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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER 1-13948
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1612879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 NORTH POINT CENTER EAST, SUITE 600 30022-8246
ALPHARETTA, GEORGIA (Zip Code)
(Address of principal executive offices)
1-800-514-0186
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-------------------- ------------------------------------------
Common stock, par value $.10 per share (together with New York Stock Exchange, Inc.
associated preferred stock purchase rights)
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 2000, 14,790,262 shares of the Corporation's common
stock, par value $.10 per share, together with preferred stock purchase rights
associated therewith, were outstanding, and the aggregate market value of the
common stock on such date (based on the closing price of these shares on the New
York Stock Exchange) held by non-affiliates was approximately $283 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
Schweitzer-Mauduit International, Inc.'s 2001 Proxy Statement, filed with
the Commission dated March 13, 2001, contains certain of the information
required in this Form 10-K, and portions of that document are incorporated by
reference herein from the applicable sections thereof. The following chart
identifies the sections of this Form 10-K which incorporate by reference
portions of the Company's 2001 Proxy Statement. The Items of this Form 10-K,
where applicable, specify which portions of such document are incorporated by
reference. The portions of such document that are not incorporated by reference
shall not be deemed to be filed with the Commission as part of this Form 10-K.
DOCUMENT OF WHICH PORTIONS ITEMS OF THIS FORM 10-K
ARE INCORPORATED BY REFERENCE IN WHICH INCORPORATED
- ----------------------------- -----------------------
2001 Proxy Statement Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related
Transactions
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PART I
ITEM 1. BUSINESS
BACKGROUND
Schweitzer-Mauduit International, Inc. ("SWM") was incorporated in Delaware
on August 21, 1995 as a wholly-owned subsidiary of Kimberly-Clark Corporation
("Kimberly-Clark") for the purpose of effectuating the tax-free spin-off of
Kimberly-Clark's U.S., French and Canadian business operations that manufacture
and sell tobacco-related papers and other specialty paper products (the
"Businesses"). Pursuant to a distribution agreement dated October 23, 1995,
Kimberly-Clark agreed to distribute in the form of a dividend to its
stockholders all of the common stock of SWM and on November 30, 1995, each
Kimberly-Clark stockholder of record on November 13, 1995 received one share of
SWM common stock for every ten shares of Kimberly-Clark common stock held on the
date of record (the "Distribution"). As a result of the Distribution, SWM became
an independent public company. As used herein, the "Company" means SWM, SWM and
its several subsidiaries or, as determined by the context, one or more of its
several subsidiaries.
On February 2, 1998, Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a
wholly-owned subsidiary of SWM, acquired 99.97 percent of the outstanding shares
of Companhia Industrial de Papel Pirahy ("Pirahy"), a specialty paper
manufacturer located in Santanesia, Brazil, near Rio de Janeiro. Pirahy,
subsequently renamed Schweitzer-Mauduit do Brasil, S.A. ("SWM-B"), is the
largest supplier of tobacco-related papers to the South American market. It also
produces printing and writing papers as well as papers for packaging and
labeling applications. As a result of cumulative purchases of outstanding
minority shares, SM-Spain now owns 99.99 percent of the outstanding shares of
SWM-B.
Additionally, on February 11, 1998, Schweitzer-Mauduit Enterprises S.A.
("SM-Enterprises"), a wholly-owned subsidiary of Schweitzer-Mauduit France,
S.A.R.L. ("SMF"), acquired all of the outstanding shares of Ingefico, S.A. and
97.1 percent of the outstanding shares of its pulp and specialty paper
manufacturing subsidiaries, Groupe SAPAM S.A. ("Groupe SAPAM") and Papeteries de
la Moulasse S.A., located in Saint-Girons in the southwestern part of France.
Subsequently, SM-Enterprises acquired all the remaining shares of Groupe SAPAM.
SM-Enterprises and Ingefico, S.A. were then merged into Groupe SAPAM. Papeteries
de la Moulasse S.A. was renamed Papeteries de Saint-Girons S.A. ("PdStG") and
Groupe SAPAM was then merged into PdStG. Approximately 90 percent of the net
sales of PdStG are of fine papers to the tobacco industry.
Financial information about foreign and domestic operations, contained
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" appearing in Part II, Item 7 herein and in Note 13 to
Consolidated Financial Statements contained in "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" appearing in Part II, Item 8 herein, are incorporated in
this Item 1 by reference.
DESCRIPTION OF THE BUSINESS
GENERAL. The Company manufactures and sells paper and reconstituted
tobacco products to the tobacco industry as well as specialized paper products
for use in other applications. Tobacco industry products, which comprised 88
percent of the Company's 2000 consolidated net sales, include cigarette, plug
wrap and tipping papers used to wrap various parts of a cigarette ("Cigarette
Papers"), reconstituted tobacco leaf ("RTL") for use as filler in cigarettes,
reconstituted tobacco wrappers and binders for cigars and paper products used in
cigarette packaging. These products are sold directly to the major tobacco
companies or their designated converters in North and South America, Western and
Eastern Europe, China and elsewhere.
Non-tobacco industry products include lightweight printing and writing
papers, coated papers for packaging and labeling applications, business forms,
furniture laminates, battery separator paper, drinking straw wrap, filter papers
and other specialized papers primarily for the North American, Western European
and Brazilian markets. These products are generally sold directly to converters
and other end-users in North America and Western Europe and through brokers in
Brazil. The non-tobacco industry products are a diverse
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mix of products, certain of which represent commodity paper grades produced to
maximize machine utilization.
PRODUCTS. Each of the three principal types of paper used in
cigarettes -- cigarette, plug wrap and tipping papers -- serves a distinct
purpose in the function of a cigarette.
Cigarette paper wraps the column of tobacco in a cigarette. Certain
properties of cigarette paper, such as basis weight, porosity, opacity, tensile
strength, texture and whiteness must be closely controlled to tight tolerances.
Many of these characteristics are critical to meet runnability standards of the
high-speed production processes utilized by cigarette manufacturers.
Plug wrap paper forms the outer layer of a cigarette filter and is used to
hold the filter materials in a cylindrical form. Conventional plug wrap is
manufactured on flat wire paper machines using wood pulp. Porous plug wrap, a
highly porous paper, is manufactured on inclined wire paper machines using a
furnish consisting of "long fibers", such as abaca, and wood pulp. Porosity, a
measure of air permeability, ranges from a typical level of less than 100
Coresta on conventional plug wrap to 35,000 Coresta on high porosity papers.
High porosity plug wrap is sold under the registered trademark POROWRAP(R) and
is used on filter-ventilated cigarettes. High porosity papers can also be used
for such specialty products as battery separator paper.
Tipping paper, produced in white or buff color, joins the filter element to
the tobacco section of the cigarette. The ability to produce tipping paper which
is both printable and glueable at high speeds is critical to producing a
cigarette with a distinctive finished appearance.
Reconstituted tobacco is used by manufacturers of cigarettes, cigars and
other tobacco products. The Company currently produces reconstituted tobacco in
two forms: leaf in France and wrapper and binder in the United States.
Reconstituted tobacco leaf is used by manufacturers of cigarettes primarily as a
filler that is blended with virgin tobacco in order to cost-effectively utilize
tobacco leaf by-products. Wrapper and binder are reconstituted tobacco products
used by manufacturers of machine-made cigars. Binder is used to hold the tobacco
leaves in a cylindrical shape during the production process. Wrapper is used to
wrap around the outside of the cigar, providing a uniform, finished appearance.
BUSINESS SEGMENTS. The Company is operated and managed based on the
geographical location of its manufacturing operations: the United States, France
and Brazil. As such, these geographical operations also represent the Company's
business segments for reporting purposes. While the products are comparable in
each segment, they vary based on the technological capabilities of each of the
manufacturing operations and the respective markets and customers served. Sales
by a segment into markets primarily served by a different segment occur where
specific product needs cannot be cost-effectively met by the manufacturing
operations domiciled in that segment.
MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies the
major, and many of the smaller, cigarette manufacturers in North America, and
also has significant sales in South America and Japan. The customer base for the
U.S. operations consists of more than 60 customers in approximately 30
countries. The Company's French businesses rely predominantly on worldwide
exports, primarily to Western Europe, China, Eastern Europe and the former
Commonwealth of Independent States, and, in lesser but substantial amounts, to
Asia (excluding China), Africa, the Middle East and Australia. The customer base
for the French operations consists of a diverse group of over 200 customers in
more than 80 countries. The Company's Brazilian business primarily supplies
customers in Brazil, but with increasing sales to other South American
countries. The current customer base of the Brazilian operations consists of the
cigarette manufacturers in Brazil, as well as approximately 20 customers in
approximately ten countries outside Brazil. Customers of all three business
units include international tobacco companies, regional tobacco manufacturers
and government monopolies.
Philip Morris Incorporated ("Philip Morris"), including its subsidiaries,
and B.A.T. Industries PLC ("BAT"), including its U.S. subsidiary Brown &
Williamson Tobacco Corporation, its Brazilian subsidiary Souza Cruz S.A. ("Souza
Cruz") and its other subsidiaries, are the Company's two largest customers.
Philip Morris and BAT, together with their respective affiliates and designated
converters, accounted for approximately 30 percent and 17 percent, respectively,
of the Company's 2000 consolidated net sales.
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The Company's French paper businesses, together, are the largest exporter
of cigarette paper to China with an estimated 45 to 50 percent share of that
country's cigarette paper imports. However, as cigarette paper manufacturers in
China have continued to increase capacity, the total volume of cigarette paper
imports into China has declined.
LTR Industries, S.A. ("LTRI") is a 72 percent owned second tier subsidiary
of the Company which manufactures RTL in France. LTRI has many customers,
consisting primarily of the large cigarette manufacturers in Western and Eastern
Europe. A small number of these large customers account for a substantial
portion of LTRI's net sales. The loss of any one or more of these large
customers could have a significant adverse effect on LTRI's and the Company's
results of operations.
PHILIP MORRIS SUPPLY AGREEMENT. Since 1992, the Company's U.S. unit has
been the single source of supply of Cigarette Papers to Philip Morris' U.S.
operations. In May 2000, Philip Morris and the Company reached agreement on a
Second Amended and Restated Supply Agreement for Fine Paper Supply ("Second
Amended Supply Agreement"). The Second Amended Supply Agreement extends the
Company's position as the supplier of Cigarette Papers to Philip Morris' U.S.
operations through December 31, 2004, except that Philip Morris has the
continuing right to acquire up to ten percent of its prior year purchases of
Cigarette Papers from other suppliers, although to-date it has chosen not to do
so. By its terms, the Second Amended Supply Agreement automatically renews for
three successive terms of two years each unless either party gives notice of
non-renewal 24 months before the end of the then-current contract term. Further,
a June 2000 notice to proceed, given in accordance with the terms of an addendum
to the Second Amended Supply Agreement, initiated a seven-year exclusive supply
arrangement with Philip Morris U.S.A. for a new jointly developed banded
cigarette paper that may make a cigarette less likely to ignite certain fabrics.
In January 2000, Philip Morris began consumer testing of cigarettes made with
this new paper. Philip Morris and the Company also have entered into a licensing
and royalty agreement covering future commercialization of this new paper, the
commercial viability of which has not yet been determined.
SOUZA CRUZ SUPPLY AGREEMENT. On February 2, 1998, as part of the Company's
agreement to purchase Pirahy, the Brazilian operations entered into two
exclusive supply agreements with its former owner and its largest customer,
Souza Cruz, to supply all of Souza Cruz's needs for papers which SWM-B is
capable of producing. The supply agreement for tobacco-related papers, as
amended in February 2000, has an initial term of six years until February 2,
2004 and automatically renews for additional three-year terms unless either
party provides notice of phase-out prior to the date of expiration. The supply
agreement for coated paper used in the packaging of cigarette products, as
amended in February 2000, has an initial term of six years until February 2,
2004, with extensions to be negotiated prior to the date of expiration.
EMPLOYEE AND LABOR RELATIONS. As of December 31, 2000, the Company had
3,490 regular full-time active employees of whom 650 hourly employees and 288
salaried employees were located in the United States and Canada, 1,097 hourly
employees and 642 salaried employees were located in France and 768 hourly
employees and 45 salaried employees were located in Brazil.
North American Operations -- Hourly employees at the Lee, Massachusetts,
Spotswood, New Jersey and Ancram, New York mills are represented by locals of
the PACE International Union. The current collective bargaining agreements
expire at the Ancram mill on September 30, 2001, at the Spotswood mill on June
15, 2002 and at the Lee mills on August 1, 2002. There have been no strikes or
work stoppages at any of these locations for approximately 20 years, and the
Company believes employee and union relations are positive.
The fiber operations of the Company's Canadian subsidiary are non-union.
The Company believes that employee relations are positive.
French Operations -- Hourly employees at the Company's mills in Quimperle,
Malaucene, Saint-Girons and Spay, France are union represented. New labor
agreements were signed during 2000 for each of these mills. The new agreements
in Quimperle, Spay and Saint-Girons are two-year agreements expiring on December
31, 2001, February 28, 2002 and April 30, 2002, respectively, while the new
agreement in Malaucene was for a one-year term which expired on December 31,
2000. The Company's French management is in the process of negotiating a new
contract at the Malaucene mill and expects to reach
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agreement during the first quarter of 2001. Over the years, there have been
intermittent work stoppages lasting from a few hours to several days. The
Company believes that, overall, employee relations are positive and comparable
to similar French manufacturing operations.
Brazilian Operations -- Hourly employees at the Pirahy mill are represented
by a union. The current annual collective bargaining agreement expires on May
31, 2001. The Company believes that, overall, employee relations are positive
and comparable to similar Brazilian manufacturing operations.
RAW MATERIALS. Wood pulp is the primary fiber used in the Company's
operations. These operations consumed approximately 116,000 and 107,000 metric
tons of wood pulp in 2000 and 1999, respectively, all of which was purchased.
Company operations also use other cellulose fibers, the most significant of
which are in the form of flax fiber and tobacco leaf by-products, as the primary
raw materials for the Company's Cigarette Papers and reconstituted tobacco
products, respectively. While tobacco leaf by-products are generally the
property of the cigarette manufacturer for whom the reconstitution is
contracted, the Company and LTRI purchase some tobacco leaf by-products for use
in the production of RTL and wrapper and binder products.
Flax straw is purchased and subsequently processed into flax tow at
processing facilities in Canada and France. The flax tow is then converted into
flax pulp at pulping facilities in the United States and France. Flax tow and
flax pulp are also purchased externally, but these purchases only represent
approximately 30 percent of the flax pulp currently consumed by the Company's
U.S. and French operations.
Certain specialty papers are manufactured with other cellulose fibers, such
as abaca, and small amounts of secondary and recycled fibers. All of these
secondary and recycled fibers are purchased.
The Company believes that the raw materials purchased by the Company are
readily available from several sources and that the loss of a single supplier
would not have a material adverse effect on the Company's ability to procure
needed raw materials.
COMPETITION. The Company is the leading producer of Cigarette Papers in
the world. LTRI is the leading independent producer of RTL for use in
cigarettes. The Company does not sell its products directly to consumers or
advertise its products in consumer media. The specialized nature of these
tobacco-related papers requires research and development capability to develop
them and special papermaking equipment and skills to meet exacting customer
specifications. These factors have limited the number of competitors in each of
the tobacco-related paper categories discussed separately below.
Cigarette Paper -- Management believes that the Company has an estimated 60
to 65 percent share of the North American cigarette paper market. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major domestic
competitor in the sale of cigarette paper in North America. European suppliers,
such as Wattens GmbH ("Wattens"), an Austrian subsidiary of Trierenberg Holding
("Trierenberg"), and Miquel y Costas & Miquel S.A., a Spanish corporation
("Miquel y Costas"), also compete in this market but, to date, their market
share has not exceeded an estimated 10 percent. Management believes that the
bases of cigarette paper competition are price, consistent quality, level of
technical service and performance requirements of the customer's
cigarette-making equipment.
The principal competitors of the Company's French cigarette paper
businesses are Wattens, Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), a German
subsidiary of P.H. Glatfelter Company, Robert Fletcher (Greenfield) Limited,
Miquel y Costas and Julius Glatz GmbH. Papeteries de Mauduit, S.A. ("PdM") and
PdStG, indirect wholly-owned subsidiaries of the Company in France, sell
approximately 65 to 70 percent of their products (cigarette paper and porous and
conventional plug wrap) in Western Europe and China. Management believes that
the bases of competition for PdM's and PdStG's products are the same as for the
Company's U.S. business.
The principal competitors of the Company's Brazilian cigarette paper
business are Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens.
SWM-B has an estimated 75 percent share of the cigarette paper market in Brazil
and an estimated 60 percent share of the cigarette paper market in South
America. Management believes that the bases of cigarette paper competition for
SWM-B are the same as for the Company's U.S. business.
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Plug Wrap Paper -- Management believes that the Company's U.S. business has
an estimated 70 to 75 percent share of the North American market for plug wrap
papers. The remainder of the North American market is shared by three
competitors: Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens.
The Company's French businesses hold an estimated 65 percent of the Western
European high porosity plug wrap market. Schoeller & Hoesch is the Company's
principal competitor in that market along with Wattens. Through the Brazilian
business' supply of conventional plug wrap papers and the U.S. business' supply
of porous plug wrap papers, the Company has an estimated 75 percent share of the
South American market for plug wrap papers. Ecusta (including Schoeller &
Hoesch), Miquel y Costas and Wattens are the Company's principal competitors in
that market.
Management believes that the primary basis of competition for high porosity
plug wrap is technical capability with price being a less important
consideration. On the other hand, conventional plug wrap entails less technical
capability with the result that price and quality are the primary bases of
competition.
Tipping Paper -- Management believes that the Company's U.S. business has
an estimated 60 to 65 percent share of the North American market for base
tipping paper which is subsequently printed by converters. Its principal
competitors in this market are Ecusta and Tervakoski Oy, a Finnish subsidiary of
Trierenberg. Management believes that the bases for competition are consistent
quality, price and, most importantly, the ability to meet the runnability and
printability requirements of converting equipment and high-speed
cigarette-making machines.
Papeteries de Malaucene S.A. ("PdMal"), another of the Company's indirect
wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene,
France, and ranks among the largest converted tipping paper producers in Western
Europe, with an estimated 15 percent market share. PdMal produces printed and
unprinted, and laser and electrostatically perforated tipping papers. PdMal's
principal European competitors are Tann-Papier GmbH, an Austrian subsidiary of
Trierenberg, Benkert GmbH (Germany) and Miquel y Costas. Management believes
that the bases of competition for perforated tipping paper in Europe are
perforation technology, consistent quality and price.
The Company's Brazilian business has an estimated 60 to 65 percent share of
the South American market for base tipping paper which is subsequently printed
by converters. The Company's principal competitors in Latin America are Ecusta
(including Schoeller & Hoesch) and Miquel y Costas. Management believes that the
bases of tipping paper competition for SWM-B are the same as for the Company's
U.S. business.
Reconstituted Tobacco -- LTRI is the leading independent producer of RTL.
Management believes that the basis of competition in this market is primarily
quality. However, sales volumes are influenced by worldwide virgin tobacco
prices as lower prices of virgin tobacco may result in lower reconstituted
tobacco sales volumes.
LTRI's principal competitors are (i) R.J. Reynolds Tobacco Company, which
produces RTL for both internal and external use, (ii) Yelets, an affiliate of
Japan Tobacco Inc. which operates in Russia, (iii) B.V. Deli-HTL Tabak
Maatschappiji B.V., an independent producer which operates in Holland, and (iv)
cigarette companies such as Philip Morris and BAT, which produce RTL primarily
for internal use.
Management estimates that approximately 50 percent of reconstituted cigar
wrapper and binder used in the U.S. market is produced internally by domestic
cigar manufacturers. The Company's Ancram mill and Nuway Microflake Partnership,
a cast process manufacturer, produce the balance.
Other Products -- As noted above, the Company and its subsidiaries produce
papers for lightweight printing and writing, coated papers for packaging and
labeling applications, business forms, furniture laminates, battery separator
papers, wrapping paper for drinking straws, filter papers and other specialized
papers. Management believes that price is the primary basis of competition for
drinking straw wrap, printing and writing and filter papers (collectively,
"Filler Papers"), while consistent quality and customer service are believed to
be the primary competitive factors for battery separator and business forms
papers. The Company does not possess a significant market share in any of the
above segments, except for battery separator papers,
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where it holds approximately 25 percent of the worldwide market. The Company
continues, to the extent feasible, to convert its production of less profitable
Filler Papers to more profitable niche applications.
RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. The Company has research
and laboratory facilities in Spay, France, Santanesia, Brazil and Alpharetta,
Georgia and employs more than 50 research personnel. The Company is dedicated to
developing Cigarette Papers, reconstituted tobacco and non-tobacco paper product
innovations and improvements to meet the needs of individual customers. The
development of new components for tobacco products and the development of new
non-tobacco paper products are the primary focuses of these research and
development functions, including several development projects for the Company's
major customers. The Company expensed $6.3 million, $6.7 million and $6.5
million in 2000, 1999 and 1998, respectively, on product research and
development.
The Company believes that its research and product development capabilities
are unsurpassed in the industry and have played an important role in
establishing the Company's reputation for high quality, superior products. The
Company's commitment to research and development has enabled the Company, for
example, to (i) produce high-performance papers designed to run on the
high-speed manufacturing machines of its customers, (ii) produce papers to
exacting specifications with very high uniformity, (iii) produce cigarette paper
with extremely low basis weights, and (iv) have an acceptance rate by its
customers in excess of 99 percent. The Company also believes it is in the
forefront of the specialty paper manufacturing process, having invested heavily
in modern technology, including laser technology and modern paper-slitting
equipment. The Company believes that its commitment to research and development,
coupled with its investment in new technology and equipment, has positioned the
Company to take advantage of growth opportunities abroad where the demand for
American-style premium cigarettes continues to increase.
As of December 31, 2000, the Company and its subsidiaries collectively
owned 85 patents and had pending 68 patent applications covering a variety of
Cigarette Papers, RTL and cigar wrapper and binder products and processes in the
United States, Western Europe and several other countries. The Company believes
that such patents, together with its papermaking expertise and technical sales
support, have been instrumental in establishing it as the leading worldwide
supplier of Cigarette Papers, RTL and reconstituted wrapper and binder made by
the papermaking process.
Management believes that the Company's "POROWRAP(R)" trademark for highly
porous plug wrap paper, the "PDM" logo and the "JOB PAPIER A CIGARETTES",
"PAPETERIES DE MAUDUIT" and "SCHWEITZER" trade names also have been significant
contributors to the marketing of the Company's products.
BACKLOG; SEASONALITY. The Company has historically experienced a steady
flow of orders. Its mills typically receive and ship orders within a 30-day
period, except in the case of RTL where orders are generally placed well in
advance of delivery. The Company plans its manufacturing schedules and raw
material purchases based on its evaluation of customer forecasts and current
market conditions.
The U.S. business does not calculate or maintain records of order backlogs.
Philip Morris, its largest customer, provides forecasts of future demand, but
actual orders for Cigarette Papers are typically placed two weeks in advance of
shipment.
The French businesses do maintain records of order backlogs. For Cigarette
Papers, the order backlog was approximately $31 million and $22 million on
December 31, 2000 and 1999, respectively. This represented approximately 50 and
40 days of Cigarette Paper sales for the French businesses in 2000 and 1999,
respectively. LTRI's RTL business operates under a number of annual supply
agreements. The order backlog for RTL was approximately $48 million and $44
million on December 31, 2000 and 1999, respectively.
The Brazilian business does not calculate or maintain records of order
backlogs. Approximately 40 percent of its sales are on a consignment basis with
Souza Cruz, its largest customer. Souza Cruz also provides forecasts of future
demand in order for the Brazilian operations to manage levels of consignment
inventories.
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Sales of the Company's products are not subject to seasonal fluctuations,
except in the United States where customer shutdowns of one to two weeks in
duration typically occur in July and December, and in Brazil where customer
orders are typically lower in December due to a January and February holiday
season.
SALES AND DISTRIBUTION. Essentially all sales of tobacco-related products
by the U.S. and French businesses are sold by the Company's marketing, sales and
customer service organizations directly to cigarette manufacturers or their
designated converters, and to cigar manufacturers, except in China where sales
are generally made to trading companies for resale to cigarette producers. The
Brazilian business' tobacco-related products are sold by the Brazilian marketing
and sales organization directly to cigarette manufacturers, and through brokers
for non-tobacco related products. Most of the Company's U.S. and French
businesses' non-tobacco related products are sold on a direct basis.
ENVIRONMENTAL MATTERS. Capital expenditures for environmental controls to
meet legal requirements and otherwise relating to the protection of the
environment at the Company's facilities in the United States, France, Brazil and
Canada are estimated to be approximately $2 million to $3 million annually in
2001 and 2002. These expenditures are not expected to have a material adverse
effect on the Company's financial condition, results of operations or
competitive position; however, these estimates could be modified as a result of
changes in the Company's plans, changes in legal requirements or other factors.
RISKS FOR FOREIGN OPERATIONS. In addition to its U.S. operations, the
Company has manufacturing facilities in France, Brazil and Canada. Products made
in France, Brazil or in the United States are marketed in more than 90
countries. Because these countries are so numerous, it is not feasible to
generally characterize the risks involved. Such risks vary from country to
country and include such factors as tariffs, trade restrictions, monetary
exchange controls, changes in business and income taxes, changes in currency
value, economic conditions and international relations. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Factors That May Affect Future Results" appearing in Part II, Item
7 herein.
INSURANCE. The Company maintains coverage for most insurable risks that
are incident to its operations.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company operated eight mills (which include
four fiber pulping operations) in the United States, France and Brazil that
produce specialty papers or reconstituted tobacco products. The Company also
operates flax fiber processing operations in France and Canada. The Company or
one of its subsidiaries owns each of these facilities except for a flax tow
storage facility in Killarney, Manitoba, which is leased. The Company and its
subsidiaries maintain administrative and sales offices in Alpharetta, Georgia,
in Quimperle and Paris, France, in Hong Kong, China, in Santanesia and Rio de
Janeiro, Brazil and in Madrid, Spain. The Company's world headquarters are also
located in Alpharetta. All of these offices are leased except for the Quimperle
and Santanesia offices, which are owned by PdM and SWM-B, respectively.
Management believes that each of these facilities is well-maintained,
suitable for conducting the Company's operations and business, and adequately
insured.
The Company's U.S. and French paper operations experienced limited downtime
on certain machines during 2000 because of reduced demand. In the latter half of
2000, machine schedules at all locations were at or near capacity. Currently no
market-related production downtime is expected in 2001.
In addition to the operating equipment listed on the following page, the
Company and its subsidiaries have additional equipment which has been taken out
of service. These pieces of equipment are in various states of condition and may
or may not be usable should the Company need additional capacity. Further, it
may not be cost-effective to make upgrades which may be necessary to bring this
equipment back into service.
9
10
The following are locations of the Company's principal facilities and
operating equipment as of December 31, 2000:
PRODUCTION LOCATIONS EQUIPMENT PRODUCTS
- -------------------- --------- --------
Lee Mills 4 Paper Machines Base Tipping and Specialty
Lee, Massachusetts Pulping Equipment Papers,
(4 mill sites) Plug Wrap Paper and Straw Wrap
Paper
Spotswood Mill 5 Paper Machines Cigarette Paper and Straw Wrap
Spotswood, New Jersey Pulping Equipment Paper
Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and
Ancram, New York 1 Reconstituted Tobacco Binder and Porous Plug Wrap Paper
Wrapper and Binder
Machine
Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing
Manitoba, Canada
Papeteries de Mauduit Mill 11 Paper Machines Cigarette Paper, Plug Wrap Paper
Quimperle, France Pulping Equipment and
Long Fiber Specialties
Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers
Malaucene, France 4 Printing Presses
11 Laser Perforating Lines
1 Electrostatic Perforating
Line
Papeteries de Saint-Girons Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper,
Saint-Girons, France Pulping Equipment Base Tipping and Specialty Papers
and Flax Pulp
LTR Industries Mill 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax
Spay, France Leaf Fiber Processing and Research &
Machines Development
1 Fiber Mill
Pirahy Mill 4 Paper Machines Cigarette Paper, Plug Wrap Paper,
Santanesia, Brazil 1 Coating Machine Base Tipping and Specialty Papers
ADMINISTRATIVE LOCATIONS OFFICE SPACE FUNCTION
- ------------------------ ------------ --------
Alpharetta, Georgia Leased Office Space Company World Headquarters,
Research & Development, and
Administrative and Sales
- U.S. Business
Madrid, Spain Leased Office Space Administrative Office for
International Investments
Quimperle, France Owned Office Space Administrative Offices for French
Businesses
Paris, France Leased Office Space Administrative and Sales Offices
for French Businesses
Hong Kong, China Leased Office Space Sales Office for French
Businesses
Santanesia, Brazil Owned Office Space Administrative Offices for
Brazilian Business and Research &
Development
Rio de Janeiro, Brazil Leased Office Space Administrative and Sales Offices
for
Brazilian Business
10
11
ITEM 3. LEGAL PROCEEDINGS
The following is a brief description of potentially material legal
proceedings to which the Company or any of its subsidiaries is a party, or of
which any of their properties is subject:
LITIGATION
On December 27, 2000, SWM-B received two assessments from the tax
authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre
Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax,
consisting of unpaid ICMS taxes from January 1995 through November 2000,
together with interest and penalties in the total amount of approximately $13.6
million, based on the foreign currency exchange rate at December 31, 2000 (the
"Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax
credits generated from the production and sale of certain non-tobacco related
grades of paper sold domestically that are immune from the tax to offset ICMS
taxes otherwise owed on the sale of products that are not immune. A portion of
the Assessment, estimated at approximately $6.9 million, relates to tax periods
that predate the Company's acquisition of Pirahy, the predecessor in name to
SWM-B, and is covered by an indemnification from the sellers of Pirahy. SWM-B is
vigorously contesting the Assessment on both procedural and constitutional
grounds and believes that the Assessment will ultimately be resolved in its
favor. However, the final resolution of this matter will most likely entail both
administrative and judicial proceedings up to and including presentation of the
matter to the Supreme Court of Brazil and is not likely to be finally resolved
for several years. No liability has been recorded in the Company's financial
statements for the Assessment. Pending final resolution of this matter,
beginning in December 2000, SWM-B suspended the further accrual and application
of ICMS tax credits generated on immune products to reduce its possible exposure
to future ICMS tax assessments. A reserve of $1.1 million was recorded for the
entire asset balance of unused ICMS tax credits as of December 31, 2000.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without a material adverse effect on the Company's
consolidated financial statements.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims and its obligation to participate in the
remediation or the monitoring of certain hazardous waste disposal sites, will
not have a material adverse effect on the Company's financial condition or
results of operations. However, future events, such as changes in existing laws
and regulations, or unknown contamination of sites owned, operated or used for
waste disposal by the Company (including contamination caused by prior owners
and operators of such sites or other waste generators) may give rise to
additional costs which could have a material adverse effect on the Company's
financial condition or results of operations.
The Company is a party to an administrative consent order with the
Massachusetts Department of Environmental Protection ("MDEP") governing the
post-closure care of the Willow Hill Landfill in Lee, Massachusetts. The consent
order required the Company to perform certain remedial measures and to reduce
the concentration of landfill gases to specified levels at all monitoring points
by September 15, 1998, or the Company could be liable for stipulated penalties.
Results of monitoring tests conducted in October 2000 and thereafter show that
the Company has reduced the concentration of landfill gases at all monitoring
points to the levels specified in the consent order. MDEP previously advised the
Company informally that stipulated penalties would not be assessed based on a
delay in complying with the consent order because of the Company's ongoing
efforts to resolve the issue and no sanctions have been imposed to date. The
Company must continue bimonthly monitoring and remain in compliance at all
monitoring points for twelve months.
11
12
Costs of these measures were previously accrued and are not material. The
Company does not believe that this matter will have a material adverse effect on
the Company's business or financial condition.
At Distribution, the Company assumed Kimberly-Clark's liabilities as a
potentially responsible party ("PRP") under the provisions of the U.S.
Comprehensive Environmental Response, Compensation and Liability Act and
analogous New Jersey statutes in connection with the Global Landfill Reclaiming
Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey.
The Company continues to participate in the remediation of the Global Landfill
as a member of a group of PRPs that entered into a consent decree with the state
of New Jersey in 1993. The Company previously recorded its pro-rata portion of
the estimated liability for remediation of this site, the remainder of which is
not material.
The Company incurs spending necessary to meet legal requirements and
otherwise relating to the protection of the environment at the Company's
facilities in the United States, France, Brazil and Canada. For these purposes,
the Company incurred total capital expenditures of $1.2 million in 2000, and
anticipates that it will incur approximately $2 million to $3 million annually
in 2001 and 2002. The major projects included in these estimates include
upgrading wastewater treatment facilities at various locations and installation
of ink solvent treatment equipment in France. The foregoing capital expenditures
are not expected to reduce the Company's ability to invest in capacity
expansion, quality improvements, capital replacements, productivity improvements
or cost containment projects, and are not expected to have a material adverse
effect on the Company's financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of February
27, 2001, together with certain biographical information, are as follows:
NAME POSITION
- ---- --------
Wayne H. Deitrich............................ Chief Executive Officer
Jean-Pierre Le Hetet......................... Chief Operating Officer and
President - French Operations
Peter J. Thompson............................ President - U.S. Operations
Otto R. Herbst............................... President - Brazilian Operations
Paul C. Roberts.............................. Chief Financial Officer and Treasurer
John W. Rumely, Jr. ......................... General Counsel and Secretary
Wayne L. Grunewald........................... Controller
MR. WAYNE H. DEITRICH, 57, has served as Chief Executive Officer of the
Company since August 1995 and was elected Chairman of the Board of Directors
immediately after the Distribution. From June 1995 through August 1995, Mr.
Deitrich served as President - Specialty Products Sector of Kimberly-Clark. From
1993 through May 1995, Mr. Deitrich was the President - Paper and Specialty
Products Sector of Kimberly-Clark, and from 1992 to 1993, he was
President - Paper Sector of Kimberly-Clark. From 1988 through 1992, Mr. Deitrich
served as the President of Neenah Paper, a business unit of Kimberly-Clark.
MR. JEAN-PIERRE LE HETET, 57, has served as Chief Operating Officer of the
Company since April 1998 in addition to having served as President - French
Operations of the Company since August 1995. Mr. Le Hetet was elected to the
Board of Directors immediately after the Distribution. From 1991 through August
1995, Mr. Le Hetet was the President of Specialty Products, France, a business
unit of Kimberly-Clark. Prior to that time, Mr. Le Hetet served as General
Manager of Specialty Products, France.
MR. PETER J. THOMPSON, 38, has served as President - U.S. Operations of the
Company since November 1998. From April 1998 through November 1998, Mr. Thompson
was Director - Sales and Marketing for the U.S. Operations of the Company. Mr.
Thompson joined the Company in January 1997 as a Marketing Manager in the U.S.
Operations. Prior to joining the Company, he was employed by Tape, Inc. from May
1995 through January 1997, where he held several senior management positions in
marketing, sales and finance. Mr. Thompson was employed by Kimberly-Clark from
June 1984 through May 1995 in a variety of financial positions.
MR. OTTO R. HERBST, 41, has served as President - Brazilian Operations of
the Company since April 1999. Prior to April 1999, he served as General Manager
for New Business and Services from 1997 through March 1999 for Interprint, a
manufacturer of security documents, telephone cards and business forms. From
1990 through 1997, Mr. Herbst served as Director of Agaprint, a manufacturer of
packaging materials, business forms, commercial printing papers, personalized
documents and envelopes.
MR. PAUL C. ROBERTS, 52, has served as Chief Financial Officer and
Treasurer of the Company since August 1995. From June 1995 through August 1995,
he served as Chief Financial Officer - Specialty Products Sector of
Kimberly-Clark. From January 1995 through May 1995, he was Director - Corporate
Strategic Analysis of Kimberly-Clark, and from 1988 through 1994, Mr. Roberts
was Director - Operations Analysis and Control, Pulp and Paper Sector of
Kimberly-Clark.
MR. JOHN W. RUMELY, JR., 47, has served as General Counsel and Secretary of
the Company since January 1, 2000. From March 1998 through December 31, 1999, he
served as Associate General Counsel of the Company. From May 1989 through
February 1998, Mr. Rumely was Assistant General Counsel of Alumax Inc.
MR. WAYNE L. GRUNEWALD, 49, has served as Controller of the Company since
August 1995. From July 1995 through August 1995, he served as
Controller - Specialty Products Sector of Kimberly-Clark. From December 1989
through June 1995, he was Controller - U.S. Pulp and Newsprint, a business unit
of Kimberly-Clark.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL MARKET
Since the Distribution of the Company's Common Stock by Kimberly-Clark on
November 30, 1995, the Common Stock has been listed on the New York Stock
Exchange under the trading symbol "SWM".
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of February 27, 2001, there were 5,834 stockholders of record of the
Company's Common Stock. This number does not include shares held in "nominee" or
"street" name.
STOCK PRICE AND DIVIDEND INFORMATION
The dividend and market price data included in Note 15 to Consolidated
Financial Statements contained in "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
appearing in Part II, Item 8 herein is incorporated in this Item 5 by reference.
COMPANY WEB SITE
The Company currently has a web site under development and anticipates that
it will be operational approximately April 1, 2001. The web site address is
http://www.schweitzer-mauduit.com. The web site will provide background
information about the Company, including information on the Company's history,
products, locations and employment opportunities. The web site will also allow
access to the Company's historical financial information, press releases and
quarterly earnings conference calls. The Company's quarterly earnings conference
calls will be available via a webcast accessible through the Company's web site.
The tentative dates for the Company's quarterly earnings conference calls
related to 2001 financial results are April 26, 2001, July 26, 2001, October 25,
2001 and January 31, 2002. These dates are subject to change. When the web site
is available, instructions on how to listen to the webcasts and updated
information on times and actual dates will be available through the web site.
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15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Annual Report. The financial statement data is presented on a consolidated
basis.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net Sales........................................... $496.8 $504.4 $546.7 $460.6 $471.3
Gross Profit........................................ 91.9 110.4 106.1 121.9 114.2
Operating Profit.................................... 49.7 64.6 59.1 81.9 74.0
Net Income.......................................... 27.8 31.4 31.0 45.3 38.7
Net Income Per Share:
Basic............................................ $ 1.82 $ 1.99 $ 1.94 $ 2.82 $ 2.41
Diluted.......................................... $ 1.82 $ 1.99 $ 1.92 $ 2.77 $ 2.38
Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .60 $ .60 $ .45
CASH FLOW AND BALANCE SHEET DATA:
Capital Spending.................................... $ 29.4 $ 26.3 $ 36.7 $ 35.8 $ 51.5
Depreciation and amortization....................... 22.1 22.2 24.8 14.4 13.4
Cash Provided By Operations......................... 71.7 60.7 67.1 67.3 90.4
Total Assets........................................ 441.7 436.6 474.7 391.0 380.6
Long-Term Debt...................................... 97.7 100.9 108.4 80.8 86.6
Equity.............................................. 179.9 184.2 197.0 179.5 156.0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Schweitzer-Mauduit International, Inc. was incorporated on August 21, 1995
as a wholly-owned subsidiary of Kimberly-Clark Corporation for the purpose of
effectuating the tax-free spin-off of Kimberly-Clark's U.S., French and Canadian
business operations that manufactured and sold tobacco-related papers and other
specialty paper products, which occurred effective at the close of business on
November 30, 1995.
The Company operates principally in the tobacco industry, manufacturing and
selling papers used in the manufacturing of cigarettes, paper products used in
cigarette packaging and reconstituted tobacco products. The Company's
non-tobacco industry products represented 12 percent of the Company's net sales
in 2000. The non-tobacco industry products are a diverse mix of products,
certain of which represent commodity paper grades produced to maximize machine
utilization.
The Company is operated and managed based on the geographical location of
its manufacturing operations: the United States, France and Brazil. While the
products are comparable in each segment, they vary based on the technological
capabilities of each of the manufacturing operations and the respective markets
and customers served. Sales by a segment into markets primarily served by a
different segment occur where specific product needs cannot be cost-effectively
met by the manufacturing operations domiciled in that segment.
For purposes of the segment disclosure in the following tables, the term
"United States" includes operations in the United States and Canada. The
Canadian operations only produce flax fiber used as raw material in the U.S.
operations. The Company's Brazilian operations, acquired on February 2, 1998,
and the operations of the French business acquired on February 11, 1998, are
included in the Company's Consolidated Financial Statements since the beginning
of February 1998.
Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between segments. Adjustments to
operating profit consist of unallocated overhead expenses not associated with a
segment and eliminations of inter-segment transactions.
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered. This section should be read in
conjunction with the Company's Consolidated Financial Statements included
herein.
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16
RESULTS OF OPERATIONS
2000 Compared to 1999
By Segment for the Years Ended December 31, 2000 and 1999
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 2000 1999 VS. 1999 2000 1999
- --------- ------ ------ -------- ------- -------
United States................................ $163.7 $166.3 -1.6% 33.0% 33.0%
France....................................... 264.9 284.6 -6.9 53.3 56.4
Brazil....................................... 70.0 54.0 +29.6 14.1 10.7
Eliminations................................. (1.8) (0.5) (0.4) (0.1)
------ ------ ----- -----
Consolidated....................... $496.8 $504.4 -1.5% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 2000 1999 VS. 1999 2000 1999 2000 1999
---------------- ----- ----- -------- ------- ------- ---- ----
United States................... $ 2.6 $ 9.3 -72.0% 5.2% 14.4% 1.6% 5.6%
France.......................... 47.2 55.2 -14.5 95.0 85.4 17.8 19.4
Brazil.......................... 4.5 5.2 -13.5 9.1 8.1 6.4 9.6
Unallocated/Eliminations........ (4.6) (5.1) (9.3) (7.9)
----- ----- ----- -----
Consolidated.......... $49.7 $64.6 -23.1% 100.0% 100.0% 10.0% 12.8%
===== ===== ===== =====
Net Sales
Net sales decreased by $7.6 million as a result of unfavorable currency
exchange rates and lower average selling prices, partially offset by higher
sales volumes. The net sales comparison was unfavorably affected by $31.0
million from changes in currency exchange rates, primarily related to a
strengthened U.S. dollar versus the French franc. Lower average selling prices
and changes in sales mix had an unfavorable effect of $3.9 million, as the
impact of increased average selling prices of the Brazilian business was more
than offset by the effects of lower average selling prices of the French
businesses. Worldwide sales volumes increased by three percent, which favorably
affected net sales by $27.3 million. Sales volumes of the Brazilian business
increased by 15 percent, primarily as a result of increased sales of
nontobacco-related papers and sales outside Brazil. Sales volumes of the French
businesses increased by one percent. Sales volumes of the U.S. business unit
declined by three percent.
Operating Profit
Operating profit decreased by $14.9 million, with lower operating profit in
all three business segments, primarily as a result of higher wood pulp and
energy costs, which in total increased operating expenses by $22.1 million.
Changes in the average per ton wood pulp costs compared with the prior year
unfavorably impacted operating expenses by $17.5 million. Partially offsetting
these higher operating expenses were the favorable effects of increased sales
volumes, improved mill operations and lower nonmanufacturing expenses.
In France, operating profit declined by $8.0 million primarily as a result
of higher wood pulp and energy costs and lower average selling prices. These
negative effects were partially offset by the benefits of the French business
unit's increased sales volumes, cost reduction activities and improved mill
operations.
The U.S. business unit's operating profit declined by $6.7 million
primarily due to the higher wood pulp and energy costs and additional expenses
associated with implementation of the banded cigarette paper project at the
Spotswood, New Jersey mill. The effects of the decline in sales volumes were
offset by cost reduction activities and lower nonmanufacturing expenses.
In Brazil, operating profit declined by $0.7 million for the year as a
result of higher wood pulp, energy and other material costs and increased
business taxes. These negative factors were partially offset by the effects of
increased sales volumes, higher average selling prices, cost reduction
activities and improved mill operations.
16
17
Nonmanufacturing expenses decreased by $3.6 million, primarily due to a
reduction in selling expenses of the French business unit and lower general
expenses, in part from personnel reductions implemented during 1999.
1999 Compared to 1998
By Segment for the Years Ended December 31, 1999 and 1998
(U.S. $ in millions)
% OF
CONSOLIDATED
% CHANGE --------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ------ ------ -------- ----- -----
United States................................... $166.3 $186.0 -10.6% 33.0% 34.0%
France.......................................... 284.6 312.0 -8.8 56.4 57.1
Brazil.......................................... 54.0 57.9 -6.7 10.7 10.6
Eliminations.................................... (0.5) (9.2) (0.1) (1.7)
------ ------ ----- -----
Consolidated........................... $504.4 $546.7 -7.7% 100.0% 100.0%
====== ====== ===== =====
% OF % RETURN
CONSOLIDATED ON SALES
% CHANGE -------------- ------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ----- ----- -------- ----- ----- ---- ----
United States...................... $ 9.3 $ 6.2 +50.0% 14.4% 10.5% 5.6% 3.3%
France............................. 55.2 60.3 -8.5 85.4 102.0 19.4 19.3
Brazil............................. 5.2 (2.3) N.M. 8.1 (3.9) 9.6 (4.0)
Unallocated/Eliminations........... (5.1) (5.1) (7.9) (8.6)
----- ----- ----- -----
Consolidated.............. $64.6 $59.1 +9.3% 100.0% 100.0% 12.8% 10.8%
===== ===== ===== =====
- ---------------
N.M. -- Not meaningful
Net Sales
Net sales decreased by $42.3 million as a result of lower average selling
prices, unfavorable currency exchange rates and reduced sales volumes. Lower
worldwide selling prices and unfavorable sales mix had an unfavorable effect of
$18.4 million. The net sales comparison was unfavorably affected by $12.6
million from changes in currency exchange rates, primarily related to a
strengthened U.S. dollar versus the French franc and the Brazilian real.
Worldwide sales volumes declined by one percent, which unfavorably affected net
sales by $11.3 million. Sales volumes from the U.S. and French business units
declined by seven and two percent, respectively, while sales volumes of the
Brazilian business unit improved by eight percent. U.S. and French business unit
volumes declined in most major product lines. The improvement in the Brazilian
business' sales volumes was primarily in nontobacco-related papers and sales
outside Brazil. Sales volumes in 1999 benefited in each of the three business
units from sales related to Year 2000 concerns as certain customers increased
their year-end inventories.
Operating Profit
Despite lower net sales, operating profit increased by $5.5 million, with
higher operating profit in Brazil and the United States more than offsetting a
decline in France. The impact of sales volumes related to customers' Year 2000
concerns may have benefited 1999 operating profit by as much as $1.3 to $1.8
million. Changes in the average per ton wood pulp costs compared with the prior
year favorably impacted operating expenses by $2.7 million, although this
benefit was offset by changes in selling prices. Operating profit in 1998 was
negatively affected by one-time pre-tax charges totaling $5.9 million related to
a voluntary retirement program at the Company's Spotswood mill which eliminated
67 hourly positions, non-cash write-downs of assets related primarily to idled
equipment that was no longer expected to be used due to changed market
conditions and one-time labor payments, the majority of which related to
operational changes.
In Brazil, operating profit improved by $7.5 million for the year as a
result of cost reduction activities, improved mill operations, increased sales
volumes, the lack of its portion of the 1998 charges and the positive impact of
the Brazilian currency devaluation which occurred in the first quarter of 1999.
These favorable items
17
18
were partially offset by lower average selling prices. The currency devaluation
was a positive impact for the Brazilian business unit since a portion of its
sales are tied to the U.S. dollar.
The U.S. business unit's operating profit improved by $3.1 million as a
result of the benefits of cost savings programs and the lack of its portion of
the 1998 charges, which more than offset the effects of lower selling prices,
unfavorable sales mix and lower sales and production volumes.
In France, operating profit declined by $5.1 million as a result of lower
selling prices, unfavorable sales mix and lower sales and production volumes.
These negative effects were partially offset by the benefits of the French
business unit's cost reduction activities, improved mill operations and the lack
of its portion of the 1998 charges.
Nonmanufacturing expenses decreased by $1.2 million, primarily due to a
reduction in selling expenses of the French business unit.
NON-OPERATING EXPENSES
The increase in interest expense in 2000 compared with 1999 was primarily
due to higher average interest rates, partially offset by a lower average amount
of debt outstanding and the effects of changes in currency exchange rates. The
decline in interest expense in 1999 compared with 1998 was primarily due to
lower average interest rates, changes in currency exchange rates and a lower
average amount of debt outstanding. The weighted average effective interest rate
on the Company's term loans was approximately 5.7 percent in 2000, 4.5 percent
in 1999 and 5.1 percent in 1998. Other income, net consisted primarily of
interest income, royalty income and foreign currency transaction gains and
losses in each of the years presented, as well as a favorable settlement related
to a prior-period claim in 2000 and recovery of prior-period business taxes in
1999.
INCOME TAXES
The effective income tax rates for the years ended December 31, 2000, 1999
and 1998 were 31.4 percent, 39.0 percent and 32.1 percent, respectively.
The lower effective income tax rate in 2000 compared with 1999 was in part
a result of a decrease in the French corporate income tax rate from 40.0 percent
for 1999 to 37.7 percent for 2000 and a decline in the Brazilian corporate
income tax rate from 37.0 percent for most of 1999 to 34.0 percent for most of
2000. Additionally, the lower effective income tax rate in 2000 was due to
several items, including a $1.0 million favorable adjustment to reduce Spanish
deferred income tax valuation allowances, favorable income tax treatment of a
settlement related to a prior-period claim and an equity-related payment from
Brazil and income tax benefits associated with treatment of certain
repatriations during the year. Excluding the effects of these four items, the
effective income tax rate for 2000 would have been 37.0 percent.
The provision for income taxes in 1998 included the benefit of a reduction
in the valuation allowance recorded against certain French deferred income tax
assets arising from net operating loss carryforwards ("NOLs"). This adjustment
reduced the deferred provision for income taxes by $5.2 million. The reduction
in the valuation allowance was recorded because of continued earnings and
projected future earnings at the French businesses that utilize the NOLs,
reducing the uncertainty that these NOLs will be fully utilized in the future.
Excluding the impact of this adjustment, the effective income tax rate for the
year ended December 31, 1998 would have been 41.7 percent. The decrease from
this adjusted 1998 effective income tax rate of 41.7 percent to 39.0 percent in
1999 was due to the reduction in the French statutory income tax rate from 41.7
percent in 1998 to 40.0 percent in 1999 and due to a greater proportion of the
Company's 1999 earnings being in Brazil and the United States, which had lower
income tax rates than France.
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19
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
(U.S. $ IN MILLIONS)
Cash Provided by (Used for):
Changes in operating working capital...................... $ 2.6 $ (9.0) $ (1.9)
Operations................................................ 71.7 60.7 67.1
Capital spending.......................................... (29.4) (26.3) (36.7)
Purchases of treasury stock............................... (13.2) (4.3) (3.8)
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. Impacting the cash
flow from operations are changes in operating working capital. In 2000, changes
in operating working capital contributed favorably to cash flow by $2.6 million
due primarily to higher accounts payable and accrued expenses, partially offset
by higher accounts receivable. Accounts payable and accrued expenses were higher
in 2000 compared with 1999 as a result of recorded liabilities associated with
capital projects and maintenance costs at December 31, 2000. Accounts receivable
was higher in 2000 compared with 1999 primarily because of increased French
business unit export sales having longer payment terms. In 1999, changes in
operating working capital contributed unfavorably to cash flow by $9.0 million
due primarily to lower accounts payable. Accounts payable was lower in 1999
compared with 1998 as a result of payments in early 1999 for capital projects
included in accounts payable at December 31, 1998. In 1998, changes in operating
working capital contributed unfavorably to cash flow by $1.9 million, excluding
the acquired working capital balances of the Brazilian and French businesses
acquired in 1998.
During 2000, the Company and Philip Morris reached agreement to proceed
with the modification of paper machines and related manufacturing equipment at
the Company's Spotswood mill to produce commercial quantities of a new
proprietary banded cigarette paper for Philip Morris. Capital spending to
implement the banded cigarette paper project was $12.7 million in 2000 and is
currently expected to be approximately $40 million in 2001. The Company does not
expect this project to impair its ability to pursue other appropriate business
opportunities. Funding for the Spotswood mill conversion and increased working
capital requirements is coming from internal sources and from advance payments
by Philip Morris against future product purchases.
Capital spending in 2000 included $16.5 million toward three projects at
the Spotswood mill: the banded cigarette paper project, a high-speed slitter and
a project for mill effluent solids removal. Also included in the total capital
spending for 2000 was $1.3 million toward improvement of a reconstituted tobacco
leaf machine in the Spay mill. Capital spending in 1999 included (i) $8.1
million toward the speed-up of two machines in the French mills, (ii) $3.2
million toward the expansion of converted tipping paper capacity at the
Malaucene mill, and (iii) $1.1 million toward replacement of a yankee dryer in
the Spay mill. Capital spending in 1998 included (i) $3.9 million toward the
expansion of the Malaucene mill, (ii) $3.0 million toward speed-ups of both RTL
machines and replacement of a yankee dryer hood at the Spay mill, (iii) $2.3
million for speed-up of a paper machine at the Quimperle mill, (iv) $1.4 million
to modify a paper machine at the Saint-Girons mill, (v) $1.2 million toward
upgrades to a paper machine at the Spotswood mill, (vi) $1.0 million to upgrade
a coating machine at the Pirahy mill, and (vii) $1.0 million toward improvements
at the Quimperle pulping facility.
In December 1998, the Company announced that the Board of Directors had
authorized the repurchase of shares of the Company's common stock during the
period January 1, 1999 through December 31, 2000 in an amount not to exceed $20
million. Under this program the Company repurchased a total of 1,177,050 shares
of its common stock for $17.5 million, of which 882,700 shares were purchased
during 2000 for $13.2 million. The Company repurchased 155,700 shares of its
common stock during 1998 for $3.8 million under a previous program which was
effective through December 31, 1998.
During 2000, the Company's Board of Directors authorized the further
repurchase of shares of the Company's common stock during the period January 1,
2001 through December 31, 2002 in an amount not to exceed $20 million.
19
20
On January 25, 2001, the Company announced that the Board of Directors had
declared a quarterly cash dividend of fifteen cents per share of common stock.
The dividend will be payable on March 12, 2001 to stockholders of record on
February 12, 2001.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, including the banded
cigarette paper project, stockholder dividends, purchases of Company stock and
working capital. The Company has declared and paid quarterly dividends of
fifteen cents per share since the second quarter of 1996. Management currently
expects to continue this level of quarterly dividend. Other than expenditures
associated with environmental matters (see Note 12 of the Notes to Consolidated
Financial Statements), as of December 31, 2000 the Company had unrecorded
outstanding commitments for capital expenditures of approximately $13.9 million.
As of December 31, 2000, the Company had approximately $33 million
available under its revolving credit facilities in the United States and France,
and on January 19, 2001, the Company renewed these facilities to January 25,
2002. The Company also has other bank credit facilities available in the United
States, France and Brazil.
The Company believes its cash flow from operations, including advance
payments from customers for future product purchases, together with borrowings
still available under its revolving and other credit facilities, will be
sufficient to fund its ongoing cash requirements.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays
the effective date for the new requirements of SFAS No. 133 by one year. As a
result, SFAS No. 133 will be effective for the Company's first quarter of 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends and clarifies certain
requirements of SFAS No. 133. The Company's adoption of these new accounting
rules is not expected to have a material effect on the Company's financial
condition or results of operations.
OUTLOOK
Although cigarette consumption and production in the United States were
lower in 2000 than in the prior year as a result of declines in domestic
cigarette consumption and exports of cigarettes manufactured in the United
States, the declines were less than in 1998 and 1999 and sales volumes of the
Company's U.S. business segment appear to be stabilizing. The negative impact of
lower U.S. cigarette production is being partially offset by the Company's
increased market share within the North American market and this trend is
expected to continue. Outside the United States, recent improvements in the
Company's sales volumes to several key markets compared with prior-year levels,
including Eastern Europe and Russia, are also expected to continue. Growth in
French reconstituted tobacco leaf volumes is anticipated in 2001 compared with
2000. Sales of tobacco-related papers within the Brazilian market appear to be
stabilizing. The Company's Brazilian business continues to benefit from
increased sales to Latin American countries outside of Brazil, although the
level of these exports is being unfavorably impacted by the implementation of an
export tax on some raw materials used in the manufacturing of cigarettes.
The new Brazilian export tax, which was enacted in the third quarter of
2000, is a 150 percent tax which applies to tobacco-related papers manufactured
by the Company's Brazilian business and exported from Brazil to other Latin
American countries. This new tax was apparently enacted by the Brazilian
government in an attempt to reduce the quantity of contraband or smuggled
cigarettes being sold in Brazil. Modifications to the new export tax were
enacted during the fourth quarter of 2000 and are expected to reduce the
negative impact on our Brazilian operation's exports from Brazil; however, even
as modified, the new tax is expected to unfavorably impact the Company's
financial results by approximately $.01 to $.02 per share per quarter, as it did
beginning in the fourth quarter of 2000. Cost of sales of certain products in
Brazil are also being unfavorably impacted by a recent change in the treatment
of ICMS taxes (see "Litigation" under the caption "LEGAL PROCEEDINGS" in Part I,
Item 3), which may reduce earnings by up to $.05 per share per
20
21
quarter, as it did during the fourth quarter of 2000. SWM-B is evaluating
possible changes in its business, including a possible change in its product
mix, to minimize the impact of this matter on its financial results.
Worldwide demand for tobacco-related papers remains below worldwide
capacity for such papers despite actions by suppliers to shut-down less
efficient machines. The combination of this continuing excess worldwide capacity
for tobacco-related papers and the strong U.S. dollar versus European and other
foreign currencies is making it difficult to increase selling prices to offset
the Company's negative cost pressures since several competitors have cost
structures that are based upon currencies that have weakened versus the U.S.
dollar.
Cost reduction continues to be a priority in each of the Company's business
segments. Future periods are expected to benefit from various cost savings
programs and certain past and future capital projects.
The per ton cost of wood pulp steadily increased during the latter half of
1999 and the first three quarters of 2000. Additionally, higher energy costs
were experienced throughout 2000 in each of the Company's business segments. The
Company has not been able to offset these cost increases with higher selling
prices. However, it appears that the cost of wood pulp has stabilized. The
Company expects the per ton cost of wood pulp to decline in the first half of
2001 from its level at the end of 2000 which could provide an opportunity to
regain some of the loss in gross profit margin experienced during 2000.
In December 2000, the French government enacted a reduction in the French
corporate income tax rate from 37.7 percent for 2000 to 36.3 percent for 2001
and 35.3 percent for 2002 and beyond. Considering this recent change, the
Company expects its consolidated effective income tax rate to be approximately
35 to 36 percent for 2001 and to decline to approximately 34 to 35 percent for
2002.
During the second quarter of 2000, the Company and Philip Morris reached
agreement to proceed with the modification of paper machines and related
manufacturing equipment at the Spotswood mill to produce commercial quantities
of a new proprietary banded cigarette paper for Philip Morris. This new
cigarette paper was jointly developed by the Company and Philip Morris and may
make a cigarette less likely to ignite certain fabrics. Capital spending to
implement the banded cigarette paper project is currently expected to total
approximately $40 million in 2001, in addition to amounts already incurred by
the Company as of December 31, 2000. The Company does not expect this project to
impair its ability to pursue other appropriate business opportunities. The
banded cigarette paper operations are expected to have a negative impact on 2001
financial results because of additional expenses associated with implementation.
Excluding capital spending associated with the banded cigarette paper
project, the Company expects to control its capital spending to approximately
$20 to $25 million for 2001, focused primarily on product quality improvements
and cost reduction opportunities.
During 2000, the Company's Board of Directors authorized the repurchase of
shares of the Company's common stock during the period January 1, 2001 through
December 31, 2002 in an amount not to exceed $20 million. Common stock
repurchases in 2001 will be dependent upon various factors, including cash
availability, the stock price and strategic opportunities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Many factors outside the control of the Company could impact the Company's
results. The following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual results for 2001 and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company.
International Business Risks
The Company and its subsidiaries are subject to international business
risks, including unsettled political and economic conditions, expropriation,
import and export controls and restrictions, exchange controls, inflationary
economies, currency risks, changes in business and income tax regulations and
risks related to the restrictions of repatriation of earnings or proceeds from
liquidated assets of foreign subsidiaries.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legal
currencies") and one common currency - the euro. The euro
21
22
now trades on currency exchanges and may be used in business transactions.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legal currencies will be withdrawn from circulation by no later than
February 15, 2002. The Company established a committee to identify and implement
changes necessary to address the systems and business issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and other business systems and equipment to accommodate
euro-denominated transactions, competitive implications of increased price
transparency within European Union countries, changes in currency exchange costs
and rate exposures, continuity of contracts that require payment in a legal
currency and tax implications of the conversion.
The Company's French subsidiaries currently utilize multi-currency software
that was capable of euro-denominated sales and purchase transactions on January
1, 1999. Consideration has also been given to other potential issues in
connection with the conversion, including those mentioned above. The Company's
French subsidiaries are in the process of implementing already-purchased
software capable of translating current and historical data into euro currency
data, which implementation will be fully completed no later than January 1,
2002, at which time the euro will become the functional currency of the French
subsidiaries. The Company does not anticipate any significant negative
consequences of these issues and does not anticipate that the euro conversion
will have a material adverse impact on its financial condition or results of
operations.
Tax and Repatriation Matters
The Company and its subsidiaries are subject to various business and income
tax laws in each of the countries in which it does business through wholly-owned
subsidiaries and through affiliates. The Company makes a comprehensive review of
the business and income tax requirements of each of its operations, files
appropriate returns and makes appropriate tax planning analyses directed toward
the minimization of its tax obligations in these countries. Appropriate business
and income tax provisions are determined on an individual subsidiary level and
at the corporate level on both an interim and annual basis. These processes are
followed using a combination of internal staff at both the subsidiary and
corporate levels as well as independent outside advisors in review of the
various tax laws and in compliance reporting for the various operations.
Dividend distributions are regularly made to the United States from certain
foreign subsidiaries and are appropriately considered in the provision for U.S.
income taxes. The Company intends for the undistributed earnings of certain
other foreign subsidiaries to be reinvested indefinitely. These undistributed
earnings are not subject to either additional foreign income taxes or U.S.
income taxes unless remitted as dividends. Accordingly, no provision has been
made for U.S. taxes on those earnings. The Company regularly reviews the status
of the accumulated earnings of each of its foreign subsidiaries and reevaluates
the aforementioned dividend policy as part of its overall financing plans.
Hedging Activities and Foreign Currency Exchange Risks
Management selectively hedges the Company's foreign currency risks, as well
as its exposure to interest rate increases on its variable rate long-term debt,
when it is practical and economical to do so. The instruments used to hedge
foreign currency risks are forward contracts and, to a lesser extent, option
contracts. The Company utilizes various forms of interest rate hedge agreements,
including interest rate swap agreements and forward rate agreements. These
instruments are purchased from well-known money center banks, insurance
companies or government agencies ("counterparties"). Usually, the contracts
extend for no more than 12 months, although their contractual term has been as
long as 24 months. Management believes that credit risks with respect to the
counterparties and the foreign currency risks that would not be hedged, were the
counterparties to fail to fulfill their obligations under the contracts, are
minimal in view of the financial strength of the counterparties.
In addition to the effect of changes in currency exchange rates on
operating profit, foreign currency gains and losses have arisen from the
remeasurement of non-local currency denominated monetary assets and liabilities
into the currency of the country in which the operation is domiciled. These
gains and losses, related primarily to trade receivable and payable balances,
are included in other income, net.
Additional information concerning foreign currency related matters is
disclosed in Note 9 of the Notes to Consolidated Financial Statements.
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Inflation
In recent years, inflation has not had a significant impact on the
Company's cost structure.
Effect of Changing Pulp Costs
Per ton pulp costs tend to be cyclical in nature and are a large component
of product costs. The Company consumed approximately 116,000, 107,000 and
112,000 metric tons of wood pulp in 2000, 1999 and 1998, respectively. During
the period from January 1998 through December 2000, the U.S. list price of
northern bleached softwood kraft pulp, a representative pulp grade used by the
Company, ranged from a low of $500 per metric ton to a high of $710 per metric
ton in the third and fourth quarters of 2000. Generally, over time, the Company
has been able to increase its selling prices in response to increased per ton
pulp costs, although this was not the case in 2000 as a result of other
marketplace factors, and has generally reduced its selling prices when pulp
costs have significantly declined. The Company may or may not be able to fully
recover future pulp cost increases, or fully retain future pulp cost decreases,
in its sales pricing structure.
Seasonality
Sales of the Company's products are not subject to seasonal fluctuations,
except in the United States and Brazil. In the United States, customer shutdowns
typically occur in July and December and typically have resulted in reduced net
sales and operating profit during those two months. Additionally, the U.S. mills
shut down equipment to perform additional maintenance during these months,
resulting in higher product costs and reduced operating profit. In Brazil,
customer orders are typically lower in December due to a holiday season through
much of January and February.
Environmental Matters
The Company is subject to federal, state, local and foreign environmental
protection laws and regulations with respect to the environmental impact of air,
water and other emissions from its mills as well as its disposal of solid waste
generated by its operations. The Company believes it is operating in compliance
with, or is taking action aimed at ensuring compliance with, such laws and
regulations. While the Company has incurred in the past several years, and will
continue to incur, capital and operating expenditures in order to comply with
these laws and regulations, these costs are not expected to materially affect
the Company's business or results of operations. The Company, or its
predecessor, is currently named as a potentially responsible party at two waste
disposal sites, neither of which, individually, or in the aggregate, in
management's opinion, is likely to have a material adverse effect on the
Company's financial condition, results of operations or liquidity. However,
there can be no assurance that such an effect will not occur at some future
time. Additional information concerning environmental matters is disclosed in
Note 12 of the Notes to Consolidated Financial Statements and in Part I, Item 3
"LEGAL PROCEEDINGS" herein.
Legal Proceedings
Information concerning legal proceedings is disclosed in Note 11 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein. In addition, the Company and its subsidiaries are involved
in legal actions and claims arising in the ordinary course of business.
Litigation is subject to many uncertainties and, while it is not possible to
predict the outcome of the litigation pending against the Company and its
subsidiaries, management believes that such actions and claims will be resolved
without a material adverse effect on the Company's financial statements.
Reliance on Significant Customers
Most of the Company's customers are manufacturers of tobacco products
located in more than 90 countries around the world. Two such customers have
accounted for a significant portion of the Company's net sales in each of the
last several years, and the loss of one or both such customers, or a significant
reduction in one or both of these customers' purchases, could have a material
adverse effect on the Company's results of operations. See Note 14 of the Notes
to Consolidated Financial Statements.
23
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Tobacco Products and Governmental Actions
In recent years, governmental entities around the world, particularly in
the United States, have taken or have proposed actions that may have the effect
of reducing consumption of tobacco products. Reports and speculation with
respect to the alleged harmful physical effects of cigarette smoking and use of
tobacco products have been publicized for many years and, together with actions
to restrict or prohibit advertising and promotion of cigarettes or other tobacco
products and to increase taxes on such products, are intended to discourage the
consumption of cigarettes and other such products. In the fourth quarter of
1998, the major U.S. cigarette manufacturers reached agreement with all 50 U.S.
states and several commonwealths and territories to settle health care cost
recovery and other claims. In anticipation of these settlements and as a direct
result of these settlements, most of the U.S. cigarette manufacturers have
increased prices of cigarettes significantly. Domestic cigarette consumption has
declined, in part due to these price increases which, in turn, decreases demand
for the Company's products. During 1999, the U.S. Department of Justice filed a
multi-billion dollar civil suit against the tobacco industry. In addition,
litigation is pending against the major manufacturers of consumer tobacco
products seeking damages for health problems allegedly resulting from the use of
tobacco in various forms and for alleged violations of antitrust laws. It is not
possible to predict the outcome of such litigation or what effect adverse
developments in pending or future litigation may have on the tobacco industry,
its financial liquidity or relationships with its suppliers.
Also in recent years, certain governmental entities, particularly in the
United States, have considered or proposed actions that would require cigarettes
to meet specifications aimed at reducing their likelihood of igniting fires when
the cigarettes are not actively being smoked. The state of New York has enacted
such a set of requirements scheduled to take effect beginning in 2003. Cigarette
manufacturers are in varying stages of development of cigarettes with such
characteristics. Philip Morris and the Company previously announced the joint
development of a banded cigarette paper that may make a cigarette less likely to
ignite certain fabrics and have entered into a licensing and royalty agreement
covering future commercialization of this new paper, the commercial viability of
which has not yet been determined. The Company also continues to work on other
possible innovations with other customers and on its own as the cigarette
industry faces these evolving requirements.
It is not possible to predict what additional legislation or regulations
relating to tobacco products will be enacted, or to what extent, if any, such
legislation or regulations might affect the consumer tobacco products industry
in general.
During 2000, 88 percent of the Company's net sales were from products used
by the tobacco industry in the making and packaging of cigarettes or other
tobacco products. Management is unable to predict the effects that the
above-described legal and governmental actions might have on the Company's
results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, particularly in the foregoing
discussion regarding the "Outlook" of the Company and "Factors That May Affect
Future Results", constitute forward-looking statements, generally identified by,
but not limited to, phrases such as "the Company expects" or "the Company
anticipates", as well as by use of words of similar effect, such as "appears",
"could", "should", "may" and "typically". This report contains many such
forward-looking statements, including statements regarding management's
expectations of future selling prices for the Company's products, the Company's
anticipated market shares, future market prices for wood pulp used by the
Company, expected sales volumes trends, new product introductions, anticipated
cost savings, anticipated financial and operational results, anticipated capital
spending, anticipated tax and other governmental actions, contingencies,
anticipated common stock share repurchases and other expected transactions of
the Company. Forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the Company. There
can be no assurances that such events will occur or that the results of the
Company will be as estimated. Many factors outside the control of the Company
also could impact the realization of such estimates. The above-mentioned
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause the Company's actual
results for 2001 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998..................... 26
Consolidated Balance Sheets as of December 31, 2000 and
1999.................................................. 27
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2000, 1999 and
1998.................................................. 28
Consolidated Statements of Cash Flow for the years
ended December 31, 2000, 1999 and 1998................ 29
Notes to Consolidated Financial Statements............. 30
Report of Independent Auditors.............................. 54
Management's Responsibility for Financial Reporting......... 55
Schedules have been omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.
25
26
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
--------- --------- ---------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales.................................... $496.8 $504.4 $546.7
Cost of products sold...................... 404.9 394.0 440.6
------ ------ ------
Gross Profit................................. 91.9 110.4 106.1
Selling expense............................ 18.5 19.5 21.0
Research expense........................... 6.3 6.7 6.5
General expense............................ 17.4 19.6 19.5
------ ------ ------
Operating Profit............................. 49.7 64.6 59.1
Interest expense........................... (6.1) (5.8) (6.4)
Other income, net.......................... 3.2 1.9 1.2
------ ------ ------
Income Before Income Taxes and Minority
Interest................................... 46.8 60.7 53.9
Provision for income taxes................. 14.7 23.7 17.3
------ ------ ------
Income Before Minority Interest.............. 32.1 37.0 36.6
Minority interest in earnings of
subsidiaries............................ 4.3 5.6 5.6
------ ------ ------
Net Income................................... $ 27.8 $ 31.4 $ 31.0
====== ====== ======
Net Income Per Common Share:
Basic...................................... $ 1.82 $ 1.99 $ 1.94
====== ====== ======
Diluted.................................... $ 1.82 $ 1.99 $ 1.92
====== ====== ======
See Notes to Consolidated Financial Statements
26
27
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
--------------------
2000 1999
------- -------
(U.S. $ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 23.6 $ 15.1
Accounts receivable....................................... 77.7 72.1
Inventories............................................... 64.5 62.9
Current income tax refunds receivable..................... 2.9 2.2
Deferred income tax benefits.............................. 4.8 4.1
Prepaid expenses.......................................... 1.7 2.8
------ ------
Total Current Assets............................... 175.2 159.2
------ ------
Property
Land and improvements..................................... 7.0 7.0
Buildings and improvements................................ 61.5 63.4
Machinery and equipment................................... 368.7 370.9
Construction in progress.................................. 24.8 10.6
------ ------
Gross Property.......................................... 462.0 451.9
Less accumulated depreciation............................. 212.5 199.8
------ ------
Net Property....................................... 249.5 252.1
------ ------
Noncurrent Deferred Income Tax Benefits..................... 1.0 6.9
------ ------
Deferred Charges and Other Assets........................... 16.0 18.4
------ ------
Total Assets................................. $441.7 $436.6
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 3.6 $ 3.2
Other short-term debt..................................... 2.0 8.8
Accounts payable.......................................... 52.7 46.3
Accrued expenses.......................................... 52.1 49.1
------ ------
Total Current Liabilities.......................... 110.4 107.4
------ ------
Long-Term Debt.............................................. 97.7 100.9
------ ------
Noncurrent Deferred Income Tax Liabilities.................. 14.9 13.1
------ ------
Noncurrent Deferred Revenue................................. 10.0 2.0
------ ------
Other Noncurrent Liabilities................................ 22.4 21.9
------ ------
Minority Interest........................................... 6.4 7.1
------ ------
Contingencies (See Notes 6, 10, 11 and 12)
Stockholders' Equity
Preferred Stock - $.10 par value - 10,000,000 shares
authorized, none issued................................. -- --
Common Stock - $.10 par value - 100,000,000 shares
authorized, 16,078,733 shares issued at both
December 31, 2000 and 1999, respectively................ 1.6 1.6
Additional paid-in capital................................ 60.5 60.7
Common stock in treasury, at cost - 1,288,471 and 441,845
shares at December 31, 2000 and 1999, respectively...... (20.5) (8.0)
Retained earnings......................................... 175.3 156.7
Unearned compensation..................................... (0.3) --
Accumulated other comprehensive income (loss) -
Unrealized foreign currency translation adjustments..... (36.7) (26.8)
------ ------
Total Stockholders' Equity......................... 179.9 184.2
------ ------
Total Liabilities and Stockholders' Equity... $441.7 $436.6
====== ======
See Notes to Consolidated Financial Statements
27
28
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER
------------------- ------------------ PAID-IN RETAINED UNEARNED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL
---------- ------ --------- ------ ---------- -------- ------------ ------------- ------
(U.S. $ IN MILLIONS)
BALANCE, DECEMBER 31,
1997.................... 16,065,443 $1.6 $60.3 $113.5 $ 4.1 $179.5
Net income.............. 31.0 31.0
Adjustments to
unrealized foreign
currency
translation........... (0.4) (0.4)
------
Comprehensive income.... 30.6
------
Dividends declared
($0.60 per share)..... (9.6) (9.6)
Purchases of treasury
stock................. 155,700 $(3.8) (3.8)
Stock issued to
directors as
compensation.......... 1,350 (1,032) --
Stock issued for options
exercised............. 11,940 0.3 0.3
Adjustments due to
rounding.............. 0.1 (0.1) --
---------- ---- --------- ------ ----- ------ ------ ------
BALANCE, DECEMBER 31,
1998.................... 16,078,733 1.6 154,668 (3.8) 60.7 134.8 3.7 197.0
Net income.............. 31.4 31.4
Adjustments to
unrealized foreign
currency
translation........... (30.5) (30.5)
------
Comprehensive income.... 0.9
------
Dividends declared
($0.60 per share)..... (9.5) (9.5)
Purchases of treasury
stock................. 294,350 (4.3) (4.3)
Stock issued to
directors as
compensation.......... (7,173) 0.1 0.1
---------- ---- --------- ------ ----- ------ ------ ------
BALANCE, DECEMBER 31,
1999.................... 16,078,733 1.6 441,845 (8.0) 60.7 156.7 (26.8) 184.2
Net income.............. 27.8 27.8
Adjustments to
unrealized foreign
currency
translation........... (9.9) (9.9)
------
Comprehensive income.... 17.9
------
Dividends declared
($0.60 per share)..... (9.2) (9.2)
Purchases of treasury
stock................. 882,700 (13.2) (13.2)
Restricted stock
issuances............. (30,000) 0.6 (0.2) $(0.4) --
Amortization of unearned
compensation.......... 0.1 0.1
Stock issued to
directors as
compensation.......... (5,474) 0.1 0.1
Issuance of shares for
options exercised..... (600) --
---------- ---- --------- ------ ----- ------ ----- ------ ------
BALANCE, DECEMBER 31,
2000.................... 16,078,733 $1.6 1,288,471 $(20.5) $60.5 $175.3 $(0.3) $(36.7) $179.9
========== ==== ========= ====== ===== ====== ===== ====== ======
See Notes to Consolidated Financial Statements
28
29
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2000 1999 1998
------ ------ -------
(U.S. $ IN MILLIONS)
Operations
Net income................................................ $ 27.8 $ 31.4 $ 31.0
Non-cash items included in income:
Depreciation and amortization.......................... 22.1 22.2 24.8
Deferred income tax provision.......................... 6.1 10.4 5.0
Minority interest in earnings of subsidiaries.......... 4.3 5.6 5.6
Other.................................................. 0.8 0.1 0.6
Advance payments from customers........................... 8.0 -- 2.0
Changes in operating working capital, excluding effects of
acquisitions:
Accounts receivable.................................... (5.6) (2.6) (1.2)
Inventories............................................ (1.6) 6.5 (1.4)
Accounts payable....................................... 6.4 (11.8) 2.4
Accrued expenses....................................... 3.0 (1.6) 0.3
Prepaid expenses....................................... 1.1 (0.1) 1.2
Accrued income taxes................................... (0.7) 0.6 (3.2)
------ ------ -------
Net changes in operating working capital............. 2.6 (9.0) (1.9)
------ ------ -------
Cash Provided by Operations....................... 71.7 60.7 67.1
------ ------ -------
Investing
Capital spending.......................................... (29.4) (26.3) (36.7)
Capitalized software costs................................ (1.4) (3.1) (4.0)
Acquisitions, net of cash acquired........................ -- -- (65.4)
Other..................................................... 0.3 (2.5) (1.3)
------ ------ -------
Cash Used for Investing........................... (30.5) (31.9) (107.4)
------ ------ -------
Financing
Cash dividends paid to SWM stockholders................... (9.2) (9.5) (9.6)
Cash dividends paid to minority owners.................... (4.6) (5.2) (5.3)
Changes in short-term debt................................ (6.8) (2.5) 8.4
Proceeds from issuances of long-term debt................. 5.1 6.5 24.8
Payments on long-term debt................................ (4.0) (5.4) (5.0)
Purchases of treasury stock............................... (13.2) (4.3) (3.8)
Issuances of capital stock................................ -- -- 0.3
------ ------ -------
Cash Provided by (Used for) Financing............. (32.7) (20.4) 9.8
------ ------ -------
Increase (Decrease) in Cash and Cash Equivalents............ 8.5 8.4 (30.5)
Cash and Cash Equivalents at beginning of year.............. 15.1 6.7 37.2
------ ------ -------
Cash and Cash Equivalents at end of year.................... $ 23.6 $ 15.1 $ 6.7
====== ====== =======
See Notes to Consolidated Financial Statements
29
30
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. BACKGROUND
On November 30, 1995, Kimberly-Clark Corporation ("Kimberly-Clark")
distributed all of the outstanding common stock of Schweitzer-Mauduit
International, Inc. (the "Distribution") to its stockholders, through a tax-free
spin-off of its U.S., French and Canadian business operations that manufactured
and sold tobacco-related papers and other specialty paper products (the
"Businesses"). Effective at the close of business on November 30, 1995, the
Company became an independent, publicly owned company as a result of the
Distribution.
In order to effectuate the spin-off of the Businesses, on August 21, 1995
and July 31, 1995, respectively, Schweitzer-Mauduit International, Inc. ("SWM")
and Schweitzer-Mauduit Canada, Inc. ("SM-Canada") were incorporated and
nominally capitalized. Prior to the Distribution, Kimberly-Clark transferred to
SWM (the "Transfer") (i) the assets and liabilities of its U.S.-based specialty
products business; (ii) all of the issued and outstanding shares of SM-Canada
and of Schweitzer-Mauduit France, S.A.R.L., a French corporation ("SMF"); and
(iii) 72 percent of the issued and outstanding shares of LTR Industries, S.A., a
French corporation ("LTRI"). After the Transfer, the Company consisted of the
operating assets and liabilities of Kimberly-Clark's U.S. specialty products
business and investments in SM-Canada (100 percent owned), SMF (100 percent
owned) and LTRI (72 percent owned). SMF, directly or indirectly, then owned 100
percent of two principal French operating subsidiaries, Papeteries de Mauduit
S.A. ("PdM") and Papeteries de Malaucene S.A. ("PdMal"), and a French holding
company, Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"). The Transfer
was accounted for at historical cost in a manner similar to that in pooling of
interests accounting as the entities were all under common control. As used
herein, the Company means SWM, SWM and its several subsidiaries or, as
determined by the context, one or more or its several subsidiaries.
During 1997, the Company established and nominally capitalized
Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a 100 percent owned holding company
organized under the Spanish holding company regime. During 1998, the Company
transferred its 72 percent interest in LTRI to SM-Spain. During 2000, the
Company transferred its 100 percent interest in SMF to SM-Spain. SM-Spain is the
primary foreign investment holding company for SWM.
NOTE 2. ACQUISITIONS
On February 2, 1998, SM-Spain paid approximately $62.0 in cash for 99.97
percent ownership interest in Companhia Industrial de Papel Pirahy ("Pirahy"), a
specialty paper manufacturer located near Rio de Janeiro, Brazil. In connection
with this acquisition, the Company modified its existing credit agreement to
provide a $20.0 term loan to SM-Spain. SM-Spain borrowed the remaining funds for
the transaction from SMF, which in turn utilized its existing cash balances and
borrowings from its revolving credit facilities. Subsequently, Pirahy was
renamed Schweitzer-Mauduit do Brasil, S.A. ("SWM-B"). As a result of cumulative
purchases of outstanding minority shares, SM-Spain now owns 99.99 percent of the
outstanding shares of SWM-B.
On February 11, 1998, SM-Enterprises paid 37.2 million French francs (then
approximately $6.1) in cash and assumed approximately $5.8 in existing net debt
for all of the outstanding shares of Ingefico, S.A. and 97.1 percent of the
outstanding shares of its pulp and specialty paper manufacturing subsidiaries,
Groupe SAPAM S.A. ("Groupe SAPAM") and Papeteries de la Moulasse S.A., located
in Saint-Girons, France. Subsequently, SM-Enterprises acquired all the remaining
shares of Groupe SAPAM for $0.2 in cash. SM-Enterprises and Ingefico, S.A. were
then merged into Groupe SAPAM. Papeteries de la Moulasse S.A. was renamed
Papeteries de Saint-Girons S.A. ("PdStG") and Groupe SAPAM was then merged into
PdStG.
30
31
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The above acquisitions were accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values as of the respective dates of the
acquisitions. In conjunction with the acquisitions, liabilities were assumed as
follows:
Fair value of assets acquired............................... $ 95.7
Less: Cash paid for the stock.............................. (68.3)
Direct costs incurred................................ (2.0)
------
Liabilities assumed....................................... $ 25.4
======
The operating results of these acquired companies are included in the
Consolidated Statements of Income beginning February 1, 1998. Unaudited
consolidated pro forma net sales and net income for 1998, assuming the
acquisitions had occurred as of the beginning of 1998, would have been $555.9
and $31.1, respectively. Unaudited consolidated pro forma basic and diluted
earnings per share for 1998 would have been $1.94 and $1.92, the same as the
Company's audited consolidated basic and diluted earnings per share.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which require
management to make estimates and assumptions that affect amounts of assets and
liabilities reported, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses reported
for the periods. Actual results could differ from these estimates. These
financial statements are presented on a consolidated basis and include the
accounts of SWM and all its majority-owned subsidiaries. All material
intercompany and interdivisional transactions are eliminated.
Revenue Recognition
Sales are generally recognized upon shipment of the product to the
customer. Deferred revenue represents advance payments from customers which are
earned based upon a mutually agreed-upon amount per unit of future product
sales.
Foreign Currency Translation
The income statements of foreign entities are translated into U.S. dollars
at average exchange rates prevailing during the periods. The balance sheets of
these entities are translated at period-end exchange rates, and the differences
from historical exchange rates are reflected in a separate component of
accumulated other comprehensive income (loss) as unrealized foreign currency
translation adjustments. Foreign currency gains and losses arising from
settlement of transactions in non-local currencies and remeasurement of
non-local currency denominated monetary assets and liabilities are included in
other income, net.
Earnings Per Share
Basic net income per common share is computed based on net income divided
by the weighted average number of common shares outstanding. The average number
of common shares used in the calculation of basic net income per common share
for 2000, 1999 and 1998 were 15,224,100, 15,805,700 and 16,018,700,
respectively. Diluted net income per common share is computed based on net
income divided by the weighted average number of common and potential common
shares outstanding. The average number of common and potential common shares
used in the calculation of diluted net income per common share for 2000, 1999
and 1998 were 15,272,400, 15,807,200 and 16,161,300, respectively. Potential
common shares are those related to
31
32
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
stock options and restricted stock outstanding and directors' deferred stock
compensation during the respective years.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and readily
marketable securities with original maturities of three months or less. The
recorded amount reported in the balance sheet approximates fair value.
Inventories
Most U.S. inventories are valued at cost on the Last-In, First-Out ("LIFO")
method. The balance of the U.S. inventories and inventories of entities outside
the United States are valued at the lower of cost, using the First-In, First-Out
("FIFO") and weighted average methods, or market.
Property and Depreciation
Property, plant and equipment are stated at cost. Depreciable property is
depreciated on the straight-line method for accounting purposes. When property
is sold or retired, the cost of the property and the related accumulated
depreciation are removed from the balance sheet, and any gain or loss on the
transaction is included in income. The depreciable lives for the principal asset
categories are as follows:
ASSET CATEGORY DEPRECIABLE LIFE
- -------------- ----------------
Machinery and Equipment.................. 5 to 20 years
Buildings................................ 20 to 40 years
Building Improvements.................... Lesser of 20 years or remaining life of
the relevant building or lease
Capitalized Software Costs
The Company accounts for costs incurred in connection with software
developed for internal use in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" issued in March 1998 by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants. The Company
capitalizes certain purchases of software and software design and installation
costs in connection with major projects for software development for internal
use. These costs are included in Deferred Charges and Other Assets on the
consolidated balance sheet and are amortized on the straight-line method for
accounting purposes over the estimated useful life not to exceed seven years.
Costs associated with business process redesign, end-user training, system
start-up and ongoing software maintenance are expensed as incurred.
Environmental Spending
Environmental spending is capitalized if such spending qualifies as
property, plant and equipment, substantially increases the economic value or
extends the useful life of an asset. All other such spending is expensed as
incurred. Environmental spending relating to an existing condition caused by
past operations is expensed. Liabilities are accrued when environmental
assessments or remedial efforts are probable, and the costs can be reasonably
estimated. Generally, timing of these accruals coincides with completion of a
feasibility study or commitment to a formal plan of action.
32
33
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Impairment of Assets
The Company periodically assesses the likelihood of recovering the cost of
long-lived assets based on its expectation of future profitability and
undiscounted cash flow of the related operations. These factors, along with
management's plans with respect to the operations, are considered in assessing
the recoverability of property and purchased intangibles.
Income Taxes
Income tax expense and deferred income tax assets and liabilities are
determined under the asset and liability method. Deferred income taxes have been
provided on the differences between the financial reporting and tax basis of
assets and liabilities by applying enacted tax rates in effect for the years in
which the differences are expected to reverse.
In France, SMF and its subsidiaries form a consolidated income tax group,
while LTRI separately files its own income tax returns. PdStG joined the
consolidated income tax group of SMF effective January 1, 1999.
Stock Compensation
Compensation cost for stock options is measured based on the intrinsic
value method under APB No. 25, "Accounting for Stock Issued to Employees" (See
Note 8). Payments in the form of shares of the Company made to third parties,
including the Company's outside directors, are recorded at fair value based on
the market value of the Company's common stock at the time of payment.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays
the effective date for the new requirements of SFAS No. 133 by one year. As a
result, SFAS No. 133 will be effective for the Company's first quarter of 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends and clarifies certain
requirements of SFAS No. 133. The Company's adoption of these new accounting
rules is not expected to have a material effect on the Company's financial
condition or results of operations.
33
34
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 4. SUPPLEMENTAL DISCLOSURES
Supplemental Balance Sheet Data
AS OF DECEMBER 31,
-------------------
2000 1999
------- -------
Summary of Accounts Receivable:
Trade..................................................... $64.2 $56.8
Other..................................................... 15.3 17.2
Less allowances for doubtful accounts and sales
discounts.............................................. (1.8) (1.9)
----- -----
Total............................................. $77.7 $72.1
===== =====
Summary of Inventories by Major Class:
At the lower of cost on the FIFO and weighted average
methods or market:
Raw materials.......................................... $28.7 $29.0
Work in process........................................ 6.1 5.6
Finished goods......................................... 23.7 21.1
Supplies and other..................................... 12.2 12.0
----- -----
70.7 67.7
Excess of FIFO cost over LIFO cost..................... (6.2) (4.8)
----- -----
Total............................................. $64.5 $62.9
===== =====
Total inventories included $23.7 and $25.5 of inventories subject to the
LIFO method of valuation at December 31, 2000 and 1999, respectively. If LIFO
inventories had been valued at FIFO cost, net income would have been increased
by $0.9 in 2000 and would have been decreased by $0.5 and $0.4 in 1999 and 1998,
respectively.
AS OF DECEMBER 31,
-------------------
2000 1999
------- -------
Summary of Accrued Expenses:
Accrued salaries, wages and employee benefits............. $24.4 $29.2
Other accrued expenses.................................... 27.7 19.9
----- -----
Total............................................. $52.1 $49.1
===== =====
34
35
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Analysis of Allowances for Doubtful Accounts and Sales Discounts:
BALANCE AT WRITE-OFFS BALANCE
BEGINNING BALANCES CHARGED TO AND CURRENCY AT END OF
OF PERIOD ACQUIRED EXPENSE DISCOUNTS TRANSLATION PERIOD
---- ---- ---- ----- ----- -----
AS OF DECEMBER 31, 2000
Allowance for doubtful accounts...... $1.9 $0.3 $(0.3) $(0.1) $ 1.8
Allowance for sales discounts........ -- 0.1 (0.1) -- --
---- ---- ----- ----- -----
Total...................... $1.9 $0.4 $(0.4) $(0.1) $ 1.8
==== ==== ===== ===== =====
AS OF DECEMBER 31, 1999
Allowance for doubtful accounts...... $1.9 $0.6 $(0.1) $(0.5) $ 1.9
Allowance for sales discounts........ -- 0.1 (0.1) -- --
---- ---- ----- ----- -----
Total...................... $1.9 $0.7 $(0.2) $(0.5) $ 1.9
==== ==== ===== ===== =====
AS OF DECEMBER 31, 1998
Allowance for doubtful accounts...... $0.4 $1.5 $0.3 $(0.1) $(0.2) $ 1.9
Allowance for sales discounts........ -- -- 0.2 (0.2) -- --
---- ---- ---- ----- ----- -----
Total...................... $0.4 $1.5 $0.5 $(0.3) $(0.2) $ 1.9
==== ==== ==== ===== ===== =====
Supplemental Cash Flow Information
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
------ ------- -------
Interest paid............................................... $6.7 $ 6.4 $ 6.2
Interest capitalized........................................ 0.2 0.2 0.1
Income taxes paid(1)........................................ 8.8 12.3 15.6
Decrease in cash and cash equivalents due to exchange rate
changes................................................... 0.1 0.9 1.0
- ---------------
(1) The SMF consolidated tax group paid only nominal amounts of minimum required
income taxes in all periods presented due to net operating loss
carryforwards retained in the Distribution.
NOTE 5. DEBT
In 1995, the Company, SMF and PdM Industries S.N.C. ("PdM Industries"), a
subsidiary owned 99 percent by PdM and one percent by SMF, entered into an
unsecured credit agreement (the "Credit Agreement") with a group of banks to
provide term and revolving loans totaling 375 million French francs (or
approximately $54 at December 31, 2000 and $57 at December 31, 1999) to SMF and
PdM Industries (the "French Credit Facility") and term and revolving loans
totaling $40.0 to the Company (the "U.S. Credit Facility" and, together with the
French Credit Facility, the "Credit Facilities"). The French Credit Facility
consists of a term loan to SMF in the amount of 250 million French francs (or
approximately $36 at December 31, 2000 and $38 at December 31, 1999) (the
"French Term Loan Facility") and a renewable 364-day revolving credit facility
available to both SMF and PdM Industries in an amount of up to 125 million
French francs (or approximately $18 at December 31, 2000 and $19 at December 31,
1999) (the "French Revolving Credit Facility"). Borrowings under the French
Credit Facility are guaranteed by the Company. The U.S. Credit Facility consists
of a term loan to the Company in the amount of $25.0 (the "U.S. Term Loan
Facility", and, together with the French Term Loan Facility, the "Term Loan
Facilities") and a renewable 364-day revolving credit facility available to the
Company in an amount of up to $15.0 (the "U.S. Revolving Credit Facility" and,
together with the French Revolving Credit Facility, the "Revolving Credit
35
36
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Facilities"). In connection with the Distribution, the Company made cash
distributions to Kimberly-Clark principally financed by borrowings of the full
amounts by SWM and SMF under the Term Loan Facilities.
In February 1998, the Company completed the Brazilian and French
acquisitions (see Note 2). In anticipation of these acquisitions, the Company
modified its then existing Credit Agreement. The terms of the "Amended and
Restated Credit Agreement" entered into on January 30, 1998 were substantially
the same as the prior Credit Agreement, except that it (i) provided an
additional $20.0 term loan to SM-Spain (adding it to the Term Loan Facilities),
which has subsequently been transferred to SWM in the United States, (ii)
extended the maturities of the Term Loan Facilities by approximately two years,
and (iii) renewed the Revolving Credit Facilities. The Revolving Credit
Facilities have subsequently been renewed annually, most recently in January
2001, now with an expiration date of January 25, 2002. Loans under each of the
Term Loan Facilities are payable in three equal semi-annual installments
beginning in January 2002, however the Company currently intends to refinance
such loans prior to the semiannual installment payment dates.
The interest rate under the U.S. Term Loan Facility is based, at the
election of the Company, on either (a) the sum of (i) either 0.375 percent per
annum or 0.300 percent per annum (the "Applicable Margin"), determined by
reference to the Company's Leverage Ratio (as defined in the Amended and
Restated Credit Agreement) plus (ii) the London interbank offered rate for U.S.
dollar deposits ("LIBOR"), or (b) an alternate base rate. After the most recent
amendment to the Credit Facilities in January 2001, the interest rate under the
French Term Loan Facility is based on the sum of the Applicable Margin plus the
euro zone interbank offered rate for euro deposits ("EURIBOR"). Beginning
January 26, 2001, the interest rates under the U.S. and French Revolving Credit
Facilities are determined using the same formula for the respective Term Loan
Facility except that the Applicable Margin is 0.900 percent per annum.
The Amended and Restated Credit Agreement contains representations and
warranties which are customary for facilities of this type and covenants and
provisions that, among other things, require the Company maintain certain
defined financial ratios (a minimum Tangible Net Worth, a maximum Leverage Ratio
and a minimum Fixed Charge Coverage Ratio, all as defined in the Amended and
Restated Credit Agreement). Events of default under the Amended and Restated
Credit Agreement include, among other things, termination of the Company's
supply agreement with Philip Morris without entry into one or more suitable
replacement agreements.
The Company selectively enters into interest rate hedge agreements with
respect to its variable rate long-term borrowings under the Credit Facilities to
manage its exposure to interest rate increases when it is practicable and
cost-effective to do so. The weighted average effective interest rates on the
Term Loan Facilities for the years ended December 31, 2000, 1999 and 1998 were
5.7 percent, 4.5 percent and 5.1 percent, respectively.
At both December 31, 2000 and 1999, long-term debt other than the Term Loan
Facilities primarily consisted of obligations of the French operations related
to government-mandated profit sharing. These amounts bear interest at the
five-year treasury note rate in France (6.0 percent at both December 31, 2000
and 1999) and are generally payable in the fifth year subsequent to the year the
profit sharing is accrued.
36
37
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Following are the balances of long-term debt obligations as of December 31:
2000 1999
------ ------
French Term Loan............................................ $ 35.9 $ 38.4
U.S. Term Loan.............................................. 25.0 25.0
Spanish Term Loan........................................... 20.0 20.0
French Employee Profit Sharing.............................. 16.7 16.1
Other....................................................... 3.7 4.6
------ ------
101.3 104.1
Less current portion........................................ (3.6) (3.2)
------ ------
$ 97.7 $100.9
====== ======
Following are the scheduled maturities for these long-term debt obligations
as of December 31, 2000:
2001........................................................ $ 3.6
2002........................................................ 57.9
2003........................................................ 30.5
2004........................................................ 4.1
2005........................................................ 4.3
Thereafter.................................................. 0.9
------
$101.3
======
At December 31, 2000, the U.S. and French operations of the Company
together had approximately $33 of Revolving Credit Facilities available, all of
which was unused. These facilities permit borrowing at competitive interest
rates and are available for general corporate purposes. The Company pays
commitment fees on the unused portion of these Revolving Credit Facilities at an
annual rate of .200 percent and may cancel the facilities without penalty at any
time prior to their expiration at January 25, 2002.
The Company also had other bank credit facilities available totaling
approximately $27, of which $2.0 was outstanding at December 31, 2000. No
commitment fees are paid on the unused portion of these facilities.
At December 31, 2000 and 1999, the estimated fair value of the Company's
long-term debt and short-term debt approximated the carrying amount. These fair
values were based on quoted market prices for the same or similar debt or on
current rates offered to the Company for obligations with the same maturities.
37
38
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 6. INCOME TAXES
An analysis of the provision (benefit) for income taxes for the years ended
December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
----- ----- -----
Current income taxes:
U.S. Federal.............................................. $(0.2) $ 0.4 $(1.7)
U.S. State................................................ -- 0.1 (0.3)
Foreign................................................... 8.8 12.8 14.3
----- ----- -----
8.6 13.3 12.3
----- ----- -----
Deferred income taxes:
U.S. Federal.............................................. (1.3) 0.6 1.9
U.S. State................................................ (0.2) 0.1 (0.1)
Foreign................................................... 7.6 9.7 3.2
----- ----- -----
6.1 10.4 5.0
----- ----- -----
Total............................................. $14.7 $23.7 $17.3
===== ===== =====
Income before income taxes included income of $49.2 in 2000, $56.9 in 1999
and $52.6 in 1998 from operations outside the United States.
A reconciliation of income taxes computed at the U.S. federal statutory
income tax rate to the provision for income taxes is as follows for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax at U.S. statutory rate...................... $16.4 35.0% $21.2 35.0% $18.9 35.0%
State income taxes, net of federal tax
benefit....................................... (0.1) (0.2) 0.1 0.1 (0.3) (0.5)
Statutory rates outside the United States in
excess of U.S. statutory rate, net............ 1.1 2.4 2.7 4.4 3.9 7.2
French income tax rate change - deferred
benefit....................................... (0.1) (0.2) (0.2) (0.3) -- --
Net benefit of Brazilian equity - related
payment....................................... (0.4) (0.9) -- -- -- --
Adjustment of valuation allowances.............. (1.0) (2.1) -- -- (5.2) (9.6)
Claim settlement not taxable.................... (0.4) (0.9) -- -- -- --
Benefit of currency losses in connection with
certain repatriations......................... (0.8) (1.7) -- -- -- --
Other, net...................................... -- -- (0.1) (0.2) -- --
----- ---- ----- ---- ----- ----
Provision for income taxes...................... $14.7 31.4% $23.7 39.0% $17.3 32.1%
===== ==== ===== ==== ===== ====
The provision for income taxes in 2000 was impacted by a decrease in the
French corporate income tax rate from 40.0 percent for 1999 to 37.7 percent for
2000 and a decline in the Brazilian corporate income tax rate from 37.0 percent
for most of 1999 to 34.0 percent for most of 2000. Changes in French tax law
enacted in December 2000 will reduce the French corporate income tax rate from
37.7 percent for 2000 to 36.3 percent for 2001 and 35.3 percent for 2002 and
thereafter. The effect of this enacted change in the French corporate income tax
rate had a nominal favorable effect on the deferred income tax provision in 2000
related to the net balances of deferred income tax assets and liabilities.
Additionally, the provision for income taxes in 2000 was impacted by several
items, including a favorable adjustment to reduce Spanish deferred income tax
valuation allowances, favorable income tax treatment of a settlement related to
a prior-period claim and an equity-related payment from Brazil and income tax
benefits associated with treatment of certain repatriations during
38
39
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
the year. Excluding the effects of these four items, the effective income tax
rate for 2000 would have been 37.0 percent.
The provision for income taxes in 1999 was impacted by an increase in the
effective statutory income tax rate enacted in France in December 1999 for years
beginning in 2000 from the scheduled rate of 36.7 percent to 37.7 percent. The
favorable effect of $0.2 on the deferred provision for income taxes was due to
the increased value of deferred income tax assets, primarily attributable to the
tax benefits from net operating loss carryforwards ("NOLs") of the SMF tax group
estimated to be realizable in future years, net of the increased value of
deferred income tax liabilities.
The provision for income taxes in 1998 included the benefit of a reduction
in the valuation allowance recorded against certain French deferred income tax
assets arising from NOLs. This adjustment reduced the deferred provision for
income taxes by $5.2. The reduction in the valuation allowance was recorded
because of continued earnings and projected future earnings at the French
businesses that utilize the NOLs, reducing the uncertainty that these NOLs would
be fully utilized in the future.
The Company considers the undistributed earnings of certain foreign
subsidiaries to be indefinitely reinvested or plans to repatriate such earnings
only when tax-effective to do so. Accordingly, no provision for U.S. federal and
state income taxes has been made thereon. Upon distribution of those earnings in
the form of dividends, loans to the U.S. parent, or otherwise, the Company could
be subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to foreign tax authorities. Determination
of the amount of unrecognized deferred U.S. tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
Deferred income tax assets (liabilities) as of December 31, 2000 and 1999
were comprised of the following:
2000 1999
------ ------
Current deferred income tax assets attributable to:
Inventories............................................... $ (0.9) $ (0.8)
Postretirement and other employee benefits................ 2.8 3.4
Other accrued liabilities................................. 2.1 1.6
Other..................................................... 0.8 (0.1)
------ ------
Net current deferred income tax asset............. $ 4.8 $ 4.1
====== ======
Net noncurrent deferred income tax assets attributable to:
Operating and capital loss carryforwards.................. $ 1.9 $ 44.9
Accumulated depreciation and amortization................. -- (26.6)
Valuation allowances...................................... (0.9) (12.0)
Other..................................................... -- 0.6
------ ------
Net noncurrent deferred income tax asset.......... $ 1.0 $ 6.9
====== ======
Net noncurrent deferred income tax liabilities attributable
to:
Accumulated depreciation and amortization................. $(47.9) $(21.3)
Operating loss, capital loss and tax credit
carryforwards.......................................... 37.0 --
Postretirement and other employee benefits................ 8.1 7.9
Valuation allowances...................................... (10.9) --
Other..................................................... (1.2) 0.3
------ ------
Net noncurrent deferred income tax liability...... $(14.9) $(13.1)
====== ======
39
40
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
In the above presentation, for 2000, the net noncurrent deferred income tax
asset relates to the Spanish tax jurisdiction and the net noncurrent deferred
income tax liability relates to the U.S., Canadian, French and Brazilian tax
jurisdictions. In the above presentation, for 1999, the net noncurrent deferred
income tax asset relates to the French, Brazilian and Spanish tax jurisdictions,
and the net noncurrent deferred income tax liability relates to the U.S. and
Canadian tax jurisdictions. Total deferred income tax assets were $44.0 and
$46.7 at December 31, 2000 and 1999, respectively. Total deferred income tax
liabilities were $53.1 and $48.8 at December 31, 2000 and 1999, respectively.
Under French tax law, NOLs incurred through December 31, 1994 by SMF
subsidiaries unrelated to the Businesses, which were distributed to
Kimberly-Clark prior to the Distribution, were retained by SMF as of January 1,
1995. In addition to SMF's remaining NOLs, NOLs were obtained in the acquisition
of Pirahy and were generated during 1998 by SWM-B, during 1998 through 2000 by
SM-Spain and during 2000 in the United States. The Company elected to include
PdStG, acquired in February 1998, in the SMF consolidated tax group beginning
January 1, 1999.
The following summarizes the changes in the Company's NOLs and the related
noncurrent deferred income tax asset and valuation allowance for the years ended
December 31, 2000, 1999 and 1998:
TOTAL VALUATION NET
NOLS ASSET ALLOWANCE ASSET
------ ----- --------- -----
Amount at December 31, 1997........................... $160.2 $60.6 $(16.4) $44.2
Obtained in acquisition............................. 10.3 3.2 -- 3.2
French valuation allowance adjustment............... -- -- 5.2 5.2
1998 utilization, net of generated.................. (13.9) (6.3) (0.8) (7.1)
Currency translation effect......................... 9.2 3.4 (0.8) 2.6
------ ----- ------ -----
Amount at December 31, 1998........................... 165.8 60.9 (12.8) 48.1
French income tax rate increase..................... -- 1.1 (0.3) 0.8
1999 utilization, net of generated.................. (21.5) (8.3) (0.6) (8.9)
Currency translation effect......................... (24.2) (8.8) 1.7 (7.1)
------ ----- ------ -----
Amount at December 31, 1999........................... 120.1 44.9 (12.0) 32.9
French income tax rate decreases.................... -- (2.0) 0.6 (1.4)
Spanish valuation allowance adjustment.............. -- -- 1.0 1.0
2000 utilization, net of generated.................. (5.8) (2.2) (0.5) (2.7)
Currency translation effect......................... (8.2) (3.0) 0.7 (2.3)
------ ----- ------ -----
Amount at December 31, 2000........................... $106.1 $37.7 $(10.2) $27.5
====== ===== ====== =====
Under current tax laws governing the tax jurisdictions in which the Company
has NOLs, remaining NOLs in France and Brazil carry forward indefinitely, NOLs
in Spain expire the later of ten years subsequent to the year generated or ten
years subsequent to the first year of taxable income in Spain (which was 2000),
and NOLs in the United States carry forward 20 years. Of the $106.1 of NOLs
still available at December 31, 2000, $4.8 will expire in 2010 if not utilized
against taxable income in Spain and $5.1 will expire in 2020 if not utilized
against taxable income in the United States. The remaining $96.2 of NOLs have no
expiration date. Valuation allowances totaled $10.2 as of December 31, 2000,
reducing the related net deferred tax asset to an amount which is estimated to
be realizable through utilization of the NOLs. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax asset will be realized. However, that amount could change if, among other
considerations, estimates of future taxable income or income tax regulations or
interpretations change during the carryforward periods.
In addition to the NOLs above, the Company has generated foreign tax
credits in excess of the amount of foreign tax credits utilized in its U.S.
federal income tax returns and federal alternative minimum tax
40
41
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
("AMT") credits. The amount of cumulative excess foreign tax credits through its
U.S. federal income tax return for the year ended December 31, 1999, the most
recent year filed, totaled $1.6. These credits carry forward five years from the
date generated, however, because the Company does not currently foresee being
able to realize the benefit of these credits prior to their expiration, the
assets are fully reserved with a valuation allowance of $1.6. The Company's
federal AMT credits, related to its filed 1999 and prior year tax returns, carry
forward indefinitely and totaled $0.5 at December 31, 2000.
Along with numerous other companies and banks in France, PdM is subject to
a tax claim with respect to its purchase of certain bonds in 1988 which were
represented by the two selling banks as carrying specific tax benefits. The
French taxing authority is challenging the use by PdM of those benefits. In
1999, the French taxing authority reduced its claim against PdM to exclude an
"abuse of law" penalty and to include instead a "bad faith" penalty. In November
2000, the Administrative Court of Rennes rendered a decision granting PdM relief
of the "bad faith" penalty but maintaining the principal and interest portions
of the claim. The total claim by the French taxing authority, excluding the "bad
faith" penalty was $0.6 as of December 31, 2000, including interest. PdM's
adjusted accrued liability related to this exposure as of December 31, 2000 was
$0.6. PdM will appeal this most recent decision with respect to its maintaining
the principal and interest portions of the claim. The Company will continue to
vigorously defend the claim based on the merits and has filed claims against
each selling bank on the basis of their misrepresentation of certain facts. The
Company's claim against one of the banks was rejected by a trial court in 1996
and the Company appealed this decision. In 1997, the case against the other bank
was stayed until the claim filed by the French taxing authority against PdM has
been resolved. Since the claim against PdM by the French taxing authority
relates to a period prior to PdM joining the consolidated tax group, any
unfavorable outcome could not be offset with the NOLs of the SMF consolidated
tax group. Based on information currently available, there exists a reasonable
possibility of an unfavorable outcome for this claim, however PdM's negative
exposure is now fully reserved.
NOTE 7. POSTRETIREMENT AND OTHER BENEFITS
North American Pension Benefits
In connection with the Distribution, retirees of the Company's U.S. and
Canadian businesses prior to the Distribution remained participants of their
respective Kimberly-Clark plans. Subsequent to the Distribution, the Company and
its subsidiary in Canada established defined benefit retirement plans covering
substantially all full-time employees. Retirement benefits were based on years
of service and generally on the average compensation earned in the highest five
of the last 15 years of service. Employees as of the date of the Distribution
retained credit for prior service while employees of Kimberly-Clark.
Effective July 1, 2000, the Company amended its defined benefit retirement
plan for U.S. employees to include a cash balance benefit formula that covers
all salaried employees hired on or after July 1, 2000 and all salaried employees
as of July 1, 2000, except those salaried employees who were "grandfathered" and
chose to retain retirement benefits under the terms of the plan prior to this
amendment. Salaried employees who, as of July 1, 2000, had either attained the
sum of their age plus years of vesting service equal to 65 or more, or attained
the sum of their age plus years of vesting service equal to 60 or more and had
at least 15 years of vesting service were grandfathered under the plan and could
elect either the new cash balance benefit formula or to retain retirement
benefits under the terms of the plan prior to this amendment. For employees
under the cash balance formula, the Company will annually credit to the
employee's account balance a retirement contribution credit, which is a
percentage of the employee's earnings with the percentage varying based on the
years of vesting service in the plan, and an interest credit, based on the
average yield for 30-year treasury bills.
The Company's funding policy is to contribute assets that, at a minimum,
fully fund the accumulated benefit obligation, subject to regulatory and tax
deductibility limits. Under the Distribution, Kimberly-Clark was required to
transfer a proportionate share of assets of its plans related to the employees
who transferred to
41
42
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
the Company in the Distribution. The plan assets for the U.S. and Canadian plans
were transferred during 1997 from the Kimberly-Clark plans, in which the
employees had participated prior to the Distribution, to the Company's plans
upon receiving favorable determination letters from the Internal Revenue Service
and Revenue Canada, respectively, qualifying the Company's plans. Plan assets
are invested in a diversified portfolio consisting primarily of equity and debt
securities.
The components of net pension expense for U.S. employees for the years
ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
----- ----- -----
Service cost................................................ $ 1.9 $ 2.4 $ 2.3
Interest cost............................................... 5.0 4.8 4.4
Expected return on plan assets.............................. (5.9) (5.1) (4.3)
Amortizations and other..................................... (0.1) 0.3 0.1
----- ----- -----
Net periodic pension cost................................... 0.9 2.4 2.5
Special termination benefits charge......................... -- 0.4 1.1
----- ----- -----
Total pension cost.......................................... $ 0.9 $ 2.8 $ 3.6
===== ===== =====
The assumed long-term rate of return on pension assets for purposes of
pension expense recognition for the U.S. employee plans was 10.0 percent for
each of the years 2000, 1999, and 1998. Transition adjustments for these plans
are being amortized on the straight-line method over 14 to 18 years. The
discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the U.S. employee pension plans were 7.5
percent and 8.0 percent at December 31, 2000 and 1999, respectively. The assumed
long-term rates of compensation increases used to determine the projected
benefit obligations for these plans were 3.5 percent and 4.0 percent for
December 31, 2000 and 1999, respectively.
The funded status of the U.S. employee pension plans as of December 31,
2000 and 1999 were as follows:
2000 1999
----- ------
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year......... $64.0 $ 69.3
Service cost........................................... 1.9 2.4
Interest cost.......................................... 5.0 4.8
Actuarial (gains) losses............................... 1.1 (11.1)
Plan amendments........................................ (1.9) --
Special termination benefits........................... -- 0.4
Gross benefits paid.................................... (2.7) (1.8)
----- ------
Projected benefit obligation at end of year............... 67.4 64.0
----- ------
Change in Plan Assets:
Fair value of plan assets at beginning of year............ 65.4 57.2
Actual return on plan assets........................... (1.9) 7.4
Employer contributions................................. -- 2.6
Gross benefits paid.................................... (2.7) (1.8)
----- ------
Fair value of plan assets at end of year.................. 60.8 65.4
----- ------
Funded status at end of year................................ (6.6) 1.4
Unrecognized actuarial (gains) losses....................... 1.3 (7.6)
Unrecognized prior service cost and net transition
obligation................................................ (1.7) 0.1
----- ------
Net accrued pension liability............................... $(7.0) $ (6.1)
===== ======
42
43
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The projected benefit obligation and accumulated benefit obligation for a
U.S. supplemental executive pension plan with accumulated benefit obligations in
excess of plan assets were $1.9 and $1.7, respectively, as of December 31, 2000,
and $1.7 and $1.4, respectively, as of December 31, 1999. This particular plan
is unfunded and therefore has no plan assets.
French Pension Benefits
In France, employees are covered under a government administered program.
In addition, the Company's French operations sponsor retirement indemnity plans
which pay a lump sum retirement benefit to employees who retire from the
Company. The Company's French operations also sponsor a supplemental executive
pension plan which is designed to provide a retirement benefit equal to between
50 and 65 percent of final earnings, depending upon years of service, after
considering other government and Company sponsored retirement plans. Plan assets
are principally invested in the general asset portfolio of a French insurance
company.
The Company's net pension expense for the French pension plans was $1.7,
$1.5 and $1.6 for the years ended December 31, 2000, 1999 and 1998,
respectively. The assumed long-term rates of return on pension assets for
purposes of pension expense recognition for the French plans were 4.5 percent
for 2000, 6.5 percent for 1999 and 7.0 percent for 1998. Transition adjustments
for these plans are being amortized on the straight-line method over 19 to 20
years. The discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the French plans were 6.0 percent and 5.5
percent at December 31, 2000 and 1999, respectively. The assumed long-term rates
of compensation increases used to determine the projected benefit obligation for
these plans were 2.5 percent at both December 31, 2000 and 1999.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the French pension plans were $16.3, $8.6 and $5.7,
respectively, as of December 31, 2000, and $14.3, $7.2 and $3.5, respectively,
as of December 31, 1999. The Company's net accrued pension liability for the
French plans was $3.9 and $5.3 at December 31, 2000 and 1999, respectively.
Brazilian Pension Benefits
In Brazil, employees are covered under a government administered program.
Postretirement Healthcare and Life Insurance Benefits
In connection with the Distribution, retirees of the Company's U.S. and
Canadian businesses prior to the Distribution remained participants of their
respective Kimberly-Clark plans. Subsequent to the Distribution, the Company and
its subsidiary in Canada established unfunded healthcare and life insurance
benefit plans which will cover substantially all future retirees of the Company.
Eligibility for benefits under the Company's plans is based on years of service
and age at retirement. Employees as of the date of the Distribution retained
credit for prior service while employees of Kimberly-Clark. The Company's plans
are noncontributory for certain long service employees when they retire, but are
contributory for most other future retirees.
Effective July 1, 2000, the Company amended its postretirement healthcare
and group life insurance coverages for U.S. salaried employees, except certain
grandfathered employees. Grandfathered employees will continue to receive
retiree healthcare coverage and life insurance coverage at rates subsidized by
the Company. For all other U.S. salaried employees, future retiree healthcare
coverage access will be offered at full cost to the retiree.
43
44
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The components of U.S. employee postretirement healthcare and life
insurance benefit costs were as follows for the years ended December 31, 2000,
1999 and 1998:
2000 1999 1998
----- ----- -----
Service cost................................................ $ 0.2 $ 0.3 $ 0.3
Interest cost............................................... 0.8 0.6 0.5
Amortizations and other..................................... (0.3) (0.3) (0.5)
----- ----- -----
Net periodic postretirement benefit cost.................... 0.7 0.6 0.3
Curtailment credits......................................... (0.5) -- --
Special termination benefits charge......................... -- -- 0.3
----- ----- -----
Total postretirement benefit cost........................... $ 0.2 $ 0.6 $ 0.6
===== ===== =====
The components of the unfunded U.S. employee postretirement healthcare and
life insurance benefit obligation included in other noncurrent liabilities as of
December 31, 2000 and 1999 were as follows:
2000 1999
------ ------
Change in Benefit Obligation:
Benefit obligation at beginning of year................... $ 8.9 $ 8.1
Service cost........................................... 0.2 0.3
Interest cost.......................................... 0.8 0.6
Actuarial (gains) losses............................... 1.9 0.6
Plan amendments........................................ (0.1) --
Curtailment credits.................................... (0.3) --
Gross benefits paid by the Company..................... (0.9) (0.7)
------ ------
Benefit obligation at end of year......................... 10.5 8.9
------ ------
Funded status at end of year................................ (10.5) (8.9)
Unrecognized actuarial (gains) losses....................... (2.5) (4.7)
Unrecognized prior service cost............................. (0.9) (1.1)
------ ------
Net accrued postretirement benefit liability................ $(13.9) $(14.7)
====== ======
For purposes of measuring the benefit obligation at December 31, 2000, a
6.5 percent annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2001. The rate was assumed to decrease to 5.0
percent for 2002 and remain at that level thereafter. For purposes of measuring
the benefit obligation at December 31, 1999, a 5.5 percent annual rate of
increase in the per capita cost of covered healthcare benefits was assumed for
2000 and thereafter. Discount rates of 7.5 percent and 8.0 percent were used to
determine the postretirement benefit obligations at December 31, 2000 and 1999,
respectively.
A one-percentage point increase or decrease in the healthcare cost trend
rate would have a nominal effect on the total of the service and interest cost
components of the postretirement benefit obligation at December 31, 2000. A one
percentage point increase in the healthcare cost trend rate would increase the
total postretirement benefit obligation by $0.1 at December 31, 2000. Likewise,
a one percentage point decrease in the healthcare cost trend rate would decrease
the total postretirement benefit obligation by $0.1 at December 31, 2000.
Other Benefits
Substantially all U.S. employees have been given the opportunity to
participate in a voluntary retirement savings plan. Under the plan, the Company
matches a portion of employee contributions. The Company's cost
44
45
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
under the plan reflected in the accompanying consolidated income statements was
$0.9 for both 2000 and 1999, and $1.0 for 1998. At December 31, 2000, 1999 and
1998, 500,000 shares of the Company's Common Stock were reserved for issuance
under the plan, none of which had been issued as of December 31, 2000. The
shares may, at the Company's option, be used to satisfy the Company's liability
for its matching contributions.
Beginning in 2000, the Company also provides U.S. executives, certain other
key personnel and its directors the opportunity to participate in deferred
compensation plans. Those participating employees can elect to defer a portion
of their salaries and certain other compensation. Those participating directors
can elect to defer their meeting fees, as a cash deferral, as well as their
quarterly retainer fees, as deferred stock unit credits. The Company's liability
under these plans totaled approximately $0.5 at December 31, 2000, which is
included on the consolidated balance sheet in Other Noncurrent Liabilities. In
connection with these plans, as well as the Company's supplemental executive
retirement and executive severance plans, the Company also established a grantor
trust during 2000 into which the Company contributed funds toward its future
obligations under the various plans. Grantor trust investments are primarily in
company-owned life insurance policies. Grantor trust assets totaled $0.5 at
December 31, 2000, which are included in Other Assets on the consolidated
balance sheet.
NOTE 8. STOCKHOLDERS' EQUITY
The Company's Certificate of Incorporation authorizes the issuance of up to
100,000,000 shares of Common Stock, par value $.10 per share, and 10,000,000
shares of Preferred Stock, par value $.10 per share. Each share of presently
outstanding Common Stock and each share of Common Stock issued after the date of
this report will have attached to it, one right to purchase from the Company one
one-hundredth (1/100) of a share of a series of Preferred Stock designated as
the Series A Junior Participating Preferred Stock (the "Series A Preferred
Stock") (a "Right"). Each Right entitles a shareholder to purchase from the
Company one one-hundredth (1/100) of a share of the Series A Preferred Stock at
a price of $65 per one one-hundredth (1/100) of a share, subject to certain
anti-dilution adjustments. The Rights, however, become exercisable only at such
time as a person or group acquires, or commences a public tender or exchange
offer for, 15 percent or more of the Company's Common Stock. The Rights have
certain anti-takeover effects since they may cause substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Company's Board of Directors. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors since
they may be redeemed by the Company at $.01 per Right at any time until a person
or group has obtained beneficial ownership of 15 percent or more of the voting
stock. The Rights will expire at the close of business on October 1, 2010,
unless redeemed earlier by the Company.
The Series A Preferred Stock will be non-redeemable and, unless otherwise
provided in connection with the creation of a subsequent series of preferred
stock, will be subordinate to any other series of the Company's preferred stock.
Each share of Series A Preferred Stock will be entitled to receive when, as and
if declared, a quarterly dividend in an amount equal to the greater of $1 per
share or 100 times the cash dividends declared on the Company's Common Stock. In
addition, the Series A Preferred Stock is entitled to 100 times any non-cash
dividends (other than dividends payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock) declared on the Common
Stock, in like kind. In the event of a liquidation, the holders of the Series A
Preferred Stock will be entitled to receive a liquidation payment in an amount
equal to the greater of $100 per share or 100 times the payment made per share
of Common Stock. Each share of Series A Preferred Stock will have 100 votes,
voting together with the Common Stock. In the event of any merger, consolidation
or other transaction in which common shares are exchanged, each share of Series
A Preferred Stock will be entitled to receive 100 times the amount received per
share of Common Stock. The rights of the Series A Preferred Stock as to
dividends, liquidation and voting are protected by antidilution provisions.
45
46
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The Company's Equity Participation Plan provides that eligible employees
may be granted stock options which, when exercised, give the recipient the right
to purchase the Company's Common Stock at a price no less than the "fair market
value" (as defined in the Equity Participation Plan) of such stock at grant
date. Options awarded under the Equity Participation Plan only become
exercisable after specified periods of employment after the grant thereof (30
percent after the first year, 30 percent after the second year and the remaining
40 percent after the third year). Generally, such options expire ten years
subsequent to the date of grant.
SFAS No. 123 "Accounting for Stock Based Compensation" defines a fair value
based method of accounting for stock compensation, including stock options, to
employees. This statement provides entities a choice of recognizing related
compensation expense by adopting the fair value method or to measure
compensation using the intrinsic value method under Accounting Principles Board
Opinion No. 25 ("APB No. 25"). The Company has elected to continue to measure
compensation cost for stock compensation based on the intrinsic value method
under APB No. 25, "Accounting for Stock Issued to Employees". Payments in the
form of shares of the Company made to third parties, including the Company's
outside Directors, are recorded at fair value based on the market value of the
Company's common stock at the time of payment. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. SFAS No. 123 requires presentation of pro forma net income and
earnings per share as if the Company had accounted for its employee stock
compensation under the fair value method of that statement. For purposes of the
pro forma disclosures, the estimated fair value of the stock compensation is
amortized to expense over the vesting period. Under the fair value method, the
Company's net income and earnings per share would have been the pro forma
amounts indicated below:
2000 1999 1998
----- ----- -----
Net Income:
As reported............................................... $27.8 $31.4 $31.0
Pro forma................................................. $27.1 $29.8 $29.8
Basic net income per share:
As reported............................................... $1.82 $1.99 $1.94
Pro forma................................................. $1.78 $1.89 $1.86
Diluted net income per share:
As reported............................................... $1.82 $1.99 $1.92
Pro forma................................................. $1.78 $1.89 $1.84
The valuation under SFAS No. 123 was based on the Black-Scholes option
pricing model with the market value of the stock equal to the exercise price, an
estimated volatility over the ten year option term of 30 percent for the 2000
awards, 27 percent for the 1999 awards and 24 percent for the 1998 awards, a
risk-free rate of return based upon the zero coupon government bond yield and an
assumed quarterly dividend of $0.15 per share. At both December 31, 2000 and
1999, 1,500,000 shares of the Company's Common Stock were reserved under the
Equity Participation Plan. At December 31, 2000 and 1999, there were 261,360 and
70,410 shares, respectively, available for future awards.
46
47
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The following stock options were outstanding as of December 31, 2000, 1999
and 1998:
2000 1999 1998
---------------------- ---------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- -------- ---------
Outstanding at beginning of
year........................... 1,406,010 $21.19 869,380 $24.95 764,360 $23.11
Granted........................ 50,000 13.00 562,300 15.60 136,900 36.23
Forfeited...................... (112,950) 23.07 (17,170) 21.27 (19,940) 32.81
Cancelled...................... (128,000) 30.13 (8,500) 35.05 --
Exercised...................... (600) 15.69 -- (11,940) 23.93
---------- ---------- --------
Outstanding at end of year....... 1,214,460 19.74 1,406,010 21.19 869,380 24.95
========== ========== ========
Options exercisable at
year-end....................... 772,400 $21.10 793,590 $22.83 655,200 $21.60
========== ========== ========
Weighted-average per share fair
value of options granted during
the year....................... $ 4.92 $ 6.57 $ 15.00
========== ========== ========
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------- --------- ----------- ---------
$12.15 to $15.91.......................... 595,800 8.1 years $15.39 198,140 $15.61
$21.06 to $28.19.......................... 502,660 4.9 21.14 502,660 21.14
$32.43 to $37.38.......................... 116,000 7.1 36.04 71,600 36.03
--------- -------
$12.15 to $37.38.......................... 1,214,460 6.7 years $19.74 772,400 $21.10
========= =======
Effective December 2, 1999, the Company established a Restricted Stock Plan
which is intended to promote the long-term financial success of the Company by
attracting to the Company and retaining outstanding executive personnel and to
motivate such personnel by means of restricted stock grants. The Compensation
Committee of the Company's Board of Directors selects participants and
establishes the terms of any grant of restricted stock. The Company's Restricted
Stock Plan provides that such a grant immediately transfers ownership rights in
shares of the Company's Common Stock to the recipient of the grant, including
the right to vote the shares and to receive dividends thereon, at a share price
established by the Compensation Committee in its discretion. The recipient's
continued ownership of and right to freely transfer the restricted stock is
subject to such conditions on transferability and to such risks of forfeiture as
are established by the Compensation Committee at the time of grant, which may
include continued employment with the Company for a defined period, achievement
of specified management performance objectives or other conditions established
by the Compensation Committee. The number of shares which may be issued under
this Restricted Stock Plan is limited to the lesser of 200,000 shares or the
number of treasury shares held by the Company as of the date of any grant. No
single participant may be awarded, in the aggregate, more than 50 percent of the
shares authorized to be issued under the Restricted Stock Plan. As of December
31, 2000, 30,000 restricted shares had been issued under the Restricted Stock
Plan which will not vest until four years of service from the date of the grant.
The number of shares available for future awards is limited, as of December 31,
2000, to 170,000.
47
48
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 9. FOREIGN CURRENCY
Foreign currency losses have arisen from settlement of transactions in
non-local currencies and the remeasurement of non-local currency denominated
monetary assets and liabilities into the currency of the country in which the
operation is domiciled. Such losses included in other income, net were $0.6 in
2000 and were nominal in 1999 and 1998.
Foreign currency risks arise from transactions and commitments denominated
in non-local currencies. These transactions and commitments may include the
purchase of inventories or property, plant and equipment, the sale of products
and the repayment of loans.
Management selectively hedges the Company's foreign currency risks when it
is practicable and cost effective to do so. The instruments are purchased from
well-known money center banks, insurance companies or government agencies
(counterparties). Usually the contracts extend for no more than 12 months,
although their contractual term has been as long as 24 months. Credit risks with
respect to the counterparties, and the foreign currency risks that would not be
hedged if the counterparties fail to fulfill their obligations under the
contracts, are minimal in view of the financial strength of the counterparties.
Gains and losses on instruments that hedge firm commitments are deferred
and included in the basis of the underlying hedged items. Premiums paid for
options are amortized ratably over the life of the option. All other gains and
losses are included in period income or expense based on the period-end market
price of the instrument.
At December 31, 2000, there were outstanding forward contracts, which were
held for purposes other than trading, maturing at various dates in 2001, to
purchase $9.2 of various foreign currencies. These contracts have not given rise
to any significant net deferred gains or losses as of December 31, 2000.
NOTE 10. COMMITMENTS
Operating Leases
Future minimum obligations under non-cancelable operating leases having an
initial or remaining term in excess of one year as of December 31, 2000 are less
than $1 annually over the next five years. Rental expense under operating leases
was $4.0, $4.3 and $5.1 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Other Commitments
During 1998, PdM entered into a 10 year agreement with one of its vendors
in connection with PdM's purchases of calcium carbonate, a raw material used in
the manufacturing of some paper products. The vendor agreed to construct and
operate an on-site plant at the Quimperle, France mill. The cost to construct
the necessary building and equipment was approximately $7. PdM agreed to annual
minimum purchase commitments at prices which will vary according to quantities
consumed. If PdM buys less than the minimum purchase commitments, the vendor can
terminate the contract and require PdM to pay to the vendor the then net book
value of the building and equipment, determined using a straight-line method of
depreciation over the life of the agreement.
Similarly, a vendor of SWM-B operates a calcium carbonate plant on-site at
the Pirahy, Brazil mill. Under that agreement, which will expire in 2006, the
net raw material prices vary according to the quantities produced, however,
SWM-B is committed to pay at least the monthly fixed costs of the calcium
carbonate plant which are less than $0.1 per month.
48
49
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Under each of the above agreements, the net raw material prices expected to
be paid are less than the net prices at which the raw material could otherwise
be purchased, and thus the commitments are not expected to result in losses.
Additionally, PdM's and SWM-B's current levels of calcium carbonate usage exceed
their respective contractual minimum commitments.
The Company enters into certain other immaterial contracts from time to
time for the purchase of certain raw materials. The Company also enters into
certain contracts for the purchase of equipment and related costs in connection
with its ongoing capital projects which, at December 31, 2000, totaled
approximately $13.9.
NOTE 11. LEGAL PROCEEDINGS
On December 27, 2000, SWM-B received two assessments from the tax
authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre
Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax,
consisting of unpaid ICMS taxes from January 1995 through November 2000,
together with interest and penalties in the total amount of approximately $13.6,
based on the foreign currency exchange rate at December 31, 2000 (the
"Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax
credits generated from the production and sale of certain non-tobacco related
grades of paper sold domestically that are immune from the tax to offset ICMS
taxes otherwise owed on the sale of products that are not immune. A portion of
the Assessment, estimated at approximately $6.9, relates to tax periods that
predate the Company's acquisition of Pirahy, the predecessor in name to SWM-B,
and is covered by an indemnification from the sellers of Pirahy. SWM-B is
vigorously contesting the Assessment on both procedural and constitutional
grounds and believes that the Assessment will ultimately be resolved in its
favor. However, the final resolution of this matter will most likely entail both
administrative and judicial proceedings up to and including presentation of the
matter to the Supreme Court of Brazil and is not likely to be finally resolved
for several years. No liability has been recorded in the Company's financial
statements for the Assessment. Pending final resolution of this matter,
beginning in December 2000, SWM-B suspended the further accrual and application
of ICMS tax credits generated on immune products to reduce its possible exposure
to future ICMS tax assessments. A reserve of $1.1 was recorded for the entire
asset balance of unused ICMS tax credits as of December 31, 2000.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without a material adverse effect on the Company's
consolidated financial statements.
NOTE 12. ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims and its obligation to participate in the
remediation or the monitoring of certain hazardous waste disposal sites, will
not have a material adverse effect on the Company's financial condition or
results of operations. However, future events, such as changes in existing laws
and regulations, or unknown contamination of sites owned, operated or used for
waste disposal by the Company (including contamination caused by prior owners
and operators of such sites or other waste generators) may give rise to
additional costs which could have a material adverse effect on the Company's
financial condition or results of operations.
The Company is a party to an administrative consent order with the
Massachusetts Department of Environmental Protection ("MDEP") governing the
post-closure care of the Willow Hill Landfill in Lee,
49
50
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Massachusetts. The consent order required the Company to perform certain
remedial measures and to reduce the concentration of landfill gases to specified
levels at all monitoring points by September 15, 1998, or the Company could be
liable for stipulated penalties. Results of monitoring tests conducted in
October 2000 and thereafter show that the Company has reduced the concentration
of landfill gases at all monitoring points to the levels specified in the
consent order. MDEP previously advised the Company informally that stipulated
penalties would not be assessed based on a delay in complying with the consent
order because of the Company's ongoing efforts to resolve the issue and no
sanctions have been imposed to date. The Company must continue bimonthly
monitoring and remain in compliance at all monitoring points for twelve months.
Costs of these measures were previously accrued and are not material. The
Company does not believe that this matter will have a material adverse effect on
the Company's business or financial condition.
At Distribution, the Company assumed Kimberly-Clark's liabilities as a
potentially responsible party ("PRP") under the provisions of the U.S.
Comprehensive Environmental Response, Compensation and Liability Act and
analogous New Jersey statutes in connection with the Global Landfill Reclaiming
Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey.
The Company continues to participate in the remediation of the Global Landfill
as a member of a group of PRPs that entered into a consent decree with the state
of New Jersey in 1993. The Company previously recorded its pro-rata portion of
the estimated liability for remediation of this site, the remainder of which is
not material.
The Company incurs spending necessary to meet legal requirements and
otherwise relating to the protection of the environment at the Company's
facilities in the United States, France, Brazil and Canada. For these purposes,
the Company incurred total capital expenditures of $1.2 in 2000, and anticipates
that it will incur approximately $2 to $3 annually in 2001 and 2002. The major
projects included in these estimates include upgrading wastewater treatment
facilities at various locations and installation of ink solvent treatment
equipment in France. The foregoing capital expenditures are not expected to
reduce the Company's ability to invest in capacity expansion, quality
improvements, capital replacements, productivity improvements or cost
containment projects, and are not expected to have a material adverse effect on
the Company's financial condition or results of operations.
NOTE 13. BUSINESS SEGMENTS AND GEOGRAPHY
Business Segment Reporting
The Company is operated and managed based on the geographical location of
its manufacturing operations: the United States, France and Brazil. These
business segments manufacture and sell cigarette, plug wrap and tipping papers,
used to wrap various parts of a cigarette, reconstituted tobacco products and
paper products used in cigarette packaging, primarily to the tobacco industry.
While the products are comparable in each segment, they vary based on the
technological capabilities of each of the manufacturing operations and the
respective markets and customers served. Sales by a segment into markets
primarily served by a different segment occur where specific product needs
cannot be cost-effectively met by the manufacturing operations domiciled in that
segment.
Tobacco industry products comprised 88 to 90 percent of the Company's
consolidated net sales in each of the years 2000, 1999 and 1998. The Company's
non-tobacco industry products are a diverse mix of products, certain of which
represent commodity paper grades produced to maximize machine utilization.
Consolidated Operations by Segment
For purposes of the segment disclosure in the following tables, the term
"United States" includes operations in the United States and Canada. The
Canadian operations only produce flax fiber used as raw material in the U.S.
operations. The Company's Brazilian operations acquired on February 2, 1998 and
the
50
51
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
operations of the French business acquired on February 11, 1998 are included in
the Company's consolidated financial statements since the beginning of February
1998.
Intercompany sales of products between segments are made at market prices
and are referred to as intersegment items. Expense amounts not associated with
segments are referred to as unallocated items. Assets reported by segment
represent assets which are directly used and an allocated portion of jointly
used assets. These assets include receivables from other segments and are
included in eliminations.
NET SALES OPERATING PROFIT TOTAL ASSETS
------------------------ --------------------- ---------------
2000 1999 1998 2000 1999 1998 2000 1999
------ ------ ------ ----- ----- ----- ------ ------
United States................................ $163.7 $166.3 $186.0 $ 2.6 $ 9.3 $ 6.2 $155.4 $147.6
France....................................... 264.9 284.6 312.0 47.2 55.2 60.3 232.6 237.7
Brazil....................................... 70.0 54.0 57.9 4.5 5.2 (2.3) 53.9 53.0
------ ------ ------ ----- ----- ----- ------ ------
Subtotal............................ 498.6 504.9 555.9 54.3 69.7 64.2 441.9 438.3
------ ------ ------
Intersegment sales by:
United States.............................. (0.2) (0.2) (7.1)
France..................................... (0.3) (0.3) (2.1)
Brazil..................................... (1.3) -- --
------ ------ ------
Subtotal............................ (1.8) (0.5) (9.2)
------ ------ ------
Unallocated items and eliminations, net...... -- -- -- (4.6) (5.1) (5.1) (0.2) (1.7)
------ ------ ------ ----- ----- ----- ------ ------
Consolidated................... $496.8 $504.4 $546.7 $49.7 $64.6 $59.1 $441.7 $436.6
====== ====== ====== ===== ===== ===== ====== ======
CAPITAL SPENDING DEPRECIATION AND AMORTIZATION
------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ------- ------- -------
United States..................... $19.7 $ 5.0 $ 9.2 $ 9.0 $ 8.9 $11.6
France............................ 7.3 18.9 25.3 10.3 10.7 9.5
Brazil............................ 2.4 2.4 2.2 2.8 2.6 3.7
----- ----- ----- ----- ----- -----
Consolidated........ $29.4 $26.3 $36.7 $22.1 $22.2 $24.8
===== ===== ===== ===== ===== =====
Consolidated Operations by Geographic Area
Long-lived assets, excluding deferred income tax assets and certain other
deferred charges, were $108.8 $123.9 and $29.3 in the United States, France and
Brazil, respectively, as of December 31, 2000, and $99.1, $134.3 and $32.3 in
the United States, France and Brazil, respectively, at December 31, 1999.
For purposes of the geographic disclosure in the following table, net sales
are attributed to geographic locations based on the location of the Company's
direct customers.
NET SALES
------------------------
2000 1999 1998
------ ------ ------
United States............................................... $143.0 $142.9 $156.2
Europe and the former Commonwealth of Independent States.... 194.9 214.4 224.7
Asia/Pacific (including China).............................. 65.8 66.4 76.8
Latin America............................................... 75.7 60.2 67.4
Other foreign countries..................................... 17.4 20.5 21.6
------ ------ ------
Consolidated.................................. $496.8 $504.4 $546.7
====== ====== ======
51
52
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 14. MAJOR CUSTOMERS
Two of the Company's customers have accounted for a significant portion of
the Company's net sales in the periods presented in the financial statements,
and the loss of one or both such customers, or a significant reduction in one or
both of these customers' purchases, could have a material adverse effect on the
Company's results of operations. Net sales to Philip Morris Incorporated
("Philip Morris"), together with its affiliates and designated converters,
accounted for approximately 30 percent of total consolidated net sales for the
years ended December 31, 2000 and 1999, and approximately 28 percent for 1998.
Net sales to B.A.T. Industries PLC ("BAT"), together with its affiliates and
designated converters, accounted for approximately 17 percent, 18 percent and 14
percent of consolidated net sales for the years ended December 31, 2000, 1999
and 1998, respectively. Each of the Company's segments reported sales to these
customers for each of the respective periods reported above.
The Company had sales to the minority shareholder of LTRI of $19.1, $24.2
and $16.8 in 2000, 1999 and 1998, respectively.
The Company's consolidated accounts receivable at December 31, 2000 and
1999 included balances from Philip Morris and BAT, together with their
respective affiliates and designated converters. The percentage of these
customers' balances of consolidated accounts receivable is less than each of
their respective percentages of consolidated net sales.
The Company performs ongoing credit evaluations on all of its customers'
financial condition and generally does not require collateral or other security
to support customer receivables. A substantial portion of the Company's
consolidated accounts receivable are due from companies in the tobacco industry
which has been and continues to be under substantial pressure from legal,
regulatory and tax developments. It is not possible to predict the outcome of
such litigation or what effect adverse developments in pending or future
litigation, regulatory actions and additional taxes may have on the tobacco
industry, its financial liquidity or relationships with its suppliers. Nor is it
possible to predict what additional legislation or regulations relating to
tobacco products will be enacted, or to what extent, if any, such legislation or
regulations might affect the tobacco products industry in general.
52
53
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 15. UNAUDITED QUARTERLY FINANCIAL DATA AND COMMON STOCK INFORMATION
The Company's Common Stock is listed on the New York Stock Exchange under
the ticker symbol "SWM". As of December 31, 2000, there were 5,930 stockholders
of record of the Company's Common Stock. This number does not include shares
held in "nominee" or "street" name.
2000
------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------ ------
Net Sales............................................. $118.0 $121.7 $126.8 $130.3 $496.8
Gross Profit.......................................... 22.0 21.9 24.5 23.5 91.9
Operating Profit...................................... 11.4 11.1 14.3 12.9 49.7
Net Income............................................ $ 6.8 $ 6.4 $ 8.0 $ 6.6 $ 27.8
Net Income Per Share:
Basic............................................... $ .44 $ .41 $ .53 $ .44 $ 1.82
Diluted............................................. .44 .41 .53 .44 1.82
Cash Dividends Declared and Paid Per Share............ $ .15 $ .15 $ .15 $ .15 $ .60
Market Price Per Share:
High................................................ $16.94 $15.69 $15.19 $19.64 $19.64
Low................................................. 12.38 12.48 11.81 12.88 11.81
Close............................................... $12.94 $12.52 $13.38 $19.15 $19.15
1999
------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------ ------
Net Sales............................................. $128.6 $119.7 $125.5 $130.6 $504.4
Gross Profit.......................................... 29.4 24.7 27.2 29.1 110.4
Operating Profit...................................... 18.0 13.6 16.2 16.8 64.6
Net Income............................................ $ 9.1 $ 7.1 $ 7.6 $ 7.6 $ 31.4
Net Income Per Share:
Basic............................................... $ .57 $ .45 $ .48 $ .49 $ 1.99
Diluted............................................. .57 .45 .48 .49 1.99
Cash Dividends Declared and Paid Per Share............ $ .15 $ .15 $ .15 $ .15 $ .60
Market Price Per Share:
High................................................ $16.50 $17.50 $17.50 $13.88 $17.50
Low................................................. 11.50 11.50 12.81 11.69 11.50
Close............................................... $11.50 $15.00 $12.94 $13.44 $13.44
53
54
SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Schweitzer-Mauduit International,
Inc.:
We have audited the accompanying consolidated balance sheets of
Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 2000, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Schweitzer-Mauduit
International, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
January 19, 2001
54
55
SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Schweitzer-Mauduit International, Inc. is responsible for
conducting all aspects of the business, including the preparation of the
financial statements in this Annual Report. The financial statements have been
prepared using accounting principles generally accepted in the United States of
America considered appropriate in the circumstances to present fairly the
Company's consolidated financial position, results of operations and cash flows
on a consistent basis. Management also has prepared the other information in
this Annual Report and is responsible for its accuracy and consistency with the
financial statements.
As can be expected in a complex and dynamic business environment, some
financial statement amounts are based on management's estimates and judgments.
Even though estimates and judgments are used, measures have been taken to
provide reasonable assurance of the integrity and reliability of the financial
information contained in this Annual Report. These measures include an effective
control-oriented environment in which a company-wide internal control program
plays an important role, an Audit Committee of the Board of Directors which
oversees the financial reporting process, and independent audits. As part of
that responsibility, the Audit Committee recommended to the Board of Directors
the selection of the Company's independent auditors, Deloitte & Touche LLP.
One characteristic of a control-oriented environment is a system of
internal control over financial reporting and over safeguarding of assets
against unauthorized acquisition, use or disposition, designed to provide
reasonable assurance to management and the Board of Directors regarding
preparation of reliable published financial statements and such asset
safeguarding. The system is supported with written policies and procedures and
contains self-monitoring mechanisms. Appropriate actions are taken by management
to correct deficiencies as they are identified. All internal control systems
have inherent limitations, including the possibility of circumvention and
overriding of controls, and therefore, can provide only reasonable assurance as
to financial statement preparation and such asset safeguarding. Management
believes the Company's system of internal control maintains an appropriate
cost-benefit relationship.
The Company has also adopted a code of conduct which, among other things,
contains policies for conducting business affairs in a lawful and ethical manner
in each country in which it does business, for avoiding potential conflicts of
interest, and for preserving confidentiality of information and business ideas.
Internal controls have been implemented to provide reasonable assurance that the
code of conduct is followed.
The financial statements have been audited by Deloitte & Touche LLP. During
their audits, the independent auditors were given unrestricted access to all
financial records and related data. Management believes that all representations
made to the independent auditors during their audits were valid and appropriate.
During the audits conducted by the independent auditors, management
received minor recommendations to strengthen or modify internal controls in
response to developments and changes. Management has adopted, or is in the
process of adopting, all recommendations which are cost-effective.
/s/ Wayne H. Deitrich
Wayne H. Deitrich
Chairman of the Board and Chief Executive Officer
/s/ Paul C. Roberts
Paul C. Roberts
Chief Financial Officer and Treasurer
January 19, 2001
55
56
PART II, CONTINUED
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section of the Company's Proxy Statement dated March 13, 2001 (the
"2001 Proxy Statement") captioned "Certain Information Regarding Directors and
Nominees" under "Proposal 1. Election of Directors" identifies members of the
Board of Directors of the Company and nominees, and is incorporated in this Item
10 by reference.
See also "Executive Officers of the Registrant" appearing in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information in the section of the 2001 Proxy Statement captioned
"Executive Compensation" is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections of the 2001 Proxy Statement captioned
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Holders" is incorporated in this Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section of the 2001 Proxy Statement captioned
"Certain Transactions and Business Relationships" is incorporated in this Item
13 by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
(1) and (2) Financial Statements and Financial Statement Schedules:
See the Index to Financial Statements included in Item 8 of Part II
under the caption "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
Schedules have been omitted because they were not applicable or
because the required information has been included in the financial
statements or notes thereto.
(3) Exhibits:
See the Index to Exhibits that appears at the end of this document
and which is incorporated by reference herein.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the fourth
quarter of 2000.
56
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
By: /s/ WAYNE H. DEITRICH
---------------------------------------
Wayne H. Deitrich
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
Dated: March 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
---- -------- ----
/s/ WAYNE H. DEITRICH Chairman of the Board and Chief March 2, 2001
- ----------------------------------------------------- Executive Officer
Wayne H. Deitrich (principal executive officer)
/s/ PAUL C. ROBERTS Chief Financial Officer March 2, 2001
- ----------------------------------------------------- and Treasurer
Paul C. Roberts (principal financial officer)
/s/ WAYNE L. GRUNEWALD Controller March 2, 2001
- ----------------------------------------------------- (principal accounting officer)
Wayne L. Grunewald
* Director March 2, 2001
- -----------------------------------------------------
Claire L. Arnold
* Director March 2, 2001
- -----------------------------------------------------
Alan R. Batkin
* Director March 2, 2001
- -----------------------------------------------------
K.C. Caldabaugh
* Director March 2, 2001
- -----------------------------------------------------
Laurent G. Chambaz
* Director March 2, 2001
- -----------------------------------------------------
Richard D. Jackson
* Director March 2, 2001
- -----------------------------------------------------
Leonard J. Kujawa
* Director March 2, 2001
- -----------------------------------------------------
Jean-Pierre Le Hetet
* Director March 2, 2001
- -----------------------------------------------------
Larry B. Stillman
*By: /s/ JOHN W. RUMELY, JR. March 2, 2001
------------------------------------------------
John W. Rumely, Jr.
Attorney-In-Fact
57
58
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 -- Distribution Agreement (incorporated by reference to Exhibit
2.1 to Form 10/A Amendment 2, dated October 27, 1995).
2.2 -- Stock Purchase Agreement by and between SWM, Souza Cruz S.A.
and Contab Participacoes Ltda. dated December 16, 1997 for
the purchase of Companhia Industrial de Papel Pirahy
(incorporated by reference to Exhibit 2.1 to Form 8-K, dated
February 2, 1998).
3.1 -- Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Form 10, dated September 12, 1995).
3.2 -- By-Laws, as amended on and through February 27, 1996
(incorporated by reference to Exhibit 3.2 to the Company's
Form 10-K for the year ended December 31, 1995).
4.1 -- Form of Common Stock Certificate as of October 1, 2000
(incorporated by reference to Exhibit 4.1 to Form 10-Q for
the quarter ended September 30, 2000).
4.2 -- Rights Agreement Amended and Restated as of October 1, 2000
(incorporated by reference to Exhibit 4.2 to the Company's
Form 10-Q for the quarter ended September 30, 2000).
10.1 -- Transfer, Contribution and Assumption Agreement
(incorporated by reference to Exhibit 10.1 to Form 10/A
Amendment 2, dated October 27, 1995).
10.2 -- Employee Matters Agreement (incorporated by reference to
Exhibit 10.3 to Form 10/A Amendment 2, dated October 27,
1995).
10.3 -- Tax Sharing Agreement (incorporated by reference to Exhibit
10.4 to Form 10/A Amendment 2, dated October 27, 1995).
10.4 -- Outside Directors' Stock Plan (incorporated by reference to
Exhibit 10.5 to Form 10/A Amendment 2, dated October 27,
1995).
10.5 -- Annual Incentive Plan Amended and Restated as of February
25, 1999 (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 1998).
10.6* -- Equity Participation Plan Amended and Restated as of April
26, 2001.
10.7 -- Long-Term Incentive Plan Amended and Restated as of February
25, 1999 (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-K for the year ended December 31, 1998).
10.8.1 -- Deferred Compensation Plan, Amended and Restated as of April
21, 2000 (incorporated by reference to Exhibit 10.8.1 to the
Company's Form 10-Q for the quarter ended March 31, 2000).
10.8.2 -- Deferred Compensation Plan for Non-Employee Directors,
effective April 1, 2000 (incorporated by reference to
Exhibit 10.8.2 to the Company's Form 10-Q for the quarter
ended March 31, 2000).
10.9 -- Restricted Stock Plan effective as of December 2, 1999
(incorporated by reference to Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 1999).
10.10 -- Supplemental Benefit Plan Amended and Restated as of
February 25, 1999 (incorporated by reference to Exhibit
10.11 to the Company's Form 10-K for the year ended December
31, 1998).
10.11 -- Executive Severance Plan Amended and Restated as of February
24, 2000 (incorporated by reference to Exhibit 10.11 to the
Company's Form 10-Q for the quarter ended March 31, 2000).
10.12.1 -- Amended and Restated Agreement between Philip Morris
Incorporated and Schweitzer-Mauduit International, Inc. for
Fine Paper Supply, effective as of July 1, 2000+
(incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 2000).
58
59
INDEX TO EXHIBITS -- CONTINUED
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12.2 -- Amended and Restated Technology Ownership, Technical
Assistance and Technology License Agreement by and among
Philip Morris Incorporated, Philip Morris Products, Inc. and
Schweitzer-Mauduit International, Inc., effective as of July
1, 2000+ (incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 2000).
10.12.3 -- Amended and Restated Addendum to Second Amended and Restated
Agreement between Philip Morris Incorporated and
Schweitzer-Mauduit International, Inc. for Fine Paper Supply
effective as of July 1, 2000+ (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 2000).
10.13 -- Supply Agreement between Companhia Industrial de Papel
Pirahy and Souza Cruz S.A. dated as of February 2, 1998+
(incorporated by reference to Exhibit 10.10.1 to the
Company's Form 10-K for the year ended December 31, 1998).
10.13.1 -- Amendment No. 1, dated February 23, 2000, to the Supply
Agreement between Schweitzer-Mauduit do Brasil, S.A.
(formerly known as Companhia Industrial de Papel Pirahy) and
Souza Cruz S.A.+ (incorporated by reference to Exhibit
10.13.1 to the Company's Form 10-Q for the quarter ended
March 31, 2000).
10.13.2 -- Amendment No. 1, dated February 23, 2000, to the Art-Coated
Supply Agreement between Schweitzer-Mauduit do Brasil, S.A.
(formerly known as Companhia Industrial de Papel Pirahy) and
Souza Cruz S.A.+ (incorporated by reference to Exhibit
10.13.2 to the Company's Form 10-Q for the quarter ended
March 31, 2000).
10.14.1 -- Amended and Restated Credit Agreement dated January 29, 1998
between the Company, as Borrower and Guarantor, SMF, as
Borrower, PdM Industries, as Borrower, SM-Spain, as
Borrower, the Banks named therein and Societe Generale, as
Agent (the "Amended and Restated Credit Agreement")
(incorporated by reference to Exhibit 10 to the Company's
Form 10-Q for the quarter ended March 31, 1998).
10.14.2 -- Amendment No. 1, dated January 29, 1999, to the Amended and
Restated Credit Agreement (incorporated by reference to
Exhibit 10.13.2 to the Company's Form 10-K for the year
ended December 31, 1998).
10.14.3 -- Amendment No. 2, dated May 6, 1999, to the Amended and
Restated Credit Agreement (incorporated by reference to
Exhibit 10 to the Company's Form 10-Q for the quarter ended
June 30, 1999).
10.14.4 -- Amendment No. 3, dated January 7, 2000, to the Amended and
Restated Credit Agreement (incorporated by reference to
Exhibit 10.14.4 to the Company's Form 10-K for the year
ended December 31, 1999).
10.14.5* -- Amendment No. 4, dated January 19, 2001, to the Amended and
Restated Credit Agreement.
21.1* -- Subsidiaries of the Company.
23.1* -- Independent Auditors' Consent.
24.1* -- Powers of Attorney.
- ---------------
* Filed herewith.
+ Exhibit has been redacted pursuant to a Confidentiality Request under Rule
24(b)-2 of the Securities Exchange Act of 1934.
59
60
BOARD OF DIRECTORS OFFICERS
CLAIRE L. ARNOLD(1,2) WAYNE H. DEITRICH
Chief Executive Officer Chairman of the Board and
Leapfrog Services, Inc. Chief Executive Officer
ALAN R. BATKIN(1) WILLIAM R. FOUST
Vice Chairman Vice President - Administration
Kissinger Associates, Inc.
WAYNE L. GRUNEWALD
K.C. CALDABAUGH(1,3) Controller
Chairman of the Board and
Chief Executive Officer OTTO R. HERBST
Spinnaker Coating, Inc. President - Brazilian Operations
LAURENT G. CHAMBAZ(3) JEAN-PIERRE LE HETET
Partner Chief Operating Officer and
UGGC & Associes President - French Operations
WAYNE H. DEITRICH RAYMOND NEDELLEC
Chairman of the Board and Vice President - Finance
Chief Executive Officer
Schweitzer-Mauduit International, Inc. PAUL C. ROBERTS
Chief Financial Officer and Treasurer
RICHARD D. JACKSON(2)
Chairman of the Board JOHN W. RUMELY, JR.
ebank.com General Counsel and Secretary
LEONARD J. KUJAWA(1) PETER J. THOMPSON
Retired Partner President - U.S. Operations
Arthur Andersen LLP
JEAN-PIERRE LE HETET
Chief Operating Officer and
President - French Operations
Schweitzer-Mauduit International, Inc.
LARRY B. STILLMAN(2,3)
Vice President, Northwest Group
xpedx
- ---------------
(1) Audit Committee
(Chairman - Leonard J. Kujawa)
(2) Compensation Committee
(Chairman - Richard D. Jackson)
(3) Nominating Committee
(Chairman - Larry B. Stillman)
60
61
CORPORATE
INFORMATION
CORPORATE HEADQUARTERS
100 North Point Center East
Suite 600
Alpharetta, GA 30022-8246
Phone -- 800-514-0186 or 770-569-4200
Facsimile -- 770-569-4275
http://www.schweitzer-mauduit.com
STOCK EXCHANGE
The Common Stock of
Schweitzer-Mauduit International, Inc. is
listed on the New York Stock Exchange.
The ticker symbol is SWM.
TRANSFER AGENT/REGISTRAR
American Stock Transfer
& Trust Company
59 Maiden Lane
New York, NY 10038
Phone -- 800-937-5449 or 718-921-8200
http://www.amstock.com
INDEPENDENT AUDITORS
Deloitte & Touche LLP
191 Peachtree Street, Suite 1500
Atlanta, GA 30303
INFORMATION REQUESTS
Schweitzer-Mauduit International, Inc. welcomes inquiries from stockholders and
other interested parties. Requests for information should be made in writing and
sent to the Investor Relations Department at the Corporate Headquarters.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Thursday, April 26, 2001, at
11:00 a.m. at the Company's Corporate Headquarters located at 100 North Point
Center East, Suite 600, Alpharetta, Georgia.
61