##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)  [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004   [  ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from                      to Commission file number  1-8712 BOWATER
INCORPORATED   Delaware
    
    62-0721803(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602(Address of principal executive offices)
    
    (Zip Code)
 (864) 271-7733 
  (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of May 5, 2004. Class
    
    Outstanding at May 5, 2004Common Stock, $1.00 Par Value
    
    55,603,345 Shares




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##### 



BOWATER INCORPORATED
I N D E X PageNumberPART I FINANCIAL INFORMATION1. Financial Statements:Consolidated Statement of Operations for the Three Months Ended March 31, 2004, and
2003
    
    
    3Consolidated Balance Sheet at March 31, 2004, and December 31, 2003
    
    
    4Consolidated Statement of Capital Accounts for the Three Months Ended March 31, 2004
    
    
    5Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2004 and
2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  162. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17  293. Quantitative and Qualitative Disclosures About Market Risk
    
    
    294. Controls and Procedures
    
    
    30PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 2. Change in Securities, Use of Proceeds and Issuer Repurchase of Equity Securities
    
    
    31Item 6. Exhibits and Reports on Form 8 K
    
    
    31SIGNATURES
    
    
    32




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended March 31,2004
    
    2003Sales
    
    $
    745.3
    
    
    $
    630.5Cost of sales, excluding depreciation, amortization
and cost of timber harvested
    
    
    567.5
    
    
    
    516.5Depreciation, amortization and cost of timber harvested
    
    
    86.2
    
    
    
    82.5Distribution costs
    
    
    77.0
    
    
    
    62.1Selling and administrative expense
    
    
    37.0
    
    
    
    36.8Net gain (loss) on fixed assets and land sales
    
    
    (0.9
    )
    
    
    11.1Operating income (loss)
    
    
    (23.3
    )
    
    
    (56.3
    )Other expense (income):Interest income
    
    
    (1.0
    )
    
    
    (1.0
    )Interest expense, net of capitalized interest
    
    
    48.2
    
    
    
    39.9Other, net
    
    
    (1.2
    )
    
    
    8.346.0
    
    
    
    47.2Income (loss) before income taxes, minority interests
and cumulative effect of accounting change
    
    
    (69.3
    )
    
    
    (103.5
    )Provision for income tax benefit
    
    
    (33.8
    )
    
    
    (30.3
    )Minority interests in net loss of subsidiaries
    
    
    (3.0
    )
    
    
    (3.6
    )Income (loss) before cumulative effect of accounting change
    
    
    (32.5
    )
    
    
    (69.6
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (2.1
    )Net income (loss)
    
    
    (32.5
    )
    
    
    (71.7
    )Other comprehensive income (loss), net of taxes:Foreign currency translation adjustments
    
    
    (0.8
    )
    
    
    4.7Minimum pension liability adjustments
    
    
    0.2
    
    
    
    (2.5
    )Unrealized gain (loss) on hedged transactions
    
    
    (18.3
    )
    
    
    39.9Comprehensive loss
    
    $
    (51.4
    )
    
    $
    (29.6
    )Basic earnings per common shareIncome (loss) before cumulative effect of accounting change
    
    
    (0.57
    )
    
    
    (1.22
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.04
    )Net income (loss)
    
    $
    (0.57
    )
    
    $
    (1.26
    )Diluted earnings per common shareIncome (loss) before cumulative effect of accounting change
    
    
    (0.57
    )
    
    
    (1.22
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.04
    )Net income (loss)
    
    $
    (0.57
    )
    
    $
    (1.26
    )Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
 See accompanying notes to consolidated financial statements 3




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED BALANCE SHEET
 (Unaudited, in millions of US dollars except share amounts)
 March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35.6
    
    
    $
    19.4Accounts receivable, net
    
    
    372.2
    
    
    
    360.9Inventories
    
    
    302.2
    
    
    
    293.1Unrealized gain on hedged transactions
    
    
    117.1
    
    
    
    126.7Other current assets
    
    
    40.9
    
    
    
    42.9Total current assets
    
    
    868.0
    
    
    
    843.0Timber and timberlands
    
    
    183.1
    
    
    
    184.1Fixed assets, net
    
    
    3,481.2
    
    
    
    3,557.3Goodwill
    
    
    828.2
    
    
    
    828.2Other assets
    
    
    199.1
    
    
    
    203.2Total assets
    
    $
    5,559.6
    
    
    $
    5,615.8LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    13.3
    
    
    $
    13.4Short-term bank debt
    
    
    120.0
    
    
    
    200.5Accounts payable and accrued liabilities
    
    
    418.5
    
    
    
    434.1Dividends payable
    
    
    11.7
    
    
    
    11.7Total current liabilities
    
    
    563.5
    
    
    
    659.7Long-term debt, net of current installments
    
    
    2,437.9
    
    
    
    2,292.4Pension, other postretirement benefits and other long-term liabilities
    
    
    488.0
    
    
    
    481.4Deferred income taxes
    
    
    450.0
    
    
    
    500.3Minority interests in subsidiaries
    
    
    66.4
    
    
    
    69.3Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value. Authorized 100,000,000 shares; issued
67,199,751 and 67,048,804 shares at March 31, 2004 and
December 31, 2003, respectively
    
    
    67.1
    
    
    
    67.0Exchangeable shares, no par value. Unlimited shares authorized;
1,597,365 and 1,641,312 outstanding at March 31, 2004 and
December 31, 2003, respectively
    
    
    76.0
    
    
    
    78.2Additional paid-in capital
    
    
    1,608.3
    
    
    
    1,602.6Retained earnings
    
    
    355.1
    
    
    
    399.1Unearned compensation
    
    
    (0.7
    )
    
    
    (1.0
    )Accumulated other comprehensive loss
    
    
    (66.0
    )
    
    
    (47.1
    )Treasury stock, at cost, 11,609,629 and 11,611,203 shares at
March 31, 2004 and December 31, 2003, respectively
    
    
    (486.0
    )
    
    
    (486.1
    )Total shareholders equity
    
    
    1,553.8
    
    
    
    1,612.7Total liabilities and shareholders equity
    
    $
    5,559.6
    
    
    $
    5,615.8
 See accompanying notes to consolidated financial statements 4




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
 For The Three Months Ended March 31, 2004
 (Unaudited, in millions of US dollars except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    Exchangeable
    
    Paid-in
    
    Retained
    
    Unearned
    
    Comprehensive
    
    TreasuryStock
    
    Shares
    
    Capital
    
    Earnings
    
    Compensation
    
    Loss
    
    StockBalance at December 31, 2003
    
    $
    67.0
    
    
    $
    78.2
    
    
    $
    1,602.6
    
    
    $
    399.1
    
    
    $
    (1.0
    )
    
    $
    (47.1
    )
    
    $
    (486.1
    )Retraction of exchangeable shares (43,947 shares issued
and exchangeable shares retracted)
    
    
    
    
    
    
    (2.2
    )
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32.5
    )
    
    
    
    
    
    
    
    
    
    
    Dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    Stock options exercised (107,000 shares)
    
    
    0.1
    
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension plan additional minimum liability,
net of tax provision of $0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (1,574 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    Unrealized loss on hedged transactions,
net of tax
benefit of $11.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.3
    )
    
    
    Balance at March 31, 2004
    
    $
    67.1
    
    
    $
    76.0
    
    
    $
    1,608.3
    
    
    $
    355.1
    
    
    $
    (0.7
    )
    
    $
    (66.0
    )
    
    $
    (486.0
    )
 See accompanying notes to consolidated financial statements 5




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited, in millions of US dollars)
 Three Months Ended March 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (32.5
    )
    
    $
    (71.7
    )Adjustments to reconcile net loss to net cash
from (used for) operating activities:Cumulative effect of accounting change
    
    
    
    
    
    
    2.1Depreciation, amortization and cost of
timber harvested
    
    
    86.2
    
    
    
    82.5Deferred income taxes
    
    
    (37.5
    )
    
    
    (30.8
    )Amortization of unearned compensation
    
    
    0.3
    
    
    
    0.4Minority interests in net loss of subsidiaries
    
    
    (3.0
    )
    
    
    (3.6
    )Net gain (loss) on fixed assets and land sales
    
    
    0.9
    
    
    
    (11.1
    )Changes in working capital:Accounts receivable, net
    
    
    (11.3
    )
    
    
    (5.8
    )Inventories
    
    
    (9.1
    )
    
    
    (24.5
    )Income taxes receivable
    
    
    
    
    
    
    75.6Accounts payable and accrued liabilities
    
    
    7.4
    
    
    
    2.8Income taxes payable
    
    
    (18.7
    )
    
    
    20.4Other, net
    
    
    (3.7
    )
    
    
    12.3Net cash from (used for) operating activities
    
    
    (21.0
    )
    
    
    48.6Cash flows from (used for) investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (18.9
    )
    
    
    (96.3
    )Disposition of assets, including timber and timberlands
    
    
    1.6
    
    
    
    11.4Net cash used for investing activities
    
    
    (17.3
    )
    
    
    (84.9
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (11.5
    )
    
    
    (11.5
    )Short-term financing
    
    
    259.8
    
    
    
    344.9Short-term financing repayments
    
    
    (340.3
    )
    
    
    (235.9
    )Long-term financing
    
    
    246.1
    
    
    
    Payments of long-term debt
    
    
    (102.5
    )
    
    
    (9.7
    )Stock options exercised
    
    
    2.9
    
    
    
    0.2Other
    
    
    
    
    
    
    0.1Net cash from financing activities
    
    
    54.5
    
    
    
    88.1Net increase in cash and cash equivalents
    
    
    16.2
    
    
    
    51.8Cash and cash equivalents at beginning of year
    
    
    19.4
    
    
    
    35.9Cash and cash equivalents at end of period
    
    $
    35.6
    
    
    $
    87.7SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest, including capitalized interest of $0 and $3.0, respectively
    
    $
    22.6
    
    
    $
    21.5Income taxes
    
    $
    20.6
    
    
    $
    1.0
 See accompanying notes to consolidated financial statements 6




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BOWATER INCORPORATED 
 Notes to Consolidated Financial Statements  Unaudited
  1.
    
    Basis of PresentationThe accompanying consolidated financial statements include the accounts of
Bowater Incorporated and subsidiaries (Bowater). The consolidated balance
sheet as of March 31, 2004, and the related statements of operations, capital
accounts and cash flows for the three-month periods ended March 31, 2004 and
2003 are unaudited. In our opinion, 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, 2004, are not necessarily indicative of the results to be expected
for the full year. These financial statements should be read in conjunction
with the consolidated financial statements, critical accounting policies,
significant accounting policies and the notes to the consolidated financial
statements included in our most recent Annual Report on Form 10-K. Certain
prior-year amounts in the financial statements and the notes have been
reclassified to conform to the 2004 presentation. The reclassifications had
no effect on total shareholders equity or net loss.2.
    
    Asset Retirement ObligationsEffective January 1, 2003, Bowater adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations.
This Statement requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and for
which a reasonable estimate of a fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related long-lived asset. Subsequently, the asset retirement costs are to be
allocated to expense using a systematic and rational method and the liability
is to be accreted to its face amount.In connection with the adoption of SFAS No. 143, Bowater recorded a
cumulative effect charge, net of taxes, of $2.1 million (or $0.04 per share)
to our consolidated statement of operations for the three months ended March
31, 2003. The adoption adjustment also included increases to fixed assets,
net, of $0.9 million, long-term obligations of $4.3 million and deferred tax
assets of $1.3 million. Asset retirement obligations were recorded for those
obligations where a legally enforceable obligation exists, the life is
determinable and a reasonable estimate of fair value can be made. Asset
retirement obligations recorded in connection with the adoption of SFAS No.
143 were primarily for industrial waste landfills, bark piles and sludge
basins where we have a legally enforceable obligation to perform capping and
post closure monitoring procedures upon closing of these assets. Prior to
SFAS No. 143, Bowater had not recorded an obligation for these asset
retirement obligations. Bowater has not had to legally restrict these assets
for purposes of settling its asset retirement obligations.Additionally, we have certain asset retirement obligations that have
indeterminate useful lives and thereby have an indeterminate settlement date
for the related asset retirement obligation. As a result, no asset
retirement obligation has been recorded for these assets. These assets
include, for example, wastewater and effluent ponds that will be required to
be drained once the related operating facility is closed and removal of
chemicals and other related materials from storage sites on owned facilities
once the related operating facility is closed. Once the life of these assets
becomes determinable and an estimate of fair value can be made, an asset
retirement obligation will be recorded.The following table describes changes to Bowaters asset retirement
obligation liability for the three months ended March 31, 2004 and 2003: Three Months Ended March 31,(Unaudited, in millions)
    
    2004
    
    2003Asset retirement obligation at the beginning of period
    
    $
    4.6
    
    
    $
    Cumulative effect adjustment of adoption of SFAS No. 143
    
    
    
    
    
    
    4.3Accretion expense
    
    
    0.1
    
    
    
    0.1Asset retirement obligation at the end of period
    
    $
    4.7
    
    
    $
    4.4
 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  3.
    
    Off-Balance Sheet Arrangement  FIN 46, Consolidation of Variable
Interest EntitiesIn January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) 46, Consolidation of Variable Interest
Entities. Many variable interest entities (VIEs) have commonly been
referred to as special-purpose entities or off-balance sheet structures. In
general, a VIE is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
46 requires a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss from the VIEs activities or entitled to
receive a majority of the entitys residual returns or both. The
consolidation requirements of FIN 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the VIE was established.In October 2003, the FASB issued FASB Staff Position FIN 46-6 which (i)
deferred the implementation of FIN 46 for VIEs created before February 1,
2003, for periods ending after December 15, 2003, and (ii) permitted early
adoption of FIN 46 before the end of the deferral period for some or all VIEs
in which an entity holds an interest. Effective July 1, 2003, Bowater early
adopted FIN 46 specific to the Covington, Tennessee paper coating facility
(referred to as Nuway) which had been financed through a special purpose
entity (SPE). This SPE was determined to be a VIE and required to be
consolidated by Bowater in accordance with FIN 46. As such, in the third
quarter of 2003, Bowater consolidated assets of approximately $49.4 million
and debt of approximately $51.8 million and recorded a non-cash, after tax
cumulative effect charge, of $2.4 million (or $0.04 per share). On August
11, 2003, Bowater terminated the lease agreement with the SPE and paid
approximately $51.8 million to pay off the debt.The pro forma effects of the application of FIN 46, as if the statement had
been adopted on January 1, 2003 (rather than July 1, 2003) are presented
below: Three Months Ended March(In millions, except per-share amounts)
    
    31, 2003Net loss
    
    $
    (72.1
    )Basic loss per common share
    
    
    (1.27
    )Diluted loss per common share
    
    
    (1.27
    )
  In December 2003, the FASB issued a revision to FIN 46 (FIN 46R). Under
the new FIN 46R guidance, application of FIN 46R is required in financial
statements of entities that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
Bowater completed its adoption of FIN 46R in the first quarter of 2004.
Adoption of FIN 46R had no impact on Bowaters Consolidated Financial
Statements.4.
    
    Stock Based CompensationBowater accounts for stock-based compensation utilizing the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB No. 25, compensation
expense for employee stock options is generally not recognized if the
exercise price of the option equals or exceeds the fair value of the
underlying stock on the date of grant.The following table represents the pro forma effect on net loss and loss per
share if we had applied the fair value-based method and recognition
provisions of SFAS No. 123 Accounting for Stock-Based Compensation. The
estimated fair value of the option is amortized to expense over the vesting
period of the option award, in accordance with the provisions of SFAS No.
123. 8




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited Three Months Ended March 31,(Unaudited, in millions, except per-share amounts)
    
    2004
    
    2003Net loss as reported:
    
    $
    (32.5
    )
    
    $
    (71.7
    )Add: Stock-based compensation expense included in
net loss, net of related tax effects
    
    
    0.2
    
    
    
    0.3Deduct: Stock-based compensation expense
determined under fair value based methods, net
of related tax effects
    
    
    (1.8
    )
    
    
    (1.9
    )Pro forma net loss
    
    $
    (34.1
    )
    
    $
    (73.3
    )Loss per share:Basic, as reported
    
    $
    (0.57
    )
    
    $
    (1.26
    )Basic, pro forma
    
    
    (0.60
    )
    
    
    (1.29
    )Diluted, as reported
    
    $
    (0.57
    )
    
    $
    (1.26
    )Diluted, pro forma
    
    
    (0.60
    )
    
    
    (1.29
    )
  The fair value of each option granted in the three months ended March 31,
2004 and 2003 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: March 31,2004
    
    2003Assumptions:Dividend yield
    
    
    1.8
    %
    
    
    2.0
    %Expected volatility
    
    
    30.6
    %
    
    
    31.8
    %Risk-free interest rate
    
    
    3.4
    %
    
    
    3.4
    %Expected option lives in years
    
    
    6.5
    
    
    
    6.2Weighted average fair value of each option
    
    $
    13.64
    
    
    $
    12.20
  In January 2004, Bowater granted 862,000 options pursuant to its 2002 stock
option plan at an exercise price of approximately $45.0 per share. The options generally
become exercisable over a period of two years and expire 10 years from date
of grant.On January 28, 2003, Bowater granted 82,510 restricted stock awards to
certain officers under the 2002 stock option plan. In accordance with APB
No. 25, Bowater is recognizing a compensation charge over the vesting periods
equal to the fair market value of these shares on the date of the grant. The
expense measured under SFAS No. 123 does not differ from that under APB No.
25. Shares of restricted stock awarded under the 2002 plan vest over a
two-year period and are subject to forfeiture in the event of termination of
employment prior to the vesting dates. Prior to vesting, the participants
may vote and receive dividends. The market value of the restricted shares
granted on January 28, 2003 was approximately $3.3 million and was recorded
in the first quarter of 2003 as unearned compensation, which is a separate
component of shareholders equity. Bowater recorded compensation expense of
approximately
$0.3 million and $0.4 million related to the amortization of unearned
compensation for the three months ended March 31, 2004 and 2003,
respectively.5.
    
    Net Gain (Loss) on Fixed Assets and Land SalesBowater recorded a pre-tax loss of $0.9 million on fixed assets and land
sales during the three months ended March 31, 2004 and a pre-tax gain of
$11.1 million during the three months ended March 31, 2003. 9




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  6.
    
    Other (Income) ExpenseOther, net in the Consolidated Statement of Operations includes the
following: Three Months Ended March 31,(Unaudited, in millions)
    
    2004
    
    2003Foreign exchange loss
    
    $
    0.4
    
    
    $
    8.2(Income) loss from joint venture
    
    
    (0.1
    )
    
    
    0.8Miscellaneous income
    
    
    (1.5
    )
    
    
    (0.7
    )$
    (1.2
    )
    
    $
    8.3
  7.
    
    Accumulated Other Comprehensive Income (Loss)The components of Accumulated Other Comprehensive Loss in the Consolidated
Balance Sheet at March 31, 2004 and December 31, 2003 are as follows: March 31,
    
    December 31,(Unaudited, in millions)
    
    2004
    
    2003Pension plan additional minimum liabilities (1)
    
    $
    (156.7
    )
    
    $
    (156.9
    )Foreign currency translation (2)
    
    
    2.1
    
    
    
    2.9Unrealized gain on hedging transactions (3)
    
    
    88.6
    
    
    
    106.9$
    (66.0
    )
    
    $
    (47.1
    )
  (1)
    
    Net of deferred tax benefit of $88.1 million and $88.2 million,
respectively.  (2)
    
    No tax effect is recorded for foreign currency translation since the
foreign net assets translated are deemed permanently invested.  (3)
    
    Net of deferred tax expense of $54.3 million and $65.5 million,
respectively.  8.
    
    Loss Per ShareBasic and diluted loss per share are based on net loss and do not include any
impact from Other comprehensive loss. The calculation of basic and diluted
loss per share after cumulative effect of accounting change is as follows: Three Months Ended March 31,(Unaudited, in millions, except per-share amounts)
    
    2004
    
    2003Basic Computation:Basic loss available to common shareholders
    
    $
    (32.5
    )
    
    $
    (71.7
    )Basic weighted average shares outstanding
    
    
    57.1
    
    
    
    56.9Basic loss per common share
    
    $
    (0.57
    )
    
    $
    (1.26
    )Diluted Computation:Diluted loss available to common shareholders
    
    $
    (32.5
    )
    
    $
    (71.7
    )Basic weighted average shares outstanding
    
    
    57.1
    
    
    
    56.9Effect of dilutive securities:Options
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    57.1
    
    
    
    56.9Diluted loss per common share
    
    $
    (0.57
    )
    
    $
    (1.26
    )
 10




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  The dilutive effect of options outstanding is calculated using the treasury
stock method. Options for approximately 4.8 million shares outstanding at
March 31, 2004, and 4.2 million shares outstanding at March 31, 2003, were
excluded from the calculation of diluted earnings per share as the impact
would have been antidilutive.9.
    
    Severance Related LiabilitiesCOST REDUCTION PROGRAM:In connection with a multifaceted cost reduction initiative announced in the
fourth quarter of 2002 and completed in the fourth quarter of 2003, Bowater
reduced its salaried and hourly workforce at certain locations by
approximately 600 people. The majority of the 600 terminations were part of
either a voluntary or involuntary workforce reduction that included
termination charges for severance, medical, pension, and other benefits.
Total costs associated with the initiative were $47.9 million ($34.5 million
in 2003 and $13.4 million in 2002), including $11.8 million of pension
related costs ($5.3 million for pension and other postretirement plan
curtailments and $6.5 million of other pension plan benefits related to
accelerated pension years of service). The termination costs are classified
as either cost of sales (manufacturing personnel) or selling and
administrative expense (administrative personnel) in the Consolidated
Statement of Operations. Termination costs under the above initiative for
the three months ended March 31, 2003, totaled approximately $6.7 million and
related to the termination of 79 people. There were no termination costs for
the three months ended March 31, 2004, as the cost reduction plan was
completed in the fourth quarter of 2003. Payments relating to the cost
reduction initiative for the three months ended March 31, 2004 totaled
approximately $4.8 million. The remaining accrual at March 31, 2004, of $4.2
million, which excludes the pension related charges, is expected to be paid
over the remainder of 2004 and is included in Accounts payable and accrued
liabilities in the Consolidated Balance Sheet.The following table summarizes the activity of our cost reduction initiative,
by reportable segment, expensed to our Consolidated Statement of Operations: Expense For ThreeMonths Ended(Unaudited, in Millions)
    
    March 31, 2003Employee termination costs by segment:Newsprint
    
    $
    4.7Coated and Specialty Papers
    
    
    0.6Canadian Forest Products
    
    
    0.4Forest Products
    
    
    1.0Corporate/Other
    
    
    $
    6.7
  The following table summarizes the activity for the liabilities described
above, excluding the pension related costs: Write-offs &
    
    IncreaseBalance,
    
    Payments Against
    
    (Decrease)
    
    Foreign
    
    Balance,(Unaudited, in millions)
    
    12/31/03
    
    Reserve
    
    Reserve
    
    Exchange
    
    3/31/04Employee termination
costs
    
    $
    9.0
    
    
    $
    (4.8
    )
    
    $
    
    
    
    $
    
    
    
    $
    4.2
  10.
    
    Long-Term and Short-Term Debt and Off-Balance Sheet Debt GuaranteesOn March 17, 2004, Bowater sold, in a registered offering, $250 million notes
due March 15, 2010. Interest on the notes accrue at a rate based on LIBOR
plus 3% and is payable quarterly beginning on June 15, 2004. On or after
March 15, 2006, Bowater may redeem all or a portion of the notes at any time.
The redemption price will be 102% of 11




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  the principal amount if redeemed from
March 15, 2006 to March 14, 2007; 101% if redeemed from March 15, 2007 to
March 14, 2008; and 100% if redeemed on or after March 15, 2008. We received
net proceeds from the sale of the notes of $246.2 million, which were net of
underwriting fees of $3.8 million. These fees are being amortized over the
life of the notes. The proceeds were used to pay amounts outstanding under
the short-term bank debt credit facilities ($146.2 million) and the
term loan ($100.0 million).On April 22, 2004, Bowater closed on a new three-year revolving credit
facility due April 2007. The new facility provides $400 million of revolving
credit in the United States and $35 million in Canada. This new facility
replaces the previous $500 million three-year credit facility in the United
States and the $100 million 364-day credit facility in Canada. Borrowings
under the new facility incur interest based, at our option, on specified
market interest rates plus a margin tied to the credit rating of our
long-term debt. The facility contains various covenants, including
requirements to maintain a minimum consolidated net worth (generally defined
as common shareholders equity, plus any outstanding preferred stock plus
minimum pension liability amounts) of $1.5 billion, a maximum 62.5% ratio of
total debt to total capital (defined as total debt less revaluation of debt
assumed through acquisitions, plus net worth including minority interest,
plus minimum pension liability amounts), and to maintain an annual minimum
EBITDA (generally defined as net income, excluding extraordinary,
non-recurring or non-cash items, plus income taxes plus depreciation plus net
interest expense) of $250.0 million measured quarterly, beginning March 31, 2005,
through December 31, 2005, and $400.0 million at the end of each quarter
thereafter. If Bowater generates net income, the minimum net worth
requirement increases by half of Bowaters consolidated net income for each
fiscal quarter (excluding gains from cash flow hedges in place as of December
31, 2003).Bowater has off-balance sheet debt guarantees of approximately $47.5 million
at March 31, 2004, with $37.2 million related to Ponderay Newsprint Company
(Ponderay) and $10.3 million related to Timber Note Holdings LLC, a
Qualified Special Purpose Entity.Bowater has a 40% interest in Ponderay, an unconsolidated partnership.
Ponderay has a credit facility with several banks that is made up of two
separate tranches. The first tranche is a $25.0 million revolving credit
facility and the second tranche is a $93.0 million term loan. Bowater and
the other partners serve as guarantors on the term loan. Ponderays outstanding balance under
the term loan at March 31, 2004 was $93.0 million. The revolving credit
facility has $10 million reserved for letters of credit. There are no other
balances outstanding under the revolving credit facility. Ponderays
term loan outstanding balance is reduced annually by its excess cash flows as defined
in the credit facility and the final balance is due at maturity on April 12,
2006. Bowater guarantees 40% of the outstanding balance under the Ponderay
term loan (a guarantee of $37.2 million at March 31, 2004). Bowaters
guarantee is reduced as the outstanding balance of the term loan is reduced.
Bowater would be required to perform on the guarantee if Ponderay were to
default on its credit facility.In connection with Bowaters 1999 land sale and note monetization, we
guarantee 25% of the outstanding investor notes principal balance of Timber
Note Holdings LLC. Bowater currently guarantees approximately $10.3 million
of the investor notes principal balance. This guarantee is proportionately
reduced by annual principal repayments on the
investor notes (annual minimum repayments of $2.0 million) through 2008.
The remaining investor notes principal amount is to be repaid in 2009.
Bowater would be required to perform on the guarantee if Timber Note Holdings
LLC were to default on the investor notes or if there were a default on the
notes receivable. 12




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  11.
    
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to Bowaters pension
and other postretirement plans are as follows for the three months ended
March 31, 2004 and 2003: Pension Plans
    
    Other Postretirement Plans(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit cost:Service cost
    
    $
    9.5
    
    
    $
    8.0
    
    
    $
    1.2
    
    
    $
    1.0Interest cost
    
    
    27.3
    
    
    
    25.5
    
    
    
    4.5
    
    
    
    3.6Expected return on plan assets
    
    
    (27.1
    )
    
    
    (26.0
    )
    
    
    
    
    
    
    Amortization of transition amount
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    0.5
    
    
    
    0.2
    
    
    
    (1.5
    )
    
    
    (1.6
    )Recognized net actuarial loss
    
    
    3.2
    
    
    
    1.1
    
    
    
    2.6
    
    
    
    2.0Net periodic benefit cost
    
    $
    13.4
    
    
    $
    8.7
    
    
    $
    6.8
    
    
    $
    5.0
  12.
    
    Commitments and Contingencies  a.
    
    Bowater is involved in various legal proceedings relating to
contracts, commercial disputes, taxes, environmental issues, employment
and workers compensation claims and other matters. We periodically
review the status of these proceedings with both inside and outside
counsel. We believe that the ultimate disposition of these matters will
not have a material adverse effect on our financial condition, but it
could have a material adverse effect on the results of operations in a
given quarter or the year.b.
    
    There have been no material developments to the legal proceedings
described in our annual report on Form 10-K filed on March 10, 2004.  13.
    
    Financial InstrumentsBowater utilizes certain derivative instruments to enhance its ability to
manage risk relating to cash flow exposure. Derivative instruments are
entered into for periods consistent with related underlying cash flow
exposures and do not constitute positions independent of those positions. We
do not enter into contracts for speculative purposes; however, we do, from
time to time enter into commodity and certain forward contracts that are not
accounted for as accounting hedges. On the earlier of the date into which
the derivative contract is entered or the date of transition, we designate
the derivative as a cash flow hedge.We pay a significant portion of the operating expenses of our Canadian mill
sites in Canadian dollars. To reduce our exposure to United States and
Canadian dollar exchange rate fluctuations, we enter into and designate
Canadian dollar forward contracts to hedge certain of our forecasted Canadian
dollar cash outflows at the Canadian mill operations. 13




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  The components of the net gain (loss) related to cash flow hedges and
included in Accumulated other comprehensive loss for the three months ended
March 31, 2004 and 2003 are as follows: Three Months Ended March 31,(In millions)
    
    2004
    
    2003(Gains) losses resulting from reclassification to
earnings from Accumulated other comprehensive income
(loss)
    
    $
    (31.9
    )
    
    $
    (3.3
    )Unrealized gain for change in value of cash flow hedges
    
    
    2.4
    
    
    
    67.6(29.5
    )
    
    
    64.3Income tax (expense) benefit
    
    
    11.2
    
    
    
    (24.4
    )Net gain (loss)
    
    $
    (18.3
    )
    
    $
    39.9
  We formally document all relationships between hedging instruments and hedged
items, as well as our risk-management objectives and strategies for
undertaking various hedge transactions. We link all hedges that are
designated as cash flow hedges to forecasted transactions. The maximum time
period we have hedged transactions is two years. We also assess, both at the
inception of the hedge and on an on-going basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes
in cash flows of hedged items. When it is determined that a derivative is
not highly effective as a hedge, we discontinue hedge accounting
prospectively.Information regarding our Canadian dollar contracts notional amount,
carrying value, fair market value, and range of exchange rates of the
contracts is summarized in the table below. The notional amount of these
contracts represents the amount of foreign currencies to be purchased or sold
at maturity and does not represent our exposure on these contracts. Net Asset (Liability)Notional
    
    
    
    
    
    
    
    
    
    Range OfAmount of
    
    Carrying
    
    Fair
    
    U.S.$/CDN$March 31, 2004 (in millions)
    
    Derivatives
    
    Amount
    
    Market Value
    
    Exchange RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2004
    
    $
    426.0
    
    
    $
    93.9
    
    
    $
    93.9
    
    
    
    .6476-.6124Due in 2005
    
    
    507.0
    
    
    
    47.5
    
    
    
    47.5
    
    
    
    .7489-.6316Due in 2006
    
    
    108.0
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    .7609-.7332$
    1,041.0
    
    
    $
    142.9
    
    
    $
    142.9
  In order to reduce our exposure to exchange rate fluctuations on our Canadian
dollar denominated long-term debt, we enter into Canadian dollar forward
contracts with notional amounts of approximately $100 million. These
economic hedge contracts are marked to market through earnings. The
contracts are settled quarterly and gains or losses are included in Other,
net in our Consolidated Statement of Operations. At March 31, 2004, our
outstanding Canadian dollar forward contracts had notional amounts of $100
million due on June 29, 2004. The fair value of the Canadian dollar forward
contracts outstanding at March 31, 2004 was a liability of less than $0.1
million. We recorded a loss of less than $0.1 million for the three months
ended March 31, 2004 and a gain of approximately $7.9 million for the three
months ended March 31, 2003 in the Consolidated Statement of Operations as a
result of these economic hedge contracts.  The counterparties to our derivative financial instruments are substantial
and creditworthy multi-national financial institutions and no one financial
institution has more than 15% of our derivative financial instruments.
Therefore, the risk of counterparty nonperformance is considered to be
remote. 14




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  14.
    
    Segment InformationBelow is a description of the types of products and services from which each
reportable segment derives its revenues:Bowater is organized into five divisions: the Newsprint Division, the Coated
and Specialty Papers Division, the Pulp Division, the Forest Products
Division and the Canadian Forest Products Division. Except for the Pulp
Division, each division is responsible for the sales and marketing of
distinct product lines and the operation of certain manufacturing sites. The
Pulp Division is primarily a marketing and distribution division whose
administrative expenses are included in Corporate & Other Eliminations.
Therefore, the other four divisions are our reportable segments. Certain
segment information for the three-month period ended March 31, 2003 has been
reclassified to conform to the March 31, 2004 presentation.NEWSPRINT DIVISIONThe Newsprint Division operates seven manufacturing sites (including Ponderay
Newsprint Company, an unconsolidated partnership) in the United States,
Canada and South Korea. The principal product at these manufacturing sites
is newsprint, but several of the sites also produce market pulp and uncoated
specialty papers. This division has primary responsibility for the domestic
and international marketing and sales of newsprint.COATED AND SPECIALTY PAPERS DIVISIONThe Coated and Specialty Papers Division operates a manufacturing site that
produces coated paper, newsprint (through January 2003), market pulp and
uncoated specialty papers, and two Nuway coating facilities, both located in
the United States. This division is responsible for the marketing and sales
of the full spectrum of coated and uncoated groundwood specialty papers
manufactured by Bowater.CANADIAN FOREST PRODUCTS DIVISIONThe Canadian Forest Products Division operates four paper manufacturing sites
in Canada. The division manages 0.4 million acres of owned or leased
timberland and over 23.5 million acres of Crown-owned land in the Canadian
provinces of Quebec and New Brunswick on which we have cutting rights. The
division also operates nine sawmills and one wood treatment plant, supplies
wood to four paper mills and nine sawmills, and is responsible for the
marketing and sales of its timber and lumber production.FOREST PRODUCTS DIVISIONThe Forest Products Division manages 1.0 million acres of timberland owned or
leased in the United States and the Canadian provinces of Ontario and Nova
Scotia and over 8.3 million acres of Crown-owned land in the province of
Ontario on which we have cutting rights. The division also operates four
softwood sawmills, supplies wood fiber to our pulp and paper production sites
and markets and sells timber and southern yellow pine lumber in North
America.PULP DIVISIONThe Pulp Division markets and distributes market pulp produced by other
divisions. Financial results for the production and sale of market pulp are
included in the Newsprint Division or the Coated and Specialty Papers
Division, depending upon which site manufactures the product. The Pulp
Divisions selling and administrative expenses are included in Corporate and
Other Eliminations. Accordingly, no separate results are reported for this
division.Factors management used to identify our segments:Bowaters reportable segments are business units responsible for the
marketing and sales of different products. They are managed separately
because of the different products they are responsible for manufacturing and
distributing. 15




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  The line entitled Segment income (loss) in the following tables is equal to
Operating income (loss) as presented in our Consolidated Statement of
Operations. In addition, none of the income or loss items following
Operating income (loss) in our Consolidated Statement of Operations are
allocated to our segments, since they are reviewed separately by Bowaters
management.The following tables summarize information about segment profit and loss for
the three months ended March 31, 2004 and 2003 and segment assets as of March
31, 2004 and 2003: Coated and
    
    CanadianThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Net Gain (Loss) onMarch 31, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    Fixed Assets and
    
    Corporate/ Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Land Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    394.8
    
    
    $
    141.3
    
    
    $
    179.8
    
    
    $
    39.7
    
    
    $
    
    
    
    $
    
    
    
    $
    755.6Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.3
    )
    
    
    (10.3
    )Sales  external customers
    
    
    394.8
    
    
    
    141.3
    
    
    
    179.8
    
    
    
    39.7
    
    
    
    
    
    
    
    (10.3
    )
    
    
    745.3Segment income (loss)
    
    
    (15.5
    )
    
    
    (1.5
    )
    
    
    (19.6
    )
    
    
    (0.6
    )
    
    
    (0.9
    )
    
    
    14.8
    
    
    
    (23.3
    )]Total assets at 3/31/04
    
    $
    2,613.6
    
    
    $
    789.4
    
    
    $
    1,296.5
    
    
    $
    244.8
    
    
    $
    
    
    
    $
    615.3
    
    
    $
    5,559.6
 Coated and
    
    CanadianThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Net Gain (Loss) onMarch 31, 2003
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    Fixed Assets and
    
    Corporate/ Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Land Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    350.8
    
    
    $
    106.2
    
    
    $
    171.3
    
    
    $
    22.3
    
    
    $
    
    
    
    $
    
    
    
    $
    650.6Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20.1
    )
    
    
    (20.1
    )Sales  external customers
    
    
    350.8
    
    
    
    106.2
    
    
    
    171.3
    
    
    
    22.3
    
    
    
    
    
    
    
    (20.1
    )
    
    
    630.5Segment income (loss)
    
    
    (21.0
    )
    
    
    (20.3
    )
    
    
    (12.0
    )
    
    
    (1.8
    )
    
    
    11.1
    
    
    
    (12.3
    )
    
    
    (56.3
    )Total assets at 3/31/03
    
    $
    2,713.9
    
    
    $
    762.1
    
    
    $
    1,344.7
    
    
    $
    259.0
    
    
    $
    
    
    
    $
    558.6
    
    
    $
    5,638.3
 16




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Organization Bowater is organized into five divisions: the Newsprint Division, the Coated
and Specialty Papers Division, the Canadian Forest Products Division, the
Forest Products Division and the Pulp Division. Except for the Pulp Division,
each division is responsible for the sales and marketing of distinct product
lines and the operation of certain manufacturing sites. The Pulp Division is
primarily a marketing and distribution division. Therefore, Bowaters
financial results are collected, analyzed and reported through the other four
divisions. Cautionary Statement Regarding Forward-Looking Information Statements that are not reported financial results or other historical
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include,
for example, statements about our business outlook, assessment of market
conditions, strategies, future plans, future sales, prices for our major
products, inventory levels, capital spending and tax and exchange rates. These
forward-looking statements are not guarantees of future performance. These
statements are based on managements expectations that involve a number of
business risks and uncertainties, any of which could cause actual results to
differ materially from those expressed in or implied by the forward-looking
statements. In addition to specific factors described in connection with any
particular forward-looking statement, factors that could cause actual results
to differ materially include, but are not limited to, those described under the
caption Cautionary Statement Regarding Forward-Looking Information in
Bowaters annual report on Form 10-K for the year ended December 31, 2003, and
from time to time, in Bowaters other filings with the Securities and Exchange
Commission. In addition, other risks could adversely affect us, as it is not
possible for us to predict or assess all risks. We disclaim any obligation to
publicly update or revise any forward-looking statements even if our situation
changes in the future. Information about industry or general economic conditions contained in this
report are derived from third party sources (e.g. trade publications) that
Bowater believes are widely accepted and accurate; however, Bowater has not
independently verified this information and cannot provide assurances of its
accuracy. Accounting Policies and Estimates The following discussion and analysis provides information that we believe is
useful in understanding our operating results, cash flows and financial
condition on our unaudited Consolidated Financial Statements included in this
quarterly report. Our significant accounting policies are described in Note 1
to the Consolidated Financial Statements in Bowaters annual report on Form
10-K for the year ended December 31, 2003. Bowaters critical accounting
policies and estimates are described under the caption Critical Accounting
Policies and Estimates in Item 7 of Bowaters annual report on Form 10-K for
the year ended December 31, 2003. The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates, assumptions and judgments
and rely on future projections of results of operations and cash flows. We
base our estimates and assumptions on historical data and other assumptions
that we believe are reasonable under the circumstances. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities in our financial statements.
In addition, they affect the reported amounts of revenues and expenses during
the reporting period. Our judgments are based on our assessment as to the effect certain estimates,
assumptions of future trends or events may have on the financial condition and
results of operations reported in our Consolidated Financial Statements. Our
projections of future results of operations and cash flows are utilized by an
independent valuation firm to determine fair value for selected assets. These
values are important assumptions in certain of our critical accounting
policies. It is important that the reader of our financial statements
understand that actual results could differ materially from these estimates,
assumptions, projections and judgments. 17




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Overview of Financial Performance The first quarter of 2004 continued to be a difficult operating environment.
Our net loss for the quarter was $32.5 million ($0.57 per diluted share) with
an operating loss of $23.3 million. These results compare favorably to both
the first quarter of 2003, when our net loss was $71.7 million ($1.26 per
diluted share) with an operating loss of $56.3 million, and to the fourth
quarter of 2003, when our net loss was $50.9 million ($0.89 per diluted share)
with an operating loss was $24.3 million. The principal reason for these
improved results was higher product pricing and a higher tax benefit. However,
our pricing improvements in the first quarter of 2004 compared to the fourth
quarter of 2003, were largely offset by higher energy costs and fiber costs. In the first quarter our capital spending was $18.9 million. Our debt, net of
cash, increased approximately $51.0 million in the quarter due to an increase
in cash used by operations of $21.0 million, resulting from higher working
capital needs, $18.9 million of capital spending and $11.5 million in dividend
payments. We improved our liquidity by completing the sale of $250 million in registered
floating rate notes due in 2010, using the proceeds to repay bank debt. In
April 2004, we entered a new three year $435 million credit facility. Outlook We believe that demand for our products is improving due to a recovery in the
U.S. economy. March 2004 newspaper ad linage increased 3.3%. Demand for
coated and specialty papers generally increased in the first quarter by 5.8%
for coated groundwood and by 10.8% for uncoated mechanical groundwood. First
quarter industry shipments of market pulp were a record 9.5 million tons.
Continued strong housing starts and railcar shortages have tightened the lumber
markets. We therefore enter the second quarter with higher pricing in
newsprint, market pulp, specialty papers, and lumber compared to the average of
the first quarter and with a price increase announced for June in our coated
paper grades. Wood and energy costs are expected to return to more normal
levels but we may incur higher costs for recycled fiber. Also, in the second
quarter we expect higher maintenance due to regular outages required every one
to two years. Despite the favorable indicators of demand, our challenges and risks continue.
Prices realized during the quarter were insufficient to return us to
profitability. Our ability to fully implement all product pricing announced
thus far in 2004 may be influenced by the recovery of demand for those
products. The Canadian dollar has weakened in the second quarter of 2004,
easing cost pressures caused by its strengthening during 2003, but we cannot
predict whether this trend will continue. Other economic factors may shorten or
weaken the apparent economic recovery, which could negatively impact demand for
our products.  18




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations Three Months Ended March 31,
    
    Change(In millions, except per share amounts)
    
    2004
    
    2003
    
    2004 vs. 2003Sales
    
    $
    745.3
    
    
    $
    630.5
    
    
    $
    114.8Operating loss
    
    
    (23.3
    )
    
    
    (56.3
    )
    
    
    33.0Net loss
    
    
    (32.5
    )
    
    
    (71.7
    )
    
    
    39.2Loss per diluted share
    
    
    (0.57
    )
    
    
    (1.26
    )
    
    
    0.69Significant items that (increased) decreased operating loss:Net loss on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    $
    (12.0
    )Product pricing
    
    
    
    
    
    
    
    
    
    
    63.5Distribution costs
    
    
    
    
    
    
    
    
    
    
    (9.2
    )Shipments
    
    
    
    
    
    
    
    
    
    
    (6.1
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (9.7
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    6.7Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.2
    )$
    33.0
 Salesincreased in the first quarter of 2004 as compared to the first quarter
of 2003 primarily due to higher transaction prices for all products and due to
increased shipments of newsprint, coated and specialty papers, and lumber as
further discussed in the Product Line Information section. Operating lossdecreased in the first quarter of 2004 as compared to the first
quarter of 2003. The above table analyzes the major items that caused the
decrease in operating loss. A brief explanation of these major items follows:  Net loss on fixed assets and land salesrelates primarily to land sales and
the disposition or write-off of fixed assets. The decrease is due to lower
land sales in the first quarter of 2004 compared to the first quarter of 2003
and increases in losses associated with asset dispositions and write-offs.Product pricingfor all of our major product groups was higher in the first
quarter of 2004 as compared to the first quarter of 2003. Please refer to
the discussion of Product Line Information for a more detailed analysis of
product pricing and shipments.Distribution costswere higher in the first quarter of 2004 as compared to
the first quarter of 2003 as a result of higher sales, higher shipments and
lumber duties on increased lumber shipments.Shipmentswere higher in the first quarter of 2004 as compared to the first
quarter of 2003 due to increased demand. Please refer to the discussion of
Product Line Information for a more detailed analysis of product pricing
and shipments.Manufacturing costswere higher in the first quarter of 2004 as compared to
the first quarter of 2003 primarily as a result of a stronger Canadian dollar
($44.5 million) and increased fiber costs ($13.9 million). These increases
were offset by improved production volumes ($23.4 million). The negative
impact on manufacturing costs of a strong Canadian dollar was partially
offset by gains on hedged transactions of approximately $31.9 million that
were recorded against manufacturing costs during the period.Employee termination costswere lower in the first quarter of 2004 as
compared to the first quarter of 2003, as we completed our cost reduction
program in the fourth quarter of 2003. 19




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Net lossfor the three months ended March 31, 2003 includes an after tax charge
of $2.1 million, or $0.04 per diluted share, for the cumulative effect
adjustment resulting from the adoption of Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. PRODUCT LINE INFORMATION Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions. In general, our 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. Newsprint Three Months Ended March 31,2004
    
    2003Sales (in millions)
    
    $
    326.5
    
    
    $
    290.8Average prices (per metric ton)
    
    $
    504
    
    
    $
    460Shipments (thousands of metric tons)
    
    
    648.2
    
    
    
    632.2Downtime (thousands of metric tons)
    
    
    38.7
    
    
    
    48.6Inventory at end of period (thousands of metric tons)
    
    
    75.6
    
    
    
    96.1
 Our average newsprint transaction price was 9.6% higher during the three months
ended March 31, 2004 compared to the first three months of 2003. The increase
reflects the realization of price increases during 2003 and in the first
quarter of 2004. Newsprint shipments were 2.5% higher in the first three
months of 2004 primarily due to increased orders and less downtime. We plan to
take 50,000 metric tons of market and maintenance downtime in the second
quarter of 2004. The market downtime is primarily from an idled paper machine
at our Thunder Bay mill (since late June 2003) and maintenance downtime from
scheduled annual or biennial outages. We expect this market downtime to
continue until market conditions improve. We will continue to match production
to orders. We announced a $50 per metric ton price increase for the domestic market
effective February 1, 2004; however, market conditions will determine whether
we fully realize the increase. Newsprint Third Party Data:During the three months ended March 31, 2004, total
United States demand of newsprint increased 1.8%, while consumption decreased
2.6%, compared to the same period a year ago. North American net exports of
newsprint increased 6.5% versus the first quarter 2003 level. Newspaper
advertising linage improved 2.6% in the first three months of 2004 compared to
2003. Total inventories (North American mills and users) were 1.54 million
metric tons at March 31, 2004, approximately 117,000 metric tons below
historical levels. Coated and Specialty Papers Three Months Ended March 31,2004
    
    2003Sales (in millions)
    
    $
    195.9
    
    
    $
    153.7Average prices (per short ton)
    
    $
    580
    
    
    $
    551Shipments (thousands of short tons)
    
    
    337.8
    
    
    
    279.0Downtime (thousands of short tons)
    
    
    31.6
    
    
    
    31.0Inventory at end of period (thousands of short tons)
    
    
    61.0
    
    
    
    44.8
 20




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Our average transaction price for coated paper was 4.0% higher during the three
months ended March 31, 2004, compared to the first three months of 2003 due to
the realization of price increases during 2003. Our coated groundwood papers
shipments increased 43.0% in the first quarter of 2004 as compared to the first
quarter of 2003, primarily as a result of the conversion of a paper machine at
our Catawba facility from newsprint to coated paper. Our average transaction
price for specialty paper was 3.5% higher during the first three months of 2004
due to the price increases noted above. Our specialty papers shipments
increased 3.1% due to increased demand. Effective March 1, 2004, and June 1, 2004, Bowater announced price increases of
$45 and $60 per short ton for selected uncoated groundwood and coated paper
products, respectively. Market conditions will determine whether we realize
these increases. Coated and Specialty Papers Third Party Data:According to Publishers
Information Bureau, U.S. magazine advertising pages decreased 2.3% compared to
the first quarter of 2003 and catalog mailings (measured by Standard Mail
weight) were up 4.6% in the fourth quarter of 2003, compared to the same period
in the previous year. North American demand for coated mechanical papers was
up 5.8% compared to the first quarter of 2003. North American demand for
supercalendered high gloss papers and other uncoated mechanical papers was flat
and up 10.8%, respectively, compared to the first quarter of 2003. Market Pulp Three Months Ended March 31,2004
    
    2003Sales (in millions)
    
    $
    137.2
    
    
    $
    128.9Average prices (per metric ton)
    
    $
    485
    
    
    $
    452Shipments (thousands of metric tons)
    
    
    282.5
    
    
    
    285.0Downtime (thousands of metric tons)
    
    
    5.0
    
    
    
    1.3Inventory at end of period (thousands of metric tons)
    
    
    50.3
    
    
    
    59.7
 Our average price for market pulp was 7.3% higher during the three months ended
March 31, 2004 compared to the first three months of 2003. The increase
reflects the realization of price increases in the latter half of 2003 and
early 2004 brought about by improved world demand. Our shipments decreased
0.9% in the first three months of 2004. Our market pulp inventories ended the
first quarter of 2004 at 14 days supply, 18 days below the industry average. Bowater announced a $30 per metric ton price increase on paper grade pulps
beginning in April 2004. Market conditions will determine whether we fully
realize this increase. Market Pulp Third Party Data:Demand for market pulp increased in the first
three months of 2004 compared to the same period last year. World shipments
were up 4.3% for the first three months of 2004 compared to the same period in
2003. World Market Pulp producers operated at 96% of capacity but shipped at
97% of capacity. Consequently, inventories decreased over the quarter by
75,000 metric tons, to end the quarter at 3.292 million metric tons, or 32 days
supply. Inventories are 523,000 metric tons or 4 days supply above the
corresponding period of 2003. 21




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Lumber Three Months Ended March 31,2004
    
    2003Sales (in millions)
    
    $
    77.0
    
    
    $
    49.3Average prices
    
    $
    315
    
    
    $
    248Shipments (million board feet)
    
    
    244.9
    
    
    
    199.1Downtime (million board feet)
    
    
    67.1
    
    
    
    71.9Inventory at end of period (million board feet)
    
    
    68.1
    
    
    
    60.0
 Lumber prices increased approximately 27% during the three months ended March
31, 2004 as compared to the first three months of 2003 as a result of continued
strong demand associated with record high housing starts and lower overall
inventories. Our lumber shipments increased 23.0% in the first quarter of 2004
as compared to the first quarter of 2003 as a result of the higher demand and
the opening of our Thunder Bay sawmill in May 2003. Lumber Third Party Data:The U.S. housing starts increased 15.2% in the first
quarter of 2004 as compared to the first quarter of 2003. The U.S. Commerce Department (DOC) has imposed antidumping duties of 8.43% on
all of Bowaters Canadian softwood lumber imports and countervailing duties
(CVD) of 18.79% on softwood lumber imported from all provinces except New
Brunswick and Nova Scotia. The duties became effective for lumber shipments
beginning May 22, 2002 and are payable in cash. Lumber duties are included as
a component of distribution costs in our consolidated statement of operations. The Canadian government has appealed the duties to the World Trade Organization
(WTO) and under the terms of the North American Free Trade Agreement (NAFTA)
and requested that the duties be refunded. The final amount of countervailing
and antidumping duties that may be assessed on Canadian softwood lumber imports
into the U.S. will depend upon negotiations among the governments involved in
the dispute or upon determinations made by the NAFTA, WTO or other adjudicatory
panels to which the duties may be appealed. Until the dispute about the duties
is resolved, we will continue to pay the duties as assessed by the Commerce
Department. On January 12, 2004, the DOC issued its remand determination in the CVD order
on softwood lumber from Canada, pursuant to the NAFTA panel reports
requirements. The overall result of the remand review was a new lower CVD rate
of 13.23% ad valorem. However, this revised CVD rate will not be the effective
rate until the entire NAFTA panel process is complete, which is ongoing.
Additionally, the DOC will determine the final CVD duty assessment rate through
its administrative review process, which is still ongoing. We have not
adjusted our CVD rate until a final determination is made by the NAFTA panel
process or the DOC administrative review.  22




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Divisional Performance Newsprint Division Three Months Ended March 31,
    
    Change(In millions)
    
    2004
    
    2003
    
    2004 vs. 2003Sales
    
    $
    394.8
    
    
    $
    350.8
    
    
    $
    44.0Segment loss
    
    
    (15.5
    )
    
    
    (21.0
    )
    
    
    5.5Significant items that (increased) decreased segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    31.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.3
    )Shipments
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (27.6
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    4.7Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.2$
    5.5
 Sales increased in the first quarter of 2004 compared to the first quarter of
2003 primarily as a result of higher product pricing for newsprint ($21.3
million), pulp ($7.9 million) and specialty papers ($2.4 million). See the
previous discussion of product line results. Segment loss decreased in the first quarter of 2004 compared to the first
quarter of 2003, as a result of higher product pricing noted above. These
product pricing improvements were partially offset by higher manufacturing
costs, primarily from a stronger Canadian dollar ($20.0 million) and higher
prices for recycled fiber ($9.4 million). Coated and Specialty Papers Division Three Months Ended March 31,
    
    Change(In millions)
    
    2004
    
    2003
    
    2004 vs. 2003Sales
    
    $
    141.3
    
    
    $
    106.2
    
    
    $
    35.1Segment loss
    
    
    (1.5
    )
    
    
    (20.3
    )
    
    
    18.8Significant items that (increased) decreased segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    7.0Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    13.4Employee termination costs
    
    
    
    
    
    
    
    
    
    
    0.6Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1.2
    )$
    18.8
 Sales increased in the first quarter of 2004 compared to the first quarter of
2003 primarily as a result of increased shipments ($28.1 million), due
primarily to the conversion of the No. 3 paper machine at the Catawba facility
in early 2003 from newsprint to coated paper, and higher product pricing in
coated and specialty papers and pulp ($7.0 million). See the previous
discussion of product line results. Segment loss decreased in the first quarter of 2004 as compared to the first
quarter of 2003 primarily as a result of higher product pricing in coated and
specialty papers and pulp ($7.0 million) and lower manufacturing costs
associated with improved production volumes for coated papers.  23




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Canadian Forest Products Division Three Months Ended March 31,
    
    Change(In millions)
    
    2004
    
    2003
    
    2004 vs. 2003Sales
    
    $
    179.8
    
    
    $
    171.3
    
    
    $
    8.5Segment loss
    
    
    (19.6
    )
    
    
    (12.0
    )
    
    
    (7.6
    )Significant items that (increased) decreased segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    19.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.9
    )Shipments
    
    
    
    
    
    
    
    
    
    
    0.9Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (27.3
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    0.4Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    2.6$
    (7.6
    )
 Sales increased in the first quarter of 2004 as compared to the first quarter
of 2003 primarily as a result of higher product pricing for newsprint ($9.5
million), coated and specialty papers ($2.1 million), lumber ($7.5 million),
and timber ($0.6 million), offset by lower shipments ($11.2 million). See the
previous discussion of product line results. Segment loss increased in the first quarter of 2004 as compared to the first
quarter of 2003 primarily as a result of higher manufacturing and distribution
costs. The higher manufacturing costs are due to a stronger Canadian dollar
($21.7 million) and lower production volumes ($5.4 million). The impact of
these increases was partially offset by higher product pricing and lower
selling and administrative expenses. Forest Products Division Three Months Ended March 31,
    
    Change(In millions)
    
    2004
    
    2003
    
    2004 vs. 2003Sales
    
    $
    39.7
    
    
    $
    22.3
    
    
    $
    17.4Segment income (loss)
    
    
    (0.6
    )
    
    
    (1.8
    )
    
    
    1.2Significant items that (increased) decreased segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    5.9Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Shipments
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (4.7
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    1.0Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.0$
    1.2
 Sales increased in the first quarter of 2004 as compared to the first quarter
of 2003 primarily as a result of higher lumber shipments from our Thunder Bay
sawmill, which became operational in May 2003 and higher lumber product pricing
($6.2 million) associated with increased demand. See the previous discussion of
product line results. Segment loss decreased in the first quarter of 2004 as compared to the first
quarter of 2003 as a result of higher lumber product pricing, partially offset
by higher manufacturing costs. The higher manufacturing costs are attributable
primarily to a stronger Canadian dollar ($2.9 million) and higher wood costs
($0.8 million). 24




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Net Gain (Loss) on Fixed Assets and Land Sales and Corporate & Other
Eliminations Net gain (loss) on fixed assets and land sales and corporate and other
eliminations are included in order to reconcile division sales and segment
income (loss) to our total sales and operating income (loss) on our
Consolidated Statement of Operations. Three Months Ended March 31,
    
    Change(In millions)
    
    2004
    
    2003
    
    2004 vs. 2003Net gain (loss) on fixed assets and land sales
    
    $
    (0.9
    )
    
    $
    11.1
    
    
    $
    (12.0
    )Corporate & other eliminations:Sales
    
    
    (10.3
    )
    
    
    (20.1
    )
    
    
    9.8Segment income (loss)
    
    
    14.8
    
    
    
    (12.3
    )
    
    
    27.1
 Net gain (loss) on fixed assets and land sales:We recorded a loss of $0.9
million on fixed assets and land sales in the first quarter of 2004 compared
to a gain of $11.1 million in the first quarter of 2003. The decrease is due
to lower land sales in the first quarter of 2004 compared to the first
quarter of 2003 and increases in losses associated with asset dispositions
and write-offs. Corporate & other eliminations: The elimination of intersegment sales decreased
$9.8 million in the first quarter of 2004 versus the same period in 2003.
Corporate income increased $27.1 million in the first quarter of 2004 due
primarily to increased gains on hedged transactions of approximately $28.6
million over the same period in 2003. These increases were offset by higher
compensation related expenses recorded in the first quarter of 2004 compared to
the first quarter of 2003. Interest and Other Income
and Expenses Interest expense increased $8.3 million from $39.9 million for the first three
months of 2003 to $48.2 million for the first three months of 2004. This
increase is primarily attributable to higher average debt balances and interest
rates and less capitalized interest in the first quarter of 2004 compared to
the same period in 2003. Based on the current debt balances at March 31, 2004,
we expect interest expense to be at similar levels for the balance of 2004. Other income increased $9.5 million (income of $1.2 million during the three
months ended March 31, 2004 versus an expense of $8.3 million in the first
three months of 2003) primarily as a result of a decrease in foreign exchange
losses during the period of $7.8 million. Bowater recorded a foreign exchange
loss of $0.4 million during the first three months of 2004 compared to a loss
of $8.2 million for the same period of 2003. The majority of our exchange
gain/loss amounts are attributable to the revaluation of unhedged foreign
denominated assets and liabilities into United States dollars. Income Taxes Bowaters effective tax rate for the three months ended March 31, 2004 was
48.8% versus 29.2% for the first three months of 2003. The rate in 2004 and
2003 was impacted primarily by certain exchange losses on which the company
receives no tax benefit as well as permanent tax differences that are not
dependent on pre-tax income (loss). Our effective tax rate varies frequently and substantially from the
weighted-average effect of both domestic and foreign statutory tax rates
primarily as a result of special tax treatment on foreign currency gains and
losses. We have a number of Canadian subsidiaries whose unconsolidated income
and gains are taxed in Canada. On consolidation, such income and gains are
eliminated but we are still liable for the Canadian taxes. Due to the
variability and volatility of foreign exchange rates we are unable to estimate
the impact of future changes in exchange rates on our effective tax rate. 25




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The primary components of our cash flows are as follows: Three Months Ended March 31,(In millions)
    
    2004
    
    2003Increase in cash and cash equivalents
    
    $
    16.2
    
    
    $
    51.8Cash from (used for) operations
    
    
    (21.0
    )
    
    
    48.6Changes in working capital needs
    
    
    (31.7
    )
    
    
    68.5Cash used for investing activities
    
    
    (17.3
    )
    
    
    (84.9
    )Cash invested in fixed assets, timber and timberlands
    
    
    (18.9
    )
    
    
    (96.3
    )Disposition of fixed assets, timber, and timberlands
    
    
    1.6
    
    
    
    11.4Cash from (used for) financing activities
    
    
    54.5
    
    
    
    88.1Short-term financing, net
    
    
    (80.5
    )
    
    
    109.0Long-term financing, net
    
    
    143.6
    
    
    
    (9.7
    )Dividends
    
    
    (11.5
    )
    
    
    (11.5
    )
 Cash from Operating Activities:During the first three months of 2004 and 2003,
Bowater had net losses of $32.5 million and $71.7 million, respectively. Cash
used in operating activities totaled $21.0 million in the first three months of
2004 versus cash provided by operating activities of $48.6 million during the
same period of 2003. The cash used in operating activities of $21.0 million is
generally due to the net loss of $32.5 million, income tax payments of $20.6
million, and other changes in working capital during the period. During the
first three months of 2003, Bowater received income tax refunds of $75.6
million, which are included in cash from operating activities. Excluding such
income tax refunds, Bowaters cash from operating activities for the first
quarter of 2003 would have been a deficiency of approximately $27.0 million. Cash used for Investing Activities:Cash used for investing activities totaled
$17.3 million and $84.9 million for the first three months of 2004 and 2003,
respectively. The decrease in cash used for investing activities during the
first three months of 2004 compared to the same period in 2003 is the result of
lower capital expenditures. For 2004, capital expenditures primarily have
been, and will continue to be, for compliance and maintenance requirements,
while 2003 capital expenditures related to the completion of two significant
projects at our Catawba mill as well as compliance and maintenance matters. Cash from Financing Activities:Cash generated from financing activities
totaled $54.5 million and $88.1 million for the first three months of 2004 and
2003, respectively. Cash from financing activities for the first three months
of 2004 includes the sale of $250.0 million of registered notes that are due
March 15, 2010 (See Note 10 of the Notes to Consolidated Financial Statements). We received net proceeds from the sale of the notes of $246.2
million, which were net of underwriting fees of $3.8 million. The proceeds
from the sale of the notes were used to pay amounts outstanding under the
short-term bank debt credit facilities ($146.2 million) and the three-year term
loan ($100.0 million). Bowater received proceeds of $109 million (net of
payments of $235.9 million) from its short-term credit facilities during the
first three months of 2003. Credit Arrangements: Bowater had available borrowings on our short-term bank debt  credit
facilities as follows:  26




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Commitment,
    
    March 31, 2004
    
    Commitment
    
    TerminationShort-Term Bank Debt
    
    April 22, 2004
    
    Amount Outstanding
    
    Available,(2)
    
    Date(in millions)Revolving credit facility
    
    $
    435.0
    
    
    $
    
    
    
    $
    359.0
    
    
    
    04/07364-day Accounts Receivable
Securitization Arrangement
(1)
    
    
    200.0
    
    
    
    120.0
    
    
    
    33.0
    
    
    
    12/04$
    635.0
    
    
    $
    120.0
    
    
    $
    392.0
  (1)
    
    The amount that can be borrowed at any time under our 364-day accounts
receivables securitization arrangement depends on the amount and nature of
the accounts receivable. The interest rate is based on commercial paper
issued by the lenders plus a margin.  (2)
    
    The commitment available under the 364-day Accounts Receivable
Securitization Arrangement is based on qualified trade accounts
receivable. The commitments available under the Revolving credit facility
and BCFPI 364-day credit facility are subject to covenant restrictions
described below and is reduced by outstanding letters of credit, which
were $47.4 million and $28.6 million, respectively, at March 31, 2004. In February 2004, effective beginning January 1, 2004, we obtained an amendment
to the minimum net worth and debt to capitalization covenants contained in our
$500 million three-year credit facility in the United States and the $100
million 364-day credit facility in Canada. On April 22, 2004, we replaced these
facilities with a new three-year revolving credit facility due April 2007. The
new facility provides $400 million of revolving credit in the United States and
$35 million in Canada. Borrowings under the new facility incur interest
based, at our option, on specified market interest rates plus a margin tied to
the credit rating of our long-term debt. The facility contains various
covenants, including requirements to maintain a minimum consolidated net worth
(generally defined as common shareholders equity, excluding hedging gains in
place as of December 31, 2003, plus any outstanding preferred stock plus
minimum pension liability amounts) of $1.5 billion, a maximum 62.5% ratio of
total debt to total capital (defined as total debt less revaluation of debt
assumed through acquisitions, plus net worth including minority interest, plus
minimum pension liability amounts), and to maintain an annual minimum EBITDA (generally defined as
net income, excluding extraordinary, non-recurring or non-cash items, plus
income taxes plus depreciation plus net interest expense) of $250.0 million
measured quarterly, beginning March 31, 2005, through December 31, 2005 and $400.0
million at the end of each quarter thereafter. If we generate net income, the
minimum net worth requirement increases by half of our consolidated net income
for each fiscal quarter, excluding gains from cash flow hedges in place as of
December 31, 2003. At March 31, 2004, our consolidated net worth was
approximately $1.711 billion, and our ratio of total debt to total capital was
58.3%, calculated according to our credit facilities guidelines. Total debt as a percentage of total capitalization is the most directly
comparable measure using GAAP. A reconciliation of the GAAP items to the
calculation of total debt as a percentage of total capitalization, in
accordance with our credit facilities, is as follows: (in millions, except ratios)
    
    March 31, 2004Total debt
    
    $
    2,571.2Less: Revaluation of debt
    
    
    (83.6
    )Total debt, per credit facilities
    
    $
    2,487.6Capitalization:Total shareholders equity
    
    $
    1,553.8Total debt
    
    
    2,571.2Minority interest
    
    
    66.4Less: Revaluation of debt
    
    
    (83.6
    )Plus: Additional minimum pension liability
    
    
    157.0Total capitalization, per credit facilities
    
    $
    4,264.8Total debt as a percentage of total capitalization in accordance with credit facilities
    
    
    58.3
    %Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    61.3
    %
 We believe we are in compliance with all of our covenants and other
requirements set forth in our credit facilities. We believe that cash generated from operations and access to our credit
facilities will be sufficient to provide for our anticipated requirements for
working capital, contractual obligations and capital expenditures for the next
12 months. In addition, we periodically review timberland holdings and sell
timberlands. In February 2004, Moodys downgraded our credit rating to Ba2 with a negative
outlook. In March 2004, S&P downgraded our credit ratings to BB with a stable
outlook. There is no way to predict with certainty any future rating actions
by these two agencies. The interest rates associated with the bank lines of
credit described above are based on our lowest credit rating. Each reduction in
our lowest rating will increase our cost of borrowing under this facility by
250 basis points. In addition to higher interest rates, although further
downgrades would have no material impact on availability under our present debt
and credit agreements, it could impact our access to and cost of capital and
financial flexibility in the future. 27




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Employees As of March 31, 2004, Bowater employed 8,100 people, of whom 5,600 were
represented by bargaining units. Labor agreements covering approximately 2,200
employees at five of our six Canadian paper mills expired on April 30, 2004.
These employees are represented predominantly by the Communications, Energy and
Paper Union (CEP). We understand that the CEP has selected Abitibi
Consolidated Inc. as the target company for this years negotiations.
Traditionally, negotiations with the target company have proceeded to a
conclusion and that agreement has been the basis for other agreements in the
region. We understand that the bargaining process between Abitibi and the CEP
is continuing but we do not have sufficient information to predict the timing
or outcome. While we have held some preliminary discussions, we have not yet
begun negotiating with the CEP pending a resolution of the CEPs bargaining
with Abitibi. In addition, a labor agreement covering
approximately 150 of our employees at
our Mokpo, Korea paper mill expires in July 2004. We incurred a two-month
work stoppage at this mill in 2002, which was concluded with the ratification
of the current labor agreement. We consider relations with our employees to be good and we do not expect a work
stoppage to occur at any of our paper mills in 2004. However, because the
negotiations regarding the expired and expiring labor agreements can be
affected by many factors outside of our control (including, without limitation,
the outcome of the CEPs negotiations with Abitibi and the Korean economic and
political climate), we can provide no assurance regarding the timing or outcome
of these negotiations. Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings Nearly half of our manufacturing costs and certain financial liabilities are
denominated in Canadian dollars. Sales are denominated in the currency of the
country in which they occur. Accordingly, changes in the Canadian-U.S. dollar
exchange rate may significantly impact our revenues and costs. The magnitude
and direction of this impact primarily depends on our production and sales
volume, the proportion of our production and sales that occur in Canada, the
proportion of our tax and other financial liabilities denominated in Canadian
dollars, our hedging levels, and the magnitude, direction and duration of
changes in the Canadian-U.S. dollar exchange rate. Increases in the value of
the Canadian dollar versus the U.S. dollar reduce our earnings, which are
reported in U.S. dollar terms. We attempt to partially limit our exposure to Canadian-U.S. dollar exchange
rate fluctuations through hedging transactions. Under the exchange rates,
hedging levels and operating conditions that existed during the three months
ended March 31, 2004, for every one-cent change in the Canadian-U.S. dollar
exchange rate, our operating income, net of hedging, for the three months ended
March 31, 2004 would have been reduced by approximately $1.25 million, or
approximately $5.0 million on an annualized basis. For a description of our
hedging activities, see Note 13 to the Notes to Consolidated Financial
Statements included in this quarterly report. Canadian Dollar Hedging Program At March 31, 2004, we had approximately $142.9 million of unrealized gains
recorded on our Canadian dollar hedging program compared to approximately
$172.4 million of unrealized gains at December 31, 2003. These unrealized
gains are classified in Other current assets or Other assets in our
Consolidated Balance Sheet depending on the maturity date of the hedging
contract. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46, Consolidation of Variable Interest Entities. Many variable interest
entities (VIE) have commonly been referred to as special-purpose entities or
off-balance sheet structures. In general, a VIE is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN 46 requires a VIE to be consolidated by a company if that
company is subject to a majority of the risk of loss from the VIEs 28




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations activities
or entitled to receive a majority of the entitys residual returns or both.
The consolidation requirements of FIN 46 apply immediately to VIEs
 created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the VIE was established. In October 2003, the FASB issued FASB Staff Position FIN 46-6 which (i)
deferred the implementation of FIN 46 for VIEs created before February 1, 2003,
for periods ending after December 15, 2003, and (ii) permitted early adoption
of FIN 46 before the end of the deferral period for some or all VIEs in which
an entity holds an interest. Effective July 1, 2003, Bowater early adopted FIN 46 specific to the Covington
paper coating facility (referred to as Nuway) which had been financed through
a special purpose entity (SPE). This SPE was determined to be a VIE and
required to be consolidated by Bowater in accordance with FIN 46. As such, in
the third quarter of 2003, Bowater consolidated assets of approximately $49.4
million and debt of approximately $51.8 million and recorded a non-cash, after
tax cumulative effect charge, of $2.4 million (or $0.04 per share). On August
11, 2003, Bowater terminated the lease agreement with the SPE and paid
approximately $51.8 million to pay off the debt. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R). Under the
new FIN 46R guidance, application of FIN 46R is required in financial
statements of entities that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
Bowater adopted the remaining provisions of FIN 46R in the first quarter of
2004. Adoption of FIN 46R had no impact on Bowaters Consolidated Financial
Statements. In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was passed. The Act introduced a prescription drug
benefit under Medicare Part D as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. Our postretirement benefits include
prescription drug benefits for Medicare-eligible retirees. On March 12, 2004,
the Financial Accounting Standards Board (FASB) issued an exposure draft
providing guidance on how to account for the subsidy. The FASB expects to
finalize the guidance shortly thereafter. The proposed guidance would be
effective for the first interim or annual period beginning after June 15, 2004.
When the new guidance is initially applied, a remeasurement of the plans
assets and APBO, including the effects of the subsidy, if applicable, as well
as the other effects of the Act, should be made as of the earlier of (a) the
plans measurement date that normally would have followed enactment of the Act
or (b) the end of the employers interim or annual period that includes the
date of the Acts enactment. For Bowater, the results for the quarter ending
September 30, 2004 would need to reflect the new legislation and the proposed
accounting guidance. While not yet measurable, we believe the Act will likely
result in postretirement benefit liabilities that are lower than they would be
without the effects of the Act. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk We have updated the disclosure concerning our Canadian dollar forward
contracts, which is included in Note 13 to the Notes to Consolidated Financial
Statements included in this quarterly report. For information about the effect
of Canadian-U.S. dollar exchange rate fluctuations on our manufacturing costs
and Canadian dollar denominated liabilities, see the section entitled
Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings. Interest Rate Risk We are exposed to interest rate risk on our fixed-rate long-term debt and our
short-term variable rate bank and long-term debt. Our objective is to manage
the impact of interest rate changes on earnings and cash flows and on the
market value of our borrowings. We maintain a mix of fixed rate and variable
rate borrowings. At March 31, 2004 we had $2,167.7 million of fixed rate
long-term debt and $403.5 million of short and long-term variable rate debt.
The fixed rate long-term debt is exposed to fluctuations in fair value
resulting from changes in market interest rates, 29




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations but not earnings or cash
flows. Our variable rate debt approximates fair value as it bears interest
rates that approximate market, but changes in interest rates do affect future
earnings and cash flows. Based on our short and long-term variable rate bank
debt at March 31, 2004 of $403.5 million, a 100 basis point increase in
interest rates would increase our quarterly interest expense by $1.0 million. Commodity Price Risk We purchase significant amounts of energy, chemicals, wood fiber and recovered
paper to supply our manufacturing facilities. These raw materials are
market-priced commodities and, as such, are subject to fluctuations in market
prices. Increases in the prices of these commodities will tend to reduce our
reported earnings and decreases will tend to increase our reported earnings.
From time to time, we may enter into contracts aimed at securing a stable
source of supply for commodities such as timber, wood fiber, energy, chemicals
and recovered paper. These contracts typically require us to pay the market
price at the time of purchase. Thus under these contracts we generally remain
subject to market fluctuations in commodity prices. 
 Item 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures: We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2004. Based on that
evaluation, the Chairman, President and Chief Executive Officer and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in recording, processing, summarizing, and timely reporting
information required to be disclosed in our reports to the Securities and
Exchange Commission. (b) Changes in Internal Controls: In connection with the evaluation of internal controls, there were no changes
that materially affect our internal controls over financial reporting during
the period covered by this report. 30




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 PART II OTHER INFORMATION 
 Item 1. Legal Proceedings.  a.
    
    Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers
compensation claims and other matters. We periodically review the status
of these proceedings with both inside and outside counsel. We believe
that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material
adverse effect on the results of operations in a given quarter or the
year.b.
    
    There have been no material developments to the legal proceedings
described in our annual report on Form 10-K filed on March 10, 2004. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchase of Equity
Securities.  a.
    
    Refer to Managements Discussion and Analysis of Financial Conditions and
Results of Operations  Liquidity and Capital Resources  Cash from
Financing Activities on page 28 for a discussion of the use of proceeds
from the sale of $250.0 million of registered notes in March 2004.b.
    
    Bowater Incorporated repurchased 7,774 shares of restricted stock at an
average price of 44.38. This was under the 2002 Stock Option Plan. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits (numbered in accordance with Item 601 of Regulation S-K): Exhibit No.
    
    Description10.1
    
    Credit Agreement dated April 22, 2004 between Bowater
Incorporated and Bowater Canadian Forest Products Inc. (as Borrowers)
and JPMorgan Chase Bank, The Bank of Nova Scotia and certain lenders
(pursuant to Instruction 2 to Item 601 of Regulation S-K, the
Schedules to the Credit Agreement are not being filed).12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K:  On March 17, 2004, the Company filed a report on Form 8-K under items 5
and 7 announcing the completed sale of an aggregate amount of $250.0
million of its floating rate senior notes due March 15, 2010.On January 29, 2004, the Company furnished a report on Form 8-K announcing
its earnings for the fourth quarter of 2003 and for the year ended
December 31, 2003, under items 7 and 9. 31




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized. BOWATER INCORPORATEDBy
    
    /s/ David G. MaffucciDavid G. MaffucciExecutive Vice President andChief Financial OfficerBy
    
    /s/ Michael F. NocitoMichael F. NocitoVice President and Controller
 Dated: May 10, 2004 32




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INDEX TO EXHIBITS Exhibit No.
    
    Description10.1
    
    Credit Agreement dated April 22, 2004 between Bowater
Incorporated and Bowater Canadian Forest Products Inc. (as Borrowers)
and JPMorgan Chase Bank, The Bank of Nova Scotia and certain lenders
(pursuant to Instruction 2 to Item 601 of Regulation S-K, the
Schedules to the Credit Agreement are not being filed).12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.