resale and no extraordinary commission or consideration is
paid in respect thereof. Applicable Canadian securities legislation provides a
rebuttable presumption that a person or company is a control person in relation
to an issuer where the person or company alone or in combination with others
holds more than 20% of the outstanding voting securities of the issuer. Upon
completion of the Arrangement, Bowater Canada will become a reporting issuer in
Ontario and the other Canadian provinces that have a reporting issuer concept.
Bowater Canada has applied for certain exemptions from statutory financial and
other reporting requirements on the condition that Bowater files with the
relevant provincial securities regulatory authorities in Canada copies of
certain of its reports filed with the Securities and Exchange Commission (the
"SEC") and that the holders of Exchangeable Shares receive materials that are
sent to Bowater Shareholders. Upon completion of the Arrangement, Avenor will
continue to be a reporting issuer in Ontario and certain other provinces of
Canada. It is intended that Avenor will apply to be deemed to have ceased to be
a reporting issuer in each jurisdiction in Canada where Avenor is currently a
reporting issuer.
Bowater, Bowater Holdings and Bowater Canada have also applied or will
apply for rulings or orders of certain provincial securities regulatory
authorities in Canada to permit the issuance of shares of Bowater Common Stock
to holders of Exchangeable Shares, and to permit the resale of shares of Bowater
Common Stock by such holders (other than "control persons") without the
requirement of filing a prospectus.
ONGOING CANADIAN REPORTING OBLIGATIONS
Upon completion of the Arrangement, Bowater Canada will become a reporting
issuer in certain Canadian provinces. Application has been made for certain
exemptions from statutory financial and other reporting requirements, including
exempting insiders of Bowater Canada from the requirement of filing reports with
respect to trades of Bowater Canada securities in those Canadian provinces, on
the condition that Bowater files with the relevant provincial securities
regulatory authorities copies of certain of its reports filed with the SEC and
that holders of Exchangeable Shares receive materials that are sent to holders
of shares of Bowater Common Stock.
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OTHER TERMS OF THE ARRANGEMENT AGREEMENT
The following is a summary of the material provisions of the Arrangement
Agreement not previously described in "The Transaction". The full text of the
Arrangement Agreement is attached as Annex D to this Joint Proxy Statement.
REPRESENTATIONS AND WARRANTIES
The Arrangement Agreement contains various representations and warranties
of Bowater with respect to Bowater and its subsidiaries relating to, among other
things: (a) their corporate organization, existence and similar corporate
matters; (b) their capitalization; (c) the authorization, execution, delivery
and enforceability of the Arrangement Agreement; (d) the absence of any material
violation of, breach of or required consent under their articles or bylaws, any
law, regulation, order or judgment and other agreements and documents, any
material acceleration of indebtedness or termination of available credit, or any
material encumbrance, charge or lien on their assets; (e) the absence of certain
required consents, approvals, orders, or authorizations of, or declarations or
filings with, certain governmental entities relating to the Arrangement; (f) the
availability of funds and financing for the Arrangement; (g) the documents and
reports filed with the SEC and the accuracy of the information contained
therein; (h) the absence of material changes or events since December 31, 1997;
(i) employment agreements; (j) financial statements; (k) the absence of material
pending or threatened litigation and material compliance with applicable laws;
(l) environmental matters; (m) insurance matters; (n) filing of tax returns and
payment of taxes; (o) pension and employee benefit matters; (p) real property
matters; and (q) the existence of necessary licences and permits from certain
governmental entities.
The Arrangement Agreement also contains various representations and
warranties of Avenor with respect to Avenor and its subsidiaries relating to,
among other things, (a) their corporate organization, existence and similar
corporate matters; (b) their capitalization; (c) the authorization, execution,
delivery and enforceability of the Arrangement Agreement; (d) the absence of any
material violation, breach of or required consent under their articles or
by-laws, any law, regulation, order or judgment and other agreements and
documents, any material acceleration of indebtedness or termination of available
credit, or any material encumbrance, charge or lien on their assets which would,
individually, or in the aggregate, have a materially adverse effect on Avenor;
(e) the absence of certain required consents, approvals, orders, or
authorizations of, or declarations or filings with, certain governmental
entities relating to the Arrangement; (f) material customers; (g) rights with
respect to intellectual property; (h) the absence of material changes or events
since December 31, 1997; (i) employment agreements and labor matters; (j) the
documents filed with the Canadian securities authorities and the accuracy of the
information contained therein; (k) financial statements; (l) the absence of
material pending or threatened litigation and material compliance with
applicable laws; (m) environmental matters; (n) insurance matters; (o) filing of
tax returns and payment of taxes; (p) pension and employee benefit matters; (q)
real property matters; (r) the existence of necessary licences and permits from
certain governmental entities; and (s) the absence of certain non-competition
agreements.
CONDUCT OF BUSINESS PENDING THE ARRANGEMENT
Each of Bowater and Avenor has agreed that, except as otherwise
contemplated in the Arrangement Agreement, until the Effective Date or the day
upon which the Arrangement Agreement is terminated:
(a) in a timely and expeditious manner it will (i) forthwith carry out
such terms of the Interim Order as are required under the terms thereof to
be done by it, (ii) prepare, in consultation with the other party, and file
this Joint Proxy Statement with respect to the Avenor Meeting and the
Bowater Meeting in all jurisdictions where the same is required to be filed
and mail the same as ordered by the Interim Order and in accordance with
all applicable laws, in all jurisdictions where the same is required,
complying in all material respects with all applicable laws on the date of
mailing thereof and containing full, true and plain disclosure of all
material facts relating to the Arrangement and Avenor and Bowater and not
containing any misrepresentation (as defined under applicable securities
laws) with respect thereto, (iii) convene the Bowater Meeting or the Avenor
Meeting, as the case may be, on a date agreed
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to by the parties, which will be no later than September 30, 1998, and
distribute copies of the Arrangement Agreement (or a written summary
thereof prepared by Avenor or Bowater, as the case may be, in form and
substance reasonably satisfactory to the other party), in each case as
ordered by the Interim Order, (iv) provide notice to the other party of its
respective Meeting and allow the other party's representatives to attend
such Meeting (unless, in the case of the Avenor Meeting, such attendance is
prohibited by the Interim Order), and (v) conduct its Meeting in accordance
with the Interim Order, its bylaws and any instrument governing such
meeting, as applicable, and as otherwise required by applicable laws;
(b) in a timely and expeditious manner, it will prepare (in
consultation with the other party) and file any mutually agreed (or
otherwise required by applicable laws) amendments or supplements to the
Joint Proxy Statement and mail the same as required by the Interim Order
and in accordance with all applicable laws, in all jurisdictions where the
same is required, complying in all material respects with all applicable
legal requirements on the date of mailing thereof;
(c) except for proxies and other non-substantive communications, it
will furnish promptly to the other party a copy of each notice, report,
schedule or other document or communication delivered, filed or received by
it in connection with the Arrangement or the Interim Order, its Meeting or
any other meeting of its security holders or class of security holders
which all such holders, as the case may be, are entitled to attend, any
filings under applicable laws and any dealings with regulatory agencies in
connection with, or in any way affecting, the Transaction;
(d) in a timely and expeditious manner, it will provide the other
party all information as may be reasonably requested by the other party or
as required by the Interim Order or applicable laws with respect to it and
its subsidiaries and their respective businesses and properties for
inclusion in the Joint Proxy Statement or in any amendments or supplements
to the Joint Proxy Statement complying in all material respects with all
applicable legal requirements on the date of mailing thereof and containing
full, true and plain disclosure of all material facts relating to the other
party and not containing any misrepresentation (as defined under applicable
securities laws) with respect thereto;
(e) it will prepare and file with all applicable securities
commissions or similar securities regulatory authorities in Canada and the
United States all necessary applications to seek exemptions, if required,
from the prospectus, registration and other requirements of the applicable
securities laws of Canada and the United States for the issue of
Exchangeable Shares and the issue of shares of Bowater Common Stock
pursuant to the Arrangement and the resale of such shares (other than by
control persons and subject to requirements of general application);
(f) it will use all commercially reasonable efforts to satisfy (or
cause the satisfaction of) the conditions precedent to its obligations
under the Arrangement Agreement to the extent the same is within its
control and to take, or cause to be taken, all other action and to do, or
cause to be done, all other things necessary, proper or advisable under all
applicable laws to complete the Transaction, including using its
commercially reasonable efforts to (i) obtain all necessary waivers,
consents and approvals required to be obtained by it from other parties to
loan agreements, leases and other contracts; (ii) obtain all necessary
consents, approvals and authorizations as are required to be obtained by it
under any applicable law; (iii) effect all necessary registrations and
filings and submissions of information requested by governmental entities
required to be effected by it in connection with the Transaction, and
participate and appear in any proceedings of either party before
governmental entities; (iv) oppose, lift or rescind any injunction or
restraining order or other order or action seeking to stop, or otherwise
adversely affecting the ability of the parties to consummate, the
Transaction; (v) fulfill all conditions and satisfy all provisions of the
Arrangement Agreement and the Arrangement; and (vi) cooperate with the
other party in connection with the performance by it of its obligations
under the Arrangement Agreement; and
(g) it will not take any action, refrain from taking any action
(subject to its commercially reasonable efforts), or permit any action to
be taken or not taken, inconsistent with the Arrangement Agreement or which
would reasonably be expected to significantly impede the consummation of
the Arrangement, provided that where it is required to take any such action
or refrain from taking such action
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(subject to its commercially reasonable efforts) as a result of the
Arrangement Agreement, it will immediately notify the other party in
writing of such circumstances.
In addition, Avenor has agreed that, except as contemplated in the
Arrangement Agreement or the Arrangement, until the Effective Date or the day
upon which the Arrangement Agreement is terminated, whichever is earlier:
(a) in a timely and expeditious manner, it will file, proceed with and
diligently prosecute an application to the Ontario Court for the Interim
Order; provided, however, that the parties have agreed to consult
regarding, as soon as possible, seeking the Interim Order and mailing this
Joint Proxy Statement earlier than as required by the Arrangement
Agreement;
(b) subject to the approval of the Arrangement at the Avenor Meeting
in accordance with the provisions of the Interim Order, it will forthwith
file, proceed with and diligently prosecute an application for the Final
Order;
(c) it will forthwith carry out the terms of the Interim Order and the
Final Order and, subject to the receipt of the Final Order, the
satisfaction of the conditions precedent in favor of Avenor and the receipt
of the written confirmation of Bowater that the conditions precedent in
favor of Bowater have been satisfied, file Articles of Arrangement and the
Final Order with the Director in order for the Arrangement to become
effective;
(d) except as previously disclosed in writing to Bowater, it will, and
will cause each of its subsidiaries to, conduct its and their respective
businesses only in, and not take any action except in, the usual, ordinary
and regular course of business and consistent with past practice;
(e) except as previously disclosed in writing to Bowater, it will not,
without the prior written consent of Bowater, which consent will not be
unreasonably withheld, directly or indirectly do or permit to occur any of
the following: (i) issue, sell, pledge, lease, dispose of, encumber or
agree to issue, sell, pledge, lease, dispose of or encumber (or permit any
of its subsidiaries to do so): (A) any shares of, or any options, warrants,
calls, conversion privileges or rights of any kind to acquire any shares of
it or any of its subsidiaries, other than (I) the issue of Avenor Common
Shares on the conversion of the Avenor Convertible Debentures; or (II)
pursuant to the exercise of stock options (whether vested or unvested)
currently outstanding or under existing share issuance plans in accordance
with their current terms; (B) except in the usual, ordinary and regular
course of business and consistent with past practice, any assets of it or
any of its material subsidiaries; (ii) amend or propose to amend its
articles or by-laws or those of any of its material subsidiaries; (iii)
split, combine or reclassify any of its outstanding shares, or declare, set
aside or pay any dividend or other distribution payable in cash, stock,
property or otherwise with respect to its shares (other than regular
quarterly dividends in respect of its common shares, in amounts consistent
with past practice); (iv) redeem, purchase or offer to purchase (or permit
any of its material subsidiaries to redeem, purchase or offer to purchase)
any shares or other securities of it or any of its material subsidiaries,
unless otherwise required by the terms of such securities; (v) reorganize,
amalgamate or merge it or any of its material subsidiaries with any other
person, corporation, partnership or other business organization whatsoever;
(vi) acquire or agree to acquire any person, corporation, partnership,
joint venture or other business organization or division or acquire or
agree to acquire any assets, which, in each case are, individually or in
the aggregate, material; (vii) except in the usual, ordinary and regular
course of business and consistent with past practice: (A) satisfy or settle
any claims or liabilities, except such as have been reserved against in its
financial statements delivered to Bowater, which are, individually or in
the aggregate, material; (B) relinquish any contractual rights which are,
individually or in the aggregate, material; or (C) enter into any interest
rate, currency or commodity swaps, hedges or other similar financial
instruments; (viii) except for the purpose of the renewal of or the
replacement of existing credit facilities, incur or commit to provide
guarantees, incur any indebtedness for borrowed money or issue any amount
of debt securities, which are, individually or in the aggregate, material;
(ix) incur or commit to capital expenditures prior to the Effective Date,
individually or in the aggregate, exceeding C$50 million; or (x) make any
changes to its existing accounting practices or make any material tax
election;
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(f) without the prior written consent of Bowater, which consent will
not be unreasonably withheld, it will not, and will cause each of its
subsidiaries not to: (i) other than as previously disclosed in writing to
Bowater or in the usual, ordinary and regular course of business and
consistent with past practice or pursuant to existing employment, pension,
supplemental pension, termination, compensation arrangements or policies,
enter into or modify any employment, severance, collective bargaining or
similar agreements, policies or arrangements with, or grant any bonuses,
salary increases, stock options, pension or supplemental pension benefits,
profit sharing, retirement allowances, deferred compensation, incentive
compensation, severance or termination pay to, or make any loan to, any
officers or directors of it; or (ii) other than as previously disclosed in
writing to Bowater or in the usual, ordinary and regular course of business
and consistent with past practice or pursuant to existing employment,
pension, supplemental pension, termination or compensation arrangements or
policies, in the case of employees who are not officers or directors, take
any action with respect to the entering into or modifying of any
employment, severance, collective bargaining or similar agreements,
policies or arrangements or with respect to the grant of any bonuses,
salary increases, stock options, pension or supplemental pension benefits,
profit sharing, retirement allowances, deferred compensation, incentive
compensation, severance or termination pay or any other form of
compensation or profit sharing or with respect to any increase of benefits
payable; provided that the foregoing will not prevent Avenor from taking
such action that is reasonably necessary so that the condition relating to
the exercise or termination of Avenor stock options can be fulfilled. In
such regard, Avenor has agreed to keep Bowater informed as to the
arrangements which Avenor believes are necessary to fulfill such condition
so that Bowater can participate in the decisions made by Avenor;
(g) it will use its reasonable commercial efforts (or cause each of
its subsidiaries to use reasonable commercial efforts) to cause its current
insurance (or re-insurance) policies not to be canceled or terminated or
any of the coverage thereunder to lapse, unless simultaneously with such
termination, cancelation or lapse, replacement policies underwritten by
insurance and re-insurance companies of nationally recognized standing
providing coverage equal to or greater than the coverage under the
canceled, terminated or lapsed policies for substantially similar premiums
are in full force and effect and, at or prior to the Effective Date, to
acquire insurance through a "discovery" endorsement which protects
directors and officers of Avenor (including former directors and officers)
if requested by Bowater and on such terms as approved by Bowater;
(h) it will: (i) use its reasonable commercial efforts, and cause each
of its subsidiaries to use its reasonable commercial efforts, to preserve
intact its business organizations and goodwill, to maintain satisfactory
relationships with suppliers, agents, distributors, customers and others
having business relationships with it or its subsidiaries; (ii) not take
any action, or permit any of its subsidiaries to take any action, that
would interfere with or be inconsistent with the completion of the
transactions contemplated by the Arrangement Agreement or would render, or
that reasonably may be expected to render, any representation or warranty
made by it in the Arrangement Agreement untrue in any material respect at
any time prior to the Effective Date if then made; and (iii) promptly
notify Bowater of any material adverse change, or any change which could
reasonably be expected to become a material adverse change, in respect of
its or any of its subsidiaries' businesses or in the operation of its or
any of its subsidiaries' businesses or in the operation of its or any of
its subsidiaries' properties, and of any material governmental entity or
third party complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
(i) it will not and will cause its subsidiaries not to settle or
compromise any claim brought by any present, former or purported holder of
any of its securities in connection with the Transaction prior to the
Effective Date without the prior written consent of Bowater, which consent
will not be unreasonably withheld;
(j) except in the usual, ordinary and regular course of business and
consistent with past practice, or except as previously disclosed in writing
to Bowater or as required by applicable laws, it and its subsidiaries will
not enter into or modify in any material respect any contract, agreement,
commitment or arrangement which new contract or series of related new
contracts or modification to an existing contract
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or series of related existing contracts would be material to Avenor or
which would have a material adverse effect on Avenor;
(k) it will, in all material respects, conduct itself so as to keep
Bowater fully informed as to the material decisions or actions required or
required to be made with respect to the operation of its business; provided
that such disclosure is not otherwise prohibited by reason of a
confidentiality obligation owed to a third party for which a waiver could
not be obtained or is in respect of customer-specific competitively
sensitive information relating to areas or projects where Avenor and
Bowater are competitors;
(l) it will make, or cooperate as necessary in the making of, all
other necessary filings and applications under all applicable laws required
in connection with the Transaction and take all reasonable action necessary
to be in compliance with such laws;
(m) it will use its reasonable commercial efforts to conduct its
affairs and will cause its subsidiaries to conduct their affairs so that
all of its representations and warranties contained in the Arrangement
Agreement will be true and correct in all material respects on and as of
the Effective Date as if made on and as of such date; and
(n) it will not allow the Debt Ratio (as defined in the Arrangement
Agreement) to exceed 70%.
Bowater has also agreed that, except as contemplated by the Arrangement
Agreement, the Arrangement and transactions (including financing transactions)
necessary to implement the Arrangement, until the Effective Date or the day upon
which the Arrangement Agreement is terminated, whichever is earlier:
(a) except as previously disclosed in writing to Avenor, it will, and
will cause each of its subsidiaries to, refrain from entering into any
transaction or making any other decision which would result in a material
adverse change in Bowater;
(b) it will take all such steps and do all such acts and things,
including without limitation, making or causing to be made cash payments
and issuing shares of Bowater Common Stock, as are specified in the
Arrangement and the Final Order to be taken or done by Bowater;
(c) except as previously disclosed in writing to Avenor or as required
by its obligation described in paragraph (e) below, it will not amend or
propose to amend the Bowater Certificate;
(d) except as previously disclosed in writing to Avenor, it will not
split, combine or reclassify any of its outstanding shares, or declare, set
aside or pay any dividend or other distribution payable in cash, stock,
property or otherwise with respect to its shares (other than regular
quarterly dividends in respect of its common shares, in amounts consistent
with past practice, and dividends provided for pursuant to the provisions
of its preferred stock);
(e) it will (i) create one share of Special Voting Stock, which
entitles the holder of record to a number of votes at meetings of holders
of Bowater Common Stock equal to the number of Exchangeable Shares
outstanding from time to time (other than those Exchangeable Shares held by
Bowater and its affiliates) with respect to which it has received
instructions to vote and (ii) authorize shares of Bowater Common Stock to
be issued under the Arrangement and a sufficient number of shares of
Bowater Common Stock so that the retraction and exchange rights attached to
the Exchangeable Shares may be honored; and
(f) it will forthwith carry out such terms of the Final Order required
under the terms thereof to be done by Bowater.
NON-SOLICITATION
Avenor has agreed that it will not, directly or indirectly, through any
officer, director, employee, representative or agent of Avenor or any of its
subsidiaries, solicit, initiate or knowingly encourage (including by way of
furnishing information or entering into any form of agreement, arrangement or
understanding) the initiation of any inquiries or proposals regarding an
Acquisition Proposal, participate in any discussions or negotiations regarding
any Acquisition Proposal, withdraw or modify in a manner adverse to Bowater the
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approval of the Avenor Board of the Transaction, approve or recommend any
Acquisition Proposal or cause Avenor to enter into any agreement related to any
Acquisition Proposal; provided, however, that subject to Avenor's obligation to
give notice and Bowater's right to respond, nothing will prevent the Avenor
Board from considering, negotiating, approving, recommending to its shareholders
or entering into an agreement in respect of an unsolicited bona fide written
Acquisition Proposal that the Avenor Board determines in good faith, after
consultation with financial advisors and after receiving an opinion of outside
counsel to the effect that the Avenor Board is required to take such action in
order to discharge properly its fiduciary duties, would, if consummated in
accordance with its terms, result in a Superior Proposal.
Bowater has agreed that it will not, directly or indirectly, through any
officer, director, employee, representative or agent of Bowater or any of its
subsidiaries, solicit, initiate or knowingly encourage (including by way of
furnishing information or entering into any form of agreement, arrangement or
understanding) the initiation of any inquiries or proposals regarding an
Acquisition Proposal; provided, however, that notwithstanding any other
provision of the Arrangement Agreement, nothing will prevent the Bowater Board
from considering, negotiating, approving, recommending to its shareholders or
entering into an agreement in respect of an unsolicited bona fide written
Acquisition Proposal if the Bowater Board determines in good faith, after
consultation with financial advisors and after receiving an opinion of outside
counsel, that it is required to do so in order to discharge properly its
fiduciary duties.
Each of Bowater and Avenor has agreed that it will promptly notify the
other party of any current Acquisition Proposals or of any future Acquisition
Proposal of which directors or senior officers become aware, or any amendments
to the foregoing, or any request for non-public information relating to it or
any of its material subsidiaries in connection with an Acquisition Proposal or
for access to the properties, books or records of it or any of its material
subsidiaries by any person or entity that informs it or such material subsidiary
that such person is considering making, or has made, an Acquisition Proposal.
Such notice will include a description of the material terms and conditions of
any proposal and provide such details of the proposal, inquiry or contact as the
other party may reasonably request, including the identity of the person making
such proposal, inquiry or contact.
Bowater and Avenor have further agreed that if Avenor receives a request
for material non-public information from a person who proposes a bona fide
Acquisition Proposal in respect of Avenor (the existence and content of which
have been disclosed to Bowater), and the Avenor Board determines that such
proposal would be a Superior Proposal having received the advice of its
financial advisors and outside counsel as described above, then, and only in
such case, the Avenor Board may, subject to the execution of a confidentiality
agreement containing a standstill provision substantially similar to that
described below in "--Mutual Standstill", provide such person with access to
information regarding Avenor; provided, however, that the person making the
Acquisition Proposal will not be precluded thereunder from making the
Acquisition Proposal, and provided further that Avenor sends a copy of any such
confidentiality agreement to Bowater immediately upon its execution and Bowater
is provided with a list of or copies of the information provided to such person
and immediately provided with access to similar information to which such person
was provided.
Bowater and Avenor have also agreed that Avenor will not accept, approve,
recommend or enter into any agreement in respect of an Acquisition Proposal
(other than a confidentiality agreement) on the basis that it would constitute a
Superior Proposal unless (i) it has provided Bowater with a copy of the
Acquisition Proposal document which the Avenor Board has determined would be a
Superior Proposal, and (ii) five business days have elapsed from the later of
the date Bowater received notice of the proposed determination to accept,
approve, recommend or enter into an agreement in respect of such Acquisition
Proposal, and the date Bowater received a copy of the Acquisition Proposal
document.
During such five business day period, Bowater will have the opportunity,
but not the obligation, to offer to amend the terms of the Arrangement Agreement
and the Arrangement. The Avenor Board will review any offer by Bowater to amend
the terms of the Arrangement Agreement in good faith in order to determine, in
its discretion in the exercise of its fiduciary duties, whether Bowater's offer
upon acceptance by Avenor would result in the Acquisition Proposal not being a
Superior Proposal. If the Avenor Board so determines, it will
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enter into an amended agreement with Bowater reflecting Bowater's amended
proposal. If the Avenor Board determines that the Acquisition Proposal is
nonetheless a Superior Proposal, Avenor will pay to Bowater the termination fee
payable to Bowater described in "--Termination and Termination Fees".
MUTUAL STANDSTILL
During the period commencing on the date of the Arrangement Agreement and
continuing until the Effective Date or the termination of the Arrangement
Agreement, other than pursuant to the Arrangement Agreement, the Arrangement and
the Transaction, each of Bowater and Avenor has agreed that it will not, except
in connection with the Arrangement Agreement or the Arrangement or with the
prior approval of the other party, which approval may be given on such terms as
the other party may determine: (i) in any manner acquire, agree to acquire or
make any proposal or offer to acquire, directly or indirectly, any securities or
property of the other party; (ii) propose or offer to enter into, directly or
indirectly, any merger or business combination involving the other party or to
purchase, directly or indirectly, a material portion of the assets of the other
party; (iii) directly or indirectly, "solicit", or participate or join with any
person in the "solicitation" of, any "proxies" (as such terms are defined in the
Securities Act (Ontario), as the same may be amended from time to time) to vote,
to seek to advise or to influence any person with respect to the voting of any
voting securities of the other party (but Avenor has acknowledged that Bowater
and its agents and advisors (including TD Securities and Goldman Sachs) will be
entitled to solicit proxies and otherwise influence any person to vote in favor
of the Arrangement at the Avenor Meeting or Bowater Meeting and Bowater has
acknowledged that Avenor and its agents and advisors (including RBC DS) will be
entitled to solicit proxies and otherwise influence any person to vote in favor
of the Arrangement at the Avenor Meeting or Bowater Meeting); (iv) otherwise act
alone or in concert with others to seek to control or to influence the
management, Board of Directors or policies of the other party; (v) make any
public or private disclosure of any consideration, intention, plan or
arrangement inconsistent with any of the foregoing; or (vi) advise, assist or
encourage any of the foregoing or work in concert with others in respect of the
foregoing. For the purpose of the provisions described in this section, each
party includes its subsidiaries and their successors. The termination of the
Arrangement Agreement will also terminate any other agreements between the
parties that have a similar effect as the provisions described in this section,
including but not limited to any such standstill provisions contained in the
Confidentiality Agreement dated as of April 10, 1997, between Avenor and
Bowater.
EMPLOYMENT AGREEMENTS
Bowater has agreed, and has agreed to cause Avenor and any successor to
Avenor, after the Effective Time, to agree, (i) to honor and comply with the
terms of the existing employment and severance agreements of Avenor which Avenor
has disclosed to Bowater in writing at the time of the Arrangement Agreement and
(ii) that for a period of one year it will deal with any employees of Avenor
whose employment may be terminated after the Effective Date in a fair and
equitable manner consistent with the existing termination policies of Avenor as
disclosed to Bowater in writing.
CONDITIONS TO CLOSING
The obligations of Avenor and Bowater to complete the Transaction are
subject to the fulfilment of the following conditions on or before the Effective
Date or such other time as is specified below:
(a) the Interim Order having been granted in form and substance
satisfactory to Avenor and Bowater, acting reasonably, and not being set
aside or modified in a manner unacceptable to such parties, acting
reasonably, on appeal or otherwise;
(b) the Share Issuance having been duly approved at the Bowater
Meeting and the Arrangement Resolution and the Shareholder Rights Plan
Resolution having been passed at the Avenor Meeting, duly approving the
Arrangement, in accordance with the Interim Order;
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(c) the Final Order having been granted in form and substance
satisfactory to Avenor and Bowater, acting reasonably, and not having been
set aside or modified in a manner unacceptable to such parties on appeal or
otherwise;
(d) the Articles of Arrangement being in form and substance
satisfactory to Avenor and Bowater, acting reasonably;
(e) the Effective Date being on or before September 30, 1998, subject
to certain notice and cure provisions described below;
(f) no action having been taken under any law or by any governmental
entity that (i) makes it illegal or otherwise directly or indirectly
restrains, enjoins or prohibits the Arrangement or any other transactions
contemplated by the Arrangement Agreement, or (ii) results, or could
reasonably be expected to result, in a judgment or assessment of damages,
directly or indirectly, relating to the Transaction which is materially
adverse;
(g) all consents, waivers, permits, orders and approvals of any
governmental entity (other than as described in paragraphs (h) and (i)
below) or other person, and the expiry of any waiting periods, in
connection with, or required to permit, the consummation of the
Arrangement, the failure of which to obtain or the non-expiry of which
would be materially adverse to Avenor or Bowater, as the case may be, or
materially impede the completion of the Arrangement, having been obtained
or received on terms that will not have a material adverse effect on Avenor
and/or Bowater or reasonably satisfactory evidence thereof having been
delivered to each party;
(h) the Arrangement having received the allowance or approval or
deemed allowance or approval by the responsible Minister under the
Investment Canada Act in respect of the Arrangement, to the extent such
allowance or approval is required, and such allowance or approval being on
terms and conditions satisfactory to the parties, acting reasonably;
(i) without limiting the scope of the condition described in clause
(g) of this section, any applicable waiting periods under the HSR Act
having expired or been earlier terminated and (i) the applicable waiting
period under section 123 of the Competition Act having expired without the
Director of Investigation and Research appointed under the Competition Act
(the "Competition Director"), having given notice that he intends to make
an application to the Competition Tribunal for an order under section 92 or
100 of the Competition Act in respect of the Arrangement or (ii) the
Competition Director having issued an ARC under section 102 of the
Competition Act in respect of the Arrangement;
(j) the Exchangeable Shares and the shares of Bowater Common Stock
issuable pursuant to the Arrangement having been conditionally approved for
listing on the TSE and the NYSE, respectively, subject to the filing of
required documentation, any required prospectus exemptions having been
obtained or being available and such securities not being subject to resale
restrictions in Canada and the United States other than in respect of
control persons and subject to the requirements of general application; and
(k) the Arrangement Agreement not having been terminated.
The obligation of Avenor to complete the Transaction is subject to the
fulfilment of the following conditions on or before the Effective Date or such
other time as specified below:
(a) the representations and warranties made by Bowater in the
Arrangement Agreement being true and correct as of the Effective Date as if
made on and as of such date (except to the extent such representations and
warranties speak as of an earlier date, in which event such representations
and warranties must be true and correct as of such earlier date, or except
as affected by transactions contemplated or permitted by the Arrangement
Agreement or except for any failures or breaches of representations and
warranties which individually or in the aggregate would not have a material
adverse effect on Bowater or materially impede the completion of the
Arrangement or the other transactions contemplated by the Arrangement
Agreement, it being understood by the parties that for the purposes of this
paragraph any reference to materiality, material adverse change or material
adverse effect in such
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representation or warranty will be disregarded), and Bowater having
provided to Avenor the certificate of two qualified officers of Bowater
certifying such accuracy on the Effective Date;
(b) Bowater having complied with its covenants in the Arrangement
Agreement, if the failure to comply with such covenants would individually
or in the aggregate have a material adverse effect on Bowater or materially
impede the completion of the Arrangement or the other transactions
contemplated in the Arrangement Agreement, and Bowater having provided to
Avenor the certificate of two qualified officers of Bowater certifying that
Bowater has so complied with such covenants;
(c) from the date of the Arrangement Agreement up to and including the
Effective Date, there having been no change, condition, event or occurrence
which, in the reasonable judgment of Avenor has, or is reasonably likely to
have, a material adverse effect on Bowater; and
(d) the Bowater Board having made and not having modified or amended,
in any material respect, prior to the Avenor Meeting and the Bowater
Meeting, an affirmative recommendation that its shareholders approve the
Share Issuance.
The obligation of Bowater to complete the Transaction is subject to the
fulfilment of the following conditions on or before the Effective Date or such
other time as specified below:
(a) the representations and warranties made by Avenor in the
Arrangement Agreement being true and correct as of the Effective Date as if
made on and as of such date (except to the extent such representations and
warranties speak as of an earlier date, in which event such representations
and warranties must be true and correct as of such earlier date, or except
as affected by transactions contemplated or permitted by the Arrangement
Agreement or except for any failures or breaches of representations and
warranties which individually or in the aggregate would not have a material
adverse effect on Avenor or materially impede the completion of the
Arrangement or the other transactions contemplated by the Arrangement
Agreement, and it being understood by the parties that for purposes of this
paragraph, any reference to materiality, material adverse change or
material adverse effect in such representation or warranty will be
disregarded), and Avenor having provided to Bowater the certificate of two
qualified officers of Avenor certifying such accuracy on the Effective
Date;
(b) Avenor having complied with its covenants in the Arrangement
Agreement, if the failure to comply with such covenants would individually
or in the aggregate have a material adverse effect on Avenor or materially
impede the completion of the Arrangement or the other transactions
contemplated by the Arrangement Agreement, and Avenor having provided to
Bowater the certificate of two qualified officers of Avenor certifying that
Avenor has so complied with its covenants in the Arrangement Agreement;
(c) from the date of the Arrangement Agreement up to and including the
Effective Date, there having been no change, condition, event or occurrence
which, in the reasonable judgment of Bowater has, or is reasonably likely
to have, a material adverse effect on Avenor;
(d) the Avenor Board having made and having not modified or amended,
in any material respect, prior to the Avenor Meeting, an affirmative
recommendation that its shareholders approve the Arrangement;
(e) the Debt Ratio being less than 70% at the Effective Date and the
Debt Ratio not having been in excess of 70% for a period of 20 consecutive
days during the period from the date of the Arrangement Agreement to the
Effective Date;
(f) all Avenor Options having been exercised or terminated prior to
the Effective Time; and
(g) the holders of not more than 5% of the issued and outstanding
Avenor Common Shares having exercised dissent rights in relation to the
Arrangement.
Each of Bowater and Avenor has agreed that it will give prompt notice to
the other party of the occurrence, or failure to occur, at any time from the
date of the Arrangement Agreement until the Effective Date, of any event or
state of facts which occurrence or failure would, or would be likely to (i)
cause any of
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the representations or warranties of either party contained in the Arrangement
Agreement to be untrue or inaccurate in any material respect on the date of the
Arrangement Agreement or on the Effective Date, or (ii) result in the failure to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by either party under the Arrangement Agreement prior to the
Effective Date.
Bowater and Avenor have also agreed that neither party may elect not to
complete the Transaction pursuant to the conditions described in this section or
exercise any termination right arising therefrom, unless forthwith and in any
event prior to the filing of the Final Order for acceptance by the Director, the
party intending to rely thereon has delivered a written notice to the other
party specifying in reasonable detail all breaches of covenants, representations
and warranties or other matters which the party delivering such notice is
asserting as the basis for the non-fulfilment of the applicable condition
precedent or termination right, as the case may be. If any such notice is
delivered, provided that a party is proceeding diligently to cure such matter,
if such matter is susceptible to being cured, the other party may not terminate
the Arrangement Agreement until the later of September 30, 1998, and the
expiration of a period of 30 days from such notice. If such notice has been
delivered prior to the date of the Avenor Meeting and the Bowater Meeting, such
meetings will be postponed until the expiry of such period.
AMENDMENT AND WAIVER
The Arrangement Agreement may, at any time before or after the Avenor
Meeting and the Bowater Meeting, be amended by mutual written agreement of
Avenor and Bowater without further notice to or authorization on the part of
their respective shareholders, and any such amendment may, without limitation:
(i) change the time for performance of any of the obligations or acts of the
parties; (ii) waive any inaccuracies or modify any representation contained in
the Arrangement Agreement or in any document delivered pursuant thereto; (iii)
waive compliance with or modify any of the covenants contained in the
Arrangement Agreement and waive or modify performance of any of the obligations
of the parties; and (iv) waive compliance with or modify any conditions to
closing contained in the Arrangement Agreement; provided, however, that any such
change, waiver or modification does not invalidate any required security holder
approval of the Arrangement.
TERMINATION AND TERMINATION FEES
The Arrangement Agreement may be terminated at any time prior to the
Effective Time (i) by mutual written consent of Avenor and Bowater, (ii) by
either Avenor or Bowater, subject to the other party's right to cure in certain
circumstances, if the conditions to the Arrangement have not been satisfied on
or before September 30, 1998, (iii) by Avenor upon the occurrence of the Avenor
Termination Fee Event, (iv) by Bowater upon the occurrence of a Bowater
Termination Fee Event, or (v) by Avenor upon any determination by Avenor that an
Acquisition Proposal constitutes a Superior Proposal, subject to the payment of
the termination fee payable to Bowater as described below.
If the holders of Bowater Common Stock do not approve the Share Issuance at
the Bowater Meeting (the Avenor Termination Fee Event), then Bowater must pay to
Avenor, on the business day following such vote, C$70 million in immediately
available funds to an account designated by Avenor; provided, however, that (i)
the holders of Avenor Common Shares have not disapproved the Arrangement and
(ii) the Arrangement Agreement has not been duly terminated prior to the
occurrence of such Avenor Termination Fee Event.
If (x) the Avenor Board has withdrawn or modified in a manner adverse to
Bowater its approval or recommendation of the Arrangement, or approved or
recommended any Superior Proposal, or determined that any Acquisition Proposal
is a Superior Proposal, or resolved to take any of the foregoing actions, or (y)
an Acquisition Proposal has been made known to Avenor or made directly to the
holders of Avenor Common Shares or any person has publicly announced an
intention to make an Acquisition Proposal and, after such Acquisition Proposal
has been made known, made or announced (A) the holders of Avenor Common Shares
do not approve the Arrangement at the Avenor Meeting or (B) the Arrangement is
not, prior to September 30, 1998, submitted for their approval (each of the
events described in clauses (x) and (y) being Bowater Termination Fee Events),
then Avenor must pay to Bowater, in the case of clause (x), one business
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day after taking any such action, and, in the case of clause (y) (A), on the
business day following such vote and, in the case of clause (y) (B), on November
1, 1998, C$70 million in immediately available funds to an account designated by
Bowater; provided, however, that in the case of clause (y), the holders of
Bowater Common Stock have not disapproved the Share Issuance; and in the case of
clauses (x) and (y), the Arrangement Agreement has not been duly terminated
prior to the occurrence of such Bowater Termination Fee Event.
Neither Bowater nor Avenor will be obligated to make more than one payment
pursuant to the termination fee provisions described above.
EXPENSES
Bowater and Avenor have agreed that all out-of-pocket third-party expenses
incurred in connection with the Transaction, including legal fees, financial
advisor fees, regulatory filing fees, all disbursements by advisors and printing
and mailing costs, will be paid by the party incurring such expenses.
REGULATORY MATTERS
HART-SCOTT-RODINO ACT
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Transaction may not be consummated until
notifications and certain information have been given to the Antitrust Division
of the U.S. Department of Justice (the "Antitrust Division") and the FTC and
waiting period requirements have been satisfied. The applicable waiting period
expired on May 14, 1998.
The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of transactions such as the Transaction. At any time before
or after the Meetings, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Transaction or seeking the divestiture
of substantial assets of Bowater, Avenor or their affiliates.
In addition, state antitrust authorities may also bring legal action under
state antitrust laws. Such action could include seeking to enjoin the
consummation of the Transaction or seeking divestiture of certain assets of
Bowater or Avenor or their affiliates. Private parties may also seek to take
legal action under the antitrust laws under certain circumstances. There can be
no assurance that a challenge to the Transaction on antitrust grounds will not
be made or, if such a challenge is made, of the result thereof.
COMPETITION ACT (CANADA)
Under the Competition Act, certain transactions involving the acquisition
of voting shares of a corporation that carries on an operating business in
Canada require prior notification to the Competition Director. If a transaction
is subject to the notification requirement (a "Notifiable Transaction"),
notification must be made either on the basis of a short-form filing (in respect
of which there is a seven-day statutory waiting period) or a long-form filing
(in respect of which there is a 21-day statutory waiting period). The decision
as to whether to make a short-form or long-form filing is at the discretion of
the parties; however, if a short-form filing is made, the Competition Director
may, within the seven-day waiting period, require that the parties make a
long-form filing, thereby extending the waiting period for a further 21 days
following receipt of the long-form filing.
A Notifiable Transaction may not be completed until the applicable
statutory waiting period has expired. However, the Competition Director's review
of a Notifiable Transaction may take longer than the statutory waiting period.
Upon completion of the Competition Director's review of a Notifiable
Transaction, the Competition Director may decide to (i) challenge the Notifiable
Transaction, if the Competition Director concludes that it is likely to
substantially lessen or prevent competition, and ultimately seek an order of the
Competition Tribunal (a) prohibiting the completion of the Notifiable
Transaction on an interim or permanent basis if the parties insist on proceeding
with it without addressing the Competition Director's
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concerns, (b) requiring the divestiture of shares or assets or the dissolution
of the Notifiable Transaction, if it has been completed, or (c) with the consent
of the person against whom the order is directed, requiring that person to take
any other action; (ii) issue an advisory opinion stating that the Competition
Director does not intend to challenge the Notifiable Transaction at that time
but retains the authority to do so for three years after completion of the
Notifiable Transaction; or (iii) issue an ARC. Where an ARC is issued and the
Notifiable Transaction to which the ARC relates is substantially completed
within one year after the ARC is issued, the Competition Director cannot seek an
order of the Competition Tribunal in respect of the Notifiable Transaction
solely on the basis of information that is the same or substantially the same as
the information on the basis of which the ARC was issued.
As the Arrangement is a Notifiable Transaction, Avenor and Bowater filed a
short-form notification with the Competition Director on April 9, 1998, and also
requested that an ARC or favorable advisory opinion be issued. The seven-day
statutory waiting period expired on April 16, 1998. The Competition Director
issued an ARC in respect of the Arrangement on May 8, 1998. As previously noted,
the obligations of Avenor and Bowater to consummate the Arrangement are subject
to the condition that the applicable waiting period under the Competition Act
has expired or the Competition Director has issued an ARC in respect of the
Arrangement.
INVESTMENT CANADA ACT
Under the Investment Canada Act, certain transactions involving the
acquisition of control of a Canadian business by a non-Canadian are subject to
review and cannot be implemented unless the Minister responsible for the
Investment Canada Act (the "Minister") is satisfied that the transaction is
likely to be of net benefit to Canada. If a transaction is subject to the review
requirement (a "Reviewable Transaction"), an application for review must be
filed with the Director of Investments appointed under the Investment Canada Act
(the "Director of Investments") prior to the implementation of the Reviewable
Transaction. The Minister is then required to determine whether the Reviewable
Transaction is likely to be of net benefit to Canada taking into account, among
other things, certain factors specified in the Investment Canada Act and any
written undertakings that may have been given by the applicant. The Investment
Canada Act contemplates an initial review period of 45 days after filing;
however, if the Minister has not completed the review by that date, the Minister
may unilaterally extend the review period by a further 30 days (or such longer
period as may be agreed to by the applicant) to permit completion of the review.
The prescribed factors of assessment to be considered by the Minister
include, among other things, the effect of the investment on the level and
nature of economic activity in Canada (including the effect on employment,
resource processing, utilization of Canadian products and services and exports),
the degree and significance of participation by Canadians in the acquired
business, the effect of the investment on productivity, industrial efficiency,
technological development, product innovation and product variety in Canada, the
effect of the investment on competition within any industry in Canada, the
compatibility of the investment with national industrial, economic and cultural
policies (taking into consideration corresponding provincial policies), and the
contribution of the investment to Canada's ability to compete in world markets.
If the Minister determines that he or she is not satisfied that a Reviewable
Transaction is likely to be of net benefit to Canada, the Reviewable Transaction
may not be implemented.
As the Arrangement is a Reviewable Transaction, Bowater filed an
application with the Director of Investments on April 9, 1998. The Minister has
not yet completed the review of the Arrangement and has extended the initial 45
day review period by a further 30 days. The obligations of Avenor and Bowater to
consummate the Arrangement are subject to the condition that the Minister has
concluded, or deemed to have concluded, on terms and conditions satisfactory to
Avenor and Bowater that the Transaction is of net benefit to Canada.
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INCOME TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR AVENOR SHAREHOLDERS
Subject to the qualifications and assumptions contained herein, the
following discussion is the opinion of Davies, Ward & Beck, Canadian counsel to
Avenor, and Fraser & Beatty, Canadian counsel to Bowater, as to the principal
Canadian federal income tax considerations, as of the date of this Joint Proxy
Statement, generally applicable to Avenor Shareholders who at all relevant
times, for purposes of the Canadian Tax Act, hold their Avenor Common Shares and
will hold their Exchangeable Shares and shares of Bowater Common Stock as
capital property and deal at arm's length with, and are not affiliated with,
Avenor or Bowater. This discussion does not apply to a holder with respect to
whom Bowater is a foreign affiliate within the meaning of the Canadian Tax Act.
Each Avenor Shareholder who disposes of Avenor Common Shares on the Arrangement
also will be disposing of the Rights associated with such Avenor Common Shares.
Because approval of the Shareholder Rights Plan Resolution is a condition to the
Arrangement, it has been assumed that the Rights have no adjusted cost base and
no value. All references to Avenor Common Shares in this discussion refer to the
Avenor Common Shares and the Rights.
All Avenor Shareholders should consult their own tax advisors as to
whether, as a matter of fact, they hold their Avenor Common Shares and will hold
their Exchangeable Shares and shares of Bowater Common Stock as capital property
for purposes of the Canadian Tax Act. Certain provisions in the Canadian Tax Act
(the "mark-to-market rules") relating to financial institutions (including
certain financial institutions, registered securities dealers and corporations
controlled by one or more of the foregoing) will preclude such financial
institutions from treating their Avenor Common Shares, Exchangeable Shares and
shares of Bowater Common Stock as capital property for purposes of the Canadian
Tax Act. (The Proposed Amendments will expand the definition of financial
institution.) This discussion does not take into account the mark-to-market
rules, and Avenor Shareholders that are financial institutions for purposes of
these rules should consult their own tax advisors to determine the tax
consequences to them of the Arrangement.
This discussion is based on the current provisions of the Canadian Tax Act
and the regulations thereunder, the current provisions of the Canada-United
States Income Tax Convention (the "Tax Treaty"), and counsel's understanding of
the current published administrative practices of Revenue Canada. This
discussion takes into account the Proposed Amendments and assumes that all such
Proposed Amendments will be enacted in their present form. No assurances can be
given that the Proposed Amendments will be enacted in the form proposed, if at
all; however, the Canadian federal income tax considerations generally
applicable to Avenor Shareholders with respect to the Arrangement will not be
different in a material adverse way if the Proposed Amendments are not enacted.
Except for the foregoing, this discussion does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein.
WHILE INTENDED TO ADDRESS ALL PRINCIPAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS, THIS DISCUSSION IS OF A GENERAL NATURE ONLY. THEREFORE, AVENOR
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES. NO ADVANCE INCOME TAX RULING HAS BEEN OBTAINED FROM
REVENUE CANADA TO CONFIRM THE TAX CONSEQUENCES OF ANY OF THE TRANSACTIONS
DESCRIBED HEREIN.
For purposes of the Canadian Tax Act, all amounts relating to the
acquisition, holding or disposition of Bowater Common Stock, including
dividends, adjusted cost base and proceeds of disposition, must be converted
into Canadian dollars based on the prevailing United States dollar exchange rate
at the time such amounts arise. In computing a shareholder's liability for tax
under the Canadian Tax Act, any cash amounts received by a shareholder in United
States dollars must be converted into the Canadian dollar equivalent, and the
amount of any non-cash consideration received by a shareholder must be expressed
in Canadian dollars at the time such consideration is received.
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SHAREHOLDERS RESIDENT IN CANADA
The following portion of this discussion is applicable to Avenor
Shareholders who, for purposes of the Canadian Tax Act and any applicable tax
treaty or convention, are resident or deemed to be resident in Canada at all
relevant times. Certain of such persons to whom the Avenor Common Shares might
not constitute capital property may elect, in certain circumstances, to have
such property treated as capital property by making the irrevocable election
permitted by subsection 39(4) of the Canadian Tax Act.
Certain Avenor Shareholders may be subject to the "tax-free zone" rules,
applicable in respect of property owned or deemed owned on December 31, 1971, in
determining the adjusted cost base of such shareholder's Avenor Common Shares.
Such Avenor Shareholders should consult their own tax advisors.
Exchange of Avenor Common Shares for Shares of Bowater Common Stock. On
the exchange of Avenor Common Shares for shares of Bowater Common Stock, an
Avenor Shareholder will realize a capital gain (or a capital loss) equal to the
amount by which the proceeds of disposition for the Avenor Common Shares, net of
any reasonable costs of disposition, exceed (or are less than) the aggregate
adjusted cost base to the holder of the Avenor Common Shares so exchanged. For
this purpose, the proceeds of disposition will be the fair market value at the
time of the exchange of the shares of Bowater Common Stock received plus any
cash in lieu of fractional shares of Bowater Common Stock. The taxation of
capital gains and capital losses is described below.
Exchange of Avenor Common Shares for Cash and/or Exchangeable Shares Where
No Election Is Made under Section 85 of the Canadian Tax Act. An Avenor
Shareholder who disposes of Avenor Common Shares to Bowater Canada will realize
a capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition, net of any reasonable costs of disposition, exceed (or are less
than) the adjusted cost base of the Avenor Common Shares to the shareholder
unless such holder is eligible to make and makes a joint tax election under
subsection 85(1) or (2) of the Canadian Tax Act as discussed below. For this
purpose, the proceeds of disposition will equal the sum of (i) any cash
received, (ii) the fair market value, at the time of the exchange, of the
Exchangeable Shares received, and (iii) the fair market value, at the time of
the exchange, of the Ancillary Rights acquired by such holder in connection with
the exchange. The taxation of capital gains and capital losses is described
below.
The cost of the Exchangeable Shares received in exchange for the Avenor
Common Shares will be equal to the fair market value of the Exchangeable Shares
at the time of the exchange. The cost of the Ancillary Rights received in
connection with the exchange of the Avenor Common Shares will be equal to their
fair market value at the time of the exchange.
For these purposes, a holder of Avenor Common Shares will be required to
determine the fair market value of the Ancillary Rights on a reasonable basis.
Each of Bowater and Bowater Canada is of the view, and has advised counsel, that
the Ancillary Rights have only nominal value. Such determination of value is not
binding on Revenue Canada and counsel can express no opinion on matters of
factual determination such as this.
Exchange of Avenor Common Shares for Exchangeable Shares or Cash and
Exchangeable Shares Where an Election Is Made under Section 85 of the Canadian
Tax Act. An "Eligible Holder" (as defined below) who disposes of Avenor Common
Shares to Bowater Canada and who receives Exchangeable Shares may obtain a full
or partial tax deferral by entering into a joint tax election with Bowater
Canada and filing with Revenue Canada (and where applicable a provincial tax
authority) a joint tax election under subsection 85(1) of the Canadian Tax Act
or, in the case of an Eligible Holder that is a partnership, under subsection
85(2) of the Canadian Tax Act, (and the corresponding provisions of any
applicable provincial tax legislation) in respect of such Avenor Common Shares
and specifying therein a transfer price (the "Elected Transfer Price") within
the limits described below.
An "Eligible Holder" is an Avenor Shareholder who is (i) a resident of
Canada for the purposes of the Canadian Tax Act and who is not exempt from
Canadian tax under the Canadian Tax Act, or (ii) a non-resident of Canada for
the purposes of the Canadian Tax Act whose Avenor Common Shares constitute
"taxable Canadian property" (as defined in the Canadian Tax Act) and who is not
exempt from Canadian tax
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in respect of any gain that would be realized on the disposition of the Avenor
Common Shares by reason of an exemption contained in an applicable income tax
treaty or convention. A partnership that holds Avenor Common Shares is also an
Eligible Holder if one or more members of the partnership would be an Eligible
Holder if such member held the Avenor Common Shares directly.
The joint tax election must specify the Elected Transfer Price in respect
of the Avenor Common Shares transferred to Bowater Canada. The Elected Transfer
Price may not:
(a) be less than the aggregate of the fair market value of the
Ancillary Rights and any cash received by the Eligible Holder;
(b) be less than the lesser of the Eligible Holder's adjusted cost
base of those Avenor Common Shares at the time of disposition and the fair
market value of those Avenor Common Shares at that time; and
(c) exceed the fair market value of those Avenor Common Shares at the
time of disposition.
Elected Transfer Prices which do not otherwise comply with the foregoing
limitations will be automatically adjusted under the Canadian Tax Act so that
they are in compliance.
Where an Eligible Holder makes a joint tax election in respect of the
disposition of such holder's Avenor Common Shares to Bowater Canada in the form
prescribed under the Canadian Tax Act and specifies therein an Elected Transfer
Price within the limits set out in the Canadian Tax Act, and the joint tax
election is filed with Revenue Canada within the time prescribed in the Canadian
Tax Act, the Canadian federal income tax consequences are as follows:
(a) Such Avenor Common Shares will be deemed to have been disposed of
for proceeds of disposition equal to the Elected Transfer Price. If the
proceeds of disposition in respect of such Avenor Common Shares are equal
to the aggregate of the shareholder's adjusted cost base of those Avenor
Common Shares (determined immediately before the disposition) and any
reasonable costs of disposition, no capital gain or capital loss will be
realized by the shareholder. Subject to the limitations set out in
subsections 85(1) and (2) of the Canadian Tax Act, to the extent that the
proceeds of disposition in respect of the Avenor Common Shares exceed (or
are less than) the aggregate of the adjusted cost base thereof and any
reasonable costs of disposition, the holder will realize a capital gain (or
a capital loss). The taxation of capital gains and capital losses is
described below.
(b) The cost to a shareholder of the Exchangeable Shares received upon
the disposition of the Avenor Common Shares to Bowater Canada will be equal
to the Elected Transfer Price in respect of those Avenor Common Shares,
less the aggregate of any cash consideration received and the fair market
value, at the time of the exchange, of the Ancillary Rights acquired by
such holder in connection with the exchange.
Consequently, notwithstanding any election, if the aggregate of the cash
consideration received by an Avenor Shareholder and the fair market value, at
the time of the exchange, of the Ancillary Rights acquired by such holder in
connection with the exchange exceeds the adjusted cost base of his Avenor Common
Shares and any reasonable costs of disposition, the holder will realize a
capital gain at least equal to such excess. The taxation of capital gains and
capital losses is described below.
For these purposes, an Avenor Shareholder will be required to determine the
fair market value of the Ancillary Rights on a reasonable basis. Each of Bowater
and Bowater Canada is of the view, and has advised counsel, that the Ancillary
Rights have only nominal value. Such determination of value is not binding on
Revenue Canada and counsel can express no opinion on matters of factual
determination such as this.
A Tax Election Filing Package may be obtained from the Depositary by
checking the appropriate box on the Letter of Transmittal and Election Form. The
election forms may also be obtained directly from Revenue Canada and (if
applicable) the appropriate provincial election forms may be obtained from the
relevant provincial income tax authorities. An Eligible Holder interested in
obtaining a Tax Election Filing Package
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should so indicate on the Letter of Transmittal and Election Form accompanying
this Joint Proxy Statement in the space provided therein.
In order to make a joint tax election, a duly completed Tax Election Filing
Package together with any required supporting schedules must be signed and
forwarded by the Eligible Holder to KPMG, Chartered Accountants, at its address
at 4120 Yonge Street, Suite 500, North York, Ontario M2P 2B8 on or before
November 30, 1998. BOWATER CANADA WILL NOT EXECUTE ANY TAX ELECTION RECEIVED BY
KPMG AFTER NOVEMBER 30, 1998. The Tax Election Filing Package consists of:
(a) two (2) copies of Revenue Canada form T2057 or, if the Eligible
Holder is a partnership as indicated on the Letter of Transmittal and
Election Form, two (2) copies of Revenue Canada form T2058;
(b) if the Eligible Holder is required to file in Quebec as indicated
by the Eligible Holder on the Letter of Transmittal and Election Form, then
two (2) copies of the Quebec Tax Election Form TP-518V or, if the Eligible
Holder is a partnership as indicated on the Letter of Transmittal and
Election Form, three (3) copies of Quebec Tax Election Form TP-529V; and
(c) a tax election filing authorization letter (in duplicate if the
Eligible Holder is required to file in Quebec as indicated on the Letter of
Transmittal and Election Form).
Where Avenor Common Shares are held in joint ownership and two or more of
the co-owners wish to elect, one of the co-owners designated for such purpose
should file the designation and a copy of the Revenue Canada form T2057 (and,
where applicable, the corresponding provincial form) for each co-owner along
with a list of all co-owners electing, which list should contain the address and
social insurance number or tax account number of each co-owner. Where the Avenor
Common Shares are held as partnership property, a partner designated by the
partnership must file one copy of Revenue Canada form T2058 on behalf of all
members of the partnership (and, where applicable, the corresponding form in
duplicate with the provincial taxation authorities). Such Revenue Canada form
T2058 (and provincial form, if applicable) must be accompanied by a list
containing the name and social insurance number or account number of each
partner and must be signed by each partner or be accompanied by a copy of the
document authorizing the designated partner to complete, execute and file the
form on behalf of the other partners.
Bowater Canada will make a joint tax election under subsection 85(1) or (2)
of the Canadian Tax Act and the corresponding provisions of any applicable
provincial tax legislation only with an Eligible Holder, and at the amount(s)
determined by the Eligible Holder subject to the limitations set out in
subsections 85(1) and (2) of the Canadian Tax Act and any applicable provincial
tax statute. Bowater Canada agrees only to execute any joint tax election and to
forward such tax election by mail (within 30 days after the receipt thereof by
KPMG) to the appropriate tax authorities with a copy to the Eligible Holder.
With the exception of execution and filing of the election by Bowater Canada,
compliance with the requirements to ensure the validity of a joint tax election
will be the sole responsibility of the Eligible Holder making the election.
Bowater Canada will not be responsible for the proper completion of any joint
tax election, and the Eligible Holder will be solely responsible for the payment
of any late filing penalty that does not result from a failure on the part of
Bowater Canada. Accordingly, Bowater Canada will not be responsible or liable
for taxes, interest, penalties, damages or expenses resulting from the failure
by anyone to properly complete any joint tax election form or to properly file
such form within the time prescribed and in the form prescribed under the
Canadian Tax Act or the corresponding provisions of any applicable provincial
legislation.
In order for Revenue Canada to accept the joint tax election without a late
filing penalty being paid by an Eligible Holder, the joint tax election, duly
completed and executed by both the Eligible Holder and Bowater Canada, must be
received by Revenue Canada on or before the day that is the earliest of the days
on or before which either Bowater Canada or the Eligible Holder is required to
file an income tax return for the taxation year in which the disposition occurs.
Bowater Canada has advised counsel that its current taxation year is scheduled
to end on December 31, 1998. Bowater Canada will be required to file an income
tax return for the current taxation year on or before June 30, 1999. In general,
the joint tax elections of Eligible Holders who are individuals (other than
trusts) must be filed by April 30, 1999. HOWEVER, REGARDLESS OF SUCH DEADLINE,
THE TAX
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ELECTION FILING PACKAGES OF ELIGIBLE HOLDERS MUST BE RECEIVED BY KPMG NO LATER
THAN NOVEMBER 30, 1998. CERTAIN ELIGIBLE HOLDERS MAY BE REQUIRED TO FORWARD
THEIR TAX ELECTION FILING PACKAGE TO KPMG BEFORE THAT DATE TO AVOID LATE FILING
PENALTIES. If, for whatever reason, the current taxation year of Bowater Canada
were to terminate before December 31, 1998, the joint tax elections might have
to be filed earlier to avoid late filing penalties. In such event, Bowater
Canada has agreed to notify forthwith, through the Depositary, every Avenor
Shareholder who received Exchangeable Shares on the Arrangement of such change.
ELIGIBLE HOLDERS ARE URGED TO CONSULT THEIR OWN ADVISORS AS SOON AS POSSIBLE
REGARDING THE DEADLINES APPROPRIATE TO THEIR CIRCUMSTANCES. ANY ELIGIBLE HOLDER
WHO DOES NOT ENSURE THAT KPMG HAS RECEIVED A DULY COMPLETED TAX ELECTION FILING
PACKAGE ON OR BEFORE NOVEMBER 30, 1998, WILL NOT BE ABLE TO BENEFIT FROM THE
ROLLOVER PROVISIONS OF THE CANADIAN TAX ACT. ACCORDINGLY, ALL ELIGIBLE HOLDERS
WHO WISH TO ENTER INTO A JOINT ELECTION WITH BOWATER CANADA SHOULD GIVE THEIR
IMMEDIATE ATTENTION TO THIS MATTER. THE INSTRUCTIONS FOR REQUESTING A TAX
ELECTION FILING PACKAGE ARE SET OUT IN THE LETTER OF TRANSMITTAL AND ELECTION
FORM.
Eligible Holders who wish to make a joint tax election are referred for
further information to Information Circular 76-19R3 and Interpretation Bulletin
IT-291R2 issued by Revenue Canada.
ELIGIBLE HOLDERS WISHING TO COMPLETE A FEDERAL OR, IF APPLICABLE, A
PROVINCIAL TAX ELECTION SHOULD CONSULT THEIR OWN TAX ADVISORS. THE COMMENTS
HEREIN WITH RESPECT TO SUCH JOINT TAX ELECTIONS ARE PROVIDED FOR GENERAL
ASSISTANCE ONLY. THE LAW IN THIS AREA IS COMPLEX AND CONTAINS NUMEROUS TECHNICAL
REQUIREMENTS. COMPLIANCE WITH SUCH REQUIREMENTS TO ENSURE THE VALIDITY OF THE
JOINT TAX ELECTION WILL BE THE SOLE RESPONSIBILITY OF THE ELIGIBLE HOLDER.
Call Rights. Each of Bowater and Bowater Canada is of the view, and has
advised counsel, that the Liquidation Call Right, the Redemption Call Right and
the Retraction Call Right have nominal value. On this basis, a holder of Avenor
Common Shares who receives Exchangeable Shares in exchange therefor should not
realize a gain at the time that any of such rights are granted to Bowater
Holdings. Such determinations of value are not binding on Revenue Canada and
counsel can express no opinion on matters of factual determination such as this.
Dividends on Exchangeable Shares. In the case of a shareholder who is an
individual, dividends received or deemed to be received on the Exchangeable
Shares will be included in computing the shareholder's income, and will be
subject to the gross-up and dividend tax credit rules normally applicable to
taxable dividends received from taxable Canadian corporations.
Subject to the discussion below, in the case of a shareholder that is a
corporation other than a "specified financial institution" (as defined in the
Canadian Tax Act), dividends received or deemed to be received on the
Exchangeable Shares normally will be included in the corporation's income and
deductible in computing its taxable income.
A shareholder that is a "private corporation" (as defined in the Canadian
Tax Act) or any other corporation resident in Canada and controlled or deemed to
be controlled by or for the benefit of an individual or a related group of
individuals may be liable under Part IV of the Canadian Tax Act to pay a
refundable tax of 33 1/3% of dividends received or deemed to be received on the
Exchangeable Shares to the extent that such dividends are deductible in
computing the shareholder's taxable income.
If Bowater or any person with whom Bowater does not deal at arm's length is
a specified financial institution for purposes of the Canadian Tax Act at the
time a dividend is paid on an Exchangeable Share, then, subject to the exemption
described in the next paragraph, dividends received or deemed to be received by
a shareholder that is a corporation will be fully includible in income and will
not be deductible in computing taxable income under Part I of the Canadian Tax
Act. A corporation will generally be a specified financial institution for these
purposes if it is a bank, a trust company, a credit union, an insurance
corporation or a corporation whose principal business is the lending of money to
persons with whom the corporation is dealing at arm's length or the purchasing
of debt obligations issued by such persons or a combination thereof, or a
corporation controlled by one or more such entities, or related to such
entities. Bowater has informed counsel that it is of the view that neither it
nor any person with whom it does not deal at arm's length is a specified
financial institution at the current time. Avenor has informed counsel that it
is of the view that
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neither it nor any person with whom it does not deal at arm's length is a
specified financial institution at the current time. However, there can be no
assurances that this status will not change prior to any dividend on the
Exchangeable Shares being received or deemed to be received by a corporate
shareholder.
This denial of the dividend deduction to a corporate shareholder will not
apply if, at the time a dividend is received or deemed to be received, the
Exchangeable Shares are listed on a prescribed stock exchange (which currently
includes the TSE and the ME), Bowater controls Bowater Holdings and Bowater
Canada, and the recipient (together with persons with whom the recipient does
not deal at arm's length and any partnership or trust of which the recipient or
such person is a member or beneficiary, respectively) does not receive dividends
on more than 10% of the issued and outstanding Exchangeable Shares.
The Exchangeable Shares will be "term preferred shares" as defined in the
Canadian Tax Act. Consequently, in the case of a shareholder that is a specified
financial institution, such a dividend will be deductible in computing its
taxable income only if:
(i) where neither Bowater nor any person with whom Bowater does not
deal at arm's length is a specified financial institution at the time the
dividend is received, the specified financial institution did not acquire
the Exchangeable Shares in the ordinary course of the business carried on
by such institution; or
(ii) in any case, at the time the dividend is received by the
specified financial institution, the Exchangeable Shares are listed on a
prescribed stock exchange in Canada (which currently includes the TSE and
the ME) and the specified financial institution, either alone or together
with persons with whom it does not deal at arm's length, does not receive
(or is not deemed to receive) dividends in respect of more than 10% of the
issued and outstanding Exchangeable Shares.
In addition, to the extent that a deemed dividend arises on the redemption of
the Exchangeable Shares by Bowater Canada, a portion of the dividend may not be
subject to the denial of dividend deduction applicable in respect of term
preferred shares. Specified financial institutions should consult their own tax
advisors.
A shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation" (as defined in the Canadian Tax Act)
may be liable to pay an additional refundable tax of 6 2/3% on its "aggregate
investment income" for the year which will include dividends or deemed dividends
that are not deductible in computing taxable income.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Canadian Tax Act. Accordingly, Bowater
Canada will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act
on dividends (other than "excluded dividends" as defined in the Canadian Tax
Act) paid or deemed to be paid on the Exchangeable Shares and will be entitled
to deduct an amount equal to 9/4 of the tax so payable in computing its taxable
income for purposes of the Canadian Tax Act. Dividends received or deemed to be
received on the Exchangeable Shares will not be subject to the 10% tax under
Part IV.1 of the Canadian Tax Act applicable to certain corporations.
Redemption of Exchangeable Shares. On the redemption (including a
retraction) of an Exchangeable Share by Bowater Canada, the holder of an
Exchangeable Share will be deemed to have received a dividend equal to the
amount, if any, by which the redemption proceeds exceed the paid-up capital at
that time of the Exchangeable Share so redeemed. For these purposes, the
redemption proceeds will be the fair market value, at the time of the
redemption, of the shares of Bowater Common Stock received from Bowater Canada
plus the amount, if any, of all accrued but unpaid dividends on the Exchangeable
Share paid on the redemption. The amount of such deemed dividend generally will
be subject to the same tax treatment accorded to dividends on the Exchangeable
Shares as described above. On the redemption, the holder of an Exchangeable
Share will also be considered to have disposed of the Exchangeable Share, but
the amount of such deemed dividend will be excluded in computing the
shareholder's proceeds of disposition for purposes of computing any capital gain
or capital loss arising on the disposition. In the case of a shareholder that is
a corporation, in some circumstances, the amount of any such deemed dividend may
be treated as proceeds of disposition and not as a dividend. The taxation of
capital gains and capital losses is described below.
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Exchange of Exchangeable Shares with Bowater Holdings or Bowater. On the
exchange of an Exchangeable Share with Bowater Holdings or Bowater for shares of
Bowater Common Stock, the holder will generally realize a capital gain (or a
capital loss) equal to the amount by which the proceeds of disposition of the
Exchangeable Share, net of any reasonable costs of disposition, exceed (or are
less than) the adjusted cost base to the holder of the Exchangeable Share
immediately before the exchange. For these purposes, the proceeds of disposition
will be the fair market value at the time of exchange of the shares of Bowater
Common Stock plus any other amount received by the holder from Bowater Holdings
or Bowater as part of the exchange consideration. The taxation of capital gains
and capital losses is described below.
BECAUSE OF THE EXISTENCE OF THE RETRACTION CALL RIGHT, A HOLDER EXERCISING
THE RIGHT OF RETRACTION IN RESPECT OF AN EXCHANGEABLE SHARE CANNOT CONTROL
WHETHER SUCH HOLDER WILL RECEIVE BOWATER COMMON STOCK BY WAY OF REDEMPTION OF
THE EXCHANGEABLE SHARE BY BOWATER CANADA OR BY WAY OF PURCHASE OF THE
EXCHANGEABLE SHARE BY BOWATER HOLDINGS. AS DESCRIBED ABOVE, THE CANADIAN FEDERAL
INCOME TAX CONSEQUENCES OF A REDEMPTION DIFFER FROM THOSE OF A PURCHASE.
Dividends on Bowater Common Stock. Dividends on shares of Bowater Common
Stock will be included in the recipient's income for the purposes of the
Canadian Tax Act. Such dividends received by an individual shareholder will not
be subject to the gross-up and dividend tax credit rules in the Canadian Tax
Act. A shareholder that is a corporation will include such dividends in
computing its income and generally will not be entitled to deduct the amount of
such dividends in computing its taxable income. A shareholder that is throughout
the relevant taxation year a "Canadian-controlled private corporation" (as
defined in the Canadian Tax Act) may be liable to pay an additional refundable
tax of 6 2/3% on its "aggregate investment income" for the year which will
include such dividends. United States non-resident withholding tax on such
dividends will be eligible for foreign tax credit or deduction treatment, where
applicable, under the Canadian Tax Act.
Disposition of Shares of Bowater Common Stock. The cost of a share of
Bowater Common Stock received on the Arrangement or on a retraction, redemption
or exchange of an Exchangeable Share will be equal to the fair market value of
such share at the time of such event. A disposition or deemed disposition of a
share of Bowater Common Stock by a holder will generally result in a capital
gain (or a capital loss) equal to the amount by which the proceeds of
disposition, net of any reasonable costs of disposition, exceed (or are less
than) the adjusted cost base to the holder of such share immediately before the
disposition. The adjusted cost base to a holder of shares of Bowater Common
Stock acquired on the Arrangement or on a retraction, redemption or exchange of
an Exchangeable Share will be determined by averaging the cost of such share
with the adjusted cost base of all other shares of Bowater Common Stock held by
such holder as capital property immediately before the Arrangement, retraction,
redemption or exchange, as the case may be. The taxation of capital gains and
capital losses is described below.
Taxation of Capital Gains and Capital Losses. Three-quarters of any
capital gain ("taxable capital gain") must be included in a shareholder's income
for the year of disposition. Three-quarters of any capital loss ("allowable
capital loss") generally must be deducted by the holder from taxable capital
gains for the year of disposition. Any allowable capital losses in excess of
taxable capital gains for the year of disposition generally may be carried back
up to three taxation years or forward indefinitely and deducted against net
taxable capital gains in such other years to the extent and under the
circumstances described in the Canadian Tax Act.
Capital gains realized by an individual or trust, other than other certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act.
A shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation" (as defined in the Canadian Tax Act)
may be liable to pay an additional refundable tax of 6 2/3% on its "aggregate
investment income" for the year which will include an amount in respect of
taxable capital gains.
If the holder of an Avenor Common Share or an Exchangeable Share is a
corporation, the amount of any capital loss arising from a disposition or deemed
disposition of such share may be reduced by the amount of dividends received or
deemed to have been received by it on such share to the extent and under
circumstances prescribed by the Canadian Tax Act. Similar rules may apply where
a corporation is a member of a
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partnership or a beneficiary of a trust that owns Avenor Common Shares or
Exchangeable Shares or where a trust or partnership of which a corporation is a
beneficiary or a member is a member of a partnership or a beneficiary of a trust
that owns Avenor Common Shares or Exchangeable Shares. Shareholders to whom
these rules may be relevant should consult their own tax advisors.
Foreign Property Information Reporting. A holder of Bowater Common Stock
who is a "specified Canadian entity" for a taxation year or fiscal period and
whose total cost amount of "specified foreign property", including such shares,
at any time in the year or fiscal period exceeds C$100,000 will be required to
file an information return for the year or period disclosing prescribed
information, including the shareholder's cost amount, any dividends received in
the year, and any gains or losses realized in the year, in respect of such
property. With some exceptions, a taxpayer resident in Canada in the year will
be a specified Canadian entity. A holder of Bowater Common Stock should consult
its own advisors about whether it must comply with these rules. On October 2,
1997, the Minister of Finance (Canada) and the Minister of National Revenue
announced that this requirement to report such specified foreign property is
suspended pending a review and that the first filing date has been delayed until
April 1999.
Dissenting Shareholders. Avenor Shareholders are permitted to dissent from
the Arrangement in the manner set out in section 190 of the CBCA. A dissenting
Avenor Shareholder will be entitled, in the event the Arrangement becomes
effective, to be paid by Avenor the fair value of the Avenor Common Shares held
by such holder determined as of the appropriate date. See "Dissenting
Shareholders' Rights". Such shareholder will be considered to have realized a
deemed dividend and a capital gain (or a capital loss) based on redemption
proceeds equal to such fair value, computed as generally described above with
respect to a redemption of an Exchangeable Share by Bowater Canada under
"Redemption of Exchangeable Shares". Additional income tax considerations may be
relevant to dissenting Avenor Shareholders who fail to perfect or withdraw their
claims pursuant to the right of dissent. Dissenting Avenor Shareholders should
consult their own tax advisors.
SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of the discussion is applicable to Avenor
Shareholders who, for purposes of the Canadian Tax Act and any applicable tax
treaty or convention, have not been and will not be resident or deemed to be
resident in Canada at any time while they have held Avenor Common Shares or will
hold Exchangeable Shares or shares of Bowater Common Stock and, except as
specifically discussed below, to whom such shares are not "taxable Canadian
property" (as defined in the Canadian Tax Act and the Proposed Amendments) and,
in the case of a non-resident of Canada who carries on an insurance business in
Canada and elsewhere, such shares are not "designated insurance property" as
defined in the Canadian Tax Act.
Generally, Avenor Common Shares, Exchangeable Shares and shares of Bowater
Common Stock will not be taxable Canadian property at a particular time provided
that such shares are listed on a prescribed stock exchange (which exchanges
currently include the NYSE, the TSE and the ME), the holder does not use or
hold, and is not deemed to use or hold, the Avenor Common Shares, the
Exchangeable Shares or the shares of Bowater Common Stock, as applicable, in
connection with carrying on a business in Canada and the holder, persons with
whom such holder does not deal at arm's length, or the holder and such persons,
has not owned (or had under option) 25% or more of the issued shares of any
class or series of the capital stock of Avenor, Bowater Canada or Bowater, as
applicable, at any time within five years preceding the particular time. In the
case of Bowater, even if the holder exceeds the 25% threshold referred to in the
preceding sentence with respect to shares of Bowater Common Stock, such shares
may not be taxable Canadian property. At the time of disposition such a holder
should consult its own tax advisors to determine whether its shares of Bowater
Common Stock constitute taxable Canadian property at that time. The TSE and the
ME have conditionally approved the listing of the Exchangeable Shares. See "The
Transaction--Stock Exchange Listings".
A holder of Avenor Common Shares that are not taxable Canadian property
will not be subject to tax under the Canadian Tax Act on the sale of Avenor
Common Shares for cash or on the exchange of Avenor Common Shares for
Exchangeable Shares or shares of Bowater Common Stock. Similarly, provided the
Exchangeable Shares or shares of Bowater Common Stock are not taxable Canadian
property to the holder,
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the holder will not be subject to tax under the Canadian Tax Act on the exchange
of an Exchangeable Share for shares of Bowater Common Stock (except to the
extent the exchange gives rise to a deemed dividend discussed below), or on the
sale or other disposition of an Exchangeable Share or share of Bowater Common
Stock.
In the event that the Avenor Common Shares constitute taxable Canadian
property to a particular non-resident holder thereof, such holder will realize a
capital gain computed in the manner described above under "--Shareholders
Resident in Canada". Where any such capital gain is not exempt from Canadian tax
by virtue of an applicable income tax treaty or convention, the non-resident
shareholder will be an "Eligible Holder" and may choose to make an election
pursuant to subsection 85(1) or (2) of the Canadian Tax Act (or the
corresponding provisions of any applicable provincial tax legislation) in order
to defer the recognition of the capital gain as described above under
"--Shareholders Resident in Canada--Exchange of Avenor Common Shares for
Exchangeable Shares or Cash and Exchangeable Shares Where an Election Is Made
under Section 85 of the Canadian Tax Act". HOWEVER, IF SUCH ELECTION IS MADE,
THE EXCHANGEABLE SHARES RECEIVED IN EXCHANGE FOR AVENOR COMMON SHARES WILL BE
DEEMED TO BE TAXABLE CANADIAN PROPERTY TO SUCH HOLDER.
Dividends paid or deemed to be paid on the Exchangeable Shares are subject
to non-resident withholding tax under the Canadian Tax Act at the rate of 25%,
although such rate may be reduced under the provisions of an applicable income
tax treaty or convention. For example, under the Tax Treaty, the rate is
generally reduced to 15% in respect of dividends paid to a person who is the
beneficial owner thereof and who is resident in the United States for purposes
of the Tax Treaty. See "--United States Federal Income Tax Considerations for
Avenor Shareholders--Distributions on the Exchangeable Shares".
A HOLDER WHOSE EXCHANGEABLE SHARES ARE REDEEMED BY BOWATER CANADA (EITHER
UNDER BOWATER CANADA'S REDEMPTION RIGHT OR PURSUANT TO THE HOLDER'S RETRACTION
RIGHTS) WILL BE DEEMED TO RECEIVE A DIVIDEND AS DESCRIBED ABOVE UNDER
"--SHAREHOLDERS RESIDENT IN CANADA--REDEMPTION OF EXCHANGEABLE SHARES". ANY SUCH
DEEMED DIVIDEND WILL BE SUBJECT TO WITHHOLDING TAX AS DESCRIBED IN THE PRECEDING
PARAGRAPH. HOLDERS OF EXCHANGEABLE SHARES CANNOT CONTROL WHETHER THEY WILL
REALIZE A DEEMED DIVIDEND OR PROCEEDS OF DISPOSITION ON AN EXCHANGE OF THE
EXCHANGEABLE SHARES FOR SHARES OF BOWATER COMMON STOCK.
Avenor Shareholders are permitted to dissent from the Arrangement in the
manner set out in section 190 of the CBCA. A dissenting Avenor Shareholder will
be entitled, in the event the Arrangement becomes effective, to be paid by
Avenor the fair value of the Avenor Common Shares held by such holder determined
as of the appropriate date. See "Dissenting Shareholders' Rights". Such
shareholder will be considered to have realized a deemed dividend and capital
gain (or a capital loss) based on redemption proceeds equal to such fair value,
computed generally as described above in the case of a redemption (including a
retraction) of an Exchangeable Share by Bowater Canada for a share of Bowater
Common Stock under "--Shareholders Resident in Canada--Redemption of
Exchangeable Shares". Deemed dividends will be subject to withholding tax as
described above. Any capital gain realized by a dissenting Avenor Shareholder
will not be taxed under the Canadian Tax Act if the Avenor Common Shares in
respect of which the right of dissent is exercised are not taxable Canadian
property, as described above. Additional income tax considerations may be
relevant to dissenting Avenor Shareholders who fail to perfect or withdraw their
claims pursuant to the right of dissent. Dissenting Avenor Shareholders should
consult their own tax advisors.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR BOWATER SHAREHOLDERS
In the opinion of Cravath, Swaine & Moore, special United States counsel to
Bowater, Bowater Shareholders will not recognize gain or loss for United States
federal income tax purposes as a result of the consummation of the Arrangement,
except by reason of their ownership of Avenor Common Shares, if any. See "United
States Federal Income Tax Considerations for Avenor Shareholders" below for a
discussion of the United States federal income tax consequences of the
Arrangement to a Bowater Shareholder who also owns Avenor Common Shares.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR AVENOR SHAREHOLDERS
The following discussion of the principal United States federal income tax
considerations generally applicable to a United States Holder (as defined below)
arising from and relating to the Arrangement, including the receipt and
ownership of Exchangeable Shares and Bowater Common Stock, is the opinion of
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), special United States counsel to Avenor ("Fried Frank"), insofar
as it relates to matters of United States federal income tax law and legal
conclusions with respect thereto. This discussion is based, in part, on certain
representations and agreements made by Bowater and Bowater Canada, and the
assumption that such representations are, and will be as of the Effective Time,
true and correct, that such agreements will be complied with and that the Plan
of Arrangement will be consummated in accordance with its terms.
As used herein, a "United States Holder" includes an Avenor Shareholder who
is a citizen or individual resident of the United States, a corporation created
or organized in or under the laws of the United States, or of any political
subdivision thereof, an estate or other entity the income of which is includible
in its gross income for United States federal income tax purposes without regard
to its source or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more United
States persons have the authority to control all substantial decisions of the
trust, but excludes persons subject to special provisions of United States
federal income tax law, such as tax-exempt organizations, financial
institutions, insurance companies, broker-dealers, persons having a "functional
currency" other than the United States dollar, Avenor shareholders who hold
Avenor shares as part of a hedge, straddle, wash sale, synthetic security,
conversion transaction or other integrated investment comprised of Avenor shares
and one or more other investments (other than by virtue of their participation
in the Arrangement) and Avenor shareholders who acquired their Avenor shares
through the exercise of employee stock options or otherwise as compensation for
services. This discussion is limited to United States Holders who hold Avenor
shares as capital assets and who own, actually or constructively, less than 5
percent of the Avenor Common Shares. In addition, the following discussion
assumes that persons who in the aggregate presently own, actually or
constructively, 50% or more by vote or value of the outstanding shares of Avenor
do not, and will not following the Arrangement, own, actually or constructively,
50% or more by vote or value of the outstanding shares of Bowater.
This discussion is based on United States federal income tax law in effect
as of the date of this Joint Proxy Statement. No statutory, judicial or
administrative authority exists that directly addresses certain of the United
States federal income tax consequences of the issuance and ownership of
instruments and rights comparable to the Exchangeable Shares, the Ancillary
Rights granted to the Avenor shareholders and the Call Rights. Consequently, the
conclusions contained in the discussion below are subject to significant
uncertainty. No advance income tax ruling has been sought or obtained from the
United States Internal Revenue Service (the "Service") regarding the tax
consequences of any of the transactions described herein. There can be no
assurance that the Service would not challenge the conclusions contained in the
discussion below, or that, if challenged, a court would not agree with the
Service.
This discussion does not address aspects of United States taxation other
than United States federal income taxation under the United States Internal
Revenue Code of 1986, as amended (the "U.S. Code"), nor does it address all
aspects of United States federal income taxation that may be applicable to a
particular United States Holder in light of the United States Holder's
particular circumstances. Accordingly, all United States Holders are urged to
consult their own tax advisors with respect to the United States federal income
tax consequences to them of the Arrangement in light of their particular
circumstances. In addition, this discussion does not address the United States
state or local tax consequences or the foreign tax consequences of the
Arrangement or the receipt and ownership of the Exchangeable Shares or shares of
Bowater Common Stock.
UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE UNITED STATES STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN TAX
CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF
EXCHANGEABLE SHARES, ANCILLARY RIGHTS AND SHARES OF BOWATER COMMON STOCK.
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Receipt of Shares of Bowater Common Stock, Exchangeable Shares and Cash
Except as described below under "--Ordinary Income Treatment", a United
States Holder of Avenor Common Shares who receives cash, Bowater Common Stock or
a combination of the foregoing in exchange for its Avenor Common Shares will
recognize gain or loss on such exchange and a United States Holder of Avenor
Common Shares who receives Exchangeable Shares, or Exchangeable Shares and
Bowater Common Stock, cash or both in exchange for its Avenor Common Shares
generally should, although it is not free from doubt, recognize gain or loss on
such exchange. If an exchange by a United States Holder is treated as described
in this paragraph, the gain or loss would equal the difference, if any, between
the fair market value of the consideration received in exchange for the United
States Holder's Avenor Common Shares and the United States Holder's tax basis in
the Avenor Common Shares exchanged for that consideration. A United States
Holder would have a tax basis in the Exchangeable Shares and/or shares of
Bowater Common Stock received equal to the fair market value of such shares at
the time of the exchange, and the holding period for such shares would begin on
the day after the exchange. Bowater Canada intends to treat the exchange of
Avenor Common Shares for Exchangeable Shares as a taxable transaction.
It is possible that a United States Holder who receives in exchange for its
Avenor Common Shares Exchangeable Shares, or Exchangeable Shares and cash, would
not be treated as described in the preceding paragraph, but rather would
recognize its gain, if any, on such exchange only to the extent of the amount of
cash received. In that case, the tax basis of the Exchangeable Shares would
generally equal the tax basis of the Avenor Common Shares exchanged therefor,
reduced by the amount of cash received in respect of such Avenor Common Shares
and increased by the amount of gain recognized on the exchange, and the holding
period of the Exchangeable Shares would include the holding period of the Avenor
Common Shares exchanged therefor.
The United States federal income tax consequences to a United States Holder
who receives Exchangeable Shares and Bowater Common Stock (or Bowater Common
Stock and cash) in exchange for its Avenor Common Shares, if not described in
the second preceding paragraph, are uncertain and depend upon whether the Avenor
Common Shares exchanged for the Bowater Common Stock could be deemed to have
been purchased by Bowater Canada. Such United States Holders should consult
their own tax advisors.
Any gain or loss recognized upon an exchange of Avenor Common Shares will
generally be capital gain or loss and will be long-term capital gain or loss if
the United States Holder's holding period for the Avenor Common Shares exchanged
is more than one year at the time of the exchange. With respect to non-corporate
United States Holders, long-term capital gains will be subject to United States
federal income tax at a maximum rate of 28% if at the time of the exchange the
Avenor Common Shares have been held for more than 12 months, and a maximum rate
of 20% if at the time of the exchange the Avenor Common Shares have been held
for more than 18 months.
Ordinary Income Treatment
The foregoing discussion under "--Receipt of Shares of Bowater Common
Stock, Exchangeable Shares and Cash" may not apply to certain United States
Holders if persons who control Avenor prior to the Arrangement also control
Bowater Canada following the Arrangement (the "Control Test"). Persons are
considered in "control" of a corporation for this purpose if, in general, such
persons own in the aggregate, actually or constructively, at least 50% of the
corporation's stock, by vote or value. Whether the Control Test will be
satisfied will depend upon the facts and circumstances existing at the time of
the Arrangement and cannot be accurately predicted at the time of this Joint
Proxy Statement. If the Control Test is satisfied, any cash (other than cash
received in lieu of fractional shares of Bowater Common Stock) and, if Bowater
Canada is deemed to purchase the Avenor Common Shares exchanged for shares of
Bowater Common Stock, shares of Bowater Common Stock and any cash (including
cash received in lieu of any fractional shares) (such cash and shares of Bowater
Common Stock, the "Boot"), received by a United States Holder who is an
"Ordinary Income Shareholder" (as defined below), would be treated as a dividend
to the United States Holder. In the case of shares of Bowater Common Stock, the
amount of such dividend would be the fair market value of the shares at the
Effective Time. Any such dividends would be taxable as ordinary income to the
extent of the
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current and accumulated earnings and profits of Avenor (without any offset for
such holder's basis in its Avenor Common Shares).
A holder of Avenor Common Shares will be an Ordinary Income Shareholder if
(i) such holder actually or constructively owns Avenor Common Shares prior to
the Effective Time, (ii) such holder retains or acquires any proprietary
interest in Bowater Canada in connection with the Arrangement and (iii) (a) the
holder's actual or constructive ownership of Avenor, through ownership of
Exchangeable Shares and Bowater Common Stock, after the Arrangement and the
deemed redemption (defined below) is not meaningfully reduced or (b) the deemed
redemption of the holder's Exchangeable Shares is not substantially
disproportionate (in the case of (a) and (b), applying the attribution rules of
Section 318 of the U.S. Code, and treating a holder as though the holder
received Exchangeable Shares (rather than the Boot) in exchange for its Avenor
Common Shares and those Exchangeable Shares were redeemed by Bowater Canada in
exchange for the Boot (the "deemed redemption")).
The Service has indicated in a published ruling that, in the case of a
minority holder of a publicly held corporation who exercises no control over
corporate affairs, any actual reduction in the holder's proportionate interest
in the corporation in connection with a deemed redemption should be treated as a
meaningful reduction. A deemed redemption will be "substantially
disproportionate" with respect to a holder of Avenor Common Shares if the amount
of the outstanding voting stock of Avenor constructively owned by such holder
after the deemed redemption (treating the Avenor Common Shares acquired by
Bowater Canada in the deemed redemption as not outstanding) is less than 80% of
the amount of the outstanding voting stock of Avenor constructively owned by
such holder before the deemed redemption (treating the Avenor Common Shares
acquired by Bowater Canada in the deemed redemption as outstanding).
Because the United States Federal income tax consequences to Ordinary
Income Shareholders may be significant and are complex, United States Holders
are urged to discuss those consequences with their tax advisors.
Ancillary Rights and Call Rights
Avenor Shareholders who receive Exchangeable Shares will also receive the
Ancillary Rights, and may be deemed to grant the Call Rights. Bowater and
Bowater Canada believe that the Ancillary Rights received and any Call Rights
deemed to be granted by Avenor Shareholders pursuant to the Arrangement
Agreement and the Arrangement generally will have only nominal value and,
therefore, that their receipt or grant, as the case may be, should not result in
any material United States federal income tax consequences, although the value
of such rights could vary depending on the circumstances of a particular Avenor
Shareholder. It is possible, however, that the Service could take the position
that the Ancillary Rights and the Call Rights have greater than nominal value.
In such event, the receipt of Ancillary Rights and the grant of certain of the
Call Rights could generate taxable gain or loss. Such gain or loss would be
capital gain or loss, except if the Ancillary Rights are deemed contributed by
Bowater and Bowater Holdings to Bowater Canada and received by a United States
Holder subject to ordinary income treatment, as discussed above under
"--Ordinary Income Treatment". United States Holders should consult their tax
advisors with respect to the potential tax consequences of the receipt of the
Ancillary Rights pursuant to the Arrangement.
Exchange of Exchangeable Shares
Assuming the Exchangeable Shares are treated as issued by Bowater Canada
for United States federal income tax purposes, it is anticipated that a United
States Holder who exchanges its Exchangeable Shares for shares of Bowater Common
Stock generally will recognize gain and should recognize loss on such exchange.
Such gain or loss will be equal to the difference between the fair market value
of the shares of Bowater Common Stock at the time of the exchange and the United
States Holder's tax basis in the Exchangeable Shares surrendered. The gain or
loss will generally be capital gain or loss, except that, with respect to any
declared but unpaid dividends on the Exchangeable Shares, ordinary income may be
recognized. Capital gain or loss will generally be long-term capital gain or
loss if the United States Holder's holding period for the Exchangeable Shares is
more than one year at the time of the exchange. With respect to non-corporate
United
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States Holders, long-term capital gains will be subject to United States federal
income tax at a maximum rate of 28% if at the time of the exchange the
Exchangeable Shares have been held for more than 12 months, and a maximum rate
of 20% if at the time of the exchange the Exchangeable Shares have been held for
more than 18 months. A United States Holder will have a tax basis in the shares
of Bowater Common Stock received equal to the fair market value of such shares
at the time of the exchange. The holding period for such shares will begin on
the day after the exchange. The Service could assert, however, that the
Exchangeable Shares and certain of the rights associated therewith constitute
"offsetting positions" for purposes of the straddle rules set forth in Section
1092 of the U.S. Code. In such case, the holding period of the Exchangeable
Shares would not increase while held by a United States Holder (and interest
incurred in carrying the Exchangeable Shares would not be deductible by a United
States Holder). Under certain limited circumstances, the exchange by a United
States Holder of Exchangeable Shares for shares of Bowater Common Stock may be
characterized as a tax-free exchange. Whether an exchange would be tax-free will
depend upon the facts and circumstances existing at the time of the exchange and
cannot be accurately predicted at the time of this Joint Proxy Statement.
For United States federal income tax purposes, gain recognized on the
exchange of Exchangeable Shares for shares of Bowater Common Stock generally
will be treated as United States source gain, except that, under the terms of
the Tax Treaty, such gain may be treated as sourced in Canada. Any Canadian tax
imposed on the exchange may be available as a credit against United States
federal income taxes, subject to applicable limitations. A United States Holder
that is ineligible for a foreign tax credit with respect to any Canadian tax
paid may be entitled to a deduction therefor in computing United States taxable
income.
The foregoing discussion would apply only if the Exchangeable Shares are
treated as issued by Bowater Canada, rather than by Bowater, for United States
federal income tax purposes. There is some possibility, however, that the
Service would assert that the Exchangeable Shares should be treated as issued by
Bowater for United States federal income tax purposes. If the Service were to
make such assertion successfully, an exchange of Exchangeable Shares for shares
of Bowater Common Stock would likely not give rise to taxable gain or loss.
Distributions on the Exchangeable Shares
Bowater Canada and Bowater intend to treat dividends, if any, received by a
holder with respect to the Exchangeable Shares as dividends from Bowater Canada
rather than from Bowater. The following discussion assumes that such dividends
will be treated as dividends from Bowater Canada. A United States Holder of
Exchangeable Shares generally will be required to include in gross income as
ordinary income dividends paid on the Exchangeable Shares to the extent paid out
of the earnings and profits of Bowater Canada, as determined under United States
federal income tax principles. Such dividends paid in Canadian dollars will be
includible in the income of a United States Holder in a United States dollar
amount calculated by reference to the exchange rate in effect on the date the
dividends are deemed received. United States Holders should consult their own
tax advisors regarding the treatment of any foreign currency gain or loss on any
Canadian dollars received which are not converted into United States dollars on
such date. Dividends generally should be treated as foreign source passive
income for foreign tax credit limitation purposes, except, however, that a
portion of dividends paid by Bowater Canada equal to the ratio of which Avenor's
earnings and profits from sources within the United States for the year such
dividends are paid bear to Bowater Canada's earnings and profits for such year
from all sources (if such ratio is 10% or greater) will be treated as derived
from sources within the United States, unless the taxpayer elects to have such
dividend treated as foreign source income by electing to have the Tax Treaty
source rules apply pursuant to Section 904(g)(10) of the U.S. Code. Under the
current Tax Treaty, such distributions will be subject to Canadian withholding
tax at a maximum rate of 15%. Subject to certain limitations of United States
federal income tax law, a United States Holder generally should be entitled to
either a credit against such holder's United States federal income tax liability
or a deduction in computing United States taxable income for Canadian income
taxes withheld from distributions with respect to the Exchangeable Shares.
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Dissenting Shareholders
A United States Holder who exercises such holder's right to dissent from
the Arrangement will recognize gain or loss on the exchange of such holder's
Avenor Common Shares for cash in an amount equal to the difference between the
amount of cash received (other than amounts, if any, which are or are deemed to
be interest for federal income tax purposes, which amounts will be taxed as
ordinary income) and such holder's basis in its Avenor Common Shares. Such gain
or loss generally will be capital gain or loss if the Avenor Common Shares were
held as capital assets at the time of the Effective Time and will be long-term
capital gain or loss if the United States Holder's holding period for the Avenor
Common Shares is more than one year at such time. With respect to non-corporate
United States Holders, long-term capital gains will be subject to United States
federal income tax at a maximum rate of 28% if at the Effective Time the Avenor
Common Shares have been held for more than 12 months, and a maximum rate of 20%
if at the Effective Time the Avenor Common Shares have been held for more than
18 months.
Passive Foreign Investment Company Considerations
For United States federal income tax purposes, Avenor generally will be
classified as a "passive foreign investment company" (a "PFIC") within the
meaning of Section 1297(a) of the U.S. Code for any taxable year during which
either (i) 75% or more of its gross income is passive income (as defined for
United States federal income tax purposes) or (ii) on average for such taxable
year, 50% or more of its assets (by value) produce or are held for the
production of passive income. For purposes of applying the foregoing, the assets
and gross income of Avenor's significant subsidiaries will be proportionately
attributed to Avenor.
While there can be no assurance with respect to the classification of
Avenor as a PFIC, Avenor believes that it did not constitute a PFIC during its
taxable years ending prior to consummation of the Arrangement. However, in
connection with the transactions contemplated herein no opinion will be rendered
regarding Avenor's status as a PFIC. Following the Arrangement, Bowater Canada
and Bowater intend to endeavor to cause Bowater Canada to avoid PFIC status,
although there can be no assurance that they will be able to do so or that their
intent will not change. Promptly following the end of each taxable year, Bowater
Canada will endeavor to notify United States Holders of Exchangeable Shares if
it believes that it was a PFIC for that taxable year and will provide such
holders with information sufficient to allow such holders to make certain
potentially beneficial elections under the U.S. Code. If Avenor has ever been,
or if Bowater Canada were to become, a PFIC, the United States federal income
tax consequences to United States Holders could be less favorable than those
described herein. United States Holders of Avenor Common Shares are urged to
discuss the United States federal income tax consequences of the PFIC rules with
their tax advisors.
Shareholders Not Resident in or Citizens of the United States
The following discussion is applicable to a non-United States Holder. As
used herein, a "non-United States Holder" is an Avenor shareholder who, for
United States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a foreign estate or trust, but
excludes persons subject to special provisions of United States federal income
tax law, such as tax-exempt organizations, financial institutions, insurance
companies, broker-dealers, Avenor shareholders who hold Avenor shares as part of
a hedge, straddle, wash sale, synthetic security, conversion transaction or
other integrated investment comprised of Avenor shares and one or more other
investments (other than by virtue of their participation in the Arrangement) and
Avenor shareholders who acquired their Avenor shares through the exercise of
employee stock options or otherwise as compensation for services. A non-United
States Holder seeking benefits under an applicable tax treaty or an exemption
from United States withholding tax for "effectively connected" income, as
described below, may be required to comply with additional certification and
other requirements in order to establish the holder's entitlement to such
benefits or exemption. This discussion is limited to non-United States Holders
who hold Avenor shares as capital assets and who will hold Exchangeable Shares
and shares of Bowater Common Stock as capital assets. In addition, the following
discussion assumes that persons who in the aggregate presently own, actually or
constructively, 50% or more by vote or value of the outstanding shares of Avenor
do not, and will not following the Arrangement, own, actually or constructively,
50% or more by vote or value of the outstanding shares of Bowater.
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An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to tax as if they were United States citizens.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular non-United States Holder's tax position, including
whether such non-United States Holder is a United States expatriate.
Bowater Canada and Bowater do not intend that Bowater Canada or Bowater
will withhold any amounts in respect of United States tax from dividends
received by a non-United States Holder with respect to Exchangeable Shares.
There is some possibility, however, that the Service may assert that United
States withholding is payable with respect to dividends paid on the Exchangeable
Shares to non-United States Holders. In such case, holders of Exchangeable
Shares could be subject to United States withholding tax at a rate of 30%, which
rate may be reduced by an applicable income tax treaty in effect between the
United States and the non-United States Holder's country of residence (currently
15%, generally, on dividends paid to residents of Canada under the Tax Treaty).
Dividends received by a non-United States Holder with respect to Bowater
Common Stock that are not effectively connected with the conduct by such holder
of a trade or business in the United States will generally be subject to United
States withholding tax at a rate of 30%, which rate may be reduced by an
applicable income tax treaty in effect between the United States and the
non-United States Holder's country of residence (currently 15%, generally, on
dividends paid to residents of Canada under the Tax Treaty).
A non-United States Holder who participates in the Arrangement and is an
Ordinary Income Shareholder (as described above) could be treated as having
received a dividend from Bowater Canada in connection with the Arrangement in
the event the Control Test (as described above) is satisfied. Bowater Canada and
Bowater do not intend that any amounts in respect of United States tax will be
withheld in connection with the Arrangement by reason of the foregoing.
Subject to the discussion below, a non-United States Holder generally will
not be subject to United States federal income tax on gain (if any) recognized
on the receipt of cash, shares of Bowater Common Stock or Exchangeable Shares in
exchange for Avenor Common Shares, on the sale or exchange of the Exchangeable
Shares, or on the sale or exchange of shares of Bowater Common Stock, unless (i)
such gain is effectively connected with a trade or business of the non-United
States Holder in the United States, or, if a tax treaty applies, is attributable
to a permanent establishment maintained by the non-United States Holder in the
United States or (ii) the non-United States Holder is an individual who holds
the Avenor Common Shares, the Exchangeable Shares or the Bowater Common Stock,
as the case may be, as capital assets and is present in the United States for
183 days or more in the taxable year of disposition, and certain other
conditions are satisfied.
Notwithstanding the general rule set forth in the preceding paragraph,
under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), gain
or loss recognized by a non-United States Holder on the sale or exchange of
Exchangeable Shares, or on the sale or exchange of shares of Bowater Common
Stock, will be subject to regular United States federal income tax as if such
gain or loss were effectively connected with a United States trade or business
if (a) shares of Bowater Common Stock are "United States real property
interests" ("USRPIs") (as defined below) with respect to the non-United States
Holder and (b) the non-United States Holder is a "greater than 5% shareholder"
(as defined below) at some time during the shorter of (x) the five-year period
ending on the date of the sale or exchange of the Exchangeable Shares or shares
of Bowater Common Stock (as the case may be) or (y) the period during which such
non-United States Holder held the Exchangeable Shares or shares of Bowater
Common Stock (as the case may be) (such period the "FIRPTA holding period").
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Shares of Bowater Common Stock will be USPRIs with respect to a non-United
States Holder unless it is established that Bowater was at no time a United
States real property holding corporation (a "USRPHC") during the non-United
States Holder's FIRPTA holding period. A corporation is a USRPHC if the fair
market value of its interests in United States real property equals or exceeds
50% of the sum of the fair market value of all of its interests in real property
and all of its other assets used or held for use in a trade or business (as
defined in applicable regulations). Bowater does not believe that it is
presently a USRPHC. Moreover, Bowater considers it unlikely that it will become
a USRPHC in the future unless its interests in United States real property
increase significantly as a result of one or more acquisitions, but there can be
no assurance that Bowater is not, or will not in any event become, a USRPHC in
the future. After the Arrangement, Bowater intends to monitor its USRPHC status
regularly, and will endeavor to notify non-United States Holders of Exchangeable
Shares and Bowater Common Stock if it believes that it may become a USRPHC in
any taxable year.
The definition of a "greater than 5% shareholder" is complex and subject to
some uncertainty. In the case of a non-United States Holder who owns only
Bowater Common Stock (actually and constructively), such non-United States
Holder will be a greater than 5% shareholder if such non-United States Holder
holds more than 5% of the total fair market value of the Bowater Common Stock
outstanding (on a non-diluted basis). In the case of a non-United States Holder
who owns only Exchangeable Shares (actually and constructively), disregarding
for this purpose any Bowater Common Stock constructively owned by reason of
ownership of Exchangeable Shares, such non-United States Holder will be a
greater than 5% shareholder if such holder holds Exchangeable Shares with a fair
market value on the relevant date of determination greater than 5% of the total
fair market value of the Bowater Common Stock outstanding (on a non-diluted
basis) on such date and the Exchangeable Shares are not treated as "regularly
traded on an established securities market". It is not anticipated that the
Exchangeable Shares will be considered regularly traded on an established
securities market for this purpose as neither Bowater nor Bowater Canada
anticipates making certain filings which would be required for the Exchangeable
Shares to be so considered. If the Exchangeable Shares were so treated, a
non-United States Holder who holds more than 5% of the total fair market value
of the Exchangeable Shares outstanding could be treated as a greater than 5%
shareholder. If, at any time, shares of Bowater Common Stock were not regularly
traded on an established securities market, or the Exchangeable Shares were
traded on an established securities market located in the United States,
different rules, not described herein, may apply. Non-United States Holders who
believe they may be greater than 5% shareholders are particularly urged to
consult their own tax advisors to determine the possible application of FIRPTA
to them.
A non-United States Holder that is a greater than 5% shareholder at any
time during the FIRPTA holding period may be subject to withholding on the sale
or exchange of Exchangeable Shares, if, at the time of such sale or exchange,
such Exchangeable Shares are not treated as regularly traded on an established
securities market. Upon the sale or exchange of Exchangeable Shares, the
transferee of such Exchangeable Shares would be required to withhold 10% of the
amount realized in the sale or exchange, unless, in general, the non-United
States Holder obtains from Bowater and provides to the transferee a statement
signed under penalties of perjury to the effect that Bowater is not a USRPHC and
was not a USRPHC at any time during the FIRPTA holding period. Any tax withheld
may be credited against the United States federal income tax owed by the
non-United States Holder for the year in which the sale or exchange occurs.
The foregoing discussion of the possible application of the FIRPTA rules to
non-United States Holders is only a summary of certain material aspects of these
rules. Because the United States federal income tax consequences to a non-United
States Holder under FIRPTA may be significant and are complex, non-United States
Holders are urged to discuss those consequences with their tax advisors.
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DESCRIPTION OF CAPITAL STOCK
PRINCIPAL HOLDERS OF SECURITIES
To the knowledge of Bowater and its directors and officers, and based on
the information provided by Avenor other than as disclosed in the security
ownership table of certain beneficial owners and management of Bowater, there
are no persons who, had the Transaction occurred on June 8, 1998, would
beneficially own, directly or indirectly, or exercise control or direction over,
in excess of 5% of the outstanding shares of Bowater Common Stock or 5% of the
combined voting power of the Bowater Common Stock and the Exchangeable Shares.
See "Information Concerning Avenor--Directors and Officers" and "Information
Concerning Bowater--Security Ownership of Certain Beneficial Owners and
Management" for information with respect to securities of Avenor and Bowater
currently owned by certain directors and officers.
BOWATER CAPITAL STOCK
In the event of the consummation of the Transaction, the share capital of
Bowater will be as described below.
The authorized capital stock of Bowater will consist of 100,000,000 shares
of Bowater Common Stock and 10,000,000 shares of preferred stock, US$1 par value
per share, issuable in series.
The Bowater Board, without further shareholder action, is authorized to
provide for the issuance of shares of preferred stock in one or more series, and
to establish from time to time the number of shares to be included in each such
series and to fix the designation, powers, preferences and rights of the shares
of each such series and any qualifications, limitations or restrictions thereof.
As of June 8, 1998, there were 40,562,019 shares of Bowater Common Stock and
264,318 shares of 8.4% Series C Cumulative Preferred Stock, par value US$1 per
share (the "Bowater Series C Preferred Stock"), issued and outstanding. The
Trustee will become the holder of the one share of Bowater Special Voting Stock
upon the consummation of the Transaction.
Bowater Common Stock
Shares of Bowater Common Stock have a par value of US$1 per share. The
holders of Bowater Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting for
the election of directors is not authorized by the Bowater Certificate. Subject
to the rights of the holders of any class of capital stock of Bowater having any
preference or priority over the Bowater Common Stock (such as the Bowater Series
C Preferred Stock), the holders of shares of Bowater Common Stock are entitled
to receive such dividends as may be declared by the Bowater Board out of funds
legally available therefor and are entitled upon any liquidation, dissolution or
winding-up of Bowater to receive rateably the net assets of Bowater available
for distribution. No preemptive rights, conversion rights, redemption rights or
sinking fund provisions are applicable to the Bowater Common Stock, and there
are no dividends in arrears or dividend default.
Bowater Series C Preferred Stock
The Bowater Board has designated 850,000 authorized shares of preferred
stock as Bowater Series C Preferred Stock. All of the shares of Bowater Series C
Preferred Stock are held by SunTrust Bank, as depositary for the holders of
Depositary Shares of Bowater (the "Bowater Depositary Shares"). Each of the
Bowater Depositary Shares represents a one-fourth interest in a share of Bowater
Series C Preferred Stock and entitles the holder to that proportion of the
rights and preferences of the Bowater Series C Preferred Stock (including
dividend, voting and liquidation rights) represented thereby. The Bowater
Depositary Shares are evidenced by depositary receipts ("Depositary Receipts")
issued pursuant to a Deposit Agreement, dated as of February 1, 1994, by and
among Bowater, the Sun Trust Bank and the holders from time to time of the
Depositary Receipts. Dividends on the Bowater 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 in the amount of
US$2.10 per quarter. Each Bowater Series C Preferred Stock has a liquidation
preference over the Special Voting Stock and Bowater Common Stock of US$100 plus
an amount equal to accrued and unpaid
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dividends thereon (whether or not declared). The Bowater Series C Preferred
Stock is not redeemable prior to February 8, 1999. On or after that date, the
Bowater Series C Preferred Stock is redeemable at the option of Bowater, in
whole or in part, at US$100 per share (equivalent to US$25 per Depositary Share)
plus accrued and unpaid dividends (whether or not declared) to the redemption
date. The Bowater Series C Preferred Stock has no stated maturity and is not
subject to any sinking fund or mandatory redemption and is not convertible into
any other securities of Bowater. The Depositary Shares are listed on the NYSE.
The Bowater Series C Preferred Stock is not so listed, and there is no trading
market for the Series C Preferred Stock except as represented by the Depositary
Shares.
Bowater Special Voting Stock
The Bowater Board has designated one authorized share of preferred stock as
Special Voting Stock, par value US$1 per share. The holder of the share of
Special Voting Stock will be entitled to cast a number of votes equal to the
number of outstanding Exchangeable Shares from time to time not owned by Bowater
or its affiliates as to which the holder of the share of Special Voting Stock
has timely received voting instructions from the holders of such Exchangeable
Shares in accordance with the Voting and Exchange Trust Agreement. The holders
of Bowater Common Stock and the holder of the share of Special Voting Stock will
vote together as a single class on all matters. The Special Voting Stock will,
with respect to rights on liquidation, winding-up and dissolution, rank senior
to all classes of common stock of Bowater and junior to any other class or
series of preferred stock of Bowater. In the event of any liquidation,
dissolution or winding-up of Bowater, the holder of the share of Special Voting
Stock will be entitled to receive, prior to any distributions to holders of the
shares of Bowater Common Stock, US$10 out of the assets of Bowater available for
distribution to its shareholders. No dividends will be payable on the share of
Special Voting Stock. The Special Voting Stock will be issued to the Trustee
appointed under the Voting and Exchange Trust Agreement. See "--Voting and
Exchange Trust Agreement". The share of Special Voting Stock will not be subject
to redemption except that, at such time as the share of Special Voting Stock has
no votes attached to it because there are no Exchangeable Shares outstanding not
owned by Bowater or its affiliates, and there are no shares of stock, debt,
options or other agreements of Bowater Canada that could give rise to the
issuance of any Exchangeable Shares to any person (other than Bowater or its
affiliates), the share of Special Voting Stock will be automatically redeemed
and canceled, with the US$10 liquidation preference due and payable upon such
redemption.
Certain Certificate, Bylaw and Contract Provisions
Certain provisions of the Bowater Certificate or Bowater Bylaws may have
the effect of delaying, deferring or preventing a change in control of Bowater.
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 Bowater Board
under certain circumstances; the requirement that the shareholders may act only
through a shareholders meeting, coupled with the provision that only the Bowater
Board or certain executive officers can call a special meeting of the
shareholders; the requirements under the Bowater Bylaws for submitting proposals
at shareholder meetings; the ability of the Bowater Board to issue preferred
stock issued serially without prior approval of the shareholders 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 Bowater;
and the supermajority voting requirements to amend certain provisions of the
Bowater Certificate or, in certain circumstances, various provisions (including
the notice provisions) of the Bowater Bylaws. Certain provisions in Bowater's
employment contracts, change-in-control agreements, stock option plans,
severance pay plans, and qualified and nonqualified benefit plans, in Bowater's
existing and anticipated credit agreements, and in the indentures relating to
Bowater's outstanding debt securities may also have the effect of inhibiting a
change of control of Bowater.
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BOWATER HOLDINGS SHARE CAPITAL
The authorized capital of Bowater Holdings consists of 100,000,000 common
shares without nominal or par value ("Bowater Holdings Common Shares") and 1,000
non-voting preferred shares ("Bowater Holdings Preferred Shares").
Bowater Holdings Common Shares
Immediately following the Transaction, all of the issued and outstanding
Bowater Holdings Common Shares will be held by Bowater. The holders of the
Bowater Holdings Common Shares are entitled to receive notice of and to attend
all meetings of the shareholders of Bowater Holdings and are entitled to one
vote for each share held at all meetings of the shareholders of Bowater
Holdings. Subject to the prior rights of the holders of the Bowater Holdings
Preferred Shares, the holders of the Bowater Holdings Common Shares are entitled
(i) to receive such dividends as may be declared by the Board of Directors of
Bowater Holdings out of funds legally available therefor, and (ii) upon any
liquidation, dissolution, or winding-up of Bowater Holdings, to receive the
remaining property and assets of Bowater Holdings.
Bowater Holdings Preferred Shares
All of the issued and outstanding Bowater Holdings Preferred Shares will be
held by a service provider who will not transfer any property to Bowater
Holdings. The holder of the Bowater Holdings Preferred Shares, in priority to
holders of Bowater Holdings Common Shares, will be entitled (i) to receive
cumulative dividends at the rate of 7.5% per annum subject to declaration by the
Board of Directors of Bowater Holdings out of funds legally available therefor,
and (ii) upon the liquidation, dissolution or winding up of Bowater Holdings to
C$100 per share plus accrued but unpaid dividends. Holders of Bowater Holdings
Preferred Shares are not, except as required by applicable law, entitled to
notice of, to attend or to vote at any meeting of the shareholders of Bowater
Holdings. The Bowater Holdings Preferred Shares are redeemable at the option of
Bowater Holdings any time at C$100 per share plus accrued and unpaid dividends.
BOWATER CANADA SHARE CAPITAL
The authorized capital of Bowater Canada consists of an unlimited number of
common shares ("Bowater Canada Common Shares"). Prior the Effective Time, the
articles of Bowater Canada will be amended so that, at the Effective Time, the
authorized capital of Bowater Canada will consist of the Bowater Canada Common
Shares, 1,000 non-voting preferred shares (the "Bowater Canada Preferred
Shares") and an unlimited number of Exchangeable Shares. The rights, privileges,
restrictions and conditions attaching to the Bowater Canada Common Shares,
Bowater Canada Preferred Shares and Exchangeable Shares are summarized below.
Such summary as it relates to the Exchangeable Shares is qualified in its
entirety by reference to the Plan of Arrangement and the Exchangeable Share
Provisions.
Bowater Canada Common Shares
Immediately following the Transaction, all of the issued and outstanding
Bowater Canada Common Shares will be held by Bowater Holdings. The holders of
Bowater Canada Common Shares are entitled to receive notice of and to attend all
meetings of the shareholders of Bowater Canada and are entitled to one vote for
each share held at all meetings of the shareholders of Bowater Holdings. Subject
to the prior rights of the holders of the Bowater Canada Preferred Shares and
the Exchangeable Shares, the holders of Bowater Canada Common Shares are
entitled (i) to receive such dividends as may be declared by the Board of
Directors of Bowater Canada out of funds legally available therefor and (ii)
upon any liquidation, dissolution or winding-up of Bowater Canada, to receive
the remaining property and assets of Bowater Canada.
Bowater Canada Preferred Shares
All of the issued and outstanding Bowater Canada Preferred Shares will be
held by a service provider who will not transfer any property to Bowater Canada.
The holder of the Bowater Canada Preferred Shares, in priority to the holders of
Bowater Canada Common Shares and the holders of Exchangeable Shares, will be
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entitled (i) to receive cumulative dividends at the rate of 7.5% per annum
subject to declaration by the Board of Directors of Bowater Canada out of funds
legally available therefor, and (ii) upon the liquidation, dissolution or
winding-up of Bowater Canada, to C$100 per share plus accrued but unpaid
dividends. Holders of Bowater Canada Preferred Shares are not, except as
required by applicable law, entitled to notice of, to attend or to vote at any
meeting of the shareholders of Bowater Canada. The Bowater Canada Preferred
Shares are redeemable at the option of Bowater Canada any time at C$100 per
share plus accrued and unpaid dividends.
Bowater Canada Exchangeable Shares
Ranking. The Exchangeable Shares will rank prior to the Bowater Canada
Common Shares, the Bowater Canada Preferred Shares and any other shares ranking
junior to the Exchangeable Shares with respect to the payment of dividends and
the distribution of assets in the event of liquidation, dissolution or
winding-up of Bowater Canada.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends paid from time to time by Bowater on shares of
Bowater Common Stock. The declaration date, record date and payment date for
dividends on the Exchangeable Shares will be the same as that for the
corresponding dividends on the Bowater Common Stock.
Certain Restrictions. Except as provided in the next sentence, Bowater
Canada will not at any time without the approval of the holders of the
Exchangeable Shares as set forth below under "--Amendment and Approval":
(a) pay any dividend on the Bowater Canada Common Shares, the Bowater
Canada Preferred Shares, or any other shares ranking junior to the
Exchangeable Shares, other than stock dividends payable in Bowater Canada
Common Shares or any such other shares ranking junior to the Exchangeable
Shares, as the case may be;
(b) redeem, purchase or make any capital distribution in respect of
the Bowater Canada Common Shares, the Bowater Canada Preferred Shares, or
any other shares ranking junior to the Exchangeable Shares;
(c) redeem or purchase any other shares of Bowater Canada ranking
equally with the Exchangeable Shares with respect to the payment of
dividends or on any liquidation distribution; or
(d) issue any Exchangeable Shares or any other shares of Bowater
Canada ranking equally with, or superior to, the Exchangeable Shares other
than by way of stock dividends to the holders of such Exchangeable Shares.
The restrictions in clauses (a), (b), (c) and (d) above will not apply if
all the dividends on the outstanding Exchangeable Shares corresponding to
dividends declared and paid to date on the shares of Bowater Common Stock have
been declared and paid in full on the Exchangeable Shares.
Liquidation of Bowater Canada. In the event of the liquidation,
dissolution or winding-up of Bowater Canada or any other proposed distribution
of the assets of Bowater Canada among its shareholders for the purpose of
winding up its affairs, a holder of Exchangeable Shares will be entitled,
subject to applicable law, to receive the Liquidation Amount from the assets of
Bowater Canada for each Exchangeable Share on the Liquidation Date.
On or after the Liquidation Date, a holder of Exchangeable Shares may
surrender certificates representing such Exchangeable Shares, together with such
other documents as may be required to effect the transfer of Exchangeable Shares
under the CBCA or the by-laws of Bowater Canada or by the transfer agent, at
Bowater Canada's registered office or the office of the transfer agent. Upon
receipt of the certificates and other documents and subject to the exercise by
Bowater Holdings of its Liquidation Call Right, Bowater Canada will deliver the
Liquidation Amount to such holder at the address recorded in the securities
register or hold the Liquidation Amount for pick up by the holder at Bowater
Canada's registered office or the office of the transfer agent, as specified by
Bowater Canada in a notice to such holders.
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<PAGE> 115
Upon the occurrence of a liquidation, dissolution or winding-up of Bowater
Canada or other distribution of assets of Bowater Canada among its shareholders
for the purpose of winding up its affairs, Bowater Holdings will have the
Liquidation Call Right to purchase all but not less than all of the Exchangeable
Shares then outstanding at a purchase price per share equal to the Liquidation
Amount and, upon the exercise of the Liquidation Call Right, the holders of the
Exchangeable Shares will be obligated to sell such shares to Bowater Holdings.
The purchase by Bowater Holdings of all of the outstanding Exchangeable Shares
upon the exercise of the Liquidation Call Right will occur on the Liquidation
Date.
Upon the occurrence of a Bowater Canada Insolvency Event, the Trustee under
the Voting and Exchange Trust Agreement on behalf of the holders of Exchangeable
Shares will have the right to require Bowater to purchase any or all of the
Exchangeable Shares then outstanding (other than Exchangeable Shares held by
Bowater or its affiliates) for an amount per share to be satisfied by the
delivery of one share of Bowater Common Stock. See "--Voting and Exchange Trust
Agreement--Optional Exchange Right in Case of Bowater Canada Insolvency Event".
Retraction of Exchangeable Shares by Holders. Holders of the Exchangeable
Shares will be entitled at any time following the Effective Time to retract
(i.e., to require Bowater Canada to redeem) any or all Exchangeable Shares owned
by them and to receive the Retraction Price in exchange therefor, subject to the
Retraction Call Right of Bowater Holdings described below. Holders of
Exchangeable Shares may effect such retraction by presenting to Bowater Canada
or its transfer agent a certificate or certificates representing the
Exchangeable Shares the holder desires to have Bowater Canada redeem, together
with such other documents and instruments as may be required under the CBCA or
the by-laws of Bowater Canada or by the transfer agent, and a duly executed
Retraction Request (i) specifying that the holder desires to have Retracted
Shares redeemed by Bowater Canada, (ii) stating the Retraction Date on which the
holder desires to have Bowater Canada redeem such Retracted Shares, provided
that the Retraction Date is not less than 10 business days nor more than 15
business days after the date on which the Retraction Request is received by
Bowater Canada and further provided that, in the event that no such business day
is specified by the holder in the Retraction Request, the Retraction Date will
be deemed to be the fifteenth business day after the date on which the
Retraction Request is received by Bowater Canada, and (iii) acknowledging the
Retraction Call Right of Bowater Holdings to purchase all but not less than all
the Retracted Shares directly from the holder and that the Retraction Request
will be deemed to be a revocable offer by the holder to sell the Retracted
Shares to Bowater Holdings in accordance with the Retraction Call Right on the
terms and conditions described below.
Upon receipt by Bowater Canada of a Retraction Request, Bowater Canada will
promptly notify Bowater and Bowater Holdings of the Retraction Request. In order
to exercise its Retraction Call Right, Bowater Holdings must provide Bowater
Canada with the Bowater Holdings Call Notice within five business days of
notification to Bowater Holdings by Bowater Canada of the receipt by Bowater
Canada of the Retraction Request. If Bowater Holdings delivers the Bowater
Holdings Call Notice within such five business days time period, and provided
that the Retraction Request is not revoked by the holder in the manner described
below, Bowater Canada will not redeem the Retracted Shares and Bowater Holdings
will purchase from such holder and such holder will sell to Bowater Holdings on
the Retraction Date the Retracted Shares for the Retraction Price. In the event
that Bowater Holdings does not deliver a Bowater Holdings Call Notice within
such five business day period, and provided that the Retraction Request is not
revoked by the holder in the manner described below, Bowater Canada will redeem
the Retracted Shares on the Retraction Date for the Retraction Price.
A holder of Retracted Shares may, by notice in writing given by the holder
to Bowater Canada before the close of business on the business day immediately
preceding the Retraction Date, withdraw its Retraction Request, in which event
such Retraction Request will be null and void and the revocable offer
constituted by the Retraction Request to sell the Retracted Shares to Bowater
Holdings will be deemed to have been revoked.
If, as a result of solvency provisions of applicable law, Bowater Canada is
not permitted to redeem all Exchangeable Shares tendered by a retracting holder,
Bowater Canada will redeem only those Exchangeable Shares tendered by the holder
(rounded down to a whole number of shares) as would not be contrary to such
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<PAGE> 116
provisions of applicable law. The holder of any Exchangeable Shares not redeemed
by Bowater Canada or purchased by Bowater Holdings as a consequence of such
applicable law will be deemed to have required Bowater to purchase such
unretracted shares in exchange for Bowater Common Stock on the Retraction Date
pursuant to the optional Exchange Right. See "--Voting and Exchange Trust
Agreement--Optional Exchange Right in Case of Bowater Canada Insolvency Event".
Redemption of Exchangeable Shares. Subject to applicable law and the
exercise by Bowater Holdings of the Redemption Call Right, on the Redemption
Date, Bowater Canada will redeem all but not less than all of the then
outstanding Exchangeable Shares for the Redemption Price. Bowater Canada will,
at least 60 days prior to the Redemption Date provide the registered holders of
the Exchangeable Shares with written notice of the proposed redemption of the
Exchangeable Shares by Bowater Canada (except in the case of an acquisition of
Control of Bowater as described in the Exchangeable Share Provisions, in which
case, in the event the Board of Directors of Bowater Canada elects to redeem the
Exchangeable Shares, the notice will be provided the number of days prior to the
Redemption Date as the Board of Directors of Bowater Canada determines to be
reasonably practicable under the circumstances). On or after the Redemption
Date, upon the holder's presentation and surrender of the certificates
representing the Exchangeable Shares and such other documents as may be required
at the office of the transfer agent or the registered office of Bowater Canada,
Bowater Canada will deliver the Redemption Price to the holder at the address of
the holder recorded in the securities register or hold the Redemption Price for
pick up by the holder at the registered office of Bowater Canada or the office
of the transfer agent as specified in the written notice.
Notwithstanding a proposed redemption of the Exchangeable Shares by Bowater
Canada on the Redemption Date, pursuant to the Exchangeable Share Provisions,
Bowater Holdings is entitled to exercise the Redemption Call Right to purchase
on such Redemption Date all but not less than all of the Exchangeable Shares
then outstanding in exchange for the Redemption Price and, upon the exercise of
the Redemption Call Right, the holders thereof will be obligated to sell such
shares to Bowater Holdings. If Bowater Holdings exercises the Redemption Call
Right, Bowater Canada's right to redeem the Exchangeable Shares on the
Redemption Date will terminate.
Voting Rights. The holders of the Exchangeable Shares are not entitled as
such to receive notice of or to attend any meeting of the shareholders of
Bowater Canada or to vote at any such meeting.
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares may be added to, changed or
removed but only with the approval of the holders thereof. Any such approval or
any other approval or consent to be given by the holders of the Exchangeable
Shares will be sufficiently given if given in accordance with applicable law and
subject to a minimum requirement that such approval be evidenced by a resolution
passed by not less than two-thirds of the votes cast thereon at a meeting of the
holders of Exchangeable Shares duly called and held at which holders of at least
25% of the outstanding Exchangeable Shares are present or represented by proxy.
In the event that no such quorum is present at such meeting within one-half hour
after the time appointed therefor, then the meeting will be adjourned to such
date (not less than five days later) and to such time and place as may be
designated by the Chairman of such meeting and the holders of Exchangeable
Shares present or represented by proxy at the adjourned meeting may transact the
business for which the meeting was originally called. At the adjourned meeting,
a resolution passed by the affirmative vote of not less than two-thirds of the
votes cast thereon will constitute the approval or consent of the holders of the
Exchangeable Shares.
Actions by Bowater Canada under Support Agreement. Under the Exchangeable
Share Provisions, Bowater Canada has agreed to take all such actions and do all
such things as are necessary or advisable to perform and comply with, and to
ensure the performance and compliance by Bowater with, all provisions of the
Support Agreement applicable to Bowater.
AVENOR SHARE CAPITAL
The authorized capital of Avenor after the Transaction will consist of one
class of common shares, unlimited in number. All of such shares that are issued
and outstanding will be held by Bowater Canada.
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<PAGE> 117
For a description of Avenor's debt, see note 13 to Avenor's Consolidated
Financial Statements included in this Joint Proxy Statement and "Information
Concerning Avenor--Debt".
VOTING AND EXCHANGE TRUST AGREEMENT
The following is a summary description of the material provisions of the
Voting and Exchange Trust Agreement and is qualified in its entirety by
reference to the full text of the Voting and Exchange Trust Agreement which
appears as Annex F hereto.
Voting Rights
Pursuant to the Voting and Exchange Trust Agreement, Bowater will issue one
share of Special Voting Stock to the Trustee for the benefit of the holders
(other than Bowater or its affiliates) of the Exchangeable Shares. The Special
Voting Stock will have a number of votes, which may be cast by the Trustee at
any meeting at which Bowater Shareholders are entitled to vote, equal to the
number of outstanding Exchangeable Shares (other than shares held by Bowater or
its affiliates) for which it has timely received instructions from the holders
of Exchangeable Shares.
Each holder of an Exchangeable Share (other than Bowater or its affiliates)
on the record date for any meeting at which Bowater Shareholders are entitled to
vote will be entitled to instruct the Trustee to exercise one of the votes
attached to the Special Voting Stock for such Exchangeable Share. The Trustee
will exercise each vote attached to the Special Voting Stock only as directed by
the relevant holder and, in the absence of instructions from a holder as to
voting, the Trustee will not have voting rights with respect to such votes. A
holder may, upon instructing the Trustee, obtain a proxy from the Trustee
entitling the holder to vote directly at the relevant meeting the votes attached
to the Special Voting Stock to which the holder is entitled.
The Trustee will send to the holders of the Exchangeable Shares the notice
of each meeting at which the Bowater shareholders are entitled to vote, together
with the related meeting materials and a statement as to the manner in which the
holder may instruct the Trustee to exercise the votes attaching to the Special
Voting Stock, at the same time as Bowater sends such notice and materials to the
Bowater Shareholders. The Trustee will also send to the holders of Exchangeable
Shares copies of all information statements, interim and annual financial
statements, reports and other materials sent by Bowater to the Bowater
Shareholders at the same time as such materials are sent to the Bowater
Shareholders. To the extent such materials are provided to the Trustee by
Bowater, the Trustee will also send to the holders all materials sent by third
parties to Bowater Shareholders generally, including dissident proxy circulars
and tender and exchange offer circulars, as soon as possible after such
materials are first sent to Bowater Shareholders.
All rights of a holder of Exchangeable Shares to exercise votes attached to
the Special Voting Stock will cease upon the exchange of all of such holder's
Exchangeable Shares for shares of Bowater Common Stock.
Optional Exchange Right in Case of Bowater Canada Insolvency Event
Upon the occurrence and during the continuance of a Bowater Canada
Insolvency Event, a holder of Exchangeable Shares will be entitled, subject to
the provisions of the Voting and Exchange Trust Agreement, to instruct the
Trustee to exercise the optional Exchange Right with respect to any or all of
the Exchangeable Shares held by such holder, thereby requiring Bowater to
purchase such Exchangeable Shares from the holder. As soon as practicable
following the occurrence of a Bowater Canada Insolvency Event or any event that
may, with the passage of time or the giving of notice or both, become a Bowater
Canada Insolvency Event, Bowater Canada and Bowater will give written notice
thereof to the Trustee. As soon as practicable after receiving such notice, the
Trustee will then notify each holder of Exchangeable Shares of such event or
potential event and will advise the holder of its rights with respect to the
optional Exchange Right.
The purchase price payable by Bowater for each Exchangeable Share to be
purchased under the optional Exchange Right will be satisfied by the delivery of
one share of Bowater Common Stock to the holder thereof.
If, as a result of solvency provisions of applicable law, Bowater Canada is
unable to redeem all of the Exchangeable Shares tendered for retraction by a
holder in accordance with the Exchangeable Share
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<PAGE> 118
Provisions, the holder will be deemed to have exercised the optional Exchange
Right with respect to the unredeemed Exchangeable Shares and Bowater will be
required to purchase such shares from the holder in the manner set forth above.
Automatic Exchange on Liquidation of Bowater
In the event of a Bowater Liquidation Event, Bowater will be required to
purchase each outstanding Exchangeable Share (other than Exchangeable Shares
held by Bowater or its affiliates) on the fifth business day prior to the
effective date of a Bowater Liquidation Event for a purchase price to be
satisfied by the delivery of one share of Bowater Common Stock for each
Exchangeable Share purchased.
SUPPORT AGREEMENT
Prior to the Effective Time, Bowater, Bowater Holdings and Bowater Canada
will enter into the Support Agreement in substantially the form attached to this
Joint Proxy Statement as Annex G. Pursuant to the Support Agreement, Bowater
will make the following covenants regarding the Exchangeable Shares: (i) Bowater
will not declare or pay any dividend on the Bowater Common Stock unless (a)
Bowater Canada immediately thereafter declares or pays, as the case may be, an
equivalent dividend on the Exchangeable Shares and (b) Bowater Canada has
sufficient money or other assets or authorized but unissued securities available
to enable the due declaration and the due and punctual payment, in accordance
with applicable law, of an equivalent dividend on the Exchangeable Shares; (ii)
Bowater will advise Bowater Canada in advance of the declaration of any dividend
on the shares of Bowater Common Stock and take other actions reasonably
necessary to ensure that the declaration date, record date and payment date for
dividends on the Exchangeable Shares are the same as that for any corresponding
dividends on the shares of Bowater Common Stock; (iii) Bowater will ensure that
the record date for any dividend declared on the shares of Bowater Common Stock
is not less than 10 business days after the declaration date of such dividend;
and (iv) Bowater will take all actions and do all things reasonably necessary or
desirable to enable and permit Bowater Canada, in accordance with applicable
law, to pay the Liquidation Amount, the Retraction Price or the Redemption Price
to the holders of the Exchangeable Shares in the event of a liquidation,
dissolution or winding-up of Bowater Canada, a Retraction Request by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares by Bowater Canada, as
the case may be.
The Support Agreement also provides that Bowater will not, without the
prior approval of Bowater Canada and the holders of the Exchangeable Shares as
set forth under "--Bowater Canada Share Capital--Bowater Canada Exchangeable
Shares--Amendment and Approval": (i) distribute additional shares of Bowater
Common Stock, securities convertible therefor or rights to subscribe therefor or
other property, assets or other securities of Bowater to the holders of all or
substantially all outstanding shares of Bowater Common Stock, unless the same or
an economically equivalent distribution on the Exchangeable Shares is made
simultaneously, or (ii) subdivide, consolidate, reclassify, or otherwise change
the then outstanding Bowater Common Stock or effect a transaction, such as a
merger or reorganization, which changes or affects the shares of Bowater Common
Stock, unless the same or an economically equivalent change is simultaneously
made with respect to, or in the rights of the holders of, the Exchangeable
Shares. The Board of Directors of Bowater Canada will determine in good faith
and in its sole discretion economic equivalence for the purpose of any event
described above. In the event of any proposed tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction (other than a
"Rule 10b-18 Purchase" of shares of Bowater Common Stock by Bowater, Bowater
Holdings or Bowater Canada pursuant to Rule 10b-18 of the Exchange Act)
affecting the shares of Bowater Common Stock, Bowater will use reasonable
efforts to take all actions necessary or desirable to enable holders of
Exchangeable Shares to participate in such transaction to the same extent and on
an economically equivalent basis as the holders of shares of Bowater Common
Stock.
The Support Agreement also provides that, as long as any outstanding
Exchangeable Shares are owned by any person or entity other than Bowater or any
of its affiliates, Bowater will, unless approval to do otherwise is obtained
from the holders of the Exchangeable Shares, remain the direct or indirect
beneficial owner of all issued and outstanding voting shares of Bowater Canada
and Bowater Holdings.
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With the exception of changes for the purpose of (i) adding covenants for
the protection of the holders of Exchangeable Shares, (ii) making certain
necessary amendments or (iii) curing ambiguities or clerical errors (provided,
in each case, that the Bowater Board and the Board of Directors of each of
Bowater Canada and Bowater Holdings are of the opinion that such amendments are
not prejudicial to the interests of the holders of the Exchangeable Shares), the
Support Agreement may not be amended without the approval of the holders of the
Exchangeable Shares as set forth under "--Bowater Canada Share Capital--Bowater
Canada Exchangeable Shares--Amendment and Approval".
Under the Support Agreement, each of Bowater and Bowater Holdings will
agree with Bowater Canada not to exercise, and to prevent their affiliates from
exercising, any voting rights attached to the Exchangeable Shares owned by
Bowater or Bowater Holdings or their affiliates on any matter considered at
meetings of holders of Exchangeable Shares (including any approval sought from
such holders in respect of matters arising under the Support Agreement).
REGISTRATION AND LISTING OF BOWATER COMMON STOCK
Bowater will ensure that all shares of Bowater Common Stock to be delivered
by it under the Voting and Exchange Trust Agreement, the Support Agreement or
the Arrangement are duly registered, qualified or approved under applicable
Canadian and United States securities laws, if required, so that such shares may
be freely traded by the holders thereof (other than any restriction on transfer
by reason of a holder being a "control person" of Bowater Canada for purposes of
Canadian law or an "affiliate" of Bowater or, prior to the Effective Date, of
Avenor for purposes of United States law). In addition, Bowater will take all
actions necessary to cause all such shares of Bowater Common Stock to be listed
or quoted for trading on the NYSE and the Pacific Exchange, Inc.
AVENOR CONVERTIBLE DEBENTURES
Holders of the Avenor Convertible Debentures who do not convert their
Avenor Convertible Debentures to Avenor Common Shares and participate in the
Transaction will continue to hold the Avenor Convertible Debentures after the
Effective Date. Bowater intends that appropriate adjustments will be made in
accordance with the terms of the Avenor Convertible Debentures with respect to
the shares, securities or other property that the holders of the Avenor
Convertible Debentures will be entitled to receive upon conversion of the Avenor
Convertible Debentures after the Effective Date. The effect of these adjustments
will be that, after the Effective Date, the holders of the Avenor Convertible
Debentures will be entitled to convert their Avenor Convertible Debentures into
Exchangeable Shares on the same basis as if they had converted the Avenor
Convertible Debentures into Avenor Common Shares prior to the Effective Date and
such Avenor Common Shares had been exchanged for a number of Exchangeable Shares
equal to the Exchange Ratio. In addition, it is anticipated that Bowater Canada
will become a co-obligor with respect to, or fully and unconditionally guarantee
the payment of all amounts due under, the Avenor Convertible Debentures.
TRANSFER AGENTS AND REGISTRARS
The Bank of New York at its offices in New York, New York, is the transfer
agent and registrar for the Bowater Common Stock. Montreal Trust Company of
Canada at its offices in Toronto and Montreal will be the transfer agent and
registrar for the Exchangeable Shares.
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BOWATER INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the Transaction to be accounted for using the purchase method of
accounting, whereby the total cost of the Transaction will be allocated to the
tangible and intangible assets acquired and liabilities assumed based upon their
respective fair values at the effective date of the Transaction. Although
management's plans for the combined company include selling certain assets
including the Dryden, Ontario, mill after completion of the Transaction, as
described in "The Transaction--Plans and Proposals" and "--Accounting
Treatment", these amounts have not been classified as assets held for sale in
these Unaudited Pro Forma Condensed Combined Financial Statements because the
sale of such assets is not a condition to closing. For purposes of the unaudited
pro forma condensed combined financial statements, such allocations have been
made based upon management's estimates. Accordingly, the allocations of the
purchase price included in the unaudited pro forma condensed combined financial
statements are preliminary.
The unaudited pro forma condensed combined statements of operations were
prepared as if the Transaction occurred as of January 1, 1997, and the unaudited
pro forma condensed combined balance sheet was prepared as if the Transaction
occurred as of March 31, 1998. These statements do not purport to represent what
the results of operations or financial position of Bowater would actually have
been if the Transaction had in fact occurred on the applicable date. In
addition, these statements do not project the results of operations or financial
position of Bowater for any future date or period and do not reflect the
benefits expected to be realized or any restructuring charges resulting from the
Transaction. The unaudited pro forma condensed combined financial statements
should be read together with the historical consolidated financial statements
and related notes of Bowater and Avenor included elsewhere in this Joint Proxy
Statement.
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BOWATER INCORPORATED
PRO FORMA CONDENSED COMBINED BALANCE SHEET -- UNAUDITED
MARCH 31, 1998
(IN MILLIONS OF US$)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA
BOWATER AVENOR(2) INCREASES DECREASES COMBINED
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......... $ 339.6 $ 96.8 $ -- $ 415.0(3) $ 21.4
Marketable securities.............. 90.7 -- -- 85.0(3) 5.7
Accounts receivable, net........... 194.0 205.3 -- -- 399.3
Inventories........................ 114.1 125.3 -- -- 239.4
Other current assets............... 34.6 7.4 -- -- 42.0
-------- -------- -------- -------- --------
Total current assets....... 773.0 434.8 -- 500.0 707.8
Timber and timberlands............... 383.0 19.1 75.0(3) -- 477.1
Fixed assets......................... 1,543.7 1,197.6 854.3(3) -- 3,595.6
Intangible assets.................... -- -- 619.9(3) -- 619.9
Investment in subsidiary............. -- 25.2 -- -- 25.2
Deferred tax asset................... -- 20.1 -- -- 20.1
Other assets......................... 79.3 64.3 -- -- 143.6
-------- -------- -------- -------- --------
Total assets.................... $2,779.0 $1,761.1 $1,549.2 $ 500.0 $5,589.3
======== ======== ======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings.............. $ -- $ 20.7 $ 324.7(3) $ -- $ 345.4
Current installments of long-term
debt............................ 1.8 5.9 -- -- 7.7
Accounts payable and accrued
liabilities..................... 174.5 164.5 30.0(3) -- 369.0
Other current liabilities.......... 30.7 9.4 -- -- 40.1
-------- -------- -------- -------- --------
Total current
liabilities.............. 207.0 200.5 354.7 -- 762.2
Long-term debt, net of current
installments....................... 756.7 753.0 199.4(3) -- 1,709.1
Other long-term liabilities.......... 167.0 117.2 -- -- 284.2
Deferred income taxes................ 351.9 59.4 277.3(3)(4) -- 688.6
-------- -------- -------- -------- --------
Total liabilities.......... 1,482.6 1,130.1 831.4 -- 3,444.1
Minority interests in subsidiaries... 118.2 24.1 -- -- 142.3
Commitment and contingencies......... -- -- -- -- --
Shareholders' Equity
Preferred stock.................... 25.5 -- -- -- 25.5
Common stock....................... 45.1 614.1 1.5(3) 614.1(3) 46.6
Exchangeable shares................ -- -- 742.2(3) -- 742.2
Additional paid-in capital......... 570.3 353.9 81.0(3) 353.9(3) 651.3
Retained earnings.................. 733.1 (361.1) 361.1(3) -- 733.1
Equity adjustments................. (19.5) -- -- -- (19.5)
Treasury stock..................... (176.3) -- -- -- (176.3)
-------- -------- -------- -------- --------
Total shareholders'
equity................... 1,178.2 606.9 1,185.8 968.0 2,002.9
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity..... $2,779.0 $1,761.1 $2,017.2 $ 968.0 $5,589.3
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
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<PAGE> 122
BOWATER INCORPORATED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS OF US$, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA
BOWATER AVENOR(2) INCREASES DECREASES COMBINED
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................ $1,484.5 $1,385.3 $ -- $ -- $2,869.8
Cost of sales........................ 1,106.8 1,147.3 -- -- 2,254.1
Depreciation, amortization and cost
of timber harvested................ 169.8 123.3 62.0(5) -- 355.1
Restructuring/impairment charges..... -- 207.8 -- -- 207.8
-------- -------- ------ ------ --------
Gross profit (loss)........... 207.9 (93.1) (62.0) -- 52.8
Selling and administrative expense... 72.2 56.1 -- -- 128.3
-------- -------- ------ ------ --------
Operating income (loss)....... 135.7 (149.2) (62.0) -- (75.5)
Other expense (income):
Interest income.................... (21.5) -- -- (21.5)(6) --
Interest expense................... 67.5 90.4 21.1(6) 12.6(5) 166.4
Gain on sale of assets............. (0.8) (146.0) -- -- (146.8)
Equity interest in unconsolidated
subsidiary...................... -- 1.4 -- -- 1.4
Other, net......................... 1.0 88.2 -- -- 89.2
-------- -------- ------ ------ --------
Income (loss) before income
taxes, minority interests
and extraordinary
charges.................... 89.5 (183.2) (83.1) 8.9 (185.7)
Income tax expense (benefit)....... 33.1 (31.3) -- 11.3(5) (25.7)
16.2(6)
Minority interests in net income of
subsidiaries.................... 2.7 2.4 -- -- 5.1
-------- -------- ------ ------ --------
Income (loss) before
extraordinary charges...... $ 53.7 $ (154.3) $(83.1) $(18.6) $ (165.1)
======== ======== ====== ====== ========
Per share amounts:
Basic average common shares
outstanding..................... 40.3 15.0(3) 55.3
======== ====== ========
Basic income (loss) before
extraordinary charges(8)........ $ 1.26 $ (3.04)
======== ========
Diluted average common and common
equivalent shares outstanding... 40.8 15.0(3) 0.5(7) 55.3
======== ====== ====== ========
Diluted income (loss) before
extraordinary charges(8)........ $ 1.25 $ (3.04)
======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
101
<PAGE> 123
BOWATER INCORPORATED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS OF US$, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA
BOWATER AVENOR(2) INCREASES DECREASES COMBINED
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 383.2 $ 301.3 $ -- $ -- $ 684.5
Cost of sales........................ 274.4 223.6 -- -- 498.0
Depreciation, amortization and cost
of timber harvested................ 45.2 23.3 15.5(5) -- 84.0
Restructuring/impairment charges..... -- -- -- -- --
-------- -------- ------ ------ --------
Gross profit.................. 63.6 54.4 (15.5) -- 102.5
Selling and administrative expense... 17.3 6.9 -- -- 24.2
-------- -------- ------ ------ --------
Operating income.............. 46.3 47.5 (15.5) -- 78.3
Other expense (income):
Interest income.................... (6.5) -- -- (6.5)(6) --
Interest expense................... 16.5 17.5 5.3(6) 3.2(5) 36.1
Gain on sale of assets............. (21.0) -- -- -- (21.0)
Equity interest in unconsolidated
subsidiary...................... -- (0.6) -- -- (0.6)
Other, net......................... 4.4 (23.2) -- -- (18.8)
-------- -------- ------ ------ --------
Income before income taxes,
minority interests and
extraordinary charges...... 52.9 53.8 (20.8) 3.3 82.6
Income tax expense................. 20.1 19.7 -- 2.8(5) 32.5
4.5(6)
Minority interests in net income of
subsidiaries.................... 8.0 (0.4) -- -- 7.6
-------- -------- ------ ------ --------
Income before extraordinary
charges.................... $ 24.8 $ 34.5 $(20.8) $ (4.0) $ 42.5
======== ======== ====== ====== ========
Per share amounts:
Basic average common shares
outstanding..................... 40.4 15.0(3) 55.4
======== ====== ========
Basic income before extraordinary
charges(8)...................... $ .60 $ .76
======== ========
Diluted average common and common 15.0(3)
equivalent shares outstanding... 41.0 2.6(7) 58.6
======== ====== ========
Diluted income before extraordinary
charges(8)...................... $ .59 $ .73
======== ========
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
102
<PAGE> 124
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN MILLIONS OF US$, UNLESS OTHERWISE NOTED)
1. MAJOR ASSUMPTIONS AND SENSITIVITY OF RESULTS
These unaudited pro forma condensed combined financial statements present
results of operations as if the Transaction occurred as of January 1, 1997 and
financial position as if the Transaction occurred March 31, 1998. Major
assumptions embodied within these statements are as follows:
- Bowater will acquire all of the outstanding common stock of Avenor at
C$35 per share.
- The Transaction will be consummated 50% in cash, 5% in shares of
Bowater Common Stock, and 45% in Exchangeable Shares.
- The assumed Bowater Average Trading Price per share of Bowater Common
Stock, as well as the Exchangeable Share price per share, is US$55.00.
- The assumed currency conversion rate applicable to the calculation of
the Exchange Ratio is C$1.4184 to US$1.
- The assumed Exchange Ratio is calculated as follows assuming the above
per share prices and currency conversion rate:
<TABLE>
<C> <S>
C$35.00 per share
--------------------------- = .4486
US$55.00 per share X 1.4184
</TABLE>
Minimum and maximum ranges of certain variables in the Exchange Ratio and
sensitivity of pro forma results are as follows:
<TABLE>
<CAPTION>
SENSITIVITY(1)
-------------------------------------
PRO FORMA HIGH LOW
--------- ----------------- -----------------
<S> <C> <C> <C>
Bowater Stock Price................................... $ 55.00 $ 55.62(2) $ 45.51(2)
============= ============= =============
Impact on diluted earnings per share for the year
ended December 31, 1997:
50% Cash/50% Stock.................................. ($ 3.04) ($ 3.05) ($ 2.88)
============= ============= =============
60% Cash/40% Stock.................................. ($ 3.34) ($ 3.35) ($ 3.19)
============= ============= =============
Impact on diluted earnings per share for the three
months ended March 31, 1998:
50% Cash/50% Stock.................................. $ .73 $ .73 $ .70
============= ============= =============
60% Cash/40% Stock.................................. $ .74 $ .74 $ .71
============= ============= =============
</TABLE>
- ---------------
(1) Sensitivity to currency exchange, using the high and low exchange rates for
1997, is immaterial for presentation purposes. Bowater hedged its currency
risk by purchasing options on the Canadian dollar.
(2) High and low range of Bowater share price for purposes of this transaction.
2. CONVERSION OF AVENOR'S HISTORICAL FINANCIAL STATEMENTS
The pro forma condensed combined financial statements are presented in U.S.
dollars and in accordance with accounting principles generally accepted in the
United States (U.S. GAAP). Thus, the Avenor statements of operations for the
year ended December 31, 1997, and for the three months ended March 31, 1998,
were converted from C$ to US$ using an average exchange rate for each period
(US$.7219 per C$1 and US$.7003 per C$1, respectively). The balance sheet of
Avenor was converted from C$ to US$ using the exchange rate effective on the
balance sheet date (US$.7045 per C$1). Certain adjustments were necessary to
convert Avenor's historical financial statements, which were prepared in
accordance with Canadian GAAP, to U.S. GAAP. The pro forma combined financial
statements were prepared using the historical accounting policies of both Avenor
and Bowater, as applicable. The material adjustments are summarized below.
103
<PAGE> 125
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CANADIAN CANADIAN U.S.
GAAP GAAP GAAP
C$ US$ US$
-------- -------- -------
<S> <C> <C> <C>
As of March 31, 1998:
ASSETS
Cash and equivalents(A)................................ $ 137.9 97.2 96.8
Marketable securities.................................. -- -- --
Accounts receivable, net(A)............................ 299.9 211.3 205.3
Inventories(A)......................................... 181.4 127.8 125.3
Other current assets(A)................................ 10.8 7.6 7.4
-------- ------- -------
Total current assets................................... 630.0 443.9 434.8
Timber and timberlands, net............................ 27.1 19.1 19.1
Fixed assets, net(A)................................... 1,839.8 1,296.1 1,197.6
Investment in subsidiary(A)............................ -- -- 25.2
Deferred tax asset(B-D)(G-J)........................... -- -- 20.1
Other assets(B)(G)(J).................................. 158.0 111.3 64.3
-------- ------- -------
Total assets........................................... $2,654.9 1,870.4 1,761.1
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.................................. $ 29.4 20.7 20.7
Current installments of long-term debt................. 15.0 10.6 5.9
Accounts payable and accrued liabilities(A)............ 240.8 169.6 164.5
Other current liabilities.............................. 13.3 9.4 9.4
-------- ------- -------
Total current liabilities.............................. 298.5 210.3 200.5
Long-term debt(A) (K).................................. 1,055.0 743.2 753.0
Other long-term liabilities(C-D)(J).................... 31.9 22.5 117.2
Deferred income taxes(B-D)(G-J)........................ 155.0 109.2 59.4
Minority interests..................................... 34.2 24.1 24.1
Common stock........................................... 990.0 697.5 614.1
Additional paid-in capital............................. 502.4 353.9 353.9
Retained earnings(B-K)................................. (412.1) (290.3) (361.1)
-------- ------- -------
Total liabilities and stockholders' equity........ $2,654.9 1,870.4 1,761.1
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
CANADIAN CANADIAN U.S.
GAAP GAAP GAAP
C$ US$ US$
-------- -------- -------
<S> <C> <C> <C>
For the year ended December 31, 1997:
Net sales(A)........................................... $1,991.7 1,437.8 1,385.3
Cost of sales(A)(D)(G)................................. 1,634.2 1,179.7 1,147.3
Depreciation, amortization and cost of timber
harvested(A).......................................... 181.1 130.8 123.3
Restructuring/impairment charges....................... 287.8 207.8 207.8
-------- ------- -------
Gross loss............................................. (111.4) (80.5) (93.1)
Selling and administrative............................. 77.8 56.1 56.1
-------- ------- -------
Operating loss......................................... (189.2) (136.6) (149.2)
Other expense (income):
Interest income........................................ -- -- --
Interest expense, net(A)(H)............................ 125.2 90.4 90.4
Gain on sales of assets(E)............................. (186.2) (134.4) (146.0)
Loss on early extinguishment of debt(F)................ 45.3 32.7 --
</TABLE>
104
<PAGE> 126
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CANADIAN CANADIAN U.S.
GAAP GAAP GAAP
C$ US$ US$
-------- -------- -------
<S> <C> <C> <C>
Equity interest in unconsolidated subsidiary(A)........ -- -- 1.4
Other expense (income)(B-C)............................ 40.8 29.5 88.2
-------- ------- -------
Loss before taxes and minority interest................ (214.3) (154.8) (183.2)
Income tax benefit(I).................................. (5.1) (3.7) (31.3)
Minority interests..................................... 3.3 2.4 2.4
-------- ------- -------
Loss before extraordinary charges................. $ (212.5) (153.5) (154.3)
======== ======= =======
For the three months ended March 31, 1998:
Net sales(A)........................................... $ 450.6 315.6 301.3
Cost of sales(A)(D)(G)................................. 336.1 235.4 223.6
Depreciation, amortization and cost of timber
harvested(A).......................................... 36.0 25.2 23.3
Restructuring charges.................................. -- -- --
-------- ------- -------
Gross profit........................................... 78.5 55.0 54.4
Selling and administrative............................. 9.9 6.9 6.9
-------- ------- -------
Operating income....................................... 68.6 48.1 47.5
Other expense (income):
Interest income........................................ -- -- --
Interest expense, net(A)(H)............................ 25.0 17.5 17.5
Gain on sales of assets(E)............................. -- -- --
Loss on early extinguishment of debt(F)................ -- -- --
Equity interest in unconsolidated subsidiary(A)........ -- -- (0.6)
Other expense (income)(B-C)............................ (4.6) (3.2) (23.2)
-------- ------- -------
Income before taxes and minority interest.............. 48.2 33.8 53.8
Income tax expense(I).................................. 20.2 14.1 19.7
Minority interests..................................... (0.5) (0.4) (0.4)
-------- ------- -------
Income before extraordinary charges............... $ 28.5 20.1 34.5
======== ======= =======
</TABLE>
- ---------------
(A) Under Canadian GAAP, Avenor's 40% interest in Ponderay Newsprint Company was
recorded using the proportional method of consolidation. Under U.S. GAAP,
this investment is recorded using the equity method of accounting.
(B) Under Canadian GAAP, unrealized exchange gains and losses arising from the
translation of long-term debt denominated in foreign currencies were
deferred and amortized over the remaining life of the related debt. Under
U.S. GAAP, such exchange gains and losses would have been included in
earnings in the period in which they arose and consequently, no amount would
have been deferred in the consolidated balance sheet under the item "Other
Assets".
Canadian GAAP requires gains and losses on forward exchange and range
forward contracts which hedge anticipated future sales to be included in
earnings in the same period the sale is recognized. Under U.S. GAAP, such
gains and losses would have been included in earnings in the period in
which they arose.
(D) Under Canadian GAAP, costs of providing life insurance and health care
benefits to substantially all employees after retirement were recognized as
paid. Costs of providing benefits to former or inactive employees after
employment but before retirement were also recognized as paid under Canadian
GAAP. Under U.S. GAAP, these costs would have been accrued during the
employees' years of active service.
(E) A permanent difference existing under Canadian GAAP would have been treated
as a temporary difference under U.S. GAAP, thereby creating a deferred tax
liability in the books of the subsidiary that was sold. As a result, net
assets of the subsidiary at the date of sale would have been lower, and
consequently, the gain recorded on the sale would have been higher under
U.S. GAAP. In addition, as a
105
<PAGE> 127
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
result of the sale, postretirement obligations previously recognized under
U.S. GAAP were settled, thereby increasing the gain from sale which would
have been recognized under U.S. GAAP.
(F) The cost of early redemption of long-term debt was included in earnings
(loss) before taxes and non-controlling interest in accordance with Canadian
GAAP. Under U.S. GAAP, it would have been presented as an extraordinary
item, net of taxes.
(G) Under Canadian GAAP, certain start-up costs were deferred and amortized.
Under U.S. GAAP, such costs would have been included in net earnings as
incurred.
(H) Under Canadian GAAP, the equity element of the convertible debentures was
increased over the term of the debentures through periodic charges to
retained earnings (deficit) of the difference between the principal amount
and the initial carrying amount. The discount related to the liability
element of the convertible debentures was charged to net earnings. Under
U.S. GAAP, since no separate presentation of the equity element of the
convertible debentures would have been made, interest would have been
accrued and charged to net earnings (loss) in accordance with the terms of
the debentures.
(I) For Canadian GAAP reporting purposes, income taxes were provided on the
deferral method basis, whereas for U.S. GAAP deferred tax assets and
liabilities would have been recognized based on differences between the
financial statement and tax bases of assets and liabilities using presently
enacted rates. In addition, under U.S. GAAP, a valuation allowance must be
established for deferred tax assets when it is more likely than not that
they will not be realized.
(J) Accounting for pension costs under U.S. GAAP differs from Canadian GAAP
principally with respect to the choice of the discount rate used to
calculate the projected benefit obligation and to the valuation of assets
and related effects on pension expense. There was no significant difference
in pension expense for 1997 or the three months ended March 31, 1998. In
addition, under U.S. GAAP, Avenor would have recorded an additional minimum
liability for underfunded plans representing the excess of the accumulated
benefit obligation over the pension plan assets, less the pension liability
already recognized and the net unamortized prior service cost. Under U.S.
GAAP, the additional minimum liability at December 31, 1997 of $24.0 million
would be reported and offset by an intangible asset of $23.5 million and a
reduction of shareholders' equity of $0.3 million, net of a tax benefit of
$0.1 million.
(K) Canadian GAAP requires the separate presentation on the balance sheet of the
liability and equity elements of convertible debentures. U.S. GAAP does not
permit the separate presentation of the convertible debentures which must be
classified as debt.
(L) The following are the significant presentation differences between Canadian
GAAP and U.S. GAAP:
<TABLE>
<CAPTION>
CANADIAN U.S.
GAAP GAAP
-------- ----
<S> <C>
1) "Amortization" "Depreciation, amortization and
cost of timber harvested"
2) "Unusual items" included after "Restructuring/impairment
gross profit, but before operating charges" included in calculation
earnings (loss) of gross profit
3) "Loss on early repayment of "Extraordinary item" not included
long-term debt" included after on pro forma presentation of
operating earnings (loss), but income (loss) before
before earnings (loss) before extraordinary charges
taxes and non-controlling
interests
4) "Costs related to an unrealized "Other expense"
acquisition project"
5) "Non-controlling interest" "Minority interests in net income
of subsidiaries"
</TABLE>
106
<PAGE> 128
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PURCHASE PRICE ALLOCATION
The purchase price to Avenor shareholders of $1,649.4 million was
calculated by multiplying the total outstanding common shares of Avenor and
shares reserved for stock options plans (66.8 million aggregate shares) by
C$35.00 per share (US$24.675) per share. Payment is assumed as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF US$)
--------------------
<S> <C>
Cash from cash, cash equivalents and marketable
securities................................................ 500.0
Proceeds from $1 billion short-term credit facility......... 324.7
Issuance of 1.5 million Bowater shares at US$55 per share... 82.5
Issuance of 13.5 million shares exchangeable into Bowater
shares at US$55 per share................................. 742.2
--------
1,649.4
========
</TABLE>
The purchase price to Avenor shareholders, plus estimated transaction
costs, the excess of fair value of liabilities assumed over the historical book
value, and the deferred tax effect of applying purchase accounting at March 31,
1998, over the historical net assets of Avenor was calculated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF
US$)
---------------
<S> <C>
Purchase price to Avenor shareholders....................... 1,649.4
Estimated transaction costs................................. 30.0
Excess of fair value of long-term debt assumed over
historical value.......................................... 149.4
Excess of fair value of convertible debt over historical
value..................................................... 50.0
Deferred tax effect of applying purchase accounting......... 277.3
Less historical net assets.................................. (606.9)
--------
1,549.2
========
</TABLE>
The excess purchase price was allocated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF
US$)
---------------
<S> <C>
Timber and timberlands...................................... 75.0
Fixed assets................................................ 854.3
Goodwill.................................................... 619.9
--------
1,549.2
========
</TABLE>
As described in Footnote 5, the excess purchase price will be
depreciated/amortized over various time periods and will be offset by the
amortization of the debt premium and deferred tax benefits.
4. INCOME TAX ADJUSTMENTS
The increase to deferred tax liabilities of $277.3 million relates to the
tax effect of the increase to fair market value of assets acquired and
liabilities assumed.
5. DEPRECIATION, AMORTIZATION AND REDUCTION OF DEFERRED TAX LIABILITY
Additional depreciation and amortization on the increase to fair market
value of fixed assets and timber and timberlands has been calculated on a
straight-line basis over 20 years. Additional amortization on the increase in
goodwill has been calculated on a straight-line basis over 40 years. The pro
forma adjustment to depreciation and amortization was $62.0 million in 1997 and
$15.5 million for the three months ended March 31, 1998. The increase to fair
market value of debt assumed will be amortized using the interest method over
the remaining life of the debt. The pro forma adjustment to reduce interest
expense was $12.6 million in 1997 and $3.2 million for the three months ended
March 31, 1998. A deferred tax benefit of $11.3 million and $2.8 million
resulted from the above charges in 1997 and for the three months ended March 31,
1998, respectively.
107
<PAGE> 129
BOWATER INCORPORATED
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
These purchase accounting adjustments resulted in an after-tax charge to
the 1997 statement of operations of $38.1 million. The after-tax charges
anticipated for years 1998, 1999, and 2000 are $37.7 million, $37.2 million, and
$36.8 million, respectively. The aggregate amount of amortization and
depreciation less the interest expense reduction and deferred tax benefits for
years 1997 through 2036 is anticipated to be approximately $1,121.9 million.
6. INTEREST COSTS
Pro forma interest income has been reduced to reflect the use of $500
million of cash as part of the purchase consideration and interest expense on
the short-term debt has been calculated using an interest rate of 6.5%. The tax
effect of reducing interest income and increasing interest expense provides a
benefit of $16.2 million for 1997 and $4.5 million for the three months ended
March 31, 1998.
7. DILUTION
In order to present no dilution in loss per share for the year ended
December 31, 1997, diluted shares outstanding were adjusted to basic shares
outstanding and were not adjusted to reflect the conversion of the C$125.4
million principal amount of Avenor Convertible Debentures. For the three months
ended March 31, 1998, diluted shares outstanding were adjusted by 2.6 million
shares to reflect the conversion of the Avenor Convertible Debentures.
8. CALCULATION OF EARNINGS PER SHARE
Income (loss) before extraordinary charges was reduced by $2.9 million for
1997 and $.6 million for the three months ended March 31, 1998, for Bowater
preferred stock dividends in calculating basic and diluted income (loss) before
extraordinary charges per share for Bowater historical and pro forma combined
amounts. In addition, income before extraordinary charges for the three months
ended March 31, 1998, was increased by $1.0 million to reflect the reduction in
interest expense associated with the conversion of the Avenor Convertible
Debentures in calculating diluted income before extraordinary charges per share
for the pro forma combined amounts.
108
<PAGE> 130
AVENOR MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Avenor's Consolidated Financial Statements and the notes thereto contained in
this Joint Proxy Statement.
These consolidated financial statements were prepared in accordance with
Canadian GAAP. If these consolidated financial statements were prepared in
accordance with US GAAP, results of operations would have been as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ ----------------------------
1998 1997 1997 1996 1995
------- -------- -------- ------- -------
(C$ MILLION, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating earnings (loss) before unusual
items...................................... C$ 70.6 C$ (23.2) C$ 86.9 C$170.2 C$719.7
======= ======== ======== ======= =======
Net earnings (loss).......................... C$ 49.2 C$(110.2) C$(226.0) C$ 14.4 C$416.7
======= ======== ======== ======= =======
Earnings (loss) per share.................... C$ 0.75 C$ (1.69) C$ (3.45) C$ 0.22 C$ 6.21
======= ======== ======== ======= =======
</TABLE>
For further details as to the nature of the differences between Canadian
GAAP and US GAAP, refer to note 19 of Avenor's consolidated financial statements
for years ended December 31, 1997, 1996 and 1995.
This discussion and analysis relates to Avenor on a stand-alone basis and
does not give effect to the Transaction. Accordingly, the forward looking
statements contained herein should be considered superseded upon completion of
the Transaction.
QUARTERS ENDED MARCH 31, 1998 AND 1997
FINANCIAL RESULTS
Avenor reported net earnings applicable to common shares for the first
quarter of 1998 of C$27.2 million, or C$0.42 per share (C$0.40 fully diluted),
on net sales of C$450.6 million.
These results compare with a net loss applicable to common shares of C$94.9
million, or C$1.45 per share, for the same quarter a year earlier. Excluding an
unusual item of C$48.2 million (C$31.3 million after tax) for the implementation
of a workforce reduction program and expenses of C$28.0 million (C$22.8 million
after tax) relating to an unsuccessful acquisition attempt, the net loss
applicable to common shares for the first quarter of 1997 amounted to C$40.8
million, or C$0.62 per share, on net sales of C$444.9 million.
Operating earnings for this quarter were C$68.6 million compared to an
operating loss before unusual item of C$19.3 million for the same quarter last
year. Excluding the operating results of Pacific Forest Products Limited,
Avenor's 53%-owned subsidiary sold in December 1997, the first quarter operating
loss last year would have been C$30.7 million. Therefore, Avenor's operating
results for the first quarter of 1998 represent nearly a C$100 million
turnaround compared to the same quarter a year earlier.
Overall cost reductions and stronger pricing in all four businesses as well
as higher productivity in the Newsprint Group contributed to the improved
operating results in the first quarter of the year compared to the same period
in 1997.
MARKETS, OPERATIONS, OUTLOOK
Newsprint
In the United States, prices for newsprint were essentially constant during
the quarter. Demand continued to rise driven by increased newsprint consumption
and advertising expenditures. In overseas markets, a general improvement in
transaction pricing occurred during the quarter.
The Newsprint Group reported operating earnings of C$54.6 million on net
sales of C$233.6 million compared to an operating loss of C$16.7 million on net
sales of C$170.6 million for the same quarter last year. High productivity, a
strong cost performance at all newsprint mills and a favourable US to Canadian
dollar
109
<PAGE> 131
exchange rate offset the negative impact on revenue and costs resulting from the
severe January 1998 ice storm in Southwestern Quebec. An enforced 12-day power
curtailment caused the complete shutdown of the Gatineau mill. Despite this
difficult start to a new year, the Gatineau mill achieved a new production
record of 1,283 tonnes per day for the balance of the quarter.
A price increase of US$40 per tonne for the East Coast, announced for April
1, 1998, has been deferred to May 1, 1998. Prices in overseas markets are
expected to remain steady in the second quarter of 1998.
Pulp
An excess supply of pulp combined with weaker demand resulted in decreased
prices in all markets during the quarter compared to the fourth quarter of 1997.
In North America, prices for Northern Bleached Softwood Kraft Pulp (NBSK)
dropped from US$610 per tonne to US$550 per tonne. Similar price decreases
occurred in European and Asian markets. However, during the latter part of the
quarter, demand for market pulp strengthened, particularly in China, and
inventories decreased.
For the first quarter, the Pulp Group had operating earnings of C$8.3
million on net sales of C$115.4 million compared with an operating loss of C$3.9
million on net sales of C$106.1 million for the same quarter last year.
Operating results improved compared to the first quarter of 1997 as a result of
higher prices, stronger shipments and reduced costs from the implementation of
Operational Excellence initiatives. The Gold River pulp mill, which had been
shut down since late December 1997, resumed operations at the end of the first
quarter.
Further industry inventory reductions are anticipated as the spring
maintenance period for producers commences and demand for market pulp
strengthens, leading to gradual price improvement over the balance of the year.
White Paper
Inventory buildup in the distribution channels early in the quarter led to
lower shipments and reduced prices by the end of the first quarter. However, on
average, prices were higher compared to the same quarter a year earlier. A
growing concern about the level of offshore imports of uncoated freesheet paper
into the North American market contributed to the lower prices.
The White Paper Group reported first quarter operating earnings of C$9.0
million on net sales of C$81.4 million compared to an operating loss of C$1.6
million for the same period last year on net sales of C$71.4 million. The higher
operating earnings resulted primarily from higher prices.
Demand is expected to grow over the remainder of the year in North America.
While improvements in pulp pricing should positively affect white paper pricing,
the possibility of increasing levels of imports from Asia could dampen white
paper improvements.
Wood Products
Lumber markets are generally oversupplied resulting in continued low prices
despite strong demand, primarily in the United States. However, studs and
shorter lengths of lumber, Avenor's prime lumber production, are selling at
higher prices than the longer lengths.
For the first quarter, the Wood Products Group reported operating earnings
of C$1.0 million on net sales of C$20.2 million compared to operating earnings
of C$11.9 million on net sales of C$96.8 million for the same quarter last year.
The operating results for the first quarter of last year included the
contribution of Pacific Forest Products Limited thereby accounting for the lower
results in 1998.
Lumber prices are expected to remain at low levels for the remainder of the
year.
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<PAGE> 132
LABOUR
In 1998, labour agreements covering mill and woodlands employees in Thunder
Bay, Gatineau, Dalhousie and Dryden become open for negotiation.
TRANSACTION WITH BOWATER
On March 9, 1998, Avenor announced that it had entered into an Arrangement
Agreement with Bowater which has the economic effect of Bowater acquiring Avenor
pursuant to a Plan of Arrangement under Canadian law.
Each holder of Avenor Common Shares will be entitled to receive C$35 for
each Avenor Common Share held by such holder, payable, at the election of such
holder and subject to proration, in cash, Exchangeable Shares, shares of Bowater
Common Stock, or a combination of the foregoing. The Exchangeable Shares will be
exchangeable at any time at the option of the holder on a one-for-one basis for
Bowater Common Stock. Each Avenor Common Share for which an effective election
to receive Exchangeable Shares is made will be exchanged for a number of
Exchangeable Shares equal to the Exchange Ratio (subject to possible proration)
consisting of C$35 divided by the product of the Bowater Average Trading Price
(but not more than US$55.6187 or less than US$45.5062), multiplied by the
Currency Exchange Rate. Each Avenor Common Stock for which an effective election
to receive Bowater Common Stock is made will be exchanged for a number of shares
of Bowater Common Stock equal to the Exchange Ratio (subject to possible
proration). The maximum aggregate number of Avenor Common Shares that may be
exchanged for cash may not exceed 60% of the total number of outstanding Avenor
Common Shares. The maximum aggregate number of Avenor Common Shares that may be
exchanged for shares of Bowater Common Stock or Bowater Exchangeable Shares may
not exceed 50% of the total number of outstanding Avenor Common Shares.
The Arrangement Agreement with Bowater provides for mutual termination fees
of C$70 million, and Avenor has agreed not to solicit or encourage any competing
offers. The transaction must be approved by the shareholders of both companies
and appropriate regulatory authorities.
DIVIDENDS
A dividend of C$0.12 per share payable on June 30, 1998 to shareholders of
record at the close of business on June 5, 1998 was declared by the Avenor Board
at a meeting held on April 21, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary investments stood at C$137.9 million as at March 31,
1998 compared to C$185.4 million as at December 31, 1997. Bank indebtedness was
virtually unchanged from December 31, 1997. The decrease in cash and temporary
investments since December 31, 1997 was primarily the result of repayments of
long-term debt and additions to capital assets, partially offset by cash flow
from operations, as more fully described below.
Cash from Operating Activities
For the first quarter of 1998, operating activities generated C$32.5
million compared to C$7.5 million for the same quarter in 1997. This increase is
mainly attributable to a turnaround in operating earnings before unusual items
(from a loss of C$19.3 million in 1997 to earnings of C$68.6 million in 1998)
partially offset by an unfavorable variance in working capital in 1998 whereas
this variance had been favorable in 1997.
Cash from Investing Activities
Cash used by investing activities was C$20.9 million for the first three
months of 1998 compared to C$25.0 million for the same period a year earlier.
Additions to capital assets totaled C$30.8 million in the first quarter of 1998
compared to C$24.0 million in the first quarter of 1997, reflecting the
installation of a sheeter
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<PAGE> 133
at Dryden's white paper mill in 1998. Other cash from investing activities
included the proceeds from the sale of the corporate aircraft in the first
quarter of 1998.
Cash from Financing Activities
For the first quarter of 1998, financing activities used C$56.6 million of
cash whereas they had generated C$9.6 million of cash in the first quarter of
1997. The net variance of long-term debt was approximately the same in both
periods, a net repayment of C$53.0 million in 1998 compared to C$52.9 million in
1997. However, in the first quarter of 1997, a transfer of C$62.1 million from a
segregated account was used to repay long-term debt while the repayment in 1998
was done using available cash. The remaining cash in the segregated account was
used to repay long-term debt during the fourth quarter of 1997. A dividend of
C$0.12 per share was paid during the first quarter of 1998 whereas, in the same
quarter of 1997, the dividend had been suspended in view of an acquisition
project which subsequently did not materialize.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RESULTS OF OPERATIONS
Summary of Operating Results
The following table shows Avenor's net sales and operating results by
business segment as well as total financial results and cash from operations for
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(C$ MILLIONS)
<S> <C> <C> <C>
Net sales
Newsprint................................................. C$ 826.4 C$ 907.2 C$1,057.0
Pulp...................................................... 472.8 427.0 768.7
White Paper............................................... 305.0 322.6 409.7
Wood Products............................................. 387.5 404.5 376.9
--------- --------- ---------
C$1,991.7 C$2,061.3 C$2,612.3
========= ========= =========
Operating earnings (loss) before unusual items
Newsprint................................................. C$ 63.3 C$ 168.2 C$ 292.5
Pulp...................................................... 22.3 (30.1) 245.5
White Paper............................................... 20.7 32.2 160.2
Wood Products............................................. 27.0 46.1 64.5
Corporate expenses........................................ (34.7) (36.4) (34.0)
--------- --------- ---------
C$ 98.6 C$ 180.0 C$ 728.7
========= ========= =========
Net earnings (loss) applicable to common shares............. C$ (217.4) C$ 6.7 C$ 343.8
========= ========= =========
Cash from operations........................................ C$ 72.0 C$ 166.2 C$ 656.6
========= ========= =========
</TABLE>
OVERVIEW
Avenor reported a net loss applicable to common shares of C$217.4 million,
or C$3.32 per share, for the year 1997. However, these results were negatively
impacted by non-recurring charges totaling C$172.3 million (C$163.0 million
after tax). Excluding all non-recurring items, Avenor would have recorded a net
loss applicable to common shares of C$54.4 million, or C$0.83 per share, on
operating earnings of C$98.6 million and net sales of C$1,991.7 million. This
compares with net earnings applicable to common shares for the year 1996 of
C$6.7 million, or C$0.10 per share, on operating earnings of C$180.0 million and
net sales of C$2,061.3 million. The 1997 results also represent a decline from
1995's record net earnings applicable to common shares of C$343.8 million, or
C$5.12 per share (C$4.75 fully diluted). In 1995, Avenor achieved operating
earnings of C$728.7 million before unusual items of C$24.8 million consisting of
the reversal of certain provisions for the Gold River Newsprint Limited
Partnership. Total operating earnings for 1995 amounted to C$753.5 million. The
reduced operating earnings in 1997 compared to 1996 resulted from lower
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<PAGE> 134
pricing, primarily in the newsprint business. The average transaction price for
newsprint in 1997 approximated US$562 per tonne compared to US$624 per tonne in
1996. Lower newsprint prices reduced Avenor's 1997 operating results by C$199.2
million as compared with 1996. However, a reduction in operating costs of 7%
over 1996, due primarily to the implementation of the Operational Excellence
Program, partially offset the impact of lower pricing on operating earnings.
Avenor currently markets less than 25% of its pulp and less than 15% of its
newsprint in Asian markets. In 1997, Asian paper markets experienced oversupply
and the recent currency depreciation and economic crisis have made these paper
markets even more competitive and volatile. A shutdown at the Gold River pulp
mill was undertaken commencing in late December 1997 as a result of the weak
market conditions in Asia. The mill resumed operations in late March 1998. In
addition, Avenor's newsprint sales to Japan are subject to currency risk since
substantially all of those sales are denominated in yen. The majority of the
balance of Avenor's sales to Asian markets is denominated in U.S. dollars. To
date, the effect of weakened Asian markets has not been material to Avenor's
sales. There can be no assurance, however, that weaknesses in Asian markets and
currencies will not have a material adverse effect on pricing and sales volume
levels for Avenor's products. See "Risk Factors--Risks Related to Operations
after the Transaction--Effect of Weak Asian Markets".
In 1996, the decline in operating earnings from 1995 of C$548.7 million,
before unusual items, was mainly caused by lower net prices in Avenor's Pulp and
White Paper businesses of C$380.3 million and lower newsprint and pulp shipments
of C$165.4 million. Those unfavorable variances were partly offset by
productivity improvements. Avenor's overall costs rose 2% in 1996 as compared
with 1995, primarily due to higher costs associated with mill shutdowns.
1997 EVENTS
- The Operational Excellence Program was implemented during the year. In
1997, Avenor achieved annualized cost reductions totaling C$87 million as
a result of increasing productivity by 166 tonnes per day, reducing mill
costs by C$34 per tonne, and reducing the workforce by 446 as of December
31, 1997. The program is expected to achieve C$140 million of cost
reductions on an annualized basis when fully implemented by the end of
1998.
- Avenor's new sawmill at Ear Falls, Ontario commenced operations on
schedule in September 1997. The sawmill will have a capacity of 130
million board feet once fully operational. Avenor has invested C$61
million in the sawmill.
- In December 1997, Avenor completed the sale of its 53%-owned subsidiary,
Pacific Forest Products Limited, located in British Columbia, for cash
proceeds of C$302 million. At the same time, Avenor sent notice of
redemption to the holders of its Series F Senior Notes and notice of
partial redemption to the holders of its Series E Senior Notes, for
prepayment on or before January 9, 1998 of a total principal amount of
US$97.8 million.
- Avenor continued to focus on debt reduction in 1997 and, in addition to
the above-mentioned prepayments, repaid its syndicated loan and a portion
of the 9.25% U.S. debentures for a total of US$133.8 million. The amount
of C$45.0 million outstanding under a revolving credit facility was also
repaid.
RESULTS BY BUSINESS GROUP
Newsprint Group
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Shipments (000s tonnes)..................................... 1,281 1,133 1,228
Net sales (C$ millions)..................................... 826.4 907.2 1,057.0
Operating rate (%).......................................... 99 90 98
Operating earnings before unusual items (C$ millions)....... 63.3 168.2 292.5
</TABLE>
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<PAGE> 135
The Newsprint Group operates three newsprint mills located in Dalhousie,
New Brunswick; Gatineau, Quebec; and Thunder Bay, Ontario. In addition, Avenor
has a 40% interest in Ponderay Newsprint Company, a joint venture mill in the
United States.
Operating earnings for the Newsprint Group amounted to C$63.3 million in
1997, a decline of C$104.9 million from 1996, and C$229.2 million from 1995. Net
sales decreased 8.9% from C$907.2 million in 1996 to C$826.4 million in 1997.
Compared to 1995, net sales were down 21.8%. Lower prices accounted for C$199.2
million of the drop in operating earnings from 1996. The negative impact of
lower prices was mitigated by increasing productivity and reduced costs. During
1997, the Newsprint Group's focus on improving cost competitiveness through
increased productivity, successful completion of the Dalhousie Mill
Modernization Project and implementation of Operational Excellence Program
initiatives has resulted in an overall cost improvement of close to 9% compared
to 1996. Implementation of Operational Excellence Program initiatives resulted
in annualized savings of C$29.0 million in 1997 for the Newsprint Group.
In 1997, newsprint demand in North America improved as newsprint
consumption grew by 4% in the United States, advertising lineage rose by 6% and
inventories returned to normal levels. Approximately 70% of the Group's net
sales came from the U.S. market. Although two price increases of US$75 per tonne
in May and US$35 per tonne in November were successfully implemented, overall
average transaction prices remained below 1996 levels. As illustrated in the
chart below, average U.S. transaction prices continually declined from the end
of 1995 until the second quarter of 1997.
AVERAGE QUARTERLY EAST COAST PUBLISHER PRICE (48.8 GM)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
First Quarter............................................... US$520 US$723 US$566
Second Quarter.............................................. US$568 US$659 US$652
Third Quarter............................................... US$570 US$590 US$698
Fourth Quarter.............................................. US$590 US$525 US$741
Annual average.............................................. US$562 US$624 US$664
</TABLE>
In overseas markets, demand improved compared to 1996. However, capacity
increases, particularly in Asia, prevented matching the price improvements
achieved in North American markets.
It is expected that U.S. economic growth will remain positive in 1998 and
consumption is expected to continue to increase. Newsprint demand is expected to
likely exceed consumption as customers restock inventories. European and South
American demand is expected to remain steady. However, demand in Asia is
expected to drop due to the economic uncertainties in that region. In spite of
weakness in Asia, North American mills are expected to operate at relatively
high levels primarily as a result of strengthened demand in North America and
the lack of capacity additions.
In 1998, the Group will continue to focus on cost reductions through full
implementation of Operational Excellence initiatives and improved operating
efficiencies. Overall costs are expected to improve by almost 5% compared to
1997.
Pulp Group
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Shipments (000s tonnes)..................................... 729 655 733
Net sales (C$ millions)..................................... 472.8 427.0 768.7
Operating rate (%).......................................... 96 85 95
Operating earnings (loss) before unusual items (C$
millions)................................................. 22.3 (30.1) 245.5
</TABLE>
The Pulp Group operates three pulp mills located in Thunder Bay and Dryden,
Ontario and Gold River, British Columbia.
The Pulp Group reported operating earnings of C$22.3 million, a turnaround
of C$52.4 million from the 1996 operating loss of C$30.1 million. In 1995, the
Group reported operating earnings of C$245.5 million. Net
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<PAGE> 136
sales increased to C$472.8 million in 1997 from C$427.0 million a year earlier
but were C$295.9 million lower than 1995. The improved operating earnings in
1997 resulted primarily from reduced operating costs of 11% over 1996 and
improved productivity. Operational Excellence Program initiatives resulted in
annualized cost savings of C$23.0 million in 1997 through employee reduction,
increased productivity and lower mill spending. The Group achieved an operating
rate of 96% in 1997. During the year, the Thunder Bay mill was shut down for a
total of 17 days and the Gold River mill for 53 days of scheduled maintenance
and market-related downtime.
In North America, economies continued to expand in 1997 providing
favourable market conditions for paper manufacturers. Demand was particularly
strong in the light weight coated sector of the market due to high advertising
levels in magazines and mail order catalogues.
AVERAGE QUARTERLY PRICE OF NBSK DELIVERED TO THE U.S. IN US$
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
First Quarter............................................... US$572 US$705 US$775
Second Quarter.............................................. US$577 US$515 US$853
Third Quarter............................................... US$610 US$566 US$910
Fourth Quarter.............................................. US$610 US$583 US$956
Annual average.............................................. US$592 US$593 US$874
</TABLE>
In the United States, strong paper markets translated into higher demand
for market pulp where shipments were up more than 11% over 1996. After an
initial decline in the first quarter to US$560 per tonne for Northern Bleached
Softwood Kraft pulp ("NBSK") prices recovered at the end of the year to US$610
per tonne in the North American market.
The European paper market was also strong in 1997, with improved demand
throughout the year for all grades. Approximately 10% of Avenor's pulp shipments
are to this market. However, Asian paper markets have been experiencing
oversupply and the recent currency devaluation and economic crisis have made
those markets even more competitive and volatile. Avenor currently ships
approximately 22% of its pulp production to Asian markets. After reaching a low
of US$520 per tonne for NBSK in March 1997, European prices improved to US$605
per tonne by November 1997. European prices ended the year at US$595 per tonne.
A shutdown at the Gold River pulp mill late in December 1997 was required to
adjust to the weak market conditions in Asia.
It is anticipated that demand for paper products, and consequently pulp,
will remain strong in North America and Europe in 1998. However, the problems
facing the Asian markets are expected to continue to have an effect on supply
and consequently, pricing. In 1998, the Group will complete the Operational
Excellence initiatives, further reducing costs. Conversion costs are expected to
be lower by 2% compared to 1997 due to improved operating rates, staffing
reductions and lower spending. Improving safety will also continue to be a
primary objective of the Group.
White Paper Group
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Shipments (000s tonnes)..................................... 310 311 287
Net sales (C$ millions)..................................... 305.0 322.6 409.7
Operating rate (%).......................................... 96 99 98
Operating earnings before unusual items (C$ millions)....... 20.7 32.2 160.2
</TABLE>
The White Paper Group operates one mill located in Dryden, Ontario. The
White Paper Group's operating earnings for the year were C$20.7 million, down
from 1996 operating earnings of C$32.2 million and 1995 operating earnings of
C$160.2 million. During the year, net sales declined 5% to C$305.0 million
compared to C$322.6 million in 1996 and C$409.7 million in 1995. During the
first half of the year, prices weakened as inventories increased, resulting in
declining demand. However, prices improved in the second
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<PAGE> 137
half of 1997 and ended the year approximately 10% higher than March 1997 levels.
The implementation of Operational Excellence Program initiatives resulted in
annualized savings of C$20.0 million for the Group.
The Group continued its focus on improving mill safety and was rated by
Pulp and Paper Canada magazine as the safest mill in Canada and has twice won
Avenor's President's Award for safety. In December 1997, a new milestone was
reached when the mill achieved 2.5 million hours without a lost-time injury.
During 1997, the White Paper Group realized considerable success on Artica,
its mill brand of printing and writing paper, launched in 1996. Sales of Artica
were close to 85,000 tonnes in 1997, up from 20,000 tonnes in 1996.
In 1998, the Group will continue to reduce costs by completing its
implementation of Operational Excellence Program initiatives. Production of
cutsize papers for the digital printing markets will double by the end of 1998
after the installation of a new 120,000 tonne per year cutsize sheeter. That
investment will permit the Group to capitalize on the growth potential of the
cutsize paper market. Customer satisfaction continues to be a primary focus with
the implementation of a supply chain management strategy in 1998. The strategy
includes the installation of an integrated computer system covering product
tracking, warehouse management, and order entry. The continued growth of the
U.S. economy should have a positive impact on the white paper market and
operating rates are expected to be high. However, there is a risk that problems
facing the Asian pulp markets could affect pricing of white paper products.
Wood Products Group
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Shipments -- Logs (in thousands of m(3)).................... 953 825 852
Shipments -- Lumber (in millions of board feet)............. 376 400 334
Net sales (C$ millions)..................................... 387.5 404.5 376.9
Operating earnings before unusual items (C$ millions)....... 27.0 46.1 64.5
</TABLE>
The Wood Products Group includes a studmill in Dryden, Ontario; woodlands
in Dalhousie, New Brunswick and in Thunder Bay and Dryden, Ontario; a Gatineau,
Quebec fibre supply; a sawmill complex located in Maniwaki, Quebec owned and
operated by Manifor Inc., a wholly-owned subsidiary; and a new sawmill in Ear
Falls, Ontario. Until December 10, 1997, the Wood Products Group also included
Avenor's 53%-owned subsidiary, Pacific. This subsidiary was sold on December 10,
1997 for cash proceeds of C$302 million, which resulted in an after-tax gain of
C$108.4 million.
Operating earnings for the Wood Products Group amounted to C$27.0 million
in 1997 compared to C$46.1 million in 1996 and C$64.5 million in 1995. The Wood
Products Group recorded net sales of C$387.5 million in 1997 compared with
C$404.5 million in 1996 and C$376.9 million in 1995.
Lumber market conditions deteriorated steadily throughout the year with
prices of US$400 per thousand board feet at the beginning of 1997 declining to
below US$300 by December 1997. The collapse of the Japanese lumber markets
combined with the economic uncertainties in the Asian markets late in the year
led to an oversupply of lumber in North America despite strong demand in both
the United States and Canada. The negative impact of lower prices was partly
offset by cost reductions realized through the implementation of Operational
Excellence Program initiatives and improved operating efficiencies. In 1997, the
Group realized targeted annualized savings of C$15.0 million with the
implementation of Operational Excellence Program initiatives. Other operational
efficiencies included the improved management of Avenor's freehold land which
increased revenues. Freehold land profitability was up 66% in 1997 over the
previous year. In Quebec, the residual chip management plan for the Gatineau
newsprint mill reduced delivered costs by C$13 per dry tonne of chips from the
previous year. In northwestern Ontario, the Group completed the move to
third-party contractor operations and as a result, Avenor no longer uses any
woodlands equipment in its operations. That move eliminated Avenor's future
capital requirements for woodlands equipment and will reduce operating costs by
C$0.60 per cubic metre.
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<PAGE> 138
In 1997, the construction of the new sawmill at Ear Falls, located in
northwestern Ontario, was completed and operations commenced. The sawmill is
expected to have a production capacity of 130 million board feet once it is
fully operational.
In December 1997, Avenor announced that it had signed a marketing agreement
with Canfor Corporation ("Canfor") of Vancouver, British Columbia, effective
January 1, 1998. Canfor became the exclusive marketing agent for Avenor's lumber
products. This agreement is expected to increase Avenor's market coverage and is
expected to help to capitalize on its product mix and Canfor's expertise.
In 1998, lumber prices are not expected to improve if the oversupply in
solid wood products continues globally. However, the Wood Products Group's cost
competitiveness in Eastern Canada should ensure continued production.
CONSOLIDATED RESULTS IN FISCAL 1997 VS. FISCAL 1996
Net Sales
In 1997, net sales were down 3.4%, or C$69.6 million compared to 1996, due
primarily to lower pricing for newsprint. The following table provides an
analysis of the changes in net sales by business group.
ANALYSIS OF CHANGES IN NET SALES
<TABLE>
<CAPTION>
ATTRIBUTABLE TO:
------------------
1997 1996 CHANGE VOLUME PRICE(1)
--------- --------- ------- ------- --------
(C$ MILLIONS)
<S> <C> <C> <C> <C> <C>
Newsprint.................................. C$ 826.4 C$ 907.2 C$(80.8) C$118.4 C$(199.2)
Pulp....................................... 472.8 427.0 45.8 48.2 (2.4)
White Paper................................ 305.0 322.6 (17.6) (1.0) (16.6)
Wood Products.............................. 387.5 404.5 (17.0) 1.6 (18.6)
--------- --------- ------- ------- --------
C$1,991.7 C$2,061.3 C$(69.6) C$167.2 C$(236.8)
========= ========= ======= ======= ========
</TABLE>
- ---------------
Note:
(1) Includes approximately C$31 million resulting from exchange rate
fluctuations.
Cost of Sales
Cost of sales was lower by C$5.2 million from 1996 with C$131.0 million
related to lower spending as a result of the implementation of Operational
Excellence Program initiatives and lower fibre costs. This was partly offset by
a C$125.8 million increase in costs due to higher sales volumes.
Amortization Expense
Amortization expense increased C$16.5 million, or 10.0%, to C$181.1 million
in 1997 due primarily to capital investments completed in 1996 for which a full
12 months of amortization has been recorded in 1997. The capital project to
convert production at the Dalhousie mill to a thermomechanical pulping process
is one of these investments.
Selling and Administrative Expenses
Selling and administrative expenses of C$77.8 million remained unchanged
from 1996.
Interest Expense, Net
Interest expense increased C$13.8 million to C$125.2 million. The higher
net interest expense resulted from lower interest income of C$17.9 million as
Avenor had lower average cash balances and a lower amount of funds held in a
segregated account which were used to repay debt. A lower amount of capitalized
interest of C$3.9 million attributed to lower capital spending also contributed
to the higher interest expense. These
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<PAGE> 139
reductions were partly offset by lower interest expense of C$8.0 million as the
full effect of debt repaid in 1996 was realized in 1997.
Other Expense
Other expense of C$15.4 million consisted primarily of the amortization of
exchange losses on U.S. denominated long-term debt.
Non-Recurring Items
Non-recurring items amounted to a net charge of C$172.3 million before tax
and included:
- C$287.8 million recorded as unusual items. Of the C$287.8 million,
C$225.2 million related to write-downs of assets after an assessment
determined that there was an impairment in the carrying value of certain
assets relating primarily to the Gold River mill. Of the balance, C$57.5
million related to the implementation of a workforce reduction program
and will significantly reduce costs in future years. The remaining C$5.1
million is related to the costs of modifying internal use computer
software to be Year 2000 compliant.
- C$186.2 million gain realized from the sale of Pacific.
- C$45.3 million of expenses were recognized relating to the debt reduction
program consisting of early repayment premiums and the write-off of
deferred exchange losses. The debt reduction program is expected to
reduce interest payments on long-term debt by approximately C$34 million
annually. However, interest income will be somewhat reduced as cash
balances, including the segregated account, will be lower.
- C$25.4 million of expenses relating to an unsuccessful acquisition
attempt were written off during the first half of the year.
FINANCIAL CONDITION AND LIQUIDITY
In 1997, Avenor generated cash flow from operations of C$72.0 million
compared to C$166.2 million in 1996 and C$656.6 million in 1995. The decrease
from 1996 resulted primarily from lower pricing, mainly for newsprint. The cash
generated from operations of C$72.0 million, the funds held in a segregated
account of C$325.8 million, the proceeds of C$301.8 million received from the
sale of Pacific Forest Products Limited and C$165.7 million of borrowings on
Avenor's long-term lines of credit were primarily used as follows:
- repayment of debt of C$518.7 million;
- capital spending of C$170.1 million; and
- dividend payments of C$23.6 million.
[Graph of cash flow from operations, 1995-1997.]
<TABLE>
<CAPTION>
Cash From Operations
(C$ millions)
<S> <C>
1995 656.6
1996 166.2
1997 72.0
</TABLE>
118
<PAGE> 140
Overall, Avenor's cash position increased to C$153.5 million at December
31, 1997, from a deficit of C$15.3 million at December 31, 1996. At December 31,
1995, the cash position was C$328.7 million.
Investing Activities
Capital spending amounted to C$170.1 million in 1997, down from C$284.1
million spent in 1996 and C$219.3 million spent in 1995. Of the C$170.1 million
spent in 1997, approximately C$50 million was used for the construction of the
sawmill at Ear Falls, Ontario.
Avenor anticipates that capital spending in 1998 will be less than 1997 and
is expected to be financed by cash from operations.
Capital Expenditures by Year 1989-1997 (C$ millions)
[Graph of capital expenditures by year 1989-1997 (C$ millions)]
<TABLE>
<S> <C>
1989 520.7
1990 415.9
1991 355.1
1992 244.7
1993 158.1
1994 61.6
1995 219.3
1996 284.1
1997 170.1
</TABLE>
In 1997, as a result of the divestiture of Pacific, Avenor generated
C$145.3 million of cash from total investing activities compared to a C$288.8
million use of cash in 1996 and a generation of cash in 1995 of C$18.3 million.
Financing Activities
At December 31, 1997, Avenor's total debt amounted to C$1,056.7 million,
down from C$1,432.5 million at December 31, 1996 and C$1,438.0 million at
December 31, 1995.
During 1997, financing activities used C$48.5 million of cash compared to
C$221.4 million in 1996 and C$453.4 million in 1995. Financing activities
included a C$353.0 million net repayment of debt, a C$325.8 million transfer of
funds from the segregated account and a C$23.6 million dividend payment to
common shareholders. Debt repayments included:
- the repayment of US$83.8 million of the 9.25% Debentures;
- the repayment of US$16.9 million of the Series E Senior Notes;
- the repayment of US$46.0 million of the Series F Senior Notes;
- the repayment of the US$50.0 million syndicated loan; and
- the repayment of C$45.0 million outstanding under a revolving credit
facility.
Also on January 9, 1998, an amount totalling US$34.9 million was repaid and
consisted of US$20.4 million of the Series E Senior Notes and US$14.5 million of
the Series F Senior Notes.
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<PAGE> 141
As illustrated in the following table, the debt-to-capitalization ratio was
47.3% at December 31, 1997, compared to 44.4% at December 31, 1996 and 39.0% at
December 31, 1995.
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
------------- ----- ------------- ----- ------------- -----
(C$ MILLIONS) (C$ MILLIONS) (C$ MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net total debt (including current
portion)........................... 979.5 47.3 1,133.9 44.4 935.1 39.0
Non-controlling interest............. 34.7 1.7 132.7 5.2 119.6 5.0
Shareholders' equity................. 1,054.5 51.0 1,285.5 50.4 1,341.3 56.0
------- ----- ------- ----- ------- -----
2,068.7 100.0 2,552.1 100.0 2,396.0 100.0
======= ===== ======= ===== ======= =====
</TABLE>
In the above table, net total debt includes both the current and long-term
portions of long-term debt, plus bank indebtedness, less funds held in a
segregated account and less cash and temporary investments.
The increase in the net total debt-to-capitalization ratio in 1997 resulted
primarily from a lower shareholders' equity due to a net loss applicable to
common shares recognized in 1997 of C$217.4 million.
Total debt denominated in U.S. dollars amounted to US$658.9 million as at
December 31, 1997. The unrealized translation loss on this debt amounted to
C$192.0 million, of which C$90.7 million was unamortized. The unamortized amount
will be amortized over the term remaining on each debt instrument and is
included in the balance sheet under "Other Assets".
Approximately 85% of Avenor's long-term debt was at fixed rates as of
December 31, 1997, thereby providing a measure of protection to Avenor against
rising interest rates in the future.
Avenor has an available and unutilized C$250 million unsecured revolving
credit facility with four Canadian banks. Negotiations have been finalized to
add a fifth bank, bringing the total credit facility to C$300 million. This
facility, along with the cash position of C$153.5 million at the end of 1997, is
expected to meet Avenor's future cash requirements.
Credit Ratings
The following table shows the credit ratings of Avenor's senior debt as at
December 31, 1997:
<TABLE>
<S> <C> <C>
Canadian Bond Rating Service................................ B+ (High)
Dominion Bond Rating Service................................ BB (High)
Moody's Investors Service................................... Ba1
Standard & Poor's........................................... BB+
</TABLE>
RISKS AND UNCERTAINTIES
Nature of the Business
Traditionally, demand for pulp and paper products has been expected to
follow economic cycles. However, in recent years, product prices have been
affected by fluctuations in supply, demand and consumption.
In 1998, approximately half of Avenor's net sales is expected to be derived
from the Newsprint business and, therefore, changes in newsprint prices have a
significant impact on Avenor's net sales. In 1997, the average price for
newsprint approximated US$562 per tonne compared to US$624 a year earlier and
US$664 in 1995. This drop in newsprint prices from 1996 negatively impacted
Avenor's 1997 operating earnings by C$199.2 million.
To withstand future downturns in the industry, Avenor is focusing on cost
reductions. Avenor's Operational Excellence Program is expected to provide C$140
million of cost reductions on an annualized basis when fully implemented by the
end of 1998. As of December 31, 1997, Avenor achieved annualized cost reductions
totalling C$87 million as a result of increasing productivity by 166 tonnes per
day, reducing mill costs by C$34 per tonne and reducing the workforce by 446
employees.
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<PAGE> 142
FOREIGN EXCHANGE RISK AND MANAGEMENT
Most of Avenor's net sales are denominated in U.S. dollars and,
accordingly, exchange rate fluctuations between the United States and Canadian
dollars represent a potential risk. The following graph shows average exchange
rates of the Canadian dollar versus the United States dollar for the past ten
years:
[Graph showing average exchange rating of Canadian dollar versus the United
States dollar for the past ten years.]
<TABLE>
<S> <C>
1988 81.3 cents
1989 84.5 cents
1990 85.7 cents
1991 87.3 cents
1992 82.8 cents
1993 77.6 cents
1994 73.2 cents
1995 72.9 cents
1996 73.3 cents
1997 72.2 cents
</TABLE>
In 1995, Avenor implemented a new foreign exchange risk management program,
whereby a portion of forecasted U.S. dollar receipts are hedged at decreasing
levels for periods of up to three years through the use of forward and range
forward contracts.
Although this program will not totally eliminate foreign exchange risk, it
is expected to reduce the potential negative impact of a rising Canadian dollar.
As of December 31, 1997, Avenor had entered into forward contracts and range
forward contracts which protect Avenor against the Canadian dollar rising above
an average of US$0.75 during 1998. This program is further described in Note 16
to Avenor's Consolidated Financial Statements.
Sensitivity Analysis
The following table summarizes Avenor's sensitivity of Net Earnings to
fluctuations in exchange rates between the U.S. and Canadian dollars and in
selling prices of its products:
SENSITIVITY OF NET EARNINGS
<TABLE>
<CAPTION>
IN MILLIONS OF
CANADIAN DOLLARS C$ PER SHARE
---------------- ------------
<S> <C> <C>
TO U.S. DOLLAR:
Effect of US$0.01 change in the value of the Canadian
dollar.............................................. C$ 8.0 C$0.12
TO SELLING PRICES:
Effect of each US$25 change in transaction price per
tonne of:
Newsprint.............................................. 30.0 0.46
Pulp................................................... 20.9 0.32
White Paper............................................ 7.6 0.12
</TABLE>
Fibre Supply
Avenor has a secure fibre supply through its management of more than 7.3
million hectares of Company-owned and Crown-licensed land in Ontario, Quebec and
New Brunswick. Avenor also has long-term contracts with several sawmills.
Readiness for Year 2000
Avenor started taking steps several years ago to prepare its information
technology and process control computer systems for the Year 2000. A task force
was set up in May 1997, and subsequently a Year 2000 steering committee was
formed including senior management and the presidents of each business group.
The
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<PAGE> 143
steering committee reports on a regular basis to the President and Chief
Executive Officer and to the Audit Committee on its progress.
The Year 2000 problem is the result of computer programs written using two
digits, rather than four, to identify the year. When "00" is used, the
application may interpret the year as 1900. Depending on the application, this
incorrect date conversion may result in one or all of the following: improper
logic solutions, misleading information or system failures. Additional risks
include embedded microchips found in production and utility systems which could
affect production capabilities.
Avenor has completed an inventory and has assessed the risk of each of its
systems. A project plan has been developed to address non-compliant systems.
Individual projects have been established to repair, replace or test each
business system for Year 2000 compliance. The most critical information
technology systems identified are the 42 company-wide management and resource
planning and financial applications. Of these, approximately 21% are Year 2000
compliant. Avenor has also completed an inventory of process control computer
systems used in its manufacturing facilities and a plan has been developed to
address these systems.
Avenor is communicating to its customers and vendors the status of its Year
2000 program and is seeking information on the status of their Year 2000
initiatives.
Costs of resolving the Year 2000 issue are not expected to have a material
adverse impact on Avenor's future financial position, results of operations or
cash flows. Approximately half of the total expected costs of C$32 million has
been spent as of December 31, 1997. Of the C$32 million, approximately C$27
million relates to improvement or replacement of existing systems and,
therefore, will be capitalized.
Labour
In 1998, labour contracts will open for negotiations at the Gatineau,
Thunder Bay, Dryden and Dalhousie mills. At the Dalhousie mill, labour
agreements are expected to follow industry-wide settlements. Labour contracts
opened for negotiation in 1997 at the Gold River mill and are expected to follow
the industry pattern.
Environmental Issues
Based on currently available information, Avenor has projected
environmental capital expenditures of C$20 million over the period of 1998 to
2000 to allow its facilities to meet the requirements of current environmental
laws and regulations. This amount excludes capital expenditures that may be
required to comply with the requirement in British Columbia to reduce adsorbable
organic halogens ("AOX") to non-detectable levels by the end of 2002.
While it is impossible to predict with certainty the nature or extent of
future environmental regulations, or the manner in which current regulations
will be interpreted in the future, Avenor believes that it will not be at a
competitive disadvantage with regard to meeting applicable Canadian or U.S.
standards.
See "Information Concerning Avenor--Business and Properties--Environmental
Matters".
Safety
The creation of a safe and healthy work environment is a primary objective
for Avenor. Improving safety will add value to Avenor, namely through an
environment conducive to high performance. The following table shows the safety
recordable rates for the last three years:
<TABLE>
<CAPTION>
TOTAL SAFETY RECORDABLE RATE 1997 1996 1995
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Newsprint................................................... 3.8 6.2 8.7
Pulp........................................................ 3.7 6.4 9.6
White Paper................................................. 2.1 4.6 7.5
Wood Products(1)............................................ 4.6 6.8 4.7
</TABLE>
- ---------------
Note:
(1) Excludes Pacific Forest Products Limited.
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<PAGE> 144
Overall 1997 performance, with a recordable rate of 3.5, was better than
1996 and 1995 with recordable rates of 6.0 and 7.9, respectively.
Ice Storm
Avenor estimates that the major ice storm which occurred in Quebec in
January 1998 will have no material adverse effect on Avenor's future financial
position.
OTHER
The following table is presented in conjunction with the listing of
Avenor's common shares on the NYSE and may not be appropriate for any other
purpose.
CONSOLIDATED CASH FLOW FROM OPERATIONS BEFORE CHANGES IN
WORKING CAPITAL (ACCORDING TO U.S. GAAP)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------- -------
(UNAUDITED)
(C$ MILLIONS)
<S> <C> <C> <C>
Cash flow from operations before changes in non-cash
operating working capital................................. C$92.1 C$193.2 C$686.5
</TABLE>
The consolidated cash flow from operations before changes in non-cash
operating working capital data has been prepared in accordance with U.S. GAAP,
but is not intended to be a complete presentation of the statements of cash
flows of Avenor. The accounting principles applied are based on the Statement of
Financial Accounting Standards No. 95 ("FAS 95") whereby net earnings are
adjusted to remove the effects of all items whose cash effects are investing or
financing activities as described in paragraph 28(b) of FAS 95.
The data regarding the information for the preparation of the consolidated
cash flow from operations has been derived from the audited consolidated
financial statements of Avenor for the three years ended December 31, 1997. The
consolidated cash flow from operations before changes in non-cash operating
working capital should be read in conjunction with the audited consolidated
financial statements of Avenor and notes thereto.
INFORMATION CONCERNING AVENOR
INCORPORATION AND HISTORY
Avenor is a federal corporation resulting from the amalgamation on January
1, 1989 under the CBCA of CIP Inc. ("CIP") and Canadian Pacific Forest Products
Limited, formerly known as Great Lakes Forest Products Limited ("Great Lakes").
CIP was a federal corporation resulting from the amalgamation under the CBCA, on
January 1, 1985, of several corporations under common control. CIP's business
had been carried on in Canada since 1916. Great Lakes was incorporated under the
laws of the Province of Ontario by articles of incorporation dated April 3, 1936
for the purpose of acquiring a business originally established in 1919.
Prior to the January 1, 1989 amalgamation, all of the shares of CIP were
transferred on June 2, 1988 to Great Lakes by Canadian Pacific Enterprises
Limited ("Enterprises"), a wholly-owned subsidiary of Canadian Pacific Limited,
in exchange for shares of Great Lakes. Prior to the share exchange, Enterprises
held 54.28% of Great Lakes. Following such exchange, Great Lakes was continued
under the CBCA and changed its name to Canadian Pacific Forest Products Limited.
On September 1, 1993, Avenor's former indirect controlling shareholder, Canadian
Pacific Limited, through Enterprises, completed the sale by way of a secondary
offering in the Canadian public markets of all the shares it then held in
Avenor, with the result that Avenor no longer had a controlling shareholder. By
Certificate of Amendment dated March 21, 1994, the name of the corporation was
changed from Canadian Pacific Forest Products Limited to Avenor Inc.
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<PAGE> 145
Avenor's registered office is located at 40 King Street West, Suite 4200,
Toronto, Ontario M5H 3Y4. Avenor maintains its principal executive office at
1250 Rene-Levesque Boulevard West, Montreal, Quebec H3B 4Y3, and has other
executive offices in Ottawa, Brampton, and Burlington, Ontario.
SUBSIDIARIES AND INTERESTS IN PARTNERSHIPS
The following is a description of Avenor's principal subsidiaries and
partnership interest:
Avenor America Inc.
Avenor America Inc. ("Avenor America") is an indirect wholly-owned
subsidiary of Avenor incorporated on September 16, 1977 under the laws of
Delaware. Avenor America is Avenor's distributor for newsprint, market pulp and
white paper in the United States. Avenor America also holds a 40% equity
investment in the Ponderay Partnership, through a wholly-owned subsidiary which
is the managing partner.
Ponderay Newsprint Company
Ponderay Newsprint Company (the "Ponderay Partnership") is a general
partnership formed under the Partnership Act of the State of Washington on
September 12, 1985 for the purpose of constructing and operating a newsprint
mill at Usk, Washington. An indirect wholly-owned subsidiary of Avenor is the
managing partner of the Ponderay Partnership and owns a 40% interest in the
partnership. The balance of the partnership interests is held by five United
States newspaper publishers. Avenor is responsible for the operation of the
newsprint mill and the marketing of newsprint produced by the mill.
Avenor Maritimes Inc.
Avenor Maritimes Inc. ("Avenor Maritimes") was incorporated on December 18,
1984 under the laws of New Brunswick and produces newsprint at its mill located
at Dalhousie, New Brunswick. Oji Paper Co., Ltd. and Mitsui & Co., Ltd. of Japan
hold minority interests of 25% and 8% in Avenor Maritimes, respectively. The
predecessor company to Avenor Maritimes was incorporated by a Special Act of the
Province of New Brunswick on April 30, 1926.
GENERAL DEVELOPMENT OF THE BUSINESS
Overview
On December 10, 1997, Avenor sold its 53% ownership interest in Pacific
Forest Products Limited ("Pacific"). The operating and financial data of Avenor
contained in the sections "--General Development of the Business" and
"--Business and Properties" include the operations of Pacific up to December 10,
1997.
Avenor manufactures newsprint, pulp, white paper and wood products.
Avenor's net sales were approximately C$2.0 billion in 1997 and total assets at
year-end 1997 were approximately C$2.7 billion.
Avenor has built a strong presence in all of its key markets and is one of
North America's largest suppliers of post-consumer recycled-content newsprint as
well as one of Canada's leading exporters of market pulp. Avenor owns and
operates three newsprint mills in Canada which supply printers and publishers
around the world and, in its capacity as managing partner of the Ponderay
Partnership, operates one newsprint mill at Usk in the State of Washington. In
market pulp, Avenor operates three mills and manufactures premium grades of pulp
for global markets. Avenor also owns one white paper mill and three sawmills,
all located in Canada. Avenor's primary mills are located in New Brunswick,
Quebec, Ontario and British Columbia. Avenor is a major forest landowner and
holds substantial timber-cutting rights in Canada which cover approximately
77,330 square kilometres of forest.
Avenor supplies customers in more than 40 countries, with its largest
market being the United States. In 1997, export markets accounted for
approximately 80% of total sales. Avenor's mills are well-positioned to supply
their products to all parts of the world. Avenor has a network of marketing and
sales offices in Canada, the United States, Europe and Asia.
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<PAGE> 146
In early 1997, Avenor announced a program aimed at enhancing shareholder
value through its Operational Excellence Program. The financial goal of this
program is to reduce production costs by C$140 million on an annualized basis by
the end of 1998 through increased productivity, lower mill costs and a reduced
work force. By December 31, 1997, C$87 million of the annualized Operational
Excellence Program cost reductions were in place.
The following table sets forth certain segmented information regarding
Avenor's operations in 1997:
<TABLE>
<CAPTION>
OPERATING EARNINGS
(BEFORE UNUSUAL
GROUP SHIPMENTS NET SALES ITEMS)
- ----- --------- --------- ------------------
(000'S OF (C$ (C$ MILLIONS)
TONNES) MILLIONS)
<S> <C> <C> <C>
Newsprint......................................... 1,281 C$826.4 C$63.3
Pulp.............................................. 729 472.8 22.3
White Paper....................................... 310 305.0 20.7
Wood Products:.................................... 387.5 27.0
Logs (in thousands of m(3))..................... 953
Lumber (in millions of board feet).............. 376
</TABLE>
The following table sets forth certain information regarding the geographic
distribution of Avenor's net sales in 1997:
<TABLE>
<CAPTION>
COUNTRY OR REGION % OF NET SALES
- ----------------- ---------------
<S> <C>
United States............................................... 52%
Canada...................................................... 21
Japan....................................................... 12
Asia (other than Japan)..................................... 7
Europe...................................................... 4
Latin America............................................... 3
Other....................................................... 1
---
Total............................................. 100%
===
</TABLE>
BUSINESS AND PROPERTIES
Products and Markets
Avenor's operations are conducted through four business units: the
Newsprint Group, the Pulp Group, the White Paper Group and the Wood Products
Group, each of which is briefly described below. Refer to Note 3 of Avenor's
consolidated financial statements for financial information by business segment.
Newsprint Group
Newsprint is Avenor's largest business segment, with shipments of 1,281,000
tonnes in 1997, including Avenor's proportionate share of shipments of the
Ponderay Partnership. Production consists principally of standard virgin and
post-consumer recycled-content newsprint, and total annual newsprint production
capacity is 1,318,200 tonnes, including 40% of the production capacity of the
Ponderay Partnership. Avenor has a total of eight newsprint machines at three
mills located in Dalhousie, New Brunswick, Gatineau, Quebec and Thunder Bay,
Ontario. In addition, Avenor is responsible for the operation of the Ponderay
Partnership's newsprint mill in Usk, Washington, which produces newsprint on one
machine.
Newspaper publishers are the principal purchasers of newsprint.
Concentration of ownership within the newspaper publishing industry results in
substantial consumer buying power. Avenor has continually upgraded its newsprint
facilities and operating methods to keep pace with market requirements.
Demand for post-consumer recycled-content newsprint continues to be strong.
In response to demand for recycled material, recycling plants were completed in
1991 at Gatineau and Thunder Bay and in 1995 at the Ponderay mill. Avenor is one
of North America's largest suppliers of post-consumer recycled-content
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<PAGE> 147
newsprint with an annual capacity of over one million tonnes of newsprint with a
recycled fibre content level which varies from 18% to 40%. Avenor uses up to
400,000 tonnes of old newspapers and magazines annually.
The United States remains the most important newsprint market, accounting
for 70% of Avenor's newsprint sales in 1997. In 1997, Avenor also shipped
significant volumes of newsprint to customers in Canada, Japan and Europe
representing 7%, 5% and 3% of the Newsprint Group's sales, respectively. The
remainder of Avenor's newsprint sales in 1997 were destined mainly to Asian and
South American markets.
In 1997, newsprint demand in North America improved as newsprint
consumption grew by 4% in the United States, advertising lineage rose by 6% and
inventories returned to normal levels. Despite price increases of US$75 per
tonne in May 1997 and US$35 per tonne in November 1997, average transaction
prices remained below 1996 levels. In overseas markets, 1997 demand improved
compared to 1996; however, capacity increases, particularly in Asia, prevented
matching the price improvements achieved in North American markets.
The negative impact of lower prices was mitigated by increased productivity
and reduced costs. During 1997, the Newsprint Group's focus on improving cost
competitiveness through increased productivity, successful start-up of the
Dalhousie mill modernization project and implementation of Operational
Excellence Program initiatives resulted in an overall cost improvement of close
to 9% compared to 1996. By December 31, 1997, the Newsprint Group had
implemented C$29 million of Operational Excellence Program cost reductions. The
target for this group is to achieve C$70 million of annualized savings by the
end of 1998.
Pulp Group
The Pulp Group is Avenor's second largest segment, with an annual market
pulp capacity of 855,000 tonnes and total production of 806,000 tonnes in 1997.
About 7% of this production was transferred to other Avenor operations, while
729,000 tonnes of pulp were shipped to outside customers for use in virtually
all types of paper and paper products. NBSK comprised over 80% of Avenor's total
market pulp shipments, with the balance consisting of high-quality bleached
hardwood kraft pulp. Avenor's market pulp facilities are located at Dryden,
Ontario, Thunder Bay, Ontario and Gold River, British Columbia.
In 1997, approximately 60% of Avenor's market pulp sales were made in the
United States. Sales in Europe accounted for approximately 10% of total
shipments, Japan for 5%, and 8% were made within Canada.
In 1997, strong paper markets in the United States resulted in higher
demand for market pulp and an over 11% increase in shipments to this market
compared to 1996 levels. After an initial decline to US$560 per tonne in the
first quarter of 1997, NBSK prices recovered at the end of 1997 to US$610 per
tonne in the North American market. The European paper market was also strong in
1997, with improved demand throughout the year for all grades. However, Asian
paper markets experienced oversupply, and the recent currency devaluation and
economic crisis have made these paper markets even more competitive and
volatile. Avenor ships approximately 22% of its pulp production to Asian
markets. A shutdown at the Gold River pulp mill was undertaken commencing in
late December 1997 as a result of the weak market conditions in Asia. The mill
resumed operations in late March 1998.
During 1997, the Thunder Bay mill was shut down for a total of 17 days and
the Gold River mill for 53 days of scheduled maintenance and market-related
downtime.
The operating earnings of the Pulp Group improved in 1997, primarily as a
result of an 11% reduction in operating costs and improved productivity.
Operational Excellence Program initiatives resulted in annualized cost savings
of C$23.0 million in 1997 through employee reductions, increased productivity
and mill cost reductions. This represented almost 77% of the Pulp Group's
objective of C$30 million of annualized cost savings to be achieved by the end
of 1998.
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<PAGE> 148
White Paper Group
Avenor's white paper production includes uncoated freesheet for copy and
laser print papers, printing papers, register bond, envelopes and post-consumer
recycled-content white papers. Total shipments of white paper were 310,000
tonnes in 1997.
Avenor's white paper is sold in Canada and the United States, with 1997
shipments in Canada representing 57% of white paper sales and those to the
United States representing the remaining 43%.
During the first half of 1997, white paper prices weakened as industry
inventories increased, resulting in reduced demand. Prices improved in the
second half of 1997 and ended the year approximately 10% higher than prices in
March 1997.
By December 1997, the implementation of Operational Excellence Program
initiatives by the White Paper Group had resulted in annualized savings of C$20
million. The Operational Excellence Program target for the White Paper Group is
C$25 million of annualized savings by the end of 1998.
Wood Products Group
The Wood Products Group was created in 1996 and currently includes a
sawmill in Ear Falls, Ontario, a studmill in Dryden, Ontario, woodlands in New
Brunswick, Quebec and northwestern Ontario and a sawmill located in Maniwaki,
Quebec which is owned and operated by Manifor Inc., a wholly-owned subsidiary of
Avenor. The Wood Products Group is responsible for all of Avenor's harvesting,
fibre procurement and solid wood products converting activities. Management of
these operations is aimed at improving the generation of value from Avenor's
northern softwood fibre base and ensuring a low cost, adequate fibre supply to
Avenor's primary pulp and paper operations as well as its sawmills.
The Wood Products Group had lumber shipments of 376 million board feet and
total log shipments of 953,000 cubic metres in 1997 (including Pacific until
December 10, 1997). In 1997, sales of wood products to Japan (served by
Pacific), consisting mainly of lumber shipments, represented approximately 46%
of wood products sales. Within Canada, shipments were primarily logs and chips
and represented 38% of wood products sales.
Lumber market conditions deteriorated steadily throughout 1997. The
collapse of the Japanese lumber markets, combined with the economic
uncertainties in the Asian markets late in 1997, led to an oversupply of lumber
in North America despite strong demand in both the United States and Canada. The
effect of lower prices was partially offset by cost reductions realized through
the implementation of operational efficiencies, including improved management of
Avenor's freehold lands, which resulted in increased revenues and profitability.
In Quebec, the residual chip management plan for the Gatineau mill reduced
delivery costs by C$13 per dry tonne of chips over 1996 and, in northwestern
Ontario, a move to third-party contractor operations was completed. In addition
to these efficiencies, the Wood Products Group also realized its targeted
annualized Operational Excellence Program savings of C$15 million by December
31, 1997. The Operational Excellence Program savings were passed on to the other
business groups in the form of lower fibre costs.
In December 1997, Avenor announced that it had entered into a marketing
agreement with Canfor, whereby Canfor will act as the exclusive marketing agent
for Avenor's lumber products effective January 1, 1998. This agreement will
increase Avenor's market coverage and provide access to Canfor's lumber
marketing expertise.
MANUFACTURING FACILITIES
The following is a brief summary of Avenor's manufacturing facilities,
substantially all of which are owned outright and are free from mortgages.
Dalhousie, New Brunswick
The Dalhousie newsprint operations are owned and operated through Avenor
Maritimes which has two minority shareholders, one of whom is committed to
purchasing approximately 35% of the mill's output. The
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<PAGE> 149
Dalhousie newsprint facility is strategically located on the Atlantic coast and
has year-round deep-sea docking facilities that can accommodate large ocean
freighters. The mill manufactures standard grade newsprint on two newsprint
machines which were modernized in 1982. The aggregate annual capacity of the
facility is approximately 227,000 tonnes.
A renewal program was completed at the Dalhousie, New Brunswick mill in
1996. The project included the construction of a secondary effluent treatment
plant, the construction of a thermomechanical pulp mill and the conversion of
the fibre supply to 100% wood chips.
Gatineau, Quebec
The Gatineau newsprint mill is located on the north bank of the Ottawa
River. The mill has three paper machines, the most recent of which was installed
in 1987. In 1991, construction of a recycling plant with an annual capacity of
180,000 tonnes of deinked pulp was completed. The plant consumes about 200,000
tonnes per year of old newspapers and magazines.
A new refuse boiler became operational during 1992, a new thermomechanical
pulp mill was installed in early 1993 and paper machine improvements at the
newsprint mill were completed in the fourth quarter of 1993. The mill's annual
production capacity is 450,000 tonnes on three machines. A new secondary
effluent treatment facility was completed in 1995. The modernized Gatineau mill
is a competitive manufacturer of high-quality post-consumer recycled-content
newsprint.
Thunder Bay, Ontario
The Thunder Bay manufacturing facilities are located beside the
Kaministiquia River and include two kraft pulp mills and three newsprint
machines. The two kraft pulp mills at Thunder Bay have an aggregate annual
capacity of 500,000 tonnes. Avenor has made substantial capital expenditures in
recent years to modernize the newsprint operations at this mill in order to meet
the increasing quality standards of the marketplace. The Thunder Bay facility
also includes a 275,000 tonne per year thermomechanical pulp mill which became
operational in early 1991. A 240,000 tonne per year newsprint machine installed
in 1991 replaced two older machines and the total newsprint capacity of the
facility is 544,000 tonnes per year on three machines. In 1991, a recycling
plant with an annual capacity of 125,000 tonnes of deinked pulp was completed.
The plant consumes about 150,000 tonnes per year of old newspapers and
magazines. In 1995, a new chip handling system and secondary effluent treatment
plant were completed at the Thunder Bay mill.
Gold River, British Columbia
The Gold River manufacturing facility is located on Vancouver Island and
consists of a 255,000 tonne-per-year kraft pulp mill. The facility has direct
shipping access to export markets.
Dryden, Ontario
The Dryden manufacturing facilities are located adjacent to the Wabigoon
River. These facilities include a pulp mill, a white paper mill and a stud
lumber mill. The integrated kraft pulp mill has an annual capacity of
approximately 300,000 tonnes. The mill commenced operations in 1983 following
completion of a major modernization and expansion program. The white paper mill
includes two modern paper machines with an aggregate annual capacity of
approximately 324,000 tonnes or 357,000 short tons.
Wood Products
Avenor owns and operates a sawmill at Ear Falls, Ontario with an annual
capacity of 130 million board feet, a stud lumber mill at Dryden, Ontario with
an annual capacity of 70 million board feet and a sawmill in Maniwaki, Quebec
with an annual capacity of 70 million board feet.
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<PAGE> 150
INVESTMENT IN PONDERAY PARTNERSHIP
Avenor has a 40% ownership interest in the Ponderay Partnership through a
wholly-owned subsidiary which is the managing partner. The balance of the
interest in the partnership is held by subsidiaries of five United States
newspaper publishers. The Ponderay Partnership owns a 243,000 tonne-per-year
newsprint mill at Usk, Washington which can produce newsprint with a recycled
content level of up to 18%. The mill began production in December 1989 and has
operated continuously since that date. A new deinking plant has been in
operation since early 1995.
Avenor is responsible for the operation of the newsprint mill and the
marketing of newsprint production. As of December 31, 1997, Avenor had invested
US$107.8 million in equity of the Ponderay Partnership. In 1997, the net sales
of the Ponderay Partnership amounted to US$131.3 million. Substantially all the
output from the mill is committed under long-term contracts, the majority of
which are with the partners of the Ponderay Partnership.
The assets of the Ponderay Partnership are pledged in favour of its lending
financial institutions. Avenor has guaranteed US$50 million of the Ponderay
Partnership's long-term debt.
CAPITAL EXPENDITURES
The following table sets forth Avenor's capital expenditures for the past
five years, including Avenor's proportionate share of investments made by the
Ponderay Partnership and the Gold River Partnership:
<TABLE>
<S> <C>
1997................................. C$170.1 million
1996................................. C$284.1 million
1995................................. C$219.3 million
1994................................. C$ 61.6 million
1993................................. C$158.1 million
</TABLE>
Avenor does not expect to incur significant capital expenditures in 1998.
The expenditures will be used primarily for maintenance of Avenor's assets. It
is expected that these expenditures will be financed by cash generated from
operations.
Avenor completed a C$370 million investment program at the Gatineau
facility in 1993 which included the construction of a deinking plant, a refuse
boiler, a thermomechanical pulp mill and paper machine improvements. A C$167
million renewal plan was completed in 1996 at the Dalhousie newsprint facility.
The project included the construction of a thermomechanical pulp mill,
conversion of the fibre supply to 100% wood chips and construction of a
secondary effluent treatment plant. In 1997, the construction of a new sawmill
at Ear Falls, located in northwestern Ontario, was completed at a total cost of
C$61 million. All significant expenditures required to bring Avenor's facilities
in compliance with current effluent regulations in Canada and the United States
were completed by the end of 1996. Environmental expenditures for the next three
years are estimated at C$20 million, primarily relating to air quality and waste
management.
FIBRE SUPPLY
Avenor manages approximately 77,330 square kilometres of forests, excluding
the private timberlands and Crown forest licenses of Pacific which were sold in
December 1997. In 1997, Avenor and Pacific together provided directly or
indirectly over one-half of the virgin fibre requirements of Avenor's pulp and
paper mills. Avenor's annual allowable cut ("AAC") totals approximately seven
million cubic metres of fibre. In addition to its virgin fibre requirements,
Avenor uses old newspaper and magazines in the recycling plants at the Gatineau,
Thunder Bay and Ponderay mills. In 1997, Avenor sourced approximately 65% of its
old newspaper and magazine needs for the Gatineau and Thunder Bay recycling
plants under long-term supply agreements. The supply of old newspapers and
magazines originates primarily from areas where Avenor's newsprint is sold in
order to minimize transportation costs.
Avenor carries out woodland operations in New Brunswick, Ontario and
Quebec, on both freehold lands owned by Avenor and Crown-owned lands. Woodland
operations are highly mechanized, enabling Avenor to
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<PAGE> 151
harvest and deliver wood requirements efficiently. Forest operations are managed
by a professional staff that plan and carries out harvesting and reforestation
activities on a sustainable basis.
The following table sets forth the forest areas owned and managed by Avenor
(excluding Pacific) as at December 31, 1997:
<TABLE>
<CAPTION>
AVENOR CROWN LAND
PROVINCE FREEHOLD LANDS CUTTING RIGHTS TOTAL AREA
- -------- -------------- -------------- ----------
(KM(2)) (KM(2)) (KM(2))
<S> <C> <C> <C>
New Brunswick.................................... 853 4,245 5,098
Quebec........................................... 660 19,347 20,007
Ontario.......................................... 407 51,820 52,227
----- ------ ------
Total.................................. 1,920 75,412 77,332
===== ====== ======
</TABLE>
Dalhousie, New Brunswick
The Dalhousie mill has access, either directly or indirectly through
Avenor, to an AAC which is equivalent to its total fibre requirements.
Approximately 55% of this AAC is on freehold land in New Brunswick and Quebec
and the remainder is located on forests managed through a Forest Management
Agreement ("FMA") granted by the Province of New Brunswick. The FMA has an
initial term of 25 years which, if the holder fulfills its obligations, will be
extended up to the full 25-year term every five years. The FMA requires the
payment of stumpage fees and the assumption of certain responsibilities,
including reforestation for which provincially-determined credits are given.
Gatineau, Quebec
The Gatineau mill purchases wood chips for its supply of virgin fibre of
which substantially all is sourced either from Avenor's sawmill located in
Maniwaki, Quebec or through long-term contracts with other sawmills. Through
Manifor Inc., the Gatineau mill has access to an AAC which supplies
approximately 25% of its virgin fibre requirements. There is currently a
sufficient supply of wood chips from sawmills in the region to meet the
remainder of the mill's requirements. The Maniwaki sawmill is the holder of a
forest management agreement ("CAAF") with the Province of Quebec. The CAAF has
an initial term of 25 years which, if the holder fulfills its obligations, is
extended to the full 25-year term every five years. The CAAF entitles Avenor to
harvest a volume of wood from specific Crown land. The CAAF also requires the
payment of stumpage fees and assumption of certain responsibilities for forest
regeneration and other silviculture work for which provincially-determined
credits are given. In addition to wood chips, the Gatineau mill purchases
approximately 200,000 tonnes per year of old newspapers and magazines for its
recycling plant, of which more than 65% is sourced through long-term contracts
at market prices and the remainder through purchases on the spot market.
Thunder Bay, Ontario
The Thunder Bay mill has access to an AAC approximately equivalent to the
combined requirements of the Thunder Bay pulp and newsprint mills. Substantially
all of this AAC is on Crown land managed by Avenor through renewable licenses or
FMAs with the Province of Ontario. Those agreements generally are for 20-year
terms and are extended for the full term every five years. Avenor is required to
pay stumpage fees and, for the majority of these agreements, Avenor assumes
certain reforestation responsibilities. Costs incurred for reforestation of
Avenor's FMAs are recoverable from trust funds which are dedicated to
silviculture and fully funded by Avenor. Ontario stumpage fees are based on the
prices of newsprint, pulp and lumber. The Province of Ontario is currently in
the process of changing its FMAs into Sustainable Forest Licences or "SFLs".
This will result in a change in forest management procedures but does not affect
AAC volumes.
In addition to its virgin fibre supply, the mill purchases approximately
150,000 tonnes per year of old newspapers and magazines, of which roughly 65% is
obtained through long-term contracts, with the remainder obtained through market
purchases.
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<PAGE> 152
Dryden, Ontario
The Dryden mill, together with the Dryden stud mill and Ear Falls sawmill,
has access to an AAC which provides full fibre self-sufficiency. The AAC is
located on Crown lands which are managed by Avenor through renewable licenses or
FMAs with the Province of Ontario. These licenses are similar in nature to those
of the Thunder Bay mill. The Dryden mill also uses purchased recycled pulp in
the production of the higher grade Artica line of recycled-content white paper.
Gold River, British Columbia
In 1997, the Gold River pulp mill obtained approximately 65% of its fibre
requirements through a long-term fibre supply agreement with Pacific. This
arrangement provided Avenor with wood chips produced as a by-product of
Pacific's sawmill operations as well as pulp logs produced from its logging
operations. The remaining 35% of the 1997 fibre supply requirement was purchased
on the open market.
When Pacific was sold in December 1997, Avenor entered into agreements with
affiliates of the two purchasers of Pacific, TimberWest Timber Trust
("TimberWest") and Doman Industries Limited ("Doman") to ensure continuity of
fibre flows from the former Pacific properties to the Gold River mill, under
substantially the same terms and conditions as those in effect before the sale
of Pacific.
The fibre supply agreements with TimberWest and Doman are evergreen
agreements which are tied to the Gold River pulp mill and may be terminated only
at the option of Avenor. Together, the two agreements will secure approximately
60% of the mill's ongoing fibre requirements.
Ponderay Partnership
All fibre requirements of the Ponderay Partnership mill are sourced through
open-market purchases. The Ponderay Partnership has entered into a long-term
contract with a local chipping contractor to supply approximately 35% of the
newsprint mill's fibre requirements. The remainder of the mill's wood chip
requirements are supplied from regional sawmills under contracts which are
negotiated annually.
The Ponderay Partnership mill began production of up to 18%
recycled-content newsprint in the Spring of 1995, using approximately 45,000
tonnes of old newspapers and magazines on an annual basis.
MAJOR DEVELOPMENTS
During the five years ended December 31, 1997, Avenor's capital
expenditures amounted to approximately C$900 million, including Avenor's
proportionate share of capital expenditures in partnerships. Avenor's total
assets were C$2.7 billion at the end of 1997.
Major developments since 1990 include the following:
- the completion in 1991 of a major modernization of the Thunder Bay
complex initiated in 1988 which included the installation of a
thermomechanical pulp mill, a new high-speed newsprint machine to
replace two older machines, a secondary effluent treatment system for
the pulp mill and a deinking plant for newsprint recycling;
- the sale of Avenor's tissue business, which was completed in 1991, for
proceeds of C$184.8 million;
- the permanent closure in 1992 of the Trois-Rivieres groundwood
specialties mill and its subsequent disposition by Avenor;
- the construction of a secondary effluent treatment system at the Gold
River complex completed in 1992;
- the completion of a C$370 million modernization program at the
Gatineau newsprint mill which included a deinking plant completed in
1991, a refuse boiler which came on-line in 1992 and a
thermomechanical pulp mill and paper machine improvements which were
completed in 1993;
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<PAGE> 153
- the indefinite shutdown in December 1993 of the newsprint mill of the
Gold River Newsprint Partnership (the "Gold River Partnership") of
which Avenor was general partner; on October 23, 1995, through a court
order, certain newsprint assets of the partnership were sold to a
third party and the outstanding indebtedness of the partnership to its
third-party lenders was fully extinguished;
- the sale by Avenor of its Canexel Hardboard Division in East River,
Nova Scotia for approximately C$18 million in the first quarter of
1994;
- the sale by Avenor of its entire interest in its paperboard business
in June 1994, resulting in a net gain to Avenor of C$19.5 million. The
gross proceeds to Avenor from this transaction were C$247.5 million;
- the purchase, in September 1995, of a sawmilling complex located in
Maniwaki, Quebec with an annual production capacity of 70 million
board feet of lumber;
- the completion of a secondary effluent treatment facility at the
Gatineau mill in 1995;
- the completion of a new chip handling system and newsprint secondary
effluent treatment plant at the Thunder Bay mill in 1995, at a cost of
C$56 million;
- the completion in 1996 of a C$167 million renewal program for the
Dalhousie newsprint mill of Avenor Maritimes which included the
construction of a secondary effluent treatment plant, the replacement
of the pulping systems with a new thermomechanical pulp mill, and the
conversion of the fibre supply to 100% wood chips;
- the completion in early 1997 of chip handling and thickness screening
systems at the Dryden mill, at a total cost of C$54 million;
- the completion in 1997 of a new sawmill at Ear Falls, Ontario with an
annual capacity of 130 million board feet, at a total cost of C$61
million; and
- the completion, in December 1997, of the sale of Avenor's 53% interest
in Pacific, for cash proceeds of C$302 million and a realized gain of
C$186.2 million (C$108.4 million after tax); Pacific was created in
1992 as a subsidiary of Avenor and in 1993 Avenor sold to Pacific the
assets and business of Avenor's Wood Products Group in British
Columbia, including three sawmills, a 60% interest in Mayo Forest
Products Ltd., private timberlands and Crown tenures in British
Columbia.
COMPETITION AND BUSINESS ENVIRONMENT
There are numerous competitors in the major markets, both domestic and
international, in which Avenor sells its principal products. Many factors
influence Avenor's competitive position, including manufacturing and delivery
costs, fibre availability, foreign currency exchange rates, product quality and
customer service. The markets for Avenor's products are highly competitive, and
sensitive to cyclical changes in industry capacity and in the economy, both of
which can have a significant influence on selling prices and on Avenor's
capacity usage and profitability. The pricing environment for both newsprint and
market pulp depends on, among other things, growth in demand for these products
which, in turn, is dependent on economic conditions in North America, Asia and
Europe. Over the long run, growth in demand may also be adversely affected by a
number of factors, including technological changes.
The trend towards consolidation in the pulp and paper industry in North
America continues, particularly in the newsprint industry. Larger producers have
access to cost and operating efficiencies, improved geographical positions and
expanded marketing competencies which make them better able to serve domestic
and export newsprint markets and provide better customer service.
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<PAGE> 154
TRANSPORTATION
Avenor has access to efficient modes of transportation at all of its
facilities. Most plants have access to both truck and rail, providing effective
transportation to North American markets and overseas shipping ports. In
addition, the mills at Gold River and Dalhousie have ship-docking facilities on
site. Inbound wood fibre, chemicals and other materials are received by road,
rail and water.
ENERGY
Steam for process requirements is produced from a combination of natural
gas, oil and coal, and by burning wood residues from Avenor's manufacturing
operations. Two of Avenor's facilities are capable of producing steam by using
more than one energy source in order to minimize energy costs.
Most of Avenor's electrical power requirements are supplied under long-term
arrangements with the various provincial electric utilities. However, the Gold
River pulp mill generates approximately 50% of its electric power requirements,
the Thunder Bay facilities about 25% and the Dryden facilities about 50%. Avenor
continues to examine opportunities for internal generation of electricity
through cogeneration.
RESEARCH AND DEVELOPMENT
Investment in research and development is carried out by Avenor's
Technology Development group located in Ottawa, Ontario. Forestry research is
carried out at Avenor's Forestry Centre in Harrington, Quebec. Avenor incurred
C$6.7 million of direct research and development expenditures during fiscal
1997, including expenditures made by Pacific prior to December 10, 1997.
ENVIRONMENTAL MATTERS
Like its competitors in the forest products industry, Avenor's operations
are subject to general and industry-specific federal, provincial, state and
municipal laws and regulations relating to environmental protection and human
health and safety. Such laws and regulations include those governing wastewater
discharges, air emissions, the use, handling, storage, treatment, transportation
and disposal of solid and hazardous materials and wastes and the remediation of
contamination. Because of the nature of its business, Avenor has incurred, and
will continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations.
Avenor believes that its operations and facilities are currently in
substantial compliance with applicable environmental laws and regulations,
including certain regulations adopted by the federal, Quebec, Ontario, New
Brunswick and British Columbia governments which apply to wastewater discharges
and air emissions from pulp and paper mills. Those regulations regarding
wastewater discharges and air emissions require that compliance be achieved by
dates ranging from 1992 to 2002. As part of its environmental management
program, Avenor has installed and successfully implemented state-of-the art
secondary treatment systems for effluent at all of its facilities. However,
regulations adopted in British Columbia include an objective to be met before
the end of 2002 with respect to the reduction of AOX to non-detectable levels
which could require Avenor to undertake significant further capital
expenditures. Currently, it is unclear what action would be required to meet
this objective in its present form and, therefore, the cost of additional
capital expenditures cannot be estimated.
Over the next few years, Avenor's focus on environmental improvements will
be on the control of air emissions. Through the Canadian government's voluntary
program on climate change, Avenor has already reduced its emissions of carbon
dioxide and nitrogen oxides to 1990 levels. Avenor does not expect that the
recently adopted Kyoto Protocol, which addresses, among other things, carbon
dioxide and nitrogen oxide emission levels, will have a material adverse effect
on its business or financial condition. In 1996 and 1997, new electrostatic
precipitators were installed at the Gold River and Dalhousie mills to reduce
particulate emissions. Further capital expenditures will be made over the next
few years to address particulate and total reduced sulphur (TRS) emissions.
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Although Avenor believes that its currently projected environmental capital
expenditures of C$20 million over the period of 1998 to 2000 will be sufficient
to allow its pulp and paper mills to meet the standards prescribed by the
current laws and regulations, there can be no assurance that additional capital
or other expenditures will not be required. This amount excludes capital
expenditures that may be required to comply with the requirement in British
Columbia to reduce AOX to non-detectable levels by the end of 2002. Avenor will
continue to monitor and participate in the development of any new regulatory
demands.
In 1996, Avenor initiated a program to become ISO 14001 (Environmental
Management Systems) registered at all of its facilities. In December 1997,
Thunder Bay, Avenor's largest facility, achieved registration. Avenor's other
facilities are well advanced in their programs and registration will be pursued
in 1998. The program will improve Avenor's environmental management
capabilities, bringing greater awareness and knowledge to all employees and will
assist Avenor in meeting the environmental concerns of customers around the
world.
Avenor has committed to sustainable forest management (SFM) modelled on
guidelines established by the Canadian Standards Association (CSA).
Implementation of this extensive program in all of Avenor's woodlands operations
is expected to be completed within five years. In 1996 and 1997, forest audits
were undertaken by a consulting firm. Those audits reviewed Avenor's practices
for silviculture, planning and construction of roads, culverts and stream
crossings and stakeholder participation. Action plans are currently in place to
address all audit findings, none of which are considered material by Avenor.
Avenor's facilities and operations are subject to certain environmental
laws and regulations which may impose liability on certain parties to remediate,
and, in the United States, contribute to the costs of remediating sites at which
hazardous wastes or substances are or were disposed of or released. Such sites
may include sites currently or formerly owned or operated by Avenor and sites in
the United States to which Avenor has sent hazardous wastes or substances for
treatment or disposal. Liability for such remediation may be imposed without
regard to fault or the lawfulness of the activity resulting in the
contamination. Although Avenor is currently undertaking remedial action at or in
connection with some of its current and former operations, it is not currently
aware of any such liability that is reasonably expected to have a material
adverse effect on its business or financial condition. However, certain of
Avenor's facilities have been in operation for many years and, over such time,
have used or generated and disposed of substances which are or may be considered
hazardous. The discovery of previously unknown contamination of property or
groundwater underlying or in the vicinity of Avenor's facilities, operations or
managed lands could require it to incur material unforeseen expenses.
HUMAN RESOURCES
Avenor employed an average of 6,760 employees in 1997, including an average
of 1,068 employees of Pacific, the majority of whom are located in Ontario,
Quebec, British Columbia and New Brunswick. In 1997, approximately 5,460 of
Avenor's employees were covered by collective labour agreements.
In 1997, Avenor's sawmill at Maniwaki, Quebec renewed its collective labour
agreement for a three-year period and labour negotiations continue at the Gold
River pulp mill in British Columbia. In 1998, fourteen labour agreements,
covering approximately 2,930 mill and woodland employees in Thunder Bay,
Ontario, Gatineau, Quebec and Dryden, Ontario, are subject to renewal.
SHARE CAPITAL OF AVENOR
The authorized capital of Avenor consists of an unlimited number of Avenor
Common Shares of which 65,788,413 were issued and outstanding on June 12, 1998.
Each Avenor Common Share entitles its holder to one vote at meetings of the
Avenor Shareholders and to receive dividends, if, as and when declared by the
Avenor Board. Each Avenor Common Share entitles its holder to a pro rata share
of the residual assets of Avenor upon its liquidation, dissolution or winding
up.
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PRINCIPAL HOLDERS OF AVENOR COMMON SHARES
Share Ownership of Avenor Management
At the close of business on the Avenor Record Date, directors and senior
officers of Avenor and their affiliates were the beneficial owners of an
aggregate of approximately 35,258 Avenor Common Shares for approximately 0.05%
of the votes attaching to the outstanding Avenor Common Shares. All such
directors and senior officers have indicated their intention to vote their
Avenor Common Shares at the Avenor Meeting for approval of the Arrangement
Resolution and the Shareholder Rights Plan Resolution.
To the knowledge of the directors and officers of Avenor, as at June 12,
1998, no person beneficially owns or exercises control or direction over more
than 10% of the Avenor Common Shares.
DIRECTORS AND OFFICERS
The Avenor Board currently consists of eight directors. The following table
sets forth the name, position held with Avenor and the principal occupation of
each of the directors and senior officers of Avenor.
<TABLE>
<CAPTION>
NUMBER OF AVENOR
COMMON SHARES
BENEFICIALLY OWNED,
DIRECTLY OR INDIRECTLY, OR
OVER WHICH CONTROL OR
NAME AND MUNICIPALITY POSITION WITH PRINCIPAL OCCUPATION IF DIRECTION IS
OF RESIDENCE AVENOR/SINCE(6) OTHER THAN POSITION HELD EXERCISED(7)(8)
- --------------------- ---------------- ------------------------ --------------------------
<S> <C> <C> <C>
William R. C. Blundell(1)(5) Director/1993 Corporate Director 5,025
Toronto, Ontario
Lino J. Celeste(2)(3) Director/1996; Chairman of the Board 2,435
Saint John, New Brunswick Chairman of the Bruncor Inc. (holding company)
Board/1997
Purdy Crawford(2)(4) Director/1993 Chairman 5,231
Toronto, Ontario Imasco Limited (consumer
products and service
corporation)
L. Yves Fortier, C.C., Director/1992 Chairman 3,481
Q.C.(1)(2) Ogilvy Renault (barristers and
Westmount, Quebec solicitors)
James F. Hankinson(2)(4) Director/1982 President and Chief Executive 1,300
Fredericton, New Brunswick Officer
New Brunswick Power Corporation
(producer and distributor of
electricity)
Hon. Barbara J. McDougall, Director/1994 Chairperson 1,300
P.C.(1)(3)(5) AT&T Canada Long Distance
Toronto, Ontario Services Company (carrier of
voice, data and message
communications)
Frederic V. Salerno(4)(5) Director/1995 Senior Executive Vice President 4,950
Rye, New York & Chief Financial
Officer -- Strategy and Business
Development
Bell Atlantic (telecommunication
services, directory publishing
and information delivery
services)
Arthur R. Sawchuk(2)(3) Director/1993; -- 3.997
Mississauga, Ontario President and
Chief Executive
Officer/1997
Darrell S. Madill President, Wood -- 293 (9)
Montreal, Quebec Products
Group/1996
Jerry P. Soderberg President, -- --
White Plains, New York Newsprint
Group/1993
</TABLE>
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<PAGE> 157
<TABLE>
<CAPTION>
NUMBER OF AVENOR
COMMON SHARES
BENEFICIALLY OWNED,
DIRECTLY OR INDIRECTLY, OR
OVER WHICH CONTROL OR
NAME AND MUNICIPALITY POSITION WITH PRINCIPAL OCCUPATION IF DIRECTION IS
OF RESIDENCE AVENOR/SINCE(6) OTHER THAN POSITION HELD EXERCISED(7)(8)
- --------------------- ---------------- ------------------------ --------------------------
<S> <C> <C> <C>
David J. Steuart President, Pulp -- 1,870
Burlington, Ontario Group/1993
David G. Toole President, White -- 500
Etobicoke, Ontario Paper Group/1990
Francois R. Roy Executive Vice -- -- (9)
Montreal, Quebec President and
Chief Financial
Officer/1997
Marc Regnier Senior Vice -- 1,937
Outremont, Quebec President,
General Counsel
and
Secretary/1975
Edward J. Broadhurst Vice President -- 1,005
Kanata, Ontario Operations
Technology/1969
Emmanuelle A. Collin Vice President, -- 375
Montreal, Quebec Communications
and Governmental
Affairs/1991
William G. Harvey Vice President -- 1,219
Hudson, Quebec and
Treasurer/1991
Benoit Huard Vice President -- --
Lorraine, Quebec and
Comptroller/1997
James R. Marchant Vice President, -- 340
St-Lambert, Quebec Human Resources,
Environment,
Health &
Safety/1993
Karl V. Roberts Vice President, -- --
St. Albans, Vermont Supply Chain
Management/1996
John H. Sim Vice President, -- --
South Surrey, Marketing Pulp
British Columbia Group/1972
Wallace M. Vrooman Vice President, -- --
Manotick, Ontario Environment/1988
</TABLE>
- ---------------
Notes:
(1) Member of Audit Committee.
(2) Member of Corporate Governance and Nominating Committee.
(3) Member of Environment, Health and Safety Committee.
(4) Member of Management Development and Compensation Committee.
(5) Member of Pension Fund Review Committee.
(6) References to dates are to the date that the individual first became a
director or employee of Avenor.
(7) Information as to Avenor Common Shares beneficially owned or controlled or
directed by a nominee for director has been furnished by the respective
nominees.
(8) In addition to the Avenor Common Shares listed in this table, the following
individuals hold the number of Avenor Options indicated below which have an
exercise price of less than C$35; Mr. Madill -- 20,460; Mr.
Soderberg -- 66,070; Mr. Steuart -- 58,244; Mr. Toole -- 61,804; Mr.
Roy -- 30,000; Mr. Regnier -- 53,932; Mr. Broadhurst -- 27,831; Ms.
Collin -- 23,043; Mr. Harvey -- 5,664; Mr. Huard -- 2,314; Mr.
Marchant -- 28,058; Mr. Roberts -- 5,496; Mr. Sim -- 24,271; and Mr.
Vrooman -- 29,414. All outstand-
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<PAGE> 158
ing Avenor Options will vest immediately prior to the Effective Time;
therefore, it is expected that the above-noted Avenor Options will be
exercised in connection with the Transaction.
(9) Messrs. Roy and Madill are the beneficial owners of C$58,000 and C$25,900,
respectively, principal amount of Avenor Convertible Debentures.
During the past five years, each of the above directors and senior officers
held his or her present principal occupation or other management positions with
the same or other associated firms or organizations, except Mr. Lino J. Celeste
who became Chairman of the Board of Bruncor Inc. in November 1994 and prior to
that date was President and Chief Executive Officer of the New Brunswick
Telephone Company Limited; Mr. James F. Hankinson who was President and Chief
Operating Officer of Canadian Pacific Limited from 1990 to 1994; the Honourable
Barbara J. McDougall, P.C. who prior to June 1993 was Secretary of State for
External Affairs, remained a member of Parliament until October 1993, worked as
a consultant from June 1993 to December 1995 and served as the Vice-Chair of
Unitel until her appointment to her present position in December 1996; Mr.
Arthur R. Sawchuk who was Executive Chairman of Dupont Canada Inc. from
September 1997 to December 1997 (as well as serving as acting President and
Chief Executive Officer of Avenor since November 1997) and who, prior to
September 1997, was Chairman of the Board, President and Chief Executive Officer
of Dupont Canada Inc. and who, prior to September 1995, was President and Chief
Executive Officer of DuPont Canada Inc.; Mr. Jerry P. Soderberg who was Vice
President and General Sales Manager, Publishing and Packaging Paper Division of
Boise Cascade Corporation prior to July 1993, and who was President, White Paper
Group of Avenor prior to August 1994; Mr. David J. Steuart who was President of
St. Anne Pulp Sales Company Ltd. prior to September 1993; Mr. Darrell S. Madill
who was Group Vice-President, Wood Products at Canfor Corporation prior to
September 1996; Mr. David Toole who was Vice President/Chief Financial Officer
of Avenor prior to October 1994; Mr. Francois R. Roy who was Chief Financial
Officer, Vice President Finance & Treasurer of Quebecor Inc. prior to August
1997; Mr. Marc Regnier who was Senior Vice President and General Counsel of
Avenor prior to November 1997; Mr. Edward J. Broadhurst who was Director,
Technology Development of Avenor prior to December 1994 and was Vice President,
Technology Development of Avenor prior to November 1997; Ms. Emmanuelle Collin
who was Vice President, Public Affairs and Communications of Avenor prior to
October 1993; Mr. William G. Harvey who was Treasurer of Avenor prior to July
1995; Mr. Benoit Huard who was Corporate Controller of Quebecor Inc. prior to
October 1997; Mr. James R. Marchant who was Vice President, Employee and Labour
Relations at Northern Telecom Ltd. prior to December 1993 and who was Vice
President, Human Resources of Avenor prior to November 1997; and Mr. Karl V.
Roberts who was Manager of Strategic Planning and Operations Research for Boise
Cascade Corporation prior to October 1993 and who was General Manager, Vend
Portfolio, Specialty Products Division for Ore-Ida Foods from October 1993 to
September 1996.
Compensation of Directors
Each director of Avenor, other than a director who is a salaried officer or
employee of Avenor, receives an annual retainer fee of C$16,000. In addition,
each director receives a fee of C$1,000 for each meeting of the Avenor Board or
committee of the Avenor Board attended. Each director who is appointed
chairperson of a committee of the Avenor Board is paid an additional annual fee
of C$3,000. All directors are reimbursed for out-of-pocket expenses incurred for
attendance at meetings of the Avenor Board and committees of the Avenor Board.
Avenor has established a Directors' Share Remuneration Plan pursuant to which
the Corporate Governance and Nominating Committee recommends annually, for
approval by the Avenor Board, the number of Avenor Common Shares to be purchased
on behalf of the directors as part of their compensation. In fiscal 1997, 300
Avenor Common Shares were allotted to each non-officer director, the purchase
price of which was C$20.40 per share.
Termination of Employment, Change in Responsibilities and Employment Contracts
Avenor has entered into severance agreements with certain of its executive
officers, including Messrs. Madill, Soderberg, Steuart and Toole, in the normal
course of business. The severance agreements, the majority of which were entered
into in September 1993, provide for the payment of certain severance benefits if
a change in control of Avenor occurs and, within the three-year period following
the change in control, the individual's employment is terminated by Avenor other
than for cause, disability, retirement or
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<PAGE> 159
death, or by the individual for certain defined reasons such as a change in his
position, reporting relationship, in the nature or status of his
responsibilities or a reduction in salary or benefits. The agreements provide
that the executive officer would receive a lump sum severance payment equal to
the base salary and the target bonus payable under Avenor's STIP that would have
been earned through the end of the severance period (36 months) based on the
individual's highest monthly rate of base salary during the preceding 36-month
period. In addition to the lump sum severance payment, the agreements provide
that the executive officer is entitled to the continuation of benefits under
Avenor's benefit plans and certain perquisites through the end of the severance
period, including the continuation of certain insurance plan benefits and a lump
sum payment equal to the actuarial present-day value of pension arrangements
under Avenor's SERP taking into account pensionable service and earnings during
the severance period. The severance benefits provided for in the severance
agreements would be the only benefits provided to an individual in the event of
the termination of his employment following a change in control.
Avenor has also entered into employment contracts with certain of its
executive officers, including Messrs. Madill, Soderberg, Steuart and Toole.
Those contracts, apart from setting forth the basic terms and conditions of
employment, provide for the payment of certain indemnities should an executive
officer's employment be terminated by Avenor other than for cause, the
individual's breach of contract, disability or death. The agreements provide an
amount equivalent to twenty-four months of the individual's base salary in
effect at the time of termination, payable either in a lump sum or by way of
salary continuance. In addition, the individual is entitled to the target bonus
payable under Avenor's STIP that would have been earned at the time of
termination as well as to the continuation of insurance plan benefits in effect
at the time of termination (except short and long-term disability) provided the
individual has opted for salary continuance and remains unemployed during that
period. The terminated executive officer also has the right to exercise vested
Avenor Options and Avenor SARs granted pursuant to the Avenor KESOP during a
period of 90 days following the date of termination of his or her employment or
as otherwise determined by the Management Development and Compensation
Committee. Following the termination of their employment during fiscal 1997,
Messrs. Gagne and Lord became entitled to the indemnities provided for in their
employment contracts.
Directors' and Officers' Liability Insurance
Avenor has purchased directors' and officers' liability insurance which
provides coverage for payments made on behalf of its directors and officers
under the indemnity provisions of its by-laws and to individual directors and
officers for insurable losses arising during the performance of their duties for
which they are not indemnified by Avenor. In 1997, premiums paid in respect of
directors' and officers' liability insurance for the directors and officers of
Avenor were approximately C$10,388 and C$23,374, respectively. The policy
provides coverage with an aggregate limit of C$75 million for all policy
participants in each policy year, subject to a deductible of C$250,000 for each
amount payable to Avenor.
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<PAGE> 160
EXECUTIVE COMPENSATION
Compensation of Named Executive Officers
The following table sets forth certain compensation information for the two
individuals who occupied the position of Chief Executive Officer during 1997 and
the five other most highly compensated executive officers of Avenor
(collectively, the "Avenor Named Executive Officers") for services rendered in
all capacities during the last three financial years in respect of the
individuals who were Named Executive Officers in fiscal 1997. This information
includes the dollar value of base salaries and bonus awards, the number of
Avenor Options and Avenor SARs granted pursuant to the Avenor KESOP, and certain
other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
(ALL $ AMOUNTS IN C$)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION SECURITIES UNDER
-------------------------- OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) GRANTED(#) COMPENSATION(5)
- --------------------------- ---- -------- -------- -------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul E. Gagne(2).............. 1997 $501,462 $ 90,720 $29,618 24,712/12,356 $2,008,782
President and Chief 1996 540,000 -- -- 29,862/14,931 61,487
Executive Officer 1995 480,000 460,800 -- 34,909/17,454 43,385
Norman W. Lord(2)............. 1997 $291,744 $ 56,250 $30,567 7,400/3,700 $ 642,576
Vice President, 1996 250,000 -- -- 9,217/4,608 8,034
Corporate Development, 1995 214,000 73,237 -- 5,284/2,642 9,135
Logistics and Information
Technology
Darrell S. Madill(3).......... 1997 $298,231 $117,972 -- 9,424/4,712 $ 16,221
President, 1996 90,346 -- -- 11,035/5,517 5,400
Wood Products Group 1995 -- -- -- --
Arthur R. Sawchuk(4).......... 1997 $ 46,200 -- -- -- $ 60,120
President and Chief 1996 -- -- -- -- --
Executive Officer 1995 -- -- -- -- --
Jerry P. Soderberg............ 1997 $421,950 $151,172 -- 12,912/6,456 $ 38,204
President, 1996 390,450 -- -- 16,548/8,274 24,563
Newsprint Group 1995 368,962 138,732 -- 10,480/5,240 22,563
David J. Steuart.............. 1997 $309,890 $136,152 -- 9,784/4,892 $ 16,444
President, 1996 305,000 -- -- 12,650/6,325 16,390
Pulp Group 1995 287,500 98,014 -- 8,045/4,022 11,140
David G. Toole................ 1997 $273,954 $ 66,053 -- 8,890/4,445 $ 15,505
President, 1996 278,000 -- -- 11,530/5,765 15,698
White Paper Group 1995 264,000 100,169 -- 7,309/3,654 20,348
</TABLE>
- ---------------
Notes:
(1) The aggregate amount of perquisites and other personal benefits is not
greater than the lesser of $50,000 and 10% of the total of the annual salary
and bonus of each Avenor Named Executive Officer for the financial years
1995, 1996 and 1997.
(2) The employment of Messrs. Gagne and Lord terminated on November 6, 1997 and
November 24, 1997, respectively.
(3) Mr. Madill joined Avenor in September 1996.
(4) Mr. Sawchuk was appointed acting President and Chief Executive Officer of
Avenor effective November 6, 1997.
(5) All Other Compensation includes insurance premiums for all Avenor Named
Executive Officers, except Mr. Sawchuk, and in the case of Messrs. Gagne and
Lord includes amounts received on the termination of their employment with
Avenor, and in the case of Mr. Gagne includes directors' fees and retainers
and in the case of Mr. Sawchuk includes directors' fees and retainers
received prior to his appointment as President and Chief Executive Officer
of Avenor.
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<PAGE> 161
The following table sets forth information regarding grants of Avenor
Options and Avenor SARs made to the Avenor Named Executive Officers under the
Avenor KESOP during the financial year ended December 31, 1997.
OPTIONS AND SARS GRANTED DURING FISCAL 1997
(ALL $ AMOUNTS IN C$)
<TABLE>
<CAPTION>
MARKET VALUE
% OF TOTAL OF SECURITIES
OPTIONS/SARS UNDERLYING
SECURITIES UNDER GRANTED TO EXERCISE OR OPTIONS/SARS
OPTIONS/SARS EMPLOYEES IN BASE PRICE ON THE DATE EXPIRATION
NAME GRANTED(#) FINANCIAL YEAR PER SECURITY OF GRANT DATE
- ---- ---------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Paul E. Gagne................. 24,712/12,356 11.1% $28.65 $28.65 July 30, 2007(1)
Norman W. Lord................ 7,400/3,700 3.3 28.65 28.65 July 30, 2007(1)
Darrell S. Madill............. 9,424/4,712 4.3 28.65 28.65 July 30, 2007
Arthur R. Sawchuk............. -- -- -- -- --
Jerry P. Soderberg............ 12,912/6,456 5.8 28.65 28.65 July 30, 2007
David J. Steuart.............. 9,784/4,892 4.4 28.65 28.65 July 30, 2007
David G. Toole................ 8,890/4,445 4.0 28.65 28.65 July 30, 2007
</TABLE>
- ---------------
Note:
(1) Due to the termination of their employment with Avenor following the grant
of these Avenor Options and Avenor SARs and the application of specific
rules of the Avenor KESOP pertaining to such circumstances, the expiration
date has been established by the Management Development and Compensation
Committee of Avenor at August 5, 1998 for Mr. Gagne and August 23, 1998 for
Mr. Lord.
The Avenor KESOP provides for the acceleration of the vesting of the Avenor
Options and Avenor SARs upon the occurrence of a change in control of Avenor. In
connection with the Transaction, Avenor has made application to the TSE and the
ME for approval to amend the Avenor KESOP to provide for the vesting of all
outstanding Avenor Options and Avenor SARs immediately prior to the Effective
Time, in order to allow such directors and officers to participate in the
Arrangement. Any Avenor Options or Avenor SARs which are not exercised prior to
the Effective Time will be terminated as of the Effective Time.
The following table summarizes for each of the Avenor Named Executive
Officers the number of Options and SARs, if any, exercised during the financial
year ended December 31, 1997, the aggregate value realized upon exercise and the
total number of unexercised Avenor Options and Avenor SARs, if any, held at
December 31, 1997. Value realized upon the exercise of Avenor Options is the
difference between the fair market value of Avenor Common Shares on the exercise
date and the exercise or base price of the Avenor Option. Value realized upon
the exercise of Avenor SARs is either (i) the cash payment received by the
executive officer equal to the difference between the market value of the Avenor
Common Shares at the time of exercise and the corresponding Avenor SAR exercise
or base price or (ii) the fair market value of Avenor Common Shares received in
an equivalent amount to the amount established in clause (i). Value of
unexercised in-the-money Avenor Options and Avenor SARs at financial year-end,
if applicable, is the difference between their exercise or base prices and the
market value of the Avenor Common Shares on December 31, 1997. Those values,
unlike the amounts set forth in the column "Aggregate Value Realized", have
never been, and may never be, realized. These Avenor Options and Avenor SARs
have not been, and may not be exercised and actual gains, if any, on exercise
will depend on the value of the Avenor Common Shares on the date of exercise.
There can be no assurance that these values will be realized.
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND FINANCIAL YEAR-END OPTION/SAR VALUES
(ALL DOLLAR AMOUNTS IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY
SECURITIES AGGREGATE AT FY-END # OPTIONS/SARS AT FY-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul E. Gagne..................... 19,047 $107,616 105,689 72,029 $66,285 --
Norman W. Lord.................... -- -- 23,842 19,258 $15,991 --
Darrell S. Madill................. -- -- -- 20,460 -- --
Arthur R. Sawchuk................. -- -- -- -- -- --
Jerry P. Soderberg................ -- -- 31,370 34,700 $53,977 --
David J. Steuart.................. -- -- 31,788 26,457 $24,864 --
David G. Toole.................... -- -- 39,868 24,075 $12,052 --
</TABLE>
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<PAGE> 162
Pension Benefits
Avenor sponsors different registered pension plans in which the Avenor
Named Executive Officers, other than Mr. Sawchuk, participated during 1997.
Messrs. Gagne, Lord, Madill, Steuart and Toole participate in Avenor's
Employees' Retirement Plan (1988). Mr. Soderberg participates in the Employees'
Retirement Plan of Avenor America. All of those plans are registered for income
tax purposes.
Avenor also sponsors the SERP pursuant to which additional pension benefits
may become payable to executive officers of Avenor in senior positions. Messrs.
Gagne, Lord, Madill, Steuart, Toole and Soderberg participate in the SERP. The
SERP provides participants with supplementary retirement benefits determined as
the excess of (a) the amount of pension calculated in accordance with the
provisions of the SERP over (b) the amount of pension payable from the
registered plan in which the executive participates.
The SERP pays pensions based on a final pay formula. The formula is 2% of
average remuneration in the last three years preceding retirement times the
number of years of pensionable service with Avenor and 1.6% of said remuneration
times the number of years of pensionable service with a prior employer if such
service has been recognized by Avenor ("Prior Service"). When years of Prior
Service are recognized and when funds were not transferred in the registered
plan, there is an offset to account for the pension payable from the prior
employer's pension plans.
For purposes of calculating the executives' pension, remuneration includes
base salary and 50% of the target bonus under Avenor's STIP. Entitlement to an
unreduced pension for the Avenor Named Executive Officers, other than Mr.
Sawchuk, requires attainment of age 60 and completion of 15 years of continuous
employment with Avenor or designated affiliates. Pension benefits are in the
form of a life annuity with a 60% surviving spouse pension for married
executives and a minimum guarantee of 120 monthly payments for single
executives.
The following tables set forth the total basis annual pension payable under
the SERP, based on years of pensionable service with Avenor and Prior Service,
respectively, before any offset of pensions payable either from one of Avenor's
registered plans or from any prior employer's plan.
<TABLE>
<CAPTION>
YEARS OF PENSIONABLE SERVICE WITH AVENOR
---------------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
C$200,000 C$ 40,000 C$ 60,000 C$ 80,000 C$100,000 C$120,000 C$140,000
250,000 50,000 75,000 100,000 125,000 150,000 175,000
300,000 60,000 90,000 120,000 150,000 180,000 210,000
350,000 70,000 105,000 140,000 175,000 210,000 245,000
400,000 80,000 120,000 160,000 200,000 240,000 280,000
450,000 90,000 135,000 180,000 225,000 270,000 315,000
500,000 100,000 150,000 200,000 250,000 300,000 350,000
550,000 110,000 165,000 220,000 275,000 330,000 385,000
600,000 120,000 180,000 240,000 300,000 360,000 420,000
650,000 130,000 195,000 260,000 325,000 390,000 455,000
700,000 140,000 210,000 280,000 350,000 420,000 490,000
</TABLE>
<TABLE>
<CAPTION>
YEARS OF PRIOR SERVICE
---------------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
C$200,000 C$ 32,000 C$ 48,000 C$ 64,000 C$ 80,000 C$ 96,000 C$112,000
250,000 40,000 60,000 80,000 100,000 120,000 140,000
300,000 48,000 72,000 96,000 120,000 144,000 168,000
350,000 56,000 84,000 112,000 140,000 168,000 196,000
400,000 64,000 96,000 128,000 160,000 192,000 224,000
450,000 72,000 108,000 144,000 180,000 216,000 252,000
500,000 80,000 120,000 160,000 200,000 240,000 280,000
550,000 88,000 132,000 176,000 220,000 264,000 308,000
600,000 96,000 144,000 192,000 240,000 288,000 336,000
650,000 104,000 156,000 208,000 260,000 312,000 364,000
700,000 112,000 168,000 224,000 280,000 336,000 392,000
</TABLE>
The years of pensionable service with Avenor and Prior Service as of
December 31, 1997 for the Avenor Named Executive Officers who participate in the
SERP are, respectively: Mr. Gagne -- 21.43 years and no Prior Service, Mr.
Soderberg -- 4.42 years and 25.25 years, Mr. Steuart -- 4.33 years and 23.67
years, Mr. Toole -- 22.67 years and no Prior Service, Mr. Madill -- 1.32 years
and 14.98 years, and Mr. Lord --
141
<PAGE> 163
28.33 years and no Prior Service. The 1997 remuneration amounts for the purpose
of the SERP, taking into account 50% of their target bonus, were as follows:
C$622,614 for Mr. Gagne, US$346,267 for Mr. Soderberg, C$364,322 for Mr.
Steuart, C$332,278 for Mr. Toole, C$350,430 for Mr. Madill and C$300,075 for Mr.
Lord.
REPORT ON EXECUTIVE COMPENSATION
The Management Development and Compensation Committee (the "Compensation
Committee") supervises, on behalf of the Avenor Board, executive management
succession, career development and compensation of executive officers, including
the Avenor Named Executive Officers. Membership on the Compensation Committee is
limited to outside directors who are not employees of Avenor or any of its
affiliates. The Compensation Committee determines the level of compensation of
the Chief Executive Officer and, on the advice of the Chief Executive Officer,
approves the compensation of the other executive officers.
Compensation Strategy
Avenor's compensation program for its executive officers has been
structured to encourage achievement of the following goals:
- to attract executive officers who have demonstrated superior
leadership competence;
- to retain the services of valued members of the executive team
throughout the normal business cycles typical of resource-based
companies;
- to link the interests of executive officers with those of the
shareholders; and
- to motivate the executive officers to achieve excellence within their
respective areas of responsibilities.
The underlying principle of Avenor's total compensation policy for
executives is "pay for performance" with "pay", in the broader sense of total
compensation, rising in a progressive and significant manner as performance,
both corporate and personal, improves. For executive officers, the total
compensation includes: base salary compensation, incentive compensation,
benefits compensation and personal perquisites compensation. The total
compensation for each executive position is designed to place Avenor at the 75th
percentile of its selected market using a benchmark approach comparing Avenor to
a group of companies in natural resources, manufacturing and Canadian-based
multinationals (the "Selected Market"). Base compensation (pension and group
benefits) is set to place Avenor at the median of its Selected Market. Personal
perquisite compensation is intended to relate to the average of the Selected
Market. Short-term and long-term incentive compensation is set to ensure that
total compensation ranks Avenor at the 75th percentile of the Selected Market
when prescribed performance objectives, as approved by the Compensation
Committee, have been achieved.
Salary
In 1997, base salary increases were awarded to the Avenor Named Executive
Officers, other than Mr. Sawchuk, in conformity with the principle mentioned
above in respect of base compensation.
Short-Term Incentive Plan
Avenor's STIP provides annual incentive compensation to certain employees,
including executive officers and the Avenor Named Executive Officers. In 1997,
no incentive award was paid to Mr. Sawchuk. The amount payable to each employee
is based upon the achievement of financial objectives and safety targets for
each business unit and for Avenor as a whole. The total amount of an incentive
award which an individual may earn relates to his responsibilities within the
organization. In the case of the Chief Executive Officer, the award is tied 75%
to the achievement of financial objectives and 25% to strategic objectives for
Avenor. Short-term incentive awards for 1997 were calculated on the basis of 48%
of 1997 base salary for Mr. Gagne, 36% of 1997 base salary for Messrs. Madill,
Steuart, Soderberg and Toole and 30% of 1997 base salary for Mr. Lord,
multiplied by earned STIP factors ranging from 0.35 to 1.24.
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<PAGE> 164
Key Employee Stock Option Plan
In 1988, Avenor introduced its Avenor KESOP designed to focus the executive
officers' attention on the longer-term interest of Avenor and its shareholders.
Avenor Options to purchase Avenor Common Shares are issued at market value.
Avenor Option grants are considered annually. The number of Avenor Options
granted is based on a percentage of salary which reflects the responsibility of
the executive officer. For the Avenor Named Executive Officers, yearly option
opportunities ranged from 1.2 times base salary for Mr. Gagne while he was Chief
Executive Officer, to 0.8 times base salary for the other Avenor Named Executive
Officers, other than Mr. Sawchuk. Regular Avenor Option grants were made on the
foregoing basis in the third quarter of 1997.
Compensation of the Chief Executive Officer
The same compensation program components are available to the President and
Chief Executive Officer of Avenor as are available to other executive officers.
The Compensation Committee makes adjustments to his compensation package using
the same criteria as those applied to other executive officers. The base salary
of the President and Chief Executive Officer is set in accordance with the
above-mentioned compensation policy and with reference to the salaries paid to
chief executive officers in companies identified in the Selected Market.
Mr. Gagne's employment as President and Chief Executive Officer of Avenor
terminated on November 6, 1997. Mr. Gagne's base salary to that date had been
set in accordance with the above-mentioned compensation policy and with
reference to the salaries paid to chief executive officers in companies
identified in the Selected Market. In connection with the termination of his
employment, the Avenor Board approved the severance arrangements for Mr. Gagne
referred to under "Directors and Officers--Termination of Employment, Change in
Responsibilities and Employment Contracts".
Mr. Sawchuk was appointed President and Chief Executive Officer on an
interim basis effective November 6, 1997. Mr. Sawchuk's remuneration as interim
President and Chief Executive Officer equals C$4,200 per day worked.
THIS REPORT IS SUBMITTED BY THE COMPENSATION COMMITTEE, WHOSE MEMBERS ARE
MESSRS. HANKINSON (CHAIRMAN), CRAWFORD AND SALERNO.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors, officers or employees of Avenor is indebted to
Avenor in connection with the purchase of securities, other than as set forth in
the following table:
TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
UNDER SECURITIES PURCHASE PROGRAMS
<TABLE>
<CAPTION>
LARGEST
AMOUNT AMOUNT FINANCIALLY
OUTSTANDING OUTSTANDING ASSISTED
INVOLVEMENT OF DURING AS AT AMOUNT SECURITIES
CORPORATION FISCAL DECEMBER 31, OUTSTANDING AS APPLICABLE PURCHASED
NAME OR SUBSIDIARY 1997 1997 AT JUNE 18, 1998 INTEREST RATE DURING 1997
- ---- -------------- ----------- ------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
19,047 Avenor
Paul E. Gagne Lender C$199,993 C$187,993 nil nil Common Shares
<CAPTION>
SECURITY FOR
NAME INDEBTEDNESS
- ---- -------------
<S> <C>
Avenor Common
Paul E. Gagne Shares
</TABLE>
Other than routine indebtedness (debt owed by full-time employees, fully
secured against the employee's residence and in a principal amount less than the
employee's annual salary), no director, officer or employee was indebted to
Avenor other than in connection with securities purchase programs during fiscal
1997 or as at June 18, 1998.
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<PAGE> 165
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Avenor Board believes that sound corporate governance practices are
important and the Board has been proactive in adopting such practices. In line
with the Corporate Governance Guidelines of the TSE and the ME (the
"Guidelines"), the following description of Avenor's corporate governance
practices has been prepared under the supervision of the Corporate Governance
and Nominating Committee.
Mandate of the Avenor Board
The CBCA provides that the business of Avenor shall be managed under the
direction of the Avenor Board. The Avenor Board recognizes that it is
responsible for the stewardship of Avenor, meaning that it oversees the conduct
of its business and supervises its executive officers who are responsible for
the conduct of the business. The Avenor Board determines matters of corporate
policy, assesses management's execution of those policies and reviews the
results obtained. Its duties include approval of strategic plans, the management
of succession planning, approval of corporate communications policies and
assessment of the integrity of Avenor's internal controls and information
systems. It considers the principal risks of Avenor's businesses and receives
reports, as needed, of management's assessment of those risks and the approach
employed in handling them on an ongoing basis.
Composition of the Avenor Board
Avenor has no "significant shareholder" within the meaning of the
Guidelines. The Avenor Board is currently composed of eight persons. The
President and Chief Executive Officer of Avenor is a member of the Avenor Board,
and as an officer of Avenor, does not qualify as an "unrelated" or "outside"
director under the Guidelines. The Avenor Board believes that, except for the
President and Chief Executive Officer, all of its current Avenor Board members
are both "unrelated" and "outside" directors. The Chairman of the Board is a
non-executive chairman.
Committees
The Avenor Board has established the following permanent committees:
The Audit Committee is composed of four outside unrelated directors
and there is currently one vacancy. The Committee is charged by the Avenor
Board with the review of the annual and quarterly financial statements of
Avenor, management's discussion and analysis thereof and the annual report
prior to their approval by the Avenor Board and their dissemination to
shareholders. The Audit Committee also monitors the effectiveness in the
internal control procedures and information systems.
The Corporate Governance and Nominating Committee is composed of four
outside and unrelated directors and the President and Chief Executive
Officer of Avenor who serves as an "ex officio", non-voting member, except
for those meetings or parts of meetings of the Committee organized by the
Chairman of the Committee for the outside directors only. The Committee
evaluates, considers and makes recommendations to the Avenor Board with
respect to candidates for nomination as new Avenor Board members and
evaluates and recommends nominees for all committees of the Avenor Board.
The Committee is responsible for evaluating the overall performance of the
Avenor Board and the performance of the individual directors, developing
and monitoring Avenor's approach to governance issues and for reviewing
compensation policies for outside directors and members of committees of
the Avenor Board who are outside directors.
The Environment, Health and Safety Committee is composed of three
outside unrelated directors and the President and Chief Executive Officer
who serves as an "ex officio" member of this Committee. This Committee
currently has one vacancy. This Committee is charged with assessing the
major areas of health, safety and environmental risks and potential
liability in Avenor's activities and reviewing Avenor's programs for
reducing such risks and for compliance with applicable legislation in those
areas.
The Management Development and Compensation Committee is composed of
four outside unrelated directors and there is currently one vacancy. The
Committee reviews and acts upon the appointment and
144
<PAGE> 166
succession planning of officers and the performance evaluation of the Chief
Executive Officer. Based on the recommendations of management, the
Committee reviews and adopts, as the case may be, Avenor's benefit and
incentive plans. Finally, the Committee approves the salaries of all
officers of Avenor appointed by the Avenor Board.
The Pension Fund Review Committee is composed of four outside
unrelated directors and assists the Avenor Board in carrying out its
responsibilities with respect to the various pension funds of Avenor.
Apart from the foregoing, the Avenor Board, from time to time,
establishes ad hoc committees for a limited duration.
Decisions Requiring Prior Approval by the Avenor Board
In general, all matters of policy and all actions proposed to be taken by
Avenor which are not in the ordinary course of its operations require prior
approval of the Avenor Board or of an Avenor Board committee to which approval
authority has been delegated by the Avenor Board. In particular, the Avenor
Board approves the appointment of all executive officers, the annual capital
plan and individual capital expenditures in excess of C$10 million.
Recruiting New Directors and Assessment of Avenor Board Performance
The Corporate Governance and Nominating Committee is responsible for
presenting candidates to the entire Avenor Board for its consideration. The
effectiveness of Avenor's governance structure is reviewed by that committee and
brought to the entire Avenor Board for discussion and any necessary action.
Shareholder Communications
Avenor has a shareholder relations process to respond to shareholder
questions and concerns. All communications from shareholders are referred to the
appropriate executive officer for response, consideration or action. Management
promptly brings to the attention of the Avenor Board any significant issues
raised by shareholders. All significant communications such as Annual Reports,
Interim Financial Reports, Management Proxy Circulars, Annual Information Forms
and Annual Environmental Reports are either approved or reviewed by the Avenor
Board.
Avenor Board's Expectation of Management
The President and Chief Executive Officer, with the other executive
officers placed under his direct supervision, is charged with the implementation
of the business and strategic plans which are prepared by management and
reviewed and endorsed annually by the Avenor Board. The performance of Avenor
relative to the plans is reviewed annually by the Board and the performance of
the President and Chief Executive Officer and management is assessed relative to
the achievement of the strategic and business plans.
Outside Advisors for Avenor Board Members
The Avenor Board has a policy which enables an individual director to
engage an outside advisor at the expense of Avenor in appropriate circumstances.
Any such engagement is subject to the approval of the Corporate Governance and
Nominating Committee and requires advice to senior management of any such
action.
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PERFORMANCE GRAPH
The following performance graph shows the yearly percentage change in the
cumulative total shareholder return on Avenor's Common Shares compared with the
TSE 300 Stock Index and the TSE Paper and Forest Index.
The year-end values of each investment are based on share appreciation plus
dividends paid in cash, with the dividends reinvested on the date they were
paid. The calculations exclude trading commissions and taxes. Total shareholder
returns from each investment, whether measured in dollars or as a percentage,
can be calculated from the year-end investment values shown below the graph.
<TABLE>
<CAPTION>
Financial Year Ended December 31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Avenor Inc. C$100 C$81 C$116 C$99 C$88 C$90
TSE 300 Index 100 133 132 152 194 224
TSE Paper & Forest Index 100 93 148 143 157 139
</TABLE>
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Except as otherwise disclosed in this Joint Proxy Statement, in fiscal
1997, no director or senior officer of Avenor or any of his or her associates or
affiliates had any material interest in any transaction which has materially
affected or would materially affect Avenor or any of its subsidiaries.
DEBT
The following is a description of the change in control provisions in
certain of Avenor's debt instruments. See Note 13 to the consolidated financial
statements of Avenor included elsewhere in this Joint Proxy Statement for a
detailed discussion of Avenor's debt.
Certain of Avenor's trust indentures and credit agreements provide, among
other things, that if a person, acting alone or jointly or in concert, becomes
the beneficial owner of more than 30% of the voting securities of Avenor (the
"Designated Event") and if, within 90 days following the Designated Event, the
debt-to-capitalization ratio of Avenor (as defined in such documents) exceeds
70% (or in one case, 65%) for a period of 90 days and/or, in certain cases, if a
ratings decline of that debt occurs, Avenor may be required to repurchase all
indebtedness owing under such documents within certain time periods. Based on
amounts currently drawn under such documents, the amounts of the indebtedness
that Avenor would be required to repay under such circumstances are US$379.2
million and C$125.0 million.
Since Avenor's debt-to-capitalization ratio is currently below the
thresholds referred to in the previous paragraph, and Avenor will not be
assuming any additional debt in connection with the completion of the
Transaction, the above-described provisions will not be triggered as a result of
the Transaction. Following the
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completion of the Transaction, Avenor will be a wholly-owned subsidiary of
Bowater Canada and the debt obligations under the facilities described above
will not change as a result of the Transaction.
Certain of Avenor's credit facilities prohibit a change in control of the
ownership of Avenor without the consent of the respective financial institution.
LEGAL PROCEEDINGS
Avenor is party to ordinary routine litigation incidental to its business,
none of which is expected to have a material adverse effect on its results of
operations or financial condition.
DIVIDEND RECORD
In fiscal 1997, dividends of C$23.6 million were paid on the Avenor Common
Shares. The quarterly dividend of C$0.12 per share was reinstated by Avenor in
June 1997, following the suspension of dividend payments announced in January
1997 in anticipation of the acquisition of Repap Enterprises Ltd.
The trust indenture governing the US$75 million principal amount of 10.25%
Debentures due January 15, 2003 contains a covenant which limits the payment of
cash dividends on the Avenor Common Shares. C$75 million per year is available
for payment of cash dividends, without restrictions. The ability to pay cash
dividends in excess of that amount is based principally on Avenor's
profitability in future years.
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BOWATER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
OVERVIEW
Bowater's net income for 1997 was $54 million, or $1.25 per diluted share,
on net sales of $1.5 billion. Although lower than 1996, Bowater's net income
during the latter half of 1997 improved significantly as selling prices for
Bowater's major products improved. Net income for 1996 was $200 million, or
$4.55 per diluted share, which included gains on the sale of assets of $57
million after tax and minority interest, or $1.34 per diluted share, and
extraordinary charges of $4 million after tax, or $.09 per diluted share,
relating to the repurchase of outstanding debt. Net sales for 1996 totaled $1.7
billion.
FOURTH QUARTER OF 1997
Net income for the fourth quarter of 1997 was $30 million, or $.72 per
diluted share, on net sales of $401 million. For the fourth quarter of 1996,
Bowater earned net income of $18 million, or $.41 per diluted share, on net
sales of $372 million. Fourth quarter 1996 net income included after-tax gains
on asset sales of $19 million, or $.46 per diluted share.
Operating income for the fourth quarter of 1997 was $62 million,
significantly higher than operating income for the fourth quarter of 1996 of $8
million, as quarterly average transaction prices increased for all of Bowater's
products except directory paper and lumber. Operating income for the fourth
quarter of 1997 was also the highest since the second quarter of 1996. Bowater's
fourth quarter newsprint and market pulp average transaction prices were 7
percent higher than in the fourth quarter of 1996, while the average transaction
price for coated paper increased 14 percent. Comparing the same periods,
Bowater's shipments increased for all products except market pulp. The
devaluation of certain Asian currencies in the latter half of 1997 did not
materially affect Bowater's newsprint and market pulp export sales. In addition
to higher selling prices and shipments, Bowater's cost of sales, and selling and
administrative expenses were lower in the fourth quarter of 1997. This was due
to the absence of costs relating to Star Forms Incorporated ("Star Forms",
formerly Bowater Communication Papers Inc.), which was sold in 1996, and
expenses recognized in the fourth quarter of 1996 relating to an incentive
compensation program.
RESULTS OF OPERATIONS: 1997 COMPARED WITH 1996
Bowater's operating income was $136 million in 1997 on net sales of $1.5
billion, compared with $301 million on net sales of $1.7 billion in 1996. Annual
average transaction prices for all of Bowater's products, except market pulp and
lumber, were lower in 1997. These lower selling prices accounted for the
majority of the operating income decline. Net income for 1997 was $54 million,
compared to $200 million in 1996.
PRODUCT LINE INFORMATION: Although Bowater's operations are grouped in a
single segment, market and operating trends are discussed by major product. In
general, Bowater's products are globally traded commodities. Pricing and the
level of shipments of these products will continue to be influenced by the
balance between supply and demand as affected by global economic conditions,
changes in consumption and capacity, the level of customer and producer
inventories, and fluctuations in exchange rates.
The information provided in the following product line discussions
concerning market and industry conditions was obtained from the following
sources: the Newspaper Association of America; the Canadian Pulp and Paper
Association; the American Forest & Paper Association; and the Media Industry
Newsletter. This information is provided to enhance the reader's understanding
of Bowater's financial results and the conditions under which these results were
achieved.
Newsprint. In contrast to 1996, conditions in the newsprint market
improved throughout 1997. In 1996, newsprint consumption declined as high prices
in 1995 caused many newspaper and commercial printers to reduce usage. Lower
demand caused prices to decline and producer inventories to increase during
1996. By the
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end of the year, consumption began to increase, causing a recovery in the
newsprint market. This recovery continued throughout 1997 as consumption of
newsprint by U.S. daily newspapers and total U.S. newsprint consumption
increased compared to 1996. North American newsprint producer inventory levels
decreased, while U.S. daily newspapers' newsprint inventory increased slightly
at the end of the comparable periods. The newsprint export market experienced a
similar recovery. These improved market conditions enabled Bowater to increase
prices in 1997. In March, Bowater announced a $75 per metric tonne domestic
price increase, and in October, it announced a $35 per metric tonne domestic
price increase. Bowater realized slightly less than the anticipated increases
from these announcements. Although Bowater's average transaction price was 16
percent lower in 1997 compared to 1996, improved market conditions in 1997 led
to quarterly average transaction price increases in the second, third and fourth
quarters. Shipments were slightly higher comparing 1997 to 1996, while Bowater's
newsprint inventory at the end of 1997 was at its lowest level in Bowater's
history. In January 1998, Bowater announced a $40 per metric tonne domestic
price increase effective April 1.
Coated Groundwood. The coated paper market also improved in 1997 compared
to 1996, when coated groundwood paper demand declined due to conservation
measures and inventory reductions initiated by commercial printers and
publishers. During the first quarter of 1997, consumption began to increase and
market conditions improved. Comparing the full year of 1997 to 1996, U.S. coated
groundwood shipments and magazine ad pages increased while U.S. coated
groundwood producer inventory levels decreased. These favorable market
conditions allowed Bowater to increase coated groundwood transaction prices four
times. In April 1997, Bowater increased prices $60 per ton; in July it increased
prices between $50 and $80 per ton; in October it increased prices up to $40 per
ton; and in January 1998, it increased prices $60 per ton. The realization of
these price increases varied, however, according to market segment and the
timing of implementation. Bowater's average transaction price for the second,
third and fourth quarters of 1997 was higher than the respective prior quarters.
Compared to 1996, the average transaction price for 1997 was 15 percent lower,
while shipments increased 11 percent. Bowater's inventory at the end of 1997 was
at its lowest level since 1992.
Directory Paper. Sales of Bowater's directory products in 1997 decreased
compared to 1996. Bowater's average transaction price decreased 10 percent
compared to 1996, partially offset by an increase in shipments of 8 percent.
During 1996, demand decreased in the directory paper market caused by
conservation measures initiated by telephone directory publishers, which had the
effect of lowering prices. This also affected Bowater's prices in 1997, since a
large portion of Bowater's sales are based on contracts, the pricing of which
was determined in 1996. In addition, Bowater sold more higher priced grades of
directory paper in 1996 compared to 1997.
Market Pulp. The pulp market showed signs of improvement in 1997 in
comparison to the conditions and pricing that existed in 1996. In 1997, NORSCAN
(United States, Canada, Finland, Norway and Sweden) softwood market pulp
shipments increased compared to 1996, while NORSCAN inventory levels decreased
at the end of the comparable periods. Beginning in the second quarter of 1997,
Bowater's average transaction price began to improve, and for the full year, it
was $34 per metric tonne, or 8 percent higher compared to the average
transaction price for 1996. Shipments increased 4 percent over 1996 levels. Late
in the fourth quarter of 1997, the devaluation of Asian currencies negatively
affected pulp pricing, particularly in the export market. Bowater's market pulp
transaction prices and shipments were not materially affected.
Lumber. In the first half of 1997, favorable conditions in the lumber
market carried over from 1996, as demand from U.S. housing starts, low producer
inventories and strong foreign consumption kept market prices at or above prior
year levels. During the balance of 1997, however, prices decreased as supply
outpaced demand. In the United States, housing starts totaled 1.4 million in
1997, slightly less than 1996. In addition, a slowdown in the Japanese housing
market caused some producers to divert lumber to the U.S. market. Bowater's
average transaction price increased in the first three quarters of 1997 compared
to the same 1996 quarters. Bowater's fourth quarter 1997 average transaction
price, however, was 8 percent lower than the fourth quarter of 1996. For the
full year of 1997, Bowater's average transaction price was 10 percent higher
than 1996, while shipments were 3 percent higher.
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COST OF SALES AND OTHER INCOME AND EXPENSES: Cost of sales decreased 4
percent in 1997 compared to 1996. This decrease was due to the absence of costs
relating to Star Forms, partially offset by higher costs due to increased
shipments in 1997.
Selling and administrative expenses decreased 22 percent comparing 1997 to
1996. This decrease was also due to the absence of expenses relating to Star
Forms. In addition, administrative costs in 1996 included the major portion of
expense associated with a three-year incentive compensation plan established in
1994.
Interest expense decreased 5 percent in 1997, due to lower average debt
balances in 1997 compared to 1996. Interest income increased 2 percent,
comparing the same periods, due to higher average investment balances.
In 1997, Bowater sold 1,000 acres of timberlands resulting in a pre-tax
gain of $.8 million. In 1996, Bowater sold 121,000 acres of timberlands
resulting in a pre-tax gain of $81 million, and sold Star Forms resulting in a
gain of $17 million. Bowater did not incur any extraordinary charges in 1997. In
1996, the extraordinary charge of $4 million, net of taxes of $2 million,
represented the fees and expenses incurred to retire long-term debt.
LIQUIDITY AND CAPITAL RESOURCES: 1997 COMPARED WITH 1996
Bowater's cash, cash equivalents and marketable securities balance at
year-end 1997 was $406 million, a decrease of $25 million from $431 million at
year-end 1996.
Cash and cash equivalents increased to $229 million at year-end 1997, from
$85 million at year-end 1996, an increase of $144 million. Bowater generated
$196 million of cash from operations and $73 million from investing activities,
while it used $125 million of cash for financing activities. Significant
transactions for the year included: the maturity of $169 million of marketable
securities, the purchase of 1.6 million shares of Bowater Common Stock at a cost
of $67 million, the redemption of the remaining 500,000 shares of LIBOR Series A
(LIBOR) Preferred Stock for $25 million and the payment of cash dividends of $21
million to the minority shareholder of Calhoun Newsprint Company (CNC).
CASH FROM OPERATING ACTIVITIES: Bowater's operations generated $196
million of cash in 1997, $141 million less than the cash generated from
operations in 1996. This decrease was largely the result of lower operating
income of $166 million due to lower selling prices for most of Bowater's
products. Working capital changes, excluding taxes, were unfavorable by $114
million. Tax payments in 1997 were $136 million lower than in 1996, due to the
lower level of income in 1997. In addition, 1996 tax payments included payments
for Bowater's 1995 liability, which it was able to defer for one year.
CASH FROM INVESTING ACTIVITIES: Cash inflow from investing activities in
1997 was $73 million versus a cash outflow of $272 million in 1996. Capital
expenditures in 1997 totaled $100 million, slightly less than the $107 million
spent in 1996. Pre-tax cash proceeds from the disposal of fixed assets, timber
and timberlands totaled $4 million in 1997 versus $127 million in 1996. In 1996,
Bowater sold 121,000 acres of timberlands for $122 million. Also in 1996,
Bowater sold Star Forms resulting in net cash proceeds of $54 million. In 1997,
Bowater realized $169 million from the maturity of marketable securities, while
in 1996, it invested $345 million.
Several years ago, Bowater undertook an initiative to eliminate
non-strategic assets, including non-strategic timberland tracts. Since 1993,
Bowater has sold 434,000 acres of timberlands throughout the United States and
Canada. This includes the sale of 19,000 acres in January 1998 with gross
proceeds of approximately $30 million. Currently, Bowater owns and leases a
total of 3.5 million acres of timberlands. Sales of non-strategic timberlands
are processed through Bowater's Forest Products Division.
In September 1997, Bowater announced its plan to invest approximately $180
million over the next two years to modernize its Calhoun, Tennessee, newsprint
facility. The plan calls for a new thermomechanical pulp facility, an upgraded
woodyard and conversion of an idle recovery boiler. In addition to reducing
operating costs, these changes will have a positive environmental impact by
burning a variety of waste products that would otherwise be sent to landfills.
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In January 1998, Bowater announced its plan to invest approximately $220
million to modernize its East Millinocket, Maine, pulp and paper mill. The plan
encompasses a new thermomechanical pulp mill facility, modernization of two
paper machines, which produce newsprint and directory paper, and other
improvements to the site's energy and electrical systems. Although the project
will not increase Bowater's papermaking capacity, it is expected to reduce
operating costs and improve productivity. Construction is anticipated to begin
in early 1999 and take up to two years to complete. Bowater also announced its
intention to seek a buyer for its Millinocket, Maine, paper mill, which includes
four paper machines and related assets. This facility no longer meets Bowater's
long-term objectives.
If the Transaction does not occur, Bowater anticipates capital spending of
approximately $250 million in 1998, which includes approximately $100 million
for the Calhoun modernization. See "The Transaction--Plans and Proposals".
Also in January 1998, Bowater announced that it was in negotiations to
acquire a significant interest in the Daebul Newsprint Mill owned by Halla Pulp
& Paper Co. Ltd., which is part of the Halla Group of Seoul, Korea. The Korean
mill started up in late 1996 and has an annual production capacity of
approximately 250,000 metric tonnes of recycled newsprint for the Korean and
other Asian markets. These negotiations are continuing.
CASH FROM FINANCING ACTIVITIES: Cash flow used for financing activities
was $125 million in 1997, $119 million lower than the amount spent in 1996. In
1997, Bowater's cash dividends were $13 million lower due to reduced dividend
payments to the minority shareholder of CNC. Bowater also paid lower preferred
stock dividends due to the conversion of Bowater's 7% PRIDES Series B
Convertible Preferred Stock ("PRIDES") into Bowater Common Stock and the
redemption of Bowater's remaining shares of LIBOR Preferred Stock. In 1997,
Bowater used $2 million for current payments on long-term debt obligations,
while in 1996 it used $64 million to repurchase and extinguish outstanding debt
in addition to normal long-term debt payments. Common stock repurchases were
also lower in 1997 by $32 million, while Bowater received an additional $12
million from the exercise of stock options in 1997 compared to 1996.
In January 1997, Bowater converted all of its PRIDES resulting in the
issuance of 4,012,765 shares of Bowater Common Stock, which was reflected in the
Consolidated Balance Sheet on December 31, 1996.
In February 1997, Bowater completed the repurchase of approximately 10
percent of its outstanding common stock, purchasing 4 million shares at a cost
of $156 million, as part of a previously announced stock repurchase program.
During January and February 1997, Bowater purchased 1.4 million common shares at
a cost of $57 million. In November 1997, Bowater announced a new stock
repurchase program, authorizing it to purchase up to 10 percent of Bowater's
outstanding common stock in the open market, subject to normal trading
restrictions. In December 1997, Bowater purchased 220,000 shares under the new
program at a total cost of $10 million.
In May 1997, Bowater redeemed for $25 million the remaining 500,000
outstanding shares of LIBOR Preferred Stock at its par value of $50 per share,
plus accrued and unpaid dividends.
In January 1998, the Board of Directors of CNC declared a $31 million
dividend. As a result, $15 million was paid to the minority shareholder of CNC
in February 1998.
FUTURE OBLIGATIONS
Bowater expects to fund its future cash needs, including ongoing capital
expenditures, mill improvement programs, expenditures for environmental
compliance and debt obligations through a combination of operating cash flow,
short-term debt, and monetization of assets by sales or other methods.
ENVIRONMENTAL ITEMS
Bowater is subject to a variety of federal, state and provincial
environmental laws and regulations in jurisdictions in which it operates.
Bowater believes its operations are currently in substantial compliance with
applicable environmental laws and regulations.
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In late 1993, the U.S. Environmental Protection Agency (EPA) proposed
regulations that would impose new air and water quality standards aimed at
further reductions of pollutants. Known as the "Cluster Rule", these regulations
were issued in final form by the EPA in November 1997. Bowater's compliance
period begins in the first quarter of 1998 and extends until the year 2006;
however, the majority of the compliance requirements must be met by the year
2001. These new rules will require capital expenditures at all of Bowater's U.S.
paper mills.
Bowater anticipates spending approximately $60 million to $75 million to
comply with the new effluent guidelines, with the majority to be spent at
Bowater's Catawba, South Carolina location. Additional capital will also be
required to meet the new air quality standards. Engineering studies are
currently under way to define this additional cost, which is expected to be in
the same range as the requirement for the effluent guideline expenditure.
Bowater's capital spending plan for 1998 includes amounts relating to this study
and implementation of the new effluent quality regulations.
Other than the Cluster Rule regulations described above, Bowater
anticipates approximately $10 million to $15 million of capital expenditures per
year for the foreseeable future to maintain compliance with environmental
regulations.
Bowater is not involved in any proceeding under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, that
it believes will result in liabilities that will have a material adverse effect
on Bowater's future cash flow, financial condition or results of operations.
While it is difficult to predict with certainty the nature of future
environmental regulations, Bowater believes it will not be at a competitive
disadvantage in meeting future U.S. or Canadian standards.
ORGANIZATIONAL MATTERS
In July 1997, Bowater 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 Bowater 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 land management practices to
maximize sustainable harvest goals, selling certain non-strategic timberland
tracts and evaluating alternate financial structures that could provide an
enhanced market valuation.
Bowater 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 Bowater's opportunities to
better serve its groundwood-based customers while developing strategies for
improving financial returns.
YEAR 2000 COMPLIANCE
Since 1990, Bowater has reengineered its major internally developed
software programs. During this effort, Bowater examined potential problems
arising from the inability of certain application software programs to recognize
the year 2000. A formal review of all internally developed software was
completed in 1997. No major problems were encountered. In addition, all major
third-party licensed application software programs have been reviewed and are
either compliant or have released a compliant version to which Bowater will
migrate during 1998. The costs associated with this project are currently
expected to be less than $1 million.
ADOPTION OF ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". Comprehensive income includes net income and certain
changes in shareholders' equity. This standard requires the disclosure of
comprehensive income items in a financial statement that is displayed with the
same prominence as other financial statements. Bowater will adopt this standard
in the first quarter of 1998. It will not have an impact on Bowater's results of
operations or financial condition.
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Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This standard requires a
public company to disclose financial information about its reportable operating
segments. Reportable operating segments are to be determined on a basis
consistent with that used for internal management reporting. Bowater will adopt
this standard for the year ended 1998. It will not have an impact on Bowater's
results of operations or financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". This standard revises the
required disclosures for pensions and other postretirement benefits. Bowater
will adopt this standard for the year ended 1998. It will not have an impact on
Bowater's results of operations or financial condition.
HISTORICAL REFERENCE: 1996 COMPARED WITH 1995
Bowater's financial performance for 1996 was one of the best in its
history. Net income for 1996 was $200 million, or $4.55 per diluted share, which
included gains on the sale of assets of $57 million after tax and minority
interest, or $1.34 per diluted share, and extraordinary charges of $4 million
after tax, or $.09 per diluted share, relating to the repurchase of outstanding
debt. Net sales for 1996 totaled $1.7 billion. This compares to net income in
1995 of $247 million, or $5.22 per diluted share, on net sales of $2 billion.
Results from 1995 include: a gain on the sale of timberlands of $1 million after
tax and minority interest, or $.03 per diluted share; an after-tax charge of $14
million, or $.33 per diluted share, relating to salaried personnel reductions;
an after-tax charge of $30 million, or $.69 per diluted share, relating to the
write-down of Bowater's investment in Star Forms; and extraordinary charges of
$11 million after tax, or $.26 per diluted share, for premiums and expenses
related to the repurchase of approximately $300 million of outstanding debt.
Also included in the $5.22 per diluted share for 1995 is a $.23 per share charge
relating to the partial redemption of Bowater's 8.40% Series C Cumulative
Preferred Stock.
Bowater's operating income was $301 million in 1996 on net sales of $1.7
billion, compared with $549 million on net sales of $2 billion in 1995. Average
transaction prices for all of Bowater's products, except directory paper and
lumber, were lower in 1996. These lower selling prices accounted for over 90
percent of the operating income decline.
PRODUCT LINE INFORMATION:
Newsprint. Bowater's newsprint average transaction price for 1996
decreased 3 percent, while its newsprint shipments increased 3 percent, compared
to 1995. The decline in price was largely driven by market factors, while the
increase in shipments was due to changes in Bowater's product mix. In response
to record-high transaction prices in 1995, U.S. daily newspapers and commercial
printers instituted conservation measures to reduce newsprint usage. This, along
with lower circulation, resulted in a decline in consumption. In 1996, these
conditions continued, causing U.S. daily newspaper consumption and total U.S.
consumption to decrease compared to 1995. This decline in consumption, coupled
with high consumer and producer inventories, resulted in lower average newsprint
prices during 1996. Export market prices were also lower in 1996, caused by an
increase in North American exports and new capacity primarily in Asia.
Inventories held by U.S. daily newspapers at the end of 1996 were at 36 days of
supply, down from 43 days at the end of 1995, and from a high of 57 days at the
end of February 1996. North American producer inventories at the end of 1996
were 512,000 metric tonnes, 80 percent higher than the level at the end of 1995,
but lower than the third quarter of 1996.
Coated Groundwood. Bowater's coated groundwood paper average transaction
price decreased 15 percent in 1996 compared to the average price in 1995.
Shipments decreased 9 percent during the same periods, primarily due to the
conversion of coated book paper production to uncoated grades and lower
production associated with quality enhancements. A decline in coated groundwood
paper demand throughout 1996 caused selling prices to decline and producer
inventory levels to remain above historical averages. There were several reasons
for the shortfall in demand from 1995: commercial printers and magazine and
catalog publishers continued to reduce excess inventory levels; paper purchases
by catalog publishers for holiday catalog printing declined; and many end users
employed conservation measures to reduce paper costs. U.S.
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coated groundwood paper shipments for 1996 decreased compared to 1995, while
U.S. coated groundwood producer inventories at the end of 1996 totaled 242,000
tons compared to 113,000 tons at the end of 1995.
Directory Paper. The directory paper market experienced strong demand
during 1995 and early 1996, similar to demand in the newsprint market, causing
prices to rise significantly. Higher prices in 1996 caused many U.S. telephone
directory publishers to initiate conservation measures, decreasing the amount of
paper needed and resulting in decreased consumption compared to 1995. In the
export market, however, higher prices had a lesser impact on consumption.
Despite these market conditions, Bowater's directory paper average transaction
price increased 23 percent comparing 1996 to 1995, since a large portion of
Bowater's sales are based on contracts, the pricing of which was determined in
1995.
Market Pulp. Bowater's market pulp average transaction price for 1996
declined 45 percent from 1995's average price, while shipments increased 21
percent. The increase in shipments was due to higher market pulp production by
Bowater, as well as improving market conditions as the year progressed. The
decline in market pulp prices, which was first evident in late 1995, was a
result of lower global paper demand and rising inventories. During the second
quarter of 1996, however, the pulp market began to strengthen. This allowed
producers to increase prices by $60 per metric tonne in June, and by $50 per
metric tonne in July. A third price increase scheduled for the fourth quarter of
1996 was not implemented, as the surge in demand experienced earlier in the year
subsided and NORSCAN inventories in the fourth quarter increased from third
quarter levels.
Lumber. The average transaction price for Bowater's lumber products was 13
percent higher in 1996 versus 1995. During 1995 and the early part of 1996,
lumber prices were depressed due to the low levels of new housing starts. During
the second quarter of 1996, higher new housing starts, lower producer
inventories and higher foreign demand helped to increase prices, trends that
continued into the third and fourth quarters of 1996. For 1996, U.S. housing
starts totaled 1.5 million units, to date the highest in the decade.
Communication Papers. In November 1996, Bowater sold its Star Forms
converting business to CST Office Products, Inc., for $80 million, including $60
million in cash and a $20 million 13% Junior Subordinated Note. Bowater recorded
a gain on the sale of $17 million after tax. Star Forms' shortened operating
results for 1996 were lower than the full year of 1995, as average transaction
prices decreased 21 percent, offset in part by lower raw material costs.
COST OF SALES AND OTHER INCOME AND EXPENSES: Cost of sales decreased 3
percent from 1995 to 1996. In 1996, cost of sales continued to benefit from cost
reduction and operating efficiency programs initiated over 1994, 1995 and 1996.
In 1995, cost of sales included an $18 million charge related to salaried
personnel reductions.
Selling and administrative expenses decreased slightly from 1995 to 1996.
Included in 1996 expenses was a $22 million charge, the major portion of expense
associated with a three-year incentive compensation plan established in 1994.
The plan compensated senior management based on Bowater's significant
improvement in financial performance compared with a peer group and a 64 percent
increase in Bowater's share price, both of which were measures used in
determining expense associated with the plan. A large portion of this expense
was offset by savings and reductions in other areas. In 1995, selling and
administrative expenses included a $6 million charge related to salaried
personnel reductions.
Interest expense decreased 11 percent from 1995 to 1996, as Bowater reduced
its long-term debt by $58 million in 1996, and $300 million in 1995. Interest
income increased over 100 percent, compared to 1995, as a result of excess cash
that was invested in high-grade, short-term securities in 1996.
Other income in 1996 included a $17 million gain from the sale of Star
Forms and an $81 million gain from the sale of approximately 121,000 acres of
timberlands located primarily in Alabama, South Carolina and Maine. The 1996
extraordinary charge of $4 million, net of taxes of $2 million, represents the
fees and expenses incurred to retire long-term debt. Other income and expense in
1995 included a $2 million gain on the sale of 2,300 acres of timberlands and a
charge of $30 million relating to the write-down of Bowater's investment in Star
Forms. The 1995 extraordinary charge of $11 million, net of taxes of $7 million,
represents the fees and expenses incurred to retire approximately $300 million
of long-term debt.
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LIQUIDITY AND CAPITAL RESOURCES: 1996 COMPARED WITH 1995
Bowater's cash, cash equivalents, and marketable securities totaled $431
million at year-end 1996, increasing $166 million from the prior year-end
balance of $265 million.
Cash and cash equivalents decreased from year-end 1995, to year-end 1996,
by $179 million. Bowater's operations generated $336 million of cash during the
year while $272 million and $244 million were used for investing and financing
activities, respectively. Significant transactions for the year included the
purchase of $345 million of marketable securities, the retirement of $58 million
of debt and the repurchase of 2.6 million shares of Bowater Common Stock at a
cost of $99 million. Long-term debt decreased 7 percent during 1996, while total
shareholders' equity increased 7 percent, compared to 1995. The ratio of total
debt to total capital decreased from 38.7 percent in 1995 to 36.5 percent in
1996.
CASH FROM OPERATING ACTIVITIES: Bowater's operations generated $336
million of cash in 1996, $272 million less than the cash generated from
operations in 1995. This decrease was largely the result of lower operating
income and higher tax payments, as Bowater was able to defer $75 million of tax
payments from 1995 into the first quarter of 1996. The decrease was partially
offset by favorable working capital changes.
CASH FROM INVESTING ACTIVITIES: In 1996, Bowater invested $107 million in
its facilities, $11 million more than in 1995. The most significant project in
1996 involved making $13 million in improvements to market pulp production
facilities at the Calhoun mill. Cash from disposal of fixed assets, timber and
timberlands totaled $127 million. The large majority of this inflow was from the
sale of 121,000 acres of timberlands. Bowater also sold Star Forms, resulting in
net cash proceeds of $54 million. Lastly, Bowater invested $345 million in
marketable securities during the year. The net cash outflow from all of these
activities totaled $272 million.
CASH FROM FINANCING ACTIVITIES: During 1996, Bowater reduced fixed charges
from interest expense and preferred stock dividends. In June and July of 1996,
Bowater repurchased approximately $50 million of its $300 million 9% Debentures
due 2009 at a cost of $55 million for payment of principal, premium and
expenses. In December 1996, Bowater extinguished $5 million of debt prior to its
scheduled maturity at a cost of $5 million. Including other repayments, $64
million was used to reduce Bowater's debt balances in 1996. Also in December
1996, Bowater made the second of three $25 million installments to redeem its
LIBOR Preferred Stock and called for the redemption of all of its outstanding
PRIDES on January 9, 1997. Approximately 4.9 million outstanding Series B
depositary shares (each representing a one-fourth interest in a share of PRIDES)
would have converted into common stock at a 1 to 1 ratio as of January 1, 1998,
based on the mandatory conversion provision of the PRIDES. However, Bowater was
able to reduce the dilution to existing common shareholders by initiating the
optional conversion at a rate of .82 of a share of common stock for each
depositary share outstanding (approximately 4 million shares of common stock).
Based on an annual dividend of $.80 per share, cash dividends on the newly
issued common stock represent $5 million in annual savings versus the previous
enhanced dividend on the PRIDES.
In January 1996, the Board of Directors of CNC declared a $60 million
dividend. As a result, $29 million was paid to the minority shareholder. In
December 1996, the Board of Directors of CNC declared a $40 million dividend. As
a result, $20 million was paid to the minority shareholder in January 1997.
In February 1996, the Bowater Board authorized management to repurchase up
to 10 percent of Bowater's outstanding common stock within the next 12 months.
During 1996, Bowater purchased 2.6 million shares at a cost of $99 million,
representing 66 percent of the total shares originally authorized for
repurchase.
Bowater's ratio of debt to total capital improved from 38.7 percent to 36.5
percent during 1996. Bowater achieved this reduced leverage despite repurchasing
$99 million of common shares, redeeming $25 million of LIBOR Preferred Stock and
declaring aggregate dividends of $49 million payable to the minority shareholder
of CNC. Strong company earnings and $58 million in total debt reductions
contributed to Bowater's success. As a result of 1996 transactions, interest
payments and preferred dividends were reduced on an annual basis by $5 million
and $9 million, respectively.
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THREE MONTHS ENDED MARCH 31, 1998, VERSUS MARCH 31, 1997
SUMMARY
Bowater reported 1998 first quarter earnings of $25 million, or $.59 per
diluted share. This compares to a net loss of $.3 million, or $.03 per diluted
share in the first quarter of 1997, and net income of $30 million, or $.72 per
diluted share in the fourth quarter of 1997. Included in net income for the
first quarter of 1998 was a gain on the sale of timberlands of $7 million after
tax and minority interest, or $.16 per diluted share, and an after-tax charge of
$3 million, or $.07 per diluted share, relating to the market value adjustment
of a currency hedge associated with Bowater's pending acquisition of Avenor.
First quarter 1998 net sales were $383 million, compared to $349 million for the
first quarter of 1997 and $401 million for the fourth quarter of 1997.
For the first quarter of 1998, Bowater's operating income of $46 million
increased $36 million compared to the first quarter of 1997. Higher average
transaction prices for Bowater's newsprint and coated paper products, partially
offset by lower market pulp prices and lower newsprint shipments, caused
operating income to increase.
PRODUCT LINE INFORMATION
(Unaudited, $ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Net sales:
Newsprint............................................ $183,450 $167,111
Coated groundwood.................................... 97,298 73,315
Directory paper...................................... 43,814 49,616
Market pulp.......................................... 42,675 44,185
Uncoated groundwood specialties...................... 9,061 11,520
Lumber and other wood products....................... 35,392 33,958
Distribution costs................................... (28,516) (31,198)
-------- --------
$383,174 $348,507
======== ========
Operating income....................................... $ 46,334 $ 10,123
======== ========
</TABLE>
Although all Company operations are grouped in a single segment, market and
operating trends are discussed by major product. In general, Bowater's products
are globally traded commodities. Pricing and the level of shipments of these
products will continue to be influenced by the balance between supply and demand
as affected by global economic conditions, changes in consumption and capacity,
the level of customer and producer inventories, and fluctuations in exchange
rates.
The information provided in the following product line discussions
concerning market and industry conditions was obtained from the following
sources: the Newspaper Association of America; the Canadian Pulp and Paper
Association; the American Forest & Paper Association; and the Media Industry
Newsletter and Random Lengths Yardstick publications. This information is
provided to enhance the reader's understanding of Bowater's financial results
and the conditions under which these results were achieved.
Newsprint. Bowater's newsprint average transaction price in the first
quarter of 1998 was 15 percent higher than the same period last year, while
shipments were 5 percent lower. The increase in the average quarter price was
mainly a result of higher U.S. consumption throughout 1997, which allowed
Bowater to implement two price increases during 1997. The decrease in shipments
was primarily in the export market, which was negatively affected by the weak
Asian economy. Comparing the first quarter of 1998 to the first quarter of 1997,
total U.S. newsprint consumption and consumption of newsprint by U.S. daily
newspapers increased. Ad lineage for U.S. daily newspapers also increased. At
the end of the first quarter of 1998, U.S. daily newspapers' newsprint inventory
increased compared to the same time last year, while North American mill
inventories decreased. Many newsprint consumers increased inventory in the first
quarter of 1998,
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anticipating further increases in newsprint prices. In the first quarter of
1998, Bowater announced a $40 per metric ton domestic price increase effective
April 1, based on the favorable market conditions. This price increase is
currently being implemented.
Coated Groundwood. Bowater's coated groundwood average transaction price
in the first quarter of 1998 was 26 percent higher than the first quarter of
1997 and 9 percent higher than the prior quarter. Favorable market conditions in
1997 allowed Bowater to increase prices several times during that year. Tonnage
shipments for the first quarter of 1998 also improved, increasing 5 percent
compared to the first quarter of 1997. In the first quarter of 1998, strong
consumption and moderate inventory levels continued from the previous year. U.S.
coated groundwood shipments were slightly lower in the first quarter of 1998
compared to the same period last year, while magazine advertising pages
increased. U.S. coated groundwood mill inventory levels also improved,
decreasing significantly from the first quarter of 1997. In the first quarter of
1998, Bowater was able to implement a price increase of up to $60 per ton due to
the favorable supply/demand balance.
Directory Paper. Bowater's average transaction price for directory paper
decreased 5 percent in the first quarter of 1998 compared to the first quarter
of 1997, and was relatively unchanged from the fourth quarter of 1997. Shipments
were lower comparing the first quarter periods. In 1997, consumption in the
directory paper market decreased due to conservation measures, which caused
prices to fall. In the first quarter of 1998, although conditions generally
remained the same, prices in the spot market increased slightly. Bowater's
shipments are based on contracts, and as a result, spot market price increases
may not affect Bowater's selling prices until future periods.
Market Pulp. Bowater's market pulp average transaction price for the first
quarter of 1998 decreased 4 percent compared to the first quarter of last year,
while it declined 16 percent compared to the fourth quarter of last year.
Bowater's shipments were relatively the same comparing the first quarter of this
year to the same period last year, but were significantly higher compared to the
fourth quarter of 1997. In the fourth quarter of 1997, the devaluation of Asian
currencies negatively affected pulp consumption and pricing in the export
market. This trend began to reverse in the first quarter of 1998 as NORSCAN
(U.S., Canada, Finland, Norway and Sweden producers) inventory levels of market
pulp decreased in each of the first three months of 1998 compared to year-end
1997 levels. Levels at the end of the first quarter of 1998 were also
significantly lower compared to the end of the first quarter of 1997. NORSCAN
shipments of market pulp decreased slightly in the first quarter of 1998
compared to the year ago period. Several U.S. producers have announced an
increase in export prices of $50 per metric ton effective June 1.
Bowater currently markets less than 15% of its pulp and less than 5% of its
newsprint in the Asian markets. Because Bowater has been able to redirect a
portion of that tonnage to other regions, operating income has not been
materially affected to date and is currently not expected to be materially
affected in the future by reductions in export opportunities to Asian markets.
There can be no assurance, however, that weaknesses in Asian markets will not
have a material adverse effect on pricing levels for Bowater's products. See
"Risk Factors--Risks Related to Operations After the Transaction--Effect of Weak
Asian Markets".
Lumber. The average transaction price for Bowater's lumber products
decreased 10 percent in the first quarter of 1998 compared to the year ago
period, while Bowater's shipment levels were approximately the same. Lumber
prices decreased in the first quarter of 1998 compared to the latter half of
1997, as supply continued to outpace demand. In 1997, U.S. lumber production
exceeded orders, even though U.S. consumption was at record levels. In 1998,
U.S. lumber consumption is expected to decline from the high levels of 1997 due
to lower housing starts and a decline in the repair and remodeling markets.
COST OF SALES AND OTHER INCOME AND EXPENSES
Cost of sales decreased $6 million or 2 percent in the first quarter of
1998 compared to the first quarter of last year. This decrease was due to lower
shipments of pulp and paper products in the first quarter of 1998, partially
offset by slightly higher manufacturing costs due to the weather and repairs.
Comparing the same periods, selling and administrative expenses increased $2
million or 14 percent, primarily due to higher professional and consulting fees
incurred in connection with the analyses of various acquisition opportunities.
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Interest expense for the first quarter of 1998 compared to the same period last
year was approximately the same, while interest income increased due to higher
average investment balances. In the first quarter for 1998, Bowater sold
approximately 26,000 acres of non-strategic timberlands resulting in a pre-tax
gain of $21 million. Also in the first quarter of 1998, Bowater purchased
options on the Canadian dollar at a cost of $23 million to hedge its pending
acquisition of Avenor. On March 31, 1998, Bowater adjusted the cost of the
option contracts to fair market value, which resulted in a pre-tax charge of $4
million. This amount is included on the line item entitled "Other, net" in the
Consolidated Statement of Operations. The net book value of $19 million is
included on the line item entitled "Other current assets" in the Consolidated
Balance Sheet.
Bowater's effective tax rate for the first quarter of 1998 was 38 percent
versus 37 percent in the prior year first quarter. This increase was due to
higher state and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Bowater's cash, cash equivalents, and marketable securities balance on
March 31, 1998, totaled $430 million compared to $406 million on December 31,
1997, and $350 million on March 31, 1997. Aside from cash flow from operations
and capital expenditures, Bowater had three other significant cash transactions
since December 31, 1997. These included: the sale of 26,000 acres of
non-strategic timberlands with proceeds of $31 million, the purchase of currency
options on the Canadian dollar for $23 million to hedge Bowater's pending
acquisition of Avenor, and a $15 million dividend payment to the minority
shareholder of CNC.
CASH FROM OPERATING ACTIVITIES: During the first three months of 1998,
Bowater's operations generated $72 million of cash compared to $23 million of
cash during the first three months of 1997, an increase of $49 million. This
increase was primarily the result of an increase in operating income of $36
million, a favorable change in working capital (excluding taxes) of $12 million,
and higher interest income of $2 million (due to higher average investment
balances outstanding in 1998). These increases were partially offset by higher
taxes paid of $5 million due to the higher level of income in the first quarter
of 1998 versus the first quarter of 1997.
CASH FROM INVESTING ACTIVITIES: Cash flow from investing activities in the
first three months of 1998 of $57 million was $27 million lower than the first
three months of last year. Capital expenditures for the first three months of
1998 were $14 million higher compared to the first three months of 1997, due
mainly to the modernization of the Calhoun, Tenn., newsprint facility. Bowater
expects total capital expenditures for 1998 to approximate $250 million, without
regard to the pending acquisition of Avenor.
In the first three months of 1998, Bowater sold 26,000 acres of
non-strategic timberlands resulting in proceeds of $31 million. Bowater's Forest
Products Division periodically reviews timberland holdings and makes decisions
to sell certain non-strategic tracts.
In the first three months of 1998, $63 million of net cash flow was from
the maturity of marketable securities versus $107 million in the first three
months of 1997. Included in the 1998 amount is a cash outflow of $23 million for
the purchase of currency options on the Canadian dollar to hedge Bowater's
pending acquisition of Avenor.
CASH FROM FINANCING ACTIVITIES: Cash flow used for financing activities
was $62 million lower in the first three months of 1998 compared to the year ago
period. The majority of this decrease was due to the repurchase of 1.4 million
common shares at a cost of $57 million in the first quarter of 1997. In the
first quarter of 1998, no common shares were repurchased under Bowater's new
stock repurchase program, which was announced in November 1997. Also in the
first quarter of 1998, a $15 million dividend was paid to the minority
shareholder of CNC, while $20 million was paid in the same period last year.
PENDING TRANSACTIONS
On March 9, 1998, Bowater signed a definitive agreement by which it will
acquire through its subsidiaries all of the outstanding Avenor Common Shares for
approximately C$35 per share (U.S.$24.67 per share as of March 9). The purchase
price, including assumed debt, is approximately C$3.5 billion (U.S.$2.5 billion
as of March 9). The combination has been approved by the Boards of Directors of
both companies and is subject to the approval of the shareholders of Avenor and
appropriate regulatory authorities. In addition, the Share
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Issuance is subject to approval of Bowater's shareholders. If such approval by
the Bowater Shareholders is not obtained (and certain other conditions have not
occurred), Bowater has agreed to pay Avenor a termination fee of C$70 million.
In certain other circumstances if the Avenor Board of Directors withdraws its
recommendation of the Transaction or an alternate proposal to acquire Avenor has
been made by a third party and the Transaction does not close, Avenor would be
obligated to pay Bowater C$70 million.
The Transaction will be financed through a combination of cash, additional
debt and Bowater Common Stock. The maximum number of Avenor Common Shares that
may be exchanged for cash may not exceed 60 percent (subject to adjustment for
dissenting shares) and could be as low as 50 percent. Conversely, the maximum
number of Avenor Common Shares that can be exchanged for equity could be as much
as 50 percent, but not less than 40 percent. Bowater anticipates using its
existing cash reserves and a new $1 billion credit facility to fund the cash
portion of the transaction. Bowater intends to sell Avenor's uncoated freesheet
mill and pulp mill in Dryden, Ontario and expects to use a substantial portion
of the proceeds to repay debt.
Avenor is an international forest products company that manufactures
newsprint, pulp, uncoated freesheet paper and wood products. In 1997, its net
sales were C$2.0 billion, and at December 31, 1997, its total assets were C$2.7
billion. If the acquisition is consummated, Bowater will double its annual
newsprint and groundwood paper making capacity and become a major producer of
market pulp, making it a leading global newsprint producer and the third largest
market pulp producer in North America.
In January 1998, Bowater announced that it was in negotiations to acquire a
significant interest in the Daebul Newsprint Mill owned by Halla Pulp & Paper
Co. Ltd. ("Halla"), which is part of the Halla Group of Seoul, Korea. The Korean
mill, which is located on the southwest coast of South Korea, started up in late
1996 and has an annual production capacity of approximately 250,000 metric
tonnes of recycled newsprint for the Korean and other Asian markets. In April
1998, Bowater signed an agreement with Halla to acquire the Daebul Newsprint
Mill. Completion of the transaction is subject to the satisfaction of several
conditions, including the elimination of the mill's indebtedness and approval by
the shareholders of Halla (which has occurred) and by appropriate Korean
regulatory authorities. Bowater anticipates that the transaction will be
completed within two months and currently expects that the final purchase price
will be in the range of $205 million to $210 million.
Also in January 1998, Bowater announced its plan to invest approximately
$220 million to modernize its East Millinocket, Maine, pulp and paper mill. The
plan encompasses a new thermomechanical pulp mill facility, modernization of two
paper machines, which produce newsprint and directory paper, and other
improvements to the site's energy and electrical systems. Although the project
will not increase Bowater's paper making capacity, it is expected to reduce
operating costs and improve productivity. Construction is anticipated to begin
in early 1999 and take up to two years to complete. Bowater also announced its
intention to seek a buyer for its Millinocket, Maine, paper mill, which no
longer meets Bowater's long-term objectives. This facility includes four paper
machines and related assets. During the course of marketing the Millinocket
properties, Bowater received unsolicited expressions of interest in purchasing
all of Bowater's properties located in the State of Maine (which includes the
Millinocket mill, a mill located in East Millinocket, a hydroelectric facility,
a sawmill and two million acres of timberlands). Bowater does not intend to
enter into discussion with respect to these inquiries during the pendency of the
Avenor transaction.
CREDIT FACILITY
In March 1998, Bowater received a commitment letter from Chase to provide
and syndicate a new $1 billion credit facility. This new facility will replace
Bowater's current $150 million credit facility and will have two separate
components: a $650 million, 364-day facility and a $350 million, five-year
facility. Borrowings under the facilities will incur interest based, at the
option of Bowater, on specified market interest rates plus a margin tied to the
credit rating of Bowater's long-term debt. The new facility will be subject to
customary terms and is expected to close in June 1998.
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YEAR 2000 COMPLIANCE
Since 1990, Bowater has reengineered its major internally developed
software programs. During this effort, Bowater examined potential problems
arising from the inability of certain application software programs to recognize
the year 2000. A formal review of all internally developed software was
completed in 1997. No major problems were encountered.
In addition, all major third-party licensed application software programs
have been reviewed and are either compliant or have released a compliant version
to which Bowater will migrate in 1998. The costs associated with these projects
are currently expected to be less than $1 million. Bowater continues to review
all other manufacturing equipment systems, as well as third parties with whom it
conducts business. Although the results of these reviews are not yet complete,
Bowater does not expect the costs associated with these projects to have a
material adverse effect on its results of operations or financial condition.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This standard requires a
public company to disclose financial information about its reportable operating
segments. Reportable operating segments are to be determined on a basis
consistent with that used for internal management reporting. Bowater will adopt
this standard for the year ended 1998. It will not have an impact on Bowater's
results of operations or financial condition.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". This standard revises the
required annual disclosures for pensions and other postretirement benefits.
Bowater will adopt this standard for the year ended 1998. It will not have an
impact on Bowater's results of operations or financial condition.
INFORMATION CONCERNING BOWATER
BUSINESS
General
Bowater (as used in this section, the term "Bowater" includes, when
applicable, its consolidated subsidiaries) is engaged in the manufacture, sale
and distribution of newsprint, directory paper, uncoated groundwood specialties,
coated groundwood paper, market pulp and lumber. Bowater operates facilities in
both the United States and Canada, and, as of December 31, 1997, managed and
controlled approximately 3.5 million acres of timberlands to support these
facilities. Bowater markets and distributes its various products in North
America, Latin America, Europe, Asia and the Pacific Rim.
Bowater was incorporated in Delaware in 1964. Bowater's principal executive
offices are located at 55 East Camperdown Way, Greenville, South Carolina 29601,
and its telephone number at that address is (864) 271-7733.
All three of Bowater's divisions have been classified within a single
business segment, Pulp, Paper and Related Products. For information regarding
net export sales, see Note 22 to Bowater's consolidated financial statements
included with this Joint Proxy Statement. For information regarding Bowater's
fixed assets, see Note 8 to Bowater's consolidated financial statements included
with this Joint Proxy Statement.
For a more detailed discussion of Bowater's liquidity and capital
resources, see "Bowater Management's Discussion and Analysis of Financial
Conditions and Results of Operations".
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For information regarding the sales of real property and subsidiaries, see
Note 4 to Bowater's consolidated financial statements included with this Joint
Proxy Statement.
Operating Divisions
Bowater operates through three divisions: the Newsprint and Directory
Division, the Coated Paper and Pulp Division and the Forest Products Division.
In 1997, Bowater consolidated its directory paper business into the former
Newsprint Division, replacing the Great Northern Paper Division. In addition,
Bowater reorganized its United States and Canadian forest and wood products
operations into a new division called the Forest Products Division.
The Newsprint and Directory Division consists of four manufacturing
facilities: the Calhoun Operations and Calhoun Newsprint Company ("CNC") (which
is owned approximately 51 percent by Bowater and approximately 49 percent by
Herald Company, Inc.) located in Calhoun, Tennessee; Bowater Mersey Paper
Company Limited (the "Mersey Operations") (which is owned 51 percent by Bowater
and 49 percent by The Washington Post Company) located in Liverpool, Nova
Scotia; Great Northern Paper, Inc. ("GNP"), East Operations located in East
Millinocket, Maine; and GNP, Millinocket Operations located in Millinocket,
Maine. This division is also supported by four domestic sales offices, which are
responsible for marketing all of Bowater's domestic newsprint, directory paper
and some uncoated groundwood specialties. Bowater Asia Pte Ltd (formerly Paper
Traders International Pte Ltd), a wholly-owned subsidiary located in Singapore,
is responsible for Bowater's newsprint sales in Asia and Pacific Rim countries.
The Coated Paper and Pulp Division consists of the Catawba Operations
located in Catawba, South Carolina, and three sales offices. This division is
responsible for selling all of Bowater's coated groundwood paper, as well as all
of Bowater's market pulp and some uncoated groundwood specialties.
The Forest Products Division consists of three manufacturing facilities:
Bowater Lumber Company located in Albertville, Alabama; Bowater Mersey Paper
Company Limited Oakhill Sawmill (which is owned 51 percent by Bowater and 49
percent by The Washington Post Company) located in Bridgewater, Nova Scotia; and
Pinkham Lumber Company located in Ashland, Maine. This division is supported by
four business offices and is responsible for managing Bowater's timberlands and
selling all of Bowater's timber, softwood lumber and non-strategic timberlands.
Newsprint, Directory Paper and Uncoated Groundwood Specialties
Bowater is the largest manufacturer of newsprint and directory paper in the
United States. Including its Mersey Operations, Bowater's annual production
capacity of newsprint, directory paper and uncoated groundwood specialties is
approximately 8 percent of the North American capacity total and approximately 4
percent of the worldwide capacity total. Its market share in the United States
is 9 percent. These amounts were generated internally using data from Paper
Trader, a monthly publication by Resource Information Systems, Inc.
The Calhoun Operations, located on the Hiwassee River in Tennessee, is one
of the largest and most productive newsprint mills in North America. At this
facility, Bowater operates four paper machines, which produced 594,000 tons of
newsprint and uncoated groundwood specialties in 1997. Also located at this
facility is CNC's paper machine, which produced 239,000 tons of newsprint in
1997. Although Bowater manages and operates the entire facility, CNC also owns
68.4 percent of the thermomechanical pulp ("TMP") mill and 100 percent of the
recycled fiber plant at the facility. Bowater owns the remaining 31.6 percent of
the TMP mill and 100 percent of the other assets at this location. These other
assets include kraft and stone groundwood pulp mills and other support equipment
necessary to produce the finished product. Bowater is currently in the process
of expanding the TMP mill at this location.
The Mersey Operations, located on an ice-free port providing economical
access to ports along the eastern seaboard of the United States and throughout
the world, has two paper machines. Built in 1929, they were rebuilt between 1983
and 1985 and produced 263,000 tons of newsprint in 1997. This facility also
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operates a TMP mill, a wastewater treatment facility and other support equipment
required to produce the finished product.
Newsprint, directory paper and uncoated groundwood specialties are also
produced at three other Bowater locations. The newsprint machine at the Catawba
Operations, located on the Catawba River in South Carolina, produced 248,000
tons in 1997 and is one of the largest and most productive newsprint machines in
the industry. Bowater's East Millinocket Operations, located on the West Branch
of the Penobscot River in northern Maine, has two paper machines that were built
in 1954 and rebuilt in 1986. These two machines produced a total of 296,000 tons
of newsprint, directory paper and uncoated groundwood specialties in 1997. This
facility also operates a groundwood pulp mill, a recycled fiber plant and other
support equipment required to produce the finished product. Beginning in 1999,
Bowater plans to modernize this facility over a two-year period at an estimated
cost of $220 million. Bowater's Millinocket Operations, located eight miles from
the East Millinocket Operations, has four paper machines that produced 128,000
tons of directory paper and uncoated groundwood specialties in 1997. These paper
grades are used in directories, catalogs, newspaper advertising inserts and
magazines, and are sold primarily to customers east of the Mississippi River.
Bowater is seeking a buyer for this facility as it no longer meets Bowater's
long-term objectives.
Domestic newsprint, directory paper and uncoated groundwood specialty paper
sales are made directly by Bowater through its regional sales offices located
near major metropolitan areas in the eastern half of the United States. Sales to
Asia and Pacific Rim countries are made through Bowater Asia Pte Ltd, while the
balance of export sales is made primarily through international sales agents
local to their markets. CNC's minority shareholder and its affiliates purchase
the equivalent of all of CNC's annual output, and The Washington Post Company
purchases approximately 70,000 tons of newsprint annually. Combined, these two
customers in 1997 accounted for approximately 9 percent of Bowater's
consolidated net sales and approximately 20 percent of Bowater's newsprint net
sales. Bowater distributes newsprint, directory paper and uncoated groundwood
specialties by rail, truck, ship and barge.
Coated Groundwood Paper
Bowater is one of the largest producers of coated groundwood paper in the
United States and North America with approximately 11 percent and 9 percent of
the United States and North American capacity, respectively. These amounts were
generated internally using data from the American Forest and Paper Association
and Pulp & Paper Magazine. Coated groundwood paper produced by Bowater is
primarily light weight coated paper and is used in magazines, catalogs,
advertising pieces, textbooks, direct mail pieces and coupons.
Bowater manufactures a variety of coated grades on two paper machines at
the Catawba Operations and on three of the four paper machines at the
Millinocket Operations. Both machines at the Catawba Operations utilize
off-machine blade coaters. At the Millinocket Operations, two machines produce a
base stock that is coated on an off-machine blade coater while the third machine
has an on-machine roll coater. In 1997, the two coated machines at the Catawba
Operations produced 349,000 tons of coated groundwood paper, and the three
machines at the Millinocket Operations produced 124,000 tons of coated
groundwood paper. The Catawba Operations include a kraft mill, a TMP mill and
other support equipment required to produce the finished product. The
Millinocket Operations include a sulphite mill and other support equipment
required to produce the finished product.
Coated groundwood paper is sold domestically by Bowater and paper brokers
to major printers, publishers, and catalogers. It is distributed by truck and
rail from the Catawba and Millinocket facilities. These facilities are
strategically located to supply the southeastern and northeastern United States,
respectively, and jointly serve the mid-western market. Export markets are
serviced primarily through international agents.
Market Pulp
In addition to furnishing the Coated Paper and Pulp Division's internal
pulp requirements, Bowater produced 260,000 tons of softwood market pulp at its
Catawba Operations in 1997 for use by manufacturers of
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fine paper, tissues and other paper products. The Calhoun Operations produced
153,000 tons of hardwood market pulp for sale to its customers. In 1997, the
Calhoun facility benefited from a pulp dryer rebuild completed in late 1996.
This enabled Bowater to significantly increase market pulp production in 1997
from the 118,000 tons of hardwood market pulp produced by the Calhoun Operations
in 1996.
In 1997, 59 percent of Bowater's market pulp was sold to the export market.
Export sales are made through international sales agents local to their markets,
while domestic sales are made directly by Bowater and its sales agents. Bowater
distributes market pulp primarily by rail and ship.
Forest Products
In addition to market pulp and paper, Bowater sells pulpwood, sawtimber,
lumber and wood chips to a variety of customers located in the eastern United
States, the United Kingdom and Canada. Bowater also sells non-strategic
timberland tracts and provides its manufacturing facilities with a portion of
the wood needed for pulp, paper and lumber production.
At December 31, 1997, Bowater owned or managed under lease approximately
3.5 million acres of timberlands throughout the United States and Canada.
Approximately 2 million acres of these timberlands are located in the state of
Maine, 900,000 acres are located in the southeastern United States, and 600,000
acres are located in Nova Scotia. This timberland base supplies a portion of the
needs of Bowater's paper mills and sawmills, as well as many independently owned
forest products businesses. Bowater maintains one nursery and contracts with
numerous other nurseries in order to replace trees harvested from its
timberlands and from the timberlands of small private landowners. Bowater also
employs harvest activities designed to promote natural regeneration.
In 1997, Bowater consumed 8 million tons of wood for pulp, paper and lumber
production. Of this amount, 2 million tons of wood were harvested from
Bowater-owned properties, while 6 million tons were purchased, primarily under
contract, from local wood producers, private landowners and sawmills (in the
form of residual chips) at market prices. In addition, Bowater harvested 2
million tons of wood from Bowater-owned properties to sell to other sawmills and
paper companies.
Bowater operates three sawmills that produce construction grade lumber.
Bowater Lumber Company produced 95 million board feet of lumber in 1997. This
lumber is sold in the southeastern and mid-western United States. The Bowater
Mersey Paper Company Limited Oakhill Sawmill, which produced 35 million board
feet of lumber in 1997, sells to customers in eastern Canada, the northeastern
United States, and the United Kingdom. Pinkham Lumber Company produced 71
million board feet of lumber in 1997, also selling to customers in eastern
Canada and in the northeastern United States. Bowater distributes lumber by
truck and rail.
Recycling Capability
Bowater has focused its efforts in recent years on meeting the demand for
recycled-content paper products, which provides an environmental benefit in
reducing solid waste landfill deposits. In addition, this effort allows
publishers and other customers to meet recycled-content standards.
Bowater operates recycling plants at its Calhoun and East Millinocket
Operations. Taking a mixture of old newspapers and old magazines ("recovered
paper"), these plants utilize advanced mechanical and chemical processes to
manufacture high quality pulp. When this recycled fiber is combined with virgin
fiber, the resulting products, which include recycled-content newsprint,
directory paper, coated groundwood paper and uncoated groundwood specialties,
are comparable in quality to paper produced with 100 percent virgin fiber pulp.
In 1997, Bowater processed 342,000 tons of recovered paper.
Recovered paper is purchased from suppliers in the regions of Bowater's
recycling plants. These suppliers collect, sort and bale the material before
selling it to Bowater, primarily under long-term contracts, with prices and
quantities fluctuating according to market conditions. Bowater is one of the
largest purchasers of recovered paper in North America.
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Competition
In general, Bowater's products are globally-traded commodities. Pricing and
the level of shipments of these products are influenced by the balance between
supply and demand as affected by global economic conditions, changes in
consumption and capacity, the level of customer and producer inventories, and
fluctuations in exchange rates.
Newsprint and market pulp, two of Bowater's principal products, are
produced by numerous worldwide manufacturers. Aside from quality specifications
to meet customer needs, the production of newsprint and market pulp generally do
not depend upon a proprietary process or formula. There are approximately 20
major worldwide producers of newsprint with which Bowater competes. In addition,
Bowater faces actual and potential competition from numerous smaller producers
located around the world. Price, quality, service and the ability to produce
paper with recycled content are important competitive determinants. Bowater is
not a major producer in the pulp market.
Bowater competes with approximately 13 coated groundwood producers located
in North America. In addition, there are approximately six major offshore
suppliers of coated groundwood paper that sell into the North American market.
As a major supplier to printers in North America, Bowater also competes with
numerous worldwide suppliers of other grades of paper such as coated freesheet,
supercalendered and uncoated groundwood papers. 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 requires close
customer-supplier relationships.
Bowater competes with three major worldwide producers and several smaller
producers of directory paper. Price, quality and service, as well as the ability
to produce lower basis weights and recycled products, are all important
competitive determinants.
Bowater is not a major producer in the uncoated groundwood specialties or
lumber markets.
As with other globally manufactured and sold commodities, the competitive
position of Bowater's products is significantly affected by the volatility of
currency exchange rates. With several of Bowater's primary competitors 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 Bowater's ability to compete. In addition, the degree to which Bowater
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 Bowater's customers; however,
neither the timing nor the extent of those trends can be predicted with
certainty. Industry reports indicate that Bowater'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 several of Bowater's products), cable television
and the Internet. Some of these customers are also facing a decline in newspaper
readership, circulation and advertising lineage. Bowater does not believe that
this is the case in most overseas markets. Bowater's magazine and catalog
publishing customers have also been affected by the use of electronic media for
merchandising products, while benefiting from the increase in magazine and
catalog publications dealing with electronic media, especially computer hardware
and software.
Part of Bowater's competitive strategy is to be a lower-cost producer of
its products while maintaining strict quality standards and responding to
environmental concerns. Bowater's two recycling facilities have further enhanced
its competitive position by enabling it to respond to customer demand for
recycled-content newsprint, directory paper, coated groundwood paper and
uncoated groundwood specialties.
Raw Materials and Energy
The manufacture of pulp and paper requires significant amounts of wood and
energy. The wood needed for pulp, paper and lumber production is obtained from
Bowater-owned properties and purchased from local
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producers. Bowater also uses recovered paper as raw material when producing
recycled-content paper grades. See "--Forest Products" and "--Recycling
Capability" for information regarding Bowater's use of raw materials.
Steam and electrical power are the primary forms of energy used in pulp and
paper production. Process steam is produced in boilers at the various mill sites
from a variety of fuel sources. Internally generated electrical power at the
Calhoun and Catawba Operations is used to supplement purchased electrical power.
The Mersey Operations purchases all of its steam and electrical power
requirements. It has the ability, however, to produce some of its steam
requirements. GNP has the capacity to be totally 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.
Bowater 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 licenses for certain dams expired
at the end of 1993, and Bowater continued to operate those dams under interim
licenses. In October 1996, FERC issued new 30-year licenses allowing Bowater to
continue operating its hydroelectric facilities with substantially similar terms
and conditions as the old licenses. In November 1996, five intervenors filed
requests for a rehearing, generally rearguing issues already considered by FERC.
These requests are pending before FERC, and, although no assurances can be
given, management believes that the requests should not result in any material
adverse change to the terms or conditions of the licenses.
Employees
As of December 31, 1997, Bowater employed approximately 5,000 people, of
whom approximately 3,600 were represented by bargaining units. The labor
contract at Bowater's Catawba Operations, which covers all of the plant's hourly
employees, expires in April 2003. The labor contract with most of the plant's
hourly employees at the Calhoun Operations expires in July 2002. The labor
agreement for the majority of unionized employees at GNP expires in July 2001,
while all other labor agreements there expire during 2002. The labor contract
covering all unionized employees at the Mersey Operations expires in April 1998.
All plant facilities are situated in areas where adequate labor pools exist.
Relations with employees are considered good.
Trademarks and Name
Bowater owns the trademarked Bowater logo exclusively throughout the world.
Effective June 30, 1997, Bowater obtained from the former Bowater plc, now Rexam
plc, ownership of the name "Bowater" in connection with the sale of all of
Bowater's products exclusively throughout the world, with a limited exception
for a few non-conflicting uses by Rexam plc. Bowater considers its interests in
the Bowater logo and name to be valuable and necessary to the conduct of its
business.
Environmental Matters
For a discussion of Bowater's environmental matters, see "Bowater
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Bowater believes that its United States and Canadian operations are in
substantial compliance with all applicable federal, state and provincial
environmental regulations and that all currently-required control equipment is
in operation. While it is impossible to predict future environmental regulations
that may be established, Bowater believes that it will not be at a competitive
disadvantage with regard to meeting future United States or Canadian standards.
Bowater has taken positive action to address concerns about municipal solid
waste by constructing a recycled fiber plant at each of its Calhoun and East
Millinocket Operations. See "--Recycling Capability".
PROPERTIES
Information regarding Bowater's properties is described in "--Business"
above.
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In addition to the properties that it owns, Bowater also leases under
long-term leases certain timberlands, office premises, and office and
transportation equipment. Information regarding timberland leases and operating
leases is included in Note 21 to Bowater's consolidated financial statements
included with this Joint Proxy Statement.
LEGAL PROCEEDINGS
Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers'
compensation claims and other matters. Bowater's management believes that the
ultimate disposition of these matters will not have a material adverse effect on
Bowater's operations or its financial condition taken as a whole.
EXECUTIVE OFFICERS AND DIRECTORS
Bowater's executive officers, who are elected by the Bowater Board to serve
one-year terms, are listed below. There are no family relationships among
officers and no arrangements or understandings between any officer and any other
person pursuant to which the officer was selected.
<TABLE>
<CAPTION>
OFFICER/
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- --------
<S> <C> <C> <C>
Arnold M. Nemirow..... 55 Chairman, President and Chief Executive Officer/Director 1994
Arthur D. Fuller...... 54 Executive Vice President and President -- Newsprint and 1995
Directory Division
Anthony H. Barash..... 55 Senior Vice President -- Corporate Affairs and General 1996
Counsel
E. Patrick Duffy...... 56 Senior Vice President and President -- Coated Paper and Pulp 1995
Division
David G. Maffucci..... 47 Senior Vice President and Chief Financial Officer 1992
Donald G. McNeil...... 47 Senior Vice President and President -- Great Northern Paper, 1995
Inc.
James H. Dorton....... 41 Vice President and Treasurer 1996
Richard F. Frisch..... 50 Vice President -- Human Resources 1995
Richard K. Hamilton... 49 Vice President and President -- Forest Products Division 1997
Steven G. Lanzl....... 49 Vice President -- Information Technology 1996
Robert A. Moran....... 53 Vice President -- Manufacturing Services 1992
Michael F. Nocito..... 43 Vice President and Controller 1993
Wendy C. Shiba........ 47 Vice President, Secretary and Assistant General Counsel 1993
Francis J. Aguilar.... 65 Director 1984
H. David Aycock....... 67 Director 1987
Richard Barth......... 67 Director 1991
Kenneth M. Curtis..... 67 Director 1993
Charles J. Howard..... 56 Director 1997
Donald R. Melville.... 71 Director 1984
James L. Pate......... 62 Director 1996
John A. Rolls......... 57 Director 1990
</TABLE>
Arnold M. Nemirow became Chairman in March 1996, and Chief Executive
Officer in March 1995. He has been President and a director of Bowater since
September 1994 and was Chief Operating Officer from September 1994 through
February 1995. Previously he was President, Chief Executive Officer and a
director of Wausau Paper Mills Company, a pulp and paper company, from July 1990
through July 1994, Chairman, President, Chief Executive Officer and a director
of Nekoosa Papers, Inc., the business papers division of Great Northern Nekoosa
Corporation, from 1988 to March 1990 and Vice President of Great Northern
Nekoosa Corporation from 1984 to March 1990. Mr. Nemirow also serves as a
director of Interstate Energy Corporation, formerly known as WPL Holdings, Inc.
Arthur D. Fuller became Executive Vice President and President -- Newsprint
and Directory Division in August 1997. From 1995 to August 1997, he was Senior
Vice President and President -- Newsprint Division. He was Vice President
Finance, Planning & Administration of MacMillan Bloedel Packaging Inc., the
containerboard and packaging business of MacMillan Bloedel Ltd., from 1994 to
1995. From 1991 to 1993 he
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was a partner of Nukraft, which sought to develop a recycled linerboard mill,
and from 1987 to 1990 he was Vice President and General Manager of Great
Southern Paper Company, the containerboard division of Great Northern Nekoosa
Corporation. Earlier he held various management positions with Great Southern
Paper Company.
Anthony H. Barash became Senior Vice President -- Corporate Affairs and
General Counsel in April 1996. From 1993 through March 1996, he was a partner of
the law firm Seyfarth, Shaw, Fairweather & Geraldson, where he was a member of
the firm's Business Law and Real Estate Group. Previously, from 1980 to 1993, he
was a senior partner of the law firm Barash & Hill, where he also concentrated
in business and real estate law.
E. Patrick Duffy became Senior Vice President and President -- Coated Paper
and Pulp Division in 1995. He was President of the Telecommunications Business
Unit of R.R. Donnelly and Sons, a printing company located in Chicago, Illinois,
from 1993 to 1995, where he was responsible for the sale and manufacture of
printed products, and President of its Catalog Group from 1990 to 1992.
Previously he was a Senior Vice President of R.R. Donnelly and Sons.
David G. Maffucci became Senior Vice President and Chief Financial Officer
in 1995. He had served as Vice President -- Treasurer since 1993 and Treasurer
from 1992 to 1993 and relinquished the title of Treasurer in August 1996. From
1977 to 1992 he held various positions of increasing responsibility in Bowater's
Finance Department.
Donald G. McNeil became Senior Vice President in 1995, and has been
President of GNP since 1994. He was President and General Manager of Bowater
Mersey Paper Company, a subsidiary of Bowater ("Mersey"), from 1992 to 1994. He
was General Manager of Mersey from 1991 to 1992 and Assistant General Manager
from 1990 to 1991. From 1977 through 1989 he held various engineering and
management positions with Mersey.
James H. Dorton became Vice President and Treasurer in 1996. From 1990
through 1996, he was Treasurer of Intergraph Corporation, a manufacturer and
designer of computers and software for engineering applications, where he was
responsible for treasury management, corporate finance and shareholder
relations. He was Assistant Treasurer of Intergraph Corporation from 1986 to
1990.
Richard F. Frisch became Vice President -- Human Resources in 1995. He was
Director of Compensation and Benefits from 1994 to 1995. Previously he was
employed by Scott Paper Company, a pulp and paper company, at its Philadelphia,
Pennsylvania, headquarters, most recently as Director of Benefits from 1991 to
1994, where he was responsible for strategic design and management of benefit
plans.
Richard K. Hamilton became Vice President and President -- Forest Products
Division in August 1997. He was Vice President Wood Products -- Newsprint
Division from 1995 to 1997. From 1993 to 1995, he was Group Manager -- Forest
Resources Division of Georgia-Pacific Corporation, a building products and pulp
and paper company, where he was responsible for a woodlands organization
management of about 340,000 acres of timberland and the procurement, production
and sale of pulpwood, logs and wood chips. Previously, he held various woodlands
positions with Great Southern Paper Company and Scott Paper Company.
Steven G. Lanzl became Vice President -- Information Technology in 1996.
From 1992 to 1996 he was with E.I. du Pont de Nemours and Company, a diversified
chemical and petroleum products company, where he was responsible for planning
information system initiatives. Earlier he was with DuPont Asia Pacific, Ltd. in
Japan as Manager of Information Systems Planning.
Robert A. Moran became Vice President -- Manufacturing Services in 1996 and
was Vice President Pulp and Paper Manufacturing Services from 1992 to 1996. He
was Vice President -- Manufacturing Services for the Pulp and Paper Group from
1991 and Director of Planning and Development for the Pulp and Paper Group from
1988 to 1991. He also served as Assistant General Manager of the Catawba
Operations during 1988.
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Michael F. Nocito became Vice President and Controller in 1993. He was
Controller of the Calhoun Operations from 1992 to 1993 and Assistant Controller
of the Calhoun Operations from 1988 to 1992. From 1978 to 1988 he held various
positions of increasing responsibility in Bowater's Finance Department.
Wendy C. Shiba became Vice President in May 1997 and has been Secretary and
Assistant General Counsel since 1993. From 1992 to 1993, she was Corporate Chair
of the City of Philadelphia Law Department where she managed the Corporate
Group, which was responsible for all of the City's nonlitigation legal work. She
was Associate Professor of Law from 1990 to 1993 and Assistant Professor of Law
from 1985 to 1990 at Temple University School of Law, where she taught subjects
relating to corporate law and served as a consultant in legal writing and
corporate law. Earlier she practiced corporate law in the private sector.
Francis J. Aguilar is a Professor Emeritus, Harvard University Graduate
School of Business. Dr. Aguilar was a faculty member at the Harvard University
Graduate School of Business from 1965 to 1995. Since 1994, he has served as
Executive Director of the Management Education Alliance, a nonprofit educational
corporation. Dr. Aguilar is a director of Dynamics Research Corporation and
Burr-Brown Corporation and also acts as an independent business consultant.
H. David Aycock is the Retired President and Chief Operating Officer of
Nucor Corporation. Mr. Aycock was President and Chief Operating Officer of Nucor
Corporation, a steel and steel products company, from 1984 to 1991. He
previously held various management positions, including that of General Manager,
at Nucor Corporation operating units. Mr. Aycock serves as a director of Nucor
Corporation. Since retiring from Nucor Corporation, Mr. Aycock has been engaged
in managing family investments in various entrepreneurial activities.
Richard Barth is the Retired Chairman, President and Chief Executive
Officer of Ciba-Geigy Corporation. Mr. Barth became Chairman of Ciba-Geigy
Corporation, a diversified chemical products company, in 1990 and served in that
capacity until its merger into Novartis Corporation in December 1996. Mr. Barth
was President and Chief Executive Officer of Ciba-Geigy Corporation from 1986 to
1996, Chief Financial Officer from 1979 to 1986, Secretary from 1974 to 1986,
and General Counsel from 1970 to 1986. Mr. Barth is also a director of The Bank
of New York, Novartis Corporation (USA) and Imclone Systems, Inc.
Kenneth M. Curtis is a Senior Member, Curtis Thaxter Stevens Broder &
Micoleau, Limited Liability Company, P.A. Mr. Curtis was a partner in the
Portland, Maine, law firm of Curtis Thaxter Stevens Broder & Micoleau from 1975
to 1979 and from 1981 to January 1995, when the firm became a limited liability
company, of which he currently is a member. Mr. Curtis also served as President
of Maine Maritime Academy from 1986 to 1994. He was formerly Secretary of State
of Maine from 1965 to 1966, Governor of Maine from 1967 to 1975 and U.S.
Ambassador to Canada from 1979 to 1981. Mr. Curtis is a director of Key Corp.
Charles J. Howard is the Chairman, Howard, Barclay & Associates Ltd. Mr.
Howard has been Chairman of Howard, Barclay & Associates Ltd., an investment
counseling firm, since 1994. He also has been President, Chief Executive
Officer, a director and the largest shareholder of Ausnoram Holdings Limited, an
investment holding company with mining, oil and gas interests, since 1989. Mr.
Howard is also a director of Anderson Exploration Limited, Petromet Resources
Limited, Southern Africa Minerals Corporation and Unicorp Energy Corporation.
Donald R. Melville is the Retired Chairman and Chief Executive Officer of
Norton Company. Mr. Melville was Chief Executive Officer of Norton Company, a
diversified manufacturing company, from 1980 until his retirement at the end of
1987. He was Chairman from 1985 to 1987, President from 1979 to 1986, and
Executive Vice President from 1971 to 1979.
James L. Pate is the Chairman and Chief Executive Officer of Pennzoil
Company. He was named Chairman in 1994 and Chief Executive Officer in 1990. He
held the additional office of President from 1990 to 1997. Pennzoil Company is a
producer, refiner and marketer of petroleum and petroleum products.
John A. Rolls is the President and Chief Executive Officer of Thermion
Systems International. Mr. Rolls has served as President and Chief Executive
Officer of Thermion Systems International, an aerospace and
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industrial heating systems company, since March 1996. He was President and Chief
Executive Officer of Deutsche Bank North America, an international banking
company, from 1992 to March 1996. Mr. Rolls was Executive Vice President and
Chief Financial Officer of United Technologies Corporation, a diversified
aerospace and industrial products company, from 1986 to 1992. Prior to that he
was Senior Vice President and Chief Financial Officer of RCA Corporation. Mr.
Rolls is also a director of MBIA Inc., Thermion Systems International and Arguss
Holdings, Inc., formerly Conceptronic, Inc.
BOARD AND COMMITTEE MEETINGS
The Bowater Board met eight times during 1997. The Bowater Board has an
Audit Committee consisting of Messrs. Curtis, Howard and Pate, a Nominating and
Governance Committee consisting of Messrs. Barth, Aguilar, Curtis and Rolls, a
Human Resources and Compensation Committee consisting of Messrs. Aycock, Aguilar
and Melville, a Finance Committee consisting of Messrs. Rolls, Barth and Pate,
and an Executive Committee consisting of Messrs. Nemirow, Aguilar and Aycock.
The Audit Committee, which met three times in 1997, reviews the scope and
results of the annual audit of Bowater, approves the non-audit services rendered
by the independent auditors to Bowater and considers the effect of such services
on the independence of such auditors, recommends to the Bowater Board
independent auditors for the ensuing year and reviews the accounting policies of
Bowater and Bowater's systems of internal controls and internal auditing
procedures.
The Nominating and Governance Committee, which met three times in 1997,
recommends nominees for election to the Bowater Board and addresses issues of
corporate governance for Bowater Board consideration. Recommendations for
director nominees from shareholders will be considered by the Nominating and
Governance Committee. Shareholders desiring to make a recommendation to the
Nominating and Governance Committee of a director nominee proposed for election
at the 1999 Annual Meeting should comply with the procedure described under
"Proposals by Bowater Shareholders". The Committee also serves in an oversight
capacity with respect to Bowater's compliance with environmental, health and
safety regulations.
The Human Resources and Compensation Committee, which met four times in
1997, approves the adoption, amendment and termination of all employee pension
and savings benefit plans, administers executive bonus plans and awards and
stock option plans and grants thereunder, reviews programs followed by
management in developing executive resources for current and future operations
and reviews and approves the compensation of officers of Bowater.
The Finance Committee, which met three times in 1997, reviews and oversees
the financial affairs of Bowater. The Committee also provides financial
oversight and direction of Bowater's pension and savings plans, including
approving the selection of trustees and the amount of contributions to be made
by Bowater under these plans. In addition, the Committee reviews and approves
the adoption of actuarial and accounting methods and assumptions under these
plans and reviews the action of management in establishing investment policy and
administering the plans.
The Executive Committee, which met once during 1997, meets from time to
time to make decisions between meetings of the Bowater Board pursuant to
authority delegated by the Bowater Board.
All directors attended at least 75% of the aggregate of the meetings of the
Bowater Board and of Board committees on which they served in 1997.
DIRECTOR COMPENSATION
Each director who was not an employee of Bowater (an "Outside Director")
received in 1997 an annual retainer of $24,000, a fee of $1,000 per day for each
Bowater Board meeting attended and a fee of $800 per day for each Bowater Board
committee meeting attended. Each director was reimbursed for reasonable
expenses, including but not limited to transportation and lodging, incurred in
attending meetings. In addition, Outside Directors are eligible to receive
awards under the 1997 Stock Option Plan and in February 1997 each Outside
Director other than Mr. Howard was granted options with respect to 1,000 shares
of Bowater Common Stock.
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Mr. Howard became a director in April 1997 and received a prorated grant of
options with respect to 750 shares of Bowater Common Stock.
Deferred Compensation Plan for Outside Directors
The Deferred Compensation Plan for Outside Directors of Bowater
Incorporated (the "Deferred Plan") permits Outside Directors to elect
irrevocably to defer receipt of all or a part of their annual retainer and
meeting fees. Compensation that a director has elected to defer under the
Deferred Plan can be allocated to a cash account, a Bowater Common Stock account
or both accounts, in increments of ten percent, as elected by the director. On
the date on which compensation to be deferred would have been payable, a
participating director who has elected to allocate all or part of his deferred
compensation to his Deferred Plan stock account will be credited with the number
of shares of Bowater Common Stock, including fractional shares, having a value
(with a 5% discount) equivalent to the amount of deferred compensation that he
allocated to his stock account. Deferred compensation that is allocated to a
cash account will be credited on the date on which such compensation would have
been payable. Whenever dividends are paid on shares of Bowater Common Stock,
each participant's stock account will be credited with additional shares having
an undiscounted value equal to the amount of the dividend paid on a single share
of such stock, multiplied by the number of shares of Bowater Common Stock,
including fractional shares, credited to the participant's account on the
dividend record date. Amounts credited to a Deferred Plan cash account will
accrue interest on the average monthly balance of that account at a rate equal
to the rate for the Fixed Income Fund maintained for Bowater's Salaried
Employees' Savings Plan. Directors can elect to transfer balances between the
cash and stock accounts subject to certain conditions set forth in the Deferred
Plan. A participant in the Deferred Plan may elect at the time of deferral to
have his Deferred Plan account(s) distributed to him in (i) either Common Stock
or cash as soon as possible or in a stated number of years after he ceases to be
an Outside Director or (ii) cash in either five or ten installments. All of
Bowater's Outside Directors except for Messrs. Curtis and Howard have accounts
under the Deferred Plan.
Retirement Plan for Outside Directors
Bowater adopted a Retirement Plan for Outside Directors during 1988 (the
"Outside Directors' Retirement Plan"). All of Bowater's current Outside
Directors participate in the Outside Directors' Retirement Plan. The Outside
Directors' Retirement Plan provides for normal retirement benefits equal to ten
percent of the participant's annualized retainer at the termination of service
multiplied by the participant's years of service as an Outside Director of
Bowater up to a maximum of ten years. Normal retirement benefits may begin at
age 65 after the completion of five or more years of service, although early
retirement is permitted (with Bowater's consent) upon attainment of age 55 and
the completion of five years of service. Participants who elect early
commencement of benefit payments after retirement receive a reduced benefit.
The Outside Directors' Retirement Plan provides that a participant who was
an Outside Director immediately prior to a change in control of Bowater and who
is removed from or not renominated to his directorship by reason of such change
in control is entitled to the early retirement benefits provided by the plan
regardless of whether the plan requirements for early retirement have been
satisfied.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Bowater knows of no person who, or group that, owns beneficially more than
5% of the outstanding shares of Bowater Common Stock as of June 8, 1998, except
as set forth below:
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
AMOUNT AND NATURE OF PERCENT OF USING 50% USING 60%
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS CASH(2) CASH(3)
------------------------------------ -------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Tiger Management L.L.C.(4)................. 5,200,600(4) 12.82% 9.42% 9.94%
Tiger Performance L.L.C.(4)
101 Park Avenue
New York, New York 10178
</TABLE>
170
<PAGE> 192
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
AMOUNT AND NATURE OF PERCENT OF USING 50% USING 60%
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS CASH(2) CASH(3)
------------------------------------ -------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
The Capital Group Companies, Inc.(5)....... 3,147,900(5) 7.76% 5.70% 6.02%
333 South Hope Street
Los Angeles, California 90071
Wellington Management Company, LLP......... 2,899,880(6) 7.15% 5.25% 5.55%
(including shares held by
Vanguard/Windsor Funds, Inc.)(6)
75 State Street
Boston, Massachusetts 02109
Franklin Resources, Inc.(7)................ 2,246,700(7) 5.54% 4.07% 4.30%
777 Mariners Island Boulevard
San Mateo, California 94404
MacKay-Shields Financial Corporation(8).... 2,047,750(8) 5.05% 3.71% 3.92%
9 West 57th Street
New York, New York 10019
</TABLE>
- ---------------
(1) The amounts shown in the pro forma columns show the effect of the
Transaction on the percentage of outstanding Bowater Common Stock held by
beneficial owners of more than 5% of the outstanding shares of Bowater
Common Stock as of June 8, 1998, and have been calculated assuming a Bowater
Average Trading Price of $55.00 and a Currency Exchange Rate (the value in
Canadian dollars of one U.S. dollar) of 1.45.
(2) The amounts shown in this column assume that Avenor Shareholders elect (or
are deemed to elect) to exchange 50% of the Avenor Common Shares for Bowater
Common Stock and/or Exchangeable Shares.
(3) The amounts shown in this column assume that Avenor Shareholders elect (or
are deemed to elect) to exchange 40% of the Avenor Common Shares for Bowater
Common Stock and/or Exchangeable Shares.
(4) Tiger Management L.L.C. ("TML") reported in an amendment to Schedule 13G
dated May 11, 1998, that it has shared voting and dispositive power with
respect to 3,221,100 of the shares shown, that Tiger Performance L.L.C.
("TPL") has shared voting and dispositive power with respect to 1,952,500 of
the shares shown, and that Julian H. Robertson, Jr., the ultimate
controlling person of TML and TPL, has shared voting and dispositive power
with respect to all of the shares shown. The Schedule 13G reported that TML
and TPL are investment advisers, and that The Jaguar Fund, N.V., a
Netherlands Antilles corporation, has an interest with respect to more than
5% of the outstanding shares of Bowater Common Stock.
(5) In an amendment dated February 10, 1998, to Schedule 13G, The Capital Group
Companies, Inc. ("CGC") reported that it is the parent holding company of a
group of investment management companies that hold investment power and in
some cases voting power over the shares shown in the table above. It
reported that its subsidiary, Capital Research and Management Company, a
registered investment adviser with the same address as CGC, has sole
dispositive power with respect to 2,905,000 of the shares shown in the table
as a result of acting as investment adviser to various investment companies.
The Schedule 13G reported that the remaining shares reported as being
beneficially owned by CGC are beneficially owned by its other subsidiaries,
Capital International Limited and Capital International S.A. The Schedule
13G reported that CGC does not have investment power or voting power over
any of the shares shown in the table above; however, by virtue of its
subsidiaries, CGC reported that it may be deemed to have sole voting power
with respect to 242,900 of the shares shown in the table above and sole
dispositive power with respect to all of the shares.
(6) As of March 31, 1998, Wellington Management Company, LLP ("WMC") reported
that it has shared voting power with respect to 2,100 of the shares shown
and shared dispositive power with respect to all of the shares shown. WMC
serves as investment adviser to a number of clients, which have the right to
receive, or the power to direct the receipt of, dividends from, or the
proceeds of the sale of, the shares shown in the table and that one of those
clients, Vanguard/Windsor Funds, Inc., has such rights with respect to more
than 5% of the outstanding shares of Bowater Common Stock.
(7) Franklin Resources, Inc. ("FRI") informed Bowater on June 16, 1998 that, as
of March 31, 1998, the securities shown in the table above are beneficially
owned by one or more investment companies or other managed accounts that are
advised by direct or indirect investment advisory subsidiaries of FRI. The
investment advisory subsidiaries have investment and/or voting power over
the securities owned by their investment advisory clients. Accordingly, such
subsidiaries may be deemed to be the beneficial owner of the securities
shown in the table. Charles B. Johnson and Rupert H. Johnson, Jr. (the "FRI
Principal Shareholders") (each of whom has the same business address as FRI)
each own in excess of 10% of the outstanding common stock of FRI and may be
deemed to be the beneficial owners of securities held by persons and
entities advised by FRI subsidiaries. The Schedule 13G reported that one of
the investment adviser subsidiaries, Templeton Global Advisors Limited
(whose address is Lyford Cay, P.O. Box N-7759, Nassau, Bahamas), has sole
voting and dispositive power with respect to 1,070,600 of the shares shown;
Franklin Mutual Advisers, Inc. (whose address is 51 John F. Kennedy Parkway,
Short Hills, NJ 07078) has sole voting and dispositive power with respect to
171
<PAGE> 193
1,149,300 of the shares shown; Templeton Investment Counsel, Inc. (whose
address is 500 E. Broward Blvd., Suite 2100, Fort Lauderdale, FL 33394) has
sole voting and dispositive power with respect to 10,000 of the shares
shown; Franklin Advisers, Inc. (who has the same address as FRI) has sole
voting and dispositive power with respect to 8,800 of the shares shown; and
Templeton Investment Management Limited (whose address is Saltire Court, 20
Castle Terrace, Edinburgh, Scotland EH1 2EH) has sole voting and dispositive
power with respect to 8,000 of the shares shown. Each of FRI, the FRI
Principal Shareholders and the investment advisory subsidiaries disclaims
any economic interest or beneficial ownership in the shares shown in the
table above and are of the view that they are not acting as a "group" for
purposes of Securities Exchange Act of 1934, as amended.
(8) MacKay-Shields Financial Corporation ("MSFC") informed Bowater on June 11,
1998, that it has shared voting power and shared dispositive power with
respect to all of the shares shown. MSFC reported that it serves as
investment manager to a number of clients who have the right to receive and
the ultimate power to direct the receipt of dividends from, or the proceeds
of the sale of, the shares shown in the table above. MSFC reported that none
of such clients had an interest with respect to more than 5% of the
outstanding shares of Bowater Common Stock.
No officer or director owns any Bowater Series C Preferred Stock. As of
June 8, 1998, ownership of Bowater Common Stock by each of the directors, by
each of the executive officers named in the Summary Compensation Table, and by
all directors and executive officers of Bowater, as a group, was as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2)
- ------------------------ ----------------------- -------------------
<S> <C> <C>
Arnold M. Nemirow................................ 326,594(3) *
Arthur D. Fuller................................. 59,812(4) *
E. Patrick Duffy................................. 58,258(5) *
Anthony H. Barash................................ 11,890(6) *
David G. Maffucci................................ 48,243(7) *
Francis J. Aguilar............................... 21,396(8) *
H. David Aycock.................................. 12,695(9) *
Richard Barth.................................... 9,792(10) *
Kenneth M. Curtis................................ 1,500(11) *
Charles J. Howard................................ 6,375(12) *
Donald R. Melville............................... 5,069(13) *
James L. Pate.................................... 3,477(14) *
John A. Rolls.................................... 10,936(15) *
Directors and Executive Officers as a Group (21
persons)....................................... 806,418(16) 1.95%
</TABLE>
- ---------------
* Represents holdings of less than 1% of the outstanding shares of Bowater
Common Stock.
(1) Units in one or more Bowater Common Stock funds of the Bowater Incorporated
Salaried Employees' Savings Plan (the "Savings Plan") are allocated to the
accounts of officers of Bowater. These funds hold Bowater Common Stock and
relatively small amounts of short-term investments. The number of shares of
Bowater Common Stock shown in the table is an approximation provided by the
Savings Plan administrator in a statement for the period ending March 31,
1998, based on the market value of the applicable units. This table also
includes shares allocated under Bowater's Compensatory Benefits Plan based
on a statement for the period ending March 31, 1998. Additional shares of
Bowater Common Stock may have been allocated to the accounts of
participants in the Savings Plan or Compensatory Benefits Plan since the
date of the last statements from the plan administrators. Participants in
the Compensatory Benefits Plan have no voting power with respect to share
allocations, but receive cash payouts based on the number of shares
allocated to their accounts under the plan upon their retirement from
Bowater, death, disability or other termination of employment (if they have
three years of service), and do not have investment power over share
allocations prior to that time. The number of shares allocated under each
of the Savings Plan and the Compensatory Benefits Plan is subject to
revision in order to comply with requirements respecting nondiscrimination
standards and limitations on contributions under the Internal Revenue Code
of 1986, as amended (the "Code").
(2) Pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended, percentages of total outstanding shares have been
computed on the assumption that shares of Bowater Common Stock that can be
acquired within 60 days of June 8, 1998, upon the exercise of options by a
given person are outstanding, but no other shares similarly subject to
acquisition by other persons are outstanding.
(3) Represents 20,000 shares owned directly, 507.76 shares owned in the Savings
Plan, 305,000 shares that may be acquired under options currently
exercisable and 1,086.20 shares allocated under the Compensatory Benefits
Plan.
(4) Represents 10,000 shares owned directly, 1,830.20 shares owned in the
Savings Plan, 47,500 shares that may be acquired under options currently
exercisable and 481.86 shares allocated under the Compensatory Benefits
Plan.
(5) Represents 379.79 shares owned in the Savings Plan, 57,500 shares that may
be acquired under options currently exercisable and 377.85 shares allocated
under the Compensatory Benefits Plan.
172
<PAGE> 194
(6) Represents 1,000 shares owned directly, 100 shares held in the Seyfarth,
Shaw, Fairweather & Geraldson Retirement Plan for Partners, 584.43 shares
owned in the Savings Plan, 10,000 shares that may be acquired under options
currently exercisable and 205.34 shares allocated under the Compensatory
Benefits Plan.
(7) Represents 2,100 shares owned directly, 895.50 shares owned in the Savings
Plan, 45,000 shares that may be acquired under options currently
exercisable and 247.59 shares allocated under the Compensatory Benefits
Plan.
(8) Represents 12,884.12 shares owned directly, 8,011.42 shares allocated under
the Deferred Plan and 500 shares that may be acquired under options
currently exercisable.
(9) Represents 500 shares owned directly, 11,695.01 shares allocated under the
Deferred Plan and 500 shares that may be acquired under options currently
exercisable.
(10) Represents 9,292.37 shares allocated under the Deferred Plan and 500 shares
that may be acquired under options currently exercisable.
(11) Represents 1,000 shares owned directly and 500 shares that may be acquired
under options currently exercisable.
(12) Represents 1,000 shares owned directly, 5,000 shares owned by Ausnoram
Holdings Limited, of which Mr. Howard is the President, Chief Executive
Officer and largest shareholder, and 375 shares that may be acquired
subject to options currently exercisable.
(13) Represents 500 shares owned directly, 4,069.34 shares allocated under the
Deferred Plan and 500 shares that may be acquired under options currently
exercisable.
(14) Represents 1,000 shares owned directly, 1,976.59 shares allocated under the
Deferred Plan and 500 shares that may be acquired under options currently
exercisable.
(15) Represents 10,436.48 shares allocated under the Deferred Plan and 500
shares that may be acquired under options currently exercisable.
(16) This total represents 57,034.09 shares owned directly, 12,491.94 shares
allocated under the Savings Plan, 3,035.27 shares allocated under the
Compensatory Benefits Plan, 45,481.21 shares allocated under the Deferred
Plan, and 688,375 shares subject to options currently exercisable. The
number of shares allocated to the accounts of certain executive officers
under each of the Savings Plan and Compensatory Benefits Plan is subject to
revision in order to comply with requirements respecting nondiscrimination
standards and limitations on contributions under the Code. The beneficial
ownership stated above represents sole voting and investment power, except
as indicated above.
HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources and Compensation Committee (the "Committee") develops
and administers the compensation programs for Bowater's executive officers. The
Committee's goal is to develop executive compensation programs that are
consistent with strategic business objectives.
The Committee is composed entirely of independent, nonemployee directors
who have not served as officers of Bowater and have no interlocking
relationships, as defined by the Securities and Exchange Commission.
Key Elements and Policies for Compensation of Executive Officers
Bowater's basic policy for executive officers is that compensation should
vary depending on Bowater's success in the following areas:
- Performance versus Bowater's financial and strategic objectives, and
- Creation of shareholder value.
The key elements of Bowater's 1997 executive compensation program were base
salary, the Annual Bonus Plan, the 1997-1999 Long-Term Incentive Plan (the "LTIP
Plan") and stock options.
- To determine appropriate compensation levels within each pay
component, the Committee considered all elements of the executive
compensation program. Base salaries and targeted annual bonus payouts
for executive officers generally were set near the median of
comparable executives in the paper and forest products industry.
Executive officers had the opportunity to earn above-median levels of
compensation through the Annual Bonus Plan if Bowater attained
above-median performance. Actual total compensation depended on
Bowater's performance.
- Competitive market data were provided by an independent compensation
consultant. Bowater reviewed the pay practices of companies in the
paper and forest products industry, as well as other general industry
companies with annual revenues similar to Bowater's. The Committee
believed this criterion provided reasonable pay comparisons, enabling
Bowater to assure that executives
173
<PAGE> 195
were being paid fairly, while assuring shareholders and Bowater that
executive pay levels were reasonable.
- The group of companies used for independent compensation comparisons
included many of Bowater's peer companies included in the Dow Jones
Paper Products Group listed in the Total Shareholder Return chart
below. The list was expanded, however, to include other paper and
forest products companies and similar-sized general industry companies
that are not a part of the Dow Jones Paper Products Group. This
decision was based on the Committee's belief that the recruitment of
executive talent should not necessarily be limited to the companies
used in the Dow Jones group.
Base Salary
Executive officers' salaries are generally set to place them near median
levels of executive compensation at comparable companies as described above,
considering the scope of the individual's responsibilities relative to the
responsibilities of executives at comparable companies.
- Competitive market considerations form the primary basis for setting
base salary levels, since performance plays such a large role in
determining annual and long-term incentives. However, in setting base
salary levels, the Committee also considers the officer's performance
against individual objectives during the preceding year, the profits
of the individual's business unit relative to plan during the
preceding year for business unit executives, and the profits of
Bowater during the preceding year for officers with corporate-wide
responsibilities.
Annual Bonus Plan
The Annual Bonus Plan for 1997 used three performance measures: Return on
Net Assets ("RONA") (weighted 50%), Return on Capital Spending (weighted 25%)and
Mill Performance (weighted 25%):
- RONA was measured at the divisional and corporate levels (50%
consolidated RONA for corporate employees; 25% consolidated RONA and
25% divisional RONA for divisional employees), with awards based on
performance relative to goals established at the beginning of the
year. The capital intensive nature of Bowater's business means that it
is critical to evaluate earnings in the context of the resources
required to generate them. In addition, there has been a strong
historical relationship between RONA and market valuation for
companies in the paper and forest products industry.
- Return on Capital Spending targets were set at the divisional level to
reflect Bowater's priority to spend capital dollars on the highest
return capital projects. Consolidated results were used for corporate
employees.
- Mill Performance goals were established to reflect Bowater's desire to
improve performance in the areas of safety, productivity, quality and
cost reduction. These goals mirror the performance criteria
established for Bowater's gainsharing programs, which generally apply
to employees not in the Annual Bonus Plan. Divisional results were
used for divisional employees and consolidated results were used for
corporate employees.
Bowater's performance during 1997 was substantially above budgeted levels
in two measures and below budgeted levels in the remaining measure, resulting in
bonus payouts that generally were above targeted levels.
Long-Term Incentive Plan
The LTIP Plan, which was approved by Bowater's shareholders, is designed to
link rewards paid to key executives with Bowater's performance. The LTIP Plan
has a three-year plan cycle consisting of fiscal years 1997, 1998 and 1999. At
the beginning of the plan cycle, units were assigned to each participant based
on the participant's position rank. Payouts under the LTIP Plan will depend upon
Bowater's average RONA as compared to the RONA of a group of designated peer
companies, as well as upon the average daily closing
174
<PAGE> 196
price of the Common Stock for each year during the plan cycle. No payout will be
made under the LTIP Plan unless Bowater's average RONA exceeds the average RONA
of the peer group companies. The current number of participants in the LTIP Plan
is approximately 25.
Stock Options
Stock options continue to play an important role in linking executives'
compensation to Bowater's Common Stock performance, and thus to the interests of
shareholders. The 1997 Stock Option Plan, which was approved by Bowater's
shareholders, provides 1,000,000 shares of Common Stock available to be
distributed to key employees, officers and nonemployee directors. The number of
options granted to each executive officer is based on the executive's position
rank. In 1997 stock options were granted with an exercise price equal to the
fair market value (as defined in the Stock Option Plan) of the Common Stock on
the date of grant. Accordingly, the options have value to the option holder only
if the stock price appreciates.
The Committee believes this design focuses executives on the creation of
shareholder wealth over the long term.
Policy with Respect to Corporate Tax Deduction Limit
The Committee generally intends to administer the executive pay program so
that the corporate tax deduction for compensation to executives is maximized
under Section 162(m) of the Code. In order to maintain flexibility to attract
and retain qualified executives, the Committee may allow for non-deductible
compensation. Bowater paid certain non-deductible compensation to Mr. Nemirow in
1997, the impact of which was not material to Bowater.
Compensation of the CEO During 1997
The Committee annually reviews Mr. Nemirow's salary level and considers
such factors as tenure, individual performance and contribution to Bowater's
success when contemplating future salary adjustments. Mr. Nemirow's 1997 salary
and his payout under the Annual Bonus Plan for 1997 were determined on the same
basis as the base salaries and payouts under the Annual Bonus Plan for all
executive officers, as described above. In addition, stock options for 50,000
shares of Common Stock were granted to Mr. Nemirow in 1997 and 10,524 units were
assigned to him under the LTIP Plan formula. These options and units have terms
identical to, and were determined on the same basis as, those of all executive
officers as described above.
All members of the Human Resources and Compensation Committee concur in
this report.
H.D. Aycock (Chairman)
F.J. Aguilar
D.R. Melville
175
<PAGE> 197
EXECUTIVE COMPENSATION
The following table sets forth information concerning all compensation paid
by Bowater and its subsidiaries during the last three fiscal years ended
December 31, 1997, to the Chief Executive Officer and to each of the four
executive officers other than the Chief Executive Officer with the highest
salaries and bonuses during fiscal year 1997 (such officers are referred to
collectively as the "Bowater Named Executive Officers") for services rendered in
all capacities to Bowater and its subsidiaries during these fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ------------- ---------
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION OPTIONS/SARS PAYOUTS COMPENSATION
DURING 1997 YEAR SALARY($) BONUS($) ($)(1) (#) ($)(2) ($)
- --------------------------- ---- --------- -------- ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arnold M. Nemirow............. 1997 650,000 466,869 -- 50,000 0 31,250(3)
Chairman, President and Chief 1996 600,000 267,120 -- 50,000 3,050,501 25,320
Executive Officer 1995 491,667 573,000 -- 250,000 0 1,860
Arthur D. Fuller.............. 1997 333,333 182,248 -- 20,000 0 16,060(4)
Executive Vice President and 1996 290,000 110,200 1,301(5) 27,500 845,807 12,649
President -- Newsprint & 1995 242,629 198,000 -- 20,000 0 0
Directory Division
E. Patrick Duffy.............. 1997 310,000 157,220 -- 20,000 0 13,987(6)
Senior Vice President and 1996 290,000 92,104 -- 27,500 740,081 9,222
President -- Coated Paper & 1995(7) 187,500 144,750 -- 20,000 0 0
Pulp Division
Anthony H. Barash............. 1997 280,000 134,075 -- 20,000 0 12,664(8)
Senior Vice 1996(9) 195,000 57,876 -- 30,000 0 8,268
President -- Corporate
Affairs and General Counsel
David G. Maffucci............. 1997 275,000 131,681 -- 20,000 0 12,344(10)
Senior Vice President 1996 234,900 71,766 -- 27,500 852,544 10,909
and Chief Financial Officer 1995 157,647 94,721 -- 8,000 0 6,399
</TABLE>
- ---------------
(1) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of the total salary and bonus of any Bowater Named Executive
Officer for the years shown.
(2) The totals shown in this column for 1996 include amounts paid in 1997
pursuant to Bowater's Long-Term Cash Incentive Plan for the performance
period of January 1, 1994, to December 31, 1996.
(3) Amounts included under "All Other Compensation" for Mr. Nemirow for 1997
consist of Bowater contributions of $6,095 under the Savings Plan, $22,905
under the Compensatory Benefits Plan and $2,250, which is the amount that a
third party would charge to provide Mr. Nemirow with life insurance
coverage in excess of that otherwise available under Bowater's standard
group insurance plan. Bowater is self-insured with respect to its group
life insurance for any excess amounts.
(4) Amounts included under "All Other Compensation" for Mr. Fuller for 1997
consist of Bowater contributions of $4,400 under the Savings Plan and
$11,660 under the Compensatory Benefits Plan.
(5) This amount represents interest paid with respect to a deferred portion of
Mr. Fuller's payout under the 1994-1996 LTIP Plan.
(6) Amounts included under "All Other Compensation" for Mr. Duffy for 1997
consist of Bowater contributions of $4,400 under the Savings Plan and
$9,587 under the Compensatory Benefits Plan.
(7) Mr. Duffy joined Bowater in April 1995.
(8) Amounts included under "All Other Compensation" for Mr. Barash for 1997
consist of Bowater contributions of $7,354 under the Savings Plan and
$5,310 under the Compensatory Benefits Plan.
(9) Mr. Barash joined Bowater in April 1996.
(10) Amounts included under "All Other Compensation" for Mr. Maffucci for 1997
consist of Bowater contributions of $7,288 under the Savings Plan and
$5,056 under the Compensatory Benefits Plan.
176
<PAGE> 198
Stock Options
The following table sets forth information regarding options granted with
respect to Bowater Common Stock made by Bowater to the Bowater Named Executive
Officers during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(#)(1) IN 1997 PRICE($/SH) DATE(2) PRESENT VALUE($)(3)
- ---- -------------- ------------ ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Arnold M. Nemirow............ 50,000(4) 9.53% 41.8750 1/22/07 682,000
Arthur D. Fuller............. 20,000(4) 3.81% 41.8750 1/22/07 272,800
E. Patrick Duffy............. 20,000(4) 3.81% 41.8750 1/22/07 272,800
Anthony H. Barash............ 20,000(4) 3.81% 41.8750 1/22/07 272,800
David G. Maffucci............ 20,000(4) 3.81% 41.8750 1/22/07 272,800
</TABLE>
- ---------------
(1) These options were granted subject to shareholder approval of the 1997 Stock
Option Plan, which was obtained at Bowater's 1997 Annual Meeting of
Shareholders.
(2) The plan pursuant to which the options were granted and the option agreement
set forth certain earlier expiration dates.
(3) The present value of these options was calculated using the Black-Scholes
option pricing model and assuming volatility of 29.5%, a risk free return
rate of 6.4%, dividends at the rate of $.80 per share and an average
expected option life of 5.5 years. The ultimate values of the options will
depend on the future market price of the Bowater Common Stock. The actual
value, if any, an optionee will realize upon exercise of an option will
depend on the excess of the market value of the Bowater Common Stock over
the exercise price on the date the option is exercised.
(4) Options with respect to 50% of the shares of Bowater Common Stock covered
thereby became exercisable on January 22, 1998, and options with respect to
the remaining 50% of the shares of Bowater Common Stock will become
exercisable on January 22, 1999, if certain conditions are met. In addition,
the stock option plan pursuant to which the options were granted provides
that the exercisability date is accelerated and Bowater is required to
repurchase outstanding options at a defined acceleration price upon the
occurrence of a change in control event as defined in the stock option plan.
Option Exercises
The following table sets forth information concerning options exercised by
Bowater Named Executive Officers and the value at the end of 1997 of SARs and
unexercised options held by the Bowater Named Executive Officers to purchase
Bowater Common Stock.
AGGREGATED OPTION EXERCISES IN 1997
AND 1997 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Arnold M. Nemirow....... 20,000 302,188.00 255,000/75,000 4,180,630.75/364,843.75
Arthur D. Fuller........ 10,000 152,625.00 27,500/30,000 342,234.375/145,937.50
E. Patrick Duffy........ 0 0.00 37,500/30,000 411,921.875/145,937.50
Anthony H. Barash....... 0 0.00 15,000/35,000 109,218.75/159,843.75
David G. Maffucci....... 2,900 40,515.70 25,000/30,000 360,393.75/145,937.50
</TABLE>
- ---------------
(1) Based on the difference between the option exercise price and the average of
the highest and lowest prices per share of Bowater Common Stock on the NYSE
on December 31, 1997, of $44.40625.
Long-Term Incentive Plan
The number of units shown in the target column of the table below
represents the target value of the performance units awarded pursuant to
Bowater's 1997-1999 Long-Term Incentive Plan. At the beginning of the LTIP Plan
cycle, each participant received the number of units assigned to his or her
position rank. Each year during the LTIP Plan cycle, the Committee will
determine a unit value for each participant by
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<PAGE> 199
multiplying each participant's units by the average daily closing price of the
Bowater Common Stock for each such year. At the end of the LTIP Plan cycle, the
Committee will determine the final award for each participant by multiplying the
sum of each participant's unit values for all fiscal years in the LTIP Plan
cycle by a percentage determined based on Bowater's financial performance with
respect to average RONA during the plan cycle relative to designated peer
companies. No payout will be made under the LTIP Plan unless Bowater's average
RONA exceeds the peer group average. If Bowater's average RONA exceeds the peer
group average RONA, payouts will be made based on Bowater average RONA as a
multiple of the peer group average RONA with a maximum payout of 250% of the
accumulated unit values if Bowater's average is at least 1.5 times the peer
group average. At the end of the LTIP Plan cycle, payouts, if any, will be made
in Bowater Common Stock having a value equal to one-half of the participant's
final award and the remainder of the final award and will be paid in cash. This
proportion may change for participants other than the Bowater Named Executive
Officers for the year in which the payout occurred in the discretion of the
Bowater Board, and will change if the payment of Bowater Common Stock would
exceed 991,878 shares in the aggregate.
The following table sets forth information concerning units allocated in
1997 under Bowater's Long-Term Incentive Plan.
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS(1)
------------------------------------------------------
THRESHOLD TARGET MAXIMUM
PERFORMANCE PERIOD ---------------- ---------------- ----------------
NUMBER OF UNTIL MATURATION OR ESTIMATED DOLLAR ESTIMATED DOLLAR ESTIMATED DOLLAR
NAME UNITS(#) PAYOUT VALUE($)(2) VALUE($)(2) VALUE($)(2)
- ---- --------- -------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Arnold M. Nemirow.... 10,524 1/1/97 to 12/31/99 0(3) 1,450,449 3,626,123
Arthur D.
Fuller(4).......... 5,189 1/1/97 to 12/31/99 0(3) 669,774 1,674,435
E. Patrick Duffy..... 3,488 1/1/97 to 12/31/99 0(3) 480,727 1,201,817
Anthony H. Barash.... 3,488 1/1/97 to 12/31/99 0(3) 480,727 1,201,817
David G. Maffucci.... 3,488 1/1/97 to 12/31/99 0(3) 480,727 1,201,817
</TABLE>
- ---------------
(1) Payouts, if any, to the Bowater Named Executive Officers under the LTIP Plan
will be made in early 2000, one-half in cash and one-half in shares of
Bowater Common Stock.
(2) The Estimated Dollar values of payouts under the plan are based on the
average closing price of a share of Bowater Common Stock during 1997
($45.941) and are solely for illustrative purposes. The actual value of the
payout may be higher or lower than the amount shown as a result of the
average closing price of a share of Bowater Common Stock for each of 1998
and 1999. See the description of the plan above. For performance between
threshold and maximum, the payout will be prorated on a straight-line basis.
(3) As discussed above, no payout will be made under the LTIP Plan unless
Bowater's average RONA exceeds the peer group's average RONA.
(4) Initially, Mr. Fuller was assigned 3,488 units under the LTIP Plan. On
August 1, 1997, he was promoted to a higher position rank and was assigned
the number of units shown in the table. His unit value for 1997 was adjusted
to give proportionate effect to the number of days he served in each
position rank.
Stock Retention Program
In 1996 Bowater established stock ownership guidelines for executive
officers as a way to better align the financial interests of its officers with
those of its shareholders. These officers are expected to make continuing
progress towards compliance with these guidelines and to comply fully with the
guidelines by the later of January 1999 or three years after the officer's
employment with Bowater. Officers are required, as a condition of eligibility
for future bonus payments, to own Bowater Common Stock with a value equal to a
specified multiple of their base salaries. Under these guidelines, the requisite
multiples are three for the chief executive officer, two for executive and
senior vice presidents and one-half to one for corporate vice presidents,
divisional vice presidents and others, depending on their respective position
ranks. Bowater Common Stock owned outright or through qualified Bowater benefit
plans and vested stock options count toward meeting this goal.
In order to emphasize the importance of outright ownership of Bowater
stock, the stock ownership guidelines have been modified to require satisfaction
of at least one-half of the ownership requirement through stock held outright or
through Bowater benefit plans. At the same time, Bowater's directors will be
expected to own Bowater Common Stock as determined under the guidelines with a
value equal to three times their
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<PAGE> 200
annual retainers. Compliance with the new guidelines will be expected by the
later of February 1, 2002, or three years after employment or election.
Employment and Change in Control Agreements
Each Bowater Named Executive Officer (collectively, the "Executives") is
party to an employment agreement (collectively, the "Agreements"). Each
Agreement continues until death, disability, retirement or written notice of
termination by either Bowater or the Executive. In the event of a Change in
Control, as defined in the CIC Agreements described below, the term of the
Agreements continues for not less than three years thereafter unless the
Executive terminates his employment for other than Good Reason (also as defined
in the CIC Agreements). The Agreements provide for payment to each Executive of
an annual base salary and for the Executive's participation in Bowater's various
bonus and benefit plans as in effect from time to time while the Agreements are
in effect. In the event the Executive's employment is involuntarily terminated
for reasons other than death, disability, retirement or Cause (defined in the
Agreements as gross negligence or willful misconduct by the Executive either in
the course of his employment or that has a material adverse effect on Bowater or
on the Executive's ability to perform his duties adequately and effectively),
the Agreements provide for payments equal to two years of annual base salaries
and bonuses, plus a pro rata share of their bonuses for the year of termination.
With respect to employee benefit plans, Mr. Nemirow's Agreement provides
that, for purposes of determining the benefits due under Bowater's benefits
plans, he shall receive credit for continuous employment at an accelerated rate
and entitles him to receive certain minimum annual benefits upon his retirement
from Bowater if certain conditions are met; Mr. Duffy's Agreement provides that
he is entitled to immediate vesting under Bowater's Supplemental Benefits Plan;
and Mr. Barash's Agreement provides for a grant to him of 30,000 equity
participation rights and provides him with an additional five years of credited
service under Bowater's retirement plans upon his early or normal retirement.
Each Executive also is a party to a change in control agreement with
Bowater (collectively, the "CIC Agreements"). The CIC Agreements have a
three-year term that is automatically extended at the end of each year for an
additional one year. The CIC Agreements generally provide that, in the event of
a Change in Control (as defined below), the CIC Agreements shall continue in
effect until they expire in accordance with the above-described extensions, but
in any event for a period of not less than three years from the date of the
Change in Control. Following a Change in Control of Bowater, if an Executive's
employment is terminated by Bowater (except for a termination due to death,
disability, or retirement, or for Cause (defined as gross negligence that has
not been cured, willful misconduct that has not been cured, or conviction of a
felony, which action has a demonstrable and material adverse effect upon
Bowater)) or if the Executive elects to terminate his employment for Good Reason
as defined below, the Executive shall receive his full base salary and all
benefits and awards under Bowater's benefit plans and policies (in which he was
a participant prior to the Change in Control) to which he is entitled through
his date of termination and may elect to receive, in lieu of any severance
payments provided in his employment agreement described above, an amount equal
to: (i) three times the Executive's annual base salary in effect when the
Executive is terminated or, if higher, the Executive's annual base salary in
effect immediately prior to the Change in Control; plus (ii) three times the
largest annual bonus awarded to the Executive during the five fiscal years
immediately preceding the year in which the Change in Control occurred or, if
higher, the annual bonus the Executive would have been awarded under the bonus
plan had he continued in Bowater's employ on the same basis as immediately
before the Change in Control; plus (iii) three times the largest annual
contribution made by Bowater to the Savings Plan on the Executive's behalf
during the five fiscal years immediately preceding the Change in Control or, if
higher, the contribution Bowater would have made to the Savings Plan on the
Executive's behalf for the fiscal year in which the Change in Control occurred
had he continued in Bowater's employ at the same base salary and with the same
contribution level as immediately prior to the Change in Control; plus (iv)
thirty percent of the Executive's annual base salary in effect when the
Executive is terminated, or, if higher, the Executive's annual base salary in
effect immediately prior to the Change in Control (as compensation for medical,
life insurance and other benefits lost as a result of the termination of
employment). In addition, each of the CIC Agreements provides that the Executive
will be entitled to a pro rata portion of the annual bonus calculated in the
manner specified in (ii) above for the year in which the termination occurred.
The CIC Agreements provide that the foregoing payments shall be reduced by
1/36th for each month by which the date that is three
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<PAGE> 201
years from the effective date of the Executive's termination extends beyond the
Executive's normal retirement date.
The CIC Agreements define a Change in Control as occurring if: (i) any
person becomes a beneficial owner of securities of Bowater representing 20% or
more of Bowater's outstanding voting securities (unless that person has filed a
Schedule 13G indicating such person's intent to hold such securities for
investment); (ii) less than two-thirds of the total membership of the Bowater
Board shall be continuing directors (as defined in the CIC Agreements); or (iii)
the shareholders of Bowater approve a merger, consolidation, complete
liquidation or sale of all or substantially all of Bowater's assets. The CIC
Agreements define Good Reason as: (i) an adverse change in the Executive's
status, duties or responsibilities as in effect immediately prior to the Change
in Control after the Executive has given notice of the adverse change and
Bowater has failed to cure; or (ii) failure of Bowater to pay or provide the
Executive the salary or benefits to which he is entitled; or (iii) the reduction
of the Executive's salary as in effect on the date of the Change in Control; or
(iv) the taking of any action by Bowater that would substantially diminish the
value of the Executive's awards or benefits under Bowater's benefit plans in
which the Executive was participating at the time of the Change in Control; or
(v) Bowater's failure to obtain from any successor assent to the CIC Agreement;
or (vi) the relocation of the Executive's principal office to a location more
than 35 miles from its location immediately prior to the Change in Control; or
(vii) a substantial increase in the Executive's travel obligations subsequent to
the Change in Control.
The CIC Agreements also generally provide a terminated Executive with
outplacement assistance, a grossed up reimbursement of certain excise taxes that
may be levied on "excess parachute payments" and reimbursement for all costs
incurred in connection with enforcing the terms of the CIC Agreement. In
addition, the CIC Agreements generally provide that Bowater will pay or provide
the Executives, their surviving spouses or children the amounts and benefits
that they would have received, assuming certain conditions, under Bowater's
Retirement Plan and Supplemental Benefit Plan in effect immediately prior to the
Change in Control if the Executive had continued to be employed until the third
anniversary of the effective date of the termination of the Executive's
employment or until the Executive's normal retirement date, whichever is
earlier.
The Transaction will not constitute a Change in Control under the CIC
Agreements or a change of control under any other compensation plans or
arrangements of Bowater.
Retirement Benefits
The following table shows the total estimated annual pension benefits
payable for the Bowater Named Executive Officers under Bowater's qualified,
nonqualified benefits restoration and nonqualified supplemental retirement plans
upon retirement at age 65, calculated on a straight life annuity basis. Benefits
to Bowater Named Executive Officers are not reduced by any offset for Social
Security benefits.
<TABLE>
<CAPTION>
COMBINED RETIREMENT PLANS TABLE OF ESTIMATED BENEFITS
------------------------------------------------------------------
30 OR MORE
5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS YEARS
FINAL AVERAGE EARNINGS* SERVICE SERVICE SERVICE SERVICE SERVICE SERVICE
- ----------------------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
$200,000.......................... $ 25,000 $ 50,000 $ 75,000 $100,000 $110,000 $120,000
250,000.......................... 31,250 62,500 93,750 125,000 137,500 150,000
300,000.......................... 37,500 75,000 112,500 150,000 165,000 180,000
350,000.......................... 43,750 87,500 131,250 175,000 192,500 210,000
400,000.......................... 50,000 100,000 150,000 200,000 220,000 240,000
800,000.......................... 100,000 200,000 300,000 400,000 440,000 480,000
900,000.......................... 112,500 225,000 337,500 450,000 495,000 540,000
</TABLE>
- ---------------
* Average annual earnings for best 36 consecutive months in the 60 months
preceding retirement.
Retirement benefits are payable under one or more of the following plans: a
qualified plan covering all salaried employees, which provides pension benefits
based on earnings; a nonqualified benefits restoration plan, which provides a
make-up of qualified plan benefits limited by the imposition of statutory Code
limitations; and a nonqualified supplemental plan covering designated senior
executives including the Bowater Named
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<PAGE> 202
Executive Officers (the "Supplemental Plan"), which provides benefits in
addition to those under the two preceding plans. The definition of compensation
under the Supplemental Plan includes those categories of compensation under the
salary and bonus headings in the Summary Compensation Table and does not include
compensation in any of the other headings of the Summary Compensation Table. The
Supplemental Plan provides for vesting of accrued benefits in the event of a
change in control followed by termination of employment of a covered employee
not for cause. The two other plans described above provide that in the event of
a change in control, each participant in such plans will become 100% vested in
his accrued benefits. This table assumes retirement in 1997. At such time, the
individuals listed in the Summary Compensation Table above had the following
final average earnings (as defined above) and credited number of years of
service (determined by actual years of service): Mr. Nemirow, $879,536, 3.3
years; Mr. Fuller, $408,970, 2.9 years; Mr. Duffy, $372,492, 2.8 years; Mr.
Barash, $304,501, 1.8 years; and Mr. Maffucci, $235,150, 20.5 years.
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The table below compares the cumulative shareholder return of the Bowater
Common Stock for the last five years with the cumulative total return of the Dow
Jones Paper Products Group and the S&P 500, assuming a $100 investment on
December 31, 1992.
[Performance Graph]
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bowater Incorporated................... $100.00 $ 98.12 $116.32 $157.43 $170.43 $204.91
S&P 500................................ 100.00 110.03 111.53 153.30 188.40 251.71
Dow Jones Paper Products Group......... 100.00 109.17 120.91 132.26 139.69 150.76
</TABLE>
- ---------------
* Companies include: Boise Cascade Corporation, Champion International
Corporation, Consolidated Papers, Inc., International Paper Company, The Mead
Corporation, Union Camp Corporation, and Westvaco Corporation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an investment management and participation agreement, both
dated July 1, 1997 (the "Agreement"), Wellington Trust Company, NA ("Wellington
Trust") provides investment management services to a collective investment fund
of which four qualified pension plans sponsored by Bowater and its
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<PAGE> 203
subsidiaries are participants. Pursuant to the terms of the Agreement,
Wellington Trust is paid by the trustee of Bowater's benefit plans a fee for
each calendar quarter based on the average of the asset values of the accounts
managed by Wellington Trust. The Agreement generally continues in effect until
terminated by Bowater or Wellington Trust on fifteen days' notice. Bowater paid
to Wellington Trust approximately $90,800 for providing services to the pension
plans during 1997. Bowater expects to pay approximately $262,500 for these
services provided during 1998. On June 15, 1998, Wellington Management Company,
LLP, a registered investment adviser and the parent of Wellington Trust,
informed Bowater that it had shared dispositive power with respect to 2,899,880
shares of Bowater Common Stock and shared voting power with respect to 2,100
shares of Bowater Common Stock. Bowater is informed that the clients of
Wellington Management Company, LLP have the right to receive, or the power to
direct the receipt of, dividends from, or the proceeds of the sale of, such
securities. Bowater believes that its arrangements with Wellington Trust are on
terms as favorable as could be obtained from an unrelated party.
INFORMATION CONCERNING BOWATER CANADA
BUSINESS
Bowater Canada was incorporated under the CBCA on April 15, 1998, for the
purpose of implementing the Transaction. Bowater Canada's only material assets
upon completion of the Transaction will be the issued and outstanding Avenor
Common Shares. Bowater Canada's registered office is located at Suite 4100, 1
First Canadian Place, 100 King Street West, Toronto, Ontario M5X 1B2.
SHARE CAPITAL
The authorized capital of Bowater Canada consists of the Bowater Canada
Common Shares and, at the Effective Time, will consist of the Bowater Canada
Preferred Shares and the Exchangeable Shares, as described under "Description of
Capital Stock--Bowater Canada Share Capital".
DIRECTORS AND OFFICERS
Bowater Canada's Board currently consists of three directors. The following
table sets forth the name, position held with Bowater Canada and the principal
occupation of each of the directors and senior officers of Bowater Canada.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OCCUPATION
MUNICIPALITY/COUNTY POSITION WITH IF OTHER THAN
OF RESIDENCE BOWATER CANADA POSITION HELD
- ------------------- -------------- --------------------
<S> <C> <C>
Charles J. Howard Director Chairman
Oakville, Ontario Howard, Barclay & Associates
Ltd. (investment counseling firm)
R. Jamie Plant Director Partner
Toronto, Ontario Assistant Secretary Fraser & Beatty
(barristers and solicitors)
Wendy C. Shiba Director Vice President, Secretary and
Greenville, South Carolina Vice President Assistant General Counsel
and Secretary Bowater Incorporated
Arnold M. Nemirow President Chairman, President and
Greenville, South Carolina Chief Executive Officer
Bowater Incorporated
</TABLE>
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<PAGE> 204
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OCCUPATION
MUNICIPALITY/COUNTY POSITION WITH IF OTHER THAN
OF RESIDENCE BOWATER CANADA POSITION HELD
- ------------------- -------------- --------------------
<S> <C> <C>
David G. Maffucci Vice President Senior Vice President and
Greenville, South Carolina Chief Financial Officer
Bowater Incorporated
James H. Dorton Vice President Vice President and Treasurer
Greenville, South Carolina and Treasurer Bowater Incorporated
</TABLE>
Mr. Plant became a partner of Fraser & Beatty in 1997. Previously from 1971
to 1997, he was a partner of the law firm McMaster Meighen in Montreal.
For information regarding employment histories for each of Ms. Shiba and
Messrs. Howard, Nemirow, Maffucci and Dorton, see "Information Concerning
Bowater--Executive Officers and Directors".
COMPARISON OF SHAREHOLDER RIGHTS
In the event that the Transaction is consummated, holders of Avenor Common
Shares will, at the Effective Time, have their Avenor Common Shares exchanged
for cash, Exchangeable Shares, shares of Bowater Common Stock, or a combination
of the foregoing. Holders of Exchangeable Shares will have the right to retract
these shares for an equivalent number of shares of Bowater Common Stock. Bowater
is a corporation organized under the DGCL. Avenor is a corporation organized
under the CBCA. While the rights and privileges of shareholders of a Canadian
corporation are, in many instances, comparable to those of shareholders of a
Delaware corporation, there are certain differences. These differences arise
from differences between Canadian and Delaware law, between the CBCA and DGCL
and between the Avenor Articles and Avenor By-laws and the Bowater Certificate
and Bowater Bylaws. For a description of the respective rights of the holders of
Avenor Common Shares and Bowater Common Stock, see, respectively, "Information
Concerning Avenor--Share Capital of Avenor" and "Description of Capital
Stock--Bowater Capital Stock".
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
Under the CBCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed by a majority of not less than two-thirds of the votes cast by
the shareholders who voted in respect of that resolution. In certain cases, a
special resolution to approve an extraordinary corporate action is also required
to be approved separately by the holders of a class or series of shares.
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation, except
that, unless required by its certificate of incorporation, (a) no authorizing
stockholder vote is required of a corporation surviving a merger if: (i) such
corporation's certificate of incorporation is not amended by the merger, (ii)
each share of stock of such corporation will be an identical share of the
surviving corporation after the merger, and (iii) the number of shares to be
issued in the merger does not exceed 20% of such corporation's outstanding
common stock immediately prior to the effective date of the merger; and (b) no
authorizing stockholder vote is required of a corporation to authorize a merger
with or into a single direct or indirect wholly-owned subsidiary of such
corporation (provided certain other limited circumstances apply). The Bowater
Certificate provides that certain business combinations (including mergers and
sales of 25% or more of the assets of Bowater) involving a beneficial owner (a
"Bowater Acquiring Person") of more than 5% of the voting power of the
outstanding shares of capital stock of Bowater that are entitled to vote for the
election of directors of Bowater ("Bowater Voting Stock") requires the
affirmative vote of the holders of at least 75% of the voting power of the
Bowater Voting Stock, voting together as a single class, unless certain board
approval requirements are met or the transaction involves a majority owned
Bowater subsidiary. See
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<PAGE> 205
"--Anti-Takeover Provisions and Interested Stockholder Transactions".
Stockholder approval is also not required under the DGCL for mergers or
consolidations in which a parent corporation merges or consolidates with a
subsidiary of which it owns at least 90% of the outstanding shares of each class
of stock.
AMENDMENT TO GOVERNING DOCUMENTS
Under the CBCA, any amendment to the articles generally requires approval
by special resolution, which is a resolution passed by a majority of not less
than two-thirds of the votes cast by shareholders who voted in respect of the
resolution. The CBCA provides that unless the articles or bylaws otherwise
provide, the directors may, by resolution, make, amend or repeal any bylaws that
regulate the business or affairs of a corporation. Where the directors make,
amend or repeal a bylaw, they are required under the CBCA to submit the bylaw,
amendment or repeal to the shareholders at the next meeting of shareholders, and
the shareholders may confirm, reject or amend the bylaw, amendment or repeal by
an ordinary resolution, which is a resolution passed by a majority of the votes
cast by shareholders entitled to vote on the resolution.
The DGCL requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock entitled to vote
for any amendment to the certificate of incorporation, unless a greater level of
approval is required by the certificate of incorporation. The Bowater
Certificate provides that, notwithstanding any approval requirement under the
DGCL, amendments to certain provisions regarding the authorized shares, the
issuance of preferred stock, the election, renewal and replacement of directors,
the provision for a staggered board, certain delegations to board committees,
the amendment of bylaws and the adoption of cumulative voting provisions must be
approved by the affirmative vote of the holders of not less than 75% of the
voting power of the outstanding stock of Bowater. If an amendment would have the
effect of altering the powers, preferences or special rights of a particular
class or series of stock, the class or series shall be given the power to vote
as a class notwithstanding the absence of any specifically enumerated power in
the certificate of incorporation. The DGCL also states that the power to adopt,
amend or repeal the bylaws of a corporation shall be in the stockholders
entitled to vote, provided that the corporation in its certificate of
incorporation may confer such power on the corporation's board of directors. The
Bowater Certificate expressly authorizes the Bowater Board and the stockholders
to adopt, amend or repeal the Bowater Bylaws; provided, however, that any bylaws
concerning the election or removal of directors, the range of the number of
directors, the exact number of directors within such range or the method of
fixing either such range or the exact number of directors within such range, the
classification of the Bowater Board, the filling of vacancies on the Bowater
Board, the requirements, if then in the Bowater Certificate and the Bowater
Bylaws, that all stockholder action must be taken at an annual or special
meeting, the calling of special meetings of the stockholders, or the method of
adopting, amending or repealing of bylaws may not be amended, adopted or
repealed, nor shall any other bylaw be amended, adopted or repealed that will
have the effect of modifying or permitting the circumvention of such bylaws,
unless such adoption, amendment or repeal is approved by the affirmative vote of
75% of the continuing directors (as defined in the Bowater Certificate) (where
such adoption, amendment or repeal may be effected by the Bowater Board) or by
the affirmative vote of the holders of not less than 75% of the voting power of
Bowater.
DISSENTERS' RIGHTS
The CBCA provides that shareholders entitled to vote on certain matters are
entitled to exercise dissent rights and to be paid the fair value of their
shares in connection therewith. The CBCA does not distinguish for this purpose
between listed and unlisted shares. Such matters include: (a) an amendment to
the corporation's articles to add, change or remove any provisions restricting
or constraining the issue, transfer or ownership of shares of that class; (b)
any amalgamation with another corporation (other than with certain affiliated
corporations); (c) an amendment to the corporation's articles to add, change or
remove any restriction upon the business or businesses that the corporation may
carry on; (d) a continuance under the laws of another jurisdiction; (e) a sale,
lease or exchange of all or substantially all the property of the corporation
other than in the ordinary course of business; (f) a court order permitting a
shareholder to dissent in connection with an application to the court for an
order approving an arrangement proposed by the corporation; and (g) certain
amendments to the articles of a corporation that require a separate class or
series vote, provided that a
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<PAGE> 206
shareholder is not entitled to dissent if an amendment to the articles is
effected by a court order approving a reorganization or by a court order made in
connection with an action for an oppression remedy.
Under the DGCL, holders of shares of any class or series have the right, in
certain circumstances, to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by a court in an action timely
brought by the corporation or the dissenters. The DGCL grants dissenters'
appraisal rights only in the case of mergers or consolidations and not in the
case of a sale or transfer of assets or a purchase of assets for stock
regardless of the number of shares being issued. Further, no appraisal rights
are available for shares of any class or series listed on a national securities
exchange or designated as a national market system security on Nasdaq or held of
record by more than 2,000 stockholders, unless the agreement of merger or
consolidation requires the holders thereof to accept for such shares anything
other than (a) stock of the surviving corporation, (b) stock of another
corporation which is either listed on a national securities exchange or
designated as a national market system security on Nasdaq or held of record by
more than 2,000 stockholders, (c) cash in lieu of fractional shares, or (d) some
combination of the above.
OPPRESSION REMEDY
The CBCA provides an oppression remedy that enables the court to make any
order, both interim and final, to rectify the matters complained of where it is
satisfied upon application by a complainant (as defined below) that (i) any act
or omission of the corporation or any of its affiliates effects a result; (ii)
the business or affairs of the corporation or any of its affiliates are or have
been carried on or conducted in a manner; or (iii) the powers of the directors
of the corporation or any of its affiliates are or have been exercised in a
manner, that is oppressive or unfairly prejudicial to or that unfairly
disregards the interest of any security holder, creditor, director or officer of
the corporation. A complainant includes: (a) a present or former registered
holder or beneficial owner of securities of a corporation or any of its
affiliates; (b) a present or former officer or director of the corporation or
any of its affiliates; (c) the Director under the CBCA; and (d) any other person
who in the discretion of the court is a proper person to make such application.
Because of the breadth of the conduct which can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the CBCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation to pay the interim expenses of a complainant seeking an oppression
remedy, but the complainant may be held accountable for such interim costs on
final disposition of the complaint (as in the case of a derivative action).
The DGCL does not provide for a similar remedy.
DERIVATIVE ACTION
Under the CBCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any of its subsidiaries,
or to intervene in an existing action to which any such body corporate is a
party, for the purpose of prosecuting, defending or discontinuing the action on
behalf of the body corporate. Under the CBCA, no action may be brought and no
intervention in an action may be made unless the court is satisfied that (a) the
complainant has given reasonable notice to the directors of the corporation or
its subsidiary of the complainant's intention to apply to the court to commence
a derivative action if the directors of the corporation or its subsidiary will
not bring, diligently prosecute or defend or discontinue the action; (b) the
complainant is acting in good faith; and (c) it appears to be in the interests
of the corporation or its subsidiary that the action be brought, prosecuted,
defended or discontinued.
Under the CBCA, the court in a derivative action may make any interim or
final order it thinks fit. Additionally, under the CBCA, a court may order a
corporation or its subsidiary to pay the complainant's interim costs, including
reasonable legal fees. Although the complainant may be held accountable for the
interim costs on final disposition of the complaint, it is not required to give
security for costs in a derivative action.
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Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, the corporation. The DGCL provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under the CBCA, shareholder action without a meeting may only be taken by
written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting. Special meetings of shareholders may be called by the
Board of Directors or, in certain circumstances, requisitioned by a holder of at
least 5% of the outstanding shares or a court.
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
The Bowater Certificate provides that no action may be taken by stockholders of
Bowater except at an annual or special meeting of stockholders.
DIRECTOR QUALIFICATIONS
Under the CBCA, a corporation that has issued securities that are, or were
part of, a distribution to the public, remain outstanding and are held by more
than one person, must have not fewer than three directors, the majority of which
generally must be resident Canadians and at least two of which must not be
officers or employees of the corporation or its affiliates.
The DGCL does not have comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations governed by the CBCA have fiduciary obligations
to the corporation. Under the CBCA, the duty of loyalty requires directors to
act honestly and in good faith with a view to the best interests of the
corporation, and the duty of care requires that the directors exercise the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
Directors of corporations incorporated or organized under the DGCL have
fiduciary obligations to the corporation and its shareholders. Pursuant to these
fiduciary obligations, the directors must act in accordance with the so-called
duties of "due care" and "loyalty". Under the DGCL, the duty of care requires
that the directors act in an informed and deliberative manner and that they
inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty may be summarized
as the duty to act in good faith in a manner that the directors reasonably
believe to be in the best interests of the stockholders. It requires that there
be no conflict between duty and self-interest.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the CBCA, a corporation may indemnify a director or officer, a former
director or officer or a person who acts or acted at the corporation's request
as a director or officer of a body corporate of which the corporation is or was
a shareholder or creditor, and his or her heirs and legal representatives (an
"Indemnifiable Person"), against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by
him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been
a director or officer of such corporation or such body corporate, if: (a) he or
she acted honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An Indemnifiable
Person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding and fulfilled the
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conditions set out in (a) and (b), above. A corporation may, with the approval
of a court, also indemnify an Indemnifiable Person in respect of an action by or
on behalf of the corporation or body corporate to procure a judgment in its
favour, to which such person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, if he or she
fulfills the conditions set out in (a) and (b), above. The Avenor By-laws
provide for indemnification of directors and officers to the fullest extent
authorized by the CBCA.
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each, an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions initiated
by or in the right of the corporation, against all judgments, fines and amounts
paid in settlement in actions brought against them, if such individual acted in
good faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The corporation shall indemnify a current or former director or officer to the
extent that he or she is successful on the merits or otherwise in the defense of
any claim, issue or matter associated with an action. The Bowater Certificate
provides for indemnification of directors and officers to the fullest extent
authorized by the DGCL.
The DGCL allows for the advance payment of an indemnitee's expenses prior
to the final disposition of an action, provided that, in the case of a current
director or officer, the indemnitee undertakes to repay any such amount advanced
if it is later determined that the indemnitee is not entitled to indemnification
with regard to the action for which the expenses were advanced.
DIRECTOR LIABILITY
The DGCL provides that the charter of a corporation may include a provision
that limits or eliminates the liability of directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided such liability does not arise from certain proscribed conduct,
including acts or omissions not in good faith or that involve intentional
misconduct or breach of the duty of loyalty. The Bowater Certificate contains a
provision limiting the liability of its directors to the fullest extent
permitted by the DGCL. The CBCA does not permit the limitation of a director's
liability for breach of fiduciary duty through the charter of a corporation.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
The DGCL prohibits, in certain circumstances, a "business combination"
between the corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder". An "interested
stockholder" is a holder who, directly or indirectly, controls 15% or more of
the outstanding voting stock or is an affiliate of the corporation and was the
owner of 15% or more of the outstanding voting stock at any time within the
prior three-year period. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value in
excess of 10% of the consolidated assets of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. This provision does not apply where: (i) the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder is approved by the corporation's board of
directors prior to the time the interested stockholder acquired such 15%
interest; (ii) upon the consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding, for
the purpose of determining the number of shares outstanding, shares held by
persons who are directors and also officers and by employee stock plans in which
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered; (iii) the business combination is
approved by a majority of the board of directors and the affirmative vote of
two-thirds of the outstanding votes entitled to be cast by disinterested
stockholders at an annual or special meeting; (iv) the corporation does not have
a class of voting stock that is listed on a national securities exchange,
authorized for quotation on an inter-dealer quotation system of the Nasdaq Stock
Market, or held of record by more than 2,000 stockholders unless any of the
foregoing results from action taken, directly or indirectly, by an interested
stockholder or from a transaction in which a person becomes an interested
stockholder; (v) the corporation has opted out of this provision; or (vi) in
certain other limited circumstances. Bowater has not opted out of this
provision.
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The Bowater Certificate contains a provision that applies to certain
business combinations involving any Acquiring Stockholder (as defined in the
Bowater Certificate). The provision requires the affirmative vote of the holders
of at least 75% of the voting power of the Bowater Voting Stock to approve
certain transactions between the Acquiring Stockholder and Bowater or its
subsidiary, including any merger, or consolidation of Bowater or any subsidiary
with any Acquiring Stockholder irrespective of which entity is the survivor,
certain sales, leases, exchanges, pledges, transfers or other dispositions of
Bowater or its subsidiaries, any transfer or issuance of securities with Bowater
or its subsidiaries, the adoption of a plan or proposal for a liquidation or
dissolution of Bowater, certain reclassifications of securities or
recapitalizations of Bowater or certain other transactions, in each case
involving the Acquiring Stockholder. This voting requirement does not apply if
(1) the business combination is approved by Bowater continuing directors (as
defined in the Bowater Certificate), (2) the business combination is approved by
the Bowater Board prior to such person becoming an Acquiring Stockholder, or (3)
the business combination is solely between Bowater and another corporation of
which 50% or more of the stock entitled to vote at the election of directors is
owned by Bowater.
Policies of certain Canadian securities regulatory authorities, including
Policy 9.1 of the OSC ("Policy 9.1"), contain requirements in connection with
related party transactions. A related party transaction means, generally, any
transaction by which an issuer, directly or indirectly, acquires or transfers an
asset or acquires or issues treasury securities or assumes or transfers a
liability from or to, as the case may be, a Related Party by any means in any
one or any combination of transactions. "Related Party" is defined in Policy 9.1
and includes directors, senior officers and holders of at least 10% of the
voting securities of the issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a formal valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 also requires, subject to certain exceptions, that the minority shareholders
of the issuer separately approve the transaction, by either a simple majority or
two-thirds of the votes cast, depending on the circumstances.
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DISSENTING SHAREHOLDERS' RIGHTS
AVENOR
Avenor Shareholders are entitled to dissent from the Arrangement Resolution
in the manner provided in section 190 of the CBCA. Section 190 of the CBCA is
reprinted in its entirety as Annex K to this Joint Proxy Statement. The
following summary is qualified in its entirety by the provisions of section 190
of the CBCA.
Any Avenor Shareholder who dissents (a "Dissenting Avenor Shareholder")
from the Arrangement Resolution in compliance with section 190 of the CBCA will
be entitled, in the event the Arrangement becomes effective, to be paid by
Avenor the fair value of the Avenor Common Shares held by such Dissenting Avenor
Shareholder determined as at the close of business on the day before the Avenor
Meeting (or any adjournment thereof). There can be no assurance that pursuant to
section 190 of the CBCA a Dissenting Avenor Shareholder will receive
consideration for his or her Avenor Common Shares of equal value to the
consideration that such Dissenting Avenor Shareholder would have received upon
closing of the Arrangement, including giving effect to the Arrangement.
A Shareholder who wishes to dissent must send to Avenor, no later than the
termination of the Avenor Meeting (or any postponement or adjournment thereof),
at 1250 Rene-Levesque Blvd. West, 21st Floor, Montreal, Quebec H3B 4Y3,
Attention: Secretary, a written objection to the Arrangement Resolution (a
"Dissent Notice"). The filing of a Dissent Notice does not deprive an Avenor
Shareholder of the right to vote; however, the CBCA provides, in effect, that an
Avenor Shareholder who has submitted a Dissent Notice and who votes in favour of
Arrangement Resolution will no longer be considered a Dissenting Avenor
Shareholder with respect to the Avenor Common Shares voted in favour of the
Arrangement Resolution. The CBCA does not provide, and Avenor will not assume,
that a vote against the Arrangement Resolution constitutes a Dissent Notice.
Under the CBCA, there is no right of partial dissent and, accordingly, a
Dissenting Avenor Shareholder may only dissent with respect to all Avenor Common
Shares held by him or her on behalf of any one beneficial owner and which are
registered in the name of the Dissenting Avenor Shareholder.
Avenor is required, within 10 days after the Avenor Shareholders adopt the
Arrangement Resolution, to notify each Avenor Shareholder who has filed a
Dissent Notice that the Arrangement Resolution has been adopted, but such notice
is not required to be sent to any Avenor Shareholder who voted for the
Arrangement Resolution or who has withdrawn his or her Dissent Notice.
A Dissenting Avenor Shareholder must then, within 20 days after the
Dissenting Avenor Shareholder receives notice that the Arrangement Resolution
has been adopted or, if the Dissenting Avenor Shareholder does not receive such
notice, within 20 days after the Dissenting Avenor Shareholder learns that the
Arrangement Resolution has been adopted, send to Avenor a written notice (a
"Payment Demand") containing his or her name and address, the number of Avenor
Common Shares in respect of which the Dissenting Avenor Shareholder dissented,
and a demand for payment of the fair value of such Avenor Common Shares. Within
30 days after a Payment Demand, the Dissenting Avenor Shareholder must send to
the Depositary the certificates representing the Avenor Common Shares in respect
of which he or she dissented. A Dissenting Avenor Shareholder who fails to send
the certificates representing the Avenor Common Shares in respect of which he or
she dissented forfeits his or her right to make a claim under section 190 of the
CBCA. The Depositary will endorse on share certificates received from a
Dissenting Avenor Shareholder a notice that the holder is a Dissenting Avenor
Shareholder and will forthwith return the share certificates to the Dissenting
Avenor Shareholder.
On sending a Payment Demand to Avenor, a Dissenting Avenor Shareholder
ceases to have any rights as the Shareholder, other than the right to be paid
the fair value of his or her Avenor Common Shares as determined under section
190 of the CBCA, except where:
(a) the Dissenting Avenor Shareholder withdraws his or her Payment
Demand before Avenor makes an offer to the Dissenting Avenor Shareholder
pursuant to the CBCA;
(b) Avenor fails to make an offer as hereinafter described and the
Dissenting Avenor Shareholder withdraws his or her Payment Demand; or
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(c) the directors revoke the Arrangement Resolution,
in which case the Dissenting Avenor Shareholder's rights as an Avenor
Shareholder are reinstated as of the date he or she sent the Payment Demand.
Avenor is required, not later than seven days after the later of the
Effective Date or the date on which Avenor received the Payment Demand of a
Dissenting Avenor Shareholder, to send to each Dissenting Avenor Shareholder who
has sent a Payment Demand a written offer to pay ("Offer to Pay") for his or her
Avenor Common Shares in an amount considered by the Avenor Board to be the fair
value thereof, accompanied by a statement showing the manner in which the fair
value was determined. Every Offer to Pay must be on the same terms. Avenor must
pay for the Avenor Common Shares of a Dissenting Avenor Shareholder within 10
days after an Offer to Pay has been accepted by a Dissenting Avenor Shareholder,
but any such Offer to Pay lapses if Avenor does not receive an acceptance
thereof within 30 days after the Offer to Pay has been made.
If Avenor fails to make an Offer to Pay for the Avenor Common Shares of a
Dissenting Avenor Shareholder, or if a Dissenting Avenor Shareholder fails to
accept an offer that has been made, Avenor may, within 50 days after the
Effective Date or within such further period as a court may allow, apply to a
court to fix a fair value for the Avenor Common Shares of Dissenting Avenor
Shareholders. If Avenor fails to apply to a court, a Dissenting Avenor
Shareholder may apply to a court for the same purpose within a further period of
20 days or within such further period as a court may allow. A Dissenting Avenor
Shareholder is not required to give security for costs in such an application.
Upon an application to a court, all Dissenting Avenor Shareholders whose
Avenor Common Shares have not been purchased by Avenor will be joined as parties
and bound by the decision of the court, and Avenor will be required to notify
each affected Dissenting Avenor Shareholder of the date, place and consequences
of the application and of his or her right to appear and be heard in person or
by counsel. Upon any such application to a court, the court may determine
whether any person is a Dissenting Avenor Shareholder who should be joined as a
party, and the court will then fix a fair value for the Avenor Common Shares of
all Dissenting Avenor Shareholders. The final order of a court will be rendered
against Avenor in favour of each Dissenting Avenor Shareholder and for the
amount of the fair value of his or her Avenor Common Shares as fixed by the
court. The court may, in its discretion, allow a reasonable rate of interest on
the amount payable to each Dissenting Avenor Shareholder from the Effective Date
until the date of payment.
The above is only a summary of the Dissenting Avenor Shareholder provisions
of the CBCA, which are technical and complex. It is suggested that any Avenor
Shareholder wishing to avail himself or herself of his or her rights under those
provisions seek his or her own legal advice as failure to comply strictly with
the provisions of the CBCA may prejudice his or her right of dissent. For a
general summary of certain income tax implications to a Dissenting Avenor
Shareholder, see "Income Tax Considerations--Canadian Federal Income Tax
Considerations for Avenor Shareholders".
BOWATER
Under the DGCL, holders of Bowater Common Stock who object to the Share
Issuance will not be entitled to demand appraisal of, or receive payment for,
their Bowater Common Stock.
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ADDITIONAL MATTERS FOR
CONSIDERATION OF AVENOR SHAREHOLDERS
In addition to the consideration of and voting on the Arrangement
Resolution and the Shareholder Rights Plan Resolution, Avenor Shareholders will
be asked to vote on the following additional matters at the Avenor Meeting:
ELECTION OF DIRECTORS
Under the Avenor Articles, the Avenor Board consists of a minimum of three
directors and a maximum of 25 directors; the number of directors within such
range is to be determined by the Avenor Board from time to time. It is proposed
that eight directors be elected at the Avenor Meeting.
The Avenor Management Nominees named in the enclosed form of proxy intend
to vote for the election of the eight current directors of Avenor. Certain
information regarding these individuals is set out above under "Information
Concerning Avenor--Directors and Officers--Executive Compensation".
It is not anticipated that any of the nominees will be unable to serve as
directors but if that should occur for any reason prior to the Avenor Meeting,
the persons named in the enclosed form of proxy shall be entitled to vote for
any other nominees in their discretion.
Each director elected will hold office until the next annual meeting of
shareholders or until a successor is duly elected or appointed. It is
anticipated that those directors who are currently members of the committees of
the Avenor Board will continue in those positions.
If the Transaction is completed, it is anticipated that each member of the
Avenor Board will resign in favour of nominees of Bowater.
APPOINTMENT OF AUDITORS
The persons designated as Avenor Management Proxy Nominees in the enclosed
form of proxy intend to vote for the appointment of Price Waterhouse, Chartered
Accountants, as the auditors of Avenor and to authorize the directors to fix the
auditor's remuneration.
PROPOSALS BY BOWATER SHAREHOLDERS
Proposals of shareholders intended to be presented at Bowater's 1999 annual
meeting, and otherwise eligible, must be received by Bowater at the address
indicated in the accompanying notice. Any such proposal must be received on or
before the earlier of December 1, 1998, or the date specified in the Bowater
Bylaws as described below, and the proponent must comply with the proxy rules
under the Exchange Act, as well as the Bowater Bylaw requirements described
below.
The Bowater Bylaws require timely advance written notice of shareholder
nominations of director candidates and of any other proposals to be presented at
an annual meeting of shareholders. In the case of director nominations by
shareholders, the Bowater Bylaws require that 120 days advance written notice be
delivered to Bowater's Secretary (at 55 East Camperdown Way, Post Office Box
1028, Greenville, South Carolina, 29602). The notice must be given, either by
personal delivery or by United States mail, postage prepaid, to the Secretary of
Bowater no later than (i) with respect to an election to be held at an annual
meeting of shareholders, 120 days prior to the anniversary date of the
immediately preceding annual meeting; and (ii) with respect to an election to be
held at a special meeting of shareholders for the election of directors, the
close of business on the seventh day following the date on which notice of such
meeting shall first be given to shareholders. In the case of other proposals by
shareholders at an annual meeting, the Bowater Bylaws require that advance
written notice be delivered to the Bowater's secretary (at the address indicated
above). The notice must be received by the Secretary of Bowater by the earlier
of: (i) 120 days prior to the anniversary date of the immediately preceding
annual meeting; or (ii) 10 days after notice or public disclosure of the date of
the annual meeting was given or made to shareholders. The Bowater Bylaws contain
specific requirements with respect to the contents of each of these notices. A
copy of the Bowater Bylaws is available upon request to the Secretary of Bowater
at the address indicated above.
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ACCOUNTANTS
Representatives of KPMG Peat Marwick LLP, independent certified public
accountants for Bowater, and Price Waterhouse, the auditors of Avenor, are
expected to be present at the Bowater Meeting and the Avenor Meeting,
respectively, to respond to appropriate questions and to make a statement if
they so desire.
AVAILABLE INFORMATION
Bowater and Avenor are subject to the informational requirements of the
Exchange Act, and in accordance therewith file reports and other information
with the SEC. The reports and other information filed by Bowater and Avenor with
the SEC can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's Regional Offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material also can be obtained from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. Bowater and Avenor public
filings are also available to the public from commercial document retrieval
services and at the Internet World Wide Web site maintained by the SEC at
"http://www.sec.gov". In addition, such material filed by Bowater can be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Furthermore, Avenor is subject to the informational requirements of Canadian
securities legislation and the TSE and the ME. The former type of information
can be requested from Micromedia, 20 Victoria Street, Toronto, Ontario M5C 2N3
while the latter type of material can be inspected at the offices of Montreal
Trust Company, 7th Floor, 1800 McGill College Avenue, Montreal, Quebec H3A 3K9.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
BOWATER
The following documents, which have been filed by Bowater with the SEC
pursuant to the Exchange Act (File No. 1-8712), are incorporated in this Joint
Proxy Statement by reference and shall be deemed to be a part hereof for
purposes of the Exchange Act:
(a) Bowater's Annual Report on Form 10-K for the year ended December
31, 1997;
(b) Bowater's Quarterly Report on Form 10-Q for the period ended March
31, 1998;
(c) Bowater's Current Report on Form 8-K filed March 19, 1998; and
(d) the description of the Bowater Common Stock contained in the
Registration Statement of Bowater on Form S-3, File No. 33-51569.
All documents filed by Bowater pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Joint Proxy Statement
and prior to the Bowater Meeting shall be deemed to be incorporated by reference
in this Joint Proxy Statement and to be a part hereof for purposes of the
Exchange Act from the date of the filing of such documents. Any statement
contained in this Joint Proxy Statement, in a supplement to this Joint Proxy
Statement 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 Joint Proxy Statement to the extent that a statement contained herein or in
any subsequently filed supplement to this Joint Proxy Statement or in any
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Joint Proxy Statement.
Bowater hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Joint Proxy Statement has
been delivered, on the written or oral request of any such person, a copy of any
or all of the documents referred to above which have been or may be incorporated
in this Joint Proxy Statement by reference, other than exhibits to such
documents (unless such exhibits are
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specifically incorporated by reference in such documents). Written or telephone
requests for such copies should be directed to Bowater at its principal
executive offices located at 55 East Camperdown Way, P.O. Box 1028, Greenville,
South Carolina 29602, Attention: Investor Relations Department (telephone number
(864) 271-7733).
AVENOR
The following documents, filed by Avenor with the various securities
commissions or similar authorities in each of the provinces of Canada, and with
the SEC under cover of Form 40-F or Form 6-K, are specifically incorporated by
reference in and form an integral part of this Joint Proxy Statement:
(a) Annual Information Form dated April 21, 1998, including the
Management's Discussion and Analysis and the comparative Consolidated
Financial Statements for the fiscal years ended December 31, 1997 and 1996
and the Auditor's Report thereon (included in Avenor's Form 40-F dated
April 22, 1998);
(b) Interim Report to Shareholders--Three Months Ending March 31,
1998, of Avenor containing unaudited Consolidated Financial Statements of
Avenor for the fiscal quarter ended March 31, 1998, and for the comparative
period in 1997 (included in Avenor's Form 6-K dated April 21, 1998); and
(c) Material Change Report dated March 19, 1998, relating to the
Transaction (included in Avenor's Form 6-K dated March 20, 1998).
Any documents of the type referred to in the preceding paragraph and any
material change reports (excluding confidential reports) filed by Avenor with a
securities commission or any similar authority in Canada after the date of this
Joint Proxy Statement and prior to the Effective Time shall be deemed to be
incorporated by reference in this Joint Proxy Statement.
Avenor will provide without charge to each person, including any beneficial
owner, to whom a copy of this joint proxy statement has been delivered, upon the
written or oral request of such person, a copy of any or all of the documents
referred to above which have been or may be incorporated by reference in this
joint proxy statement, other than certain exhibits to such documents. Requests
for such copies should be directed to Secretary, Avenor Inc., 1250 Rene-Levesque
Blvd., Montreal, Quebec H3B 4Y3 (telephone number (514) 846-4811).
Any statement contained herein, in a supplement to this Joint Proxy
Statement 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 Joint Proxy Statement to the extent that a statement contained herein, in a
supplement to this Joint Proxy Statement or in any subsequently filed document
that also is or is deemed to be incorporated by reference herein, in a
supplement to this Joint Proxy Statement modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy Statement. The
making of a modifying or superseding statement shall not be deemed an admission
for any purposes that the modified or superseded statement, when made,
constituted a misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made.
193
<PAGE> 215
APPROVAL OF PROXY STATEMENT BY
AVENOR BOARD OF DIRECTORS
The contents of this joint management information circular and proxy
statement and the sending thereof to the shareholders of Avenor Inc. have been
approved by the Board of Directors of Avenor Inc.
By Order of the Board of Directors of
Avenor Inc.
/s/ MARC REGNIER
MARC REGNIER
Senior Vice President,
General Counsel and Secretary
June 18, 1998
194
<PAGE> 216
INDEX TO BOWATER CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of KPMG Peat Marwick LLP, Independent Auditor........ FS-2
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... FS-3
Consolidated Balance Sheet at December 31, 1997 and 1996.... FS-4
Consolidated Statement of Capital Accounts for the years
ended December 31, 1997, 1996 and 1995.................... FS-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... FS-6
Notes to Consolidated Financial Statements.................. FS-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 31, 1998 and December
31, 1997.................................................. FS-22
Consolidated Statement of Operations for the three months
ended March 31, 1998 and 1997............................. FS-23
Consolidated Statement of Capital Accounts for the three
months ended March 31, 1998............................... FS-24
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1997............................. FS-25
Notes to Consolidated Financial Statements.................. FS-26
</TABLE>
INDEX TO AVENOR CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Price Waterhouse, Chartered Accountants........... FS-27
Consolidated Statements of Earnings for the year ended
December 31, 1997, 1996 and 1995.......................... FS-28
Consolidated Statements of Retained Earnings (Deficit) for
the year ended December 31, 1997, 1996 and 1995........... FS-29
Consolidated Balance Sheets as of December 31, 1997, 1996
and 1995.................................................. FS-30
Consolidated Statements of Changes in Cash Position for the
year ended December 31, 1997, 1996 and 1995............... FS-31
Notes to Consolidated Financial Statements.................. FS-32
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Statement of Earnings for the three months
ended March 31, 1998 and 1997............................. FS-50
Consolidated Statements of Retained Earnings (Deficit) for
the three months ended March 31, 1998 and 1997............ FS-51
Consolidated Balance Sheets as of March 31, 1998 and 1997... FS-52
Consolidated Statements of Changes in Cash Position for the
three months ended March 31, 1998 and 1997................ FS-53
</TABLE>
FS-1
<PAGE> 217
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Bowater Incorporated:
We have audited the accompanying consolidated balance sheet of Bowater
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, capital accounts and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bowater
Incorporated and Subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
February 6, 1998, except as to Note 2,
which is as of March 9, 1998
FS-2
<PAGE> 218
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Sales.................................................. $1,598,943 $1,839,161 $2,108,071
Distribution costs..................................... 114,440 120,892 106,930
---------- ---------- ----------
Net sales.............................................. 1,484,503 1,718,269 2,001,141
Cost of sales.......................................... 1,106,811 1,149,593 1,183,977
Depreciation, amortization and cost of timber
harvested............................................ 169,824 174,404 174,176
---------- ---------- ----------
Gross profit......................................... 207,868 394,272 642,988
Selling and administrative expense..................... 72,200 93,090 93,737
---------- ---------- ----------
Operating income..................................... 135,668 301,182 549,251
---------- ---------- ----------
Other expense (income):
Interest income...................................... (21,575) (21,074) (8,923)
Interest expense, net of capitalized interest........ 67,488 71,347 80,513
Gain on sale of timberlands.......................... (768) (81,065) (2,152)
Gain/loss on sale of Star Forms...................... -- (17,019) 30,000
Other, net........................................... 1,040 (4,195) (14,757)
---------- ---------- ----------
Income before income taxes, minority interests and
extraordinary charges............................. 89,483 353,188 464,570
Provision for income tax expense....................... 33,109 124,393 183,090
Minority interests in net income of subsidiaries....... 2,683 24,719 23,235
---------- ---------- ----------
Income before extraordinary charges.................... 53,691 204,076 258,245
Extraordinary charges from early extinguishment of
debt, net of income tax benefit of $2,234 in 1996 and
$7,084 in 1995....................................... -- (3,922) (11,317)
---------- ---------- ----------
Net income................................... $ 53,691 $ 200,154 $ 246,928
========== ========== ==========
Earnings per share:
Basic earnings per common share:
Income before extraordinary charges.................. $ 1.26 $ 5.07 $ 6.06
Extraordinary charges................................ -- (0.10) (0.30)
---------- ---------- ----------
Net income............................................. $ 1.26 $ 4.97 $ 5.76
========== ========== ==========
Average common shares outstanding...................... 40,287 37,690 37,992
========== ========== ==========
Diluted earnings per common share:
Income before extraordinary charges.................. $ 1.25 $ 4.64 $ 5.48
Extraordinary charges................................ -- (0.09) (0.26)
---------- ---------- ----------
Net income............................................. $ 1.25 $ 4.55 $ 5.22
========== ========== ==========
Average common and common equivalent shares
outstanding.......................................... 40,812 42,922 43,448
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-3
<PAGE> 219
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER-
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 228,688 $ 85,259
Marketable securities..................................... 176,834 345,398
Accounts receivable, net.................................. 190,594 185,724
Inventories............................................... 105,514 123,745
Other current assets...................................... 16,745 13,629
---------- ----------
Total current assets.............................. 718,375 753,755
---------- ----------
Timber and timberlands...................................... 394,039 395,675
Fixed assets, net........................................... 1,554,529 1,636,705
Other assets................................................ 78,855 79,409
---------- ----------
Total assets...................................... $2,745,798 $2,865,544
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 1,800 $ 1,604
Accounts payable and accrued liabilities.................. 168,327 216,328
Income taxes payable...................................... 15,861 6,057
Dividends payable......................................... 8,663 29,892
---------- ----------
Total current liabilities......................... 194,651 253,881
---------- ----------
Long-term debt, net of current installments................. 757,100 759,029
Other long-term liabilities................................. 169,510 171,651
Deferred income taxes....................................... 345,166 358,858
Minority interests in subsidiaries.......................... 125,206 126,246
Commitments and contingencies (See note 12)
Redeemable preferred stock: $1 par value. Issued LIBOR
preferred stock, Series A, 500,000 shares at December 31,
1996 -- 24,746
Shareholders' equity:
Cumulative preferred stock, $1 par value. Issued, 8.40%
Series C, 264,318 shares (liquidation value $26,432) 25,465 25,465
Common stock, $1 par value. Authorized 100,000,000 shares;
issued 44,927,890 and 43,994,070 shares at December 31,
1997 and 1996, respectively............................... 44,928 43,994
Additional paid-in capital.................................. 563,096 531,598
Retained earnings........................................... 716,961 698,301
Equity adjustments.......................................... (15,449) (12,370)
Loan to ESOT................................................ (4,536) (6,324)
Treasury stock at cost, 4,606,785 and 2,980,965 shares at
December 31, 1997 and 1996, respectively.................. (176,300) (109,531)
---------- ----------
Total shareholders' equity........................ 1,154,165 1,171,133
---------- ----------
Total liabilities and shareholders' equity........ $2,745,798 $2,865,544
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-4
<PAGE> 220
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
<TABLE>
<CAPTION>
SERIES B SERIES C
LIBOR CONVERTIBLE CUMULATIVE ADDITIONAL
PREFERRED PREFERRED PREFERRED COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
--------- ----------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
-------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994...... $ 74,492 $ 111,333 $ 81,892 $ 37,121 $336,990
--------- --------- --------- -------- --------
Net income........................ -- -- -- -- --
Dividends on:
Common ($.60 per share).......... -- -- -- -- --
LIBOR ($2.67 per share).......... -- -- -- -- --
Series B ($6.58 per share)....... -- -- -- -- --
Series C ($8.40 per share)....... -- -- -- -- --
Increase in stated value of LIBOR
preferred stock.................. 127 -- -- -- --
Reduction in loan to ESOT......... -- -- -- -- --
Foreign currency translation...... -- -- -- -- --
Stock options exercised........... -- -- -- 2,380 55,350
Tax benefit on exercise of stock
options.......................... -- -- -- -- 17,602
Partial redemption of LIBOR and
Series C preferred stock......... (25,000) -- (56,427) -- --
Pension plan additional minimum
liability, net of tax benefit of
$6,941........................... -- -- -- -- --
Use of treasury stock............. -- -- -- -- 65
--------- --------- --------- -------- --------
BALANCE AT DECEMBER 31, 1995...... $ 49,619 $ 111,333 $ 25,465 $ 39,501 $410,007
--------- --------- --------- -------- --------
Net income........................ -- -- -- -- --
Dividends on:
Common ($.80 per share).......... -- -- -- -- --
LIBOR ($2.42 per share).......... -- -- -- -- --
Series B ($6.58 per share)....... -- -- -- -- --
Series C ($8.40 per share)....... -- -- -- -- --
Increase in stated value of LIBOR
preferred stock.................. 127 -- -- -- --
Reduction in loan to ESOT......... -- -- -- -- --
Foreign currency translation...... -- -- -- -- --
Stock options exercised........... -- -- -- 480 11,795
Tax benefit on exercise of stock
options.......................... -- -- -- -- 2,431
Partial redemption of LIBOR
preferred stock.................. (25,000) -- -- -- --
Conversion of Series B preferred
into common stock................ $ -- $(111,333) -- 4,013 107,310
Pension plan additional minimum
liability, net of taxes of
$670............................. -- -- -- -- --
Purchase of common stock.......... -- -- -- -- --
Use of treasury stock............. -- -- -- -- 55
--------- --------- --------- -------- --------
BALANCE AT DECEMBER 31, 1996...... $ 24,746 $ -- $ 25,465 $ 43,994 $531,598
--------- --------- --------- -------- --------
Net income........................ -- -- -- -- --
Dividends on:
Common ($.80 per share).......... -- -- -- -- --
LIBOR ($.79 per share)........... -- -- -- -- --
Series C ($8.40 per share)....... -- -- -- -- --
Increase in stated value of LIBOR
preferred stock.................. 254 -- -- -- --
Reduction in loan to ESOT......... -- -- -- -- --
Foreign currency translation...... -- -- -- -- --
Stock options exercised........... -- -- -- 934 23,573
Tax benefit on exercise of stock
options.......................... -- -- -- -- 7,919
Redemption of LIBOR preferred
stock............................ (25,000) -- -- -- --
Pension plan additional minimum
liability, net of tax benefit of
$372............................. -- -- -- -- --
Purchase of common stock.......... -- -- -- -- --
Use of treasury stock............. -- -- -- -- 6
--------- --------- --------- -------- --------
BALANCE AT DECEMBER 31, 1997...... $ -- $ -- $ 25,465 $ 44,928 $563,096
========= ========= ========= ======== ========
<CAPTION>
RETAINED EQUITY LOAN TO TREASURY
EARNINGS ADJUSTMENTS ESOT STOCK
--------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994...... $ 344,852 $ (3,410) $ (9,643) $ (11,710)
--------- --------- --------- ---------
Net income........................ 246,928 -- -- --
Dividends on:
Common ($.60 per share).......... (22,600) -- -- --
LIBOR ($2.67 per share).......... (4,005) -- -- --
Series B ($6.58 per share)....... (8,050) -- -- --
Series C ($8.40 per share)....... (5,910) -- -- --
Increase in stated value of LIBOR
preferred stock.................. (127) -- -- --
Reduction in loan to ESOT......... -- -- 1,610 --
Foreign currency translation...... -- 1,071 -- --
Stock options exercised........... -- -- -- --
Tax benefit on exercise of stock
options.......................... -- -- -- --
Partial redemption of LIBOR and
Series C preferred stock......... (9,883) -- -- --
Pension plan additional minimum
liability, net of tax benefit of
$6,941........................... -- (10,789) -- --
Use of treasury stock............. -- -- -- 772
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995...... $ 541,205 $ (13,128) $ (8,033) $ (10,938)
--------- --------- --------- ---------
Net income........................ 200,154 -- -- --
Dividends on:
Common ($.80 per share).......... (30,241) -- -- --
LIBOR ($2.42 per share).......... (2,420) -- -- --
Series B ($6.58 per share)....... (8,050) -- -- --
Series C ($8.40 per share)....... (2,220) -- -- --
Increase in stated value of LIBOR
preferred stock.................. (127) -- -- --
Reduction in loan to ESOT......... -- -- 1,709 --
Foreign currency translation...... -- (289) -- --
Stock options exercised........... -- -- -- --
Tax benefit on exercise of stock
options.......................... -- -- -- --
Partial redemption of LIBOR
preferred stock.................. -- -- -- --
Conversion of Series B preferred
into common stock................ -- -- -- --
Pension plan additional minimum
liability, net of taxes of
$670............................. -- 1,047 -- --
Purchase of common stock.......... -- -- -- (98,762)
Use of treasury stock............. -- -- -- 169
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996...... $ 698,301 $ (12,370) $ (6,324) $(109,531)
--------- --------- --------- ---------
Net income........................ 53,691 -- -- --
Dividends on:
Common ($.80 per share).......... (32,164) -- -- --
LIBOR ($.79 per share)........... (393) -- -- --
Series C ($8.40 per share)....... (2,220) -- -- --
Increase in stated value of LIBOR
preferred stock.................. (254) -- -- --
Reduction in loan to ESOT......... -- -- 1,788 --
Foreign currency translation...... -- (2,500) -- --
Stock options exercised........... -- -- -- --
Tax benefit on exercise of stock
options.......................... -- -- -- --
Redemption of LIBOR preferred
stock............................ -- -- -- --
Pension plan additional minimum
liability, net of tax benefit of
$372............................. -- (579) -- --
Purchase of common stock.......... -- -- -- (66,845)
Use of treasury stock............. -- -- -- 76
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997...... $ 716,961 $ (15,449) $ (4,536) $(176,300)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-5
<PAGE> 221
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 53,691 $ 200,154 $ 246,928
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and cost of timber
harvested............................................ 169,824 174,404 174,176
Deferred income taxes.................................. (3,355) 36,979 75,122
Minority interests..................................... 2,683 24,719 23,235
Gain on sale of timberlands............................ (768) (81,065) (2,152)
Gain/loss on sale of Star Forms........................ -- (17,019) 30,000
Extraordinary charge, net of taxes..................... -- 3,922 11,317
Changes in working capital:
Accounts receivable, net............................. (4,870) 39,916 (44,374)
Inventories.......................................... 18,231 13,884 (3,565)
Accounts payable and accrued liabilities............. (42,703) 30,931 11,272
Income taxes payable................................. 6,136 (78,611) 91,580
Other, net............................................. (3,213) (12,007) (5,858)
--------- --------- ---------
Net cash from operating activities................ 195,656 336,207 607,681
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in fixed assets, timber and timberlands..... (99,576) (106,960) (95,972)
Disposition of fixed assets, timber and timberlands....... 3,701 126,714 4,256
Disposition of Star Forms................................. -- 53,946 --
Cash from maturity of (invested in) marketable
securities............................................. 168,564 (345,398) --
--------- --------- ---------
Net cash from (used for) investing activities..... 72,689 (271,698) (91,716)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests.............. (57,560) (70,528) (41,783)
Purchase of common stock.................................. (66,845) (98,762) --
Purchases/payments of long-term debt...................... (1,806) (63,521) (317,282)
Redemption of preferred stock of subsidiary............... -- -- (15,000)
Stock options exercised................................... 24,507 12,275 57,730
Redemption of LIBOR and Series C preferred stock.......... (25,000) (25,000) (91,309)
Other..................................................... 1,788 1,715 1,482
--------- --------- ---------
Net cash used for financing activities............ (124,916) (243,821) (406,162)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 143,429 (179,312) 109,803
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 85,259 264,571 154,768
--------- --------- ---------
End of year............................................... $ 228,688 $ 85,259 $ 264,571
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest.................. $ (66,499) $ (72,623) $ (82,428)
Income taxes........................................... $ (30,328) $(166,025) $ (16,388)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
FS-6
<PAGE> 222
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the accounts of Bowater
Incorporated and Subsidiaries (the company). All subsidiaries are wholly owned
except Calhoun Newsprint Company (CNC) and Bowater Mersey Paper Company, Ltd.
(Mersey), which are approximately 51 percent owned. All material intercompany
items are eliminated.
Cash Equivalents
Cash equivalents generally consist of direct obligations of the United
States Government and its agencies, investment-grade commercial paper,
auction-rate preferred stock, tax-exempt municipal bonds and other short-term
investment-grade securities with original maturities of three months or less.
These investments are stated at cost, which approximates fair value.
Marketable Securities
Marketable securities generally consist of direct obligations of the United
States Government and its agencies, investment-grade commercial paper,
tax-exempt municipal bonds and other short-term investment-grade securities with
original maturities of greater than three months but less than one year. These
investments are considered to be held-to-maturity securities and are therefore
stated at cost which approximates market value.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by using the average cost and last-in, first-out (LIFO) methods.
Timber and Timberlands
The acquisition cost of land and timber as well as real estate taxes, lease
payments, site preparation and other costs related to the planting and growing
of timber are capitalized. Such costs, excluding land, are charged against
revenue at the time the timber is harvested.
Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is computed generally on the straight-line basis. Repairs and maintenance are
charged to operations as incurred.
Income Taxes
Income taxes are recorded under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred
taxes are provided for significant temporary differences. The company has not
provided income taxes on the undistributed earnings of its Canadian subsidiary
and, prior to 1993, on CNC's undistributed earnings, as it has specific plans
for reinvestment of such earnings.
Foreign Operations
Assets and liabilities of the company's Canadian operations are translated
using the exchange rate in effect at the balance sheet date. Results of
operations are translated using the average exchange rates throughout each year.
The effects of exchange rate fluctuations are accumulated as a separate
component of shareholders' equity, entitled "Equity adjustments." Gains or
losses on currency transactions are included in the Consolidated Statement of
Operations.
FS-7
<PAGE> 223
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues and assets of foreign operations do not qualify for separate
disclosure under SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise."
Stock Options
The company records stock option compensation on an intrinsic value basis
in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." The company also provides pro forma disclosures
of stock option compensation recorded on a fair value basis in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation."
Pension Plans
The company has contributory and noncontributory pension plans that cover
substantially all employees. The company's cash contributions to the plans are
sufficient to provide pension benefits to participants and meet the funding
requirements of ERISA. All pension related expenses and liabilities are recorded
under the provisions of SFAS No. 87, "Employers' Accounting for Pensions."
Revenue Recognition
The company recognizes revenue from product sales upon shipment to its
customers or when customers assume risk of ownership.
Basic and Diluted Earnings Per Share
The company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share." This statement requires the presentation of basic and
diluted earnings per common share. Basic earnings per common share is calculated
assuming no dilution. Diluted earnings per common share is computed using the
weighted average number of outstanding common shares adjusted for the
incremental shares attributed to common share equivalents (stock options and,
prior to December 1996, Series B Convertible Preferred Stock). All prior period
earnings per share amounts presented have been restated to conform with the
provisions of the statement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, they affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates and assumptions.
2. SUBSEQUENT EVENT -- ACQUISITION OF AVENOR INC.
On March 9, 1998, the company signed a definitive agreement by which it
will acquire all of the outstanding shares of Avenor Inc. common stock for C$35
per share (U.S.$24.67 per share as of March 9). The purchase price, including
assumed debt, is approximately C$3.5 billion (U.S.$2.5 billion as of March 9).
The combination has been approved by the Boards of Directors of both companies
and is expected to be completed by the end of June 1998, subject to the approval
of the shareholders of both companies and appropriate regulatory authorities.
The transaction will be financed through a combination of cash, additional debt
and common stock. The transaction will be accounted for using the purchase
method as outlined in Accounting Principles Board Opinion No. 16, "Business
Combinations."
FS-8
<PAGE> 224
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Avenor Inc. is an international forest products company that manufactures
newsprint, pulp, uncoated free sheet paper and wood products. Its 1997 net sales
were C$2.0 billion, and at December 31, 1997, its total assets were C$2.7
billion.
3. COST REDUCTIONS
In recent years, the company designed and implemented programs to reduce
operating and administrative costs to globally competitive levels. In 1997 and
1996, the company focused on improving business processes in addition to cost
reductions. In 1995, approximately 350 salaried employee positions were
eliminated, and the company recorded a pre-tax charge of $24,000,000, or $.33
per diluted share after tax, for employee termination costs, which included
severance and pension related costs. Approximately $18,000,000 of the charge was
included on the line item "Cost of sales" in the 1995 Consolidated Statement of
Operations while the remaining $6,000,000 was included on the line item "Selling
and administrative expense."
4. SALES OF REAL PROPERTY
During 1997, the company sold 1,000 acres of timberlands, primarily in
North and South Carolina. The proceeds from these sales were $1,272,000,
resulting in a pre-tax gain of $768,000, or $.01 per diluted share, after tax
and minority interest. During 1996, the company sold 121,000 acres of
timberlands, primarily in Alabama, South Carolina and Maine. The proceeds from
these sales were $121,755,000, resulting in a pre-tax gain of $81,065,000, or
$.94 per diluted share, after tax and minority interest. In 1995, the company
sold 2,300 acres of timberlands, primarily in North and South Carolina. The
proceeds were $2,603,000, resulting in a pre-tax gain of $2,152,000, or $.03 per
diluted share, after tax and minority interest.
In January 1998, the company sold 19,000 acres of timberlands with gross
proceeds of approximately $30,000,000.
5. SALE OF SUBSIDIARIES
In November 1996, the company completed the sale of Star Forms to CST
Office Products, Inc., for $80,000,000, including $60,000,000 in cash and a
$20,000,000 13% Junior Subordinated Note. The company recognized a gain on the
sale of $17,019,000, or $.40 per diluted share. Net cash proceeds totaled
$53,946,000 after working capital adjustments and fees and expenses relating to
the sale. The $20,000,000 13% Junior Subordinated Note requires semi-annual
interest payments and four $5,000,000 annual principal payments beginning in
2002. The company recorded the note at its fair market value on the line
entitled "Other assets" in the Consolidated Balance Sheet.
In the second quarter of 1995, the company announced its intention to sell
Star Forms. In the third quarter of 1995, based on the offers received, the
company recorded an estimated loss on the planned sale of Star Forms of
$30,000,000.
In January 1998, the company announced its intention to seek a buyer for
its Millinocket, Maine, paper mill which includes four paper machines and
related assets. The facility no longer meets the company's long-term objectives.
6. EARNINGS PER SHARE
The company adopted SFAS No. 128, "Earnings per Share", in December 1997
which replaces the presentation of primary earnings per common share with basic
earnings per common share. Basic earnings per common share is calculated
assuming no dilution.
FS-9
<PAGE> 225
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation between basic and diluted earnings per common share for
"Income before extraordinary charges" is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C> <C>
BASIC COMPUTATION:
Income before extraordinary charges............... $53,691 $204,076 $258,245
Less:
LIBOR dividends................................. (393) (2,420) (4,005)
Series B dividends.............................. -- (8,050) (8,050)
Series C dividends.............................. (2,220) (2,220) (5,910)
LIBOR accretion................................. (254) (127) (127)
Series C redemption costs....................... -- -- (9,883)
------- -------- --------
Basic income available to common shareholders..... $50,824 $191,259 $230,270
------- -------- --------
Basic weighted average shares outstanding......... 40,287 37,690 37,992
------- -------- --------
Basic earnings per common share................... $ 1.26 $ 5.07 $ 6.06
------- -------- --------
DILUTED COMPUTATION:
Basic income available to common shareholders..... $50,824 $191,259 $230,270
Effect of dilutive securities: Series B
dividends....................................... -- 8,050 8,050
------- -------- --------
Diluted income available to common shareholders... $50,824 $199,309 $238,320
------- -------- --------
Basic weighted shares outstanding................. 40,287 37,690 37,992
Effect of dilutive securities: Series B
convertible preferred stock..................... -- 4,662(1) 4,894(1)
Options(2)........................................ 525 570 562
------- -------- --------
Diluted weighted average shares outstanding....... 40,812 42,922 43,448
------- -------- --------
Diluted earnings per common share................. $ 1.25 $ 4.64 $ 5.48
------- -------- --------
</TABLE>
- ---------------
1. In the interim periods of 1996 and during 1995, a one for one conversion
factor was assumed in computing the common stock equivalents related to the
Series B convertible preferred stock. The shares were actually converted at a
factor of .82 to 1 in December 1996.
2. The dilutive effect of options outstanding is computed using the treasury
stock method.
Options to purchase 69,800 shares at approximately $38 per share were
outstanding during the fourth quarter of 1996, but were not included in the
computation of diluted earnings per common share because the options' exercise
price was greater than the average market price of the common shares.
7. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
At lower of cost or market:
Raw materials............................................. $ 15,205 $ 17,990
Work in process........................................... 3,126 3,077
Finished goods............................................ 33,215 47,577
Mill stores and other supplies............................ 64,031 66,925
-------- --------
115,577 135,569
Excess of current cost over LIFO inventory value............ (10,063) (11,824)
-------- --------
$105,514 $123,745
-------- --------
</TABLE>
FS-10
<PAGE> 226
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories valued using the LIFO method comprised 33.8 percent and 34.4
percent, respectively, of total inventories at December 31, 1997, and December
31, 1996.
8. FIXED ASSETS
<TABLE>
<CAPTION>
RANGE OF
ESTIMATED
USEFUL LIVES
1997 1996 IN YEARS
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and land improvements................................. $ 32,987 $ 33,105 10-20
Buildings.................................................. 286,437 290,613 20-40
Machinery and equipment.................................... 2,713,496 2,672,937 5-20
Leasehold improvements..................................... 2,618 2,741 10-20
Construction in progress................................... 24,058 22,405 --
---------- ---------- -----
3,059,596 3,021,801
Less accumulated depreciation and amortization............. 1,505,067 1,385,096
---------- ----------
$1,554,529 $1,636,705
---------- ----------
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable...................................... $ 78,574 $ 95,300
Accrued interest............................................ 16,650 16,139
Property and franchise taxes payable........................ 12,378 12,650
Payroll and bonuses......................................... 29,310 50,402
Employee benefits........................................... 23,818 29,482
Other....................................................... 7,597 12,355
-------- --------
$168,327 $216,328
-------- --------
</TABLE>
The decrease in trade accounts payable from 1996 to 1997 was due to normal
fluctuations in operating accruals. The decrease in payroll and bonuses was due
to the payment in 1997 of $25,411,000 pursuant to a long-term incentive
compensation plan accrued as of December 31, 1996.
FS-11
<PAGE> 227
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT, NET OF CURRENT INSTALLMENTS
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Unsecured:
9% Debentures due 2009...................................... $250,017 $250,017
9 3/8% Debentures due 2021, net of unamortized discount of
$1,200 in 1997 and $1,250 in 1996......................... 198,800 198,750
9 1/2% Debentures due in 2012, net of unamortized discount
of $336 in 1997 and $359 in 1996.......................... 124,664 124,641
7 3/4% recycling facilities revenue bonds due 2022.......... 62,000 62,000
7.40% recycling facilities revenue bonds due 2022........... 39,500 39,500
7 5/8% recycling facilities revenue bonds due 2016, net of
unamortized discount of $131 in 1997 and $135 in 1996..... 29,869 29,865
Pollution control revenue bonds due at various dates from
2001 to 2010 with interest at varying rates from 6.85% to
7 5/8%.................................................... 23,300 23,300
8 1/2% Notes due 2001....................................... 18,140 18,140
8 1/4% Notes due 1999, net of unamortized discount of $3 in
1997 and $4 in 1996....................................... 8,025 8,024
ESOT note due 2000.......................................... 2,740 4,724
Other....................................................... 45 68
-------- --------
$757,100 $759,029
-------- --------
</TABLE>
Long-term debt maturities for the next five years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................................ $ 1,800
1999........................................................ $ 9,828
2000........................................................ $ 936
2001........................................................ $28,040
2002........................................................ $ --
-------
</TABLE>
Based on the borrowing rates currently available to the company for debt
with similar terms and maturities as those issues included in the accompanying
Consolidated Balance Sheet, the fair value of the company's long-term debt, net
of current installments, was approximately $916,000,000 and $881,000,000 at
December 31, 1997 and 1996, respectively.
During 1996, the company repurchased approximately $50,000,000 of its
$300,000,000 9% Debentures due 2009. This resulted in an extraordinary charge of
$3,531,000 after tax, or $.08 per diluted share, for premium and expenses
related to the repurchase. In addition, the company repurchased $1,000,000 of
other long-term obligations in the first quarter of 1996 and extinguished
$5,000,000 in the fourth quarter. The second transaction resulted in an
extraordinary charge for fees and expenses of $391,000 after tax, or $.01 per
diluted share.
In 1995, the company signed a $150,000,000 Credit Agreement, which expires
September 2000. At December 31, 1997 and 1996, there were no amounts outstanding
under this agreement.
11. MINORITY INTERESTS IN SUBSIDIARIES
In 1997, the Board of Directors of CNC declared dividends of $3,184,000. As
a result, $1,560,000 was paid to the minority shareholder during the year.
FS-12
<PAGE> 228
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, the Board of Directors of CNC declared a $60,000,000
dividend resulting in a payment of $29,400,000 to the minority shareholder. In
December 1996, a $40,000,000 dividend was declared. The amount due to the
minority shareholder, $19,600,000, was included in the Consolidated Balance
Sheet at December 31, 1996, on the line entitled "Dividends payable." The
dividend was paid in January 1997.
In January 1998, the Board of Directors of CNC declared a $31,400,000
dividend. As a result, $15,386,000 was paid to the minority shareholder of CNC
in February 1998.
12. COMMITMENTS AND CONTINGENCIES
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 periodically reviews the
status of these proceedings with both inside and outside counsel. 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.
13. REDEEMABLE PREFERRED STOCK
In 1985, the company sold $75,000,000 principal amount of redeemable
preferred stock with cumulative quarterly dividends equal to 85 percent of the
arithmetic mean of three-month LIBOR for United States dollar deposits.
The company was required to redeem 500,000 shares per year from 1996
through 1998 at a redemption price of $50.00 per share plus any accrued and
unpaid dividends. In 1995 and 1996, the company redeemed 1,000,000 shares for
$50,625,000, including accrued dividends. In May 1997, the company redeemed the
remaining 500,000 shares for $25,092,000, including accrued dividends.
The company is authorized to issue 10,000,000 shares of Serial Preferred
Stock, $1 par value, of which the LIBOR Preferred Stock constituted Series A.
See Note 14 for a discussion of Series B and C preferred stock.
14. CONVERTIBLE AND CUMULATIVE PREFERRED STOCK
In 1994, the company completed two public offerings of preferred stock. The
company sold 4,893,616 depositary shares, priced at $23.50 per share, each
representing one-fourth of a share of 7% Series B Convertible Preferred Stock
referred to as Preferred Redeemable Increased Dividend Equity Securities
(PRIDES). The company also sold 3,400,000 depositary shares, priced at $25.00
per share, each representing one-fourth of a share of 8.40% Series C Cumulative
Preferred Stock. The Series C Cumulative Preferred Stock has a liquidation value
of $25.00 per depositary share.
In December 1996, pursuant to an optional redemption provision, the company
called for redemption on January 9, 1997, all of its outstanding depositary
shares relating to the PRIDES. The PRIDES were redeemed using Bowater common
stock at a conversion rate 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.
In 1995, the company repurchased 585,682 shares of the Series C Cumulative
Preferred Stock leaving a balance of 264,318 preferred shares.
15. TREASURY STOCK
In November 1997, the Board of Directors authorized the repurchase of up to
10 percent of the company's outstanding common stock in the open market, subject
to normal trading restrictions. Under this program, the company purchased
220,000 shares of stock at a cost of $9,601,000.
FS-13
<PAGE> 229
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the company completed a previously announced stock
repurchase program, purchasing 1,408,300 shares of common stock at a cost of
$57,244,000 in 1997 and 2,591,700 shares of common stock at a cost of
$98,762,000 in 1996. The company purchased a total of 4,000,000 shares of common
stock, or 10 percent of the outstanding shares under this program, at a cost of
$156,006,000.
The company uses shares of such stock to pay employee and director benefits
and to fund the company's Dividend Reinvestment Plan.
16. STOCK OPTION PLANS
The company has three stock option plans -- 1988, 1992 and 1997. These
plans authorized the grant of up to 6,000,000 shares of the company's common
stock in the form of incentive stock options, non-qualified stock options, stock
appreciation rights, performance stock and restricted stock awards. The option
price for options granted under the 1988 and 1992 plans was based on the fair
market value of the company's common stock on the date of grant, or the average
fair market value of the company's common stock for the 20 business days
immediately preceding the date of grant. The option price for options granted
under the 1997 plan was based on the fair market value of the company's common
stock on the date of grant.
All options granted through December 31,1995, were exercisable at December
31, 1997. Options granted in 1997 and 1996 generally become exercisable over a
period of two years. Unless terminated earlier in accordance with their terms,
all options expire 10 years from the date of grant. The plans provide that any
outstanding options will become immediately exercisable upon a change in control
of the company. In such event, grantees of options have the right to require the
company to purchase such options for cash in lieu of the issuance of common
stock. The company received $24,507,000, $12,275,000 and $57,730,000 from the
exercise of stock options in 1997, 1996 and 1995, respectively. The exercise of
stock options also generated $7,919,000, $2,431,000 and $17,602,000 of tax
benefits for the company in 1997, 1996 and 1995, respectively.
The company records compensation expense resulting from stock option grants
based on intrinsic value in accordance with APB Opinion No. 25. In accordance
with SFAS No. 123, the following pro forma disclosures present the effects on
income had the fair value based method been chosen. These disclosures are shown
below for 1997, 1996 and 1995, and have no impact on the company's reported
financial position or results of operations.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported............................................... $ 53,691 $200,154 $246,928
Pro forma................................................. 50,788 196,256 244,157
Earnings per share -- basic:
As reported............................................... 1.26 4.97 5.76
Pro forma................................................. 1.19 4.87 5.69
Earnings per share -- diluted:
As reported............................................... 1.25 4.55 5.22
Pro forma................................................. $ 1.17 $ 4.46 $ 5.16
--------- -------- --------
</TABLE>
The pro forma net income effects of SFAS No. 123 in 1997, 1996 and 1995 may
not be representative of the pro forma net income effects in future years due to
changes in assumptions and the number of options granted in future years.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995, respectively: dividend yield of 1.9
percent, 2.3 percent and 2.8 percent; expected volatility of 29.5 percent, 30.9
percent and
FS-14
<PAGE> 230
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
28.4 percent; risk-free interest rate of 6.4 percent, 5.4 percent and 7.8
percent; and expected option lives of 5.5 years, 5.6 years and 5.6 years. The
weighted-average fair value of each option granted during 1997, 1996 and 1995
was $13.65, $10.67 and $9.46, respectively.
Information with respect to options granted under the stock option plans is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES(000) PRICE SHARES(000) PRICE SHARES(000) PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 2,477 $27 2,576 $26 4,273 $24
Granted during the
year................. 404 $42 398 $35 769 $28
Exercised during the
year................. (934) $26 (480) $25 (2,380) $24
Canceled during the
year................. (40) $35 (17) $28 (86) $27
----- --- ----- --- ------ ---
Outstanding at end of
year................. 1,907 $31 2,477 $27 2,576 $26
----- --- ----- --- ------ ---
Exercisable at end of
year................. 1,371 $26 1,805 $25 1,486 $25
----- --- ----- --- ------ ---
</TABLE>
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING AT EXERCISABLE AT
DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------------ ----------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
NUMBER OF EXERCISE LIFE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES(000) PRICE (YEARS) SHARES(000) PRICE
------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$21 to $26.................................. 515 $23 4.5 515 $23
$26 to $31.................................. 607 $28 6.2 607 $28
$31 to $36.................................. 379 $35 7.9 217 $35
$36 to $41.................................. 13 $38 7.1 12 $38
$41 to $43.................................. 393 $42 9.0 20 $42
----- --- --- ----- ---
1,907 $31 6.1 1,371 $26
----- --- --- ----- ---
</TABLE>
17. EMPLOYEE STOCK OWNERSHIP PLAN
The company has an Employee Stock Ownership Plan (ESOP) as a component of
the company's Salaried Employees' Savings Plan. The ESOP was funded by a
$17,500,000 loan, the proceeds of which were then lent to an Employee Stock
Ownership Trust (ESOT). The ESOT purchased 574,160 shares of the company's
common stock at an average purchase price of $30.59. As of December 31, 1997,
approximately 452,000 shares have been distributed to participants' accounts.
The remaining shares serve as security for the balance of the loan.
18. INCOME TAXES
The components of "Income before income taxes, minority interests and
extraordinary charges" consist of U.S. income of $95,759,000, $331,211,000 and
$427,768,000, and Canadian income (loss) of $(6,276,000), $21,977,000 and
$36,802,000 in 1997, 1996 and 1995, respectively.
FS-15
<PAGE> 231
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income tax expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................... $30,423 $ 73,679 $ 96,853
Deferred.............................................. 2,209 30,701 52,628
------- -------- --------
32,632 104,380 149,481
------- -------- --------
State:
Current............................................... 5,262 13,058 8,590
Deferred.............................................. (1,920) (945) 14,860
------- -------- --------
3,342 12,113 23,450
------- -------- --------
Canadian:
Current............................................... 779 677 2,525
Deferred.............................................. (3,644) 7,223 7,634
------- -------- --------
(2,865) 7,900 10,159
------- -------- --------
Total:
Current............................................... 36,464 87,414 107,968
Deferred.............................................. (3,355) 36,979 75,122
------- -------- --------
$33,109 $124,393 $183,090
------- -------- --------
</TABLE>
The components of deferred income taxes at December 31, 1997 and 1996, in
the accompanying Consolidated Balance Sheet are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Timber and timberlands(1)................................... $ (38,714) $ (38,228)
Fixed assets................................................ (390,078) (406,065)
Other assets................................................ (21,109) (20,659)
--------- ---------
Deferred tax liabilities.................................... (449,901) (464,952)
--------- ---------
Accounts receivable(2)...................................... 117 18
Inventories(2).............................................. 1,864 1,043
Other current assets(2)..................................... 1,254 1,151
Current liabilities(2)...................................... 7,070 6,361
Other long-term liabilities................................. 46,226 37,823
U.S. tax credit carryforwards, primarily alternative minimum
tax credit carryforwards.................................. 35,402 42,555
Canadian investment tax credit carryforwards................ 26,827 29,437
Valuation allowance......................................... (3,720) (3,720)
--------- ---------
Deferred tax assets......................................... 115,040 114,668
--------- ---------
Net deferred tax liability.................................. $(334,861) $(350,284)
========= =========
</TABLE>
- ---------------
(1) Includes the deferred tax impact of the capitalization of lease payments,
management fees and property taxes of approximately $123,562,000 and
$121,680,000 at December 31, 1997 and 1996, respectively.
(2) Included in "Other current assets" in the accompanying Consolidated Balance
Sheet.
FS-16
<PAGE> 232
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the U.S. federal statutory and
effective tax rates as a percentage of income before income taxes, minority
interests and extraordinary charges:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 2.4 2.2 3.3
Canadian taxes.............................................. (0.7) 0.1 (0.6)
Other, net.................................................. 0.3 (2.1) 1.7
---- ---- ----
Effective income tax rate................................... 37.0% 35.2% 39.4%
==== ==== ====
</TABLE>
At December 31, 1997, $26,827,000 of Canadian investment credit
carryforwards and $35,402,000 of U.S. tax credit carryforwards were available to
reduce future income taxes. The company believes that such deferred tax assets
will be ultimately realized, net of the existing valuation allowance of
$3,720,000 at December 31, 1997. There was no net increase in the valuation
allowance for the year ended December 31, 1997. The Canadian investment credit
carryforwards expire at various dates between 1998 and 2007. The majority of the
U.S. tax credit carryforwards have no expiration.
The cumulative amount of CNC's undistributed earnings through 1992, on
which the company has not provided income taxes, was $68,406,000 as of December
31, 1997. Distribution of these earnings would qualify for the 80 percent
dividends received deduction. The company has also not provided deferred income
taxes on the cumulative amount of undistributed earnings related to its 51
percent investment in its Canadian subsidiary since that investment is
considered permanent in duration and determination of such liability is not
practicable.
19. PENSION PLANS
The company has defined benefit pension plans (the Plans) covering
substantially all employees. Benefits are based upon years of service and,
depending on the plan, average compensation earned by employees either during
their last years of employment or over their career. Pension expense for 1997,
1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................... $ 12,545 $ 12,908 $ 11,425
Interest cost......................................... 34,964 32,525 31,423
Actual return on plan assets.......................... (114,758) (39,822) (81,371)
Net amortization and deferral......................... 73,126 4,990 42,975
--------- -------- --------
Net pension expense................................... $ 5,877 $ 10,601 $ 4,452
========= ======== ========
</TABLE>
FS-17
<PAGE> 233
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of the Plans at December
31, 1997:
<TABLE>
<CAPTION>
PLAN ASSETS PLAN LIABILITIES
EXCEED PLAN EXCEED PLAN
LIABILITIES ASSETS
----------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.................................................... $337,820 $ 77,891
Non-vested................................................ 15,631 14,446
-------- --------
353,451 92,337
Benefits attributable to future salaries.................... 51,826 3,741
-------- --------
Projected benefit obligation................................ 405,277 96,078
Plan assets at fair value................................... 506,007 63,383
-------- --------
Excess (deficit) of plan assets over projected benefit
obligation................................................ 100,730 (32,695)
Unrecognized prior service cost............................. 774 5,066
Unrecognized net loss (gain)................................ (43,100) 19,426
Unrecognized transition liability (asset)................... (12,293) 486
Additional minimum liability recognized as an intangible
other asset............................................... -- (4,307)
Additional minimum liability recognized as a reduction of
shareholders' equity...................................... -- (16,964)
-------- --------
Prepaid pension cost (pension liability).................... $ 46,111 $(28,988)
======== ========
</TABLE>
The following table sets forth the funded status of the Plans at December
31, 1996:
<TABLE>
<CAPTION>
PLAN
PLAN ASSETS LIABILITIES
EXCEED PLAN EXCEED
LIABILITIES PLAN ASSETS
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.................................................... $297,246 $ 82,595
Non-vested................................................ 10,693 16,262
-------- --------
307,939 98,857
Benefits attributable to future salaries.................... 50,082 4,065
-------- --------
Projected benefit obligation................................ 358,021 102,922
Plan assets at fair value................................... 411,208 60,068
-------- --------
Excess (deficit) of plan assets over projected benefit
obligation................................................ 53,187 (42,854)
Unrecognized prior service cost............................. 902 5,522
Unrecognized net loss....................................... 9,344 16,690
Unrecognized transition liability (asset)................... (16,012) 648
Additional minimum liability recognized as an intangible
other asset............................................... -- (4,290)
Additional minimum liability recognized as a reduction of
shareholders' equity...................................... -- (16,013)
-------- --------
Prepaid pension cost (pension liability).................... $ 47,421 $(40,297)
======== ========
</TABLE>
As of December 31, 1997, the company decreased the Plans' discount rate
assumption used to determine the Plans' projected benefit obligation from 7.75
percent to 7.0 percent, which approximates more closely current interest rates
on high-quality long-term obligations. The assumed rate of compensation increase
was also decreased from 4.75 percent to 4.0 percent. The long-term rate of
return on Plan assets assumption remained at 9.5 percent. Plan assets consist
principally of common stocks and fixed income securities.
FS-18
<PAGE> 234
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions of SFAS No. 87, "Employers' Accounting for Pensions,"
required the company to record an additional minimum liability of $21,271,000
and $20,303,000 at December 31, 1997 and 1996, respectively. This liability
represents the amount by which the accumulated benefit obligation exceeds the
sum of the fair market value of plan assets and accrued amounts previously
recorded. The additional liability may be offset by an intangible asset to the
extent of previously unrecognized prior service cost. The intangible asset is
included on the line item entitled "Other assets" in the Consolidated Balance
Sheet at December 31, 1997 and 1996. The remaining amount is recorded as a
reduction to a separate component of shareholders' equity on the Consolidated
Balance Sheet entitled "Equity adjustments," net of related tax benefits.
20. RETIREE HEALTH CARE PLANS
The company provides certain health care and life insurance benefits to
retired employees. Substantially all of the company's employees may become
eligible for these benefits upon reaching retirement age while working for the
company. Retirees are required to contribute a portion of the cost of such
benefits.
The accumulated postretirement benefit obligation at December 31, 1997 and
1996, was comprised of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Retirees.................................................... $ 53,770 $ 46,947
Fully eligible active plan participants..................... 22,082 19,524
Other active plan participants.............................. 58,790 52,258
Unrecognized net loss....................................... (15,304) (6,052)
Unrecognized prior service cost............................. (5,247) (5,599)
-------- --------
$114,091 $107,078
======== ========
</TABLE>
Unlike the company's retirement plans, there are no assets dedicated to
fund retiree benefits. Net periodic cost for 1997, 1996 and 1995 included the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ 2,928 $ 2,841 $ 2,434
Interest cost on accumulated obligation................... 9,043 8,220 7,617
Net amortization.......................................... 256 814 (203)
------- ------- -------
$12,227 $11,875 $ 9,848
======= ======= =======
</TABLE>
As of December 31, 1997, the company decreased the Plans' discount rate
assumption used to determine the Plans' accumulated postretirement benefit
obligation from 7.75 percent to 7.0 percent, which approximates more closely
current interest rates on high-quality long-term obligations. During the next
five years, the Plans assume that the annual cost of postretirement benefits
will increase at an annual rate starting at 8.0 percent and decreasing to 5.5
percent. Variations in this health care cost trend rate can have a significant
effect on the amounts reported. An increase of 1 percent in this assumption
would increase the accumulated postretirement benefit obligation by
approximately 22 percent and would increase the annual cost by approximately 20
percent.
21. TIMBERLAND LEASES AND OPERATING LEASES
The company controls timberlands under long-term leases expiring 2002 to
2058, for which aggregate lease payments were $716,000, $594,000 and $943,000
for 1997, 1996 and 1995, respectively. In addition, the company leases certain
office premises, office equipment and transportation equipment under operating
leases.
FS-19
<PAGE> 235
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rental expense for these operating leases was $5,531,000, $8,024,000 and
$9,036,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, the future minimum rental payments under timberland
leases and operating leases are:
<TABLE>
<CAPTION>
TIMBERLAND OPERATING
LEASE LEASES,
PAYMENTS NET
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998........................................................ $ 695 $ 4,569
1999........................................................ 695 3,770
2000........................................................ 695 2,706
2001........................................................ 695 1,999
2002........................................................ 695 2,022
Thereafter.................................................. 20,134 7,839
------- -------
$23,609 $22,905
======= =======
</TABLE>
22. NET EXPORT SALES
The breakdown of total net export sales by geographic area was:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia:
Japan................................................ $ 21,477 $ 22,397 $ 53,136
Southeast Asia*...................................... 58,600 74,604 78,899
Other Asia*.......................................... 8,597 46,577 6,343
-------- -------- --------
$ 88,674 $143,578 $138,378
-------- -------- --------
Europe:
Italy................................................ $ 25,957 $ 18,870 $ 15,058
Western Europe*...................................... 45,810 48,065 52,335
Other Europe*........................................ 400 -- --
-------- -------- --------
$ 72,167 $ 66,935 $ 67,393
-------- -------- --------
Latin America:
Brazil............................................... $ 37,406 $ 33,121 $ 37,920
Mexico & Central America*............................ 12,177 7,101 10,916
Other Latin America*................................. 27,601 32,102 42,755
-------- -------- --------
$ 77,184 $ 72,324 $ 91,591
-------- -------- --------
Canada................................................. 20,205 20,190 24,345
Other.................................................. 9,364 10,147 --
-------- -------- --------
Sub-total............................................ $267,594 $313,174 $321,707
Less: Distribution Costs............................. (44,136) (53,847) (37,203)
-------- -------- --------
Net Export Sales....................................... $223,458 $259,327 $284,504
======== ======== ========
</TABLE>
- ---------------
* No other country included in these groupings exceeded 10 percent of Bowater's
consolidated net export sales.
FS-20
<PAGE> 236
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............ $ 348,507 $ 356,342 $ 378,631 $ 401,023 $ 1,484,503
Gross profit......... 25,344 43,014 59,234 80,276 207,868
Operating income..... 10,123 23,190 40,452 61,903 135,668
Income (loss) before
extraordinary
charge............. (314) 7,096 16,785 30,124 53,691
Net income (loss).... (314) 7,096 16,785 30,124 53,691
Basic earnings (loss)
per common share... (.03) .16 .40 .73 1.26
Diluted earnings
(loss) per common
share.............. $ (.03) $ .16 $ .40 $ .72 $ 1.25
------------- ------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............ $ 468,883 $ 453,951 $ 423,188 $ 372,247 $ 1,718,269
Gross profit......... 163,672 114,042 83,516 33,042 394,272
Operating income..... 142,721 90,339 59,887 8,235 301,182
Income before
extraordinary
charge............. 112,905 44,343 28,267 18,561 204,076
Net income........... 112,905 42,412 26,667 18,170 200,154
Basic earnings per
common share....... 2.84 1.04 .63 .41 4.97
Diluted earnings per
common share....... $ 2.53 $ .96 $ .60 $ .41 $ 4.55
------------- ------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............ $ 449,478 $ 486,836 $ 520,907 $ 543,920 $ 2,001,141
Gross profit......... 120,063 146,267 178,278 198,380 642,988
Operating income..... 97,253 117,680 154,636 179,682 549,251
Income before
extraordinary
charge............. 45,053 59,831 58,103 95,258 258,245
Net income........... 38,969 59,831 52,870 95,258 246,928
Basic earnings per
common share....... .93 1.47 1.24 2.09 5.76
Diluted earnings per
common share....... $ .85 $ 1.31 $ 1.13 $ 1.88 $ 5.22
</TABLE>
FS-21
<PAGE> 237
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 339,647 $ 228,688
Marketable securities..................................... 90,687 176,834
Accounts receivable, net.................................. 194,047 190,594
Inventories............................................... 114,118 105,514
Other current assets (Note 2)............................. 34,608 16,745
---------- ----------
Total current assets.............................. 773,107 718,375
---------- ----------
Timber and timberlands...................................... 382,964 394,039
Fixed assets, net........................................... 1,543,673 1,554,529
Other assets................................................ 79,261 78,855
---------- ----------
$2,779,005 $2,745,798
========== ==========
LIABILITIES AND CAPITAL
Current liabilities:
Current installments of long-term debt.................... $ 1,796 $ 1,800
Accounts payable and accrued liabilities.................. 174,537 168,327
Income taxes payable...................................... 22,110 15,861
Dividends payable......................................... 8,634 8,663
---------- ----------
Total current liabilities......................... 207,077 194,651
---------- ----------
Long-term debt, net of current installments................. 756,658 757,100
Other long-term liabilities................................. 166,975 169,510
Deferred income taxes....................................... 351,937 345,166
Minority interests in subsidiaries (Note 3)................. 118,175 125,206
Commitments and contingencies (Note 4)...................... -- --
Shareholders' equity:
Series C cumulative preferred stock....................... 25,465 25,465
Common stock.............................................. 45,120 44,928
Additional paid-in capital................................ 570,268 563,096
Retained earnings......................................... 733,115 716,961
Accumulated other comprehensive income.................... (15,439) (15,449)
Loan to ESOT.............................................. (4,075) (4,536)
Treasury stock, at cost................................... (176,271) (176,300)
---------- ----------
Total shareholders' equity........................ 1,178,183 1,154,165
---------- ----------
$2,779,005 $2,745,798
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-22
<PAGE> 238
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Sales....................................................... $411,690 $379,705
Distribution costs.......................................... 28,516 31,198
-------- --------
Net sales................................................. 383,174 348,507
Cost of sales............................................... 274,394 280,514
Depreciation, amortization and cost of timber harvested..... 45,152 42,649
-------- --------
Gross profit.............................................. 63,628 25,344
Selling and administrative expense.......................... 17,294 15,221
-------- --------
Operating income.......................................... 46,334 10,123
Other expense/(income):
Interest income........................................... (6,534) (5,293)
Interest expense, net of capitalized interest............. 16,584 16,818
Gain on sale of timberlands (Note 5)...................... (21,019) (11)
Other, net (Note 2)....................................... 4,424 275
-------- --------
(6,545) 11,789
-------- --------
Income/(loss) before income taxes and minority
interests.............................................. 52,879 (1,666)
Provision for income taxes (Note 6)......................... 20,094 (617)
Minority interests in net income/(loss) of subsidiaries..... 7,998 (735)
-------- --------
Net income/(loss)......................................... 24,787 (314)
Other comprehensive income/(loss), net of tax: (Note 7)
Foreign currency translation adjustments.................. 10 (590)
-------- --------
Comprehensive income/(loss)............................... $ 24,797 $ (904)
======== ========
Basic earnings/(loss) per common share (Note 8):............ $ 0.60 $ (0.03)
======== ========
Average common shares outstanding........................... 40,401 40,278
======== ========
Diluted earnings/(loss) per common share (Note 8):.......... $ 0.59 $ (0.03)
======== ========
Average common and common equivalent shares outstanding..... 41,034 40,278
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-23
<PAGE> 239
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES C ACCUMULATED
CUMULATIVE ADDITIONAL OTHER
PREFERRED COMMON PAID IN RETAINED COMPREHENSIVE LOAN TO
STOCK STOCK CAPITAL EARNINGS INCOME ESOT TREASURY
---------- ------- ---------- -------- ------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997................. $25,465 $44,928 $563,096 $716,961 $(15,449) $(4,536) $(176,300)
Net income................................... -- -- -- 24,787 -- -- --
Dividends on common stock ($.20 per share)... -- -- -- (8,078) -- -- --
Dividends on Series C preferred stock ($2.10
per share)................................. -- -- -- (555) -- -- --
Common stock issued for exercise of stock
options.................................... -- 192 5,110 -- -- -- --
Tax benefit on exercise of stock options..... -- -- 2,061 -- -- -- --
Reduction in loan to ESOT.................... -- -- -- -- -- 461 --
Treasury stock used for employee benefit and
dividend reinvestment plans................ -- -- 1 -- -- -- 29
Foreign currency translation................. -- -- -- -- 10 -- --
------- ------- -------- -------- -------- ------- ---------
Balance at March 31, 1998.................... $25,465 $45,120 $570,268 $733,115 $(15,439) $(4,075) $(176,271)
======= ======= ======== ======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-24
<PAGE> 240
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)......................................... $ 24,787 $ (314)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation, amortization and cost of timber
harvested............................................. 45,152 42,649
Deferred income taxes.................................. 3,686 (184)
Minority interests..................................... 7,998 (735)
Gain from sale of timberlands (Note 5)................. (21,019) (11)
Change in working capital:
Accounts receivable, net............................. (3,453) 12,657
Inventories.......................................... (8,604) 6,554
Accounts payable and accrued liabilities (Note 9).... 8,489 (35,016)
Income taxes payable................................. 9,908 (1,630)
Other, net............................................. 5,509 (967)
-------- --------
Net cash from operating activities................ 72,453 23,003
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in fixed assets, timber and timberlands..... (37,103) (23,572)
Disposition of fixed assets, timber and timberlands (Note
5)..................................................... 30,946 857
Maturities/(investments) of marketable securities and
option contracts, net (Note 2)......................... 63,409 106,652
-------- --------
Net cash from investing activities................ 57,252 83,937
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests (Note 3)..... (24,048) (29,840)
Purchase of common stock (Note 10)........................ -- (57,244)
Payments of long-term debt................................ (461) (443)
Stock options exercised................................... 5,302 6,558
Other..................................................... 461 440
-------- --------
Net cash used for financing activities............ (18,746) (80,529)
-------- --------
Net increase in cash and cash equivalents......... 110,959 26,411
Cash and cash equivalents at beginning of year............ 228,688 85,259
-------- --------
Cash and cash equivalents at end of period................ $339,647 $111,670
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest..................... $(12,998) $(12,711)
Income taxes.............................................. $ (6,500) $ (1,197)
</TABLE>
See accompanying notes to consolidated financial statements.
FS-25
<PAGE> 241
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements include the accounts
of Bowater Incorporated and Subsidiaries (the Company). The
consolidated balance sheets, and statements of operations, capital
accounts and cash flows are unaudited. However, in the opinion of
Company management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the interim financial
statements have been made. The results of the interim period ended
March 31, 1998, are not necessarily indicative of the results to be
expected for the full year.
2. During the first quarter of 1998, the Company purchased options on the
Canadian dollar at a cost of $22.7 million to hedge its pending
acquisition of Avenor Inc. On March 31, 1998, the Company adjusted the
cost to fair market value resulting in a pre-tax charge of $4.3
million, or $.07 per diluted share after tax.
3. During the first quarter of 1998, the Board of Directors of Calhoun
Newsprint Company (CNC) declared a $31.4 million dividend. As a result,
$15.4 million was paid to the minority shareholder. In the first
quarter of 1997, $19.6 million was paid to the minority shareholder.
4. The Company is involved in various legal proceedings relating to
contracts, commercial disputes, taxes, environmental issues, employment
and workers' compensation claims, and other matters. The Company
periodically reviews the status of these proceedings with both inside
and outside counsel. The Company's management believes that the
ultimate disposition of these matters will not have a material adverse
effect on the Company's operations or its financial condition taken as
a whole.
During the first quarter of 1998, the Company entered into several
significant asset acquisition transactions. See "Bowater Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
5. During the first quarter of 1998, the Company sold approximately 26,000
acres of non-strategic timberlands resulting in a pre-tax gain of $21
million, or $.16 per diluted share, after tax and minority interest.
6. The effective tax rates for the first quarter of 1998 and 1997 were 38
and 37 percent, respectively.
7. In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". This statement requires the disclosure of comprehensive income
items (which include net income and certain changes in shareholders'
equity) in the Consolidated Statement of Operations. These additional
disclosures do not have an impact on the Company's results of
operations or financial condition.
8. The calculations of basic and diluted earnings per share for the three
months ended March 31, 1998, are based on net income and include a
deduction of $.6 million for Series C preferred stock dividends. In
1997, the calculations included a deduction of $1.0 million for the
dividend requirements of the Company's LIBOR and Series C preferred
stock and the amortization of the difference between the net proceeds
from the LIBOR preferred stock and its mandatory redemption value.
9. During the first quarter of 1997, the Company paid $19.9 million of the
$25.4 million accrued for an incentive compensation plan established in
1994. The remainder was paid in the second quarter of 1997.
10. During the first quarter of 1997, the Company purchased 1.4 million
shares of common stock at a cost of $57.2 million, completing the stock
repurchase program authorized in February 1996. Since the beginning of
the program, 4 million shares were purchased at a total cost of $156
million. In November 1997, under a new stock repurchase program,
220,000 shares of common stock were purchased at a cost of $9.6
million.
FS-26
<PAGE> 242
AUDITORS' REPORT
To the Shareholders of
Avenor Inc.
We have audited the consolidated balance sheets of Avenor Inc. as at
December 31, 1997, 1996 and 1995 and the consolidated statements of earnings,
retained earnings (deficit) and changes in cash position for each of the years
in the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Avenor Inc. as at December 31,
1997, 1996 and 1995 and the results of its operations and the changes in its
cash position for each of the years in the three-year period ended December 31,
1997 in accordance with generally accepted accounting principles in Canada.
(Signed)
Price Waterhouse
Chartered Accountants
Montreal, Canada
February 13, 1998
FS-27
<PAGE> 243
AVENOR INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS OF CANADIAN
DOLLARS, EXCEPT PER SHARE
AMOUNTS AND NUMBER OF SHARES)
<S> <C> <C> <C>
Net sales................................................... $1,991.7 $2,061.3 $2,612.3
-------- -------- --------
Cost of sales............................................... 1,634.2 1,639.4 1,646.1
Amortization................................................ 181.1 164.6 157.7
Selling and administrative expenses......................... 77.8 77.3 79.8
-------- -------- --------
1,893.1 1,881.3 1,883.6
-------- -------- --------
Operating earnings before unusual items..................... 98.6 180.0 728.7
Unusual items (Note 4)...................................... (287.8) -- 24.8
-------- -------- --------
Operating earnings (loss)................................... (189.2) 180.0 753.5
Interest expense, net (Note 5).............................. (125.2) (111.4) (118.5)
Gain from sale of a subsidiary (Note 6)..................... 186.2 -- --
Loss on early repayment of long-term debt (Note 7).......... (45.3) (5.6) (13.3)
Costs related to an unrealized acquisition project.......... (25.4) -- --
Other expense............................................... (15.4) (11.9) (25.4)
-------- -------- --------
Earnings (loss) before taxes and non-controlling interest... (214.3) 51.1 596.3
Tax expense (recovery) (Note 8)............................. (5.1) 26.7 221.6
-------- -------- --------
Earnings (loss) before non-controlling interest............. (209.2) 24.4 374.7
Non-controlling interest.................................... 3.3 13.1 26.6
-------- -------- --------
Net earnings (loss)......................................... (212.5) 11.3 348.1
Increase in equity component of convertible debentures, net
of taxes.................................................. (4.9) (4.6) (4.3)
-------- -------- --------
Net earnings (loss) applicable to common shares............. $ (217.4) $ 6.7 $ 343.8
======== ======== ========
Basic earnings (loss) per common share...................... $ (3.32) $ 0.10 $ 5.12
======== ======== ========
Fully diluted earnings (loss) per common share.............. $ (3.32) $ 0.10 $ 4.75
======== ======== ========
Weighted average number of outstanding common shares (in
millions)................................................. 65.5 66.0 67.1
======== ======== ========
</TABLE>
FS-28
<PAGE> 244
AVENOR INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year................................ $(190.4) $(163.9) $(491.6)
Net earnings (loss)......................................... (212.5) 11.3 348.1
Increase in equity component of convertible debentures, net
of taxes of $2.9 (1996 -- $2.5; 1995 -- $2.4)............. (4.9) (4.6) (4.3)
Dividends declared.......................................... (23.6) (31.6) (16.1)
Excess of cost over stated value on repurchase of common
shares.................................................... -- (1.6) --
------- ------- -------
Balance at end of year...................................... $(431.4) $(190.4) $(163.9)
======= ======= =======
</TABLE>
FS-29
<PAGE> 245
AVENOR INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and temporary investments............................ $ 185.4 $ 28.4 $ 344.8
Accounts receivable....................................... 296.7 301.2 350.2
Inventories (Note 9)...................................... 196.0 273.7 277.7
Prepaid expenses.......................................... 3.9 11.6 6.5
--------- --------- ---------
682.0 614.9 979.2
Funds held in a segregated account (Note 10)................ -- 325.8 263.3
Capital assets (Note 11).................................... 1,877.0 2,266.2 2,136.0
Other assets (Note 12) ..................................... 159.0 190.9 194.7
--------- --------- ---------
$ 2,718.0 $ 3,397.8 $ 3,573.2
========= ========= =========
LIABILITIES
Current liabilities
Bank indebtedness......................................... $ 31.9 $ 43.7 $ 16.1
Accounts payable and accrued charges...................... 272.6 261.0 277.0
Income and other taxes payable............................ 17.8 18.8 63.1
Current portion of long-term debt (Note 13)............... 76.3 11.9 89.1
--------- --------- ---------
398.6 335.4 445.3
Long-term debt, less current portion (Note 13).............. 1,056.7 1,432.5 1,438.0
Deferred income taxes....................................... 139.3 181.9 193.2
Other liabilities........................................... 34.2 29.8 35.8
Non-controlling interest.................................... 34.7 132.7 119.6
--------- --------- ---------
1,663.5 2,112.3 2,231.9
--------- --------- ---------
SHAREHOLDERS' EQUITY
Equity component of convertible debentures (Note 13)........ 116.3 108.7 101.6
Common shares (Note 14)..................................... 867.2 864.8 887.7
Paid-in surplus............................................. 502.4 502.4 515.9
Deficit..................................................... (431.4) (190.4) (163.9)
--------- --------- ---------
1,054.5 1,285.5 1,341.3
--------- --------- ---------
$ 2,718.0 $ 3,397.8 $ 3,573.2
========= ========= =========
Approved by the Board (Signed) (Signed)
L. Yves Fortier, C.C., Q.C. Arthur R. Sawchuk
Director Director
</TABLE>
FS-30
<PAGE> 246
AVENOR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CASH POSITION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss) applicable to common shares............. $(217.4) $ 6.7 $ 343.8
Items not involving cash
Amortization.............................................. 181.1 164.6 157.7
Deferred income taxes..................................... (29.8) 3.5 165.5
Non-controlling interest.................................. 3.3 13.1 26.6
Unusual items............................................. 287.8 -- (24.8)
Gain from sale of a subsidiary............................ (186.2) -- --
Write-off of deferred exchange losses and issue costs
(Note 7)............................................... 27.4 5.6 8.0
Costs related to an unrealized acquisition project........ 9.3 -- --
Other..................................................... 24.3 5.2 17.1
------- ------- -------
99.8 198.7 693.9
Payments relating to unusual items.......................... (11.2) -- --
Change in non-cash operating working capital................ (16.6) (32.5) (37.3)
------- ------- -------
Cash from operations........................................ 72.0 166.2 656.6
------- ------- -------
INVESTING ACTIVITIES
Additions to capital assets................................. (170.1) (284.1) (219.3)
Proceeds from sale of a subsidiary.......................... 301.8 -- --
Cash received from escrow account........................... -- -- 247.5
Other....................................................... 13.6 (4.7) (9.9)
------- ------- -------
145.3 (288.8) 18.3
------- ------- -------
FINANCING ACTIVITIES
Issuance of long-term debt.................................. 165.7 144.1 74.8
Repayment of long-term debt................................. (518.7) (225.2) (250.4)
Transfer of funds from a segregated account................. 325.8 137.5 36.7
Transfer of funds to a segregated account................... -- (200.0) (300.0)
Issuance of common shares, net of expenses.................. 2.4 1.3 1.4
Repurchase of common shares................................. -- (39.3) --
Dividends paid.............................................. (23.6) (31.6) (16.1)
Other....................................................... (0.1) (8.2) 0.2
------- ------- -------
(48.5) (221.4) (453.4)
------- ------- -------
Increase (decrease) in cash position........................ 168.8 (344.0) 221.5
Cash position at beginning of year.......................... (15.3) 328.7 107.2
------- ------- -------
Cash position at end of year................................ $ 153.5 $ (15.3) $ 328.7
======= ======= =======
CASH POSITION CONSISTS OF:
Cash and temporary investments.............................. $ 185.4 $ 28.4 $ 344.8
Bank indebtedness........................................... (31.9) (43.7) (16.1)
------- ------- -------
$ 153.5 $ (15.3) $ 328.7
======= ======= =======
</TABLE>
FS-31
<PAGE> 247
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC.
1. DESCRIPTION OF BUSINESS
Avenor manufactures newsprint, pulp, white paper and wood products. The
Corporation owns and operates three newsprint mills, which supply printers and
publishers around the world and, in its capacity as managing partner of the
Ponderay Partnership, operates one newsprint mill at Usk in the State of
Washington. In market pulp, Avenor operates three mills and manufactures premium
grades of pulp for global markets. Avenor also owns one white paper mill and
three sawmills, all located in Canada. Approximately one-half of Avenor's net
sales are to the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are expressed in Canadian dollars and
have been prepared in accordance with accounting principles generally accepted
in Canada which, in the case of the Corporation, differ in certain respects from
those in the United States as explained in Note 19.
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and all subsidiary companies. All significant inter-company
transactions and balances have been eliminated.
Temporary investments
Temporary investments are stated at the lower of cost or market.
Investment in a joint venture
The Corporation's investment in a joint venture is accounted for on a
proportionate consolidation basis. Under this method, the Corporation's share of
assets, liabilities, revenues and expenses of the joint venture is included in
each major financial statement classification (see Note 15).
Foreign currency translation
The financial statements of self-sustaining foreign operations are
translated into Canadian dollars using the current rate method. Differences
arising from exchange rate fluctuations have not been material to date.
Monetary assets and liabilities are translated from foreign currencies into
Canadian dollars at rates of exchange at the date of the balance sheet. The
unrealized translation gains or losses on foreign currency denominated long-term
debt are amortized over the remaining life of the debt. Non-monetary assets and
liabilities are translated at historical rates. Revenues and expenses (except
for amortization which is translated at historical rates) are translated at
average rates in effect during the month in which the transaction took place.
Gains and losses on forward and range forward contracts which hedge
anticipated future sales are recorded in earnings in the same period the sale is
recognized and are included in net sales.
Inventories
Inventories of finished products are valued at the lower of average cost
and net realizable value. Inventories of raw materials, repair materials and
other operating supplies are valued at average cost.
Capital assets
Capital assets are stated at cost which is after the deduction of
investment tax credits. The Corporation amortizes its capital assets over their
estimated useful lives using the unit of production method for its pulp
FS-32
<PAGE> 248
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
and paper mills and the straight-line method for other buildings and equipment.
The pulp and paper mills, which are the Corporation's principal capital assets,
are amortized over a period of approximately 22 years assuming a normal rate of
production. Accumulated amortization includes write-downs of buildings and
equipment.
During the construction period, interest is capitalized on major
improvements and expansions. No amortization is charged on major improvements or
expansions until construction is completed.
Other assets
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized on a straight-line basis over 20 years.
Annually, the Corporation evaluates whether there has been a permanent
impairment in the value of the unamortized portion of goodwill. This is
accomplished by determining whether future undiscounted cash flows from the
operations to which the goodwill relates exceeds the net book value of the
goodwill as of the assessment date.
Start-up costs incurred for newly constructed facilities or major
modernizations are deferred until normal operation is achieved and amortized
over a period of five years.
Financing costs incurred in issuing long-term debt are deferred and
amortized on a straight-line basis over the term of the related obligation.
Environmental expenditures
Environmental expenditures related to current operations are expensed or
capitalized as appropriate. Liabilities are recorded for anticipated remedial
action for which costs can be reasonably estimated.
Pension costs and postretirement benefits
Pension costs are determined annually in consultation with independent
actuaries and include current service costs, a provision for the amortization of
prior service costs and settlement costs related to special events. Pension
costs for current services are charged to earnings in the year incurred. The
pension plans' surplus or deficit, which includes the liability for past
service, is amortized to earnings over the estimated remaining service lives of
the employees.
In addition to pension benefits, the Corporation provides limited life
insurance and health care benefits to eligible retired employees. The cost of
providing these benefits is expensed as paid.
Income taxes
Deferred income taxes are provided for all significant timing differences
between the recognition of income and expenses for financial statement and tax
purposes.
The Corporation does not provide for income taxes on undistributed income
of foreign subsidiaries, part of which may be subject to certain taxes on
distribution to the parent company, as such income is reinvested in foreign
operations. The amount of such undistributed income was not significant at
December 31, 1997.
Financial instruments
The Corporation manages its foreign exchange exposure on anticipated U.S.
dollar sales through the use of derivatives including forward and range forward
contracts. Derivatives are not used for trading purposes. The Corporation has
historically entered into interest rate swap agreements to reduce the impact of
changes in rates upon its floating rate debt. Net receipts or payments under the
Corporation's swap agreements are recorded as adjustments to interest expense.
If any swap agreements remain outstanding after repayment of
FS-33
<PAGE> 249
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
the related debt, or a portion thereof, net receipts or payments under the swap
agreement related to the debt which was repaid would be recorded as other
expense (income).
3. SEGMENTED INFORMATION
Geographic areas
All of the Corporation's manufacturing facilities are located in Canada,
with the exception of the Ponderay Newsprint Company joint venture which is
located in the United States.
In 1997, the Corporation had net sales of $1,029 million to the United
States (1996: $1,055 million; 1995: $1,379 million), $240 million to Japan
(1996: $311 million; 1995: $337 million) and $307 million to other foreign
countries (1996: $299 million; 1995: $404 million).
Inter-segment sales, excluding transfers within integrated facilities, are
substantially all from the Pulp and Wood Products segments and amounted to $67
million in 1997 (1996: $73 million; 1995: $162 million). Inter-segment sales are
recorded at an agreed upon price.
Industry segments
The Corporation's operations and assets by industry segment are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
NET SALES TO
SIGNIFICANT NET OPERATING ADDITIONS
GEOGRAPHIC SALES TO EARNINGS TO CAPITAL TOTAL
SEGMENT CUSTOMERS AMORTIZATION (LOSS) ASSETS ASSETS
------------ --------- ------------ --------- ---------- --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Newsprint................ U.S.A. 70% $ 826.4 $ 85.6 $ 63.3 $ 49.8 $1,381.9
Pulp..................... U.S.A. 60% 472.8 37.8 22.3 20.8 424.6
White Paper.............. Canada 57%
U.S.A. 43% 305.0 27.9 20.7 20.5 404.8
Wood Products............ Japan 46% 387.5 25.8 27.0 78.3 153.4
Corporate................ -- 4.0 (34.7) 0.7 353.3(1)
Unusual items............ -- -- (287.8) -- --(2)
-------- ------ ------- ------ --------
Total.................... $1,991.7 $181.1 $(189.2) $170.1 $2,718.0
======== ====== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------
NET SALES TO
SIGNIFICANT NET OPERATING ADDITIONS
GEOGRAPHIC SALES TO EARNINGS TO CAPITAL TOTAL
SEGMENT CUSTOMERS AMORTIZATION (LOSS) ASSETS ASSETS
------------ --------- ------------ --------- ---------- --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Newsprint................ U.S.A. 68% $ 907.2 $ 77.4 $ 168.2 $146.9 $1,454.1
Pulp..................... U.S.A. 62% 427.0 32.9 (30.1) 65.5 565.3
White Paper.............. Canada 55%
U.S.A. 45% 322.6 29.0 32.2 47.5 405.9
Wood Products............ Japan 53% 404.5 20.0 46.1 21.5 405.2
Corporate................ -- 5.3 (36.4) 2.7 567.3(1)
-------- ------ ------- ------ --------
Total.................... $2,061.3 $164.6 $ 180.0 $284.1 $3,397.8
======== ====== ======= ====== ========
</TABLE>
FS-34
<PAGE> 250
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------------
NET SALES TO
SIGNIFICANT NET OPERATING ADDITIONS
GEOGRAPHIC SALES TO EARNINGS TO CAPITAL TOTAL
SEGMENT CUSTOMERS AMORTIZATION (LOSS) ASSETS ASSETS
------------ --------- ------------ --------- ---------- --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Newsprint................ U.S.A. 69% $1,057.0 $ 79.1 $ 292.5 $ 91.2 $1,416.2
Pulp..................... U.S.A. 55% 768.7 29.8 245.5 85.1 573.7
White Paper.............. Canada 54%
U.S.A. 46% 409.7 27.4 160.2 19.3 392.5
Wood Products............ Japan 45% 376.9 18.2 64.5 22.5 344.5
Corporate................ -- 3.2 (34.0) 1.2 846.3(1)
Unusual items............ -- -- 24.8 -- --(3)
-------- ------ ------- ------ --------
Total.................... $2,612.3 $157.7 $ 753.5 $219.3 $3,573.2
======== ====== ======= ====== ========
</TABLE>
- ---------------
(1) As at December 31, 1997, Corporate assets included Cash and temporary
investments of $185.4 million (1996: $28.4 million; 1995: $344.8 million)
and Funds held in a segregated account of nil (1996: $325.8 million; 1995:
$263.3 million).
(2) In 1997, Unusual items related to the write-downs of assets, the workforce
reduction program, and Year 2000 compliance and accordingly, should have
been allocated to each industry segment. After allocation of Unusual items,
operating earnings (loss) for each segment were as follows: Newsprint $3.1
million, Pulp $(139.7) million, White Paper $17.1 million, Wood Products
$(13.0) million, and Corporate $(56.7) million.
(3) In 1995, Unusual items related to the Gold River Newsprint Limited
Partnership mill and accordingly, should have been allocated to the
Newsprint business. After allocation of Unusual items, operating earnings
for the Newsprint business amounted to $317.3 million.
4. UNUSUAL ITEMS
In 1997, the Corporation recorded Unusual items of $287.8 million which
include $225.2 million of asset write-downs. During the year, the Corporation
assessed whether there was any impairment in the carrying value of its assets.
This was accomplished by determining if future cash flows from the operations to
which the assets related exceeded the net book value of those assets as of the
assessment date. The assessment determined that certain assets, relating
primarily to the Gold River Mill, were impaired and, consequently, $225.2
million of asset write-downs were recorded.
The remaining balance of Unusual items consisted of $57.5 million which
related to the implementation of a workforce reduction program and $5.1 million
associated with the modification of internal use computer software for Year 2000
compliance.
The Gold River Newsprint Limited Partnership, of which the Corporation was
a general partner, operated a newsprint mill which closed in December 1993 and
the Corporation then provided for its total investment in the partnership and
other related closure costs. In 1995, certain newsprint assets of the
partnership were sold to a third party and the outstanding indebtedness of the
partnership to its third party lenders was extinguished. The partnership and the
Corporation then also obtained releases from the third party lenders for any and
all possible damages. As a result, certain provisions relating to the
partnership were reversed in 1995 and an amount of $24.8 million before tax was
included in Unusual items.
FS-35
<PAGE> 251
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
5. INTEREST EXPENSE, NET
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
Interest on long-term debt.................................. $133.9 $140.0 $153.5
Interest on debt component of convertible debentures........ 1.6 2.3 3.0
Interest on short-term debt................................. 2.8 4.0 1.3
------ ------ ------
138.3 146.3 157.8
Interest income............................................. (8.5) (26.4) (35.5)
Interest capitalized on capital assets...................... (4.6) (8.5) (3.8)
------ ------ ------
$125.2 $111.4 $118.5
====== ====== ======
</TABLE>
6. SALE OF A SUBSIDIARY
On December 10, 1997, the sale of the Corporation's 53% interest in Pacific
Forest Products Limited was completed for cash proceeds of $301.8 million
resulting in a pre-tax gain of $186.2 million ($108.4 million after tax).
7. EARLY REPAYMENT OF LONG-TERM DEBT
The loss recognized as the result of early repayment of long-term debt
consisted of premium costs as well as the write-off of deferred exchange losses
and unamortized issue costs. This amount also included the loss associated with
the debt which had been committed before December 31, 1997 to be repaid and was
effectively repaid on January 9, 1998.
8. TAX EXPENSE
The following table reconciles the statutory tax rate with the effective
rate:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Combined statutory federal and provincial rate.............. 42.4% 41.3% 43.8%
Manufacturing and processing deduction...................... (8.6) (0.6) (7.0)
Large corporations tax...................................... (2.6) 11.8 0.9
Capital taxes............................................... (3.7) 19.6 1.2
Permanent difference on sale of a subsidiary ............... (5.9) -- --
Permanent difference related to unusual items............... (16.1) -- --
Other items................................................. (3.1) (19.9) (1.7)
----- ----- ----
Effective tax rate.......................................... 2.4% 52.2% 37.2%
===== ===== ====
</TABLE>
9. INVENTORIES
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
Raw materials............................................ $ 46.9 $110.2 $130.0
Repair materials and other operating supplies............ 81.8 87.1 86.6
Finished products........................................ 67.3 76.4 61.1
------ ------ ------
$196.0 $273.7 $277.7
====== ====== ======
</TABLE>
FS-36
<PAGE> 252
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
10. FUNDS HELD IN A SEGREGATED ACCOUNT
In 1995, the Corporation created a segregated account dedicated to debt
reduction. The funds could not be used for other purposes without the approval
of the Board of Directors. This account consisted primarily of bankers'
acceptances and Treasury bills held to maturity and were accounted for at
amortized cost. The funds had maturities of less than one year. During 1997, all
the funds were used to repay long-term debt and the segregated account was
closed. The effective interest rate earned on these investments amounted to 3.3%
in 1997 (1996: 5.1%; 1995: 6.2%).
11. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Land........................................................ $ 9.3 $ -- $ 9.3
Buildings and equipment..................................... 3,600.8 1,760.1 1,840.7
Timberlands................................................. 42.6 15.6 27.0
-------- -------- --------
$3,652.7 $1,775.7 $1,877.0
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Land........................................................ $ 11.4 $ -- $ 11.4
Buildings and equipment..................................... 3,770.0 1,606.7 2,163.3
Timberlands................................................. 127.0 35.5 91.5
-------- -------- --------
$3,908.4 $1,642.2 $2,266.2
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ --------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Land........................................................ $ 11.1 $ -- $ 11.1
Buildings and equipment..................................... 3,556.6 1,523.4 2,033.2
Timberlands................................................. 126.3 34.6 91.7
-------- -------- --------
$3,694.0 $1,558.0 $2,136.0
======== ======== ========
</TABLE>
The Corporation and its subsidiaries have timber harvesting licensing
arrangements in the provinces of New Brunswick, Quebec and Ontario.
12. OTHER ASSETS
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
Deferred exchange losses on U.S. dollar long-term debt, net
of accumulated amortization of $101.3 (1996: $78.7; 1995:
$65.2).................................................... $ 90.7 $ 90.9 $108.5
Long-term receivable........................................ -- -- 11.3
Pension asset............................................... 34.8 42.0 29.9
Other, net of amortization.................................. 33.5 58.0 45.0
------ ------ ------
$159.0 $190.9 $194.7
====== ====== ======
</TABLE>
FS-37
<PAGE> 253
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
13. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
AVENOR INC.
Debentures
9.25% due 2002 (1997: US$92.1 million; 1996 and 1995:
US$175.9 million).................................... $ 131.6 $ 240.9 $ 239.9
10.25% due 2003 (1997: US$72.3 million; 1996 and 1995:
US$75.0 million)(i).................................. 103.3 102.7 102.3
10.85% due 2014........................................ 125.0 125.0 125.0
Senior Notes
10.625% Series A due 2010 (US$98.0 million)............ 140.0 134.2 133.7
10.50% Series B (US$102.0 million)(ii)................. 145.8 139.7 139.1
10.60% Series C due 2011 (US$70.0 million)............. 100.0 95.9 95.4
10.26% Series D (US$22.0 million)(ii).................. 31.4 30.1 30.0
9.86% Series E due 2001 (1997: US$107.6 million; 1996
and 1995: US$124.5 million)(iii)..................... 153.7 170.5 169.8
9.58% Series F due 1998 (1997: US$14.5 million; 1996
and 1995: US$60.5 million)(iii)...................... 20.7 82.9 82.5
9.22% Series G (US$55.0 million in 1995)............... -- -- 75.0
Debt portion of 7.5% Convertible Debentures(iv)........... 9.6 17.4 24.4
Syndicated loan at floating rates (1996: US$50.0 million;
1995: US$100.0 million)................................ -- 68.5 136.4
Bank loan under a revolving credit facility terminating
2000 (v)............................................... -- 45.0 --
Other long-term obligations maturing at various dates..... 0.6 3.4 5.0
AVENOR MARITIMES INC.
Bank term loan at floating rates due 1998 to 2001......... 50.0 50.0 --
11.0% promissory notes from non-controlling shareholders
due 2003............................................... 6.0 6.0 6.0
Other..................................................... -- 1.0 --
PACIFIC FOREST PRODUCTS LIMITED
Bank loans under a revolving term credit facility
terminating 1998....................................... -- 21.1 24.6
PONDERAY NEWSPRINT COMPANY
Bank loan under a credit facility terminating 1998 to 2000
(1997: US$79.8 million; 1996: US$79.4 million;
1995: US$96.4 million)................................. 114.0 108.7 131.5
Other long-term obligations maturing at various dates..... 0.9 0.9 1.2
OTHER
Other long-term obligations maturing at various dates..... 0.4 0.5 5.3
-------- -------- --------
1,133.0 1,444.4 1,527.1
Less: Current portion(iii).................................. 76.3 11.9 89.1
-------- -------- --------
$1,056.7 $1,432.5 $1,438.0
======== ======== ========
</TABLE>
AVENOR INC.
(i) The indenture under which the 10.25% Debentures were issued contains a
covenant which limits the payment of cash dividends on common shares. However, a
minimum of $75 million per year is available for payment of dividends without
restrictions. The ability to pay cash dividends in excess of this amount in
future years will be based on the Corporation's profitability.
FS-38
<PAGE> 254
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
(ii) The Series B Senior Notes are payable at the rate of US$10.2 million
per year commencing 2001 with the final payment due 2010. The Series D Senior
Notes are payable at the rate of US$2.2 million per year commencing 2002 with
the final payment due 2011.
(iii) On January 9, 1998, an amount totaling US$34.9 million was repaid and
consisted of US$20.4 million of the Series E Senior Notes and US$14.5 million of
the Series F Senior Notes.
(iv) The 7.5% Convertible Debentures were issued for net proceeds of $121.0
million on February 8, 1994 for a principal amount of $125.4 million and mature
on February 8, 2004. The Convertible Debentures are unsecured and subordinated
to other debt and are convertible at the option of each holder into common
shares, at any time up to their maturity date, at a conversion price of $22.00
per common share which is a rate of 4.54 common shares per $100 principal amount
of Convertible Debentures. The Convertible Debentures are also redeemable at the
option of the Corporation at any time on or after February 8, 1999. The
Corporation may, at its option and subject to certain conditions, repay the
principal amount of the Convertible Debentures on redemption or at maturity in
cash or by the issuance of common shares. The Convertible Debentures have been
split between long-term debt and equity components.
(v) The Corporation has in place a $250 million unsecured revolving credit
facility with four Canadian banks which will expire in 2000. The Corporation
may, with the agreement of the lenders, extend the expiry date every six months.
Negotiations have been finalized to add a fifth bank which will bring the total
credit facility to $300 million. As of December 31, 1997, no amounts were drawn
on this line (1996: $45.0 million; 1995: nil). Borrowings under this credit
facility bear interest at floating rates.
Most of the debt indentures of the Corporation provide that if a person,
acting alone or with others, becomes the beneficial owner of more than 30% of
the voting shares or if "Continuing Directors", as defined therein, shall cease
to constitute at least two-thirds of the Board of Directors and if, within a
certain period of the public disclosure thereof, a rating decline of the debt
occurs or, in some cases, if the debt to capitalization ratio, as defined
therein, exceeds 70% for a certain period, then the Corporation may be required
to repay all indebtedness under such indentures within certain delays. Based on
sums currently drawn under such indentures and excluding the US$34.9 million
which was repaid on January 9, 1998, the amounts of indebtedness that the
Corporation would be required to repay under such circumstances are US$379.2
million and $125.0 million.
As of December 31, 1997, the Corporation was in compliance with all its
debt indentures.
All of the Corporation's long-term debt is unsecured.
AVENOR MARITIMES INC.
Avenor Maritimes Inc., a 67%-owned subsidiary of the Corporation, has in
place a $50 million committed term loan with a Canadian bank. This facility was
utilized for the construction of a thermomechanical pulp mill and is repayable
over the period 1998 to 2001. The credit agreement provides that Avenor
Maritimes Inc. must conform with certain stated ratios to maintain the
availability of the facility, with which Avenor Maritimes Inc. is in compliance.
As of December 31, 1997, $50.0 million (1996: $50.0 million) was drawn under
this loan which bears interest at floating rates approximating 6.0% at December
31, 1997. In addition, Avenor Maritimes Inc. has available a $15 million demand
credit facility of which no amounts were drawn as of December 31, 1997 (1996:
$1.0 million). Amounts drawn under this demand credit facility bear interest at
floating rates.
FS-39
<PAGE> 255
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
AVENOR AMERICA INC.
Avenor America Inc., a wholly-owned subsidiary of the Corporation, has in
place a US$10 million unsecured revolving line of credit which will expire in
December 1999. As of December 31, 1997, 1996 and 1995, no amounts were drawn on
this line. This line of credit bears interest at floating rates.
PONDERAY NEWSPRINT COMPANY
Ponderay Newsprint Company, a joint venture in which the Corporation has a
40% interest (see Note 15), has in place a credit agreement with several banks
of which the Corporation has guaranteed US$50 million. The debt is
collateralized by a deed of trust on Ponderay Newsprint Company's property and a
mortgage on its other assets. This debt is at floating interest rates based on
rates of various money market instruments which may be chosen by Ponderay
Newsprint Company. An interest rate swap agreement, which expired in May 1996,
converted US$20 million of the debt to fixed rate debt of 8.36%. At December 31,
1997, the interest rate applicable to the amount drawn ranged from 6.44% to
8.63%.
Based on exchange rates as of December 31, 1997, repayments required on
long-term debt over the next five years are as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 TOTAL
----- ----- ----- ------ ------ ------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Avenor Inc. ...................................... $50.0 $ 0.5 $ -- $139.1 $149.3 $338.9
Avenor Maritimes Inc. ............................ 16.5 8.3 8.3 16.9 -- 50.0
Ponderay Newsprint Company........................ 9.7 18.9 86.3 -- -- 114.9
Other............................................. 0.1 0.3 -- -- -- 0.4
----- ----- ----- ------ ------ ------
$76.3 $28.0 $94.6 $156.0 $149.3 $504.2
===== ===== ===== ====== ====== ======
</TABLE>
14. COMMON SHARES
Authorized
As at December 31, 1997, the Corporation's authorized common share capital
is an unlimited number of shares.
Issued and outstanding
The following table shows the changes in the number of outstanding common
shares and their aggregate stated value from January 1, 1995 to December 31,
1997.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
IN MILLIONS IN MILLIONS IN MILLIONS
NUMBER OF OF CANADIAN NUMBER OF OF CANADIAN NUMBER OF OF CANADIAN
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding: beginning of
year..................... 65,425,366 $864.8 67,185,300 $887.7 67,123,733 $886.3
Issued during the year for
cash under stock option
and share purchase
plans.................... 109,214 2.4 68,866 1.3 61,567 1.4
Shares issued upon
conversion of
debentures............... 45 -- -- -- -- --
Repurchased during the
year..................... -- -- (1,828,800) (24.2) -- --
---------- ------ ---------- ------ ---------- ------
Outstanding: end of year... 65,534,625 $867.2 65,425,366 $864.8 67,185,300 $887.7
========== ====== ========== ====== ========== ======
</TABLE>
FS-40
<PAGE> 256
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
The repurchase of common shares in 1996 reduced Common shares by $24.2
million, Paid-in surplus by $13.5 million and Retained earnings (Deficit) by
$1.6 million for a total consideration of $39.3 million.
Stock option plans
The Corporation has a stock option plan under which grants (the "Grant")
are made to eligible key employees. Each Grant is comprised of an option to
purchase a specific number of common shares (the "Option") and a number of share
appreciation rights (the "SAR"), which is equal to half the number of common
shares to which the Option relates. Options are issued for ten years and half of
the Options vests after two years and the other half vests after three years.
Where an Option has been exercised as to one-half of the number of common
shares to which it relates, any further exercise cancels the number of SARs
under the same Grant on a one-share-for-one-SAR basis. At all times, the
exercise of an SAR reduces the number of common shares to which an Option under
the same Grant relates on a one-SAR-for-one-share basis.
The number of common shares that may be issued under the plan is limited to
1,500,000 shares. As at December 31, 1997, Options to purchase 1,232,847 shares
at prices ranging from $15.25 to $44.25 per share had been granted with expiry
dates from 1998 to 2007, and SARs are available equivalent to one-half of the
number of Options outstanding. Of these Options, 73% can be exercised in 1998,
91% in 1999 and 100% in 2000 or later years.
Changes in the number of shares under Options are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
Outstanding at beginning of year............................ 1,091,044 888,306 765,181
Granted..................................................... 221,928 249,450 149,910
Exercised................................................... (51,236) (7,282) (18,701)
Cancelled................................................... (28,889) (39,430) (8,084)
--------- --------- -------
Outstanding at end of year.................................. 1,232,847 1,091,044 888,306
========= ========= =======
</TABLE>
Share purchase plan
Under the Employee Share Purchase Plan (the "Plan"), employees can purchase
common shares through payroll deductions for up to 10% of their gross salary on
monthly investment dates at a 10% discount to the market price. Shares purchased
under the Plan are subject to a mandatory six-month holding period. The
Corporation has reserved a maximum of 400,000 shares for the purposes of the
Plan, including an additional 200,000 shares which were reserved in 1997. During
1997, 57,978 (1996: 61,584; 1995: 42,866) common shares were issued at an
average price of $21.70 (1996: $20.01; 1995: $25.46) per share under the Plan.
Shareholder rights plan
Under the terms of the Corporation's Shareholder Rights Plan (the "Rights
Plan"), rights are attached to the common shares and convertible debentures. The
rights become exercisable only after certain specified events. If a person
acquires, or announces an intention to acquire, 20% or more of the outstanding
shares in a non-permitted bid, each right, on exercise, entitles the holder,
other than the acquiring person, to purchase common shares of the Corporation at
a specified price.
The rights are not triggered by a permitted bid which is in effect a bid
made to all shareholders for all voting shares by way of a bid circular. Such an
offer must remain open for at least 60 days and must be accepted by at least 50%
of the outstanding common shares not held by the bidder. The Board of Directors
FS-41
<PAGE> 257
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
may redeem all rights at $0.001 per right at any time prior to the rights
becoming exercisable. The Rights Plan will remain in effect until January 1999.
15. INVESTMENT IN A JOINT VENTURE
Ponderay Newsprint Company
The Ponderay Newsprint Company is a general partnership which operates a
newsprint mill in the State of Washington. The Corporation is the managing
partner and has a 40% interest in the partnership.
The consolidated financial statements include the Corporation's 40%
proportionate share of the Ponderay Newsprint Company, a joint venture, as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
ASSETS
Current assets.............................................. $ 12.7 $ 10.3 $ 15.4
Capital assets.............................................. 136.6 138.2 146.0
------ ------ ------
149.3 148.5 161.4
LIABILITIES
Current liabilities......................................... 6.8 10.5 12.8
Long-term debt.............................................. 114.9 109.6 132.7
------ ------ ------
Net assets.................................................. $ 27.6 $ 28.4 $ 15.9
====== ====== ======
REVENUES
Net sales................................................... $ 72.7 $ 87.8 $ 83.3
------ ------ ------
EXPENSES
Costs and expenses.......................................... 56.6 56.4 64.6
Amortization................................................ 10.3 10.1 10.1
Interest.................................................... 7.8 8.8 10.9
------ ------ ------
74.7 75.3 85.6
------ ------ ------
Earnings (loss) before taxes................................ $ (2.0) $ 12.5 $ (2.3)
====== ====== ======
CASH PROVIDED BY (USED IN):
Operations.................................................. $ 8.0 $ 26.8 $ 5.7
Investing activities........................................ (3.3) (1.9) (3.6)
Financing activities........................................ 0.5 (23.5) (0.8)
------ ------ ------
Increase in cash position................................... $ 5.2 $ 1.4 $ 1.3
====== ====== ======
</TABLE>
FS-42
<PAGE> 258
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Corporation had commitments for major capital
expenditures under purchase orders and contracts amounting to approximately $24
million.
Minimum payments required under operating leases are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF
CANADIAN
DOLLARS)
<S> <C>
1998........................................................ $10.6
1999........................................................ 10.5
2000........................................................ 9.1
2001........................................................ 8.5
2002........................................................ 7.7
Subsequent years............................................ 25.9
-----
$72.3
=====
</TABLE>
As part of its sale of the paperboard business, the Corporation agreed to
indemnify the acquirer, St. Laurent Paperboard Inc. ("St. Laurent"), subject to
certain conditions, for up to an aggregate amount of $50 million in respect of
environmental claims made against St. Laurent before June 1999 based upon any
breach of environmental covenants made by the Corporation or facts or
circumstances existing on the date of sale but not disclosed to St. Laurent. In
addition, the Corporation is involved in various legal actions in the normal
course of business. In the opinion of management, the aggregate amount of any
potential liability, for which provisions have not already been made, is not
expected to have a material adverse effect on the Corporation's financial
position or its results.
At December 31, 1997, the Corporation had entered into forward and range
forward contracts for periods of up to three years for notional amounts totaling
US$1,732.3 million (1996: US$937.0 million; 1995: US$843.0 million). The
notional amount of forward and range forward contracts is the amount of foreign
currency bought or sold at maturity and is not a measure of the Corporation's
exposure. As of December 31, 1997, the forward contracts would obligate the
Corporation to sell United States dollars in 1998 at rates which average
US$0.71. The range forward contracts protect the Corporation against the
exchange rate between the United States dollar and the Canadian dollar rising
above an average of US$0.75 during 1998. However, in the event of a weakened
Canadian dollar, the Corporation would be obligated to sell United States
dollars at rates which average US$0.71 in 1998 under the range forward
contracts. Range forwards will expire unexercised if, at the date of maturity,
the value of the Canadian dollar falls between the high and low values specified
in the range forward contracts. Based on the spot rate of exchange at December
31, 1997, there was an unrealized loss of $57.2 million with respect to these
forward and range forward contracts.
The forward and range forward contracts as at December 31, 1997 expire as
follows:
<TABLE>
<CAPTION>
NOTIONAL AVERAGE AVERAGE
AMOUNT AVERAGE FLOOR CEILING
(IN MILLIONS OF RATE RATE RATE
TYPE OF CONTRACT U.S. DOLLARS) (US$) (US$) (US$)
---------------- --------------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 Forward................................... $ 257.0 $0.7086
1998 Range forward............................. 544.1 $0.7106 $0.7476
--------
801.1
1999 Range forward............................. 517.2 0.7195 0.7528
2000 Range forward............................. 414.0 0.7227 0.7544
--------
$1,732.3
========
</TABLE>
FS-43
<PAGE> 259
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
As of December 31, 1996, the range forward contracts were as follows:
<TABLE>
<CAPTION>
NOTIONAL AVERAGE AVERAGE
AMOUNT FLOOR CEILING
(IN MILLIONS OF RATE RATE
TYPE OF CONTRACT U.S. DOLLARS) (US$) (US$)
---------------- --------------- ------- -------
<S> <C> <C> <C>
1997 Range forward.................................. $470.0 $0.7126 $0.7515
1998 Range forward.................................. 363.0 0.7095 0.7483
1999 Range forward.................................. 104.0 0.7054 0.7443
------
$937.0
======
</TABLE>
As of December 31, 1995, the range forward contracts were as follows:
<TABLE>
<CAPTION>
NOTIONAL AVERAGE AVERAGE
AMOUNT FLOOR CEILING
(IN MILLIONS OF RATE RATE
TYPE OF CONTRACT U.S. DOLLARS) (US$) (US$)
---------------- --------------- ------- -------
<S> <C> <C> <C>
1996 Range forward.................................. $251.0 $0.7123 $0.7409
1997 Range forward.................................. 339.0 0.7083 0.7480
1998 Range forward.................................. 253.0 0.7048 0.7457
------
$843.0
======
</TABLE>
17. PENSIONS
The Corporation's pension plans are principally defined benefit pension
plans and cover substantially all employees. Benefits from these plans are based
on years of service and either career earnings or final average earnings. The
date of the most recent actuarial valuation for the defined benefit plans is
December 31, 1996.
Contributions to the Corporation's pension plans are based on the
recommendations of the actuarial valuation for each plan and meet the funding
requirements of the regulatory authorities.
Pension expense and actuarial estimates of the financial position of the
defined benefit plans are itemized below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS)
<S> <C> <C> <C>
Pension expense............................................. $ 49.3 $ 29.2 $ 21.9
====== ====== ======
Pension fund assets at market related values................ $859.6 $790.5 $697.5
Present value of accrued pension benefits obligation........ 903.0 871.7 749.8
------ ------ ------
Deficit..................................................... $ 43.4 $ 81.2 $ 52.3
====== ====== ======
Net pension asset........................................... $ 14.9 $ 31.4 $ 18.8
====== ====== ======
</TABLE>
The pension asset portion has been included in Other assets and the pension
liability portion has been included in Other liabilities. The Corporation also
has defined contribution plans. In 1997, the pension expense for these plans,
which equaled the Corporation's required contribution, was $5.3 million (1996:
$5.8 million; 1995: $6.6 million).
18. FINANCIAL INSTRUMENTS
Fair Value
The Corporation has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies. However, considerable
judgment is necessary to develop these estimates.
FS-44
<PAGE> 260
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Corporation could realize in a current market exchange. The use
of different assumptions or methodologies may have a material effect on the
estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument.
Short-term financial assets are valued at their carrying amounts as
presented in the Balance Sheet, which are reasonable estimates of fair value due
to the relatively short period to maturity of the instruments.
Rates currently available to the Corporation for long-term debt with
similar terms and remaining maturities have been used to estimate the fair value
of the long-term debt.
The fair value of derivatives generally reflects the estimated amounts that
the Corporation would receive or pay to terminate the contracts at the reporting
date, thereby taking into account the current unrealized gains or losses on open
contracts.
The estimated fair values of the Corporation's financial instruments which
differ from their carrying values are as follows:
<TABLE>
<CAPTION>
1997
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN MILLIONS OF
CANADIAN DOLLARS)
<S> <C> <C>
Financial liabilities:
Interest rate swap........................................ $ 0.6 $ 8.9
Long-term debt............................................ 1,133.0 1,276.5
Off-balance sheet:
Forward foreign exchange and range forward contracts
liability.............................................. $ -- $ 53.2
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN MILLIONS OF
CANADIAN DOLLARS)
<S> <C> <C>
Financial assets:
Funds held in a segregated account........................ $ 325.8 $ 329.7
Financial liabilities:
Interest rate swap........................................ 0.6 11.9
Long-term debt............................................ 1,444.4 1,517.1
Off-balance sheet:
Forward foreign exchange and range forward contracts
asset.................................................. $ -- $ 14.0
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN MILLIONS OF
CANADIAN DOLLARS)
<S> <C> <C>
Financial assets:
Long-term receivable...................................... $ 11.3 $ 10.2
Financial liabilities:
Interest rate swap........................................ 0.6 18.4
Long-term debt............................................ 1,527.1 1,699.4
</TABLE>
FS-45
<PAGE> 261
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
Credit Risk
The Corporation's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and temporary investments, accounts
receivable, and derivatives which include the forward and range forward
contracts and interest rate swap agreements. Cash and temporary investments are
in place with major financial institutions. Concentrations of credit risk with
respect to receivables are limited due to the large number of customers and
their dispersion across geographic areas. Counterparties to derivative
instruments are major financial institutions and no one counterparty can hold
more than a specified portion of the outstanding notional value of the
contracts, thereby reducing exposure to credit risk.
Interest Rate Risk
The majority of the Corporation's long-term debt is at fixed interest
rates, thus limiting the interest rate risk. During 1997, the Corporation earned
interest at an average rate of 4.2% on temporary investments (1996: 5.8%; 1995:
5.9%).
The following table summarizes the Corporation's exposure to interest rate
risk as at December 31, 1997:
<TABLE>
<CAPTION>
FIXED INTEREST RATE MATURING IN
------------------------------------
FLOATING LESS THAN MORE THAN NON-INTEREST
INTEREST RATE 1 YEAR 1 TO 5 YEARS 5 YEARS BEARING TOTAL
------------- --------- ------------ --------- ------------ ---------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and temporary
investments................. $ 185.4 $ -- $ -- $ -- $ -- $ 185.4
Accounts receivable............ -- -- -- -- 296.7 296.7
Financial liabilities:
Bank indebtedness.............. (31.9) -- -- -- -- (31.9)
Accounts payable and accrued
charges..................... -- -- -- -- (272.6) (272.6)
Long-term debt................. (165.0) (50.2) (289.0) (628.8) -- (1,133.0)
------- ------ ------- ------- ------- ---------
$ (11.5) $(50.2) $(289.0) $(628.8) $ 24.1 $ (955.4)
======= ====== ======= ======= ======= =========
Average fixed rate of long-term
debt........................... -- 9.8% 9.7% 10.5% -- --
------- ------ ------- ------- ------- ---------
Equity component of convertible
debentures..................... -- -- -- $ 116.3 -- $ 116.3
------- ------ ------- ------- ------- ---------
</TABLE>
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in Canada which differ in some
respects from those applicable in the United States. The following are the
significant differences in accounting principles as they pertain to the
consolidated financial statements. All amounts are in Canadian dollars.
FS-46
<PAGE> 262
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
The application of GAAP in the United States would have the following
effects on net earnings (loss) as reported:
Earnings adjustments
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN MILLIONS OF CANADIAN
DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Earnings (loss) before taxes and non-controlling interest in
accordance with Canadian GAAP............................. $(214.3) $ 51.1 $596.3
Adjustments:
Unrealized exchange loss on translation of long-term
debt(1)................................................ 0.2 17.6 62.7
Unrealized gain (loss) on forward exchange contracts(2)... (55.4) (2.0) 0.2
Postretirement and postemployment benefits(3)............. (3.9) (3.8) (4.9)
Gain from sale of a subsidiary(4)......................... 16.1 -- --
Prior period adjustment under Canadian GAAP(5)............ -- -- (6.2)
Loss on early redemption of long-term debt(6)............. 18.8 -- 7.7
Deferred start-up costs(7)................................ (7.8) (6.0) 2.1
Increase in equity component of convertible
debentures(8).......................................... (7.8) (7.1) (6.4)
Other..................................................... 0.3 0.9 1.1
------- ------ ------
Earnings (loss) before taxes, extraordinary items and
non-controlling interest in accordance with U.S. GAAP..... (253.8) 50.7 652.6
------- ------ ------
Tax expense (recovery) in accordance with Canadian GAAP..... (5.1) 26.7 221.6
Adjustments:
Tax recovery on above items............................... (9.4) (10.4) (16.2)
Deferred income taxes (9)................................. (28.8) 6.9 0.1
------- ------ ------
Tax expense (recovery) in accordance with U.S. GAAP......... (43.3) 23.2 205.5
------- ------ ------
Earnings (loss) before extraordinary items and
non-controlling interest in accordance with U.S. GAAP..... (210.5) 27.5 447.1
Non-controlling interest under Canadian GAAP................ (3.3) (13.1) (26.6)
Adjustment to non-controlling interest(5)................... -- -- 1.8
Extraordinary items, net of tax recovery of $6.6 million
($2.1 million in 1995)(6)................................. (12.2) -- (5.6)
------- ------ ------
Net earnings (loss) in accordance with U.S. GAAP............ $(226.0) $ 14.4 $416.7
======= ====== ======
Per common share in accordance with U.S. GAAP:
Basic
Earnings (loss) before extraordinary items................ $ (3.26) $ 0.22 $ 6.29
Extraordinary items, net of income taxes.................. (0.19) -- (0.08)
------- ------ ------
Net earnings (loss)......................................... $ (3.45) $ 0.22 $ 6.21
======= ====== ======
Diluted
Earnings (loss) before extraordinary items................ $ (3.26) $ 0.22 $ 5.82
Extraordinary items, net of income taxes.................. (0.19) -- (0.08)
------- ------ ------
Net earnings (loss)......................................... $ (3.45) $ 0.22 $ 5.74
======= ====== ======
</TABLE>
FS-47
<PAGE> 263
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
The application of GAAP in the United States would have the following
effects on the consolidated balance sheets, as reported:
Consolidated Balance Sheets
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
CDN. GAAP U.S. GAAP CDN. GAAP U.S. GAAP CDN. GAAP U.S. GAAP
--------- --------- --------- --------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Other assets(1)(2)(7)(10)...... $ 159.0 $ 80.6 $ 190.9 $ 119.3 $ 194.7 $ 104.6
Deferred income taxes --
asset(1)(2)(3)(7)(8)(9)(10)... -- 78.4 -- 10.5 -- 14.1
Long-term debt(11)............. 1,056.7 1,172.5 1,432.5 1,540.5 1,438.0 1,539.0
Deferred income taxes --
liability(1)(2)(3)(7)(8)(9)(10).. 139.3 110.0 181.9 139.5 193.2 154.7
Other liabilities(2)(3)(10).... 34.2 186.4 29.8 125.6 35.8 120.4
Shareholders' equity(1) to
(11)......................... 1,054.5 815.8 1,285.5 1,063.0 1,341.3 1,118.2
-------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
(1) Under Canadian GAAP, unrealized exchange gains and losses arising from the
translation of long-term debt denominated in foreign currencies were
deferred and amortized over the remaining life of the related debt. Under
U.S. GAAP, such exchange gains and losses would have been included in
earnings in the period in which they arose and, consequently, no amount
would have been deferred in the consolidated balance sheets under the item
"Other assets".
(2) Gains and losses on forward exchange and range forward contracts which
hedge anticipated future sales are included in earnings in the same period
the sale is recognized. Under U.S. GAAP, such gains and losses would have
been included in earnings in the period in which they arose.
(3) Under Canadian GAAP, costs of providing life insurance and health care
benefits to substantially all employees after retirement were recognized as
paid. Costs of providing benefits to former or inactive employees after
employment but before retirement were also recognized as paid under
Canadian GAAP. Under U.S. GAAP, these costs would have been accrued during
the employees' years of active service.
(4) A permanent difference existing under Canadian GAAP would have been treated
as a temporary difference under U.S. GAAP, thereby creating a deferred tax
liability in the books of the subsidiary. As a result, net assets of the
subsidiary at the date of sale would have been lower and, consequently, the
gain recorded on the sale would have been higher under U.S. GAAP. In
addition, as a result of the sale, postretirement obligations previously
recognized under U.S. GAAP were settled, thereby increasing the gain from
sale which would have been recognized under U.S. GAAP.
(5) The adjustment to non-controlling interest was charged to deficit as a
prior period adjustment under Canadian GAAP in 1995, whereas under U.S.
GAAP it would have been included in the net earnings (loss).
(6) The cost of early redemption of long-term debt was included in earnings
(loss) before taxes and non-controlling interest in accordance with
Canadian GAAP. Under U.S. GAAP, it would have been presented as an
extraordinary item, net of taxes.
(7) Under Canadian GAAP, certain start-up costs were deferred and amortized.
Under U.S. GAAP, such costs would have been included in net earnings as
incurred.
(8) Under Canadian GAAP, the equity element of the convertible debenture was
increased over the term of the debenture through periodic charges of the
difference between the principal amount and the initial carrying amount to
retained earnings (deficit). The discount related to the liability element
of a convertible debenture was charged to net earnings. Under U.S. GAAP,
interest would have been accrued and charged to net earnings (loss) in
accordance with the terms of the debenture.
FS-48
<PAGE> 264
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVENOR INC. -- (CONTINUED)
(9) For Canadian GAAP reporting purposes, income taxes were provided on the
deferral method basis, whereas for U.S. GAAP deferred tax assets and
liabilities would have been recognized based on differences between the
financial statement and tax bases of assets and liabilities using presently
enacted rates. In addition, under U.S. GAAP, a valuation allowance must be
established for deferred tax assets when it is more likely than not that
they will not be realized.
(10) Accounting for pension costs under U.S. GAAP differs from Canadian GAAP
principally with respect to the choice of the discount rate used to
calculate the projected benefit obligation and to the valuation of assets
and related effects on pension expense. There was no significant difference
in pension expense for the years 1997, 1996 and 1995. In addition, under
U.S. GAAP, the Corporation would have recorded an additional minimum
liability for underfunded plans representing the excess of the accumulated
benefit obligation over the pension plan assets, less the pension liability
already recognized and the net unamortized prior service cost. Under U.S.
GAAP, the additional minimum liability at December 31, 1997 of $34.3
million (1996: $33.7 million; 1995: $28.1 million) would be reported and
offset by an intangible asset of $33.6 million (1996: $33.3 million; 1995:
$26.8 million) and a reduction of shareholders' equity of $0.5 million
(1996: $0.3 million; 1995: $0.9 million), net of a tax benefit of $0.2
million (1996: $0.1 million; 1995: $0.4 million).
(11) Canadian GAAP requires the separate presentation on the balance sheet of
the liability and equity elements of convertible debentures. U.S. GAAP does
not permit separate presentation of the convertible debentures which have
to be classified as debt.
(12) Under Canadian GAAP, distribution costs were deducted from revenues in
arriving at net sales. Under U.S. GAAP, distribution costs should not be
presented as a deduction from revenues but should be included as expenses.
If this presentation had been adopted, net sales and operating expenses
would have increased by $219.3 million in 1997 (1996: $199.8 million; 1995:
$211.6 million). This difference in presentation did not impact operating
earnings and net earnings (loss).
(13) Under U.S. GAAP, Accounting Principles Board Opinion No. 25 was followed
for the accounting of stock options, and therefore no compensation expense
has been recorded.
20. RECLASSIFICATION
Certain prior years' numbers have been reclassified to conform with the
presentation adopted for 1997.
FS-49
<PAGE> 265
AVENOR INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FIRST QUARTER
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
------ ------
<S> <C> <C>
(IN MILLIONS OF
CANADIAN DOLLARS,
EXCEPT PER SHARE
AMOUNTS AND NUMBER OF
SHARES)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $450.6 $444.9
------ ------
Cost of sales............................................... 336.1 402.3
Amortization................................................ 36.0 44.9
Selling and administrative expenses......................... 9.9 17.0
------ ------
382.0 464.2
------ ------
Operating earnings (loss) before unusual item............... 68.6 (19.3)
Unusual item................................................ -- (48.2)
------ ------
Operating earnings (loss)................................... 68.6 (67.5)
Interest expense, net....................................... 25.0 31.4
Costs related to an unrealized acquisition project.......... -- 28.0
Other expense (income)...................................... (4.6) 4.4
------ ------
Earnings (loss) before taxes and non-controlling interest... 48.2 (131.3)
Tax expense (recovery)...................................... 20.2 (37.5)
------ ------
Earnings (loss) before non-controlling interest............. 28.0 (93.8)
Non-controlling interest.................................... (0.5) (0.1)
------ ------
Net earnings (loss)......................................... 28.5 (93.7)
Increase in equity component of convertible debentures, net
of taxes.................................................. (1.3) (1.2)
------ ------
Net earnings (loss) applicable to common shares............. $ 27.2 $(94.9)
====== ======
Net earnings (loss) per common share
Basic..................................................... $ 0.42 $(1.45)
Fully diluted............................................. $ 0.40 $(1.45)
====== ======
Weighted average number of outstanding common shares (in
millions)................................................. 65.5 65.4
====== ======
</TABLE>
FS-50
<PAGE> 266
AVENOR INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
FIRST QUARTER
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
(IN MILLIONS OF
CANADIAN DOLLARS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Balance at beginning of period.............................. $(431.4) $(190.4)
Net earnings (loss)......................................... 28.5 (93.7)
Increase in equity component of convertible debentures, net
of taxes.................................................. (1.3) (1.2)
Dividends declared.......................................... (7.9) --
------- -------
Balance at end of period.................................... $(412.1) $(285.3)
======= =======
</TABLE>
FS-51
<PAGE> 267
AVENOR INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
--------------------
1998 1997
-------- --------
(IN MILLIONS OF
CANADIAN DOLLARS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments............................ $ 137.9 $ 14.4
Accounts receivable....................................... 299.9 298.5
Inventories............................................... 181.4 275.1
Prepaid expenses.......................................... 10.8 8.3
-------- --------
630.0 596.3
Funds held in a segregated account.......................... -- 263.7
Capital assets.............................................. 1,866.9 2,243.5
Other assets................................................ 158.0 190.6
-------- --------
$2,654.9 $3,294.1
======== ========
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness......................................... $ 29.4 $ 37.6
Accounts payable and accrued charges...................... 240.8 302.4
Income and other taxes payable............................ 13.3 20.9
Current portion of long-term debt......................... 15.0 13.1
-------- --------
298.5 374.0
Long-term debt, less current portion........................ 1,055.0 1,389.3
Deferred income taxes....................................... 155.0 138.8
Other liabilities........................................... 31.9 66.6
Non-controlling interest.................................... 34.2 132.6
-------- --------
1,574.6 2,101.3
-------- --------
SHAREHOLDERS' EQUITY
Equity component of convertible debentures................ 118.3 110.5
Common shares............................................. 871.7 865.2
Paid-in surplus........................................... 502.4 502.4
Deficit................................................... (412.1) (285.3)
-------- --------
1,080.3 1,192.8
-------- --------
$2,654.9 $3,294.1
======== ========
</TABLE>
FS-52
<PAGE> 268
AVENOR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CASH POSITION
<TABLE>
<CAPTION>
FIRST QUARTER
THREE MONTHS ENDED
MARCH 31
------------------
1998 1997
------- -------
(IN MILLIONS OF
CANADIAN DOLLARS)
(UNAUDITED)
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss) applicable to common shares............. $ 27.2 $(94.9)
Items not involving cash
Amortization.............................................. 36.0 44.9
Deferred income taxes..................................... 16.6 (41.8)
Non-controlling interest.................................. (0.5) (0.1)
Unusual item.............................................. -- 48.2
Costs related to an unrealized acquisition project........ -- 24.7
Other..................................................... (15.0) 9.2
------ ------
64.3 (9.8)
Change in non-cash operating working capital................ (31.8) 17.3
------ ------
Cash from operations........................................ 32.5 7.5
------ ------
INVESTING ACTIVITIES
Additions to capital assets................................. (30.8) (24.0)
Other....................................................... 9.9 (1.0)
------ ------
(20.9) (25.0)
FINANCING ACTIVITIES
Issuance of long-term debt.................................. 16.0 26.0
Repayment of long-term debt................................. (69.0) (78.9)
Transfer of funds from a segregated account................. -- 62.1
Issuance of common shares, net of expenses.................. 4.5 0.4
Dividends paid.............................................. (7.9) --
Other....................................................... (0.2) --
------ ------
(56.6) 9.6
Decrease in cash position................................... (45.0) (7.9)
Cash position at beginning of period........................ 153.5 (15.3)
------ ------
Cash position at end of period.............................. $108.5 $(23.2)
====== ======
CASH POSITION CONSISTS OF:
Cash and temporary investments............................ $137.9 $ 14.4
Bank indebtedness......................................... (29.4) (37.6)
------ ------
$108.5 $(23.2)
====== ======
</TABLE>
- ---------------
Note -- Certain amounts have been reclassified to conform with 1998
presentation.
FS-53
<PAGE> 269
ANNEX A
ARRANGEMENT RESOLUTION
BE IT RESOLVED THAT:
1. the arrangement (the "Arrangement") under section 192 of the Canada
Business Corporations Act involving Avenor Inc. ("Avenor"), the
shareholders of Avenor, Bowater Incorporated ("Bowater"), Bowater Canadian
Holdings, Inc. and Bowater Canada Inc., all as set forth in the plan of
arrangement (the "Plan of Arrangement") attached as Annex E to the Joint
Management Information Circular and Proxy Statement of the Corporation and
Bowater dated June 18, 1998 (the "Joint Proxy Statement") is hereby
authorized, approved and adopted;
2. the amended and restated arrangement agreement dated as of March 9,
1998 between Avenor and Bowater (the "Arrangement Agreement"), the actions
of the directors of Avenor in approving the Arrangement and the actions of
the directors and officers of Avenor in executing and delivering the
Arrangement Agreement are hereby confirmed, ratified and approved;
3. notwithstanding that this resolution has been passed (and the
Arrangement adopted) by the shareholders of Avenor or that the Arrangement
has been approved by the Ontario Court of Justice (General Division), the
directors of Avenor are hereby authorized and empowered (i) to amend the
Arrangement Agreement or the Plan of Arrangement to the extent permitted by
the Arrangement Agreement and (ii) not to proceed with the Arrangement at
any time prior to the issue of a certificate of arrangement giving effect
to the Arrangement without the further approval of the shareholders of
Avenor but only if the Arrangement Agreement is terminated in accordance
with Article 9.1 thereof;
4. any director or officer of Avenor is hereby authorized, acting for,
in the name of and on behalf of Avenor, to execute, under the seal of
Avenor or otherwise, and to deliver articles of arrangement and such other
documents as are necessary or desirable to the Director under the Canada
Business Corporations Act in accordance with the Arrangement Agreement for
filing; and
5. any director or officer of Avenor is hereby authorized, acting for,
in the name of and on behalf of Avenor, to execute or cause to be executed,
under the corporate seal of Avenor or otherwise, and to deliver or to cause
to be delivered, all such documents, agreements and instruments, and to do
or to cause to be done all such other acts and things, as such director or
officer determines to be necessary or desirable in order to carry out the
intention of the foregoing paragraphs of this resolution and the matters
authorized thereby, such determination to be conclusively evidenced by the
execution and delivery of such document, agreement or instrument or the
doing of any such act or thing.
A-1
<PAGE> 270
ANNEX B
SHAREHOLDER RIGHTS PLAN RESOLUTION
WHEREAS Avenor Inc. ("Avenor") and Bowater Incorporated ("Bowater") entered
into an amended and restated arrangement agreement made as of March 9, 1998 (the
"Arrangement Agreement") pursuant to which Avenor and Bowater agreed to engage
in a transaction (the "Transaction") which has the economic effect of Bowater
acquiring Avenor for C$35 (US$24.67) per share in cash and securities;
AND WHEREAS Avenor is party to a shareholder rights plan agreement, as
amended (the "Shareholder Rights Plan"), dated as of October 20, 1995 with
Montreal Trust Company, as rights agent;
AND WHEREAS pursuant to the Shareholder Rights Plan the Avenor Board
authorized the issuance of one right (a "Right") in respect of each Avenor
common share;
AND WHEREAS on the effective date of the Transaction Bowater will become an
"Acquiring Person" (as defined in the Shareholder Rights Plan) as a result of a
subsidiary of Bowater becoming the beneficial owner of more than 20% of the
outstanding Avenor common shares;
AND WHEREAS, as a result of Bowater becoming an Acquiring Person, a
"Flip-In Event" (as defined in the Shareholder Rights Plan) will occur under the
Shareholder Rights Plan (the "Bowater Flip-In Event");
AND WHEREAS section 4.1 of the Shareholder Rights Plan provides in effect
that upon the occurrence of the Bowater Flip-In Event, each Right (other than
Rights beneficially owned by Bowater) shall constitute, effective the close of
business on the eighth trading day following the acquisition of Avenor common
shares by Bowater pursuant to the Transaction, the right to purchase additional
Avenor common shares from Avenor at a price substantially below the market price
for the Avenor common shares at such time;
AND WHEREAS it is a condition of the Arrangement Agreement that the
operation of the Shareholders Rights Plan be waived in respect of the
Transaction;
AND WHEREAS section 6.1(b) of the Shareholder Rights Plan provides that the
Avenor Board of Directors may, with the prior consent of the holders of Avenor
common shares, waive the application of section 4.1 of the Shareholder Rights
Plan to a Flip-In Event;
AND WHEREAS section 6.1(i) of the Shareholder Rights Plan provides that any
waiver by the Avenor Board of Directors under section 6.1(b) of the Shareholder
Rights Plan shall be submitted for approval to the holders of Avenor common
shares;
AND WHEREAS section 6.1(i) of the Shareholder Rights Plan further provides
that such approval of the holders of Avenor common shares shall have been deemed
to have been given if the waiver is approved by the affirmative vote of a
majority of the votes cast by Independent Shareholders (as defined in the
Shareholder Rights Plan) represented in person or by proxy at a meeting of such
holders duly held in accordance with applicable laws and Avenor's by-laws;
AND WHEREAS pursuant to section 6.1(b) of the Shareholder Rights Plan the
Avenor Board of Directors has determined to waive the application of section 4.1
of the Shareholder Rights Plan to the Bowater Flip-In Event;
NOW THEREFORE BE IT RESOLVED THAT:
1. pursuant to section 6.1(i) of the Shareholder Rights Plan, the
determination of the Avenor Board of Directors to waive the application of
section 4.1 of the Shareholder Rights Plan to the Bowater Flip-In Event is
hereby authorized and approved; and
2. any director or officer of Avenor is hereby authorized, acting for,
in the name of and on behalf of Avenor, to execute or cause to be executed,
under the corporate seal of Avenor or otherwise, and to deliver or to cause
to be delivered, all such documents, agreements and instruments, and to do
or to cause to be done all such other acts and things, as such director or
officer determines to be necessary or desirable in order to carry out the
intention of the foregoing paragraphs of this resolution and the matters
authorized thereby, such determination to be conclusively evidenced by the
execution and delivery of such document, agreement or instrument or the
doing of any such act or thing.
B-1
<PAGE> 271
ANNEX C
COMMERCIAL LIST COURT FILE NO. 98-CL-2842
ONTARIO COURT (GENERAL DIVISION)
COMMERCIAL LIST
IN THE MATTER OF AVENOR INC.
IN THE MATTER OF an application by Avenor Inc.
under the provisions of section 192 of
the Canada Business Corporations Act,
R.S.C. 1985, c. C-44, as amended, for approval of a
proposed arrangement involving Avenor Inc. and its
shareholders and for certain other relief
APPLICATION UNDER the Canada Business Corporations Act,
R.S.C. 1985, c. C-44, s.192, as amended
NOTICE OF APPLICATION
TO THE RESPONDENTS
A LEGAL PROCEEDING HAS BEEN COMMENCED by the applicant. The claim made by
the applicant appears on the following page.
THIS APPLICATION will come on for a hearing before a judge presiding over
the Commercial List at 393 University Avenue, Toronto on July 23, 1998 at 10:00
a.m. or as soon after that time as the matter can be heard.
IF YOU WISH TO OPPOSE THIS APPLICATION, to receive notice of any step in
the Application, or to be served with any documents in the Application, you or
an Ontario lawyer acting for you must forthwith prepare a Notice of Appearance
in Form 38A prescribed by the Rules of Civil Procedure, serve it on the
Applicant's lawyer and file it, with proof of service, in this court office, and
you or your lawyer must appear at the hearing.
IF YOU WISH TO PRESENT AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE COURT
OR TO EXAMINE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your lawyer
must, in addition to serving your Notice of Appearance, serve a copy of the
evidence on the Applicant's lawyer and file it, with proof of service, in the
court office where the Application is to be heard as soon as possible, but not
later than 2:00 p.m. on the day before the hearing.
IF YOU FAIL TO APPEAR AT THE HEARING, JUDGMENT MAY BE GIVEN IN YOUR ABSENCE
AND WITHOUT FURTHER NOTICE TO YOU. IF YOU WISH TO OPPOSE THIS APPLICATION BUT
ARE UNABLE TO PAY LEGAL FEES, LEGAL AID MAY BE AVAILABLE TO YOU BY CONTACTING A
LOCAL LEGAL AID OFFICE.
Date: June 15, 1998
Issued by: "O. Smith"
--------------------------------
Local Registrar
Address of Court Office:
393 University Avenue
Toronto, Ontario
M5G 1E6
TO: ALL HOLDERS OF COMMON SHARES OF AVENOR INC.
AND TO: ALL HOLDERS OF SECURITIES OF AVENOR INC. CONVERTIBLE OR EXCHANGEABLE
INTO COMMON SHARES OF AVENOR INC.
AND TO: THE DIRECTOR APPOINTED PURSUANT TO THE CANADA BUSINESS CORPORATIONS ACT,
R.S.C. 1985, c. C-44, as amended
C-1
<PAGE> 272
APPLICATION
1. THE APPLICANT, AVENOR INC. MAKES APPLICATION FOR:
(a) an interim order for directions pursuant to section 192 of the Canada
Business Corporations Act, R.S.C. 1985, c. C-44, as amended
(the "CBCA") on the terms of the draft interim order attached hereto
as Schedule "A";
(b) an order approving the plan of arrangement (the "Plan of Arrangement")
proposed by Avenor Inc. ("Avenor"); and
(c) such further and other relief as this Honourable Court deems just.
2. THE GROUNDS FOR THE APPLICATION ARE:
(a) Avenor is incorporated under the provisions of the CBCA;
(b) all statutory requirements under the CBCA have been fulfilled;
(c) the proposed Plan of Arrangement is in the best interests of Avenor, is
fair and reasonable to the shareholders of Avenor, and is put forward
in good faith;
(d) it is not practicable for Avenor to effect the changes contemplated by
the Plan of Arrangement under any other provision of the CBCA;
(e) section 192 of the CBCA;
(f) Rules 14.05(2) and 38 of the Rules of Civil Procedure; and
(g) such further and other grounds as counsel may advise and this
Honourable Court may permit.
3. THE FOLLOWING DOCUMENTARY EVIDENCE WILL BE USED AT THE HEARING OF THE
APPLICATION:
(a) such interim order as may be granted by this Honourable Court;
(b) the affidavit of Marc Regnier, sworn June 14, 1998 and the exhibits
thereto and other materials referred to therein;
(c) the supplementary affidavit to be filed and such exhibits thereto and
other materials referred to therein; and
(d) such further and other materials as counsel may advise and this
Honourable Court may permit.
Date of Issue: June 15, 1998
Davies, Ward & Beck
Barristers and Solicitors
1 First Canadian Place
44th Floor
Toronto, Ontario
M5X 1B1
James Doris (LSUC #33236P)
Tel: (416) 863-0900
Fax: (416) 863-0871
Solicitors for the Applicant
C-2
<PAGE> 273
Commercial List Court File No. 98-CL-2842
ONTARIO COURT (GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE MR. JUSTICE FERRIER
TUESDAY, THE 16TH
DAY OF JUNE, 1998
IN THE MATTER OF Avenor Inc.
IN THE MATTER of an application by Avenor Inc.
under the provisions of section 192 of the Canada Business Corporations Act,
R.S.C. 1985, c. C-44, as amended, for approval of
a proposed arrangement involving Avenor Inc.
and its shareholders and for certain other relief
APPLICATION UNDER the Canada Business Corporations Act,
R.S.C. 1985, c. C-44, s.192, as amended
ORDER
THIS MOTION, made by the Applicant, Avenor Inc. ("Avenor"), for an interim
order pursuant to section 192 of the Canada Business Corporations Act, R.S.C.
1985, c. C-44, as amended (the "CBCA"), was heard this day at 393 University
Avenue, Toronto, Ontario.
ON READING the Notice of Application herein, the Notice of Motion herein,
the Affidavit of Marc Regnier sworn June 14, 1998 and the exhibits thereto, and
upon hearing the submissions of counsel for Avenor, no one appearing for the
Director appointed under the CBCA although properly served as appears from the
affidavit of service of Christa Plumley, and upon being advised that the
Director appointed under the CBCA has determined that she does not need to
appear at the motion.
THE MEETING
1. THIS COURT ORDERS that Avenor call, hold and conduct an annual and
special meeting (the "Meeting") of the holders of its common shares (the
"Shareholders") on July 21, 1998 in Montreal, Quebec to consider and, if deemed
advisable, to pass, with or without variation, a special resolution (the
"Arrangement Resolution") to approve the arrangement described in the Plan of
Arrangement annexed as Annex E to the Joint Management Information Circular and
Proxy Statement of Avenor and Bowater Incorporated ("Bowater") contained in
Exhibit "A" to the Affidavit of Marc Regnier.
2. THIS COURT ORDERS that the Meeting shall be called, held and conducted
in accordance with the provisions of the CBCA, the by-laws of Avenor, the Joint
Management Information Circular and Proxy Statement, and this Order.
3. THIS COURT ORDERS that each Shareholder shall be entitled at the Meeting
to one vote for each Common Share held.
4. THIS COURT ORDERS that the procedure for the use of proxies at the
Meeting shall be as set out in the Joint Management Information Circular and
Proxy Statement.
5. THIS COURT ORDERS that the only persons entitled to attend or speak at
the Meeting shall be the Shareholders, their proxy holders, the directors of
Avenor and Bowater, Bowater Canadian Holdings Incorporated, Bowater Canada Inc.,
the auditors of Avenor, and the professional legal and financial advisors to
Avenor and Bowater, and such other persons with the permission of the Chair of
the Meeting.
6. THIS COURT ORDERS that Avenor may in its discretion waive generally the
time limits for the deposit of proxies by Shareholders, if Avenor deems it
advisable to do so.
NOTICE
7. THIS COURT ORDERS that a Joint Management Information Circular and Proxy
Statement, Notice of Meeting and Notice of Application in substantially the same
form as contained in Exhibits "A", "B" and "E", respectively, to the Affidavit
of Marc Regnier (with such amendments thereto as counsel for Avenor may advise
are necessary or desirable, provided that such amendments are not inconsistent
with this
C-3
<PAGE> 274
Order) shall be served on the Shareholders of record at the close of business on
June 12, 1998, all holders of securities of Avenor convertible or exchangeable
into common shares of Avenor, the directors and auditors of Avenor, and the
Director under CBCA by personal service or by mailing the same by prepaid
ordinary mail to such persons at their recorded addresses as they appear on the
books of Avenor at the close of business on June 12, 1998 being at least
twenty-one (21) days prior to the date of the Meeting, excluding the date of
mailing and the date of the Meeting.
VOTING
8. THIS COURT ORDERS that votes shall be taken at the Meeting on the basis
of one (1) vote per Common Share and that, subject to further Order of this
Court, the Arrangement Resolution will be considered to have been adopted by the
Shareholders upon approval by at least 66 2/3% of the votes cast by the
Shareholders present in person or represented by proxy at the Meeting.
9. THIS COURT ORDERS that only those Shareholders present or represented by
proxy at the Meeting who are entitled to vote at the Meeting pursuant to the
provisions of the CBCA shall be entitled to vote at the Meeting and, for the
purposes of the Meeting, any spoiled votes, illegible votes, defective votes and
abstentions shall be deemed to be votes not cast.
DISSENT RIGHTS
10. THIS COURT ORDERS that Shareholders shall be permitted to dissent from
the Arrangement pursuant to section 190 of the CBCA and the terms of the Plan of
Arrangement and to seek fair value for their Common Shares, so long as they
provide to Avenor their written objection to the Plan of Arrangement at or
before the Meeting and they otherwise strictly comply with the requirements of
section 190 of the CBCA and the Plan of Arrangement.
APPLICATION FOR APPROVAL OF PLAN
11. THIS COURT ORDERS that, following the approval of the Arrangement
Resolution at the Meeting in the manner set forth in this Order, Avenor may
apply before this Court on July 23, 1998 for approval of the Plan of Arrangement
and that service of the Notice of Application herein, in accordance with
paragraph 7 of this Order, shall constitute good and sufficient service of such
Notice of Application upon all persons who are entitled to receive such Notice
of Application pursuant to the Order and no other form of service need be made
and no other material need be served on such persons in respect of these
proceedings, unless a Notice of Appearance is served on Avenor's solicitor, in
which case Avenor shall serve such person with notice of the date of the
application for approval, together with a copy of any additional materials to be
used in support of such application.
12. THIS COURT ORDERS that any party who wishes to oppose the application
for approval of the Arrangement shall serve upon Avenor's solicitor and upon
other parties who have filed a Notice of Appearance a notice setting out the
basis for such opposition and a copy of the materials to be used to oppose the
application at least 5 days before the date set out for the application for
approval of the Arrangement or such shorter time as the Court, by order, may
allow.
"Ferrier J."
--------------------------------------
C-4
<PAGE> 275
ANNEX D
AMENDED AND RESTATED ARRANGEMENT AGREEMENT
MADE AS OF MARCH 9, 1998
BETWEEN
AVENOR INC.
AND
BOWATER INCORPORATED
D-1
<PAGE> 276
ARRANGEMENT AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT made as of the 9th day of March, 1998,
B E T W E E N:
AVENOR INC.,
a corporation existing under the laws of Canada,
(hereinafter called "Avenor"),
OF THE FIRST PART,
-- and --
BOWATER INCORPORATED,
a corporation existing under the laws of the State of
Delaware,
(hereinafter called "Bowater"),
OF THE SECOND PART.
WHEREAS Avenor and Bowater wish to propose an arrangement involving Avenor
and Bowater and the shareholders of Avenor and Bowater;
AND WHEREAS the parties hereto intend to carry out the transactions
contemplated herein by way of an arrangement under the provisions of the Canada
Business Corporations Act;
AND WHEREAS the parties hereto have entered into this Agreement to provide
for the matters referred to in the foregoing recitals and for other matters
relating to such arrangement;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
covenants and agreements herein contained and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged by
each party), the parties hereto hereby covenant and agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires:
"ACQUISITION PROPOSAL" means any merger, amalgamation, take-over bid,
sale of material assets (or any lease, long-term supply agreement or other
arrangement having the same economic effect as a sale), any material sale
of shares or rights or interests therein or thereto or similar transactions
involving Avenor or Bowater or any Material Subsidiaries of Avenor or
Bowater, or a proposal to do so, excluding the Arrangement and the
transactions permitted pursuant to Section 5.2;
"ARRANGEMENT" means the arrangement involving Avenor and its
shareholders under the provisions of Section 192 of the CBCA, on the terms
and conditions set forth in the Plan of Arrangement;
"ARTICLES OF ARRANGEMENT" means the articles of arrangement of Avenor
in respect of the Arrangement required by the CBCA to be sent to the
Director after the Final Order is made;
"AVENOR COMMON SHAREHOLDERS" means the holders of Avenor Common
Shares;
"AVENOR COMMON SHARES" means the common shares of Avenor;
"AVENOR CONVERTIBLE DEBENTURES" means the 7.5% Convertible Unsecured
Subordinated Debentures due 2004 of Avenor;
"AVENOR EXCHANGEABLE SHARES" means the shares issued by Avenor (or, at
the election of Bowater in accordance with Section 7.2, a Subsidiary of
Bowater the common shares of which are held directly or indirectly by
Bowater) in connection with the Arrangement that are exchangeable for
Bowater Common Shares;
D-2
<PAGE> 277
"AVENOR MEETING" means such meetings of Avenor Shareholders as are
required to be held in accordance with the Interim Order;
"AVENOR PARTIALLY OWNED ENTITY" means the Ponderay Newsprint Company;
"BOWATER COMMON SHAREHOLDERS" means the holders of Bowater Common
Shares;
"BOWATER COMMON SHARES" means the shares of common stock, U.S.$1.00
per share, of Bowater;
"BOWATER MEETING" means such meetings of Bowater Common Shareholders
as are required to be held in accordance with this Agreement;
"BOWATER RESOLUTION" means the resolution to be voted on at the
Bowater Meeting by the Bowater Common Shareholders approving of the
issuance of stock in connection with the Arrangement and the transactions
contemplated by this Agreement including, if applicable, an amendment to
Bowater's Restated Certificate of Incorporation;
"BUSINESS DAY" means any day, other than a Saturday, a Sunday and a
statutory holiday in Toronto, Ontario, Montreal, Quebec or New York City,
New York;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c.
C-44, as amended;
"CONFIDENTIALITY AGREEMENT" means the Confidentiality Agreement dated
as of April 10, 1997 between Avenor and Bowater;
"COURT" means the Ontario Court of Justice (General Division);
"DEBT RATIO" has the meaning ascribed thereto in Schedule D hereto;
"DIRECTOR" means the Director appointed pursuant to Section 260 of the
CBCA;
"DISSENT RIGHTS" means the rights of dissent of the holders of Avenor
Common Shares in respect of the Arrangement described in Section 3.1 in the
Plan of Arrangement;
"EFFECTIVE DATE" means the date stamped upon the Articles of
Arrangement filed with the Director;
"ENCUMBRANCE" includes, without limitation, any mortgage, pledge,
assignment, charge, lien, security interest, adverse interest in property,
other third party interest or encumbrance of any kind, whether contingent
or absolute, and any agreement, option, right or privilege (whether by law,
contract or otherwise) capable of becoming any of the foregoing;
"ENVIRONMENTAL APPROVALS" means all permits, certificates, licences,
authorizations, consents, instructions, registrations, directions or
approvals issued or required by Governmental Entities pursuant to
Environmental Laws;
"ENVIRONMENTAL LAWS" means all applicable Laws, including applicable
common laws, relating to the protection of the environment and employee and
public health and safety;
"EXCHANGE RATIO" has the meaning ascribed thereto in the Plan of
Arrangement;
"FINAL ORDER" means the order of the Court approving the Arrangement,
as such order may be amended at any time prior to the Effective Date or, if
appealed, then unless such appeal is withdrawn or denied, as affirmed;
"GOVERNMENTAL ENTITY" means any (a) multinational, federal,
provincial, state, regional, municipal, local or other government,
governmental or public department, central bank, court, tribunal, arbitral
body, commission, board, bureau or agency, domestic or foreign, (b) any
subdivision, agent, commission, board, or authority of any of the foregoing
or (c) any quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any of the
foregoing;
"HAZARDOUS SUBSTANCE" means any pollutant, contaminant, waste of any
nature, hazardous substance, hazardous material, toxic substance, dangerous
substance or dangerous good as defined, judicially interpreted or
identified in any Environmental Law;
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, of the United States of America;
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"INTERIM ORDER" means the interim order of the Court, as the same may
be amended, pursuant to subsection 192(4) of the CBCA containing
declarations and directions in respect of Avenor under the CBCA with
respect to the Arrangement;
"JOINT PROXY CIRCULAR" means the information circular and proxy
statement prepared by Avenor and Bowater for the Avenor Meeting and the
Bowater Meeting;
"LAWS" means all laws, by-laws, rules, regulations, orders,
ordinances, protocols, codes, guidelines, policies, notices, directions and
judgments or other requirements of any Governmental Entity;
"MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means, when
used in connection with Avenor or Bowater, any change, effect, event,
occurrence or state of facts that is, or would reasonably be expected to
be, material and adverse to the business, operations or financial condition
of such Party and its Subsidiaries taken as a whole other than any change,
effect, event or occurrence relating to (i) the Canadian or United States
economy or securities markets in general, (ii) any change in the trading
price of the Avenor Common Shares or Bowater Common Shares, respectively,
immediately following and reasonably attributable to the announcement of
this Agreement and the transactions contemplated hereby, or (iii) the
forest products industry in general (including commodity prices), and not
specifically relating to Avenor or Bowater or their respective
Subsidiaries, respectively;
"MATERIAL SUBSIDIARY", in respect of a Party, means a Subsidiary of
that Party the total assets of which would have constituted more than 10%
of the consolidated assets of that Party or the total revenues of which
would have constituted more than 10% of the consolidated revenues of that
Party, in each case as set out in the financial statements for the year
ended December 31, 1997, and for Avenor includes Avenor Maritimes Inc.;
"PARTIES" means Avenor and Bowater; and "Party" means either one of
them;
"PLAN OF ARRANGEMENT" means the plan of arrangement substantially in
the form and content of Schedule A annexed hereto and any amendment or
variation thereto made in accordance with Section 6.1 of the Plan of
Arrangement or Section 7.1 hereof;
"SEC" means the United States Securities and Exchange Commission;
"SUBSIDIARY" means, with respect to a specified body corporate, any
body corporate of which more than 50% of the outstanding shares ordinarily
entitled to elect a majority of the board of directors thereof (whether or
not shares of any other class or classes shall or might be entitled to vote
upon the happening of any event or contingency) are at the time owned
directly or indirectly by such specified body corporate and shall include
any body corporate, partnership, joint venture or other entity over which
it exercises direction or control or which is in a like relation to a
Subsidiary; provided, however, that, subject to Section 1.6, "Subsidiary"
for purposes of Avenor shall include the Avenor Partially Owned Entity;
"TAX ACT" means the Income Tax Act (Canada);
"TAX RETURNS" means all returns, declarations, reports, information
returns and statements required to be filed with any taxing authority
relating to Taxes; and
"TAXES" has the meaning ascribed thereto in Section 15 of Schedule B.
1.2 INTERPRETATION NOT AFFECTED BY HEADING
The division of this Agreement into Articles, Sections, subsections and
paragraphs and the insertion of headings are for convenience of reference only
and shall not affect in any way the meaning or interpretation of this Agreement.
1.3 ARTICLE REFERENCES
Unless the contrary intention appears, references in this Agreement to an
Article, Section, subsection, paragraph or Schedule by number or letter or both
refer to the Article, Section, subsection, paragraph or Schedule, respectively,
bearing that designation in this Agreement.
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1.4 NUMBER AND GENDER
In this Agreement, unless the contrary intention appears, words importing
the singular include the plural and vice versa; words importing gender shall
include all genders; and words importing persons shall include a natural person,
firm, trust, partnership, association, corporation, joint venture or government
(including any governmental agency, political subdivision or instrumentality
thereof).
1.5 DATE FOR ANY ACTION
If the date on which any action is required to be taken hereunder by any
Party is not a business day, such action shall be required to be taken on the
next succeeding day which is a business day in such place.
1.6 AVENOR PARTIALLY OWNED ENTITY
Notwithstanding any other provisions hereof, the representations and
warranties given hereunder with respect to the Avenor Partially Owned Entity or
its Subsidiaries (by incorporation in the definition of Subsidiaries) included
in Schedule B, are given by Avenor to the best of its knowledge only, based on
inquiry of the management and employees of Avenor or its Subsidiaries (excluding
the Avenor Partially Owned Entity or its Subsidiaries) but without inquiry of
the management or employees of the Avenor Partially Owned Entity or its
Subsidiaries, except for the representations and warranties given respecting
Avenor's direct or indirect ownership of such Avenor Partially Owned Entity.
Covenants given by Avenor which refer to any of the Subsidiaries shall not
extend to the Avenor Partially Owned Entity; provided, however, that if an issue
relating to the Avenor Partially Owned Entity arises, which issue would be the
subject matter of any of the covenants contained in this Agreement but for the
fact that the covenants do not extend to the Avenor Partially Owned Entity,
Avenor shall vote its voting interests in the Avenor Partially Owned Entity in
respect of such issue consistent with complying with the relevant covenant as
though such covenant did extend to the Avenor Partially Owned Entity. Avenor
shall also exercise any other influence in the Avenor Partially Owned Entity in
a manner consistent with complying with the relevant covenant as though such
covenant did extend to the Avenor Partially Owned Entity, subject to any
applicable fiduciary duties or contractual obligations, other than hereunder. To
the extent any representations, warranties, covenants or agreements contained
herein relate, directly or indirectly, to a Subsidiary of any Party, other than
the Avenor Partially Owned Entity, each such provision shall be construed as a
covenant by such Party to cause (to the fullest extent to which it is legally
capable) such Subsidiary to perform the required action.
1.7 CURRENCY
Unless otherwise stated, all references in this Agreement to sums of money
are expressed in lawful money of Canada.
1.8 SCHEDULES
Schedules A, B, C and D annexed to this Agreement, being the Plan of
Arrangement (including the provisions attaching to the Avenor Exchangeable
Shares), and the representations and warranties of Avenor and Bowater and
certain definitions, respectively, are incorporated by reference into this
Agreement and form part hereof.
1.9 ACCOUNTING MATTERS
Unless otherwise stated, all accounting terms used in this Agreement in
respect of Avenor shall have the meanings attributable thereto under Canadian
generally accepted accounting principles and all determinations of an accounting
nature in respect of Avenor required to be made shall be made in a manner
consistent with Canadian generally accepted accounting principles. Unless
otherwise stated, all accounting terms used in this Agreement in respect of
Bowater shall have the meanings attributable thereto under United States
generally accepted accounting principles and all determinations of an accounting
nature required to be made in respect of Bowater shall be made in a manner
consistent with United States generally accepted accounting principles.
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1.10 MATERIAL
The terms "material" and "materially" shall, when used in this Agreement,
be construed, measured or assessed on the basis of whether the matter would
materially affect a Party and its Subsidiaries taken as a whole or would
significantly impede the ability to complete the Arrangement in accordance with
this Agreement.
1.11 DISCLOSURE IN WRITING
The phrases "except as previously disclosed in writing" and "except as
disclosed in writing" and similar expressions used in this Agreement shall be
construed for all purposes of this Agreement as referring to a disclosure letter
prepared by each Party and delivered to the other contemporaneously with the
execution and delivery of this Agreement. Disclosure by a Party in any
particular schedule or exhibit of such disclosure letter will be deemed to be
disclosure of the information for purposes of this Agreement.
ARTICLE 2
THE ARRANGEMENT
2.1 ARRANGEMENT
(a) As soon as reasonably practicable, Avenor shall apply to the Court
pursuant to section 192 of the CBCA for an order approving the
Arrangement and, in connection with such application, Avenor shall:
(i) file, proceed with and diligently prosecute an application for an
Interim Order providing for, among other things, the calling and
holding of the Avenor Meeting for the purpose of considering and,
if deemed advisable, approving the Arrangement, which meeting
shall be held on the same date and at the same time, if
practicable, or as near as may be, as the Bowater Meeting; and
(ii) subject to obtaining the approvals as contemplated in the Interim
Order and as may be directed by the Court in the Interim Order,
take all steps necessary or desirable to submit the Arrangement
to the Court and apply for the Final Order,
and, subject to the fulfilment or waiver of the conditions set forth in
Article 6, Avenor shall deliver Articles of Arrangement to the Director
and such other documents as may be required to give effect to the
Arrangement as soon as reasonably practicable.
(b) The Articles of Arrangement shall, with such other matters as are
necessary to effect the Arrangement, and all as subject to the
provisions of the Plan of Arrangement, provide as follows:
(i) the authorized share capital of Avenor or the Subsidiary of
Bowater, as the case may be, shall be increased or modified by the
creation of an unlimited number of Avenor Exchangeable Shares
having the rights, privileges, restrictions and conditions
described in the Plan of Arrangement;
(ii) each shareholder of Avenor (other than shareholders who validly
exercise Dissent Rights and who are ultimately entitled to be
paid the fair value of the Avenor Common Shares held by them)
shall be entitled to receive $35 for each Avenor Common Share
held, which shall be payable in cash, Avenor Exchangeable Shares
or Bowater Common Shares, or a combination thereof, on the terms
and subject to the limitations and conditions set out in the Plan
of Arrangement; and
(iii) Bowater shall become the holder, directly or indirectly, of all
of the issued and outstanding Avenor Common Shares (other than
those Avenor Common Shares held by Avenor Common Shareholders
who have exercised Dissent Rights).
2.2 EFFECTIVE DATE
The Arrangement shall become effective on the Effective Date and the steps
to be carried out pursuant to the Arrangement shall become effective on the
Effective Date in the order set out in the Plan of Arrangement.
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2.3 AVENOR APPROVAL
(a) Avenor represents as of the date hereof that its directors have
determined unanimously that:
(i) the Arrangement is fair to its shareholders and is in the best
interests of Avenor; and
(ii) its Board of Directors will recommend that its shareholders vote
in favour of the Arrangement;
(b) Avenor represents as of the date hereof that its Board of Directors has
received an opinion from RBC Dominion Securities Inc., the financial
advisor to Avenor, that the Arrangement is fair from a financial point
of view to the Avenor Common Shareholders; and
(c) Avenor represents as of the date hereof that its directors have advised
it that they intend to vote the Avenor Common Shares held by them in
favour of the Arrangement and will, accordingly, so represent in the
Joint Proxy Circular.
2.4 BOWATER APPROVAL
(a) Bowater represents as of the date hereof that its directors have
determined unanimously that:
(i) its Board of Directors will recommend that its shareholders vote
in favour of the Bowater Resolution at the Bowater Meeting; and
(ii) this Agreement is in the best interests of Bowater;
(b) Bowater represents as of the date hereof that its Board of Directors
has received opinions from TD Securities Inc. and Goldman, Sachs & Co.,
the financial advisors to Bowater, that the transactions contemplated
by this Agreement are fair from a financial point of view to Bowater;
and
(c) Bowater represents as of the date hereof that its directors have
advised it that they intend to vote the Bowater Common Shares held by
them in favour of the Bowater Resolution and will, accordingly, so
represent in the Joint Proxy Circular.
2.5 SHAREHOLDER RIGHTS PLAN
Avenor covenants and represents that its Board of Directors has resolved to
take all action necessary in order to ensure that the Separation Time (as
defined in the Avenor Shareholder Rights Plan Agreement dated October 20, 1995)
does not occur in connection with this Agreement or the Arrangement, and to
recommend to the Avenor Common Shareholders that they approve such resolutions
and take such actions as may be necessary in order to waive the application of
the Avenor Shareholder Rights Plan Agreement to this Agreement and to the
Arrangement effective immediately prior to the Effective Date and covenants to
take all action necessary pursuant to the Avenor Shareholder Rights Plan
Agreement to seek such waiver.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF AVENOR
3.1 REPRESENTATIONS
Avenor hereby makes to Bowater the representations and warranties as set
forth in Schedule B to this Agreement and acknowledges that Bowater is relying
upon those representations and warranties in connection with entering into this
Agreement.
3.2 INVESTIGATION
Any investigation by Bowater and its advisors shall not mitigate, diminish
or affect the representations and warranties of Avenor pursuant to this
Agreement.
3.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Avenor contained in this Agreement
shall not survive the completion of the Arrangement and shall expire and be
terminated and extinguished on the Effective Date.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BOWATER
4.1 REPRESENTATIONS
Bowater hereby makes to Avenor the representations and warranties as set
forth in Schedule C to this Agreement and acknowledges that Avenor is relying
upon those representations and warranties in connection with entering into this
Agreement.
4.2 INVESTIGATION
Any investigation by Avenor and its advisors shall not mitigate, diminish
or affect the representations and warranties of Bowater pursuant to this
Agreement.
4.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Bowater contained in this Agreement
shall not survive the completion of the Arrangement and shall expire and be
terminated and extinguished on the Effective Date.
ARTICLE 5
COVENANTS
5.1 CONSULTATION
The Parties agree to consult with each other in issuing any press releases
or otherwise making public statements with respect to this Agreement or the
Arrangement and in making any filings with any federal, provincial or state
governmental or regulatory agency or with any securities exchange with respect
thereto. Each Party shall use its commercially reasonable efforts to enable the
other Party to review and comment on all such press releases and filings prior
to release thereof. The Parties agree to issue jointly a press release with
respect to this Agreement as soon as practicable, in a form acceptable to each
Party, and each Party agrees to file a copy of this Agreement with applicable
regulatory authorities.
5.2 COVENANTS OF AVENOR
Avenor covenants and agrees that, except as contemplated in this Agreement
or the Arrangement, until the Effective Date or the day upon which this
Agreement is terminated, whichever is earlier:
(a) in a timely and expeditious manner, it will file, proceed with and
diligently prosecute an application to the Court for the Interim Order;
provided, however, that notwithstanding the foregoing the Parties agree
to consult regarding, as soon as possible, seeking the Interim Order
and mailing the Joint Proxy Circular earlier than as required hereby;
(b) in a timely and expeditious manner it will:
(i) forthwith carry out such terms of the Interim Order as are
required under the terms thereof to be done by Avenor;
(ii) prepare, in consultation with Bowater, and file a Joint Proxy
Circular with respect to the Avenor Meeting and the Bowater
Meeting in all jurisdictions where the same is required to be
filed and mail the same as ordered by the Interim Order and in
accordance with all applicable Laws, in all jurisdictions where
the same is required, complying in all material respects with
all applicable Laws on the date of mailing thereof and
containing full, true and plain disclosure of all material facts
relating to the Arrangement and Avenor and not containing any
misrepresentation (as defined under applicable securities laws)
with respect thereto;
(iii) convene the Avenor Meeting on a date agreed to by the Parties
which shall be no later than September 30, 1998 and distribute
copies of this Agreement (or a written summary thereof prepared
by Avenor in form and substance reasonably satisfactory to
Bowater), in each case as ordered by the Interim Order;
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(iv) provide notice to Bowater of the Avenor Meeting and allow
Bowater's representatives to attend the Avenor Meeting unless
such attendance is prohibited by the Interim Order; and
(v) conduct the Avenor Meeting in accordance with the Interim Order,
the by-laws of Avenor and any instrument governing such meeting,
as applicable, and as otherwise required by applicable Laws;
(c) in a timely and expeditious manner, it will prepare (in consultation
with Bowater) and file any mutually agreed (or otherwise required by
applicable Laws) amendments or supplements to the Joint Proxy Circular
with respect to the Avenor Meeting and mail the same as required by the
Interim Order and in accordance with all applicable Laws, in all
jurisdictions where the same is required, complying in all material
respects with all applicable legal requirements on the date of mailing
thereof;
(d) subject to the approval of the Arrangement at the Avenor Meeting in
accordance with the provisions of the Interim Order, it will forthwith
file, proceed with and diligently prosecute an application for the
Final Order;
(e) it will forthwith carry out the terms of the Interim Order and the
Final Order and, subject to the receipt of the Final Order, the
satisfaction of the conditions precedent in favour of Avenor and the
receipt of the written confirmation of Bowater that the conditions
precedent in favour of Bowater have been satisfied, file Articles of
Arrangement and the Final Order with the Director in order for the
Arrangement to become effective;
(f) except for proxies and other non-substantive communications, it will
furnish promptly to Bowater a copy of each notice, report, schedule or
other document or communication delivered, filed or received by Avenor
in connection with the Arrangement or the Interim Order, the Avenor
Meeting or any other meeting of Avenor security holders or class of
security holders which all such holders, as the case may be, are
entitled to attend, any filings under applicable Laws and any dealings
with regulatory agencies in connection with, or in any way affecting,
the transactions contemplated herein;
(g) in a timely and expeditious manner, it will provide to Bowater all
information as may be reasonably requested by Bowater or as required by
the Interim Order or applicable Laws with respect to Avenor and its
Subsidiaries and their respective businesses and properties for
inclusion in the Joint Proxy Circular with respect to the Bowater
Meeting or in any amendments or supplements to such Joint Proxy
Circular complying in all material respects with all applicable legal
requirements on the date of mailing thereof and containing full, true
and plain disclosure of all material facts relating to Avenor and not
containing any misrepresentation (as defined under applicable
securities laws) with respect thereto;
(h) it will prepare and file with all applicable securities commissions or
similar securities regulatory authorities of Canada and the United
States all necessary applications to seek exemptions, if required, from
the prospectus, registration and other requirements of the applicable
securities laws of Canada and the United States for the issue by Avenor
or the Subsidiary of Bowater, as the case may be, of Avenor
Exchangeable Shares and the issue by Bowater of Bowater Common Shares
pursuant to the Arrangement and the resale of such shares (other than
by control persons and subject to requirements of general application);
(i) except as previously disclosed in writing to Bowater, it shall, and
shall cause each of its Subsidiaries to, conduct its and their
respective businesses only in, and not take any action except in, the
usual, ordinary and regular course of business and consistent with past
practice;
(j) except as previously disclosed in writing to Bowater, it shall not,
without the prior written consent of Bowater, which consent shall not
be unreasonably withheld, directly or indirectly do or permit to occur
any of the following:
(i) issue, sell, pledge, lease, dispose of, encumber or agree to
issue, sell, pledge, lease, dispose of or encumber (or permit any
of its Subsidiaries to issue, sell, pledge, lease, dispose of,
encumber or agree to issue, sell, pledge, lease, dispose of or
encumber):
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(A) any shares of, or any options, warrants, calls, conversion
privileges or rights of any kind to acquire any shares of it or
any of its Subsidiaries, other than (I) the issue of Avenor
Common Shares on the exercise of Avenor Convertible Debentures;
or (II) pursuant to the exercise of stock options (whether
vested or unvested) currently outstanding or under existing
share issuance plans in accordance with their current terms;
(B) except in the usual, ordinary and regular course of business
and consistent with past practice, any assets of it or any of
its Material Subsidiaries;
(ii) amend or propose to amend its articles or by-laws or those of
any of its Material Subsidiaries;
(iii) split, combine or reclassify any of its outstanding shares, or
declare, set aside or pay any dividend or other distribution
payable in cash, stock, property or otherwise with respect to
its shares (other than regular quarterly dividends in respect
of its common shares, in amounts consistent with past
practice);
(iv) redeem, purchase or offer to purchase (or permit any of its
Material Subsidiaries to redeem, purchase or offer to purchase)
any shares or other securities of it or any of its Material
Subsidiaries, unless otherwise required by the terms of such
securities;
(v) reorganize, amalgamate or merge it or any of its Material
Subsidiaries with any other person, corporation, partnership or
other business organization whatsoever;
(vi) acquire or agree to acquire any person, corporation,
partnership, joint venture or other business organization or
division or acquire or agree to acquire any assets, which, in
each case are, individually or in the aggregate, material;
(vii) except in the usual, ordinary and regular course of business
and consistent with past practice: (A) satisfy or settle any
claims or liabilities, except such as have been reserved
against in its financial statements delivered to Bowater, which
are, individually or in the aggregate, material; (B) relinquish
any contractual rights which are, individually or in the
aggregate, material; or (C) enter into any interest rate,
currency or commodity swaps, hedges or other similar financial
instruments;
(viii) except for the purpose of the renewal of or the replacement of
existing credit facilities, incur or commit to provide
guarantees, incur any indebtedness for borrowed money or issue
any amount of debt securities, which are, individually or in
the aggregate, material;
(ix) incur or commit to capital expenditures prior to the Effective
Date, individually or in the aggregate, exceeding $50 million;
(x) make any changes to its existing accounting practices or make
any material tax election;
(k) without the prior written consent of Bowater, which consent shall not
be unreasonably withheld, it shall not, and shall cause each of its
Subsidiaries to not:
(i) other than as previously disclosed in writing to Bowater or in
the usual, ordinary and regular course of business and
consistent with past practice or pursuant to existing
employment, pension, supplemental pension, termination,
compensation arrangements or policies, enter into or modify any
employment, severance, collective bargaining or similar
agreements, policies or arrangements with, or grant any
bonuses, salary increases, stock options, pension or
supplemental pension benefits, profit sharing, retirement
allowances, deferred compensation, incentive compensation,
severance or termination pay to, or make any loan to, any
officers or directors of it; or
(ii) other than as previously disclosed in writing to Bowater or in
the usual, ordinary and regular course of business and
consistent with past practice or pursuant to existing
employment, pension, supplemental pension, termination,
compensation arrangements or policies, in the case of
employees who are not officers or directors, take any action
with respect to the entering into or modifying of any
employment, severance, collective bargaining or similar
agreements, policies or arrangements or with respect to the
grant of any bonuses, salary increases, stock
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options, pension or supplemental pension benefits, profit sharing,
retirement allowances, deferred compensation, incentive compensation,
severance or termination pay or any other form of compensation or
profit sharing or with respect to any increase of benefits payable;
provided that the foregoing shall not prevent Avenor from taking such
action that is reasonably necessary so that the condition relating to
the exercise or termination of stock options referred to in Section
6.3(f) can be fulfilled. In such regard, Avenor agrees to keep Bowater
informed as to the arrangements which Avenor believes are necessary to
fulfill such condition in Section 6.3(f) so that Bowater can
participate in the decisions made by Avenor;
(l) it shall use its reasonable commercial efforts (or cause each of its
Subsidiaries to use reasonable commercial efforts) to cause its current
insurance (or re-insurance) policies not to be cancelled or terminated
or any of the coverage thereunder to lapse, unless simultaneously with
such termination, cancellation or lapse, replacement policies
underwritten by insurance and re-insurance companies of nationally
recognized standing providing coverage equal to or greater than the
coverage under the cancelled, terminated or lapsed policies for
substantially similar premiums are in full force and effect and, at or
prior to the Effective Date, to acquire insurance through a "discovery"
endorsement which protects directors and officers of Avenor (including
former directors and officers) if requested by Bowater and on such
terms as approved by Bowater;
(m) it shall:
(i) use its reasonable commercial efforts, and cause each of its
Subsidiaries to use its reasonable commercial efforts, to
preserve intact its business organizations and goodwill, to
maintain satisfactory relationships with suppliers, agents,
distributors, customers and others having business relationships
with it or its Subsidiaries;
(ii) not take any action, or permit any of its Subsidiaries to take
any action, that would interfere with or be inconsistent with
the completion of the transactions contemplated hereunder or
would render, or that reasonably may be expected to render, any
representation or warranty made by it in this Agreement untrue
in any material respect at any time prior to the Effective Date
if then made; and
(iii) promptly notify Bowater of any material adverse change, or any
change which could reasonably be expected to become a material
adverse change, in respect of its or any of its Subsidiaries'
businesses or in the operation of its or any of its
Subsidiaries' businesses or in the operation of its or any of
its Subsidiaries' properties, and of any material Governmental
Entity or third party complaints, investigations or hearings (or
communications indicating that the same may be contemplated);
(n) it shall not and shall cause its Subsidiaries not to settle or
compromise any claim brought by any present, former or purported holder
of any of its securities in connection with the transactions
contemplated by this Agreement or the Arrangement prior to the
Effective Date without the prior written consent of Bowater, such
consent not to be unreasonably withheld;
(o) except in the usual, ordinary and regular course of business and
consistent with past practice, or except as previously disclosed in
writing to Bowater or as required by applicable Laws, it and its
Subsidiaries shall not enter into or modify in any material respect any
contract, agreement, commitment or arrangement which new contract or
series of related new contracts or modification to an existing contract
or series of related existing contracts would be material to Avenor or
which would have a material adverse effect on Avenor;
(p) it shall use all commercially reasonable efforts to satisfy (or cause
the satisfaction of) the conditions precedent to its obligations
hereunder set forth in Article 6 to the extent the same is within its
control and to take, or cause to be taken, all other action and to do,
or cause to be done, all other things necessary, proper or advisable
under all applicable Laws to complete the Arrangement and
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the transactions contemplated by this Agreement, including using its
commercially reasonable efforts to:
(i) obtain all necessary waivers, consents and approvals required to
be obtained by it from other parties to loan agreements, leases
and other contracts;
(ii) obtain all necessary consents, approvals and authorizations as
are required to be obtained by it under any applicable Law;
(iii) effect all necessary registrations and filings and submissions
of information requested by Governmental Entities required to be
effected by it in connection with the Arrangement and the
transactions contemplated by this Agreement, participate and
appear in any proceedings of either Party before Governmental
Entities;
(iv) oppose, lift or rescind any injunction or restraining order or
other order or action seeking to stop, or otherwise adversely
affecting the ability of the Parties to consummate, the
transactions contemplated hereby or by the Arrangement;
(v) fulfill all conditions and satisfy all provisions of this
Agreement and the Arrangement; and
(vi) cooperate with Bowater in connection with the performance by it
of its obligations hereunder;
(q) it shall not take any action, refrain from taking any action (subject
to its commercially reasonable efforts), or permit any action to be
taken or not taken, inconsistent with this Agreement or which would
reasonably be expected to significantly impede the consummation of the
Arrangement, provided that where Avenor is required to take any such
action or refrain from taking such action (subject to its commercially
reasonable efforts) as a result of this Agreement, Avenor shall
immediately notify Bowater in writing of such circumstances;
(r) it will, in all material respects, conduct itself so as to keep Bowater
fully informed as to the material decisions or actions required or
required to be made with respect to the operation of its business;
provided that such disclosure is not otherwise prohibited by reason of
a confidentiality obligation owed to a third party for which a waiver
could not be obtained or is in respect of customer-specific
competitively sensitive information relating to areas or projects where
Avenor and Bowater are competitors;
(s) it shall make, or cooperate as necessary in the making of, all other
necessary filings and applications under all applicable Laws required
in connection with the transactions contemplated herein and take all
reasonable action necessary to be in compliance with such Laws;
(t) it shall use its reasonable commercial efforts to conduct its affairs
and shall cause its Subsidiaries to conduct their affairs so that all
of its representations and warranties contained herein shall be true
and correct in all material respects on and as of the Effective Date as
if made on and as of such date; and
(u) it will not allow the Debt Ratio to exceed 70% so that the condition
referred to in Section 6.3(e) can be fulfilled.
5.3 COVENANTS OF BOWATER
Bowater covenants and agrees that, except as contemplated by this
Agreement, the Arrangement and transactions (including financing transactions)
necessary to implement the Arrangement, until the Effective Date or the day upon
which this Agreement is terminated, whichever is earlier:
(a) except as previously disclosed in writing to Avenor, it shall, and
shall cause each of its Subsidiaries to, refrain from entering into any
transaction or making any other decision which would result in a
material adverse change in Bowater;
(b) it shall take all such steps and do all such acts and things, including
without limitation, making or causing to be made cash payments and
issuing Bowater Common Shares, as are specified in the Plan of
Arrangement and the Final Order to be taken or done by Bowater;
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(c) except as previously disclosed in writing to Avenor or as required by
(f) below, it shall not amend or propose to amend its Restated
Certificate of Incorporation;
(d) except as previously disclosed in writing to Avenor, it shall not
split, combine or reclassify any of its outstanding shares, or declare,
set aside or pay any dividend or other distribution payable in cash,
stock, property or otherwise with respect to its shares (other than
regular quarterly dividends in respect of its common shares, in amounts
consistent with past practice, and dividends provided for pursuant to
the provisions of its preferred shares);
(e) it shall use all commercially reasonable efforts to satisfy (or cause
the satisfaction of) the conditions precedent to its obligations
hereunder set forth in Article 6 to the extent the same is within its
control and to take, or cause to be taken, all other action and to do,
or cause to be done, all other things necessary, proper or advisable
under all applicable Laws to complete the Arrangement and the
transactions contemplated by this Agreement, including using its
commercially reasonable efforts to:
(i) obtain all necessary waivers, consents and approvals required to
be obtained by it from other parties to loan agreements, leases
and other contracts;
(ii) obtain all necessary consents, approvals and authorizations
as are required to be obtained by it under any applicable Law;
(iii) effect all necessary registrations and filings and submissions
of information requested by Governmental Entities required to be
effected by it in connection with the Arrangement and the
transactions contemplated by this Agreement and participate, and
appear in any proceedings of, either Party before Governmental
Entities;
(iv) oppose, lift or rescind any injunction or restraining order or
other order or action seeking to stop, or otherwise adversely
affecting the ability of the parties to consummate, the
transactions contemplated hereby or by the Arrangement;
(v) fulfill all conditions precedent to Avenor's obligations
hereunder and satisfy all provisions of this Agreement and the
Arrangement applicable to it; and
(vi) cooperate with Avenor in connection with the performance by it
of its obligations hereunder;
(f) it shall:
(i) create one share of special voting stock of Bowater (including
if necessary by filing amendments to its Restated Certificate of
Incorporation), which entitles the holder of record to a number
of votes at meetings of holders of Bowater Common Shares equal
to the number of Avenor Exchangeable Shares outstanding from
time to time; and
(ii) authorize Bowater Common Shares to be issued in the Arrangement
and a sufficient number of Bowater Common Shares so that the
retraction and exchange rights attached to the Avenor
Exchangeable Shares may be honoured;
(g) it shall not take any action, refrain from taking any action (subject
to its commercially reasonable efforts), or permit any action to be
taken or not taken, inconsistent with this Agreement or which would
reasonably be expected to significantly impede the consummation of the
Arrangement, provided that where Bowater is required to take any such
action or refrain from taking such action as a result of this
Agreement, Bowater shall immediately notify Avenor in writing of such
circumstances;
(h) in a timely and expeditious manner it shall:
(i) forthwith carry out such terms of the Interim Order, as are
required under the terms thereof to be done by Bowater;
(ii) prepare, in consultation with Avenor, and file the Joint Proxy
Circular with respect to the Avenor Meeting and the Bowater
Meeting in all jurisdictions where the same is required to be
filed and mail the same in accordance with all applicable Laws,
in all jurisdictions where the same is required, complying in all
material respects with all applicable Laws on the date of mailing
thereof and containing full, true and plain disclosure of all
material facts relating to the
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Arrangement and Bowater and not containing any misrepresentation (as
defined under such applicable securities laws) with respect thereto;
(iii) convene the Bowater Meeting on a date agreed to by the Parties
which shall be no later than September 30, 1998, and distribute
copies of this Agreement (or a written summary thereof prepared
by Bowater in form and substance reasonably satisfactory to
Avenor);
(iv) provide notice to Avenor of the Bowater Meeting and allow
Avenor's representatives to attend the Bowater Meeting; and
(v) conduct the Bowater Meeting in accordance with the by-laws
of Bowater and any instrument governing such meeting, as
applicable, and as otherwise required by applicable Laws;
(i) in a timely and expeditious manner it shall, prepare (in consultation
with Avenor) and file any mutually agreed (or otherwise required by
applicable Laws) amendments or supplements to the Joint Proxy Circular
with respect to the Bowater Meeting and mail the same as required by
the Interim Order and in accordance with all applicable Laws, in all
jurisdictions where the same is required, complying in all material
respects with all applicable Laws on the date of mailing thereof;
(j) except for proxies and other non-substantive communications, it shall
furnish promptly to Avenor a copy of each notice, report, schedule or
other document or communication delivered, filed or received by Bowater
in connection with the Arrangement or the Interim Order, the Bowater
Meeting or any other meeting of Bowater security holders or class of
security holders which all such holders, as the case may be, are
entitled to attend, any filings under applicable Laws and any dealings
with regulatory agencies in connection with, or in any way affecting,
the transactions contemplated herein;
(k) in a timely and expeditious manner, it shall provide to Avenor all
information as may be reasonably requested by Avenor or as required by
the Interim Order or applicable Laws with respect to Bowater and its
Subsidiaries and their respective businesses and properties for
inclusion in the Joint Proxy Circular with respect to the Avenor
Meeting or in any amendments or supplements to such Joint Proxy
Circular complying in all material respects with all applicable Laws on
the date of mailing thereof and containing full, true and plain
disclosure of all material facts relating to Bowater and not containing
any misrepresentation (as defined under applicable securities laws)
with respect thereto;
(l) assist and cooperate in the preparation and filing with all applicable
securities commissions or similar securities regulatory authorities of
Canada and the United States of all necessary applications to seek
exemptions, if required, from the prospectus, registration and other
requirements of the applicable securities laws of Canada and the United
States for the issue by Avenor or the Subsidiary of Bowater, as the
case may be, of Avenor Exchangeable Shares and the issue by Bowater of
Bowater Common Shares pursuant to the Arrangement and the resale of
such shares (other than by control persons and subject to requirements
of general application); and
(m) forthwith carry out such terms of the Final Order required under the
terms thereof to be done by Bowater.
5.4 COVENANTS REGARDING NON-SOLICITATION
(a) Avenor shall not, directly or indirectly, through any officer,
director, employee, representative or agent of Avenor or any of its
Subsidiaries, solicit, initiate or knowingly encourage (including by
way of furnishing information or entering into any form of agreement,
arrangement or understanding) the initiation of any inquiries or
proposals regarding an Acquisition Proposal, participate in any
discussions or negotiations regarding any Acquisition Proposal,
withdraw or modify in a manner adverse to Bowater the approval of the
Board of Directors of Avenor of the transactions contemplated hereby,
approve or recommend any Acquisition Proposal or cause Avenor to enter
into any agreement related to any Acquisition Proposal; provided,
however, that subject to Section 5.5 but notwithstanding the preceding
part of this Section 5.4(a) and any other provision of this Agreement,
nothing shall prevent the Board of Directors of Avenor from
considering, negotiating, approving, recommending to its shareholders
or entering into an agreement in respect of an unsolicited bona fide
written Acquisition Proposal that the Board of Directors of Avenor
determines in good faith,
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after consultation with financial advisors and after receiving an
opinion of outside counsel to the effect that the Board of Directors of
Avenor is required to take such action in order to discharge properly
its fiduciary duties, would, if consummated in accordance with its
terms, result in a transaction more favourable to Avenor's shareholders
than the transaction contemplated by this Agreement (any such
Acquisition Proposal being referred to herein as a "Superior
Proposal");
(b) Bowater shall not, directly or indirectly, through any officer,
director, employee, representative or agent of Bowater or any of its
Subsidiaries, solicit, initiate or knowingly encourage (including by
way of furnishing information or entering into any form of agreement,
arrangement or understanding) the initiation of any inquiries or
proposals regarding an Acquisition Proposal; provided, however, that
notwithstanding any other provision of this Agreement, nothing shall
prevent the Board of Directors of Bowater from considering,
negotiating, approving, recommending to its shareholders or entering
into an agreement in respect of an unsolicited bona fide written
Acquisition Proposal if the Board of Directors of Bowater determines in
good faith, after consultation with financial advisors and after
receiving an opinion of outside counsel, that it is required to do so
in order to discharge properly its fiduciary duties;
(c) Each Party shall promptly notify the other Party of any current
Acquisition Proposals or of any future Acquisition Proposal of which
directors or senior officers become aware, or any amendments to the
foregoing, or any request for non-public information relating to such
Party or any Material Subsidiaries in connection with an Acquisition
Proposal or for access to the properties, books or records of such
Party or any Material Subsidiary by any person or entity that informs
such Party or such Material Subsidiary that it is considering making,
or has made, an Acquisition Proposal. Such notice shall include a
description of the material terms and conditions of any proposal and
provide such details of the proposal, inquiry or contact as the other
Party may reasonably request including the identity of the person
making such proposal, inquiry or contact;
(d) If Avenor receives a request for material non-public information from a
person who proposes a bona fide Acquisition Proposal in respect of
Avenor (the existence and content of which have been disclosed to
Bowater), and the Board of Directors of Avenor determines that such
proposal would be a Superior Proposal pursuant to Section 5.4(a) having
received the advice referred to therein, then, and only in such case,
the Board of Directors of Avenor may, subject to the execution of a
confidentiality agreement containing a standstill provision
substantially similar to that contained in Section 5.7, provide such
person with access to information regarding Avenor; provided, however,
that the person making the Acquisition Proposal shall not be precluded
thereunder from making the Acquisition Proposal, and provided further
that Avenor sends a copy of any such confidentiality agreement to
Bowater immediately upon its execution and Bowater is provided with a
list of or copies of the information provided to such person and
immediately provided with access to similar information to which such
person was provided; and
(e) Each Party shall ensure that its officers, directors and employees and
its Subsidiaries and any financial advisors or other advisors or
representatives retained by it are aware of the provisions of this
Section 5.4, and it shall be responsible for any breach of this Section
5.4 by its financial advisors or other advisors or representatives.
5.5 NOTICE BY AVENOR OF SUPERIOR PROPOSAL DETERMINATION
Avenor shall not accept, approve, recommend or enter into any agreement in
respect of an Acquisition Proposal (other than a confidentiality agreement) on
the basis that it would constitute a Superior Proposal unless (i) it has
provided Bowater with a copy of the Acquisition Proposal document which the
Board of Directors of Avenor has determined would be a Superior Proposal, and
(ii) five business days shall have elapsed from the later of the date Bowater
received notice of the proposed determination to accept, approve, recommend or
enter into an agreement in respect of such Acquisition Proposal, and the date
Bowater received a copy of the Acquisition Proposal document. Information
provided shall constitute confidential Information for purposes of Section
5.6(c).
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During such five business day period, Avenor acknowledges that Bowater
shall have the opportunity, but not the obligation, to offer to amend the terms
of this Agreement and the Arrangement. The Board of Directors of Avenor will
review any offer by Bowater to amend the terms of this Agreement in good faith
in order to determine, in its discretion in the exercise of its fiduciary
duties, whether Bowater's offer upon acceptance by Avenor would result in the
Acquisition Proposal not being a Superior Proposal. If the Board of Directors of
Avenor so determines, it will enter into an amended agreement with Bowater
reflecting Bowater's amended proposal. If the Board of Directors of Avenor
determines that the Acquisition Proposal is nonetheless a Superior Proposal,
Avenor will pay to Bowater the break fee payable to Bowater under Section 8.2.
Avenor also acknowledges and agrees that each successive modification of
any Acquisition Proposal shall constitute a new Acquisition Proposal for
purposes of the requirement under clause (ii) of this Section 5.5 to initiate an
additional five business day notice period.
5.6 ACCESS TO INFORMATION
(a) Subject to Section 5.6(c) and applicable Laws, upon reasonable notice,
Avenor shall (and shall cause each of its Subsidiaries to) afford
Bowater's officers, employees, counsel, accountants and other
authorized representatives and advisors ("Representatives") access,
during normal business hours from the date hereof and until the earlier
of the Effective Date or the termination of this Agreement, to its
properties, books, contracts and records as well as to its management
personnel, and, during such period, Avenor shall (and shall cause each
of its Subsidiaries to) furnish promptly to Bowater all information
concerning Avenor's business, properties and personnel as Bowater may
reasonably request. Nothing in the foregoing shall require Avenor to
disclose information subject to a written confidentiality agreement
with third parties, or customer-specific or competitively sensitive
information relating to areas or projects where Bowater is a
competitor.
(b) Subject to Section 5.6(c) and applicable Laws, upon reasonable notice,
Bowater shall afford Avenor's counsel and its financial advisors, RBC
Dominion Securities Inc., an opportunity to conduct due diligence on
Bowater and its Subsidiaries to enable RBC Dominion Securities Inc. to
prepare and deliver its written fairness opinion.
(c) The Parties acknowledge that certain information provided to each other
under Section 5.6(a) and Section 5.6(b) above will be non-public and/or
proprietary in nature (the "Information"). Except as permitted below,
each Party will keep Information confidential and will not, without the
prior written consent of the other, disclose it, in any manner
whatsoever, in whole or in part, to any other person, and neither Party
will use it for any purpose other than to evaluate the transaction
contemplated by this Agreement. The Parties will each make all
reasonable, necessary and appropriate efforts to safeguard the
Information from disclosure to anyone other than as permitted hereby
and to control the copies, extracts or reproductions made of the
Information. The Information may be provided to the representatives of
a Party who require access to the same to assist it in proceeding in
good faith with the transactions contemplated by this Agreement, and
whose assistance is required for such purposes, provided that such
Party has first informed such representatives to whom Information is
provided that the representative has the same obligations, including as
to confidentiality, restricted use and otherwise, that such Party has
with respect to such Information. This provision shall not apply as to
such portions of the Information that: (a) are or become generally
available to the public other than as a result of disclosure by the
receiving Party or its representatives; (b) become available to a Party
on a non-confidential basis from a source other than, directly or
indirectly, the other Party or its representatives, provided that such
source is not to the knowledge of the receiving Party, upon reasonable
inquiry, bound by a confidentiality agreement with the Party providing
the Information or otherwise prohibited from transmitting the
Information to the receiving Party by a contractual, legal or fiduciary
obligation; or (c) were known to a Party or were in its possession on a
non-confidential basis prior to being disclosed to it by the Party
providing the Information or by someone on its behalf; or (d) are
required by applicable Laws or court order to be disclosed. The
provisions of this Section 5.6(c) shall survive the termination of this
Agreement.
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5.7 MUTUAL STANDSTILL
During the period commencing on the date hereof and continuing until the
Effective Date or the termination of this Agreement, other than pursuant to this
Agreement (including without limitation Section 5.5), the Arrangement and the
transactions contemplated hereby and thereby, each Party agrees that it will
not, except in connection with this Agreement or the Arrangement or with the
prior approval of the other Party, which approval may be given on such terms as
the other Party may determine: (i) in any manner acquire, agree to acquire or
make any proposal or offer to acquire, directly or indirectly, any securities or
property of the other Party; (ii) propose or offer to enter into, directly or
indirectly, any merger or business combination involving the other Party or to
purchase, directly or indirectly, a material portion of the assets of the other
Party; (iii) directly or indirectly, "solicit", or participate or join with any
person in the "solicitation" of, any "proxies" (as such terms are defined in the
Securities Act (Ontario), as the same may be amended from time to time) to vote,
to seek to advise or to influence any person with respect to the voting of any
voting securities of the other Party (but for greater certainty Avenor
acknowledges that Bowater and its agents and advisors (including TD Securities
Inc. and Goldman Sachs & Co.) will be entitled to solicit proxies and otherwise
influence any person to vote in favour of the Arrangement at the Avenor Meeting
or Bowater Meeting and Bowater acknowledges that Avenor and its agents and
advisors (including RBC Dominion Securities) will be entitled to solicit proxies
and otherwise influence any person to vote in favour of the Arrangement at the
Avenor Meeting or Bowater Meeting); (iv) otherwise act alone or in concert with
others to seek to control or to influence the management, Board of Directors or
policies of the other Party; (v) make any public or private disclosure of any
consideration, intention, plan or arrangement inconsistent with any of the
foregoing; or (vi) advise, assist or encourage any of the foregoing or work in
concert with others in respect of the foregoing. For the purpose of this Section
5.7, a Party shall include Subsidiaries of such Party and their successors. The
termination of this Agreement shall also terminate any other agreements between
the Parties which have a similar effect as this Section 5.7 including but not
limited to any such standstill provisions contained in the Confidentiality
Agreement.
5.8 EMPLOYMENT AGREEMENTS AND RELATED MATTERS
Bowater covenants and agrees, and after the Effective Time will cause
Avenor and any successor to Avenor to agree, to honour and comply with the terms
of those existing employment and severance agreements of Avenor which Avenor has
disclosed to Bowater in writing prior to the date hereof. Bowater also covenants
and agrees, and after the Effective Time it will cause Avenor and any successor
to Avenor to agree, that for a period of one year it will deal with any
employees of Avenor whose employment may be terminated after the Effective Date
in a fair and equitable manner consistent with the existing termination policies
of Avenor as disclosed to Bowater in writing.
5.9 INSURANCE
(a) Bowater shall ensure that the by-laws of Avenor or of any corporation
continuing following the amalgamation, merger, plan of arrangement,
consolidation or winding-up of Avenor with or into one or more other
persons (a "Surviving Corporation") shall contain the provisions with
respect to indemnification now set forth in section 5.02 of Avenor's
By-Law No. 1, as amended by Avenor's By-Law No. 2, (or as provided in
Article Eleventh of Bowater's Restated Certificate of Incorporation)
which provision shall not be amended, repealed or otherwise modified
for a period of six years from the Effective Date in any manner that
would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Date, were directors, officers,
employees or agents of Avenor, unless required by Law, and Bowater
shall ensure that the obligations of Avenor under any indemnification
agreements between Avenor and its directors and certain officers are
assumed by the Surviving Corporation.
(b) Bowater agrees that from the Effective Date until the sixth anniversary
of the Effective Date it will maintain or cause Avenor or any Surviving
Corporation to maintain Avenor's current directors' and officers'
insurance or another policy or "discovery" endorsement, on terms and
conditions which are no less advantageous to the directors and officers
of Avenor and providing no less coverage than Avenor's existing
directors' and officers' insurance, for all present and former
directors and officers of
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Avenor, covering claims made prior to or within such period of time. At
the election of Bowater and upon reasonable notice to Avenor, Avenor
will acquire the insurance through a "discovery" endorsement referred
to in Section 5.2(l) of this Agreement prior to the Effective Date; and
(c) Avenor will not, and Avenor will use its commercially reasonable
efforts to cause the insured persons under such directors' and
officers' insurance policies not to, take any actions which might
impair the coverage thereunder.
5.10 ANCILLARY AGREEMENTS
Bowater agrees to enter into the support agreement and voting and exchange
trust agreement contemplated by the provisions attaching to the Avenor
Exchangeable Shares set out on Exhibit 1 to Schedule A annexed hereto.
5.11 MERGER OF COVENANTS
The covenants set out in this Agreement (except for Sections 5.6(c), 5.8,
5.9, 5.10 and 10.1 which shall survive the completion of the Arrangement) shall
not survive the completion of the Arrangement, and shall expire and be
terminated without recourse between the Parties upon such completion.
ARTICLE 6
CONDITIONS
6.1 MUTUAL CONDITIONS
The obligations of Avenor and Bowater to complete the transactions
contemplated hereby are subject to the fulfilment of the following conditions on
or before the Effective Date or such other time as is specified below:
(a) the Interim Order shall have been granted in form and substance
satisfactory to Avenor and Bowater, acting reasonably, and shall not
have been set aside or modified in a manner unacceptable to such
Parties, acting reasonably, on appeal or otherwise;
(b) the resolutions set forth in the Joint Proxy Circular shall have been
passed at the Avenor Meeting and at the Bowater Meeting, duly approving
the Arrangement, in accordance with the Interim Order, and duly
approving the Bowater Resolution;
(c) the Final Order shall have been granted in form and substance
satisfactory to Avenor and Bowater, acting reasonably, and shall not
have been set aside or modified in a manner unacceptable to such
Parties on appeal or otherwise;
(d) the Articles of Arrangement relating to the Arrangement shall be in
form and substance satisfactory to Avenor and Bowater, acting
reasonably;
(e) the Effective Date shall be on or before September 30, 1998, subject to
any extension available to a Party pursuant to Section 6.4;
(f) there shall be no action taken under any Law or by any Governmental
Entity that:
(i) makes it illegal or otherwise directly or indirectly restrains,
enjoins or prohibits the Arrangement or any other transactions
contemplated herein; or
(ii) results, or could reasonably be expected to result, in a judgment
or assessment of damages, directly or indirectly, relating to the
transactions contemplated herein which is materially adverse;
(g) all consents, waivers, permits, orders and approvals of any
Governmental Entity (other than as contemplated in Section 6.1(h)and
(i)) or other person, and the expiry of any waiting periods, in
connection with, or required to permit, the consummation of the
Arrangement, the failure of which to obtain or the non-expiry of which
would be materially adverse to Avenor or Bowater, as the case may be,
or materially impede the completion of the Arrangement, shall have been
obtained or
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received on terms that will not have a material adverse effect on
Avenor and/or Bowater or reasonably satisfactory evidence thereof shall
have been delivered to each Party;
(h) the Arrangement shall have received the allowance or approval or deemed
allowance or approval by the responsible Minister under the Investment
Canada Act in respect of the Arrangement, to the extent such allowance
or approval is required, and such allowance or approval shall be on
terms and conditions satisfactory to the Parties, acting reasonably;
(i) without limiting the scope of the condition in Section 6.1(g), any
applicable waiting periods under the HSR Act shall have expired or been
earlier terminated and (i) the applicable waiting period under section
123 of the Competition Act (Canada) shall have expired without the
Director of Investigation and Research (the "Competition Director")
appointed under the Competition Act having given notice that he intends
to make an application to the Competition Tribunal for an order under
section 92 or 100 of the Competition Act in respect of the Arrangement
or (ii) the Competition Director shall have issued an advance ruling
certificate under section 102 of the Competition Act in respect of the
Arrangement;
(j) the Avenor Exchangeable Shares and the Bowater Common Shares issuable
pursuant to the Arrangement shall have been conditionally approved for
listing on The Toronto Stock Exchange and the New York Stock Exchange,
respectively, subject to the filing of required documentation, any
required prospectus exemptions shall have been obtained or be available
and such securities shall not be subject to resale restrictions in
Canada and the United States other than in respect of control persons
and subject to the requirements of general application; and
(k) this Agreement shall not have been terminated pursuant to Article 9.
The foregoing conditions are for the mutual benefit of Avenor and Bowater
and may be waived, in whole or in part, by Avenor and Bowater at any time. If
any of the said conditions precedent shall not be complied with or waived as
aforesaid on or before September 30, 1998 or, if earlier, the date required for
the performance thereof, either Party may rescind and terminate this Agreement
by written notice to the other Party.
6.2 AVENOR CONDITIONS
The obligation of Avenor to complete the transactions contemplated herein
is subject to the fulfilment of the following conditions on or before the
Effective Date or such other time as specified below:
(a) the representations and warranties made by Bowater in this Agreement
shall be true and correct as of the Effective Date as if made on and as
of such date (except to the extent such representations and warranties
speak as of an earlier date, in which event such representations and
warranties shall be true and correct as of such earlier date, or except
as affected by transactions contemplated or permitted by this Agreement
or except for any failures or breaches of representations and
warranties which individually or in the aggregate would not have a
material adverse effect on Bowater or materially impede the completion
of the Arrangement or the other transactions contemplated hereby, it
being understood that for the purposes of this Section 6.2(a) any
reference to materiality, material adverse change or material adverse
effect in such representation or warranty shall be disregarded for this
purpose), and Bowater shall have provided to Avenor the certificate of
two qualified officers of Bowater certifying such accuracy on the
Effective Date;
(b) Bowater shall have complied with its covenants herein, if the failure
to comply with such covenants would individually or in the aggregate
have a material adverse effect on Bowater or materially impede the
completion of the Arrangement or the other transactions contemplated in
this Agreement, and Bowater shall have provided to Avenor the
certificate of two qualified officers of Bowater certifying that
Bowater has so complied with its covenants herein;
(c) from the date hereof up to and including the Effective Date, there
shall have been no change, condition, event or occurrence which, in the
reasonable judgment of Avenor has, or is reasonably likely to have, a
material adverse effect on Bowater; and
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(d) the Board of Directors of Bowater shall have made and shall not have
modified or amended, in any material respect, prior to the Avenor
Meeting and the Bowater Meeting, an affirmative recommendation that its
shareholders approve the Bowater Resolution.
The foregoing conditions precedent are for the benefit of Avenor and may be
waived, in whole or in part, by Avenor in writing at any time. If any of the
said conditions shall not be complied with or waived by Avenor on or before
September 30, 1998 or, if earlier, the date required for their performance then
Avenor may rescind and terminate this Agreement by written notice to Bowater.
6.3 BOWATER CONDITIONS
The obligation of Bowater to complete the transactions contemplated herein
is subject to the fulfilment of the following conditions on or before the
Effective Date or such other time as specified below:
(a) the representations and warranties made by Avenor in this Agreement
shall be true and correct as of the Effective Date as if made on and as
of such date (except to the extent such representations and warranties
speak as of an earlier date, in which event such representations and
warranties shall be true and correct as of such earlier date, or except
as affected by transactions contemplated or permitted by this Agreement
or except for any failures or breaches of representations and
warranties which individually or in the aggregate would not have a
material adverse effect on Avenor or materially impede the completion
of the Arrangement or the other transactions contemplated hereby, it
being understood that for purposes of this Section 6.3(a) any reference
to materiality, material adverse change or material adverse effect in
such representation or warranty shall be disregarded for this purpose),
and Avenor shall have provided to Bowater the certificate of two
qualified officers of Avenor certifying such accuracy on the Effective
Date;
(b) Avenor shall have complied with its covenants herein, if the failure to
comply with such covenants would individually or in the aggregate have
a material adverse effect on Avenor or materially impede the completion
of the Arrangement or the other transactions contemplated in this
Agreement, and Avenor shall have provided to Bowater the certificate of
two qualified officers of Avenor certifying that Avenor has so complied
with its covenants herein;
(c) from the date hereof up to and including the Effective Date, there
shall have been no change, condition, event or occurrence which, in the
reasonable judgment of Bowater has, or is reasonably likely to have, a
material adverse effect on Avenor;
(d) the Board of Directors of Avenor shall have made and shall not have
modified or amended, in any material respect, prior to the Avenor
Meeting, an affirmative recommendation that its shareholders approve
the Arrangement;
(e) the Debt Ratio shall be less than 70% at the Effective Date and the
Debt Ratio shall not have been in excess of 70% for a period of 20
consecutive days during the period from the date hereof to the
Effective Date;
(f) all stock options granted by Avenor shall have been exercised or
terminated prior to the effective time of the Arrangement; and
(g) the holders of not more than 5% of the issued and outstanding Avenor
Common Shares shall have exercised Dissent Rights in relation to the
Arrangement.
The foregoing conditions precedent are for the benefit of Bowater and may
be waived, in whole or in part, by Bowater in writing at any time. If any of the
said conditions shall not be complied with or waived by Bowater on or before
September 30, 1998 or, if earlier, the date required for the performance
thereof, then Bowater may rescind and terminate this Agreement by written notice
to Avenor.
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6.4 NOTICE AND CURE PROVISIONS
Each Party will give prompt notice to the other Party of the occurrence, or
failure to occur, at any time from the date hereof until the Effective Date, of
any event or state of facts which occurrence or failure would, or would be
likely to:
(a) cause any of the representations or warranties of either Party
contained herein to be untrue or inaccurate in any material respect on
the date hereof or on the Effective Date; or
(b) result in the failure to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by either Party hereunder
prior to the Effective Date.
No Party may elect not to complete the transactions contemplated hereby
pursuant to the conditions precedent contained in Sections 6.1, 6.2 and 6.3 or
exercise any termination right arising therefrom, unless forthwith and in any
event prior to the filing of the Final Order for acceptance by the Director, the
Party intending to rely thereon has delivered a written notice to the other
Party specifying in reasonable detail all breaches of covenants, representations
and warranties or other matters which the Party delivering such notice is
asserting as the basis for the non-fulfilment of the applicable condition
precedent or termination right, as the case may be. If any such notice is
delivered, provided that a Party is proceeding diligently to cure such matter,
if such matter is susceptible to being cured, the other Party may not terminate
this Agreement until the later of September 30, 1998 and the expiration of a
period of 30 days from such notice. If such notice has been delivered prior to
the date of the Avenor Meeting and the Bowater Meeting, such meetings shall be
postponed until the expiry of such period.
6.5 MERGER OF CONDITIONS
The conditions set out in Sections 6.1, 6.2 and 6.3 shall be conclusively
deemed to have been satisfied, waived or released upon the filing of Articles of
Arrangement as contemplated by this Agreement, and the issuance of a certificate
of arrangement and certificate of amendment in respect thereof under the CBCA.
Avenor acknowledges and agrees that it shall have no right to file Articles of
Arrangement unless such conditions have been satisfied, fulfilled or waived.
ARTICLE 7
AMENDMENT
7.1 AMENDMENT
This Agreement may, at any time and from time to time before or after the
holding of the Avenor Meeting and the Bowater Meeting, be amended by mutual
written agreement of the Parties hereto without further notice to or
authorization on the part of their respective shareholders, and any such
amendment may, without limitation:
(a) change the time for performance of any of the obligations or acts of
the Parties;
(b) waive any inaccuracies or modify any representation contained herein or
in any document delivered pursuant hereto;
(c) waive compliance with or modify any of the covenants herein contained
and waive or modify performance of any of the obligations of the
Parties; and
(d) waive compliance with or modify any conditions precedent herein
contained;
provided, however, that any such change, waiver or modification does not
invalidate any required security holder approval of the Arrangement.
7.2 MUTUAL UNDERSTANDING REGARDING AMENDMENTS
The Parties will continue from and after the date hereof and through and
including the Effective Date, to use their respective best efforts to maximize
present and future financial and tax planning opportunities for the shareholders
of Avenor, for Bowater and for Avenor as and to the extent that the same shall
not prejudice any Party or its securityholders. The Parties will ensure that
such planning activities do not impede the progress of
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the Arrangement in any material way. If Avenor effects any transaction before
the Effective Date for such purposes, Bowater will be responsible for any
structuring and unwinding costs if the Arrangement is not effected. Bowater has
advised Avenor that Bowater will propose the restructuring of the Arrangement so
that the issuer of Avenor Exchangeable Shares will be a separate Subsidiary of
Bowater and that Bowater understands that Avenor will, at or prior to the
Effective Date, consider the transfer of certain assets to separate
corporations. These proposals will be subject to continued good faith
discussions between the parties and Avenor has no objection to such proposals,
provided that they result in no prejudice to Avenor or its securityholders.
The Parties mutually agree that if a Party proposes any other amendment or
amendments to this Agreement or to the Plan of Arrangement, the other Party will
act reasonably in considering such amendment and if the other Party and its
shareholders are not prejudiced by reason of any such amendment the other Party
will co-operate in a reasonable fashion with the Party proposing the amendment
so that such amendment can be effected subject to applicable Laws and the rights
of the securityholders.
ARTICLE 8
AGREEMENT AS TO DAMAGES AND OTHER ARRANGEMENTS
8.1 AVENOR BREAK FEE EVENT
If the Bowater Common Shareholders do not approve the Bowater Resolution at
the Bowater Meeting (an "Avenor Break Fee Event"), then Bowater shall pay to
Avenor, on the business day following such vote, $70 million in immediately
available funds to an account designated by Avenor; provided, however, that (i)
the Avenor Common Shareholders have not disapproved the Arrangement and (ii)
this Agreement shall not have been duly terminated prior to the occurrence of
such Avenor Break Fee Event. Bowater shall not be obligated to make more than
one payment pursuant to this Section 8.1.
8.2 BOWATER BREAK FEE EVENT
If (x) the Board of Directors of Avenor shall have withdrawn or modified in
a manner adverse to Bowater its approval or recommendation of the Arrangement,
or approved or recommended any Superior Proposal, or determined at the
conclusion of the process set out in Section 5.5 that any Acquisition Proposal
is a Superior Proposal, or resolved to take any of the foregoing actions, or (y)
an Acquisition Proposal shall have been made known to Avenor or made directly to
the Avenor Common Shareholders or any person has publicly announced an intention
to make an Acquisition Proposal and after such Acquisition Proposal shall have
been made known, made or announced (A) the Avenor Common Shareholders do not
approve the Arrangement at the Avenor Meeting or (B) the Arrangement is not,
prior to September 30, 1998, submitted for their approval, (each of the events
described in clauses (x) and (y) being referred to as a "Bowater Break Fee
Event"), then Avenor shall pay to Bowater, in the case of clause (x), one
business day after taking any such action, and, in the case of clause (y) (A),
on the business day following such vote and, in the case of clause (y) (B), on
November 1, 1998, $70 million in immediately available funds to an account
designated by Bowater; provided, however, that:
(i) in the case of clause (y), the Bowater Common Shareholders have not
disapproved the Bowater Resolution; and
(ii) in the case of clauses (x) and (y), this Agreement shall not have been
duly terminated prior to the occurrence of such Bowater Break Fee
Event.
Avenor shall not be obligated to make more than one payment pursuant to
this Section 8.2.
8.3 EFFECT OF BREAK FEE PAYMENTS; TIMING OF AVENOR MEETING AND BOWATER MEETING
For greater certainty, the Parties agree that the payment of the amount
pursuant to this Article 8 is the sole monetary remedy of the Party entitled to
such amount as a result of the occurrence of an Avenor Break Fee Event or
Bowater Break Fee Event, as the case may be.
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Nothing in this Agreement shall preclude a Party from seeking damages
incurred or suffered by a Party as a result of any breach of this Agreement by
the other Party, seeking injunctive relief to restrain any breach or threatened
breach of the covenants or agreements set forth in this Agreement or the
Confidentiality Agreement or otherwise to obtain specific performance of any of
such covenants or agreements, without the necessity of posting bond or security
in connection therewith.
The Parties acknowledge and agree that the Avenor Meeting and the Bowater
Meeting shall be held contemporaneously on the same day.
ARTICLE 9
TERMINATION
9.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Date:
(a) by mutual written consent of Avenor and Bowater;
(b) as provided in Sections 6.1, 6.2 and 6.3;
(c) by Avenor upon the occurrence of the Avenor Break Fee Event as provided
in Section 8.1; and
(d) by Bowater upon the occurrence of a Bowater Break Fee Event as provided
in Section 8.2; or
(e) by Avenor upon any determination by Avenor that an Acquisition Proposal
constitutes a Superior Proposal, subject to the payment of the break
fee payable to Bowater under Section 8.2.
ARTICLE 10
GENERAL
10.1 EXPENSES
The Parties agree that all out-of-pocket third party transaction expenses
incurred in connection with this Agreement and the transactions contemplated
hereby, including legal fees, financial advisor fees, regulatory filing fees,
all disbursements by advisors and printing and mailing costs, shall be paid by
the Party incurring such expenses.
Avenor and Bowater represent and warrant to each other that, except for RBC
Dominion Securities Inc. in the case of Avenor and TD Securities Inc., and
Goldman, Sachs & Co. in the case of Bowater, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission, or to
the reimbursement of any of its expenses, in connection with the Arrangement and
the transactions contemplated hereby.
10.2 NOTICES
Any notice, consent, waiver, direction or other communication required or
permitted to be given under this Agreement by a Party to the other Party shall
be in writing and may be given by delivering same or sending same by facsimile
transmission or by delivery addressed to the Party to which the notice is to be
given at its address for service herein. Any notice, consent, waiver, direction
or other communication aforesaid shall, if delivered, be deemed to have been
given and received on the date on which it was delivered to the address provided
herein (if a business day, if not, the next succeeding business day) and if sent
by facsimile transmission be deemed to have been given and received at the time
of receipt (if a business day, if not the next succeeding business day) unless
actually received after 4:00 p.m. at the point of delivery in which case it
shall be deemed to have been given and received on the next business day.
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The address for service of each of the Parties hereto shall be as follows:
(a) if to Avenor:
Avenor Inc.
1250 Rene-Levesque Blvd. West
21st Floor
Montreal, Quebec H3B 4Y3
<TABLE>
<S> <C>
Attention: Marc Regnier
Senior Vice President, General Counsel and Secretary
Fax: (514) 846-5041
</TABLE>
with a copy to:
Davies, Ward & Beck
44th Floor
1 First Canadian Place
Toronto, Ontario
M5X 1B1
<TABLE>
<S> <C>
Attention: J-P. Bisnaire
Fax: (416) 863-0871
</TABLE>
(b) if to Bowater:
Bowater Incorporated
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina
29602
<TABLE>
<S> <C>
Attention: Anthony H. Barash
Senior Vice-President,
Corporate Affairs and General Counsel
Fax: (864) 282-9468
</TABLE>
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
Toronto, Ontario
M5X 1B2
<TABLE>
<S> <C>
Attention: Jeffery Barnes and Jamie Plant
Fax: (416) 863-4592
</TABLE>
10.3 TIME OF THE ESSENCE
Time shall be of the essence in this Agreement.
10.4 ENTIRE AGREEMENT
This Agreement and the Confidentiality Agreement constitute the entire
agreement between the Parties hereto and cancel and supersede all prior
agreements and understandings between the Parties with respect to the subject
matter hereof.
10.5 FURTHER ASSURANCES
Each Party shall, from time to time, and at all times hereafter, at the
request of the other Party, but without further consideration, do all such
further acts and execute and deliver all such further documents and instruments
as shall be reasonably required in order to fully perform and carry out the
terms and intent hereof.
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10.6 GOVERNING LAW
This Agreement shall be governed by, and be construed in accordance with,
the laws of the Province of Ontario and the laws of Canada applicable therein
but the reference to such laws shall not, by conflict of laws rules or
otherwise, require the application of the law of any jurisdiction other than the
Province of Ontario. Each Party hereby irrevocably attorns to the jurisdiction
of the Courts of the Province of Ontario in respect of all matters arising under
or in relation to this Agreement.
10.7 EXECUTION IN COUNTERPARTS
This Agreement may be executed in identical counterparts, each of which is
and is hereby conclusively deemed to be an original and the counterparts
collectively are to be conclusively deemed to be one instrument.
10.8 WAIVER
No waiver by any Party shall be effective unless in writing and any waiver
shall affect only the matter, and the occurrence thereof, specifically
identified and shall not extend to any other matter or occurrence.
10.9 ENUREMENT AND ASSIGNMENT
This Agreement shall enure to the benefit of and be binding upon the
Parties hereto and their respective successors and permitted assigns. This
Agreement may not be assigned by either Party without the prior written consent
of the other Party.
IN WITNESS WHEREOF the Parties hereto have executed this Agreement as of
the date first above written.
AVENOR INC.
Per: /s/ Arthur R. Sawchuk
Arthur R. Sawchuk
President and Chief Executive Officer
BOWATER INCORPORATED
Per:/s/ Arnold M. Nemirow
Arnold M. Nemirow
Chairman, President and
Chief Executive Officer
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SCHEDULE A
PLAN OF ARRANGEMENT
UNDER SECTION 192
OF THE CANADA BUSINESS CORPORATIONS ACT
See Annex E to this Joint Proxy Statement.
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<PAGE> 301
SCHEDULE B
REPRESENTATIONS AND WARRANTIES OF AVENOR INC.
1. Organization. Each of Avenor and its Material Subsidiaries has been
duly incorporated or formed under all applicable Laws, is validly subsisting and
has full corporate or legal power and authority to own its properties and
conduct its businesses as currently owned and conducted. All of the outstanding
shares of capital stock and other ownership interests of its Subsidiaries are
validly issued, fully paid and non-assessable and all such shares and other
ownership interests owned directly or indirectly by Avenor are, except as
disclosed in writing, to Bowater or pursuant to restrictions on transfer
contained in constating documents, rights of first refusal and similar rights
restricting transfer contained in shareholders, partnership or joint venture
agreements for or pursuant to existing financing arrangements involving
Subsidiaries which are not wholly owned, owned free and clear of all material
liens, claims or encumbrances and there are no outstanding options, rights,
entitlements, understandings or commitments (contingent or otherwise) regarding
the right to acquire any such shares of capital stock or other ownership
interests in any of its Subsidiaries. Avenor has disclosed in writing to Bowater
the names and jurisdictions of incorporation of each of its Subsidiaries.
2. Capitalization. The authorized capital of Avenor consists of an
unlimited number of Avenor Common Shares. As of December 31, 1997 there were
65,534,625 Avenor Common Shares outstanding and 1,500,000 Avenor Common Shares
were reserved, in the aggregate, for issuance in respect of the Key Employee
Stock Incentive Plan of which 1,240,969 Avenor Common Shares are subject to
issuance under the Key Employee Stock Incentive Plan and 5,693,115 Avenor Common
Shares are issuable on exercise of the outstanding Avenor Convertible Debentures
and no more than 400,000 Avenor Common Shares are issuable under Avenor's
Employee Share Purchase Plan. Except as described in the immediately preceding
sentence, and except for the rights issued in connection with the Avenor
Shareholder Rights Plan Agreement dated October 20, 1995, there are no options,
warrants, conversion privileges or other rights, agreements, arrangements or
commitments obligating Avenor or any Subsidiary to issue or sell any shares of
Avenor or any of its Subsidiaries or securities or obligations of any kind
convertible into or exchangeable for any shares of Avenor, any Subsidiary or any
other person, nor is there outstanding any stock appreciation rights, phantom
equity or similar rights, agreements, arrangements or commitments based upon the
book value, income or any other attribute of Avenor or any Subsidiary. There
have been no Avenor Common Shares issued since December 31, 1997, other than
pursuant to the exercise of stock option entitlements and 4,487 Avenor Common
Shares issued under Avenor's Employee Share Purchase Plan. All outstanding
Avenor Common Shares have been duly authorized and are validly issued and
outstanding as fully paid and non-assessable shares, free of pre-emptive rights.
There are no outstanding bonds, debentures or other evidences of indebtedness of
Avenor or any Subsidiary having the right to vote (or, other than the Avenor
Convertible Debentures, that are convertible for or exercisable into securities
having the right to vote) with the holders of the Avenor Common Shares on any
matter. There are no outstanding contractual obligations of Avenor or any of its
subsidiaries to repurchase, redeem or otherwise acquire any of its outstanding
securities or with respect to the voting or disposition of any outstanding
securities of any of its Subsidiaries.
3. Authority. Avenor has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by Avenor and the consummation by
Avenor of the transactions contemplated by this Agreement have been duly
authorized by the Board of Directors of Avenor and, subject to shareholder
approval, no other corporate proceedings on the part of Avenor are necessary to
authorize this Agreement or the transactions contemplated hereby other than in
connection with the approval by the Board of Directors of Avenor of the Joint
Proxy Circular, the issuance of Avenor Exchangeable Shares and other matters
relating to the implementation of the Arrangement. This Agreement has been duly
executed and delivered by Avenor and constitutes a valid and binding obligation
of Avenor, enforceable against Avenor in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and
other applicable Laws relating to or affecting creditors' rights generally, to
general principles of equity and public policy. Except as disclosed in writing
to Bowater on or prior to the date hereof, the approval of the Arrangement
Agreement and the consents, approvals, orders, authorizations, declarations and
filings referred to in Section 6.1 of this Agreement, the execution and delivery
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by Avenor of this Agreement and performance by it of its obligations hereunder
and the completion of the Arrangement and the transactions contemplated thereby,
will not:
(a) result in a violation or breach of, require any consent to be
obtained under or give rise to any termination rights under any provision
of:
(i) it or any Material Subsidiary's certificate of incorporation,
articles, by-laws or other charter documents, including any unanimous
shareholder agreement or any other agreement or understanding with any
party holding an ownership interest in any Material Subsidiary;
(ii) any law, regulation, order, judgment or decree; or
(iii) any contract, agreement, license, franchise or permit to
which Avenor or any Material Subsidiary is bound or is subject or is the
beneficiary;
(b) give rise to any right of termination or acceleration of
indebtedness, or cause any third party indebtedness to come due before its
stated maturity or cause any available credit to cease to be available; or
(c) result in the imposition of any encumbrance, charge or lien upon
any of its assets or the assets of any Material Subsidiary, or restrict,
hinder, impair or limit the ability of Avenor or any Material Subsidiary to
carry on the business of Avenor or any Material Subsidiary as and where it
is now being carried on or as and where it may be carried on in the future,
which would, individually or in the aggregate, have a material adverse effect on
Avenor. Except as previously disclosed in writing to Bowater, no consent,
approval, order or authorization of, or declaration or filing with, any
Governmental Entity or other party is required to be obtained by Avenor and its
Subsidiaries in connection with the execution and delivery of this Agreement or
the consummation by Avenor of the transactions contemplated hereby other than
(i) any approvals required by the Interim Order, (ii) the Final Order, (iii)
filings with the Director under the CBCA and filings with and approvals required
by provincial securities authorities and stock exchanges, (iv) any other
consents, waivers, permits, orders or approvals referred to in Section 6.1 of
this Agreement and (v) any other consents, approvals, orders, authorizations,
declarations or filings which, if not obtained, would not in the aggregate have
a material adverse effect on Avenor.
4. Material Customers. There is no single customer of Avenor or its
Subsidiaries, the loss of which would have a material adverse effect on Avenor.
5. No Defaults. Except as disclosed in writing to Bowater, neither Avenor
nor any of its Subsidiaries is in default under, and there exists no event,
condition or occurrence which, after notice or lapse of time or both, would
constitute such a default under any material contract or agreement to which it
is a party which would, if terminated due to such default, cause a material
adverse effect with respect to Avenor.
6. Intellectual Property. Avenor and its Subsidiaries own, or are validly
licensed or otherwise have the right to use, all patents, patent rights,
trademarks, trade names, service marks, copyrights, know how and other
proprietary intellectual property rights that are material to the conduct of the
business of Avenor and its Subsidiaries taken as a whole.
7. Absence of Changes. Since December 31, 1997, and except as has been
previously disclosed in writing to Bowater or has been publicly disclosed prior
to the date hereof in any document filed with the Ontario Securities Commission
(the "Securities Authorities") (i) Avenor has conducted its business only in the
ordinary and regular course of business consistent with past practice, (ii)
other than in the ordinary and regular course of business consistent with past
practice, no liabilities or obligations of any nature (whether absolute,
accrued, contingent or otherwise) which would individually or in the aggregate
be material to Avenor have been incurred, (iii) there has not been any material
change (as defined under the Securities Act (Ontario)) in the affairs of Avenor
or in the financial condition, results of operations or business of Avenor, (iv)
as of the date hereof, there are no material change reports filed with the
Securities Authorities which remain confidential, (v) Avenor has not declared or
paid any dividends or distributions on any of its outstanding shares (other than
regular quarterly dividends in respect of the Avenor Common Shares consistent
with past practice), (vi) Avenor has not effected or passed any resolution to
approve a split,
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combination or reclassification of any of its outstanding shares, (vii) Avenor
has not granted any increase in the aggregate cash compensation payable to any
executive officer, except in the ordinary course of business consistent with
past practice, or granted to any such officer of any increase in severance or
termination pay, (viii) Avenor has not effected any change in its accounting
methods, principles or practices, and (ix) Avenor has not adopted or materially
amended any collective bargaining agreement, bonus, pension, profit sharing,
stock purchase, stock option or other benefit plan. The last filing by Avenor
with Securities Authorities was the 1997 financial statements and management's
discussion and analysis relating thereto filed with the Securities Authorities
on or about March 4, 1998.
8. Employment Agreements
(a) Other than as disclosed in writing to Bowater on or prior to the
date hereof, or except as set forth in the proxy circular prepared in
connection with the Annual Meeting of Avenor held in 1997, Avenor is not a
party to any written or oral policy, agreement, obligation or understanding
providing for severance or termination payments to, or any employment
agreement with, any senior executive of Avenor.
(b) Other than as disclosed in writing to Bowater on or prior to the
date hereof, neither Avenor nor any Material Subsidiary is a party to any
collective bargaining agreement nor subject to any application for
certification or threatened or apparent union-organizing campaigns for
employees not covered under a collective bargaining agreement nor are there
any current, pending or threatened strikes or lockouts at either Avenor or
any Material Subsidiary that would individually or in the aggregate have a
material adverse effect on Avenor.
(c) Other than as disclosed in writing to Bowater on or prior to the
date hereof, neither Avenor nor any Material Subsidiary is subject to any
claim for wrongful dismissal, constructive dismissal or any other tort
claim, actual or threatened, or any litigation, actual or threatened,
relating to employment or termination of employment of employees or
independent contractors other than those claims or such litigation as would
individually or in the aggregate not have a material adverse effect on
Avenor.
(d) Other than as disclosed in writing to Bowater on or prior to the
date hereof or are not material, Avenor and all Material Subsidiaries have
operated in accordance with all applicable Laws with respect to employment
and labour, including, but not limited to, employment and labour standards,
occupational health and safety, employment equity, pay equity, workers'
compensation, human rights and labour relations and there are no current,
pending or threatened proceedings before any board or tribunal with respect
to any of the areas listed herein other than where the failure to so
operate or such proceedings which, individually or in the aggregate would
not have a material adverse effect on Avenor.
9. Disclosure. Avenor has publicly disclosed in documents filed with the
Securities Authorities or disclosed to Bowater in writing, on or prior to the
date hereof, any information regarding any event, circumstance or action taken
or failed to be taken which could individually or in the aggregate have a
material adverse effect on Avenor.
10. Financial Statements. The audited consolidated statement of financial
position and related consolidated statements of income, changes in financial
position and contributed surplus and retained earnings of Avenor for the fiscal
year ending December 31, 1997, and the audited consolidated statement of
financial position and related consolidated statements of income, changes in
financial position and statements of contributed surplus and retained earnings
for the years ended December 31, 1995 and December 31, 1996, as contained in
Avenor's 1995 and 1996 Annual Reports, were prepared in accordance with
generally accepted accounting principles in Canada consistently applied and
fairly present the consolidated financial condition of Avenor at the respective
dates indicated and the results of operations of Avenor (on a consolidated
basis) for the period covered.
11. Books and Records. The corporate records and minute books of Avenor
and the Material Subsidiaries have been maintained substantially in accordance
with all applicable Laws and are complete and accurate in all material respects.
12. Litigation, Etc. Except as set forth or specifically reflected in any
document filed with the Securities Authorities, or as disclosed in writing to
Bowater prior to the date hereof, there is no claim, action, proceeding
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or investigation pending or, to the knowledge of Avenor, threatened against or
relating to Avenor or any Material Subsidiary or affecting any of their
properties or assets before any court or governmental or regulatory authority or
body that, if adversely determined, is likely to have a material adverse effect
on Avenor and its Material Subsidiaries, taken as a whole, or prevent or
materially delay consummation of the transactions contemplated by this Agreement
or the Arrangement, nor is Avenor aware of any basis for any such claim, action,
proceeding or investigation. Neither Avenor nor any Material Subsidiary is
subject to any outstanding order, writ, injunction or decree that has had or is
reasonably likely to have a material adverse effect on Avenor or prevent or
materially delay consummation of the transactions contemplated by this Agreement
or the Arrangement.
13. Environmental. All operations of Avenor and its Material Subsidiaries
have been, and are now, in compliance with all Environmental Laws, except where
the failure to be in compliance would not individually or in the aggregate have
a material adverse effect on Avenor. Except as Avenor has publicly disclosed in
documents filed with the Securities Authorities or as disclosed in writing to
Bowater prior to the date hereof, neither Avenor nor any Material Subsidiary is
aware of, or is subject to:
(a) any proceeding, application, order or directive which relates to
environmental health or safety matters, and which may require any material
work, repairs, construction or expenditures; or
(b) any demand or notice with respect to the breach of any
Environmental Laws applicable to Avenor or any Subsidiary, including,
without limitation, any regulations respecting the use, storage, treatment,
transportation, or disposition of Hazardous Substances,
which individually or in the aggregate would have a material adverse effect on
Avenor.
14. Insurance. Policies of insurance in force as of the date hereof naming
Avenor as an insured adequately cover all risks reasonably and prudently
foreseeable in the operation and conduct of the business of Avenor and the
Material Subsidiaries for which, having regard to the nature of such risk and
the relative cost of obtaining insurance, it is in the opinion of Avenor acting
reasonably to seek such insurances rather than provide for self insurance. All
such policies of insurance shall remain in full force and effect and shall not
be cancelled or otherwise terminated as a result of the transactions
contemplated hereby or by the Arrangement other than such cancellations as would
not individually or in the aggregate have a material adverse effect on Avenor.
15. Tax Matters. Avenor and each of its Subsidiaries have timely filed, or
caused to be filed, all Tax Returns required to be filed by them (all of which
returns were correct and complete in all material respects) and have paid, or
caused to be paid, all Taxes that are due and payable, in each case except for
any such Tax Returns or Taxes the non-filing or non-payment of which have not
had and would not be reasonably likely to have a material adverse effect on
Avenor, and Avenor has provided adequate accruals in accordance with generally
accepted accounting principles in its most recently published financial
statements for any Taxes for the period covered by such financial statements
that have not been paid, whether or not shown as being due on any Tax Returns.
Since such publication date, no material Tax liability not reflected in such
statements or otherwise provided for has been assessed, proposed to be assessed,
incurred or accrued other than in the ordinary course of business.
Except as otherwise disclosed in writing to Bowater, neither Avenor nor any
Subsidiary has received any written notification that any material issues have
been raised (and are currently pending) by Revenue Canada, the United States
Internal Revenue Service or any other taxing authority, including, without
limitation, any sales tax authority, in connection with any of the Tax Returns
referred to above, and no waivers of statutes of limitations have been given or
requested with respect to Avenor or any Subsidiary, in each case except for any
such written notices or waivers which have not had and would not be likely to
have a material adverse effect on Avenor. To the best of the knowledge of
Avenor, there are no material proposed (but unassessed) additional Taxes and
none have been asserted. No Tax liens have been filed other than for Taxes not
yet due and payable. Neither Avenor nor any Avenor Subsidiary (i) has made an
election to be treated as a "consenting corporation" under Section 341(f) of the
Code or (ii) is a party to any Tax sharing or other similar agreement or
arrangement of any nature with any other person pursuant to which Avenor or any
Avenor Subsidiary has or
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could have any liabilities in respect of Taxes. Avenor has not made an election
under Section 897(i) of the Code to be treated as a domestic corporation for
purposes of Sections 897, 1445 and 6039C of the Code.
"TAX" and "TAXES" means, with respect to any entity, (A) all income taxes
(including any tax on or based upon net income, gross income, income as
specially defined, earnings, profits or selected items of income, earnings or
profits) and all capital taxes, gross receipts taxes, environmental taxes, sales
taxes, use taxes, ad valorem taxes, value added taxes, transfer taxes, franchise
taxes, license taxes, withholding taxes, payroll taxes, employment taxes, Canada
or Quebec Pension Plan premiums, excise, severance, social security, workers'
compensation, unemployment insurance or compensation, stamp taxes, occupation
taxes, premium taxes, property taxes, windfall profits taxes, alternative or
add-on minimum taxes, goods and services tax, customs duties or other taxes,
fees, imports, assessments or charges of any kind whatsoever, together with any
interest and any penalties or additional amounts imposed by any taxing authority
(domestic or foreign) on such entity, and any interest, penalties, additional
taxes and additions to tax imposed with respect to the foregoing, and (B) any
liability for the payment of any amount of the type described in the immediately
preceding clause (A) as a result of being a "transferee" (within the meaning of
section 6901 of the Code or any other applicable law) of another entity or a
member of an affiliated or combined group.
16. Pension and Employee Benefits
(a) Other than as disclosed in writing to Bowater on or prior to the
date hereof or in any document previously filed with the Securities
Authorities, Avenor has complied, in all material respects, with all the
terms of, and all applicable Laws in respect of, the pension and other
employee compensation and benefit obligations of Avenor and its Material
Subsidiaries, including the terms of any collective agreements, funding and
investment contracts or obligations applicable thereto, arising under or
relating to each of the pension or retirement income plans or other
employee compensation or benefit plans, agreements, policies, programs,
arrangements or practices, whether written or oral, which are maintained by
or binding upon Avenor or any of its Material Subsidiaries (collectively
referred to as the "Avenor Plans") and all Avenor Plans are fully funded
and in good standing with such regulatory authorities as may be applicable.
(b) No step has been taken, no event has occurred and no condition or
circumstance exists that has resulted in or could reasonably be expected to
result in any Avenor Plan being ordered or required to be terminated or
wound up in whole or in part or having its registration under applicable
legislation refused or revoked, or being placed under the administration of
any trustee or receiver or regulatory authority or being required to pay
any material Taxes, fees, penalties or levies under applicable Laws. There
are no actions, suits, claims (other than routine claims for payment of
benefits in the ordinary course), trials, demands, investigations,
arbitrations or other proceedings which are pending or threatened in
respect of any of the Avenor Plans or their assets which individually or in
the aggregate would have a material adverse effect on Avenor.
17. Property. Other than as disclosed in writing to Bowater on or prior to
the date hereof, Avenor and its Material Subsidiaries have good and sufficient
title to the real property interests including, without limitation, fee simple
estate of and in real property, leases, easements, rights of way, permits or
licences from land owners or authorities permitting the use of land by Avenor
and its Material Subsidiaries, necessary to permit the operation of its
businesses as presently owned and conducted except as disclosed in writing to
Avenor and except for such failure of title that would individually or in the
aggregate not have a material adverse effect on Avenor.
18. Reports. Avenor has filed with the Securities Authorities true and
complete copies of all forms, reports, schedules, statements and other documents
required to be filed by it since January 1, 1996 (such forms, reports,
schedules, statements and other documents, including any financial statements or
other documents, including any schedules included therein, are referred to as
the "Avenor Documents"). The Avenor Documents, at the time filed, (a) did not
contain any misrepresentation (as defined in the Securities Act (Ontario)) and
(b) complied in all material respects with the requirements of applicable
securities legislation. Avenor has not filed any confidential material change
report with any Securities Authorities which at the date hereof remains
confidential.
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19. Compliance with Laws. Since December 31, 1997, and except as has been
publicly disclosed prior to the date hereof in any document filed with the
Securities Authorities, Avenor and its Material Subsidiaries have complied with
and are not in violation of any applicable Laws other than non-compliance or
violations which would not individually or in the aggregate have a material
adverse effect on Avenor.
20. Licenses, Etc. Except as disclosed in writing to Bowater on or prior
to the date hereof, Avenor and each of its Material Subsidiaries owns,
possesses, or has obtained and is in compliance with, all licenses, permits
(including permits required under Environmental Laws), certificates, orders,
grants and other authorizations of or from any Governmental Entity necessary to
conduct its businesses as now conducted or as proposed to be conducted, the
failure to own, possess, obtain or be in compliance with which would not
individually or in the aggregate have a material adverse effect on Avenor.
21. Certain Contracts. Except as disclosed in writing to Bowater on or
prior to the date hereof, neither Avenor nor any of its Material Subsidiaries is
a party to or bound by any non-competition agreement or any other agreement or
obligation which purports to limit the manner or the localities in which all or
any material portion of the business of Avenor or its Material Subsidiaries is
or would be conducted other than such contracts which individually or in the
aggregate would not have a material adverse effect on the current business or
operations of Avenor.
22. Insurance Matters. Avenor is not aware at the date of this Agreement
of any reason why insurance through a "discovery" endorsement which protects the
directors and officers of Avenor (including former directors and officers) would
not be available for the six years following the Effective Date as provided in
Section 5.9, "Insurance", of the Arrangement Agreement. There have not been any
claims asserted against Avenor with respect to any directors' or officers'
indemnification agreement referred to in Section 5.9. Avenor has not taken any
action, and Avenor is not aware that the insureds under the policy referred to
in Section 5.9 have taken any action, which would impair the coverage under such
insurance policy.
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SCHEDULE C
REPRESENTATIONS AND WARRANTIES OF BOWATER
1. Organization. Each of Bowater and its Material Subsidiaries has been
duly incorporated or formed under all applicable Laws, is validly subsisting and
has full corporate or legal power and authority to own its properties and
conduct its businesses as currently owned and conducted. All of the outstanding
shares of capital stock and other ownership interests of its Subsidiaries are
validly issued, fully paid and non-assessable and all such shares and other
ownership interests owned directly or indirectly by Bowater are, except as
disclosed in writing, to Avenor or pursuant to restrictions on transfer
contained in constating documents, rights of first refusal and similar rights
restricting transfer contained in shareholders, partnership or joint venture
agreements for or pursuant to existing financing arrangements involving
Subsidiaries which are not wholly owned, owned free and clear of all material
liens, claims or encumbrances and there are no outstanding options, rights,
entitlements, understandings or commitments (contingent or otherwise) regarding
the right to acquire any such shares of capital stock or other ownership
interests in any of its Subsidiaries.
2. Capitalization. The authorized capital of Bowater consists of
110,000,000 shares consisting of 10,000,000 of Serial Preferred Stock, U.S.$1.00
par value and 100,000,000 Bowater Common Shares. As of December 31, 1997 there
were 40,321,105 Bowater Common Shares outstanding and 264,318 8.40% Series C
Cumulative Preferred Stock outstanding. As of December 31, 1997 there were
reserved, in the aggregate, for issuance in respect of Bowater's Stock Incentive
Plans 2,549,000 Bowater Common Shares of which 642,000 have yet to be granted
and 1,907,000 were outstanding but unexercised as at December 31, 1997. In
addition, Bowater has established the 1997-1999 Long Term Incentive Plan, which
could result in the issuance of up to an additional 991,878 Bowater Common
Shares. Except as described in the immediately preceding sentences, there are no
options, warrants, conversion privileges or other rights, agreements,
arrangements or commitments obligating Bowater or any Subsidiary to issue or
sell any shares of Bowater or any of its Subsidiaries or securities or
obligations of any kind convertible into or exchangeable for any shares of
Bowater, any Subsidiary or any other person. There have been no Bowater Common
Shares issued since December 31, 1997, other than pursuant to the exercise of
stock option entitlements.
3. Authority. Bowater has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by Bowater and the consummation by
Bowater of the transactions contemplated by this Agreement have been duly
authorized by the Board of Directors of Bowater and, subject to shareholder
approval, no other corporate proceedings on the part of Bowater are necessary to
authorize this Agreement or the transactions contemplated hereby other than in
connection with the approval by the Board of Directors of Bowater of the Joint
Proxy Circular, the issuance of Bowater Common Shares and other matters relating
to the implementation of the Arrangement. This Agreement has been duly executed
and delivered by Bowater and constitutes a valid and binding obligation of
Bowater, enforceable against Bowater in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium, and
other applicable Laws relating to or affecting creditors' rights generally, to
general principles of equity and public policy. Except as disclosed in writing
to Avenor on or prior to the date hereof, the approval of the Bowater Resolution
and the consents, approvals, orders, authorizations, declarations and filings
court and regulatory approvals referred to in Section 6.1 of this Agreement, the
execution and delivery by Bowater of this Agreement and performance by it of its
obligations hereunder and the completion of the Arrangement and the transactions
contemplated thereby, will not:
(a) result in a violation or breach of, require any consent to be
obtained under or give rise to any termination rights under any provision
of:
(i) it or any Material Subsidiary's certificate of incorporation,
articles, by-laws or other charter documents, including any unanimous
shareholder agreement or any other agreement or understanding with any
party holding an ownership interest in any Material Subsidiary;
(ii) any law, regulation, order, judgment or decree; or
(iii) any contract, agreement, license, franchise or permit to
which Bowater or any Material Subsidiary is bound or is subject or is
the beneficiary;
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(b) give rise to any right of termination or acceleration of
indebtedness, or cause any third party indebtedness to come due before its
stated maturity or cause any available credit to cease to be available; or
(c) result in the imposition of any encumbrance, charge or lien upon
any of its assets or the assets of any Material Subsidiary, or restrict,
hinder, impair or limit the ability of Bowater or any Material Subsidiary
to carry on the business of Bowater or any Material Subsidiary as and where
it is now being carried on or as and where it may be carried on in the
future,
which would, individually or in the aggregate, have a material adverse effect on
Bowater. Except as disclosed in writing to Avenor, no consent, approval, order
or authorization of, or declaration or filing with, any Governmental Entity or
other party is required to be obtained by Bowater and its Subsidiaries in
connection with the execution and delivery of this Agreement or the consummation
by Bowater of the transactions contemplated hereby other than (i) any approvals
required by the Interim Order, (ii) the Final Order, (iii) filings which may be
required under the Delaware General Corporation Law and filings with and
approvals required by the SEC, state and provincial securities authorities and
stock exchanges, (iv) any other consents, waivers, permits, orders or approvals
referred to in Section 6.1 of this Agreement and (v) any other consents,
approvals, orders, authorizations, declarations or filings which, if not
obtained, would not in the aggregate have a material adverse effect on Bowater.
4. Funds Available. Bowater has sufficient funds or financing commitments
available to carry out its obligations under this Agreement and in respect of
the Arrangement and to pay all related fees and expenses. Bowater has provided
to Avenor the terms of such financing as set out in commitment letters of The
Chase Manhattan Bank both dated March 5, 1998 in favour of Bowater.
5. Absence of Changes. Since December 31, 1997, and except as has been
previously disclosed in writing to Avenor or has been publicly disclosed prior
to the date hereof in any document filed with the SEC, (i) Bowater has conducted
its business only in the ordinary and regular course of business consistent with
past practice, (ii) other than in the ordinary and regular course of business
consistent with past practice, no liabilities or obligations of any nature
(whether absolute, accrued, contingent or otherwise) which would individually or
in the aggregate be material to Bowater have been incurred, and (iii) there is
no material fact that exists on the date hereof that has not been disclosed in
the disclosure documents of Bowater filed with the SEC, which if publicly
disclosed, would reflect a material adverse change in the affairs of Bowater.
6. Employment Agreements. Other than as disclosed in writing to Avenor on
or prior to the date hereof, Bowater has disclosed all that it is required by
Law to publicly disclose with respect to any agreement, obligation or
understanding providing for severance or termination payments to, or any
employment agreement with, any senior executive officer of Bowater.
7. Disclosure. Bowater has publicly disclosed in documents filed with the
SEC or disclosed to Avenor in writing, on or prior to the date hereof, any
information regarding any event, circumstance or action taken or failed to be
taken which could individually or in the aggregate have a material adverse
effect on Bowater.
8. Financial Statements. The audited consolidated statement of operations,
consolidated balance sheet, consolidated statement of capital accounts and
consolidated statement of cash flows of Bowater for the fiscal year ending
December 31, 1997, and such statements of Bowater for the years ended December
31, 1995 and December 31, 1996, as contained in Bowater's 1995 and 1996 Annual
Reports, were prepared in accordance with generally accepted accounting
principles consistently applied and fairly present the consolidated financial
condition of Bowater at the respective dates indicated and the results of
operations of Bowater (on a consolidated basis) for the period covered.
9. Litigation, Etc. Except as set forth or specifically reflected in any
document filed with the SEC, or as disclosed in writing to Avenor prior to the
date hereof, there is no claim, action, proceeding or investigation pending or,
to the knowledge of Bowater, threatened against or relating to Bowater or any
Material Subsidiary or affecting any of their properties or assets before any
court or governmental or regulatory authority or body that, if adversely
determined, is likely to have a material adverse effect on Bowater or prevent or
materially delay consummation of the transactions contemplated by this
Agreement, nor is Bowater aware of any basis for any such claim, action,
proceeding or investigation. Neither Bowater nor any Material Subsidiary is
subject
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to any outstanding order, writ, injunction or decree that has had or is
reasonably likely to have a material adverse effect on Bowater or prevent or
materially delay consummation of the transactions contemplated by this
Agreement.
10. Environmental. All operations of Bowater and its Material Subsidiaries
have been, and are now, in compliance with all Environmental Laws, except where
the failure to be in compliance would not individually or in the aggregate have
a material adverse effect on Bowater. Except as Bowater has publicly disclosed
in documents filed with the SEC or has disclosed in writing to Avenor prior to
the date hereof, neither Bowater nor any Material Subsidiary is aware of, or is
subject to:
(a) any proceeding, application, order or directive which relates to
environmental health or safety matters, and which may require any material
work, repairs, construction or expenditures; or
(b) any demand or notice with respect to the breach of any
Environmental Laws applicable to Bowater or any Subsidiary, including,
without limitation, any regulations respecting the use, storage, treatment,
transportation, or disposition of Hazardous Substances,
which individually or in the aggregate would have a material adverse effect on
Bowater.
11. Insurance. Policies of insurance in force as of the date hereof naming
Bowater as an insured adequately cover all risks reasonably and prudently
foreseeable in the operation and conduct of the business of Bowater and the
Material Subsidiaries for which, having regard to the nature of such risk and
the relative cost of obtaining insurance, it is in the opinion of Bowater acting
reasonably to seek such insurances rather than provide for self insurance. All
such policies of insurance shall remain in full force and effect and shall not
be cancelled or otherwise terminated as a result of the transactions
contemplated hereby or by the Arrangement other than such cancellations as would
not individually or in the aggregate have a material adverse effect on Bowater.
12. Tax Matters. Except as disclosed in writing to Avenor, Bowater and
each of its Subsidiaries have filed on a timely basis (or within permitted
extensions), or caused to be filed, all Tax Returns required to be filed by them
(all of which returns were correct and complete in all material respects) and
have paid, or caused to be paid, all Taxes that are due and payable, in each
case except for any such Tax Returns or Taxes the non-filing or non-payment of
which have not had and would not be reasonably likely to have a material adverse
effect on Bowater, and Bowater has provided adequate accruals in accordance with
generally accepted accounting principles in its most recently published
financial statements for any Taxes for the period covered by such financial
statements that have not been paid, whether or not shown as being due on any Tax
Returns. Since such publication date, no material Tax liability not reflected in
such statements or otherwise provided for has been assessed, proposed to be
assessed, incurred or accrued other than in the ordinary course of business.
Except as otherwise disclosed in writing to Avenor, neither Bowater nor any
Subsidiary has received any written notification that any material issues have
been raised (and are currently pending) by Revenue Canada, the United States
Internal Revenue Service or any other taxing authority, including, without
limitation, any sales tax authority, in connection with any of the Tax Returns
referred to above, and no waivers of statutes of limitations have been given or
requested with respect to Bowater or any Subsidiary, in each case except for any
such written notices or waivers which have not had and would not be likely to
have a material adverse effect on Bowater. To the best of the knowledge of
Bowater, there are no material proposed (but unassessed) additional Taxes and
none have been asserted. No Tax liens have been filed other than for Taxes not
yet due and payable. Neither Bowater nor any Bowater Subsidiary (i) has made an
election to be treated as a "consenting corporation" under Section 341(f) of the
Code or (ii) is a party to any Tax sharing or other similar agreement or
arrangement of any nature with any other person pursuant to which Bowater or any
Bowater Subsidiary has or could have any liabilities in respect of Taxes.
13. Pension and Employee Benefits
(a) Other than as disclosed in writing to Avenor on or prior to the
date hereof, Bowater has complied, in all material respects, with all the
terms of and all applicable Laws (including funding requirements) in
respect of the pension and other employee compensation and benefit
obligations of Bowater and its Material Subsidiaries.
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(b) No step has been taken, no event has occurred and no condition or
circumstance exists that has resulted in or could reasonably be expected to
result in any Bowater Plan being ordered or required to be terminated or
wound up in whole or in part or having its registration under applicable
legislation refused or revoked, or being placed under the administration of
any trustee or receiver or regulatory authority or being required to pay
any material Taxes, fees, penalties or levies under applicable Laws. There
are no actions, suits, claims (other than routine claims for payment of
benefits in the ordinary course), trials, demands, investigations,
arbitrations or other proceedings which are pending or threatened in
respect of any of the Bowater Plans or their assets which individually or
in the aggregate would have a material adverse effect on Bowater.
14. Property. Other than as disclosed in writing to Avenor on or prior to
the date hereof, Bowater and its Material Subsidiaries have good and sufficient
title to the real property interests including, without limitation, fee simple
estate of and in real property, leases, easements, rights of way, permits or
licences from land owners or authorities permitting the use of land by Bowater
and its Material Subsidiaries, necessary to permit the operation of its
businesses as presently owned and conducted except as disclosed in writing to
Bowater and except for such failure of title that would individually or in the
aggregate not have a material adverse effect on Bowater.
15. Reports. Bowater has filed with the SEC true and complete copies of
all forms, reports, schedules, statements and other documents required to be
filed by it since January 1, 1996 (such forms, reports, schedules, statements
and other documents, including any financial statements or other documents,
including any schedules included therein, are referred to as the "Bowater
Documents"). The Bowater Documents, at the time filed, (a) did not contain any
misrepresentation and (b) complied in all material respects with the
requirements of applicable securities legislation.
16. Compliance with Laws. Since December 31, 1997, and except as has been
publicly disclosed prior to the date hereof in any document filed with the SEC,
Bowater and its Material Subsidiaries have complied with and are not in
violation of any applicable Laws other than non-compliance or violations which
would not individually or in the aggregate have a material adverse effect on
Bowater.
17. Licenses, Etc. Except as has been publicly disclosed prior to the date
hereof in any document filed with SEC or disclosed in writing to Avenor, Bowater
and each of its Material Subsidiaries owns, possesses, or has obtained and is in
compliance with, all licenses, permits (including permits required under
Environmental Laws), certificates, costs, orders, grants and other
authorizations of or from any Governmental Entity necessary to conduct its
businesses as now conducted or as proposed to be conducted, the failure to own,
possess, obtain or be in compliance with which would not individually or in the
aggregate have a material adverse effect on Bowater.
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SCHEDULE D
"CAPITALIZED LEASE" shall mean any lease, the obligation for Rentals with
respect to which is required to be capitalized on a balance sheet of the lessee
in accordance with generally accepted Canadian accounting principles.
"CAPITALIZED RENTALS" shall mean as of the date of any determination the
amount at which the aggregate Rentals due and to become due under all
Capitalized Leases under which the Company or any Subsidiary is a lessee would
be reflected as a liability on a consolidated balance sheet of the Company and
its Subsidiaries.
"COMPANY" means Avenor Inc.
"CONSOLIDATED SHAREHOLDERS' EQUITY" shall mean, as of any date as of which
the amount thereof is to be determined, the amount of the stated capital
accounts plus (or minus in the case of a deficit) the surplus and retained
earnings of the Company and its Subsidiaries, all determined in accordance with
generally accepted Canadian accounting principles, on a consolidated basis
eliminating intercompany items.
"CONSOLIDATED TOTAL CAPITALIZATION" shall mean, as of the date of any
determination thereof, the sum of (a) Consolidated Funded Debt and (b)
Consolidated Shareholders' Equity.
"CURRENT DEBT" shall mean, as of the date of any determination thereof, all
Indebtedness other than Funded Debt, including all payments that are required to
be made on Funded Debt within one year from the date of any determination of
Current Debt. "Consolidated" when used as a prefix to Current Debt shall mean
the aggregate amount of all such Current Debt of the Company and its
Subsidiaries on a consolidated basis eliminating intercompany items.
"DEBT RATIO" shall mean, as of the date of any determination thereof, the
ratio between (a) the sum of (i) Consolidated Funded Debt and (ii) Consolidated
Current Debt, and (b) the sum of (i) Consolidated Total Capitalization and (ii)
Consolidated Current Debt.
"FUNDED DEBT" of any Person shall mean (a) all Indebtedness having a final
maturity of one or more than one year from the date of origin thereof (or which
is renewable or extendible at the option of the obligor for a period or periods
more than one year from the date of origin), excluding all payments in respect
thereof that are required to be made within one year from the date of any
determination of Funded Debt, whether or not included in Current Debt, (b) all
Capitalized Rentals, and (c) all Guarantees of Funded Debt of others.
"Consolidated" when used as a prefix to any Funded Debt shall mean the aggregate
amount of all such Funded Debt of the Company and its Subsidiaries on a
consolidated basis eliminating intercompany items.
"GUARANTEES" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect, guaranteeing
any Indebtedness, dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, which in accordance
with generally accepted Canadian accounting principles shall be classified upon
a balance sheet of such Person as a liability of such Person. For the purposes
of all computations made under this Agreement, a Guaranty in respect of any
Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the
principal amount of such Indebtedness for borrowed money which has been
guaranteed, and a Guaranty in respect of any other obligation or liability or
any dividend shall be deemed to be Indebtedness equal to the maximum aggregate
amount of such obligation, liability or dividend.
"INDEBTEDNESS" of any Person shall mean and include all obligations of such
Person which in accordance with generally accepted Canadian accounting
principles shall be classified upon a balance sheet of such Person as
liabilities for borrowed money of such Person. For the purpose of computing the
"Indebtedness" of any Person, there shall be excluded any particular
Indebtedness to the extent that, upon or prior to the maturity thereof, there
shall have been deposited with the proper depository in trust the necessary
funds (or evidences of such Indebtedness, if permitted by the instrument
creating such Indebtedness) for the payment, redemption or satisfaction of such
Indebtedness; and thereafter such funds and evidences of Indebtedness so
deposited shall not be included in any computation of the assets of such Person.
"PERSON" shall mean an individual, partnership, unincorporated association,
unincorporated syndicate, unincorporated organization, trust, trustee, executor,
administrator, or other legal representative.
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"RENTALS" shall mean and include all fixed rents (including as such all
payments which the lessee is obligated to make to the lessor on termination of
the lease or surrender of the property) payable by the Company or a Subsidiary,
as lessee or sublessee under a lease of real or personal property, but shall be
exclusive of any amounts required to be paid by the Company or a Subsidiary
(whether or not designated as rents or additional rents) on account of
maintenance, repairs, insurance, taxes and similar charges. Fixed rent under any
so-called "percentage rents" shall be computed solely on the basis of minimum
rents, if any, required to be paid by the lessee regardless of sales volume or
gross revenues.
"SUBSIDIARY" shall mean, as to any particular parent corporation, any
corporation of which more than 50% (by number of votes) of the voting shares
shall be owned by such parent corporation and/or one or more corporations which
are themselves subsidiaries of such parent corporation.
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ANNEX E
SCHEDULE A
PLAN OF ARRANGEMENT
UNDER SECTION 192
OF THE CANADA BUSINESS CORPORATIONS ACT
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Plan of Arrangement, unless there is something in the subject
matter or context inconsistent therewith, the following terms shall have the
respective meanings set out below and grammatical variations of such terms shall
have corresponding meanings:
"ACT" means the Canada Business Corporations Act, R.S.C. 1995, c. C-44.
"ARRANGEMENT" means the arrangement under section 192 of the Act on the
terms and subject to the conditions set out in this Plan of Arrangement, subject
to any amendments thereto made in accordance with section 7.1 of the Arrangement
Agreement or made at the direction of the Court in the Final Order.
"ARRANGEMENT AGREEMENT" means the agreement made as of March 9, 1998
between Avenor and Bowater, as amended, supplemented and/or restated in
accordance therewith prior to the Effective Date, providing for, among other
things, the Arrangement.
"ARRANGEMENT RESOLUTION" means the special resolution passed by the holders
of the Avenor Common Shares at the Avenor Shareholders' Meeting.
"AVENOR" means Avenor Inc., a corporation subsisting under the Act.
"AVENOR COMMON SHARES" means the common shares in the capital of Avenor.
"AVENOR OPTIONS" means stock options of Avenor issued under Avenor's Key
Employee Stock Option Plan.
"AVENOR SARS" means stock appreciation rights of Avenor issued under
Avenor's Key Employee Stock Option Plan.
"AVENOR SHAREHOLDERS' MEETING" means the annual and special meeting of the
shareholders of Avenor (including any adjournment thereof) that is to be
convened as provided by the Interim Order to consider, and if deemed advisable,
approve the Arrangement.
"AVERAGE TRADING PRICE OF BOWATER COMMON SHARES" means the number that
equals the weighted average trading price, denominated in U.S. dollars, of
Bowater Common Shares as reported on the NYSE for the 20 days on which trading
took place on the NYSE ending on the Determination Date; provided, however, that
if such average trading price exceeds U.S.$55.6187, the Average Trading Price of
Bowater Common Shares shall be U.S.$55.6187, and if such average trading price
is less than U.S.$45.5062, the Average Trading Price of Bowater Common Shares
shall be U.S.$45.5062.
"BOWATER" means Bowater Incorporated, a corporation existing under the laws
of the State of Delaware.
"BOWATER CANADA" means Bowater Canada Inc., a corporation incorporated
under the Act and a subsidiary of Bowater Holdings.
"BOWATER COMMON SHARE" means a share of common stock of Bowater, US$1.00
par value per share.
"BOWATER ELECTED SHARE" means any Avenor Common Share that the holder shall
have elected, in a duly completed Letter of Transmittal received by the
Depositary no later than 5:00 p.m. (Montreal time) on the Business Day
immediately preceding the Meeting Date to exchange under the Arrangement for a
fraction of a Bowater Common Share or that is deemed to be a Bowater Elected
Share pursuant to Section 2.3(b).
"BOWATER HOLDINGS" means Bowater Canadian Holdings Incorporated, a
corporation incorporated under the Companies Act (Nova Scotia) and a subsidiary
of Bowater.
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"BUSINESS DAY" means any day, other than a Saturday, a Sunday and a
statutory holiday in Toronto, Ontario, Montreal, Quebec or New York, New York.
"CASH ELECTED SHARE" means any Avenor Common Share that the holder shall
have elected, in a duly completed Letter of Transmittal received by the
Depositary no later than 5:00 p.m. (Montreal time) on the Business Day
immediately preceding the Meeting Date to exchange under the Arrangement for
C$35 in cash or that is deemed to be a Cash Elected Share pursuant to Section
2.3(d).
"CERTIFICATE" means the certificate of arrangement giving effect to the
Arrangement, issued pursuant to subsection 192(7) of the Act after the Articles
of Arrangement have been filed.
"COURT" means the Ontario Court of Justice (General Division).
"DEPOSITARY" means the The Trust Company of Bank of Montreal appointed for
the purpose of, among other things, exchanging certificates representing Avenor
Common Shares for cash, Exchangeable Shares or Bowater Common Shares, as the
case may be.
"DETERMINATION DATE" means the day which is the third Business Day prior to
the Effective Date.
"DETERMINATION DATE FOREIGN EXCHANGE RATE" means the number (including any
decimal fraction) which is the value in Canadian dollars of one U.S. dollar at
the rate of exchange equal to the Bank of Canada's noon spot exchange rate for
such currencies on the Determination Date.
"DISSENT PROCEDURES" has the meaning set out in Section 3.1.
"DISSENTING SHAREHOLDER" means a holder of Avenor Common Shares who
dissents in respect of the Arrangement in strict compliance with the Dissent
Procedures.
"EFFECTIVE DATE" means the date shown on the Certificate.
"EFFECTIVE TIME" means 12:01 a.m. on the Effective Date.
"EXCHANGE RATIO" means the number equal to C$35 divided by the product of
(i) the Average Trading Price of Bowater Common Shares and (ii) the
Determination Date Foreign Exchange Rate.
"EXCHANGEABLE SHARE" means a share in the class of non-voting exchangeable
shares in the capital of Bowater Canada.
"EXCHANGEABLE SHARE ELECTED SHARE" means any Avenor Common Share that the
holder shall have elected, in a duly completed Letter of Transmittal received by
the Depositary no later than 5:00 p.m. (Montreal time) on the Business Day
immediately preceding the Meeting Date to exchange under the Arrangement for a
fraction of an Exchangeable Share or that is deemed to be an Exchangeable Share
Elected Share pursuant to Section 2.1(d) or 2.3(b).
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares.
"FINAL ORDER" means the final order of the Court approving the Arrangement.
"INTERIM ORDER" means the interim order of the Court made in connection
with the process for obtaining shareholder approval of the Arrangement and
related matters.
"JOINT PROXY STATEMENT" means the joint management information circular and
proxy statement of Avenor and Bowater to be prepared and sent to the
shareholders of Avenor in connection with the Avenor Shareholders' Meeting.
"LETTER OF TRANSMITTAL" means collectively a Letter of Transmittal and
Election Form in the forms accompanying the Joint Proxy Statement.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in Section
5.1(a).
"LIQUIDATION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"MEETING DATE" means the date of the Avenor Shareholders' Meeting.
"NYSE" means the New York Stock Exchange, Inc.
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"OUTSTANDING AVENOR COMMON SHARES" means the number of Avenor Common Shares
outstanding immediately prior to the Effective Time.
"PERSON" includes any individual, firm, partnership, joint venture, venture
capital fund, association, trust, trustee, executor, administrator, legal
personal representative, estate, group, body corporate, corporation,
unincorporated association or organization, government body, syndicate or other
entity, whether or not having legal status.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in Section 5.2(a).
"REDEMPTION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"SHARE ELECTED SHARE" means a Cash Elected Share that, because of the
operation of the proration provisions set forth in Section 2.3(b), shall be
deemed to be an Exchangeable Share Elected Share; provided, however, that if the
holder thereof shall have elected in a duly completed Letter of Transmittal
received by the Depositary no later than 5:00 p.m. (Montreal time) on the
Business Day immediately preceding the Meeting Date to have Cash Elected Shares
that are subject to the proration provisions set forth in Section 2.3(b) be
deemed to be Bowater Elected Shares, such Cash Elected Shares shall be deemed to
be Bowater Elected Shares.
1.2 SECTIONS AND HEADINGS
The division of this Plan of Arrangement into sections and the insertion of
headings are for reference purposes only and shall not affect the interpretation
of this Plan of Arrangement. Unless otherwise indicated, any reference in this
Plan of Arrangement to a section or an exhibit refers to the specified section
of or exhibit to this Plan of Arrangement.
1.3 NUMBER, GENDER AND PERSONS
In this Plan of Arrangement, unless the context otherwise requires, words
importing the singular number include the plural and vice versa, words importing
any gender include all genders and words importing persons include individuals,
corporations, partnerships, associations, trusts, unincorporated organizations,
governmental bodies and other legal or business entities of any kind.
ARTICLE 2
ARRANGEMENT
2.1 ARRANGEMENT
Commencing at the Effective Time, the following shall occur and shall be
deemed to occur in the following order without any further act or formality:
(a) subject to Section 2.3, each Bowater Elected Share will be transferred
by the holder thereof to Bowater Holdings in exchange for that number
of fully paid and non-assessable Bowater Common Shares equal to the
Exchange Ratio, and the name of each such holder will be removed from
the register of holders of Avenor Common Shares and added to the
register of holders of Bowater Common Shares and Bowater Holdings will
be added to the register of holders of Avenor Common Shares
accordingly;
(b) Bowater Holdings will transfer to Bowater Canada all the Avenor Common
Shares then owned by Bowater Holdings and, as consideration therefor,
Bowater Canada will issue an equivalent number of common shares of
Bowater Canada to Bowater Holdings, and Bowater Holdings will be
removed from the register of holders of Avenor Common Shares and
Bowater Canada will be added to the register of holders of Avenor
Common Shares accordingly;
(c) subject to Section 2.3, each Cash Elected Share and Exchangeable Share
Elected Share will be transferred by the holder thereof to Bowater
Canada in exchange for (i) in the case of a Cash Elected Share, C$35 in
cash, without interest thereon and (ii) in the case of an Exchangeable
Share Elected Share, that number of Exchangeable Shares equal to the
Exchange Ratio, and each holder who receives cash will be removed from
the register of holders of Avenor Common Shares and each
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holder who receives Exchangeable Shares will be removed from the
register of holders of Avenor Common Shares and added to the register
of holders of Exchangeable Shares and Bowater Canada shall be recorded
as the registered holder of such Avenor Common Shares so exchanged;
provided, however, that where a holder receives both cash and
Exchangeable Shares, each Avenor Common Share transferred to Bowater
Canada by the holder thereof will be deemed to have been transferred to
Bowater Canada for a combination of cash and Exchangeable Shares, with
the cash portion of such consideration received by such holder for such
share being equal to the aggregate cash consideration received by such
holder divided by the number of Avenor Common Shares so transferred;
(d) subject to Section 2.3, each Avenor Common Share in respect of which an
effective election has not been made (other than Avenor Common Shares
held by Dissenting Shareholders who are ultimately entitled to be paid
the fair value of the Avenor Common Shares held by them) will be deemed
to be an Exchangeable Share Elected Share and will be transferred to
Bowater Canada in exchange for Exchangeable Shares in accordance with
the provisions described in paragraph (c) above, and each such holder
will be removed from the register of holders of Avenor Common Shares
and added to the register of holders of Exchangeable Shares and Bowater
Canada shall be recorded as the registered holder of such Avenor Common
Shares so exchanged; and
(e) all outstanding Avenor Options and Avenor SARs shall be terminated.
2.2 ELECTIONS
Each Person who, at or prior to 5:00 p.m. (Montreal Time) on the Business
Day immediately preceding the Meeting Date, is a holder of record of Avenor
Common Shares, will be entitled, with respect to all or a portion of such
shares, to make an election at or prior to 5:00 p.m. on the Business Day
immediately preceding the Meeting Date to receive cash, Exchangeable Shares or
Bowater Common Shares, or a combination thereof, in exchange for such holder's
Avenor Common Shares, on the basis set forth herein and in accordance with such
arrangements and procedures as will be agreed upon in good faith by Bowater,
Bowater Holdings, Bowater Canada and Avenor, including the form of the Letter of
Transmittal containing the elections and the procedures governing transmittal.
2.3 PRORATION
(a) Notwithstanding Section 2.1(c), the maximum aggregate amount of cash
that may be paid to holders of Avenor Common Shares pursuant to this
Article 2 (the "Cash Cap") shall be equal to (A) the product of (i)
C$35, (ii) the number of Outstanding Avenor Common Shares and (iii)
0.60 less (B) the lesser of (x) the product of (i) $21 and (ii) the
number of Avenor Common Shares in respect of which a notice of dissent
has been delivered by Dissenting Shareholders in accordance with the
Act and (y) $65,000,000.
(b) If the product (the "Requested Cash Amount") of (i) the aggregate
number of Cash Elected Shares and (ii) C$35, exceeds the Cash Cap, then
a cash proration factor (the "Cash Proration Factor") shall be
determined by dividing the Cash Cap by the Requested Cash Amount and
the number of Cash Elected Shares of each holder thereof shall be
reduced to the product of (x) the Cash Proration Factor and (y) the
number of Cash Elected Shares of such holder (the "Available Cash
Elected Shares"), and the difference between such holder's Cash Elected
Shares and such holder's Available Cash Elected Shares shall be deemed
to be Share Elected Shares of such holder.
(c) Notwithstanding Sections 2.1(a), (c) and (d), the maximum aggregate
number of Exchangeable Shares and Bowater Common Shares that may be
issued to or received by holders of Avenor Common Shares pursuant to
this Article 2 (the "Share Cap") shall be equal to the product of (x)
the Exchange Ratio, (y) the number of Outstanding Avenor Common Shares
and (z) 0.50.
(d) If the product (the "Requested Share Amount") of (w) the difference
between (A) the number of Outstanding Avenor Common Shares (other than
Avenor Common Shares held by holders who have delivered a notice of
dissent in accordance with the Act) and (B) the aggregate number of
Cash Elected Shares (such difference, the "Deemed Share Elected
Shares") and (x) the Exchange
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Ratio, exceeds the Share Cap, then a share proration factor (the "Share
Proration Factor") shall be determined by dividing the Share Cap by the
Requested Share Amount and the number of Deemed Share Elected Shares of
each holder thereof shall be reduced to the product of (x) the Share
Proration Factor and (y) the number of Deemed Share Elected Shares of
such holder (the "Available Share Elected Shares") and the difference
between such holder's Deemed Share Elected Shares and such holder's
Available Share Elected Shares shall be deemed to be Cash Elected
Shares of such holder. If the number of Deemed Share Elected Shares is
reduced pursuant to the provisions of this paragraph (d), such
reduction will be made pro rata as between the Exchangeable Share
Elected Shares and the Bowater Elected Shares of such holder.
ARTICLE 3
RIGHTS OF DISSENT
3.1 RIGHTS OF DISSENT
Holders of Avenor Common Shares may exercise rights of dissent with respect
to such shares pursuant to and in the manner set forth in section 190 of the Act
and this section 3.1 (the "Dissent Procedures") in connection with the
Arrangement and holders who duly exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their Avenor Common
Shares shall be deemed to have transferred such Avenor Common Shares to
Avenor for cancellation on the Effective Date; or
(b) are ultimately not entitled, for any reason, to be paid fair value for
their Avenor Common Shares shall be deemed to have participated in the
Arrangement on the same basis as a non-dissenting holder of Avenor
Common Shares and shall receive Exchangeable Shares on the basis
determined in accordance with Section 2.1(d),
but in no case shall Bowater, Bowater Holdings, Bowater Canada, Avenor or any
other Person be required to recognize such holders as holders of Avenor Common
Shares after the Effective Time, and the names of such holders of Avenor Common
Shares shall be deleted from the registers of holders of Avenor Common Shares at
the Effective Time.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES
At or promptly after the Effective Time, Bowater Canada shall deposit with
the Depositary, for the benefit of the holders of Avenor Common Shares who will
receive Exchangeable Shares in connection with the Arrangement, certificates
representing the Exchangeable Shares issued pursuant to Section 2.1 upon the
exchange of Avenor Common Shares. Upon surrender to the Depositary for
cancellation of a certificate which immediately prior to the Effective Time
represented one or more Avenor Common Shares that were exchanged for one or more
Exchangeable Shares under the Arrangement, together with such other documents
and instruments as would have been required to effect the transfer of the shares
formerly represented by such certificate under the Act and the by-laws of Avenor
and such additional documents and instruments as the Depositary may reasonably
require, the holder of such surrendered certificate shall be entitled to receive
in exchange therefor, and the Depositary shall deliver to such holder, a
certificate representing that number (rounded down to the nearest whole number)
of Exchangeable Shares which such holder has the right to receive (together with
any dividends or distributions with respect thereto pursuant to Section 4.4 and
any cash in lieu of fractional Exchangeable Shares pursuant to Section 4.5 and
as a result of the operation of Section 2.3), and the certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of Avenor
Common Shares that is not registered in the transfer records of Avenor, a
certificate representing the proper number of Exchangeable Shares may be issued
to the transferee if the certificate representing such Avenor Common Shares is
presented to the Depositary, accompanied by all documents required to evidence
and effect such transfer. Until surrendered as contemplated by this Section 4.1,
each certificate which immediately prior to the Effective Time represented
Avenor Common Shares that were
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exchanged for Exchangeable Shares shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender (i)
the certificate representing Exchangeable Shares as contemplated by this Section
4.1, (ii) a cash payment in lieu of any fractional Exchangeable Shares as
contemplated by Section 4.5 and a cash payment as a result of the operation of
Section 2.3, and (iii) any dividends or distributions with a record date after
the Effective Time theretofore paid or payable with respect to Exchangeable
Shares as contemplated by Section 4.4.
4.2 EXCHANGE OF CERTIFICATES FOR BOWATER COMMON SHARES
At or promptly after the Effective Time, Bowater Holdings shall deposit
with the Depositary, for the benefit of the holders of Avenor Common Shares who
will receive Bowater Common Shares in connection with the Arrangement,
certificates representing the Bowater Common Shares issued pursuant to Section
2.1 in exchange for outstanding Avenor Common Shares. Upon surrender to the
Depositary for cancellation of a certificate which immediately prior to the
Effective Time represented outstanding Avenor Common Shares that were exchanged
for Bowater Common Shares, together with such other documents and instruments as
would have been required to effect the transfer of the shares formerly
represented by such certificate under the Act and the by-laws of Avenor and such
additional documents and instruments as the Depositary may reasonably require,
the holder of such surrendered certificate shall be entitled to receive in
exchange therefor, and the Depositary shall deliver to such holder, a
certificate representing that number (rounded down to the nearest whole number)
of Bowater Common Shares which such holder has the right to receive (together
with any dividends or distributions with respect thereto pursuant to Section 4.4
and any cash in lieu of fractional Bowater Common Shares pursuant to Section 4.3
and as a result of the operation of Section 2.3), and the certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of Avenor Common Shares which is not registered in the transfer
records of Avenor, a certificate representing the proper number of Bowater
Common Shares may be issued to the transferee if the certificate representing
such Avenor Common Shares is presented to the Depositary, accompanied by all
documents required to evidence and effect such transfer. Until surrendered as
contemplated by this Section 4.2, each certificate which immediately prior to
the Effective Time represented one or more outstanding Avenor Common Shares that
were exchanged for one or more Bowater Common Shares shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender (i) the certificate representing Bowater Common Shares as contemplated
by this Section 4.2, (ii) a cash payment in lieu of any fractional Bowater
Common Shares as contemplated by Section 4.5 and as a result of the operation of
Section 2.3 and (iii) any dividends or distributions with a record date after
the Effective Time theretofore paid or payable with respect to Bowater Common
Shares as contemplated by Section 4.4.
4.3 EXCHANGE OF CERTIFICATES FOR CASH
At or promptly after the Effective Time, Bowater Canada shall deposit
sufficient cash with the Depositary for the benefit of the holders of Avenor
Common Shares who will receive cash in connection with the Arrangement. Upon
surrender to the Depositary for cancellation of a certificate which immediately
prior to the Effective Time represented outstanding Avenor Common Shares that
were exchanged for cash, together with such other documents and instruments as
would have been required to effect the transfer of the shares formerly
represented by such certificate under the Act and the by-laws of Avenor and such
additional documents and instruments as the Depositary may reasonably require,
the holder of such surrendered certificate shall be entitled to receive in
exchange therefor, and the Depositary shall deliver to such holder, the cash
which such holder has the right to receive under the Arrangement. The cash
deposited with the Depositary shall be held in an interest bearing account, and
any interest earned on such funds shall be for the account of Bowater Canada.
4.4 DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES
No dividends or other distributions declared or made after the Effective
Time with respect to Exchangeable Shares or Bowater Common Shares with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
certificate which immediately prior to the Effective Time represented
outstanding Avenor Common Shares that were exchanged pursuant to Section 2.1,
and no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to Section 4.5, unless and until the holder of
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record of such certificate shall surrender such certificate in accordance with
Section 4.1 or 4.2. Subject to applicable law, at the time of such surrender of
any such certificate, there shall be paid to the record holder of the
certificates representing whole Common Shares, as the case may be, without
interest (i) the amount of any cash payable in lieu of a fractional Exchangeable
Share or Bowater Common Share to which such holder is entitled pursuant to
Section 4.5, (ii) the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
Exchangeable Share or Bowater Common Share, as the case may be, and (iii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole Exchangeable Share or
Bowater Common Share, as the case may be.
4.5 NO FRACTIONAL SHARES
No certificates or scrip representing fractional Exchangeable Shares or
fractional Bowater Common Shares shall be issued upon the surrender for exchange
of certificates pursuant to Section 4.1 or 4.2 and no dividend, stock split or
other change in the capital structure of Bowater Canada or Bowater shall relate
to any such fractional security and such fractional interests shall not entitle
the owner thereof to vote or to exercise any rights as a security holder of
Bowater Canada or Bowater. In lieu of any such fractional securities:
(a) each Person otherwise entitled to a fractional interest in an
Exchangeable Share will receive a cash payment equal to such Person's
pro rata portion of the net proceeds after expenses received by the
Depositary upon the sale of whole shares representing an accumulation
of all fractional interests in Exchangeable Shares to which all such
Persons would otherwise be entitled. The Depositary will sell such
Exchangeable Shares by private sale (including by way of sale through
the facilities of any stock exchange upon which the Exchangeable Shares
are then listed) as soon as reasonably practicable following the
Effective Date. The aggregate net proceeds after expenses of such sale
will be distributed by the Depositary, pro rata in relation to the
respective fractions, among the Persons otherwise entitled to receive
fractional interests in Exchangeable Shares; and
(b) each person otherwise entitled to a fractional interest in a Bowater
Common Share will receive a cash payment equal to such Person's pro
rata portion of the net proceeds after expenses received by the
Depositary upon the sale of whole shares representing an accumulation
of all fractional interests in Bowater Common Shares to which all such
Persons would otherwise be entitled. The Depositary will sell such
Bowater Common Shares on the NYSE as soon as practicable following the
Effective Date. The aggregate net proceeds after expenses of such sale
will be distributed by the Depositary, pro rata in relation to the
respective fractions, among the Persons otherwise entitled to receive
fractional interests in Bowater Common Shares.
4.6 LOST CERTIFICATES
In the event any certificate which immediately prior to the Effective Time
represented one or more outstanding Avenor Common Shares that were exchanged
pursuant to Section 2.1 shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such certificate to
be lost, stolen or destroyed, the Depositary will issue in exchange for such
lost, stolen or destroyed certificate, cash and/or one or more certificates
representing one or more Exchangeable Shares or Bowater Common Shares (and any
dividends or distributions with respect thereto and any cash pursuant to Section
4.5) deliverable in accordance with such holder's Letter of Transmittal and
subject to Section 2.3. When authorizing such payment in exchange for any lost,
stolen or destroyed certificate, the Person to whom certificates representing
Exchangeable Shares or Bowater Common Shares are to be issued shall, as a
condition precedent to the issuance thereof, give a bond satisfactory to Bowater
Canada or Bowater, as the case may be, in such sum as Bowater Canada or Bowater
may, acting reasonably, direct or otherwise indemnify Bowater Canada or Bowater
in a manner satisfactory to Bowater Canada or Bowater, acting reasonably,
against any claim that may be made against Bowater Canada or Bowater with
respect to the certificate alleged to have been lost, stolen or destroyed.
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4.7 EXTINCTION OF RIGHTS
Any certificate which immediately prior to the Effective Time represented
outstanding Avenor Common Shares that were exchanged pursuant to Section 2.1 and
not deposited, with all other instruments required by Section 4.1 or 4.2, on or
prior to the third anniversary of the Effective Date shall cease to represent a
claim or interest of any kind or nature as a shareholder of Bowater Canada or
Bowater. On such date, the Exchangeable Shares or Bowater Common Shares to which
the former registered holder of the certificate referred to in the preceding
sentence was ultimately entitled shall be deemed to have been surrendered to
Bowater Canada or Bowater, as the case may be, together with all entitlements to
dividends, distributions and interest thereon held for such former registered
holder.
4.8 WITHHOLDING RIGHTS
Bowater Holdings, Bowater Canada, Bowater and the Depositary shall be
entitled to deduct and withhold from any dividend or consideration otherwise
payable under this Plan of Arrangement to any holder of Avenor Common Shares,
Bowater Common Shares or Exchangeable Shares such amounts as Bowater Canada,
Bowater Holdings, Bowater or the Depositary is required or permitted to deduct
and withhold with respect to such payment under the Income Tax Act (Canada), the
United States Internal Revenue Code of 1986 or any provision of provincial,
state, local or foreign tax law, in each case as amended. To the extent that
amounts are so withheld, such withheld amounts shall be treated for all purposes
hereof as having been paid to the holder of the shares in respect of which such
deduction and withholding was made, provided that such withheld amounts are
actually remitted to the appropriate taxing authority. To the extent that the
amount so required or permitted to be deducted or withheld from any payment to a
holder exceeds the cash portion of the consideration otherwise payable to the
holder, Bowater Holdings, Bowater Canada, Bowater and the Depositary are hereby
authorized to sell or otherwise dispose of such portion of the consideration as
is necessary to provide sufficient funds to Bowater Holdings, Bowater Canada,
Bowater or the Depositary, as the case may be, to enable it to comply with such
deduction or withholding requirement and Bowater Holdings, Bowater Canada,
Bowater or the Depositary shall notify the holder thereof and remit any
unapplied balance of the net proceeds of such sale.
ARTICLE 5
CERTAIN RIGHTS OF BOWATER HOLDINGS
TO ACQUIRE EXCHANGEABLE SHARES
5.1 BOWATER HOLDINGS LIQUIDATION CALL RIGHT
(a) Bowater Holdings shall have the overriding right (the "Liquidation Call
Right"), in the event of and notwithstanding the proposed liquidation,
dissolution or winding-up of Bowater Canada pursuant to Article 5 of
the Exchangeable Share Provisions, to purchase from all but not less
than all of the holders of Exchangeable Shares on the Liquidation Date
all but not less than all of the Exchangeable Shares held by each such
holder on payment by Bowater Holdings of an amount per share equal to
(a) the Current Market Price (as defined in the Exchangeable Share
Provisions) of a Bowater Common Share on the last Business Day prior to
the Liquidation Date, which shall be satisfied in full by causing to be
delivered to such holder one Bowater Common Share, plus (b) the right
to receive the full amount when paid of all unpaid dividends on such
Exchangeable Share for which the record date has occurred prior to
Liquidation Date (collectively the "Liquidation Call Purchase Price").
In the event of the exercise of the Liquidation Call Right by Bowater
Holdings, each holder shall be obligated to sell all the Exchangeable
Shares held by the holder to Bowater Holdings on the Liquidation Date
on payment by Bowater Holdings to the holder of the Liquidation Call
Purchase Price for each such share.
(b) To exercise the Liquidation Call Right, Bowater Holdings must notify
Bowater Canada's transfer agent (the "Transfer Agent"), as agent for
the holders of Exchangeable Shares, and Bowater Canada of Bowater
Holdings' intention to exercise such right at least 45 days before the
Liquidation Date in the case of a voluntary liquidation, dissolution or
winding-up of Bowater Canada and at least
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five Business Days before the Liquidation Date in the case of an
involuntary liquidation, dissolution or winding-up of Bowater Canada.
The Transfer Agent will notify the holders of Exchangeable Shares as to
whether or not Bowater Holdings has exercised the Liquidation Call
Right forthwith after the expiry of the period during which the same
may be exercised by Bowater Holdings. If Bowater Holdings exercises the
Liquidation Call Right, then on the Liquidation Date Bowater Holdings
will purchase and the holders will sell all of the Exchangeable Shares
then outstanding for a price per share equal to the Liquidation Call
Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Bowater Holdings shall deposit
with the Transfer Agent, on or before the Liquidation Date,
certificates representing the aggregate number of Bowater Common Shares
deliverable by Bowater Holdings in payment of the total Liquidation
Call Purchase Price and shall waive any rights to receive any dividends
which represent the amount of the remaining portion, if any, of the
total Liquidation Call Purchase Price, less any amounts withheld
pursuant to Section 4.8 hereof. Provided that Bowater Holdings has
complied with the immediately preceding sentence, on and after the
Liquidation Date the rights of each holder of Exchangeable Shares will
be limited to receiving such holder's proportionate part of the total
Liquidation Call Purchase Price payable by Bowater Holdings (which in
the case of unpaid dividends, if any, shall be satisfied by the payment
thereof by Bowater Canada on the payment date for such dividends) upon
presentation and surrender by the holder of certificates representing
the Exchangeable Shares held by such holder and the holder shall on and
after the Liquidation Date be considered and deemed for all purposes to
be the holder of the Bowater Common Shares to which it is entitled.
Upon surrender to the Transfer Agent of a certificate or certificates
representing Exchangeable Shares, together with such other documents
and instruments as may be required to effect a transfer of Exchangeable
Shares under the Act and the by-laws of Bowater Canada and such
additional documents and instruments as the Transfer Agent may
reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the
Transfer Agent on behalf of Bowater Holdings shall deliver to such
holder, certificates representing the Bowater Common Shares to which
the holder is entitled and on the applicable dividend payment date a
cheque or cheques payable at par at any branch of the bankers of
Bowater Canada in Canada in payment of the remaining portion, if any,
of the total Liquidation Call Purchase Price less any amounts withheld
pursuant to Section 4.8 hereof. If Bowater Holdings does not exercise
the Liquidation Call Right in the manner described above, on the
Liquidation Date the holders of the Exchangeable Shares will be
entitled to receive in exchange therefor the liquidation price
otherwise payable by Bowater Canada in connection with the liquidation,
dissolution or winding-up of Bowater Canada pursuant to Article 5 of
the Exchangeable Share Provisions.
5.2 BOWATER HOLDINGS REDEMPTION CALL RIGHT
In addition to Bowater Holdings' rights contained in the Exchangeable Share
Provisions, including, without limitation, the Retraction Call Right (as defined
in the Exchangeable Share Provisions), Bowater Holdings shall have the following
rights in respect of the Exchangeable Shares:
(a) Bowater Holdings shall have the overriding right (the "Redemption Call
Right"), notwithstanding the proposed redemption of the Exchangeable
Shares by Bowater Canada pursuant to Article 7 of the Exchangeable
Share Provisions, to purchase from all but not less than all of the
holders of Exchangeable Shares on the Redemption Date all but not less
than all of the Exchangeable Shares held by each such holder on payment
by Bowater Holdings to the holder of an amount per share equal to (a)
the Current Market Price (as defined in the Exchangeable Share
Provisions) of a Bowater Common Share on the last Business Day prior to
the Redemption Date, which shall be satisfied in full by causing to be
delivered to such holder one Bowater Common Share plus (b) the right to
receive the full amount when paid of all unpaid dividends on such
Exchangeable Share for which the record date has occurred prior to the
Redemption Date (collectively the "Redemption Call Purchase Price"). In
the event of the exercise of the Redemption Call Right by Bowater
Holdings, each holder shall be obligated to sell all the Exchangeable
Shares held by the holder to
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Bowater Holdings on the Redemption Date on payment by Bowater Holdings
to the holder of the Redemption Call Purchase Price for each such
share.
(b) To exercise the Redemption Call Right, Bowater Holdings must notify the
Transfer Agent, as agent for the holders of Exchangeable Shares, and
Bowater Canada of Bowater Holdings' intention to exercise such right at
least 60 days before the Redemption Date, except in the case of a
redemption occurring as a result of an acquisition of Control of
Bowater (as defined in the Exchangeable Share Provisions) in which case
Bowater Holdings shall notify the Transfer Agent and Bowater Canada on
or before the Redemption Date. The Transfer Agent will notify the
holders of the Exchangeable Shares as to whether or not Bowater
Holdings has exercised the Redemption Call Right forthwith after the
expiry of the period during which the same may be exercised by Bowater
Holdings. If Bowater Holdings exercises the Redemption Call Right, on
the Redemption Date Bowater Holdings will purchase and the holders will
sell all of the Exchangeable Shares then outstanding for a price per
share equal to the Redemption Call Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, Bowater Holdings shall deposit
with the Transfer Agent, on or before the Redemption Date, certificates
representing the aggregate number of Bowater Common Shares deliverable
by Bowater Holdings in payment of the total Redemption Call Purchase
Price and shall waive any rights to receive any dividends which
represent the amount of the remaining portion, if any, of the total
Redemption Call Purchase Price less any amounts withheld pursuant to
Section 4.8 hereof. Provided that Bowater Holdings has complied with
the immediate preceding sentence, on and after the Redemption Date the
rights of each holder of Exchangeable Shares will be limited to
receiving such holder's proportionate part of the total Redemption Call
Purchase Price payable by Bowater Holdings (which in case of unpaid
dividends, if any, shall be satisfied by the payment thereof by Bowater
Canada on the payment date for such dividends) upon presentation and
surrender by the holder of certificates representing the Exchangeable
Shares held by such holder and the holder shall on and after the
Redemption Date be considered and deemed for all purposes to be the
holder of the Bowater Common Shares to which it is entitled. Upon
surrender to the Transfer Agent of a certificate or certificates
representing Exchangeable Shares, together with such other documents
and instruments as may be required to effect a transfer of Exchangeable
Shares under the Act and the by-laws of Bowater Canada and such
additional documents and instruments as the Transfer Agent may
reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the
Transfer Agent on behalf of Bowater Holdings shall deliver to such
holder, certificates representing the Bowater Common Shares to which
the holder is entitled and on the applicable dividend payment date a
cheque or cheques payable at par at any branch of the bankers of
Bowater Canada in Canada in payment of the remaining portion, if any,
of the total Redemption Call Purchase Price less any amounts withheld
pursuant to Section 4.8 hereof. If Bowater Holdings does not exercise
the Redemption Call Right in the manner described above, on the
Redemption Date the holders of the Exchangeable Shares will be entitled
to receive in exchange therefor the redemption price otherwise payable
by Bowater Canada in connection with the redemption of the Exchangeable
Shares pursuant to Article 7 of the Exchangeable Share Provisions.
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ARTICLE 6
AMENDMENTS
6.1 AMENDMENTS TO PLAN OF ARRANGEMENT
Avenor reserves the right to amend, modify and/or supplement this Plan of
Arrangement at any time and from time to time, provided that each such
amendment, modification and/or supplement must be (i) set out in writing, (ii)
approved by Bowater, (iii) filed with the Court and, if made following the
Avenor Shareholders' Meeting, approved by the Court, and (iv) communicated to
holders of Avenor Common Shares if and as required by the Court.
Any amendment, modification or supplement to this Plan of Arrangement may
be proposed by Avenor at any time prior to the Avenor Shareholders' Meeting
(provided that Bowater shall have consented thereto) with or without any other
prior notice or communication, and if so proposed and accepted by the Persons
voting at the Avenor Shareholders' Meeting (other than as may be required under
the Interim Order), shall become part of this Plan of Arrangement for all
purposes.
Any amendment, modification or supplement to this Plan of Arrangement that
is approved by the Court following the Avenor Shareholders' Meeting shall be
effective only if (i) it is consented to by each of Avenor and Bowater, and (ii)
if required by the Court, it is consented to by holders of the Avenor Common
Shares voting in the manner directed by the Court.
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EXHIBIT 1
PROVISIONS ATTACHING TO THE
EXCHANGEABLE SHARES
The Exchangeable Shares shall have the following rights, privileges,
restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"AFFILIATE" of any person means any other person directly or
indirectly controlling, controlled by, or under common control with, that
person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as applied to any person, means the possession by another person,
directly or indirectly, of the power to direct or cause the direction of
the management and policies of that first mentioned person, whether through
the ownership of voting securities, by contract or otherwise.
"BOARD OF DIRECTORS" means the board of directors of Bowater Canada.
"BOWATER" means Bowater Incorporated, a corporation existing under the
laws of the State of Delaware, and any successor corporation thereto.
"BOWATER CANADA" means Bowater Canada Inc., a corporation incorporated
under the Canada Business Corporations Act and a subsidiary of Bowater
Holdings.
"BOWATER COMMON SHARES" mean the shares of common stock of Bowater,
US$1.00 par value per share, and any other securities into which such
shares may be changed.
"BOWATER DIVIDEND DECLARATION DATE" means the date on which the Board
of Directors of Bowater declares any dividend on the Bowater Common Shares.
"BOWATER HOLDINGS" means Bowater Canadian Holdings Incorporated, a
corporation incorporated under the Companies Act (Nova Scotia) and a
subsidiary of Bowater.
"BOWATER HOLDINGS CALL NOTICE" has the meaning ascribed thereto in
Section 6.3 of these share provisions.
"BUSINESS DAY" means any day, other than a Saturday, a Sunday and a
statutory holiday in Montreal, Quebec or New York, New York.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed
in a foreign currency (the "Foreign Currency Amount") at any date the
product obtained by multiplying:
(a) the Foreign Currency Amount by,
(b) the noon spot exchange rate on such date for such foreign
currency expressed in Canadian dollars as reported by the Bank of Canada
or, in the event such spot exchange rate is not available, such exchange
rate on such date for such foreign currency expressed in Canadian
dollars as may be deemed by the Board of Directors to be appropriate for
such purpose.
"COMMON SHARES" means the common shares in the capital of Bowater
Canada.
"CONTROL OF BOWATER" means the ownership by one Person or a Person and
its Affiliates of securities carrying a majority of the voting rights
attaching to all outstanding securities of Bowater.
"CURRENT MARKET PRICE" means, in respect of a Bowater Common Share on
any date, the Canadian Dollar Equivalent of the average of the closing
prices of Bowater Common Shares during a period of 20 consecutive trading
days ending not more than three trading days before such date on the New
York Stock Exchange, or, if the Bowater Common Shares are not then quoted
on the New York Stock Exchange, on such other stock exchange or automated
quotation system on which the Bowater Common Shares are listed or quoted,
as the case may be, as may be selected by the Board of Directors for such
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purpose; provided, however, that if in the opinion of the Board of
Directors the public distribution or trading activity of Bowater Common
Shares during such period does not create a market which reflects the fair
market value of a Bowater Common Share, then the Current Market Price of a
Bowater Common Share shall be determined by the Board of Directors based
upon the advice of such qualified independent financial advisors as the
Board of Directors may deem to be appropriate, and provided further that
any such selection, opinion or determination by the Board of Directors
shall be conclusive and binding.
"EXCHANGEABLE SHARES" mean the non-voting exchangeable shares in the
capital of Bowater Canada having the rights, privileges, restrictions and
conditions set forth herein.
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in Section 5.1
of these share provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"LIQUIDATION DATE" has the meaning ascribed thereto in Section 5.1 of
these share provisions.
"PERSON" includes any individual, firm, partnership, joint venture,
venture capital fund, association, trust, trustee, executor, administrator,
legal personal representative, estate, group, body corporate, corporation,
unincorporated association or organization, government body, syndicate or
other entity, whether or not having legal status.
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of Avenor Inc. under section 192 of the Canada Business
Corporations Act, to which plan these share provisions are attached.
"PREFERRED SHARES" means the non-voting preferred shares in the
capital of Bowater Canada.
"PURCHASE PRICE" has the meaning ascribed thereto in Section 6.3 of
these share provisions.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
the Plan of Arrangement.
"REDEMPTION DATE" means the date, if any, established by the Board of
Directors for the redemption by Bowater Canada of Exchangeable Shares
pursuant to Article 7 of these share provisions, which date shall be no
earlier than June 30, 2008, unless:
(a) there are fewer than 500,000 Exchangeable Shares outstanding
(other than Exchangeable Shares held by Bowater and its
Affiliates), as such number of shares may be adjusted as deemed
appropriate by the Board of Directors to give effect to any
subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issue or distribution of rights to
acquire Exchangeable Shares or securities exchangeable for or
convertible into Exchangeable Shares, any issue or distribution
of other securities or rights or evidences of indebtedness or
assets, or any other capital reorganization or other
transaction affecting the Exchangeable Shares; or
(b) a transaction is proposed that will result in Control of
Bowater being acquired by any Person, in which case (in the
event that the Board of Directors elects to redeem the
Exchangeable Shares) the Redemption Date will be the date
immediately prior to the date the acquisition of Control of
Bowater occurs pursuant to such transaction.
"REDEMPTION PRICE" has the meaning ascribed thereto in Section 7.1 of
these share provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in Section 6.1 of
these share provisions.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in Section
6.1 of these share provisions.
"RETRACTION DATE" has the meaning ascribed thereto in Section 6.1(b)
of these share provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in Section 6.1 of
these share provisions.
"RETRACTION REQUEST" has the meaning ascribed thereto in Section 6.1
of these share provisions.
"SUPPORT AGREEMENT" means the Support Agreement to be entered into
between Bowater, Bowater Holdings and Bowater Canada.
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"TRANSFER AGENT" means the Montreal Trust Company of Canada or such
other person as may from time to time be appointed by Bowater Canada as the
registrar and transfer agent for the Exchangeable Shares.
"TRUSTEE" means Montreal Trust Company of Canada, the trustee under
the Voting and Exchange Trust Agreement, a corporation organized and
existing under the laws of Canada and authorized to carry on the business
of a trust company in all the provinces of Canada, and any successor
trustee appointed under the Voting and Exchange Trust Agreement.
"VOTING AND EXCHANGE TRUST AGREEMENT" means the Voting and Exchange
Trust Agreement to be entered into between Bowater, Bowater Holdings,
Bowater Canada and the Trustee.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the
Common Shares, the Preferred Shares and any other shares ranking junior to the
Exchangeable Shares with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of Bowater Canada, whether voluntary or involuntary, or any other
distribution of the assets of Bowater Canada among its shareholders for the
purpose of winding up its affairs.
ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Bowater Dividend
Declaration Date, declare a dividend on each Exchangeable Share:
(a) in the case of a cash dividend declared on the Bowater Common
Shares, in an amount in cash for each Exchangeable Share in U.S. dollars or
the Canadian Dollar Equivalent thereof on the Bowater Dividend Declaration
Date of the cash dividend declared on each Bowater Common Share;
(b) in the case of a stock dividend declared on the Bowater Common
Shares to be paid in Bowater Common Shares, in such number of Exchangeable
Shares for each Exchangeable Share as is equal to the number of Bowater
Common Shares to be paid on each Bowater Common Share; or
(c) in the case of a dividend declared on the Bowater Common Shares in
property other than cash or Bowater Common Shares, in such type and amount
of property for each Exchangeable Share as is the same as or economically
equivalent to (to be determined by the Board of Directors as contemplated
by Section 3.5 hereof) the type and amount of property declared as a
dividend on each Bowater Common Share.
Such dividends shall be paid out of money, assets or property of Bowater Canada
properly applicable to the payment of dividends, or out of authorized but
unissued shares of Bowater Canada, as applicable.
3.2 Cheques of Bowater Canada payable at par at any branch of the bankers
of Bowater Canada shall be issued in respect of any cash dividends contemplated
by Section 3.1(a) hereof and the sending of such a cheque to each holder of an
Exchangeable Share shall satisfy the cash dividend represented thereby unless
the cheque is not paid on presentation. Certificates registered in the name of
the registered holder of Exchangeable Shares shall be issued or transferred in
respect of any stock dividends contemplated by Section 3.1(b) hereof and the
sending of such a certificate to each holder of an Exchangeable Share shall
satisfy the stock dividend represented thereby. Such other type and amount of
property in respect of any dividends contemplated by Section 3.1(c) hereof shall
be issued, distributed or transferred by Bowater Canada in such manner as it
shall determine and the issuance, distribution or transfer thereof by Bowater
Canada to each holder of an Exchangeable Share shall satisfy the dividend
represented thereby. No holder of an Exchangeable Share shall be entitled to
recover by action or other legal process against Bowater Canada any dividend
that is represented by a cheque that has not been duly presented to Bowater
Canada's bankers for
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payment or that otherwise remains unclaimed for a period of six years from the
date on which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Exchangeable Shares under Section 3.1 hereof shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend declared on the Bowater Common Shares.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all of the
Exchangeable Shares then outstanding, any such dividends that remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which Bowater Canada shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends.
3.5 The Board of Directors shall determine, in good faith and in its sole
discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the Board of Directors may require),
economic equivalence for the purposes of Section 3.1(c) hereof, and each such
determination shall be conclusive and binding on Bowater Canada and its
shareholders. In making each such determination, the following factors shall,
without excluding other factors determined by the Board of Directors to be
relevant, be considered by the Board of Directors:
(a) in the case of any stock dividend or other distribution payable in
Bowater Common Shares, the number of such shares issued in proportion to
the number of Bowater Common Shares previously outstanding;
(b) in the case of the issuance or distribution of any rights, options
or warrants to subscribe for or purchase Bowater Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Bowater Common Shares), the relationship between the exercise price
of each such right, option or warrant and the current market value (as
determined by the Board of Directors in the manner above contemplated) of a
Bowater Common Share;
(c) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of Bowater
of any class other than Bowater Common Shares, any rights, options or
warrants other than those referred to in Section 3.5(b) above, any
evidences of indebtedness of Bowater or any assets of Bowater), the
relationship between the fair market value (as determined by the Board of
Directors in the manner above contemplated) of such property to be issued
or distributed with respect to each outstanding Bowater Common Share and
the current market value (as determined by the Board of Directors in the
manner above contemplated) of a Bowater Common Share; and
(d) in all such cases, the general taxation consequences of the
relevant event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of
Bowater Common Shares as a result of differences between taxation laws of
Canada and the United States (except for any differing consequences arising
as a result of differing marginal taxation rates and without regard to the
individual circumstances of holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of
any security listed and traded or quoted on a securities exchange shall be the
weighted average of the daily trading prices of such security during a period of
not less than 20 consecutive trading days ending not more than five trading days
before the date of determination on the principal securities exchange on which
such securities are listed and traded or quoted; provided, however, that if in
the opinion of the Board of Directors the public distribution or trading
activity of such securities during such period does not create a market which
reflects the fair market value of such securities, then the current market value
thereof shall be determined by the Board of Directors, in good faith and in its
sole discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the board may require), and provided
further that any such determination by the Board of Directors shall be
conclusive and binding on Bowater Canada and its shareholders.
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ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, Bowater
Canada shall not at any time without, but may at any time with, the approval of
the holders of the Exchangeable Shares given as specified in Section 10.2 of
these share provisions:
(a) pay any dividends on the Common Shares, the Preferred Shares or
any other shares ranking junior to the Exchangeable Shares, other than
stock dividends payable in Common Shares or any such other shares ranking
junior to the Exchangeable Shares, as the case may be;
(b) redeem or purchase or make any capital distribution in respect of
Common Shares, Preferred Shares or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of Bowater Canada ranking
equally with the Exchangeable Shares with respect to the payment of
dividends or on any liquidation distribution; or
(d) issue any Exchangeable Shares or any other shares of Bowater
Canada ranking equally with, or superior to, the Exchangeable Shares other
than by way of stock dividends to the holders of such Exchangeable Shares.
The restrictions in Sections 4.1(a), 4.1(b), 4.1(c) and 4.1(d) above shall
not apply if all dividends on the outstanding Exchangeable Shares corresponding
to dividends declared and paid to date on the Bowater Common Shares shall have
been declared and paid in full on the Exchangeable Shares.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of Bowater
Canada or any other distribution of the assets of Bowater Canada among its
shareholders for the purpose of winding up its affairs, a holder of Exchangeable
Shares shall be entitled, subject to applicable law, to receive from the assets
of Bowater Canada in respect of each Exchangeable Share held by such holder on
the effective date (the "Liquidation Date") of such liquidation, dissolution or
winding-up, before any distribution of any part of the assets of Bowater Canada
among the holders of the Common Shares, the Preferred Shares or any other shares
ranking junior to the Exchangeable Shares, an amount per share (the "Liquidation
Amount") equal to:
(a) the Current Market Price of a Bowater Common Share on the last
Business Day prior to the Liquidation Date, which shall be satisfied in
full by Bowater Canada causing to be delivered to such holder one Bowater
Common Share; plus
(b) the right to receive the full amount when paid of all unpaid
dividends on each such Exchangeable Share for which the record date has
occurred prior to the Liquidation Date.
5.2 On or promptly after the Liquidation Date, and subject to the exercise
by Bowater Holdings of the Liquidation Call Right, Bowater Canada shall cause to
be delivered to the holders of the Exchangeable Shares the Liquidation Amount
for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Canada Business Corporations Act and the by-laws
of Bowater Canada and such additional documents and instruments as the Transfer
Agent may reasonably require, at the registered office of Bowater Canada or at
any office of the Transfer Agent as may be specified by Bowater Canada by notice
to the holders of the Exchangeable Shares. Payment of the total Liquidation
Amount for such Exchangeable Shares shall be made by delivery to each holder, at
the address of the holder recorded in the securities register of Bowater Canada
for the Exchangeable Shares or by holding for pick-up by the holder at the
registered office of Bowater Canada or at any office of the Transfer Agent as
may be specified by Bowater Canada by notice to the holders of Exchangeable
Shares, on behalf of Bowater Canada of certificates representing Bowater Common
Shares (which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim or encumbrance) and on the applicable
dividend payment date a cheque of Bowater Canada payable at par at any branch of
the bankers of Bowater
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Canada in respect of the full amount of any unpaid dividends comprising part of
the total Liquidation Amount (in each case less any amounts withheld on account
of tax required to be deducted and withheld therefrom by Bowater Canada). On and
after the Liquidation Date, the holders of the Exchangeable Shares shall cease
to be holders of such Exchangeable Shares and shall not be entitled to exercise
any of the rights of holders in respect thereof, other than the right to receive
their proportionate part of the total Liquidation Amount, unless payment of the
total Liquidation Amount for such Exchangeable Shares shall not be made upon
presentation and surrender of share certificates in accordance with the
foregoing provisions, in which case the rights of the holders shall remain
unaffected until the total Liquidation Amount has been paid in the manner
hereinbefore provided. Bowater Canada shall have the right at any time after the
Liquidation Date to deposit or cause to be deposited the total Liquidation
Amount in respect of the Exchangeable Shares represented by certificates that
have not at the Liquidation Date been surrendered by the holders thereof in a
custodial account with any chartered bank or trust company in Canada. Upon such
deposit being made, the rights of the holders of Exchangeable Shares after such
deposit shall be limited to receiving their proportionate part of the total
Liquidation Amount (in each case less any amounts withheld on account of tax
required to be deducted and withheld therefrom) for such Exchangeable Shares so
deposited, against presentation and surrender of the said certificates held by
them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Liquidation Amount, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be holders of the Bowater Common Shares delivered to them or the custodian on
their behalf.
5.3 After Bowater Canada has satisfied its obligations to pay the holders
of the Exchangeable Shares the Liquidation Amount per Exchangeable Share
pursuant to Section 5.1 of these share provisions, such holders shall not be
entitled to share in any further distribution of the assets of Bowater Canada.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject
to the exercise by Bowater Holdings of the Retraction Call Right and otherwise
upon compliance with the provisions of this Article 6, to require Bowater Canada
to redeem any or all of the Exchangeable Shares registered in the name of such
holder for an amount per share equal to (a) the Current Market Price of a
Bowater Common Share on the last Business Day prior to the Retraction Date,
which shall be satisfied in full by Bowater Canada causing to be delivered to
such holder one Bowater Common Share for each Exchangeable Share presented and
surrendered by the holder, plus (b) the right to receive the full amount when
paid of all unpaid dividends thereon for which the record date for such
dividends has occurred prior to the Retraction Date (collectively the
"Retraction Price"). To effect such redemption, the holder shall present and
surrender at the registered office of Bowater Canada or at any office of the
Transfer Agent as may be specified by Bowater Canada by notice to the holders of
Exchangeable Shares the certificate or certificates representing the
Exchangeable Shares which the holder desires to have Bowater Canada redeem,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the Canada Business Corporations Act and
the by-laws of Bowater Canada and such additional documents and instruments as
the Transfer Agent may reasonably require, and together with a duly executed
statement (the "Retraction Request") in the form of Schedule A hereto or in such
other form as may be acceptable to Bowater Canada:
(a) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by Bowater
Canada;
(b) stating the Business Day on which the holder desires to have
Bowater Canada redeem the Retracted Shares (the "Retraction Date"),
provided that the Retraction Date shall be not less than 10 Business Days
nor more than 15 Business Days after the date on which the Retraction
Request is received by Bowater Canada and further provided that, in the
event that no such Business Day is specified by the holder in the
Retraction Request, the Retraction Date shall be deemed to be the fifteenth
Business Day after the date on which the Retraction Request is received by
Bowater Canada; and
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(c) acknowledging the overriding right (the "Retraction Call Right")
of Bowater Holdings to purchase all but not less than all the Retracted
Shares directly from the holder and that the Retraction Request shall be
deemed to be a revocable offer by the holder to sell the Retracted Shares
to Bowater Holdings in accordance with the Retraction Call Right on the
terms and conditions set out in Section 6.3 below.
6.2 Subject to the exercise by Bowater Holdings of the Retraction Call
Right, upon receipt by Bowater Canada or the Transfer Agent in the manner
specified in Section 6.1 hereof of a certificate or certificates representing
the number of Exchangeable Shares which the holder desires to have Bowater
Canada redeem, together with a Retraction Request, and provided that the
Retraction Request is not revoked by the holder in the manner specified in
Section 6.7, Bowater Canada shall redeem the Retracted Shares effective at the
close of business on the Retraction Date and shall cause to be delivered to such
holder the total Retraction Price with respect to such shares (provided that any
unpaid dividends forming part of the Retraction Price shall be paid on the
payment date for such dividends). If only a part of the Exchangeable Shares
represented by any certificate is redeemed (or purchased by Bowater Holdings
pursuant to the Retraction Call Right), a new certificate for the balance of
such Exchangeable Shares shall be issued to the holder at the expense of Bowater
Canada.
6.3 Upon receipt by Bowater Canada of a Retraction Request, Bowater Canada
shall immediately notify Bowater and Bowater Holdings thereof. In order to
exercise the Retraction Call Right, Bowater Holdings must notify Bowater Canada
of its determination to do so (the "Bowater Holdings Call Notice") within five
Business Days of notification to Bowater Holdings by Bowater Canada of the
receipt by Bowater Canada of the Retraction Request. If Bowater Holdings
delivers the Bowater Holdings Call Notice within such five Business Day time
period, and provided that the Retraction Request is not revoked by the holder in
the manner specified in Section 6.7, the Retraction Request shall thereupon be
considered only to be an offer by the holder to sell the Retracted Shares to
Bowater Holdings in accordance with the Retraction Call Right. In such event,
Bowater Canada shall not redeem the Retracted Shares and Bowater Holdings shall
purchase from such holder and such holder shall sell to Bowater Holdings on the
Retraction Date the Retracted Shares for a purchase price (the "Purchase Price")
per share equal to the Retraction Price per share. For the purposes of
completing a purchase pursuant to the Retraction Call Right, Bowater Holdings
shall deposit with the Transfer Agent, on or before the Retraction Date,
certificates representing Bowater Common Shares and shall waive any rights to
receive any dividends which represent the amount of the remaining portion, if
any, of the total Purchase Price (in each case less any amounts withheld on
account of tax required to be deducted and withheld therefrom by Bowater
Holdings). Provided that Bowater Holdings has complied with the immediately
preceding sentence, the closing of the purchase and sale of the Retracted Shares
pursuant to the Retraction Call Right shall be deemed to have occurred as at the
close of business on the Retraction Date and, for greater certainty, no
redemption by Bowater Canada of such Retracted Shares shall take place on the
Retraction Date. In the event that Bowater Holdings does not deliver a Bowater
Holdings Call Notice within such five Business Day period, and provided that the
Retraction Request is not revoked by the holder in the manner specified in
Section 6.7, Bowater Canada shall redeem the Retracted Shares on the Retraction
Date and in the manner otherwise contemplated in this Article 6.
6.4 Bowater Canada or Bowater Holdings, as the case may be, shall deliver
or cause the Transfer Agent to deliver to the relevant holder, at the address of
the holder recorded in the securities register of Bowater Canada for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick-up by the holder at the registered office of
Bowater Canada or at any office of the Transfer Agent as may be specified by
Bowater Canada by notice to the holders of Exchangeable Shares, certificates
representing the Bowater Common Shares (which shares shall be duly issued as
fully paid and non-assessable and shall be free and clear of any lien, claim or
encumbrance) registered in the name of the holder or in such other name as the
holder may request in payment of the total Retraction Price or the total
Purchase Price, as the case may be, and on the applicable dividend payment date
a cheque payable at par at any branch of the bankers of Bowater Canada in
payment of the remaining portion, if any, of the total Retraction Price or the
total Purchase Price, as the case may be (in each case less any amounts withheld
on account of tax required to be deducted and withheld therefrom), and such
delivery of such certificates and cheque on behalf of Bowater Canada or by
Bowater Holdings, as the case may be, or by the Transfer Agent shall be deemed
to be payment
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of and shall satisfy and discharge all liability for the total Retraction Price
or total Purchase Price, as the case may be, to the extent that the same is
represented by such share certificates and cheque (plus any tax deducted and
withheld therefrom and remitted to the proper tax authority), unless such cheque
is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the total
Retraction Price or total Purchase Price, as the case may be, unless upon
presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price or the total Purchase Price,
as the case may be, shall not be made as provided in Section 6.4, in which case
the rights of such holder shall remain unaffected until the total Retraction
Price or the total Purchase Price, as the case may be, has been paid in the
manner hereinbefore provided. On and after the close of business on the
Retraction Date, provided that presentation and surrender of certificates and
payment of the total Retraction Price or the total Purchase Price, as the case
may be, has been made in accordance with the foregoing provisions, the holder of
the Retracted Shares so redeemed by Bowater Canada or purchased by Bowater
Holdings shall thereafter be considered and deemed for all purposes to be a
holder of the Bowater Common Shares delivered to it.
6.6 Notwithstanding any other provision of this Article 6, Bowater Canada
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to solvency requirements or other provisions of applicable law. If
Bowater Canada believes that on any Retraction Date it would not be permitted by
any of such provisions to redeem the Retracted Shares tendered for redemption on
such date, and provided that Bowater Holdings shall not have exercised the
Retraction Call Right with respect to the Retracted Shares, Bowater Canada shall
only be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent of the maximum number that may be so redeemed
(rounded down to a whole number of shares) as would not be contrary to such
provisions and shall notify the holder at least two Business Days prior to the
Retraction Date as to the number of Retracted Shares which will not be redeemed
by Bowater Canada. In any case in which the redemption by Bowater Canada of
Retracted Shares would be contrary to solvency requirements or other provisions
of applicable law, Bowater Canada shall redeem Retracted Shares in accordance
with Section 6.2 of these share provisions on a pro rata basis and shall issue
to each holder of Retracted Shares a new certificate, at the expense of Bowater
Canada, representing the Retracted Shares not redeemed by Bowater Canada
pursuant to Section 6.2 hereof. Provided that the Retraction Request is not
revoked by the holder in the manner specified in Section 6.7, the holder of any
such Retracted Shares not redeemed by Bowater Canada pursuant to Section 6.2 of
these share provisions as a result of solvency requirements of applicable law
shall be deemed by giving the Retraction Request to require Bowater to purchase
such Retracted Shares from such holder on the Retraction Date or as soon as
practicable thereafter on payment by Bowater to such holder of the Purchase
Price for each such Retracted Share, all as more specifically provided in the
Voting and Exchange Trust Agreement.
6.7 A holder of Retracted Shares may, by notice in writing given by the
holder to Bowater Canada before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request, in
which event such Retraction Request shall be null and void and, for greater
certainty, the revocable offer constituted by the Retraction Request to sell the
Retracted Shares to Bowater Holdings shall be deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY BOWATER CANADA
7.1 Subject to applicable law, and provided Bowater Holdings has not
exercised the Redemption Call Right, Bowater Canada shall on the Redemption Date
redeem the whole of the then outstanding Exchangeable Shares for an amount per
share equal to (a) the Current Market Price of a Bowater Common Share on the
last Business Day prior to the Redemption Date, which shall be satisfied in full
by Bowater Canada causing to be delivered to each holder of Exchangeable Shares
one Bowater Common Share for each Exchangeable Share held by such holder, plus
(b) the right to receive the full amount when paid of all unpaid dividends
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thereon for which the record date has occurred prior to the Redemption Date
(collectively, the "Redemption Price").
7.2 In any case of a redemption of Exchangeable Shares under this Article
7, Bowater Canada shall, at least 60 days before the Redemption Date, send or
cause to be sent to each holder of Exchangeable Shares a notice in writing of
the redemption by Bowater Canada or the purchase by Bowater Holdings under the
Redemption Call Right, as the case may be, of the Exchangeable Shares held by
such holder; provided, however, that in the event of a redemption of the
Exchangeable Shares at the election of the Board of Directors (or a purchase by
Bowater Holdings as a result thereof) upon a transaction being proposed that
would result in Control of Bowater being acquired by any Person, Bowater Canada
shall cause such notice to be sent at least the number of days prior to the
Redemption Date established by the Board of Directors as the Board of Directors
determines to be reasonably practicable under the circumstances; provided
further, however, that in each case the accidental failure or omission to give
such notice to fewer than 10% of the holders of the Exchangeable Shares shall
not affect the validity of such notice of redemption. In either case, such
notice shall set out the formula for determining the Redemption Price or the
Redemption Call Purchase Price, as the case may be, the Redemption Date and, if
applicable, particulars of the Redemption Call Right.
7.3 On or after the Redemption Date and subject to the exercise by Bowater
Holdings of the Redemption Call Right, Bowater Canada shall cause to be
delivered to the holders of the Exchangeable Shares to be redeemed the
Redemption Price for each such Exchangeable Share upon presentation and
surrender at the registered office of Bowater Canada or at any office of the
Transfer Agent as may be specified by Bowater Canada in such notice of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Canada Business Corporations Act and the by-laws
of Bowater Canada and such additional documents and instruments as the Transfer
Agent may reasonably require. Payment of the total Redemption Price for such
Exchangeable Shares shall be made by delivery to each holder, at the address of
the holder recorded in the securities register of Bowater Canada or by holding
for pick-up by the holder at the registered office of Bowater Canada or at any
office of the Transfer Agent as may be specified by Bowater Canada in such
notice, on behalf of Bowater Canada of certificates representing Bowater Common
Shares (which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim or encumbrance) and on the applicable
dividend payment date a cheque of Bowater Canada payable at par at any branch of
the bankers of Bowater Canada in respect of the full amount of any unpaid
dividends comprising part of the total Redemption Price (in each case less any
amounts withheld on account of tax required to be withheld and remitted
therefrom by Bowater Canada). On and after the Redemption Date, the holders of
the Exchangeable Shares called for redemption shall cease to be holders of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of
holders in respect thereof, other than the right to receive their proportionate
part of the total Redemption Price, unless payment of the total Redemption Price
for such Exchangeable Shares shall not be made upon presentation and surrender
of certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Redemption Price
has been paid in the manner hereinbefore provided. Bowater Canada shall have the
right at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the total
Redemption Price of the Exchangeable Shares so called for redemption, or of such
of the said Exchangeable Shares represented by certificates that have not at the
date of such deposit been surrendered by the holders thereof in connection with
such redemption, in a custodial account with any chartered bank or trust company
in Canada named in such notice (less any amounts withheld on account of tax
required to be withheld and remitted therefrom by Bowater Canada). Upon the
later of such deposit being made and the Redemption Date, the Exchangeable
Shares in respect whereof such deposit shall have been made shall be redeemed
and the rights of the holders thereof after such deposit or Redemption Date, as
the case may be, shall be limited to receiving their proportionate part of the
total Redemption Price for such Exchangeable Shares so deposited, against
presentation and surrender of the said certificates held by them, respectively,
in accordance with the foregoing provisions. Upon such payment or deposit of the
total Redemption Price, the holders of the Exchangeable Shares shall thereafter
be considered and deemed for all purposes to be holders of the Bowater Common
Shares delivered to them or the custodian on their behalf.
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ARTICLE 8
PURCHASE FOR CANCELLATION
8.1 Subject to applicable law and the articles of Bowater Canada, Bowater
Canada may at any time and from time to time purchase for cancellation all or
any part of the outstanding Exchangeable Shares at any price by tender to all
the holders of record of Exchangeable Shares then outstanding or through the
facilities of any stock exchange on which the Exchangeable Shares are listed or
quoted at any price per share together with an amount equal to all declared and
unpaid dividends thereon for which the record date has occurred prior to the
date of purchase. If in response to an invitation for tenders under the
provisions of this Section 8.1, more Exchangeable Shares are tendered at a price
or prices acceptable to Bowater Canada than Bowater Canada is prepared to
purchase, the Exchangeable Shares to be purchased by Bowater Canada shall be
purchased as nearly as may be pro rata according to the number of shares
tendered by each holder who submits a tender to Bowater Canada, provided that
when shares are tendered at different prices, the pro rating shall be effected
(disregarding fractions) only with respect to the shares tendered at the price
at which more shares were tendered than Bowater Canada is prepared to purchase
after Bowater Canada has purchased all the shares tendered at lower prices. If
part only of the Exchangeable Shares represented by any certificate shall be
purchased, a new certificate for the balance of such shares shall be issued at
the expense of Bowater Canada.
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law, the holders of the Exchangeable
Shares shall not be entitled as such to receive notice of or to attend any
meeting of the shareholders of Bowater Canada or to vote at any such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the holders of the Exchangeable Shares given as hereinafter
specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add
to, change or remove any right, privilege, restriction or condition attaching to
the Exchangeable Shares or any other matter requiring the approval or consent of
the holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than two-thirds of the votes cast on such resolution at a meeting of
holders of Exchangeable Shares duly called and held at which the holders of at
least 25% of the outstanding Exchangeable Shares at that time are present or
represented by proxy; provided that if at any such meeting the holders of at
least 25% of the outstanding Exchangeable Shares at that time are not present or
represented by proxy within one-half hour after the time appointed for such
meeting then the meeting shall be adjourned to such date not less than five days
thereafter and to such time and place as may be designated by the Chairman of
such meeting. At such adjourned meeting the holders of Exchangeable Shares
present or represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution at such
meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares.
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ARTICLE 11
RECIPROCAL CHANGES, ETC.
IN RESPECT OF BOWATER COMMON SHARES
11.1 Each holder of an Exchangeable Share acknowledges that the Support
Agreement provides, in part, that Bowater will not without the prior approval of
Bowater Canada and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 10.2 of these share provisions:
(a) issue or distribute Bowater Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Bowater
Common Shares) to the holders of all or substantially all of the then
outstanding Bowater Common Shares by way of stock dividend or other
distribution, other than an issue of Bowater Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Bowater
Common Shares) to holders of Bowater Common Shares who exercise an option
to receive dividends in Bowater Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Bowater Common
Shares) in lieu of receiving cash dividends;
(b) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Bowater Common Shares
entitling them to subscribe for or to purchase Bowater Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Bowater Common Shares);
(c) issue or distribute to the holders of all or substantially all of
the then outstanding Bowater Common Shares:
(i) shares or securities of Bowater of any class other than Bowater
Common Shares (other than shares convertible into or exchangeable for or
carrying rights to acquire Bowater Common Shares);
(ii) rights, options or warrants other than those referred to in
Section 11.1(b) above;
(iii) evidences of indebtedness of Bowater; or
(iv) assets of Bowater,
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares.
11.2 Each holder of an Exchangeable Share acknowledges that the Support
Agreement further provides, in part, that Bowater will not without the prior
approval of Bowater Canada and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 10.2 of these share
provisions:
(i) subdivide, redivide or change the then outstanding Bowater Common
Shares into a greater number of Bowater Common Shares;
(ii) reduce, combine, consolidate or change the then outstanding
Bowater Common Shares into a lesser number of Bowater Common Shares; or
(iii) reclassify or otherwise change the Bowater Common Shares or
effect an amalgamation, merger, reorganization or other transaction
affecting the Bowater Common Shares,
unless the same or an economically equivalent change shall simultaneously be
made to, or in, the rights of the holders of the Exchangeable Shares. The
Support Agreement further provides, in part, that the aforesaid provisions of
the Support Agreement shall not be changed without the approval of the holders
of the Exchangeable Shares given in accordance with Section 10.2 of these share
provisions.
ARTICLE 12
ACTIONS BY BOWATER CANADA UNDER SUPPORT AGREEMENT
12.1 Bowater Canada will take all such actions and do all such things as
shall be necessary or advisable to perform and comply with and to ensure
performance and compliance by Bowater, Bowater Holdings and Bowater Canada with
all provisions of the Support Agreement applicable to Bowater, Bowater Holdings
and Bowater Canada, respectively, in accordance with the terms thereof
including, without limitation, taking all
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such actions and doing all such things as shall be necessary or advisable to
enforce to the fullest extent possible for the direct benefit of Bowater Canada
all rights and benefits in favour of Bowater Canada under or pursuant to such
agreement.
12.2 Bowater Canada shall not propose, agree to or otherwise give effect to
any amendment to, or waiver or forgiveness of its rights or obligations under,
the Support Agreement without the approval of the holders of the Exchangeable
Shares given in accordance with Section 10.2 of these share provisions other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of Bowater Canada or the holders of the
Exchangeable Shares thereunder;
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or
questions arising thereunder which, in the opinion of the Board of
Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on
the advice of counsel to Bowater Canada, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein, provided
that the Board of Directors shall be of the opinion, after consultation
with counsel, that such changes or corrections will not be prejudicial to
the interests of the holders of the Exchangeable Shares.
ARTICLE 13
LEGEND
13.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions of the Plan of
Arrangement relating to the Liquidation Call Right and the Redemption Call
Right, and the Voting and Exchange Trust Agreement (including the provisions
with respect to the voting rights, exchange right and automatic exchange
thereunder).
ARTICLE 14
NOTICES
14.1 Any notice, request or other communication to be given to Bowater
Canada by a holder of Exchangeable Shares shall be in writing and shall be valid
and effective if given by mail (postage prepaid) or by telecopy or by delivery
to the Transfer Agent, with a copy addressed to the Secretary of Bowater Canada
and addressed to the attention of the President of Bowater Canada. Any such
notice, request or other communication, if given by mail, telecopy or delivery,
shall only be deemed to have been given and received upon actual receipt thereof
by the Transfer Agent and Bowater Canada.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to
Bowater Canada or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of Bowater
Canada or the retraction or redemption of Exchangeable Shares shall be made by
registered mail (postage prepaid) or by delivery to the registered office of
Bowater Canada or to such office of the Transfer Agent as may be specified by
Bowater Canada, in each case addressed to the attention of the President of
Bowater Canada. Any such presentation and surrender of certificates shall only
be deemed to have been made and to be effective upon actual receipt thereof by
Bowater Canada or the Transfer Agent, as the case may be. Any such presentation
and surrender of certificates made by registered mail shall be at the sole risk
of the holder mailing the same.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of Bowater Canada shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of Bowater
Canada or, in the event of the address of any such holder not being so recorded,
then at the last known address of such
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holder. Any such notice, request or other communication, if given by mail, shall
be deemed to have been given and received on the third Business Day following
the date of mailing and, if given by delivery, shall be deemed to have been
given and received on the date of delivery. Accidental failure or omission to
give any notice, request or other communication to one or more holders of
Exchangeable Shares shall not invalidate or otherwise alter or affect any action
or proceeding to be taken by Bowater Canada pursuant thereto.
ARTICLE 15
SPECIFIED AMOUNT
15.1 For the purposes of subsection 191(4) of the Income Tax Act (Canada),
the specified amount in respect of an Exchangeable Share is C$ [A NUMBER
EQUAL TO C$35 DIVIDED BY THE EXCHANGE RATIO WILL BE INSERTED PRIOR TO THE FILING
OF ARTICLES OF BOWATER CANADA PROVIDING FOR THESE SHARE PROVISIONS].
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SCHEDULE A
NOTICE OF RETRACTION
To Bowater Canada Inc. ("Bowater Canada") and Bowater Canadian Holdings
Incorporated ("Bowater Holdings") and Bowater Incorporated ("Bowater").
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the Exchangeable Share(s) of Bowater Canada
represented by this certificate and all capitalized words and expressions used
in this notice that are defined in the Share Provisions have the meanings
ascribed to such words and expressions in such Share Provisions.
The undersigned hereby notifies Bowater Canada that, subject to the
Retraction Call Right referred to below, the undersigned desires to have Bowater
Canada redeem in accordance with Article 6 of the Share Provisions:
[ ] all share(s) represented by this certificate; or
[ ] ________ share(s) only.
The undersigned hereby notifies Bowater Canada that the Retraction Date
shall be ____________ .
NOTE: The Retraction Date must be a Business Day and must not be less than 10
Business Days nor more than 15 Business Days after the date upon which
this notice is received by Bowater Canada. In the event that no such
Business Day is specified above, the Retraction Date shall be deemed to be
the 15th Business Day after the date on which this notice is received by
Bowater Canada.
The undersigned acknowledges the Retraction Call Right of Bowater Holdings
to purchase all but not less than all the Retracted Shares from the undersigned
and that this notice shall be deemed to be a revocable offer by the undersigned
to sell the Retractable Shares to Bowater Holdings in accordance with the
Retraction Call Right on the Retraction Date for the Purchase Price and on the
other terms and conditions set out in Section 6.3 of the Share Provisions. This
notice of retraction, and the offer to sell the Retracted Shares to Bowater
Holdings, may be revoked and withdrawn by the undersigned only by notice in
writing given to Bowater Canada at any time before the close of business on the
Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency provisions of
applicable law, Bowater Canada is unable to redeem all Retracted Shares, the
undersigned will be deemed to have exercised the Exchange Right (as defined in
the Voting and Exchange Trust Agreement) so as to require Bowater to purchase
the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to Bowater, Bowater Canada
and Bowater Holdings that the undersigned:
[ ] is
(select one)
[ ] is not
a non-resident of Canada for purposes of the Income Tax Act (Canada). THE
UNDERSIGNED ACKNOWLEDGES THAT IN THE ABSENCE OF AN INDICATION THAT THE
UNDERSIGNED IS NOT A NON-RESIDENT OF CANADA, WITHHOLDING ON ACCOUNT OF CANADIAN
TAX WILL BE MADE FROM AMOUNTS PAYABLE TO THE UNDERSIGNED ON THE REDEMPTION OR
PURCHASE OF THE RETRACTED SHARES.
The undersigned hereby represents and warrants to Bowater, Bowater Canada
and Bowater Holdings that the undersigned has good title to, and owns, the
share(s) represented by this certificate to be acquired by Bowater, Bowater
Canada or Bowater Holdings, as the case may be, free and clear of all liens,
claims and encumbrances.
<TABLE>
<S> <C> <C>
- --------------------- ----------------------------------- -----------------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
</TABLE>
[ ] Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for pick-up
by the shareholder by the Transfer Agent, failing which the
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securities and any cheque(s) will be mailed to the last address of the
shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent may require, must be deposited
with the Transfer Agent. The securities and any cheque(s) resulting from
the retraction or purchase of the Retracted Shares will be issued and
registered in, and made payable to, respectively, the name of the
shareholder as it appears on the register of Bowater Canada and the
securities and any cheque(s) resulting from such retraction or purchase
will be delivered to such shareholder as indicated above, unless the form
appearing immediately below is duly completed.
<TABLE>
<S> <C>
Date -------------------------------------
- ------------------------------------------------------
Name of Person in Whose Name Securities or Cheque(s)
Are to be Registered, Issued or Delivered (please
print)
- ------------------------------------------------------ ---------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- ------------------------------------------------------ ---------------------------------------------
City, Province and Postal Code Signature Guaranteed by
</TABLE>
NOTE: If the notice of retraction is for less than all of the shares represented
by this certificate, a certificate representing the remaining share(s) of
Bowater Canada represented by this certificate will be issued and
registered in the name of the shareholder as it appears on the register of
Bowater Canada, unless the Share Transfer Power on the share certificate
is duly completed in respect of such share(s).
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ANNEX F
VOTING AND EXCHANGE TRUST AGREEMENT
MEMORANDUM OF AGREEMENT made as of the [ ] day of [ ], 1998.
B E T W E E N:
BOWATER CANADA INC.,
a corporation subsisting under the
laws of Canada,
(hereinafter referred to as "Bowater Canada"),
OF THE FIRST PART,
- and -
BOWATER CANADIAN HOLDINGS INCORPORATED,
a corporation subsisting under the
laws of the Province of Nova Scotia,
(hereinafter referred to as "Bowater Holdings"),
OF THE SECOND PART,
- and -
BOWATER INCORPORATED,
a corporation subsisting under the
laws of the State of Delaware,
(hereinafter referred to as "Bowater"),
OF THE THIRD PART,
- and -
MONTREAL TRUST COMPANY OF CANADA,
a trust company incorporated under
the laws of Canada,
(hereinafter referred to as "Trustee"),
OF THE FOURTH PART.
WHEREAS pursuant to an amended and restated arrangement agreement (the
"Arrangement Agreement") dated as of March 9, 1998 between Bowater and Avenor
Inc. ("Avenor"), Bowater Canada is to issue exchangeable shares (the
"Exchangeable Shares") to certain holders of common shares of Avenor pursuant to
the plan of arrangement (the "Plan of Arrangement") contemplated by the
Arrangement Agreement;
AND WHEREAS it is a condition precedent to the filing of the articles of
arrangement (the "Articles of Arrangement") to give effect to the Arrangement
that a voting and exchange trust agreement substantially in the form of this
agreement will have been entered into between the parties hereto.
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this trust agreement and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
hereto hereby covenant and agree as follows:
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ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS. In this trust agreement, the following terms shall have
the following meanings:
"AFFILIATE" of any person means any other person directly or
indirectly controlled by, or under control of, that person. For the
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control of"), as
applied to any person, means the possession by another person, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of that first mentioned person, whether through the ownership
of voting securities, by contract or otherwise.
"ARRANGEMENT" means the arrangement involving Avenor and its
shareholders contemplated by the Plan of Arrangement;
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of
Bowater to effect the automatic exchange of Bowater Common Shares for
Exchangeable Shares pursuant to section 5.12.
"BENEFICIARIES" means the registered holders from time to time of
Exchangeable Shares, other than Bowater and its Affiliates.
"BENEFICIARY VOTES" has the meaning ascribed thereto in section 4.2.
"BOARD OF DIRECTORS" means the Board of Directors of Bowater Canada.
"BOWATER AFFILIATES" means Affiliates of Bowater.
"BOWATER COMMON SHARE" means one share of Bowater Common Stock,
US$1.00 par value per share.
"BOWATER MEETING" has the meaning ascribed thereto in section 4.2.
"BOWATER SPECIAL VOTING SHARE" means the one share of Special Voting
Stock of Bowater, which entitles the holder of record to a number of votes
at meetings of holders of Bowater Common Shares equal to the number of
Exchangeable Shares outstanding from time to time (other than Exchangeable
Shares held by Bowater and its Affiliates) as to which the Trustee has
timely received voting instructions from Beneficiaries, which share is to
be issued to, deposited with, and voted by, the Trustee as described
herein.
"BOWATER SUCCESSOR" has the meaning ascribed hereto in section
11.1(a).
"BUSINESS DAY" means a day other than a Saturday, a Sunday or a
statutory holiday in Toronto, Ontario, Montreal, Quebec or New York, New
York.
"CANADIAN DOLLAR EQUIVALENT" means, in respect of an amount expressed
in a currency other than Canadian dollars (the "Foreign Currency Amount")
at any date, the product obtained by multiplying (a) the Foreign Currency
Amount by (b) the noon spot exchange rate on such date for such foreign
currency expressed in Canadian dollars as reported by the Bank of Canada
or, in the event such spot exchange rate is not available, such exchange
rate on such date for such foreign currency expressed in Canadian dollars
as may be deemed by the Board of Directors to be appropriate for such
purpose.
"CURRENT MARKET PRICE" means, in respect of a Bowater Common Share on
any date, the Canadian Dollar Equivalent of the average of the closing
prices of Bowater Common Shares during a period of 20 consecutive trading
days ending not more than three trading days before such date on the New
York Stock Exchange, or, if the Bowater Common Shares are not then quoted
on the New York Stock Exchange, on such other stock exchange or automated
quotation system on which the Bowater Common Shares are listed or quoted,
as the case may be, as may be selected by the Board of Directors for such
purpose; provided, however, that if in the opinion of the Board of
Directors the public distribution or trading activity of Bowater Common
Shares during such period does not create a market which reflects the fair
market value of a Bowater Common Share, then the Current Market Price of a
Bowater
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Common Share shall be determined by the Board of Directors based upon the
advice of such qualified independent financial advisors as the Board of
Directors may deem to be appropriate, and provided further than any such
selection, opinion or determination by the Board of Directors shall be
conclusive and binding.
"EXCHANGE RIGHT" has the meaning ascribed thereto in section 5.1.
"EXCHANGEABLE SHARES" means the exchangeable shares in the capital of
Bowater Canada.
"INSOLVENCY EVENT" means the institution by Bowater Canada of any
proceeding to be adjudicated a bankrupt or insolvent or to be wound up, or
the consent of Bowater Canada to the institution of bankruptcy, insolvency
or winding-up proceedings against it, or the filing of a petition, answer
or consent seeking dissolution or winding-up under any bankruptcy,
insolvency or analogous laws, including without limitation the Companies
Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency Act
(Canada), and the failure by Bowater Canada to contest in good faith any
such proceedings commenced in respect of Bowater Canada within 30 days of
becoming aware thereof, or the consent by Bowater Canada to the filing of
any such petition or to the appointment of a receiver, or the making by
Bowater Canada of a general assignment for the benefit of creditors, or the
admission in writing by Bowater Canada of its inability to pay its debts
generally as they become due, or Bowater Canada not being permitted,
pursuant to solvency requirements of applicable law, to redeem any
Retracted Shares pursuant to Section 6.6 of the Share Provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"LIQUIDATION EVENT" has the meaning ascribed thereto in section
5.12(b).
"LIQUIDATION EVENT EFFECTIVE DATE" has the meaning ascribed thereto in
section 5.12(c).
"LIST" has the meaning ascribed thereto in section 4.6.
"OFFICER'S CERTIFICATE" means, with respect to Bowater or Bowater
Canada, as the case may be, a certificate signed by any one of the Chairman
of the Board, the President or any Vice-President of Bowater or Bowater
Canada, as the case may be.
"PERSON" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"PLAN OF ARRANGEMENT" means the plan of arrangement of Avenor Inc.
providing for the Arrangement.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.7.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the Share
Provisions.
"SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares.
"SUPPORT AGREEMENT" means that certain support agreement made as of
even date herewith between Bowater Canada, Bowater Holdings and Bowater.
"TRUST" means the trust created by this trust agreement.
"TRUST ESTATE" means the Bowater Special Voting Share, any other
securities, the Exchange Rights, the Automatic Exchange Rights and any
money or other property which may be held by the Trustee from time to time
pursuant to this trust agreement.
"TRUSTEE" means Montreal Trust Company of Canada and, subject to the
provisions of Article 10, includes any successor trustee.
"VOTING RIGHTS" means the voting rights attached to the Bowater
Special Voting Share.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this
trust agreement into articles, sections and paragraphs and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this trust agreement.
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1.3 NUMBER, GENDER, ETC. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to be
taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
1.5 REFERENCES. References in this trust agreement to articles, sections
or paragraphs refer to the articles, sections or paragraphs of this trust
agreement unless otherwise stated.
ARTICLE 2
PURPOSE OF AGREEMENT
2.1 ESTABLISHMENT OF TRUST. The purpose of this trust agreement is to
create the Trust for the benefit of the Beneficiaries, as herein provided. The
Trustee will hold the Bowater Special Voting Share in order to enable the
Trustee to execute the Voting Rights and will hold the Exchange Right and the
Automatic Exchange Rights in order to enable the Trustee to exercise such
rights, in each case as trustee for and on behalf of the Beneficiaries as
provided in this trust agreement.
ARTICLE 3
BOWATER SPECIAL VOTING SHARE
3.1 ISSUE AND OWNERSHIP OF THE BOWATER SPECIAL VOTING SHARE. Bowater
hereby issues to and deposits with the Trustee, the Bowater Special Voting Share
to be hereafter held of record by the Trustee as trustee for and on behalf of,
and for the use and benefit of, the Beneficiaries and in accordance with the
provisions of this trust agreement. Bowater hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Beneficiaries of good and valuable
consideration (and the adequacy thereof) for the issuance of the Bowater Special
Voting Share by Bowater to the Trustee. During the term of the Trust and subject
to the terms and conditions of this trust agreement, the Trustee shall possess
and be vested with full legal ownership of the Bowater Special Voting Share and
shall be entitled to exercise all of the rights and powers of an owner with
respect to the Bowater Special Voting Share provided that the Trustee shall:
(a) hold the Bowater Special Voting Share and the legal title thereto
as trustee solely for the use and benefit of the Beneficiaries in
accordance with the provisions of this trust agreement; and
(b) except as specifically authorized by this trust agreement, have no
power or authority to sell, transfer, vote or otherwise deal in or with the
Bowater Special Voting Share and the Bowater Special Voting Share shall not
be used or disposed of by the Trustee for any purpose other than the
purposes for which this Trust is created pursuant to this trust agreement.
3.2 LEGENDED SHARE CERTIFICATES. Bowater Canada will cause each
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Beneficiaries of their right to instruct the Trustee with respect
to the exercise of the Voting Rights in respect of the Exchangeable Shares of
the Beneficiaries.
3.3 SAFE KEEPING OF CERTIFICATE. The certificate representing the Bowater
Special Voting Share shall at all times be held in safe keeping by the Trustee.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 VOTING RIGHTS. The Trustee, as the holder of record of the Bowater
Special Voting Share, shall be entitled to all of the Voting Rights, including
the right to vote in person or by proxy the Bowater Special Voting Share on any
matters, questions, proposals or propositions whatsoever that may properly come
before the holders of Bowater Common Shares at a Bowater Meeting (as hereinafter
defined). The Voting Rights shall be and remain vested in and exercised by the
Trustee. Subject to section 7.15, the Trustee shall exercise the Voting Rights
only on the basis of instructions received pursuant to this Article 4 from
Beneficiaries entitled to instruct the Trustee as to the voting thereof at the
time at which the Bowater Meeting is held. To
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the extent that no instructions are received from a Beneficiary with respect to
the Voting Rights to which such Beneficiary would otherwise be entitled, the
Trustee will not have Voting Rights with respect to such Beneficiary Votes.
4.2 NUMBER OF VOTES. With respect to all meetings of shareholders of
Bowater at which holders of Bowater Common Shares are entitled to vote (each a
"Bowater Meeting"), each Beneficiary shall be entitled to instruct the Trustee
to cast and exercise one of the votes comprised in the Voting Rights for each
Exchangeable Share owned of record by such Beneficiary on the record date
established by Bowater or by applicable law for such Bowater Meeting (the
"Beneficiary Votes"), in respect of each matter, question, proposal or
proposition to be voted on at such Bowater Meeting.
4.3 MAILINGS TO SHAREHOLDERS. With respect to each Bowater Meeting, the
Trustee will mail or cause to be mailed (or otherwise communicate in the same
manner as Bowater utilizes in communications to holders of Bowater Common
Shares) to each of the Beneficiaries named in the List referred to in section
4.6, such mailing or communication to commence on the same day as the
commencement of the initial mailing or notice (or other communication) with
respect thereto is given by Bowater to its shareholders:
(a) a copy of such notice, together with any related materials to be
provided to shareholders of Bowater;
(b) a statement that such Beneficiary is entitled to instruct the
Trustee as to the exercise of the Beneficiary Votes with respect to such
Bowater Meeting or, pursuant to section 4.7, to attend such Bowater Meeting
and to exercise personally the Beneficiary Votes thereat;
(c) a statement as to the manner in which such instructions may be
given to the Trustee, including an express indication that instructions may
be given to the Trustee to give:
(i) a proxy to such Beneficiary or his designee to exercise
personally the Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative of the
management of Bowater to exercise such Beneficiary Votes;
(d) a statement that if no such instructions are received from the
Beneficiary, the Trustee will not have Voting Rights with respect to such
Beneficiary Votes;
(e) a form of direction whereby the Beneficiary may direct and
instruct the Trustee as contemplated herein; and
(f) a statement of the time and date by which such instructions must
be received by the Trustee in order to be binding upon it, which in the
case of a Bowater Meeting shall not be earlier than the close of business
on the second Business Day prior to such meeting, and of the method and
deadline for revoking or amending such instructions.
For the purpose of determining Beneficiary Votes to which a Beneficiary is
entitled in respect of any Bowater Meeting, the number of Exchangeable Shares
owned of record by the Beneficiary shall be determined at the close of business
on the record date established by Bowater or by applicable law for purposes of
determining shareholders entitled to vote at such Bowater Meeting. Bowater will
notify the Trustee of any decision of the Board of Directors of Bowater with
respect to the calling of any Bowater Meeting and shall provide all necessary
information and materials to the Trustee in each case promptly and in any event
in sufficient time to enable the Trustee to perform its obligations contemplated
by this section 4.3.
4.4 COPIES OF SHAREHOLDER INFORMATION. Bowater will deliver to the Trustee
copies of all proxy materials (including notices of Bowater Meetings but
excluding proxies to vote Bowater Common Shares), information statements,
reports (including without limitation, all interim and annual financial
statements) and other written communications that, in each case, are to be
distributed from time to time to holders of Bowater Common Shares in sufficient
quantities and in sufficient time so as to enable the Trustee to send those
materials to each Beneficiary at the same time as such materials are first sent
to holders of Bowater Common Shares. The Trustee will mail or otherwise send to
each Beneficiary, at the expense of Bowater, copies of all such materials (and
all materials specifically directed to the Beneficiaries or to the Trustee for
the benefit of the Beneficiaries by Bowater) received by the Trustee from
Bowater contemporaneously with the sending of such materials to holders of
Bowater Common Shares. The Trustee will also make available for inspection by
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any Beneficiary at the Trustee's principal corporate trust office in the City of
Toronto and in the City of Montreal all proxy materials, information statements,
reports and other written communications that are:
(a) received by the Trustee as the registered holder of the Bowater
Special Voting Share and made available by Bowater generally to the holders
of Bowater Common Shares; or
(b) specifically directed to the Beneficiaries or to the Trustee for
the benefit of the Beneficiaries by Bowater.
4.5 OTHER MATERIALS. Immediately after receipt by Bowater or shareholders
of Bowater of any material sent or given by or on behalf of a third party to
holders of Bowater Common Shares generally, including without limitation,
dissident proxy and information circulars (and related information and material)
and tender and exchange offer circulars (and related information and material),
Bowater shall use its reasonable best efforts to obtain and deliver to the
Trustee copies thereof in sufficient quantities so as to enable the Trustee to
forward such material (unless the same has been provided directly to
Beneficiaries by such third party) to each Beneficiary as soon as possible
thereafter. Immediately upon receipt thereof, the Trustee will mail or otherwise
send to each Beneficiary, at the expense of Bowater, copies of all such
materials received by the Trustee from Bowater. The Trustee will also make
available for inspection by any Beneficiary at the Trustee's principal corporate
trust office in the City of Toronto and in the City of Montreal copies of all
such materials.
4.6 LIST OF PERSONS ENTITLED TO VOTE. Bowater Canada shall, (a) prior to
each annual, general and special Bowater Meeting and (b) forthwith upon each
request made at any time by the Trustee in writing, prepare or cause to be
prepared a list (a "List") of the names and addresses of the Beneficiaries
arranged in alphabetical order and showing the number of Exchangeable Shares
held of record by each such Beneficiary, in each case at the close of business
on the date specified by the Trustee in such request or, in the case of a List
prepared in connection with a Bowater Meeting, at the close of business on the
record date established by Bowater or pursuant to applicable law for determining
the holders of Bowater Common Shares entitled to receive notice of and/or to
vote at such Bowater Meeting. Each such List shall be delivered to the Trustee
promptly after receipt by Bowater Canada of such request or the record date for
such meeting. Bowater agrees to give Bowater Canada notice (with a copy to the
Trustee) of the calling of any Bowater Meeting, together with the record date
therefor, sufficiently prior to the date of the calling of such meeting so as to
enable Bowater Canada to perform its obligations under this section 4.6.
4.7 ENTITLEMENT TO DIRECT VOTES. Any Beneficiary named in a List prepared
in connection with any Bowater Meeting will be entitled (a) to instruct the
Trustee in the manner described in section 4.3 with respect to the exercise of
the Beneficiary Votes to which such Beneficiary is entitled or (b) to attend
such meeting and personally to exercise thereat, as the proxy of the Trustee,
the Beneficiary Votes to which such Beneficiary is entitled.
4.8 VOTING BY TRUSTEE AND ATTENDANCE OF TRUSTEE REPRESENTATIVE AT
MEETING. (a) In connection with each Bowater Meeting, the Trustee shall
exercise, either in person or by proxy, in accordance with the instructions
received from a Beneficiary pursuant to section 4.3, the Beneficiary Votes as to
which such Beneficiary is entitled to direct the vote (or any lesser number
thereof as may be set forth in the instructions); provided, however, that such
written instructions are received by the Trustee from the Beneficiary prior to
the time and date fixed by it for receipt of such instruction in the notice
given by the Trustee to the Beneficiary pursuant to section 4.3.
(b) The Trustee shall cause a representative who is empowered by it to sign
and deliver, on behalf of the Trustee, proxies for Voting Rights to attend each
Bowater Meeting. Upon submission by a Beneficiary (or its designee) of
identification satisfactory to the Trustee's representative, and at the
Beneficiary's request, such representative shall sign and deliver to such
Beneficiary (or its designee) a proxy to exercise personally the Beneficiary
Votes as to which such Beneficiary is otherwise entitled hereunder to direct the
vote, if such Beneficiary either (i) has not previously given the Trustee
instructions pursuant to section 4.3 in respect of such meeting or (ii) submits
to such representative written revocation of any such previous instructions. At
such meeting, the Beneficiary exercising such Beneficiary Votes shall have the
same rights as the Trustee to speak at the meeting in favour of any matter,
question, proposal or proposition, to exercise Voting Rights equal
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in number to the Beneficiary Votes to which such Beneficiary is entitled by way
of ballot at the meeting in respect of any matter, question, proposal or
proposition, and to exercise Voting Rights equal in number to the Beneficiary
Votes to which such Beneficiary is entitled at such meeting by way of a show of
hands in respect of any matter, question, proposal or proposition.
4.9 DISTRIBUTION OF WRITTEN MATERIALS. Any written materials distributed
by the Trustee pursuant to this trust agreement shall be sent by mail (or
otherwise communicated in the same manner as Bowater utilizes in communications
to holders of Bowater Common Shares) to each Beneficiary at its address as shown
on the books of Bowater Canada. Bowater Canada shall provide or cause to be
provided to the Trustee for this purpose, on a timely basis and without charge
or other expense:
(a) a current List; and
(b) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this trust agreement.
4.10 TERMINATION OF VOTING RIGHTS. All of the rights of a Beneficiary with
respect to the Beneficiary Votes exercisable in respect of the Exchangeable
Shares held by such Beneficiary, including the right to instruct the Trustee as
to the exercise of or to exercise personally corresponding Voting Rights, shall
be deemed to be surrendered by the Beneficiary to Bowater and such Beneficiary
Votes and the Voting Rights represented thereby shall cease immediately upon the
delivery by such holder to the Trustee of the certificates representing such
Exchangeable Shares in connection with the exercise by the Beneficiary of the
Exchange Right or the occurrence of the automatic exchange of Exchangeable
Shares for Bowater Common Shares, as specified in Article 5 (unless, in either
case, Bowater shall not have delivered the requisite Bowater Common Shares
issuable in exchange therefor to the Trustee for delivery to the Beneficiaries),
or upon the redemption of Exchangeable Shares pursuant to Article 6 or 7 of the
Share Provisions, or upon the effective date of the liquidation, dissolution or
winding-up of Bowater Canada pursuant to Article 5 of the Share Provisions, or
upon the purchase of Exchangeable Shares from the holder thereof by Bowater
Holdings pursuant to the exercise by Bowater Holdings of the Retraction Call
Right, the Redemption Call Right or the Liquidation Call Right.
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. Bowater hereby grants to
the Trustee as trustee for and on behalf of, and for the use and benefit of, the
Beneficiaries the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require Bowater to purchase from each
or any Beneficiary all or any part of the Exchangeable Shares held by the
Beneficiary and the Automatic Exchange Rights, all in accordance with the
provisions of this trust agreement. Bowater hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Beneficiaries of good and valuable
consideration (and the adequacy thereof) for the grant of the Exchange Right and
the Automatic Exchange Rights by Bowater to the Trustee. During the term of the
Trust and subject to the terms and conditions of this trust agreement, the
Trustee shall possess and be vested with full legal ownership of the Exchange
Right and the Automatic Exchange Rights and shall be entitled to exercise all of
the rights and powers of an owner with respect to the Exchange Right and the
Automatic Exchange Rights, provided that the Trustee shall:
(a) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Beneficiaries in accordance with the provisions of this trust agreement;
and
(b) except as specifically authorized by this trust agreement, have no
power or authority to exercise or otherwise deal in or with the Exchange
Right or the Automatic Exchange Rights, and the Trustee shall not exercise
any such rights for any purpose other than the purposes for which the Trust
is created pursuant to this trust agreement.
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5.2 LEGENDED SHARE CERTIFICATES. Bowater Canada will cause each
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Beneficiaries of:
(a) their right to instruct the Trustee with respect to the exercise
of the Exchange Right in respect of the Exchangeable Shares held by a
Beneficiary; and
(b) the Automatic Exchange Rights.
5.3 GENERAL EXERCISE OF EXCHANGE RIGHT. The Exchange Right shall be and
remain vested in and exercised by the Trustee. Subject to section 7.15, the
Trustee shall exercise the Exchange Right only on the basis of instructions
received pursuant to this Article 5 from Beneficiaries entitled to instruct the
Trustee as to the exercise thereof. To the extent that no instructions are
received from a Beneficiary with respect to the Exchange Right, the Trustee
shall not exercise or permit the exercise of the Exchange Right.
5.4 PURCHASE PRICE. The purchase price payable by Bowater for each
Exchangeable Share to be purchased by Bowater under the Exchange Right shall be
an amount per share equal to (a) the Current Market Price of a Bowater Common
Share on the last Business Day prior to the day of closing of the purchase and
sale of such Exchangeable Share under the Exchange Right, which shall be
satisfied in full by Bowater causing to be sent to such holder one Bowater
Common Share plus (b) the right to receive the full amount when paid of all
unpaid dividends on each such Exchangeable Share for which the record date has
occurred prior to the closing of the purchase and sale. The purchase price for
each such Exchangeable Share so purchased may be satisfied only by Bowater
issuing and delivering or causing to be delivered to the Trustee, on behalf of
the relevant Beneficiary, one Bowater Common Share and on the applicable payment
date a cheque for the balance, if any, of the purchase price without interest
(but less any amounts withheld pursuant to section 5.13).
5.5 EXERCISE INSTRUCTIONS. Subject to the terms and conditions herein set
forth, a Beneficiary shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Beneficiary on the books of Bowater Canada. To
cause the exercise of the Exchange Right by the Trustee, the Beneficiary shall
deliver to the Trustee, in person or by certified or registered mail, at its
principal corporate trust office in Toronto, Ontario or Montreal, Quebec or at
such other places in Canada as the Trustee may from time to time designate by
written notice to the Beneficiaries, the certificates representing the
Exchangeable Shares which such Beneficiary desires Bowater to purchase, duly
endorsed in blank for transfer, and accompanied by such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the Canada Business Corporations Act and the by-laws of Bowater Canada and such
additional documents and instruments as the Trustee may reasonably require
together with (a) a duly completed form of notice of exercise of the Exchange
Right, contained on the reverse of or attached to the Exchangeable Share
certificates, stating (i) that the Beneficiary thereby instructs the Trustee to
exercise the Exchange Right so as to require Bowater to purchase from the
Beneficiary the number of Exchangeable Shares specified therein, (ii) that such
Beneficiary has good title to and owns all such Exchangeable Shares to be
acquired by Bowater free and clear of all liens, claims and encumbrances, (iii)
the names in which the certificates representing Bowater Common Shares issuable
in connection with the exercise of the Exchange Right are to be issued and (iv)
the names and addresses of the persons to whom such new certificates should be
delivered and (b) payment (or evidence satisfactory to the Trustee, Bowater
Canada and Bowater of payment) of the taxes (if any) payable as contemplated by
section 5.8. If only a part of the Exchangeable Shares represented by any
certificate or certificates delivered to the Trustee are to be purchased by
Bowater under the Exchange Right, a new certificate for the balance of such
Exchangeable Shares shall be issued to the holder at the expense of Bowater
Canada.
5.6 DELIVERY OF BOWATER COMMON SHARES: EFFECT OF EXERCISE. Promptly after
receipt of the certificates representing the Exchangeable Shares which the
Beneficiary desires Bowater to purchase under the Exchange Right, together with
such documents and instruments of transfer and a duly completed form of notice
of exercise of the Exchange Right (and payment of taxes, if any, payable as
contemplated by section 5.8 or evidence thereof), duly endorsed for transfer to
Bowater, the Trustee shall notify Bowater and Bowater Canada of its receipt of
the same, which notice to Bowater and Bowater Canada shall constitute exercise
of the Exchange Right by the Trustee on behalf of the holder of such
Exchangeable Shares, and Bowater shall
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promptly thereafter deliver or cause to be delivered to the Trustee, for
delivery to such Beneficiary (or to such other persons, if any, properly
designated by such Beneficiary) the number of Bowater Common Shares issuable in
connection with the exercise of the Exchange Right, and on the applicable
payment date cheques for the balance, if any, of the total purchase price
therefor without interest (but less any amounts withheld pursuant to section
5.13); provided, however, that no such delivery shall be made unless and until
the Beneficiary requesting the same shall have paid (or provided evidence
satisfactory to the Trustee, Bowater Canada and Bowater of the payment of) the
taxes (if any) payable as contemplated by section 5.8. Immediately upon the
giving of notice by the Trustee to Bowater and Bowater Canada of the exercise of
the Exchange Right, as provided in this section 5.6, the closing of the
transaction of purchase and sale contemplated by the Exchange Right shall be
deemed to have occurred and the holder of such Exchangeable Shares shall be
deemed to have transferred to Bowater all of its right, title and interest in
and to such Exchangeable Shares and the related interest in the Trust Estate and
shall cease to be a holder of such Exchangeable Shares and shall not be entitled
to exercise any of the rights of a holder in respect thereof, other than the
right to receive his proportionate part of the total purchase price therefor,
unless the requisite number of Bowater Common Shares is not allotted, issued and
delivered by Bowater to the Trustee within five Business Days of the date of the
giving of such notice by the Trustee, in which case the rights of the
Beneficiary shall remain unaffected until such Bowater Common Shares are so
allotted, issued and delivered by Bowater. Upon delivery by Bowater to the
Trustee of such Bowater Common Shares, the Trustee shall deliver such Bowater
Common Shares to such Beneficiary (or to such other persons, if any, properly
designated by such Beneficiary). Concurrently with such Beneficiary ceasing to
be a holder of Exchangeable Shares, the Beneficiary shall be considered and
deemed for all purposes to be the holder of Bowater Common Shares delivered to
it pursuant to the Exchange Right.
5.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the event that
a Beneficiary has exercised its right under Article 6 of the Share Provisions to
require Bowater Canada to redeem any or all of the Exchangeable Shares held by
the Beneficiary (the "Retracted Shares") and is notified by Bowater Canada
pursuant to Section 6.6 of the Share Provisions that Bowater Canada will not be
permitted as a result of solvency requirements of applicable law to redeem all
such Retracted Shares, and provided that Bowater Holdings shall not have
exercised the Retraction Call Right with respect to the Retracted Shares and
that the Beneficiary has not revoked the retraction request delivered by the
Beneficiary to Bowater Canada pursuant to Section 6.1 of the Share Provisions,
the retraction request will constitute and will be deemed to constitute notice
from the Beneficiary to the Trustee instructing the Trustee to exercise the
Exchange Right with respect to those Retracted Shares that Bowater Canada is
unable to redeem. In any such event, Bowater Canada hereby agrees with the
Trustee and in favour of the Beneficiary promptly to forward or cause to be
forwarded to the Trustee all relevant materials delivered by the Beneficiary to
Bowater Canada or to the transfer agent of the Exchangeable Shares (including
without limitation, a copy of the retraction request delivered pursuant to
Section 6.1 of the Share Provisions) in connection with such proposed redemption
of the Retracted Shares and the Trustee will thereupon exercise the Exchange
Right with respect to the Retracted Shares that Bowater Canada is not permitted
to redeem and will require Bowater to purchase such shares in accordance with
the provisions of this Article 5.
5.8 STAMP OR OTHER TRANSFER TAXES. Upon any sale of Exchangeable Shares to
Bowater pursuant to the Exchange Right or the Automatic Exchange Rights, the
share certificate or certificates representing Bowater Common Shares to be
delivered in connection with the payment of the total purchase price therefor
shall be issued in the name of such Beneficiary or in such names as such
Beneficiary may otherwise direct in writing without charge to the Beneficiary;
provided, however, that such Beneficiary (a) shall pay (and none of Bowater,
Bowater Holdings, Bowater Canada or the Trustee shall be required to pay) any
documentary, stamp, transfer or other taxes that may be payable in respect of
any transfer involved in the issuance or delivery of such shares to a person
other than such Beneficiary or (b) shall have evidenced to the satisfaction of
the Trustee, Bowater, Bowater Holdings and Bowater Canada that such taxes, if
any, have been paid.
5.9 NOTICE OF INSOLVENCY EVENT. As soon as practicable following the
occurrence of an Insolvency Event or any event that with the giving of notice or
the passage of time or both would be an Insolvency Event, Bowater Canada and
Bowater shall give written notice thereof to the Trustee. As soon as practicable
following
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the receipt of notice from Bowater Canada and Bowater of the occurrence of an
Insolvency Event, or upon the Trustee becoming aware of an Insolvency Event, the
Trustee will mail to each Beneficiary, at the expense of Bowater, a notice of
such Insolvency Event, which notice shall contain a brief statement of the
rights of the Beneficiaries with respect to the Exchange Right.
5.10 QUALIFICATION OF BOWATER COMMON SHARES. Bowater covenants that if any
Bowater Common Shares to be issued and delivered pursuant to the Exchange Right
or the Automatic Exchange Rights require registration or qualification with or
approval of or the filing of any document, including any prospectus or similar
document, or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state law or regulation or
pursuant to the rules and regulations of any regulatory authority or the
fulfilment of any other Canadian or United States legal requirement before such
shares may be issued and delivered by Bowater to the initial holder thereof or
in order that such shares may be freely traded thereafter (other than any
restrictions of general application on transfer by reason of a holder being a
"control person" of Bowater for purposes of Canadian federal or provincial
securities law or an "affiliate" of Bowater for purposes of United States
federal or state securities law), Bowater will in good faith expeditiously take
all such actions and do all such things as are necessary or desirable to cause
such Bowater Common Shares to be and remain duly registered, qualified or
approved. Bowater will in good faith expeditiously take all such actions and do
all such things as are reasonably necessary or desirable to cause all Bowater
Common Shares to be delivered pursuant to the Exchange Right or the Automatic
Exchange Rights to be listed, quoted or posted for trading on all stock
exchanges and quotation systems on which outstanding Bowater Common Shares have
been listed by Bowater and remain listed and are quoted or posted for trading at
such time.
5.11 BOWATER COMMON SHARES. Bowater hereby represents, warrants and
covenants that the Bowater Common Shares issuable as described herein will be
duly authorized and validly issued as fully paid and non-assessable and shall be
free and clear of any lien, claim or encumbrance.
5.12 AUTOMATIC EXCHANGE ON LIQUIDATION OF BOWATER (a) Bowater will give
the Trustee notice of each of the following events at the time set forth below:
(i) in the event of any determination by the Board of Directors of
Bowater to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Bowater or to effect any other distribution of
assets of Bowater among its shareholders for the purpose of winding up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(ii) as soon as practicable following the earlier of (A) receipt by
Bowater of notice of, and (B) Bowater otherwise becoming aware of, any
threatened or instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or winding-up of
Bowater or to effect any other distribution of assets of Bowater among its
shareholders for the purpose of winding up its affairs, in each case where
Bowater has failed to contest in good faith any such proceeding commenced
in respect of Bowater within 30 days of becoming aware thereof.
(b) As soon as practicable following receipt by the Trustee from Bowater of
notice of any event (a "Liquidation Event") contemplated by section 5.12(a)(i)
or 5.12(a)(ii) above, the Trustee will give notice thereof to the Beneficiaries.
Such notice shall include a brief description of the automatic exchange of
Exchangeable Shares for Bowater Common Shares provided for in section 5.12(c).
(c) In order that the Beneficiaries will be able to participate on a pro
rata basis with the holders of Bowater Common Shares in the distribution of
assets of Bowater in connection with a Liquidation Event, on the fifth Business
Day prior to the effective date (the "Liquidation Event Effective Date") of a
Liquidation Event all of the then outstanding Exchangeable Shares shall be
automatically exchanged for Bowater Common Shares. To effect such automatic
exchange, Bowater shall purchase on the fifth Business Day prior to the
Liquidation Event Effective Date each Exchangeable Share then outstanding and
held by Beneficiaries, and each Beneficiary shall sell the Exchangeable Shares
held by it at such time, for a purchase price per share equal to (a) the Current
Market Price of a Bowater Common Share on the fifth Business Day prior to the
Liquidation Event Effective Date, which shall be satisfied in full by Bowater
issuing to the Beneficiary one
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Bowater Common Share, and (b) the right to receive the full amount when paid of
all unpaid dividends thereon for which the record date has occurred prior to the
date of the exchange.
(d) On the fifth Business Day prior to the Liquidation Event Effective
Date, the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Bowater Common Shares shall be
deemed to have occurred, and each Beneficiary shall be deemed to have
transferred to Bowater all of the Beneficiary's right, title and interest in and
to such Beneficiary's Exchangeable Shares and the related interest in the Trust
Estate and shall cease to be a holder of such Exchangeable Shares and Bowater
shall issue to the Beneficiary the Bowater Common Shares issuable upon the
automatic exchange of Exchangeable Shares for Bowater Common Shares and on the
applicable payment date shall deliver to the Trustee for delivery to the
Beneficiary a cheque for the balance, if any, of the total purchase price for
such Exchangeable Shares without interest but less any amounts withheld pursuant
to section 5.13. Concurrently with such Beneficiary ceasing to be a holder of
Exchangeable Shares, the Beneficiary shall be considered and deemed for all
purposes to be the holder of the Bowater Common Shares issued pursuant to the
automatic exchange of Exchangeable Shares for Bowater Common Shares and the
certificates held by the Beneficiary previously representing the Exchangeable
Shares exchanged by the Beneficiary with Bowater pursuant to such automatic
exchange shall thereafter be deemed to represent Bowater Common Shares issued to
the Beneficiary by Bowater pursuant to such automatic exchange. Upon the request
of a Beneficiary and the surrender by the Beneficiary of Exchangeable Share
certificates deemed to represent Bowater Common Shares, duly endorsed in blank
and accompanied by such instruments of transfer as Bowater may reasonably
require, Bowater shall deliver or cause to be delivered to the Beneficiary
certificates representing Bowater Common Shares of which the Beneficiary is the
holder.
5.13 WITHHOLDING RIGHTS. Bowater, Bowater Holdings, Bowater Canada and the
Trustee shall be entitled to deduct and withhold from any consideration
otherwise payable under this trust agreement to any holder of Exchangeable
Shares such amounts as Bowater, Bowater Holdings, Bowater Canada or the Trustee
is required or permitted to deduct and withhold with respect to such payment
under the Income Tax Act (Canada), the United States Internal Revenue Code of
1986 or any provision of provincial, state, local or foreign tax law, in each
case as amended or succeeded. To the extent that amounts are so withheld, such
withheld amounts shall be treated for all purposes as having been paid to the
holder of the Exchangeable Shares in respect of which such deduction and
withholding was made, provided that such withheld amounts are actually remitted
to the appropriate taxing authority. To the extent that the amount so required
or permitted to be deducted or withheld from any payment to a holder exceeds the
cash portion, if any, of the consideration otherwise payable to the holder,
Bowater, Bowater Holdings and Bowater Canada and the Trustee are hereby
authorized to sell or otherwise dispose of such portion of the consideration as
is necessary to provide sufficient funds to Bowater, Bowater Holdings, Bowater
Canada or the Trustee, as the case may be, to enable it to comply with such
deduction or withholding requirement and Bowater, Bowater Holdings, Bowater
Canada or the Trustee shall notify the holder thereof and remit to such holder
any unapplied balance of the net proceeds of such sale.
ARTICLE 6
RESTRICTIONS ON ISSUE OF BOWATER SPECIAL VOTING STOCK
6.1 ISSUE OF ADDITIONAL SHARES. During the term of this trust agreement,
Bowater will not, without the consent of the holders at the relevant time of
Exchangeable Shares, given in accordance with Section 10.2 of the Share
Provisions, issue any shares of its Special Voting Stock in addition to the
Bowater Special Voting Share.
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ARTICLE 7
CONCERNING THE TRUSTEE
7.1 POWERS AND DUTIES OF THE TRUSTEE. The rights, powers, duties and
authorities of the Trustee under this trust agreement, in its capacity as
Trustee of the Trust, shall include:
(a) receipt and deposit of the Bowater Special Voting Share from
Bowater as Trustee for and on behalf of the Beneficiaries in accordance
with the provisions of this trust agreement;
(b) granting proxies and distributing materials to Beneficiaries as
provided in this trust agreement;
(c) exercising the Voting Rights in accordance with the provisions of
this trust agreement;
(d) receiving the grant of the Exchange Right and the Automatic
Exchange Rights from Bowater as Trustee for and on behalf of the
Beneficiaries in accordance with the provisions of this trust agreement;
(e) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the provisions
of this trust agreement, and in connection therewith receiving from
Beneficiaries Exchangeable Shares and other requisite documents and
distributing to such Beneficiaries Bowater Common Shares and cheques, if
any, to which such Beneficiaries are entitled upon the exercise of the
Exchange Right or pursuant to the Automatic Exchange Rights, as the case
may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the
Trust Estate as provided in this trust agreement;
(h) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of Bowater, Bowater
Holdings and Bowater Canada under this trust agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this trust agreement.
In the exercise of such rights, powers, duties and authorities the Trustee
shall have (and is granted) such incidental and additional rights, powers,
duties and authority not in conflict with any of the provisions of this trust
agreement as the Trustee, acting in good faith and in the reasonable exercise of
its discretion, may deem necessary, appropriate or desirable to effect the
purpose of the Trust. Any exercise of such discretionary rights, powers, duties
and authorities by the Trustee shall be final, conclusive and binding upon all
persons.
The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith and with a view to the best
interests of the Beneficiaries and shall exercise the care, diligence and skill
that a reasonably prudent trustee would exercise in comparable circumstances.
7.2 NO CONFLICT OF INTEREST. The Trustee represents to Bowater, Bowater
Holdings and Bowater Canada that at the date of execution and delivery of this
trust agreement there exists no material conflict of interest in the role of the
Trustee as a fiduciary hereunder and the role of the Trustee in any other
capacity. The Trustee shall, within 90 days after it becomes aware that such
material conflict of interest exists, either eliminate such material conflict of
interest or resign in the manner and with the effect specified in Article 10.
If, notwithstanding the foregoing provisions of this section 7.2, the Trustee
has such a material conflict of interest, the validity and enforceability of
this trust agreement shall not be affected in any manner whatsoever by reason
only of the existence of such material conflict of interest. If the Trustee
contravenes the foregoing provisions of this section 7.2, any interested party
may apply to the Ontario Court of Justice (General Division) for an order that
the Trustee be replaced as Trustee hereunder.
7.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC. Bowater, Bowater
Holdings and Bowater Canada irrevocably authorize the Trustee, from time to
time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and Bowater Common Shares; and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the records
maintained by it which the Trustee may reasonably require for the
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discharge of its duties and responsibilities under this trust agreement and
(ii) from the transfer agent of Bowater Common Shares, and any subsequent
transfer agent of such shares, the share certificates issuable upon the
exercise from time to time of the Exchange Right and pursuant to the
Automatic Exchange Rights.
Bowater, Bowater Holdings and Bowater Canada irrevocably authorize their
respective registrars and transfer agents to comply with all such requests.
Bowater covenants that it will supply its transfer agent with duly executed
share certificates for the purpose of completing the exercise from time to time
of the Exchange Right and the Automatic Exchange Rights.
7.4 BOOKS AND RECORDS. The Trustee shall keep available for inspection by
Bowater, Bowater Holdings and Bowater Canada, at the Trustee's principal
corporate trust office in Toronto, Ontario and Montreal, Quebec, correct and
complete books and records of account relating to the Trust created by this
trust agreement, including without limitation, all relevant data relating to
mailings and instructions to and from Beneficiaries and all transactions
pursuant to the Exchange Right and the Automatic Exchange Rights. On or before
March 31, 1999, and on or before March 31 in every year thereafter, so long as
the Bowater Special Voting Share is on deposit with the Trustee, the Trustee
shall transmit to Bowater, Bowater Holdings and Bowater Canada a brief report,
dated as of the preceding December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that
date;
(b) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on behalf
of Beneficiaries in consideration of the issuance by Bowater of Bowater
Common Shares in connection with the Exchange Right, during the calendar
year ended on such date; and
(c) any action taken by the Trustee in the performance of its duties
under this trust agreement which it had not previously reported and which,
in the Trustee's opinion, materially affects the Trust Estate.
7.5 INCOME TAX RETURNS AND REPORTS. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system through which the Exchangeable Shares are
traded.
7.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it by
this trust agreement at the request, order or direction of any Beneficiary upon
such Beneficiary furnishing to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
therein or thereby, provided that no Beneficiary shall be obligated to furnish
to the Trustee any such security or indemnity in connection with the exercise by
the Trustee of any of its rights, duties, powers and authorities with respect to
the Bowater Special Voting Share pursuant to Article 4, subject to section 7.15,
and with respect to the Exchange Right pursuant to Article 5, subject to section
7.15, and with respect to the Automatic Exchange Rights pursuant to Article 5.
None of the provisions contained in this trust agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the exercise of any of its rights, powers, duties, or authorities unless
funded, given security and indemnified as aforesaid.
7.7 ACTION OF BENEFICIARIES. No Beneficiary shall have the right to
institute any action, suit or proceeding or to exercise any other remedy
authorized by this trust agreement for the purpose of enforcing any of its
rights or for the execution of any trust or power hereunder unless the
Beneficiary has requested the Trustee to take or institute such action, suit or
proceeding and furnished the Trustee with the security or indemnity referred to
in section 7.6 and the Trustee shall have failed to act within a reasonable time
thereafter. In such case, but not otherwise, the Beneficiary shall be entitled
to take proceedings in any court of competent jurisdiction such as the Trustee
might have taken; it being understood and intended that no one or more
Beneficiaries shall have any right in any manner whatsoever to affect, disturb
or prejudice the rights hereby created by any such action, or to enforce any
right hereunder or the Voting Rights, the Exchange Rights or the Automatic
Exchange Rights except subject to the conditions and in the manner herein
provided, and that all powers and trusts hereunder shall be exercised and all
proceedings at law shall be instituted, had and
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maintained by the Trustee, except only as herein provided, and in any event for
the equal benefit of all Beneficiaries.
7.8 RELIANCE UPON DECLARATIONS. The Trustee shall not be considered to be
in contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon statutory declarations,
certificates, opinions or reports furnished pursuant to the provisions hereof or
required by the Trustee to be furnished to it in the exercise of its rights,
powers, duties and authorities hereunder if such statutory declarations,
certificates, opinions or reports comply with the provisions of section 7.9, if
applicable, and with any other applicable provisions of this trust agreement.
7.9 EVIDENCE AND AUTHORITY TO TRUSTEE. Bowater, Bowater Holdings and/or
Bowater Canada shall furnish to the Trustee evidence of compliance with the
conditions provided for in this trust agreement relating to any action or step
required or permitted to be taken by Bowater, Bowater Holdings and/or Bowater
Canada or the Trustee under this trust agreement or as a result of any
obligation imposed under this trust agreement, including, without limitation, in
respect of the Voting Rights or the Exchange Right or the Automatic Exchange
Rights and the taking of any other action to be taken by the Trustee at the
request of or on the application of Bowater, Bowater Holdings and/or Bowater
Canada promptly if and when:
(a) such evidence is required by any other section of this trust
agreement to be furnished to the Trustee in accordance with the terms of
this section 7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this trust agreement, gives Bowater, Bowater Holdings
and/or Bowater Canada written notice requiring it to furnish such evidence
in relation to any particular action or obligation specified in such
notice.
Such evidence shall consist of an Officer's Certificate of Bowater, Bowater
Holdings and/or Bowater Canada or a statutory declaration or a certificate made
by persons entitled to sign an Officer's Certificate stating that any such
condition has been complied with in accordance with the terms of this trust
agreement.
Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Right or the Automatic Exchange Rights or the taking of any other
action to be taken by the Trustee at the request or on the application of
Bowater, Bowater Holdings and/or Bowater Canada, and except as otherwise
specifically provided herein, such evidence may consist of a report or opinion
of any solicitor, attorney, auditor, accountant, appraiser, valuer, engineer or
other expert or any other person whose qualifications give authority to a
statement made by him, provided that if such report or opinion is furnished by a
director, officer or employee of Bowater, Bowater Holdings and/or Bowater Canada
it shall be in the form of an Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this trust
agreement shall include a statement by the person giving the evidence:
(a) declaring that he has read and understands the provisions of this
trust agreement relating to the condition in question;
(b) describing the nature and scope of the examination or
investigation upon which he based the statutory declaration, certificate,
statement or opinion; and
(c) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
7.10 EXPERTS, ADVISERS AND AGENTS. The Trustee may:
(a) in relation to these presents act and rely on the opinion or
advice of or information obtained from any solicitor, attorney, auditor,
accountant, appraiser, valuer, engineer or other expert, whether retained
by the Trustee or by Bowater, Bowater Holdings and/or Bowater Canada or
otherwise, and may employ such assistants as may be necessary to the proper
discharge of its powers and duties and determination of its rights
hereunder and may pay proper and reasonable compensation for all such legal
and other advice or assistance as aforesaid; and
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(b) employ such agents and other assistants as it may reasonably
require for the proper discharge of its powers and duties hereunder, and
may pay reasonable remuneration for all services performed for it (and
shall be entitled to receive reasonable remuneration for all services
performed by it) in the discharge of the trusts hereof and compensation for
all disbursements, costs and expenses made or incurred by it in the
discharge of its duties hereunder and in the management of the Trust.
7.11 INVESTMENT OF MONEYS HELD BY TRUSTEE. Unless otherwise provided in
this trust agreement, any moneys held by or on behalf of the Trustee which under
the terms of this trust agreement may or ought to be invested or which may be on
deposit with the Trustee or which may be in the hands of the Trustee may be
invested and reinvested in the name or under the control of the Trustee in
securities in which, under the laws of the Province of Ontario and the Province
of Quebec, trustees are authorized to invest trust moneys, provided that such
securities are stated to mature within two years after their purchase by the
Trustee, and the Trustee shall so invest such moneys on the written direction of
Bowater Canada. Pending the investment of any moneys as hereinbefore provided,
such moneys may be deposited in the name of the Trustee in any chartered bank in
Canada or, with the consent of Bowater Canada, in the deposit department of the
Trustee or any other loan or trust company authorized to accept deposits under
the laws of Canada or any province thereof at the rate of interest then current
on similar deposits.
7.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not be
required to give any bond or security in respect of the execution of the trusts,
rights, duties, powers and authorities of this trust agreement or otherwise in
respect of the premises.
7.13 TRUSTEE NOT BOUND TO ACT ON REQUEST. Except as in this trust
agreement otherwise specifically provided, the Trustee shall not be bound to act
in accordance with any direction or request of Bowater, Bowater Holdings and/or
Bowater Canada or of the directors thereof until a duly authenticated copy of
the instrument or resolution containing such direction or request shall have
been delivered to the Trustee, and the Trustee shall be empowered to act upon
any such copy purporting to be authenticated and believed by the Trustee to be
genuine.
7.14 AUTHORITY TO CARRY ON BUSINESS. The Trustee represents to Bowater,
Bowater Holdings and Bowater Canada that at the date of execution and delivery
by it of this trust agreement it is authorized to carry on the business of a
trust company in the Provinces of Ontario and Quebec but if, notwithstanding the
provisions of this section 7.14, it ceases to be so authorized to carry on
business, the validity and enforceability of this trust agreement and the Voting
Rights, the Exchange Right and the Automatic Exchange Rights shall not be
affected in any manner whatsoever by reason only of such event but the Trustee
shall, within 90 days after ceasing to be authorized to carry on the business of
a trust company in the Province of Ontario or the Province of Quebec, either
become so authorized or resign in the manner and with the effect specified in
Article 10.
7.15 CONFLICTING CLAIMS. If conflicting claims or demands are made or
asserted with respect to any interest of any Beneficiary in any Exchangeable
Shares, including any disagreement between the heirs, representatives,
successors or assigns succeeding to all or any part of the interest of any
Beneficiary in any Exchangeable Shares resulting in conflicting claims or
demands being made in connection with such interest, then the Trustee shall be
entitled, at its sole discretion, to refuse to recognize or to comply with any
such claims or demands. In so refusing, the Trustee may elect not to exercise
any Voting Rights, Exchange Rights or Automatic Exchange Rights subject to such
conflicting claims or demands and, in so doing, the Trustee shall not be or
become liable to any person on account of such election or its failure or
refusal to comply with any such conflicting claims or demands. The Trustee shall
be entitled to continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Rights or Automatic Exchange Rights subject to such
conflicting claims or demands have been adjudicated by a final judgment of
a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Rights
or Automatic Exchange Rights subject to such conflicting claims or demands
have been conclusively settled by a valid written
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agreement binding on all such adverse claimants, and the Trustee shall have
been furnished with an executed copy of such agreement certified to be in
full force and effect.
If the Trustee elects to recognize any claim or comply with any demand made
by any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate to fully indemnify it as between all conflicting claims
or demands.
7.16 ACCEPTANCE OF TRUST. The Trustee hereby accepts the Trust created and
provided for by and in this trust agreement and agrees to perform the same upon
the terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who shall
from time to time be Beneficiaries, subject to all the terms and conditions
herein set forth.
ARTICLE 8
COMPENSATION
8.1 FEES AND EXPENSES OF THE TRUSTEE. Bowater, Bowater Holdings and
Bowater Canada jointly and severally agree to pay the Trustee reasonable
compensation for all of the services rendered by it under this trust agreement
and will reimburse the Trustee for all reasonable expenses (including taxes
other than taxes based on the net income of the Trustee) and disbursements,
including the cost and expense of any suit or litigation of any character and
any proceedings before any governmental agency reasonably incurred by the
Trustee in connection with its duties under this trust agreement; provided that
Bowater, Bowater Holdings and Bowater Canada shall have no obligation to
reimburse the Trustee for any expenses or disbursements paid, incurred or
suffered by the Trustee in any suit or litigation in which the Trustee is
determined to have acted in bad faith or with negligence, recklessness or wilful
misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 INDEMNIFICATION OF THE TRUSTEE. Bowater, Bowater Holdings and Bowater
Canada jointly and severally agree to indemnify and hold harmless the Trustee
and each of its directors, officers and agents appointed and acting in
accordance with this trust agreement (collectively, the "Indemnified Parties")
against all claims, losses, damages, reasonable costs, penalties, fines and
reasonable expenses (including reasonable expenses of the Trustee's legal
counsel) which, without fraud, negligence, recklessness, wilful misconduct or
bad faith on the part of such Indemnified Party, may be paid, incurred or
suffered by the Indemnified Party by reason of or as a result of the Trustee's
acceptance or administration of the Trust, its compliance with its duties set
forth in this trust agreement, or any written or oral instruction delivered to
the Trustee by Bowater, Bowater Holdings or Bowater Canada pursuant hereto.
In no case shall Bowater, Bowater Holdings or Bowater Canada be liable
under this indemnity for any claim against any of the Indemnified Parties unless
Bowater, Bowater Holdings and Bowater Canada shall be notified by the Trustee of
the written assertion of a claim or of any action commenced against the
Indemnified Parties, promptly after any of the Indemnified Parties shall have
received any such written assertion of a claim or shall have been served with a
summons or other first legal process giving information as to the nature and
basis of the claim. Subject to (ii) below, Bowater, Bowater Holdings and Bowater
Canada shall be entitled to participate at their own expense in the defence and,
if Bowater, Bowater Holdings and Bowater Canada so elect at any time after
receipt of such notice, any of them may assume the defence of any suit brought
to enforce any such claim. The Trustee shall have the right to employ separate
counsel in any such suit and participate in the defence thereof but the fees and
expenses of such counsel shall be at the expense of the Trustee unless: (i) the
employment of such counsel has been authorized by Bowater, Bowater Holdings or
Bowater Canada; or (ii) the named parties to any such suit include both the
Trustee and Bowater, Bowater Holdings or Bowater Canada and the Trustee shall
have been advised by counsel acceptable to Bowater, Bowater Holdings or Bowater
Canada that there may be one or more legal defences available to the Trustee
that are different from or in addition to those available to Bowater, Bowater
Holdings or Bowater Canada and that, in the judgment of such counsel, would
present a conflict of interest were a joint representation to be
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undertaken (in which case Bowater, Bowater Holdings and Bowater Canada shall not
have the right to assume the defence of such suit on behalf of the Trustee but
shall be liable to pay the reasonable fees and expenses of counsel for the
Trustee).
9.2 LIMITATION OF LIABILITY. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
trust agreement, except to the extent that such loss is attributable to the
fraud, negligence, recklessness, wilful misconduct or bad faith on the part of
the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 RESIGNATION. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to Bowater, Bowater
Holdings and Bowater Canada specifying the date on which it desires to resign,
provided that such notice shall not be given less than one month before such
desired resignation date unless Bowater, Bowater Holdings and Bowater Canada
otherwise agree and provided further that such resignation shall not take effect
until the date of the appointment of a successor trustee and the acceptance of
such appointment by the successor trustee. Upon receiving such notice of
resignation, Bowater, Bowater Holdings and Bowater Canada shall promptly appoint
a successor trustee by written instrument in duplicate, one copy of which shall
be delivered to the resigning trustee and one copy to the successor trustee.
10.2 REMOVAL. The Trustee, or any trustee hereafter appointed, may
(provided a successor trustee is appointed) be removed at any time on 30 days'
prior notice by written instrument executed by Bowater, Bowater Holdings and
Bowater Canada, in duplicate, one copy of which shall be delivered to the
trustee so removed and one copy to the successor trustee.
10.3 SUCCESSOR TRUSTEE. Any successor trustee appointed as provided under
this trust agreement shall execute, acknowledge and deliver to Bowater, Bowater
Holdings and Bowater Canada and to its predecessor trustee an instrument
accepting such appointment. Thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, duties and obligations of its predecessor under this trust agreement,
with the like effect as if originally named as trustee in this trust agreement.
However, on the written request of Bowater, Bowater Holdings and Bowater Canada
or of the successor trustee, the trustee ceasing to act shall, upon payment of
any amounts then due it pursuant to the provisions of this trust agreement,
execute and deliver an instrument transferring to such successor trustee all the
rights and powers of the trustee so ceasing to act. Upon the request of any such
successor trustee, Bowater, Bowater Holdings, Bowater Canada and such
predecessor trustee shall execute any and all instruments in writing for more
fully and certainly vesting in and confirming to such successor trustee all such
rights and powers.
10.4 NOTICE OF SUCCESSOR TRUSTEE. Upon acceptance of appointment by a
successor trustee as provided herein, Bowater, Bowater Holdings and Bowater
Canada shall cause to be mailed notice of the succession of such trustee
hereunder to each Beneficiary specified in a List. If Bowater, Bowater Holdings
or Bowater Canada shall fail to cause such notice to be mailed within 10 days
after acceptance of appointment by the successor trustee, the successor trustee
shall cause such notice to be mailed at the expense of Bowater, Bowater Holdings
and Bowater Canada.
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ARTICLE 11
BOWATER SUCCESSORS
11.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. Bowater shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation
(herein called the "Bowater Successor") incorporated under the laws of any
state of the United States or the laws of Canada or any province thereof;
(b) Bowater Successor, by operation of law, becomes, without more,
bound by the terms and provisions of this trust agreement or, if not so
bound, executes, prior to or contemporaneously with the consummation of
such transaction a trust agreement supplemental hereto and such other
instruments (if any) as are satisfactory to the Trustee, acting reasonably,
and in the opinion of legal counsel to the Trustee are reasonably necessary
or advisable to evidence the assumption by the Bowater Successor of
liability for all moneys payable and property deliverable hereunder and the
covenant of such Bowater Successor to pay and deliver or cause to be
delivered the same and its agreement to observe and perform all the
covenants and obligations of Bowater under this trust agreement; and
(c) such transaction shall, to the satisfaction of the Trustee, acting
reasonably, and in the opinion of legal counsel to the Trustee, be upon
such terms and substantially to preserve and not to impair in any material
respect any of the rights, duties, powers and authorities of the Trustee or
of the Beneficiaries hereunder.
11.2 VESTING OF POWERS IN SUCCESSOR. Whenever the conditions of section
11.1 have been duly observed and performed, the Trustee and, if required by
section 11.1, Bowater Successor, Bowater Holdings and Bowater Canada shall
execute and deliver the supplemental trust agreement provided for in Article 12
and thereupon Bowater Successor shall possess and from time to time may exercise
each and every right and power of Bowater under this trust agreement in the name
of Bowater or otherwise and any act or proceeding by any provision of this trust
agreement required to be done or performed by the Board of Directors of Bowater
or any officers of Bowater may be done and performed with like force and effect
by the directors or officers of such Bowater Successor.
11.3 WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned direct or indirect
subsidiary of Bowater with or into Bowater or the winding-up, liquidation or
dissolution of any wholly-owned subsidiary of Bowater provided that all of the
assets of such subsidiary are transferred to Bowater or another wholly-owned
direct or indirect subsidiary of Bowater and any such transactions are expressly
permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL TRUST AGREEMENTS
12.1 AMENDMENTS, MODIFICATIONS, ETC. This trust agreement may not be
amended or modified except by an agreement in writing executed by Bowater,
Bowater Holdings, Bowater Canada and the Trustee and approved by the
Beneficiaries in accordance with Section 10.2 of the Share Provisions.
12.2 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section
12.1, the parties to this trust agreement may in writing, at any time and from
time to time, without the approval of the Beneficiaries, amend or modify this
trust agreement for the purposes of:
(a) adding to the covenants of any or all parties hereto for the
protection of the Beneficiaries hereunder provided that the board of
directors of each of Bowater Canada, Bowater Holdings and Bowater shall be
of the good faith opinion that such additions will not be prejudicial to
the rights or interests of the Beneficiaries;
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(b) making such amendments or modifications not inconsistent with this
trust agreement as may be necessary or desirable with respect to matters or
questions which, in the good faith opinion of the board of directors of
each of Bowater, Bowater Holdings and Bowater Canada and in the opinion of
the Trustee, having in mind the best interests of the Beneficiaries, it may
be expedient to make, provided that such boards of directors and the
Trustee shall be of the opinion that such amendments and modifications will
not be prejudicial to the interests of the Beneficiaries; or
(c) making such changes or corrections which, on the advice of counsel
to Bowater, Bowater Holdings, Bowater Canada and the Trustee, are required
for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error,
provided that the Trustee and the board of directors of each of Bowater,
Bowater Holdings and Bowater Canada shall be of the opinion that such
changes or corrections will not be prejudicial to the rights and interests
of the Beneficiaries.
12.3 MEETING TO CONSIDER AMENDMENTS. Bowater Canada, at the request of
Bowater, shall call a meeting or meetings of the Beneficiaries for the purpose
of considering any proposed amendment or modification requiring approval
pursuant hereto. Any such meeting or meetings shall be called and held in
accordance with the by-laws of Bowater Canada, the Share Provisions and all
applicable laws.
12.4 CHANGES IN CAPITAL OF BOWATER AND BOWATER CANADA. At all times after
the occurrence of any event contemplated pursuant to section 2.7 or 2.8 of the
Support Agreement or otherwise, as a result of which either Bowater Common
Shares or the Exchangeable Shares or both are in any way changed, this trust
agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which Bowater Common Shares or the Exchangeable Shares or both are so
changed and the parties hereto shall execute and deliver a supplemental trust
agreement giving effect to and evidencing such necessary amendments and
modifications.
12.5 EXECUTION OF SUPPLEMENTAL TRUST AGREEMENTS. No amendment to or
modification or waiver of any of the provisions of this trust agreement
otherwise permitted hereunder shall be effective unless made in writing and
signed by all of the parties hereto. From time to time Bowater Canada (when
authorized by a resolution of its board of directors), Bowater (when authorized
by a resolution of its board of directors), Bowater Holdings (when authorized by
a resolution of its board of directors) and the Trustee may, subject to the
provisions of these presents, and they shall, when so directed by these
presents, execute and deliver by their proper officers, trust agreements or
other instruments supplemental hereto, which thereafter shall form part hereof,
for any one or more of the following purposes:
(a) evidencing the succession of Bowater Successors to Bowater and the
covenants of and obligations assumed by each such Bowater Successor in
accordance with the provisions of Article 11 and the successors or any
successor trustee in accordance with the provisions of Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this trust agreement or the Voting Rights, the Exchange Right
or the Automatic Exchange Rights which, in the opinion of the Trustee, will
not be prejudicial to the interests of the Beneficiaries or are, in the
opinion of counsel to the Trustee, necessary or advisable in order to
incorporate, reflect or comply with any legislation the provisions of which
apply to Bowater, Bowater Holdings, Bowater Canada, the Trustee or this
trust agreement; and
(c) for any other purposes not inconsistent with the provisions of
this trust agreement, including without limitation, to make or evidence any
amendment or modification to this agreement as contemplated hereby,
provided that, in the opinion of the Trustee, the rights of the Trustee and
Beneficiaries will not be prejudiced thereby.
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ARTICLE 13
TERMINATION
13.1 TERM. The Trust created by this trust agreement shall continue until
the earliest to occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of Bowater, Bowater Holdings and Bowater Canada elects in
writing to terminate the Trust and such termination is approved by the
Beneficiaries in accordance with Section 10.2 of the Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants
of His Majesty King George VI of Canada and the United Kingdom of Great
Britain and Northern Ireland living on the date of the creation of the
Trust.
13.2 SURVIVAL OF AGREEMENT. This trust agreement shall survive any
termination of the Trust and shall continue until there are no Exchangeable
Shares outstanding held by a Beneficiary; provided, however, that the provisions
of Articles 8 and 9 shall survive any such termination of this trust agreement.
ARTICLE 14
GENERAL
14.1 SEVERABILITY. If any provision of this trust agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this trust agreement shall not in any way be affected or
impaired thereby and the agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
14.2 ENUREMENT. This trust agreement shall be binding upon and enure to
the benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Beneficiaries.
14.3 NOTICES TO PARTIES. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
(a) if to Bowater Canada:
Bowater Canada Inc.
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
100 King Street West
Toronto, ON M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
(b) if to Bowater Holdings:
Bowater Canadian Holdings Incorporated
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
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Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
100 King Street West
Toronto, ON M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
(c) if to Bowater:
Bowater Incorporated
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
100 King Street West
Toronto, ON M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
(d) if to the Trustee:
Montreal Trust Company of Canada
6th Floor
1800 McGill College Avenue
Montreal, Quebec
H3A 3K9
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
14.4 NOTICE OF BENEFICIARIES. Any and all notices to be given and any
documents to be sent to any Beneficiaries may be given or sent to the address of
such Beneficiary shown on the register of holders of Exchangeable Shares in any
manner permitted by the by-laws of Bowater Canada from time to time in force in
respect of notices to shareholders and shall be deemed to be received (if given
or sent in such manner) at the time specified in such by-laws, the provisions of
which by-laws shall apply mutatis mutandis to notices or documents as aforesaid
sent to such Beneficiaries.
14.5 COUNTERPARTS. This trust agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
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14.6 JURISDICTION. This trust agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
14.7 ATTORNMENT. Each of the Trustee, Bowater and Bowater Holdings agrees
that any action or proceeding arising out of or relating to this trust agreement
may be instituted in the courts of Ontario, waives any objection which it may
have now or hereafter to the venue of any such action or proceeding, irrevocably
submits to the jurisdiction of the said courts in any such action or proceeding,
agrees to be bound by any final judgment of the said courts and not to seek, and
hereby waives, any review of the merits of any such judgment by the courts of
any other jurisdiction and hereby appoints Bowater Canada at its registered
office in the Province of Ontario as attorney for service of process.
IN WITNESS WHEREOF, the parties hereto have caused this trust agreement to
be duly executed as of the date first above written.
BOWATER CANADA
By:
------------------------------------
Name:
Title:
BOWATER CANADIAN
HOLDINGS INCORPORATED
By:
------------------------------------
Name:
Title:
BOWATER INCORPORATED
By:
------------------------------------
Name:
Title:
MONTREAL TRUST COMPANY OF
CANADA
By:
------------------------------------
Name:
Title:
C.S.
------------------------------------
Name:
Title:
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ANNEX G
SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the [ ] day of [ ], 1998.
B E T W E E N:
BOWATER INCORPORATED,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as "Bowater"),
OF THE FIRST PART,
- and -
BOWATER CANADIAN HOLDINGS INCORPORATED,
a corporation subsisting under the laws
of the Province of Nova Scotia,
(hereinafter referred to as "Bowater Holdings"),
OF THE SECOND PART,
- and -
BOWATER CANADA INC.,
a corporation subsisting under the laws
of Canada,
(hereinafter referred to as "Bowater Canada"),
OF THE THIRD PART.
WHEREAS pursuant to an amended and restated arrangement agreement (the
"Arrangement Agreement") dated as of March 9, 1998 between Bowater and Avenor
Inc. ("Avenor"), Bowater Canada is to issue exchangeable shares (the
"Exchangeable Shares") to certain holders of common shares of Avenor pursuant to
the plan of arrangement (the "Arrangement") contemplated by the Arrangement
Agreement;
AND WHEREAS it is a condition precedent to the filing of the articles of
Arrangement (the "Articles of Arrangement") to give effect to the Arrangement
that a support agreement substantially in the form of this agreement will have
been entered into between the parties hereto.
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties hereto
hereby covenant and agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINED TERMS. Each term denoted herein by initial capital letters and
not otherwise defined herein shall have the meaning ascribed thereto in the
rights, privileges, restrictions and conditions (collectively, the "Share
Provisions") attaching to the Exchangeable Shares as set out in the Articles of
Arrangement, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 NUMBER, GENDER. Words importing the singular number only shall include
the plural and vice versa. Words importing the use of any gender shall include
all genders.
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1.4 DATE FOR ANY ACTION. If any date on which any action is required to be
taken under this agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day. For the purposes of this
agreement, a "Business Day" means a day other than a Saturday, a Sunday or a
statutory holiday in Toronto, Ontario, Montreal, Quebec or New York, New York.
ARTICLE 2
COVENANTS OF BOWATER, BOWATER HOLDINGS AND BOWATER CANADA
2.1 FUNDING OF BOWATER CANADA. So long as any Exchangeable Shares not
owned by Bowater or its affiliates are outstanding, Bowater will:
(a) not declare or pay any dividend on Bowater Common Shares unless
(i) Bowater Canada shall immediately thereafter declare or pay, as the case
may be, an equivalent dividend (as provided for in the Share Provisions) on
the Exchangeable Shares and (ii) Bowater Canada shall have sufficient money
or other assets or authorized but unissued securities available to enable
the due declaration and the due and punctual payment, in accordance with
applicable law, of any such dividend on the Exchangeable Shares;
(b) advise Bowater Canada sufficiently in advance of the declaration
by Bowater of any dividend on Bowater Common Shares and take all such other
actions as are reasonably necessary, in cooperation with Bowater Canada, to
ensure that the respective declaration date, record date and payment date
for a dividend on the Exchangeable Shares shall be the same as the
declaration date, record date and payment date for the corresponding
dividend on Bowater Common Shares;
(c) ensure that the record date for any dividend declared on Bowater
Common Shares is not less than 10 Business Days after the declaration date
of such dividend; and
(d) take all such actions and do all such things as are reasonably
necessary or desirable to enable and permit Bowater Canada, in accordance
with applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price in respect of each issued and outstanding
Exchangeable Share upon the liquidation, dissolution or winding-up of
Bowater Canada, a Retraction Request by a holder of Exchangeable Shares or
a redemption of Exchangeable Shares by Bowater Canada, as the case may be,
including without limitation all such actions and all such things as are
necessary or desirable to enable and permit Bowater Canada to cause to be
delivered Bowater Common Shares to the holders of Exchangeable Shares in
accordance with the provisions of Article 5, 6 or 7, as the case may be, of
the Share Provisions.
2.2 DEPOSIT OF FUNDS. Bowater will cause Bowater Canada to deposit a
sufficient amount of funds in an account of Bowater Canada as is necessary to
enable Bowater Canada to pay dividends when due and to pay or otherwise satisfy
its respective obligations under Article 5, 6 or 7 of the Share Provisions or
Article 5 of the Plan of Arrangement, as applicable.
2.3 RESERVATION OF BOWATER COMMON SHARES. Bowater hereby represents,
warrants and covenants in favour of Bowater Canada that it has reserved for
issuance and will, at all times while any Exchangeable Shares (other than
Exchangeable Shares held by Bowater or its affiliates) are outstanding, keep
available, free from pre-emptive and other rights, out of its authorized and
unissued capital stock such number of Bowater Common Shares (or other shares or
securities into which Bowater Common Shares may be reclassified or changed as
contemplated by section 2.7 hereof) (a) as is equal to the sum of (i) the number
of Exchangeable Shares issued and outstanding from time to time and (ii) the
number of Exchangeable Shares issuable upon the exercise of all rights to
acquire Exchangeable Shares outstanding from time to time and (b) as are now and
may hereafter be required to enable and permit Bowater to meet its obligations
under the Voting and Exchange Trust Agreement and under any other security or
commitment pursuant to which Bowater may now or hereafter be required to issue
Bowater Common Shares and to enable and permit Bowater Holdings and Bowater
Canada to meet their respective obligations hereunder and under the Share
Provisions.
2.4 NOTIFICATION OF CERTAIN EVENTS. In order to assist Bowater to comply
with its obligations hereunder and to permit Bowater Holdings to exercise the
Liquidation Call Right, the Retraction Call Right and the
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Redemption Call Right, Bowater Canada will notify Bowater and Bowater Holdings
of each of the following events at the time set forth below:
(a) in the event of any determination by the Board of Directors of
Bowater Canada to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to Bowater Canada or to effect any
other distribution of the assets of Bowater Canada among its shareholders
for the purpose of winding up its affairs, at least 60 days prior to the
proposed effective date of such liquidation, dissolution, winding-up or
other distribution;
(b) promptly, upon the earlier of receipt by Bowater Canada of notice
of and Bowater Canada otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of Bowater Canada or to
effect any other distribution of the assets of Bowater Canada among its
shareholders for the purpose of winding up its affairs;
(c) immediately, upon receipt by Bowater Canada of a Retraction
Request;
(d) except in the case of an acquisition of Control of Bowater, at
least 75 days prior to any Redemption Date determined in accordance with
the Share Provisions; and
(e) as soon as practicable upon the issuance by Bowater Canada of any
Exchangeable Shares or rights to acquire Exchangeable Shares (other than
the issuance of Exchangeable Shares upon (i) the acquisition of outstanding
Avenor common shares pursuant to the Arrangement Agreement and (ii) upon
conversion of the 7.50% convertible debentures of Avenor issued February 8,
1994).
2.5 DELIVERY OF COMMON SHARES TO BOWATER CANADA. In furtherance of its
obligations under sections 2.1(d) hereof, upon notice from Bowater Canada of any
event that requires Bowater Canada to cause to be delivered Bowater Common
Shares to any holder of Exchangeable Shares, Bowater shall forthwith issue and
deliver to Bowater Canada the requisite number of Bowater Common Shares to be
received by, and issued to or to the order of, the former holder of the
surrendered Exchangeable Shares, as Bowater Canada shall direct. All such
Bowater Common Shares shall be duly authorized and validly issued as fully paid
and non-assessable and shall be free and clear of any lien, claim or
encumbrance. In consideration of the issuance and delivery of each such Bowater
Common Share, Bowater Canada shall issue to Bowater, or as Bowater shall direct,
common shares of Bowater Canada having equivalent value.
2.6 QUALIFICATION OF BOWATER COMMON SHARES. If any Bowater Common Shares
(or other shares or securities into which Bowater Common Shares may be
reclassified or changed as contemplated by section 2.7 hereof) to be issued and
delivered hereunder require registration or qualification with or approval of or
the filing of any document, including any prospectus or similar document or the
taking of any proceeding with or the obtaining of any order, ruling or consent
from any governmental or regulatory authority under any Canadian or United
States federal, provincial or state law or regulation or pursuant to the rules
and regulations of any regulatory authority or the fulfilment of any other
United States or Canadian legal requirement before such shares (or such other
shares or securities) may be issued by Bowater and delivered by Bowater, Bowater
Canada or Bowater Holdings, at the direction of Bowater Canada if applicable, to
the holder of Exchangeable Shares or in order that such shares (or such other
shares or securities) may be freely traded thereafter (other than any
restrictions of general application on transfer by reason of a holder being a
"control person" for purposes of Canadian provincial securities law or an
"affiliate" of Bowater for purposes of United States federal or state securities
law), Bowater will in good faith expeditiously take all such actions and do all
such things as are necessary or desirable to cause such Bowater Common Shares
(or such other shares or securities) to be and remain duly registered, qualified
or approved under United States and/or Canadian law, as the case may be. Bowater
will in good faith expeditiously take all such actions and do all such things as
are reasonably necessary or desirable to cause all Bowater Common Shares (or
such other shares or securities) to be delivered hereunder to be listed, quoted
or posted for trading on all stock exchanges and quotation systems on which
outstanding Bowater Common Shares (or such other shares or securities) have been
listed by Bowater and remain listed and are quoted or posted for trading at such
time.
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2.7 ECONOMIC EQUIVALENCE. (a) Bowater will not without prior approval of
Bowater Canada and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 10.2 of the Share Provisions:
(i) issue or distribute Bowater Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Bowater
Common Shares) to the holders of all or substantially all of the then
outstanding Bowater Common Shares by way of stock dividend or other
distribution, other than an issue of Bowater Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Bowater
Common Shares) to holders of Bowater Common Shares who exercise an option
to receive dividends in Bowater Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Bowater Common
Shares) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Bowater Common Shares
entitling them to subscribe for or to purchase Bowater Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Bowater Common Shares); or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding Bowater Common Shares (A) shares or securities of
Bowater of any class other than Bowater Common Shares (other than shares
convertible into or exchangeable for or carrying rights to acquire Bowater
Common Shares), (B) rights, options or warrants other than those referred
to in section 2.7(a)(ii) above, (C) evidences of indebtedness of Bowater or
(D) assets of Bowater,
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares; provided that,
for greater certainty, the above restrictions shall not apply to any securities
issued or distributed by Bowater in order to give effect to and to consummate
the transactions contemplated by, and in accordance with, the Arrangement
Agreement.
(b) Bowater will not without the prior approval of Bowater Canada and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 10.2 of the Share Provisions:
(i) subdivide, redivide or change the then outstanding Bowater Common
Shares into a greater number of Bowater Common Shares; or
(ii) reduce, combine, consolidate or change the then outstanding
Bowater Common Shares into a lesser number of Bowater Common Shares; or
(iii) reclassify or otherwise change Bowater Common Shares or effect
an amalgamation, merger, reorganization or other transaction affecting
Bowater Common Shares,
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Exchangeable Shares.
(c) Bowater will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 10 days after the
date on which such event is declared or announced by Bowater (with
contemporaneous notification thereof by Bowater to Bowater Canada and Bowater
Holdings).
(d) The Board of Directors of Bowater Canada shall determine, in good faith
and in its sole discretion (with the assistance of such reputable and qualified
independent financial advisors and/or other experts as the Board of Directors of
Bowater Canada may require), economic equivalence for the purposes of any event
referred to in section 2.7(a) or 2.7(b) above and each such determination shall
be conclusive and binding on Bowater. In making each such determination, the
following factors shall, without excluding other factors determined by the Board
of Directors of Bowater Canada to be relevant, be considered by the Board of
Directors of Bowater Canada:
(i) in the case of any stock dividend or other distribution payable in
Bowater Common Shares, the number of such shares issued in proportion to
the number of Bowater Common Shares previously outstanding;
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(ii) in the case of the issuance or distribution of any rights,
options or warrants to subscribe for or purchase Bowater Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Bowater Common Shares), the relationship between the exercise price
of each such right, option or warrant and the current market value (as
determined by the Board of Directors of Bowater Canada in the manner above
contemplated) of a Bowater Common Share;
(iii) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of Bowater
of any class other than Bowater Common Shares, any rights, options or
warrants other than those referred to in section 2.7(d)(ii) above, any
evidences of indebtedness of Bowater or any assets of Bowater), the
relationship between the fair market value (as determined by the Board of
Directors of Bowater Canada in the manner above contemplated) of such
property to be issued or distributed with respect to each outstanding
Bowater Common Share and the current market value (as determined by the
Board of Directors of Bowater Canada in the manner above contemplated) of a
Bowater Common Share;
(iv) in the case of any subdivision, redivision or change of the then
outstanding Bowater Common Shares into a greater number of Bowater Common
Shares or the reduction, combination, consolidation or change of the then
outstanding Bowater Common Shares into a lesser number of Bowater Common
Shares or any amalgamation, merger, reorganization or other transaction
affecting Bowater Common Shares, the effect thereof upon the then
outstanding Bowater Common Shares; and
(v) in all such cases, the general taxation consequences of the
relevant event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of
Bowater Common Shares as a result of differences between taxation laws of
Canada and the United States (except for any differing consequences arising
as a result of differing marginal taxation rates and without regard to the
individual circumstances of holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of
any security listed and traded or quoted on a securities exchange shall be the
weighted average of the daily trading prices of such security during a period of
not less than 20 consecutive trading days ending not more than five trading days
before the date of determination on the principal securities exchange on which
such securities are listed and traded or quoted; provided, however, that if in
the opinion of the Board of Directors of Bowater Canada the public distribution
or trading activity of such securities during such period does not create a
market which reflects the fair market value of such securities, then the current
market value thereof shall be determined by the Board of Directors of Bowater
Canada, in good faith and in its sole discretion (with the assistance of such
reputable and qualified independent financial advisors and/or other experts as
the Board of Directors of Bowater Canada may require), and provided further that
any such determination by the Board of Directors of Bowater Canada shall be
conclusive and binding on Bowater.
(e) Bowater Canada agrees that, to the extent required, upon due notice
from Bowater, it will use its best efforts to take or cause to be taken such
steps as may be necessary for the purposes of ensuring that appropriate
dividends are paid or other distributions are made by Bowater Canada, or
subdivisions, redivisions or changes are made to the Exchangeable Shares, in
order to implement the required economic equivalent with respect to the Bowater
Common Shares and Exchangeable Shares as provided for in this section 2.7.
2.8 TENDER OFFERS. In the event that a tender offer, share exchange offer,
issuer bid, take-over bid or similar transaction with respect to Bowater Common
Shares (an "Offer") is proposed by Bowater or is proposed to Bowater or its
shareholders and is recommended by the Board of Directors of Bowater, or is
otherwise effected or to be effected with the consent or approval of the Board
of Directors of Bowater, Bowater will use its reasonable efforts expeditiously
and in good faith to take all such actions and do all such things as are
necessary or desirable to enable and permit holders of Exchangeable Shares to
participate in such Offer to the same extent and on an economically equivalent
basis as the holders of Bowater Common Shares, without discrimination. Without
limiting the generality of the foregoing, Bowater will use its reasonable
efforts expeditiously and in good faith to ensure that holders of Exchangeable
Shares may participate in all such Offers without being required to retract
Exchangeable Shares as against Bowater Canada (or, if so required, to ensure
that any such retraction shall be effective only upon, and shall be conditional
upon, the closing of the Offer and only to the extent necessary to tender or
deposit to the Offer). Nothing herein shall affect the rights
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of Bowater Canada to redeem or Bowater Holdings to purchase Exchangeable Shares,
as applicable, in the event of an acquisition of Control of Bowater.
2.9 OWNERSHIP OF OUTSTANDING SHARES. Without the prior approval of Bowater
Canada and the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.2 of the Share Provisions, Bowater covenants and
agrees in favour of Bowater Canada that, as long as any outstanding Exchangeable
Shares are owned by any person or entity other than Bowater or any of its
Affiliates, Bowater will be and remain the direct or indirect beneficial owner
of all issued and outstanding voting shares in the capital of Bowater Canada and
Bowater Holdings.
2.10 BOWATER AND AFFILIATES NOT TO VOTE EXCHANGEABLE SHARES. Each of
Bowater and Bowater Holdings covenants and agrees that it will appoint and cause
to be appointed proxyholders with respect to all Exchangeable Shares held by it
and its Affiliates for the sole purpose of attending each meeting of holders of
Exchangeable Shares in order to be counted as part of the quorum for each such
meeting. Each of Bowater and Bowater Holdings further covenants and agrees that
it will not, and will cause its Affiliates not to, exercise any voting rights
which may be exercisable by holders of Exchangeable Shares from time to time
pursuant to the Share Provisions or pursuant to the provisions of the Canada
Business Corporations Act (or any successor or other corporate statute by which
Bowater Canada may in the future be governed) with respect to any Exchangeable
Shares held by it or by its Affiliates in respect of any matter considered at
any meeting of holders of Exchangeable Shares.
2.11 RULE 10B-18 PURCHASES. For certainty, nothing contained in this
Agreement, including without limitation the obligations of Bowater contained in
Section 2.8 hereof, shall limit the ability of Bowater, Bowater Holdings or
Bowater Canada to make a "Rule 10b-18 Purchase" of Bowater Common Shares
pursuant to Rule 10b-18 of the U.S. Securities Exchange Act of 1934, as amended,
or any successor provisions thereof.
ARTICLE 3
GENERAL
3.1 TERM. This agreement shall come into force and be effective as of the
date hereof and shall terminate and be of no further force and effect at such
time as no Exchangeable Shares (or securities or rights convertible into or
exchangeable for or carrying rights to acquire Exchangeable Shares) are held by
any person or entity other than Bowater and any of its Affiliates.
3.2 CHANGES IN CAPITAL OF BOWATER AND BOWATER CANADA. At all times after
the occurrence of any event contemplated pursuant to sections 2.7 and 2.8 hereof
or otherwise, as a result of which either Bowater Common Shares or the
Exchangeable Shares or both are in any way changed, this agreement shall
forthwith be amended and modified as necessary in order that it shall apply with
full force and effect, mutatis mutandis, to all new securities into which
Bowater Common Shares or the Exchangeable Shares or both are so changed and the
parties hereto shall execute and deliver an agreement in writing giving effect
to and evidencing such necessary amendments and modifications.
3.3 SEVERABILITY. If any provision of this agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this agreement shall not in any way be affected or impaired
thereby and this agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
3.4 AMENDMENTS, MODIFICATIONS. This agreement may not be amended or
modified except by an agreement in writing executed by Bowater Canada, Bowater
Holdings and Bowater and approved by the holders of the Exchangeable Shares in
accordance with Section 10.2 of the Share Provisions.
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3.5 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 3.4,
the parties to this agreement may in writing, at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend or modify
this agreement for the purposes of:
(a) adding to the covenants of any or all parties provided that the
board of directors of each of Bowater Canada, Bowater Holdings and Bowater
shall be of the good faith opinion that such additions will not be
prejudicial to the rights or interests of the holders of the Exchangeable
Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the good faith opinion of the board of directors of
each of Bowater Canada, Bowater Holdings and Bowater, it may be expedient
to make, provided that each such board of directors shall be of the good
faith opinion that such amendments or modifications will not be prejudicial
to the rights or interests of the holders of the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel
to Bowater Canada, Bowater Holdings and Bowater, are required for the
purpose of curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error, provided that
the boards of directors of each of Bowater Canada, Bowater Holdings and
Bowater shall be of the good faith opinion that such changes or corrections
will not be prejudicial to the rights or interests of the holders of the
Exchangeable Shares.
3.6 MEETING TO CONSIDER AMENDMENTS. Bowater Canada, at the request of
Bowater or Bowater Holdings, shall call a meeting or meetings of the holders of
the Exchangeable Shares for the purpose of considering any proposed amendment or
modification requiring approval pursuant to section 3.4 hereof. Any such meeting
or meetings shall be called and held in accordance with the by-laws of Bowater
Canada, the Share Provisions and all applicable laws.
3.7 AMENDMENTS ONLY IN WRITING. No amendment to or modification or waiver
of any of the provisions of this agreement otherwise permitted hereunder shall
be effective unless made in writing and signed by all of the parties hereto.
3.8 ENUREMENT. This agreement shall be binding upon and enure to the
benefit of the parties hereto and their respective successors and assigns.
3.9 NOTICES TO PARTIES. All notices and other communications between the
parties to this agreement shall be in writing and shall be deemed to have been
given if delivered personally or by confirmed telecopy to the parties at the
following addresses (or at such other address for any such party as shall be
specified in like notice):
(a) if to Bowater Canada:
Bowater Canada Inc.
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
Toronto, Ontario
M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
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(b) if to Bowater Holdings:
Bowater Canadian Holdings Incorporated
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
Toronto, Ontario
M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
(c) if to Bowater:
Bowater Incorporated
55 East Camperdown Way
P.O. Box 1028
Greenville, South Carolina 29602
Attention: Secretary
Fax: (864) 282-9573
with a copy to:
Fraser & Beatty
1 First Canadian Place
Suite 4100, P.O. Box 100
Toronto, Ontario
M5X 1B2
Attention: Jamie Plant
Fax: (416) 863-4592
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof
unless such day is not a Business Day in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
3.10 COUNTERPARTS. This agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 JURISDICTION. This agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
3.12 ATTORNMENT. Each of Bowater and Bowater Holdings agrees that any
action or proceeding arising out of or relating to this agreement may be
instituted in the courts of Ontario, waives any objection which it may have now
or hereafter to the venue of any such action or proceeding, irrevocably submits
to the jurisdiction of the said courts in any such action or proceeding, agrees
to be bound by any judgment of the said courts and not to seek, and hereby
waives, any review of the merits of any such judgment by the courts of any other
jurisdiction and hereby appoints Bowater Canada at its registered office in the
Province of Ontario as attorney for service of process.
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IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed as of the date first above written.
BOWATER INCORPORATED
By:
--------------------------------------
Name:
Title:
BOWATER CANADIAN HOLDINGS
INCORPORATED
By:
--------------------------------------
Name:
Title:
BOWATER CANADA INC.
By:
--------------------------------------
Name:
Title:
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ANNEX H
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
PERSONAL AND CONFIDENTIAL
March 9, 1998
Board of Directors
Bowater Incorporated
55 East Camperdown Way
Greenville, SC 29602-1028
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Bowater Incorporated (the "Company") of the Aggregate Consideration (as
defined below) proposed to be paid by the Company for all of the outstanding
Common Shares (the "Common Shares") of Avenor Inc. ("Avenor"), pursuant to the
Arrangement Agreement including the schedules thereto, dated as of March 9,
1998, between Avenor and the Company (the "Agreement"). Pursuant to the
Agreement, the Company proposes to pay C$35.00 per share in cash and stock (the
"Stock Consideration") for all the outstanding Common Shares (together, the
"Aggregate Consideration"). The Aggregate Consideration is to be paid 40% in
Stock Consideration and 60% in cash (or, at the election of the holders of
Common Shares, up to 50% in Stock Consideration with the remainder being paid in
cash). The Stock Consideration is payable, in accordance with the Exchange Ratio
(as defined and set forth in the Agreement), at the election of the holders of
Common Shares, either in (i) Common Stock, par value $1.00 per share (the
"Company Common Stock"), of the Company or (ii) shares to be issued by Avenor
or, at the election of the Company, a wholly owned subsidiary of the Company,
which are referred to in the Agreement as Avenor Exchangeable Shares, and, in
either such case, are exchangeable for shares of Company Common Stock.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We are also familiar with Avenor having, from time to time, provided
certain investment banking services to Avenor.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company for the five years ended December 31, 1996; Annual Reports to
Stockholders and Annual Reports on Form 40-F of Avenor for the five years ended
December 31, 1996; audited financial statements for the year ended December 31,
1997 for Avenor and the Company; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of the Company; certain interim reports to
stockholders of Avenor; certain other communications from the Company and Avenor
to their respective stockholders; certain internal financial analyses and
forecasts for Avenor prepared by the management of Avenor; and certain internal
financial analyses and forecasts for the Company and Avenor prepared by the
management of the Company. We also have held discussions with members of the
senior management of the Company and Avenor regarding the strategic rationale
for, and the potential benefits of, the transaction contemplated by the
Agreement and the past and current business operations, financial condition and
future prospects of their respective companies. In addition, we have reviewed
the reported price and trading activity for the Company Common Stock and the
Common Shares, compared certain financial and stock market information for the
Company and Avenor with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of certain
recent business combinations in the paper and forest products industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In that regard,
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we have assumed, with your consent, that the financial forecasts for the Company
and Avenor, including without limitation the projected cost savings and
operating synergies expected to result from the transaction contemplated by the
Agreement, have been reasonably prepared on a basis reflecting the best
currently available judgments of the Company and that such forecasts will be
realized in the amounts and the times contemplated thereby. In addition, we have
not made an independent evaluation or appraisal of the assets and liabilities of
the Company or Avenor or any of their respective subsidiaries and we have not
been furnished with any such evaluation or appraisal. Our advisory services and
the opinion expressed herein are provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated by the Agreement and such opinion does not
constitute a recommendation as to how any holder of Company Common Stock should
vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Aggregate Consideration to be paid by the Company pursuant to the Agreement is
fair from a financial point of view to the Company.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
GOLDMAN, SACHS & CO.
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ANNEX I
[LETTERHEAD OF TD SECURITIES INC.]
March 9, 1998
The Board of Directors
of Bowater Incorporated
55 East Camperdown Way
Greenville, SC 29601
U. S. A.
To the Board of Directors:
Bowater Incorporated ("Bowater") has entered into an agreement dated as of
March 9, 1998 (the "Agreement") with Avenor Inc. ("Avenor") pursuant to which,
Avenor will apply to the Ontario Court of Justice for an order approving an
arrangement (the "Arrangement") under section 192 of the Canada Business
Corporations Act (Canada), pursuant to which Bowater will acquire the
outstanding common shares of Avenor ("Avenor Common Shares") for C$35.00 per
Avenor Common Share payable, at the election of the holder and subject to
proration, in cash, exchangeable shares of Bowater Canada Inc. ("Exchangeable
Shares"), shares of common stock of Bowater ("Bowater Common Stock"), or a
combination of the foregoing.
In the proposed Arrangement, holders of Avenor Common shares may elect to
receive for each such share:
i. C$35.00 in cash without interest;
ii. a number of shares of Bowater Common Stock determined by reference
to the Exchange Ratio; or
iii. a number of Exchangeable Shares determined by reference to the
Exchange Ratio.
The Exchange Ratio will equal $C$35.00 divided by the product of the
weighted average trading price (in U.S.$) of shares of Bowater Common stock on
the New York Stock Exchange for the 20 trading days ending on the third business
day prior to the effective date of the Arrangement (but not more than
U.S.$55.6187 or less than U.S.$45.5062) multiplied by the value in Canadian
dollars of one U.S. dollar on the last of such trading days. The maximum number
of Avenor Common Shares that may be exchanged for cash, on the one hand and
shares of Bowater Common stock or Exchangeable Shares, on the other hand, may
not exceed 60% and 50% respectively, of the total number of outstanding Avenor
Common Shares.
The Exchangeable Shares will be issued by Avenor (which will become a
subsidiary of Bowater) and will be exchangeable, at any time at the option of
the holder, on a one-for-one basis for shares of Bowater Common Stock. Pursuant
to a Voting and Exchange Trust Agreement, holders of Exchangeable Shares will
have the same voting rights, and be entitled to receive the same dividends as
they would have after the exchange of their Exchangeable Shares.
The Board of Directors of Bowater (the "Board") has requested that TD
Securities Inc. ("TD Securities") provide the Board with an opinion (the
"Fairness Opinion") as to the fairness, from a financial point of view, of the
cash consideration and stock consideration (collectively, the "Aggregate
Consideration") to be paid by Bowater pursuant to the Arrangement.
We have not been asked to prepare, and have not prepared, a valuation of
Bowater or Avenor or any of their material assets, and the Fairness Opinion
should not be construed as such.
TD SECURITIES' ENGAGEMENT
On January 22, 1998, Bowater and TD Securities entered into a letter
agreement (the "Engagement Letter") whereby TD Securities was engaged to provide
financial advisory services and to act as non-exclusive agent to Bowater in
connection with the proposed acquisition of Avenor. The Fairness Opinion is
being provided by TD Securities to Bowater under the Engagement Letter.
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The Engagement Letter provides for TD Securities to receive from Bowater
for the various financial advisory services to be provided monthly work fees,
and a success fee upon closing of the Arrangement based upon the value of the
Avenor Shares and the assumption of Avenor's debt obligations, as well as
reimbursement of all out-of-pocket expenses.
TD SECURITIES' CREDENTIALS
TD Securities, a wholly-owned subsidiary of The Toronto-Dominion Bank, is a
Canadian investment banking firm with operations in a broad range of investment
banking activities, including corporate and government finance, mergers and
acquisition, sales and trading of fixed income instruments and equities, and
investment management. In the course of its normal trading activities, TD
Securities may, from time to time, effect transactions and hold positions in the
securities or options on securities of Bowater and/or Avenor for its own account
and for the accounts of its customers. The opinion expressed herein is the
opinion of TD Securities and its form and content have been approved by a
committee of directors of TD Securities experienced in mergers and acquisitions,
and valuation matters.
SCOPE OF REVIEW
TD Securities was given open access to information and personnel of Bowater
and no limitation was put on TD Securities' scope of review with respect to
Bowater. TD Securities was given limited access to certain non-public
information and personnel of Avenor during a due diligence period from March 7,
1998 to March 8, 1998. In preparing this Fairness Opinion, TD Securities has
relied upon, among other things, (i) the terms of the Agreement; (ii) the
audited financial statements of Bowater for the four years ended December 31,
1997; (iii) the Annual Reports and Form 10-K of Bowater for the three years
ended December 31, 1996 and other public disclosure materials of Bowater; (iv)
other financial information obtained from management of Bowater, including
internal management forecasts, projections, strategic plans and budgets; (v)
discussions with senior management of Bowater with respect to the information
referred to above, among other things; (vi) representations obtained from senior
management of Bowater as to matters of fact relevant to our engagement; (vii)
discussions with the auditors and legal counsel of Bowater; (viii) the audited
financial statements of Avenor for the five years ended December 31, 1997; (ix)
the Annual Reports, Annual Information Form and Form 40-F for Avenor for the
four years ended December 31, 1996; (x) other financial information obtained
from management of Avenor including historical internal financial statements and
Avenor's 1998 budget prepared by management; (xi) the trust indenture for 7.50%
Convertible Unsecured Subordinated Debentures due February 8, 2004 dated
February 8, 1994 between the predecessor company to Avenor, Canadian Pacific
Forest Products Limited, and Montreal Trust Company as trustee; (xii)
discussions with senior management of Avenor during due diligence sessions;
(xiii) discussions with RBC Dominion Securities Inc., Avenor's financial advisor
and Davies, Ward & Beck, Avenor's legal counsel; (xiv) certain generally
available financial performance data and relevant stock market and other trading
information relating to the Bowater Common Stock, the Avenor Common Shares, and
the convertible debentures of Avenor and securities of certain other publicly
traded companies that we consider to be relevant; (xv) generally available
statistics on certain transactions that we consider to be relevant; (xvi)
generally available information regarding the forest products industry; (xvii)
tax matters related to, or arising from, the Plan of Arrangement; and (xviii)
such other information, investigations and analyses as we considered necessary
or appropriate in the circumstances.
ASSUMPTIONS AND LIMITATIONS
We have relied upon, without independent verification, all financial and
other information that was obtained by us from public sources and that was
provided to us by Bowater, Avenor, their respective advisors, or otherwise. We
have assumed that this information was complete and accurate and did not omit to
state any material fact or any fact necessary to be stated to make that
information not misleading. Senior management of Bowater has represented to us
in a certificate delivered today that, among other things, the information
provided to us relating to Bowater and its subsidiaries was complete and correct
in all material respects and does not contain any untrue statement of a material
fact or omit to state any material fact necessary to make any such information
not misleading. Our opinion is conditional upon such completeness and accuracy.
With respect to the budgets, financial forecasts and projections provided to us
and used in our analysis, we have
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assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of management of Bowater and Avenor
as to the matters covered thereby and in rendering our opinion we express no
view as to the reasonableness of such budgets, forecasts or projections or the
assumptions on which they are based. Senior management of Bowater also has
represented that the budgets, forecasts and projections provided to us were
prepared using the identified assumptions which are reasonable in the
circumstances.
Our opinion is based on the securities markets, economics and general
business and financial conditions prevailing today and the conditions and
prospects, financial and otherwise, of Bowater, Avenor and their respective
affiliates as they were reflected in the information reviewed by us. Any changes
therein may affect our opinion and, although we reserve the right to change or
withdraw our opinion in such event, we disclaim any obligation to advise any
person of any such change that may come to our attention or update our opinion
after today.
We have assumed that all conditions precedent to the completion of the
Arrangement can be satisfied in due course, and that all consents, permissions,
exemption or orders of relevant regulatory authorities will be obtained, without
adverse condition or qualification. Our conclusions as to the fairness of the
Aggregate Consideration to be paid by Bowater pursuant to the Arrangement was
based on our review of the Arrangement taken as a whole, rather than on any
particular element of the Arrangement, and this Fairness Opinion should be read
in its entirety.
For the purposes of assessing the fairness from a financial point of view
of the Aggregate Consideration to be paid by Bowater pursuant to the Arrangement
to Bowater, we considered, among other things, (i) multiples of earnings before
interest, depreciation, and taxes ("EBITDA"), as compared to information on
publicly-traded forest products companies; (ii) multiples of EBITDA and annual
unit newsprint capacity, as compared to information on publicly disclosed
acquisitions in the forest products sector; (iii) discounted cash flow analyses
under a variety of pricing and synergy scenarios, discount rates and terminal
value multiples; and (iv) summary merger analyses indicating, among other
things, the projected earnings accretion in 1998 and 1999, with and without
synergies, to holders of Bowater Common Stock as a result of the transaction.
CONCLUSIONS
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Aggregate Consideration to be paid by Bowater pursuant to the
Arrangement is fair, from a financial point of view, to Bowater.
Yours very truly,
TD SECURITIES INC.
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ANNEX J
(RBC LETTERHEAD)
June 18, 1998
The Board of Directors
Avenor Inc.
1250 Rene-Levesque Blvd. West
Montreal, Quebec
H3B 4Y3
To the Board:
RBC Dominion Securities Inc. ("RBC DS") understands that Bowater
Incorporated ("Bowater") has entered into an agreement to acquire all of the
outstanding common shares (the "Common Shares") of Avenor Inc. ("Avenor" or the
"Company") pursuant to a plan of arrangement (the "Arrangement"), as provided in
the amended and restated arrangement agreement between Bowater and Avenor, dated
as of March 9, 1998 (the "Arrangement Agreement"). The terms of the Arrangement
are more fully described in the Joint Management Information Circular and Proxy
Statement (the "Joint Proxy Statement") dated June 18, 1998 to be mailed to
holders of the Common Shares in connection with the Arrangement.
The board of directors (the "Board") of the Company has retained RBC DS to
act as its financial advisor in connection with evaluating Avenor's stand-alone
and strategic transaction alternatives and to provide advice and assistance to
the Board in evaluating the Arrangement, including the preparation and delivery
to the Board of its opinion as to the fairness of the Arrangement from a
financial point of view to the holders of the Common Shares (the "Fairness
Opinion"). RBC DS has not prepared a valuation of the Company or any of its
securities or assets and the Fairness Opinion should not be construed as such.
ENGAGEMENT
The Board initially contacted RBC DS regarding a potential advisory
assignment on November 28, 1997, and RBC DS was formally engaged by the Board
pursuant to an agreement between the Company and RBC DS (the "Engagement
Agreement") dated February 13, 1998. The terms of the Engagement Agreement
provide that RBC DS is to be paid a fee of approximately C$13 million for its
services as financial advisor if the Arrangement is completed. In addition, RBC
DS is to be reimbursed for its reasonable out-of-pocket expenses and to be
indemnified by the Company in certain circumstances. RBC DS consents to the
inclusion of the Fairness Opinion in its entirety and a summary thereof in the
Joint Proxy Statement and to the filing thereof, as necessary, by the Company
with the securities commissions or similar regulatory authorities in Canada and
the United States.
RELATIONSHIP WITH INTERESTED PARTIES
Neither RBC DS nor any of its affiliates is an insider, associate or
affiliate (as those terms are defined in the Securities Act (Ontario)) of Avenor
or Bowater or any of their respective associates or affiliates. RBC DS has not
provided any financial advisory services or participated in financings involving
Avenor or Bowater or any of their respective associates or affiliates within the
past two years, except acting as Avenor's financial advisor in the sale of its
interest in Pacific Forest Products Limited in 1997 and as acting as one of
Avenor's financial advisors in Avenor's intended purchase of Repap Enterprises
Inc. in 1997. RBC DS has in the past been engaged to provide financial advisory
services to certain companies affiliated, associated or related to Avenor. None
of the fees received by RBC DS in respect of such engagements has been material
to RBC DS. There are no understandings, agreements or commitments between RBC DS
and Avenor or Bowater or any of their respective associates or affiliates with
respect to any future business dealings. RBC DS may in the future,
(RBC LETTERHEAD)
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in the ordinary course of its business, perform financial advisory or investment
banking services for Avenor or Bowater or any of their respective associates or
affiliates.
RBC DS acts as a trader and dealer, both as principal and agent, in major
financial markets and, as such, may have had and may in the future have
positions in the securities of Avenor or Bowater or any of their respective
associates or affiliates and, from time to time, may have executed or may
execute transactions on behalf of such companies or clients for which it
received or may receive compensation. As an investment dealer, RBC DS conducts
research on securities and may, in the ordinary course of its business, provide
research reports and investment advice to its clients on investment matters,
including with respect to Avenor or Bowater or the Arrangement.
CREDENTIALS OF RBC DOMINION SECURITIES
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales and trading and investment research. The Fairness
Opinion expressed herein represents the opinion of RBC DS and the form and
content herein have been approved for release by a committee of its directors,
each of whom is experienced in merger, acquisition, divestiture and fairness
opinion matters.
SCOPE OF REVIEW
In connection with our Fairness Opinion, we have reviewed and relied upon
or carried out, among other things, the following:
1. the Arrangement Agreement;
2. the Joint Proxy Statement;
3. the unaudited interim report of the Company for the quarterly
period ended March 31, 1998;
4. audited financial statements of the Company for each of the three
years ended December 31, 1995, 1996 and 1997;
5. annual reports of the Company for each of the two years ended
December 31, 1995 and 1996;
6. first three quarterly reports of the Company for 1996 and 1997;
7. the Notice of Annual Meeting of Shareholders and Management Proxy
Circular of the Company for each of the two years ended December
31, 1995 and 1996;
8. annual information forms of the Company for each of the two years
ended December 31, 1996 and 1997;
9. internal management budget of the Company for the year ending
December 31, 1998;
10. other internal documents of the Company including historical
financial information by mill, terms of long-term debt and credit
facilities, and material supply agreements;
11. projected financial statements for the Company for the years
ending December 31, 1998 through December 31, 2000;
12. discussions with senior management of the Company;
13. discussions with the Company's outside legal counsel;
14. site visits to certain of the Company's facilities;
15. the unaudited interim report of Bowater for the quarterly period
ended March 31, 1998;
16. audited financial statements of Bowater for each of the two years
ended December 31, 1996 and 1997;
17. annual reports of Bowater for each of the two years ended December
31, 1996 and 1997;
18. first three quarterly reports of Bowater for 1996 and 1997;
(RBC DOMINION SECURITIES LOGO)
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19. the Notice of Annual Meeting of Shareholders and Proxy Statement
of Bowater for each of the two years ended December 31, 1996 and
1997;
20. the Form 10-K of Bowater for each of the two years ended December
31, 1996 and 1997;
21. due diligence with senior management of Bowater;
22. public information relating to the business, operations, financial
performance and stock trading history of the Company, Bowater and
other selected public companies considered by us to be relevant;
23. public information with respect to other transactions of a
comparable nature considered by us to be relevant;
24. representations contained in a certificate dated the date hereof
from senior officers of the Company as to the completeness and
accuracy of the information upon which the Fairness Opinion is
based; and
25. such other corporate, industry and financial market information,
investigations and analyses as RBC DS considered necessary or
appropriate in the circumstances.
RBC DS has not, to the best of its knowledge, been denied access by the
Company to any information requested by RBC DS. RBC DS' access to Bowater was
limited to a review of publicly available information only and verbal due
diligence sessions with certain members of Bowater's senior management team. RBC
DS was not, to the best of its knowledge, denied any information or access which
was requested at such sessions. RBC DS was not provided with detailed financial
information or forecasts by Bowater.
ASSUMPTIONS AND LIMITATIONS
With the Board's approval and as provided for in the Engagement Agreement,
RBC DS has relied upon the completeness, accuracy and fair presentation of all
of the financial and other information, data, advice, opinions or
representations obtained by it from public sources, senior management of the
Company, and their consultants and advisors (collectively, the "Information").
The Fairness Opinion is conditional upon such completeness, accuracy and fair
presentation of such Information. Subject to the exercise of professional
judgment and except as expressly described herein, we have not attempted to
verify independently the completeness, accuracy or fair presentation of any of
the Information.
Senior officers of the Company have represented to RBC DS in a certificate
delivered as of the date hereof, among other things, that (i) the Information
(as defined above) provided verbally by, or in the presence of, an officer of
the Company or in writing by the Company or any of its subsidiaries or their
respective agents to RBC DS relating to the Company or any of its subsidiaries
or to the Arrangement, for the purpose of preparing the Fairness Opinion was, at
the date the Information was provided to RBC DS, and is complete, true and
correct in all material respects, and did not, and does not, contain any untrue
statement of a material fact in respect of the Company, its subsidiaries or the
Arrangement, and did not, and does not, omit to state a material fact in respect
of the Company, its subsidiaries or the Arrangement necessary to make the
Information not misleading in light of the circumstances under which the
Information was made or provided; and that (ii) since the dates on which the
Information was provided to RBC DS, except as publicly disclosed by the Company,
there has been no material change, financial or otherwise, in the financial
condition, assets, liabilities (contingent or otherwise), business, operations
or prospects of the Company or any of its subsidiaries and no material change
has occurred in the Information or any part thereof which would have, or which
would reasonably be expected to have, a material effect on the Fairness Opinion.
In preparing the Fairness Opinion, RBC DS has made several assumptions,
including that all of the conditions required to implement the Arrangement will
be met and that the disclosure provided or incorporated by reference in the
Joint Proxy Statement with respect to the Company, Bowater and their respective
subsidiaries and affiliates and the Arrangement is accurate in all material
respects.
(RBC DOMINION SECURITIES LOGO)
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The Fairness Opinion is rendered on the basis of securities markets,
economic, financial and general business conditions prevailing as at the date
hereof and the condition and prospects, financial and otherwise, of the Company,
Bowater and their respective subsidiaries and affiliates, as they were reflected
in the Information and as they have been represented to RBC DS in discussions
with management of the Company and Bowater. In its analyses and in preparing the
Fairness Opinion, RBC DS made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of RBC DS or any party involved in the Arrangement.
The Fairness Opinion has been provided for the use of the Board. The
Fairness Opinion is given as of the date hereof and RBC DS disclaims any
undertaking or obligation to advise any person of any change in any fact or
matter affecting the Fairness Opinion which may come or be brought to RBC DS'
attention after the date hereof. Without limiting the foregoing, in the event
that there is any material change in any fact or matter affecting the Fairness
Opinion after the date hereof, RBC DS reserves the right to change, modify or
withdraw the Fairness Opinion.
FAIRNESS CONCLUSION
Based upon and subject to the foregoing, RBC DS is of the opinion that, as
of the date hereof, the Arrangement is fair from a financial point of view to
the holders of the Common Shares.
Yours very truly,
/s/ RBC DOMINION SECURITIES, INC.
RBC DOMINION SECURITIES INC.
(RBC DOMINION SECURITIES LOGO)
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ANNEX K
CANADA BUSINESS CORPORATIONS ACT
R.S.C. 1985, C. C-44, AS AMENDED
PART XV -- FUNDAMENTAL CHANGES
190. (1) Right to dissent -- Subject to sections 191 and 241, a holder of
shares of any class of a corporation may dissent if the corporation is subject
to an order under paragraph 192(4)(d) that affects the holder or if the
corporation resolves to
(a) amend its articles under section 173 or 174 to add, change or
remove any provisions restricting or constraining the issue,
transfer or ownership of shares of that class;
(b) amend its articles under section 173 to add, change or remove any
restriction on the business or businesses that the corporation may
carry on;
(c) amalgamate otherwise than under section 184;
(d) be continued under section 188; or
(e) sell, lease or exchange all or substantially all its property
under subsection 189(3).
(2) Further right -- A holder of shares of any class or series of shares
entitled to vote under section 176 may dissent if the corporation resolves to
amend its articles in a manner described in that section.
(3) Payment for shares -- In addition to any other right he may have, but
subject to subsection (26), a shareholder who complies with this section is
entitled, when the action approved by the resolution from which he dissents or
an order made under subsection 192(4) becomes effective, to be paid by the
corporation the fair value of the shares held by him in respect of which he
dissents, determined as of the close of business on the day before the
resolution was adopted or the order was made.
(4) No partial dissent -- A dissenting shareholder may only claim under
this section with respect to all the shares of a class held by him on behalf on
any one beneficial owner and registered in the name of the dissenting
shareholder.
(5) Objection -- A dissenting shareholder shall send to the corporation, at
or before any meeting of shareholders at which a resolution referred to in
subsection (1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of
the meeting and of his right to dissent.
(6) Notice of resolution -- The corporation shall, within ten days after
the shareholders adopt the resolution, send to each shareholder who has filed
the objection referred to in subsection (5) notice that the resolution has been
adopted, but such notice is not required to be sent to any shareholder who voted
for the resolution or who has withdrawn his objection.
(7) Demand for payment -- A dissenting shareholder shall, within twenty
days after he receives a notice under subsection (6) or, if he does not receive
such notice, within twenty days after he learns that the resolution has been
adopted, send to the corporation a written notice containing
(a) his name and address;
(b) the number and class of shares in respect of which he dissents;
and
(c) a demand for payment of the fair value of such shares.
(8) Share certificate -- A dissenting shareholder shall, within thirty days
after sending a notice under subsection (7), send the certificates representing
the shares in respect of which he dissents to the corporation or its transfer
agent.
(9) Forfeiture -- A dissenting shareholder who fails to comply with
subsection (8) has no right to make a claim under this section.
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<PAGE> 380
(10) Endorsing certificate -- A corporation or its transfer agent shall
endorse on any share certificate received under subsection (8) a notice that the
holder is a dissenting shareholder under this section and shall forthwith return
the share certificates to the dissenting shareholder.
(11) Suspension of rights -- On sending a notice under subsection (7), a
dissenting shareholder ceases to have any rights as a shareholder other than the
right to be paid the fair value of his shares as determined under this section
except where
(a) the dissenting shareholder withdraws his notice before the
corporation makes an offer under subsection (12),
(b) the corporation fails to make an offer in accordance with
subsection (12) and the dissenting shareholder withdraws his
notice, or
(c) the directors revoke a resolution to amend the articles under
subsection 173(2) or 174(5), terminate an amalgamation agreement
under subsection 183(6) or an application for continuance under
subsection 188(6), or abandon a sale, lease or exchange under
subsection 189(9),
in which case his rights as a shareholder are reinstated as of the date he sent
the notice referred to in subsection (7).
(12) Offer to pay -- A corporation shall, not later than seven days after
the later of the day on which the action approved by the resolution is effective
or the day the corporation received the notice referred to in subsection (7),
send to each dissenting shareholder who has sent such notice
(a) a written offer to pay for his shares in an amount considered by
the directors of the corporation to be the fair value thereof,
accompanied by a statement showing how the fair value was
determined; or
(b) if subsection (26) applies, a notification that it is unable
lawfully to pay dissenting shareholders for their shares.
(13) Same terms -- Every offer made under subsection (12) for shares of the
same class or series shall be on the same terms.
(14) Payment -- Subject to subsection (26), a corporation shall pay for the
shares of a dissenting shareholder within ten days after an offer made under
subsection (12) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(15) Corporation may apply to court -- Where a corporation fails to make an
offer under subsection (12), or if a dissenting shareholder fails to accept an
offer, the corporation may, within fifty days after the action approved by the
resolution is effective or within such further period as a court may allow,
apply to a court to fix a fair value for the shares of any dissenting
shareholder.
(16) Shareholder application to court -- If a corporation fails to apply to
a court under subsection (15), a dissenting shareholder may apply to a court for
the same purpose within a further period of twenty days or within such further
period as a court may allow.
(17) Venue -- An application under subsection (15) or (16) shall be made to
a court having jurisdiction in the place where the corporation has its
registered office or in the province where the dissenting shareholder resides if
the corporation carries on business in that province.
(18) No security for costs -- A dissenting shareholder is not required to
give security for costs in an application made under subsection (15) or (16).
(19) Parties -- On an application to a court under subsection (15) or (16),
(a) all dissenting shareholders whose shares have not been purchased
by the corporation shall be joined as parties and are bound by the decision
of the court; and
(b) the corporation shall notify each affected dissenting shareholder
of the date, place and consequences of the application and of his right to
appear and be heard in person or by counsel.
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<PAGE> 381
(20) Powers of court -- On an application to a court under subsection (15)
or (16), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall then fix a fair
value for the shares of all dissenting shareholders.
(21) Appraisers -- A court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(22) Final order -- The final order of a court shall be rendered against
the corporation in favour of each dissenting shareholder and for the amount of
his shares as fixed by the court.
(23) Interest -- A court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder from the date the
action approved by the resolution is effective until the date of payment.
(24) Notice that subsection (26) applies -- If subsection (26) applies, the
corporation shall, within ten days after the pronouncement of an order under
subsection (22), notify each dissenting shareholder that it is unable lawfully
to pay dissenting shareholders for their shares.
(25) Effect where subsection (26) applies -- If subsection (26) applies, a
dissenting shareholder, by written notice delivered to the corporation within
thirty days after receiving a notice under subsection (24) may
(a) withdraw his notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder is
reinstated to his full rights as a shareholder; or
(b) retain a status as claimant against the corporation, to be paid as
soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors
of the corporation but in priority to its shareholders.
(26) Limitation -- A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
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<PAGE> 382
APPENDIX
BOWATER INCORPORATED
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR SPECIAL MEETING TO BE
HELD JULY 21, 1998
The undersigned appoints David G. Maffucci and Wendy C. Shiba, or any one of
them, each with full power of substitution, as proxies for the undersigned, to
vote as designated below, all of the shares of common stock of Bowater
Incorporated held of record by the undersigned on June 8, 1998, at the special
meeting of shareholders to be held July 21, 1998, and any adjournment thereof,
and in their discretion, to vote upon any other matters that may properly come
before the special meeting and any postponement or adjournment thereof.
Issuance of shares of common stock of Bowater in accordance with the Amended
and Restated Arrangement Agreement and the transactions related thereto.
If you have Comments or a Change of
Address, mark here [ ]
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(If you have written in the above
space, please mark the
corresponding box on the reverse
side of this card.)
You are encouraged to specify your choices by marking the appropriate boxes,
SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in
accordance with the Company's recommendation. The Proxy Committee cannot vote
your shares unless you sign and return this card.
(See reverse side)
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, the proxy will
be voted FOR Proposal 1, and proxyholders will vote, in their discretion, upon
such other business as may properly come before the special meeting and any
postponement or adjournment thereof.
1. ISSUANCE OF SHARES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. At their discretion upon such other matters as may properly come before the
special meeting and any postponement or adjournment thereof.
If your address has changed or if
you have comments, mark here [ ]
Please mark any comments or change
of address on reverse side.
Dated: , 1998
---------------------------
(Please be sure to insert date)
Signed:
--------------------------------
(Signature should conform exactly
to name shown on this proxy.
Executors, administrators,
guardians, trustees, attorneys and
officers signing for corporations
should give full title).
Vote MUST be indicated
(x) in Black or Blue ink. [ ]
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
