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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13948
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, 1997, 16,065,443 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 $598 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
Schweitzer-Mauduit International, Inc.'s 1998 Proxy Statement, filed with
the Commission dated March 13, 1998, 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 1998 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
- ----------------------------- -----------------------
1998 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 and/or one
or more of its several subsidiaries, as determined by the context.)
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 15 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 94
percent of the Company's 1997 net sales, include cigarette, tipping and plug
wrap papers used to wrap various parts of a cigarette ("Cigarette Papers"),
reconstituted tobacco wrappers and binders for cigars, and reconstituted tobacco
leaf ("RTL") for use as filler in cigarettes and cigars. These products are sold
directly to the major tobacco companies or their designated converters in North
America, Western Europe, China, and elsewhere.
Non-tobacco industry products accounted for six to seven percent of the
Company's net sales in 1997, 1996 and 1995. These products included drinking
straw wrap, lightweight printing papers, tea bag, coffee and other filter
papers, battery separator paper and other specialized papers primarily for the
North American and Western European markets. These products are generally sold
directly to converters and other end-users. In 1996, the Company phased out its
U.S. production of tea bag and coffee filter papers to focus on its core market
growth opportunities.
PRODUCTS. Each of the three principal types of paper used in
cigarettes -- cigarette, tipping and plug wrap 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 cigarette machines utilized by premium 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 from "long
fibers", such as abaca and wood pulp. Porosity 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.
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Tipping paper, produced in white or buff color, joins the cigarette's
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 primarily as a filler that is blended with virgin tobacco
in order to utilize otherwise wasted parts of the tobacco leaf. The Company
currently produces reconstituted tobacco in two forms: leaf in France and
wrapper and binder in the U.S. The Company exited the RTL product line in the
U.S. at the beginning of the second quarter of 1996. (See "Markets and
Customers" below.) The Company's decision to exit the U.S. RTL business has not
impacted its U.S. wrapper and binder business, its RTL business in France, or
the Company's commitment to reconstituted tobacco worldwide. During the fourth
quarter of 1997, the U.S. RTL production line was restarted for an undetermined
period of time to support the growth of the French RTL business while
alternatives for additional capacity are being considered.
MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies
customers in North America, but also has substantial sales in South America and
Japan. The customer base for the U.S. operations consists of most of the major,
and many of the smaller, cigarette manufacturers in North America, several cigar
manufacturers and approximately 70 manufacturers in 30 countries outside North
America. The Company's French operations rely predominantly on worldwide
exports, primarily to Western Europe, China, Eastern Europe and the Commonwealth
of Independent States, and, in lesser but substantial amounts, to Asia other
than China, Africa, the Middle East and Australia. The customer base for the
French operations consists of a diverse group of approximately 180 customers in
88 countries. Customers of both units include international tobacco companies,
regional tobacco manufacturers and government monopolies.
Between the U.S. and France, Philip Morris accounts for approximately 36
percent of the Company's net sales.
Philip Morris and B.A.T. Industries PLC ("B.A.T."), including its U.S.
subsidiary Brown & Williamson Tobacco Corporation ("Brown & Williamson"), are
the Company's two largest customers of Cigarette Papers.
The Company's French operations are the largest exporter of cigarette paper
to China with an estimated 40 percent share of that country's cigarette paper
imports.
LTR Industries, S.A. ("LTRI") is a 72-percent owned subsidiary of the
Company which manufactures RTL in France. LTRI's three largest customers for RTL
are Tekel, Philip Morris, and Rothmans Companies in Europe, each representing 10
percent or more of LTRI's sales volumes.
In December 1995, the Company made the decision to exit the U.S. RTL
business because of the loss of its two largest RTL customers in the U.S. and
ceased operations early in the second quarter of 1996. (See discussion regarding
the financial impact of this decision under the caption "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing in Part
II, Item 7 herein.)
PHILIP MORRIS SUPPLY AGREEMENT. In 1992, Philip Morris decided to form
strategic supply arrangements with some of its U.S. suppliers. With respect to
Cigarette Papers, the Company's U.S. unit was chosen to be the single source of
supply to Philip Morris' U.S. operations. The initial five year term of the
supply agreement (the "Supply Agreement") would have ended on December 31, 1997,
but, as part of the assignment of the Supply Agreement from Kimberly-Clark to
SWM, Philip Morris and SWM agreed to extend the initial term of the Supply
Agreement until December 31, 1998. By its terms, the Supply Agreement
automatically renews for successive terms of three years each unless either
party gives notice of non-renewal 24 months before the end of the then current
term. On December 20, 1996, the Company announced that Philip Morris and the
Company had agreed to extend the initial term of the Supply Agreement for an
additional six months until June 30, 1999, and, subsequently, the two companies
have twice more agreed to extend the initial term of the Supply Agreement until
March 31, 2000, thereby extending the December 31, 1996 deadline for notice of
non-renewal to March 31, 1998. The extensions were intended to allow both
parties additional time to reach agreement on changes to the Supply Agreement
which will make it acceptable to both parties. The Company
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has no reason to believe that the Supply Agreement will not be renewed but can
give no assurances that it will be so renewed. While the Company has no reason
to believe that it would lose Philip Morris as a customer in the U.S., such loss
would have a material adverse effect on the Company.
EMPLOYEE AND LABOR RELATIONS. As of December 31, 1997, the Company had
approximately 2,465 regular full-time active employees of whom approximately 760
hourly employees and 315 salaried employees were located in the U.S. and Canada,
and approximately 855 hourly employees and 535 salaried employees were located
in France.
North American Operations -- Hourly employees at the Lee, Massachusetts,
Spotswood, New Jersey and Ancram, New York mills are represented by locals of
the United Paperworkers International Union. During 1997, new five-year
collective bargaining agreements were reached at the Spotswood and Lee mills.
The current five-year collective bargaining agreements expire at the Spotswood
mill on June 15, 2002, at the Lee mills on August 1, 2002, and at the Ancram
mill on September 30, 1998. There have been no strikes or work stoppages at any
of these locations for approximately 18 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 mills of the Company's
subsidiaries in Quimperle, Malaucene, and Spay, France are union represented.
During 1996, these subsidiaries entered into new collective bargaining
agreements at Quimperle and Malaucene which expired on December 31, 1997. During
February 1997, a new collective bargaining agreement was entered into at Spay
which expired on February 24, 1998. The French subsidiaries are in the process
of negotiating new contracts at all three mills. 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.
RAW MATERIALS. Wood pulp is the primary fiber used in the Company's
operations. These operations consumed approximately 71,000 and 65,000 metric
tons of wood pulp in 1997 and 1996, 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 stems and scraps, as the primary
raw materials for the Company's paper and reconstituted tobacco products. While
tobacco stems and scraps are generally the property of the cigarette
manufacturer for whom the reconstitution is contracted, the Company and LTRI do
purchase some tobacco materials 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 U.S. and France. Flax tow and flax pulp
are also purchased externally but these purchases only represent approximately
20 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 sisal fibers and small amounts of secondary and recycled fibers.
All of these secondary and recycled fibers are purchased.
To ensure an adequate supply of wood pulp at competitive prices, the
Company and Kimberly-Clark agreed that Kimberly-Clark will, for a fee, make
available to the Company its pulp sourcing services. The Company continues to
utilize these services.
The Company believes that the fibers identified above and the remaining 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, together with its subsidiaries, is the leading
producer of Cigarette Papers in the world. It also 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.
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Cigarette Paper -- Management believes that the Company has an estimated 58
percent share of the U.S. and Canadian cigarette paper markets. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major competitor
in the sale of cigarette paper in the U.S. and Canada. European suppliers, such
as Miquel y Costas & Miquel S.A., a Spanish corporation ("Miquel y Costas"),
also compete in this market but, to-date, have achieved no more than an
estimated 10 percent market share. The Company's U.S. operations are in the
process of expanding their efforts related to sales of cigarette paper to Asia.
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
operations are Wattens, Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), acquired
by P.H. Glatfelter Company in January, 1998, Robert Fletcher (Greenfield)
Limited, Miquel y Costas, and Julius Glatz GmbH. Papeteries de Mauduit, S.A.
("PdM"), an indirect wholly-owned subsidiary of the Company in France, sells
approximately 70 percent of its products (cigarette paper and porous and
conventional plug wrap) in Western Europe and China. Management believes that
the bases of competition for PdM's products are the same as for the Company's
U.S. operations.
Plug Wrap Paper -- Management believes that the Company's U.S. operations
have a 75 percent share of the North American plug wrap market. The remaining 25
percent is shared by three competitors: Ecusta (including Schoeller & Hoesch),
Miquel y Costas, and Wattens. The Company's French operations hold an estimated
56 percent of the Western European high porosity plug wrap market. Schoeller &
Hoesch is the Company's principal competitor in that market.
Management believes that the primary basis of competition for high porosity
plug wrap is technical capability with price being a secondary 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. operations
have an estimated 58 percent share of the U.S. and Canadian markets for base
tipping paper which is subsequently printed by converters. Its principal
competitors in North America are Ecusta and Tervakoski Oy, a Finnish exporter.
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 is among the largest converted tipping paper producers in Europe.
PdMal produces printed and unprinted, and laser and electrostatically perforated
tipping papers. PdMal's principal European competitors are Tann-Papier GmbH
(Austria), 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.
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 (lower prices of virgin tobacco may result in lower reconstituted tobacco
sales volumes).
LTRI's principal competitors are (i) B.V. Deli-HTL Tabak Maatschappiji
B.V., an independent producer which operates in Holland, (ii) R.J. Reynolds
Tobacco Company, which produces RTL for both internal and external use, (iii)
Elets, an affiliate of R.J. Reynolds which operates in the Commonwealth of
Independent States, and (iv) cigarette companies such as Philip Morris and Brown
& Williamson, which produce RTL primarily for internal use.
The Company exited the RTL business in the U.S. at the beginning of the
second quarter of 1996 (see "Markets and Customers"), where its operations had
previously produced an estimated 10-15 percent of the reconstituted tobacco used
in U.S. cigarette production. The remaining 85-90 percent had been produced
internally by U.S. cigarette companies for use in U.S. produced cigarettes and
for export to their overseas affiliates. After the Company's exit of this
business in the U.S., virtually all of the reconstituted tobacco used
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in U.S. cigarette production is being produced by U.S. cigarette companies. In
the fourth quarter of 1997, the U.S. operations temporarily restarted operation
of the U.S. RTL production line, but only in support of the increased sales
volumes of LTRI.
Management estimates that 85-90 percent of 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 French subsidiaries
produce wrapping paper for drinking straws, filter papers, as well as papers for
lightweight printing, business forms and battery separators. Management believes
that price is the primary basis of competition for drinking straw wrap 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. Neither the Company nor its French
subsidiaries possess a significant market share in any of the above segments,
except for battery separator papers, where they collectively hold approximately
20 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 and its
French subsidiaries have research and laboratory facilities in Spay, France and
Alpharetta, Georgia and employ 47 research personnel. The Company is dedicated
to developing Cigarette Papers and reconstituted tobacco product innovations and
improvements to meet the needs of individual customers. The development of new
components for tobacco products is the primary focus of these research and
development functions, which are working on several development projects for
their major customers. The Company's U.S. and French operations spent in the
aggregate on product research and development $4.5 million in 1995, $6.0 million
in 1996 and $6.4 million in 1997. Research expenses were lower in 1995 due to an
increased amount of machine time and other trial expenses shared with customers.
The actual staffing for research activity was comparable to the level in the
other periods.
The Company believes that the research and product development capabilities
of its U.S. and French operations 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 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, 1997, the Company owned approximately 73 patents and had
pending 49 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, the "PdM"
logo and the 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 enjoyed 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.
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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 paper are typically placed two weeks in advance of
shipment. Approximately 5 percent of the U.S. sales are on a consignment basis.
The French business units do maintain records of order backlogs. For
Cigarette Papers, the order backlog was approximately $21 million and $24
million on December 31, 1997 and December 31, 1996, respectively. This
represented approximately 50 days of Cigarette Paper sales in 1997 and between
40 and 50 days of Cigarette Paper sales in 1996. LTRI's RTL business operates
under a number of annual supply agreements. The order backlog for RTL was
approximately $57 million and $33 million on December 31, 1997 and December 31,
1996, respectively.
Sales of the Company's products are not subject to seasonal fluctuations,
except in the U.S. where customer shutdowns of one to two weeks in duration
typically occur in July and December.
SALES AND DISTRIBUTION. Essentially all tobacco-related products are sold
by the U.S. and French 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. Most of the Company's non-tobacco
related products are also 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 and Canada
are estimated to be approximately $3 million to $5 million annually in 1998 and
1999. These estimates include amounts associated with the first phase of the
Cluster Rules. The 1998 and 1999 estimates include amounts previously planned
for earlier periods but which have been postponed in order to ensure compliance
with final governmental regulations, once published, and to take advantage of
emerging enhanced technologies. These expenditures have been anticipated for
several years and 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, 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 and Canada. Products made in
France or in the U.S. are marketed in 88 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, 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.
RECENT ACQUISITIONS. 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 provides the Company with a manufacturing facility on a third continent.
Pirahy 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. Pirahy, together with the Company's
existing business, will increase the Company's market share of tobacco-related
papers in South America to approximately 51 percent. As part of the purchase
agreement, Pirahy has exclusive supply agreements with its former owner and its
largest customer in Brazil, Souza Cruz S.A. ("Souza Cruz"), to supply all of its
needs for papers which Pirahy is capable of producing.
Additionally, on February 11, 1998, the Company's second tier subsidiary,
Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"), wholly-owned by
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
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specialty paper manufacturing subsidiaries, Groupe SAPAM and Papeteries de la
Moulasse (collectively referred to hereafter as "Ingefico"), located in St.
Girons in the southwestern part of France. Approximately 90 percent of the net
sales of Ingefico are of fine papers to the tobacco industry.
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ITEM 2. PROPERTIES
As of December 31, 1997, the Company operated six mills (which include two
fiber pulping operations) in the U.S. and France that produce specialty papers
and 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 French
subsidiaries respectively maintain administrative and sales offices in
Alpharetta, Georgia and in Quimperle and Paris, France. The Company's world
headquarters are also located in Alpharetta. All of these offices are leased
except for the Quimperle office, which is owned by PdM.
Management believes that each of these facilities is well-maintained,
suitable for conducting the Company's operations and business, and adequately
insured.
The mills are operating at or close to capacity, except for the wrapper and
binder operations in the U.S. Additionally, the U.S. operations experienced
selective downtime on certain machines during the fourth quarter of 1997 in
order to reduce cigarette paper inventories which had built up as a result of
reduced demand in the U.S. A new paper machine at the Quimperle, France mill
began operation during March 1997, increasing the capacity for production of
long fiber products, such as highly porous plug wrap papers, alkaline battery
separators, and liners for vacuum cleaner bags. During the fourth quarter of
1997, the U.S. operations temporarily restarted operation of the U.S. RTL
production line, previously shut down at the beginning of the second quarter of
1996, in support of increased sales volumes of LTRI.
The February 2, 1998 acquisition of Pirahy, a second tier subsidiary in
Brazil, provides the Company with a manufacturing facility on a third continent.
Pirahy has approximately 63,000 metric tons of annual paper capacity.
Additionally, the February 11, 1998 acquisition of Ingefico, located in the
southwestern part of France, provides approximately 14,000 metric tons of annual
paper capacity and approximately 6,000 metric tons of annual pulp capacity, most
of which is used internally.
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The following are the locations of the Company's principal facilities as of
December 31, 1997:
LOCATION EQUIPMENT/OFFICE SPACE PRODUCTS/FUNCTION
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Lee Mills 4 Paper Machines Base Tipping and Specialty Papers,
Lee, Massachusetts Pulping Equipment Plug Wrap Paper
(4 Mill Sites)
Spotswood Mill 6 Paper Machines Cigarette Paper, Plug Wrap Paper,
Spotswood, New Jersey 1 Reconstituted Tobacco Reconstituted Tobacco Leaf (in
Leaf Machine support of the French business)
Pulping Equipment
Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and
Ancram, New York 1 Reconstituted Tobacco Binder, Porous Plug Wrap and
Wrapper and Binder Specialty Papers
Machine
Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing
Manitoba, Canada
Alpharetta, Georgia Leased Office Space Company World Headquarters,
Administration, Sales and Research
& Development -- U.S. Operations
Papeteries de Mauduit Mill 11 Paper Machines Cigarette Paper, Plug Wrap Paper
Quimperle, France Pulping Equipment and Long Fiber Specialties
Quimperle, France Owned Office Space Administrative Offices for French
Operations
Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers
Malaucene, France 3 Printing Presses
11 Laser Perforating Lines
1 Electrostatic Perforating
Line
LTR Industries 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax
Spay, France Leaf Machines Fiber Processing, Research &
1 Fiber Mill Development
Paris, France Leased Office Space Administrative and Sales Offices
for French Operations
The announced acquisition of Pirahy in Santanesia, Brazil provides the
Company with five additional paper machines and a coating machine. Pirahy's
products include tobacco-related papers, as well as printing and writing papers
and papers for packaging and labeling applications.
The announced acquisition of Ingefico in St. Girons, France provides the
Company with three additional paper machines and pulping equipment. Ingefico's
products are primarily tobacco-related papers.
11
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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
Under the terms of the Distribution, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Businesses, including the following cases:
- In January 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several
tobacco companies, industry trade associations and consultants, tobacco
wholesalers and cigarette component manufacturers, including
Kimberly-Clark, seeking equitable relief and compensatory and punitive
damages in an unspecified amount for mental suffering and physical
injuries allegedly sustained as a result of having smoked cigarettes. The
nine-count complaint sets forth several theories of liability, including
intentional and negligent misrepresentation, negligence, product
liability, breach of warranty and conspiracy. Among other things, the
complaint alleges that nicotine is an addictive substance, that the
tobacco companies, by using reconstituted tobacco, are able to control the
precise amount of nicotine in their cigarettes and that LTRI specializes
in the reconstitution process to help the tobacco companies control
nicotine levels.
- On February 13, 1998, Cleo Huffman, on behalf of herself and her deceased
husband, filed a complaint in the Circuit Court of Kanawha County, West
Virginia, against several tobacco companies, industry trade associations
and consultants, tobacco wholesalers, Kimberly-Clark, LTRI and others,
seeking equitable relief, $2 million in compensatory damages and $3
million in punitive damages allegedly sustained as a result of the death
of her husband which plaintiff contends was caused by his "addiction" to
smoking Camel cigarettes. The fourteen-count complaint sets forth several
theories of liability, including intentional and negligent
misrepresentation, breach of express and implied warranties, intentional
infliction of emotional distress, product liability, sale of an
unreasonably dangerous product and conspiracy.
As a component supplier, the Company believes that it has meritorious
defenses to each of these cases, but due to the uncertainties of litigation, the
Company cannot predict their outcome. The Company is unable to make a meaningful
estimate of the amount or range of loss which could result from an unfavorable
outcome of these actions. These cases will be vigorously defended.
Also, 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 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, 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.
Prior to the Distribution, Kimberly-Clark was named a potentially
responsible party ("PRP") under the provisions of the U.S. Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or analogous
state statutes, in connection with two waste disposal sites utilized by the
Company's Spotswood mill and one site used by the Company's former Mt. Holly
Springs, Pennsylvania mill. Prior to the
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Distribution, the Spotswood mill also responded to an information request by the
New Jersey Department of Environmental Protection and Energy with respect to
another landfill site allegedly used by the Spotswood mill. The Company has
assumed Kimberly-Clark's liabilities at each of these sites but does not believe
that any of these proceedings will result in the imposition of monetary
sanctions or have a material adverse effect on the Company's business or
financial condition.
In December 1997, the Company received notification from the Environmental
Protection Agency ("EPA") that, pursuant to CERCLA, it may be named as a PRP in
connection with a 1986 shipment of transformer oil containing polychlorinated
biphenyl ("PCB's") for which the Company's Lee mills had contracted to have
transported to a disposal site by a transporter. The Company expects to be
indemnified by the transporter for any liability connected with such shipment.
The Company also assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. The Company is obligated to maintain the integrity of the
cover and to sample groundwater by means of monitoring wells, in addition to
other long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Under the terms of a consent order signed on January 24, 1997
with MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
had until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system. Since the passive venting system did not bring the
site into compliance by mid-September 1997, the Company submitted to MDEP a
revised compliance plan which employs an active gas collection system. The
Company expects that the required permits for such system will be issued in the
first quarter of 1998. The Company must activate the system no later than 120
days after issuance of such permits. The estimated total cost of such plan,
including annual operating expenses, is $0.5 million, which amount has been
accrued as of December 31, 1997.
All of the Company's U.S. facilities may be affected by revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". Although the EPA originally indicated that the proposed rules
would be finalized in 1996, final rules have just recently been "issued".
However the final rules have not yet been published. The first phase of the
Cluster Rules would affect only wastewater discharges from the Ancram and Lee
mills and would require compliance within three years after the issuance of the
new rules. The Spotswood mill discharges its effluent to a publicly-owned
treatment works and therefore is not impacted by this first phase of the Cluster
Rules. Capital expenditures for compliance with the first phase of the Cluster
Rules at the Ancram and Lee mills are estimated to be between $4 million and $7
million in the aggregate. However, due to uncertainty concerning applicable
requirements under the final Cluster Rules, the Company can give no assurance
that this estimate will accurately reflect the actual cost of compliance. In
addition, the later phases of the Cluster Rules (and/or Title V of the Clean Air
Act Amendments of 1990) may further regulate air emissions and wastewater
discharges from the Spotswood mill and require the Company to install additional
air pollution controls at its other U.S. facilities sometime after the year
2000. Potential capital expenditures to comply with this subsequent phase of the
Cluster Rules and/or Title V of the Clean Air Act Amendments cannot be estimated
until after the EPA proposes applicable requirements, if any.
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 and Canada, including the aforementioned
Cluster Rules. For these purposes, the Company incurred total capital
expenditures of $2.7 million in 1997, and anticipates that it will incur
approximately $3 million to $5 million annually in 1998 and 1999. The major
projects included in these estimates include upgrading wastewater treatment
facilities at various locations and installation of equipment to treat volatile
organic compound emissions in France. Approximately $2 million of the total
environmental capital spending estimates for 1998 and 1999 relate to projects
anticipated as necessary to comply with the wastewater discharge requirements of
the initial phase of the Cluster Rules. The balance of expenditures required for
compliance with the initial phase of the Cluster Rules is expected to occur in
2000. 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 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of February
26, 1998, together with certain biographical information, are as follows:
NAME POSITION
---- --------
Wayne H. Deitrich................................ Chief Executive Officer
Jean-Pierre Le Hetet............................. President -- French Operations
N. Daniel Whitfield.............................. President -- U.S. Operations
Luiz Jose de Saboia e Silva...................... President -- Brazilian Operations
Paul C. Roberts.................................. Chief Financial Officer and Treasurer
William J. Sharkey............................... General Counsel and Secretary
Wayne L. Grunewald............................... Controller
MR. WAYNE H. DEITRICH, 54, has served as Chief Executive Officer of the
Company since August 1995 and was elected Chairman of the Board of Directors
immediately after the spin-off of the Company from Kimberly-Clark. 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, 54, has served as President -- French Operations
of the Company since August 1995 and was elected to the Board of Directors
immediately after the spin-off of the Company from Kimberly-Clark. 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. N. DANIEL WHITFIELD, 50, has served as President -- U.S. Operations of
the Company since August 1995. From May 1995 through August 1995, Mr. Whitfield
served as President -- Specialty Products U.S. of Kimberly-Clark. From 1991
through April 1995, he was Director -- Business Planning and Analysis, Pulp and
Paper Sector of Kimberly-Clark. From 1989 through 1990, Mr. Whitfield was
Director -- Operations Analysis and Control, Household Products Sector of
Kimberly-Clark.
MR. LUIZ JOSE DE SABOIA E SILVA, 55, has served as President -- Brazilian
Operations of the Company since February 2, 1998, the date of the closing of the
Pirahy acquisition. He served as a consultant to the Company effective January
1, 1998 through the closing date. Prior to January 1, 1998, but subsequent to
his retirement from Souza Cruz in March 1995, Mr. Saboia worked on various
production consultant projects with B.A.T. Before his retirement from Souza
Cruz, Mr. Saboia had served as Industrial Director of Souza Cruz from 1991 to
1995, President -- Cigarette Division of Souza Cruz from 1987 to 1991,
Production Director of Souza Cruz from 1983 to 1987 and Production
Director -- B.A.T.-Spain from 1980 to 1983.
MR. PAUL C. ROBERTS, 49, 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. WILLIAM J. SHARKEY, 66, has served as General Counsel and Secretary of
the Company since August 1995. Prior to that time, Mr. Sharkey was Senior
Counsel for Kimberly-Clark.
MR. WAYNE L. GRUNEWALD, 46, 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 traded on the New York Stock
Exchange ("NYSE") under the trading symbol "SWM".
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of February 26, 1998, there were 8,487 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 18 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.
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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 as of and for the years ended
December 31, 1997 and 1996 and the balance sheet data as of December 31, 1995
are on a consolidated basis. The income statement data for the year ended
December 31, 1995 has been derived from historical combined financial statements
for the eleven months ended November 30, 1995, and the consolidated results of
the Company for the one month ended December 31, 1995, which have been audited
by Deloitte & Touche LLP, independent auditors. The income statement data for
the years ended December 31, 1994 and 1993 and balance sheet data as of December
31, 1994 and 1993 have been derived from historical combined financial
statements audited by Deloitte & Touche LLP. The historical combined financial
statements of SWM and predecessors do not reflect the results of operations or
financial position that would have been obtained had SWM been a separate,
independent company and are not indicative of SWM's future performance as a
separate, independent company.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Net Sales.................................... $460.6 $471.3 $462.9 $404.2 $376.2
Gross Profit................................. 121.9 114.2 101.2 92.1 89.0
Operating Profit............................. 81.9 74.0 58.7 58.7 57.8
Interest income (expense) from affiliates,
net(1).................................... -- -- 3.3 5.1 6.1
Net Income................................... 45.3 38.7 36.8 35.1 31.9
Per Share Basis
Net Income:
Basic..................................... $ 2.82 $ 2.41
Diluted................................... $ 2.77 $ 2.38
Unaudited Pro Forma Net Income --
Basic and Diluted(2)...................... 1.81 1.66
Cash Dividends Declared and Paid............. .60 .45
Cash Flow and Balance Sheet Data:
Capital Spending............................. $ 35.8 $ 51.5 $ 22.5 $ 16.8 $ 30.0
Depreciation................................. 14.4 13.4 13.4 11.7 10.3
Cash Provided By Operations.................. 67.3 90.4 64.9 53.7 55.5
Receivables from affiliated
companies(1)(3)........................... -- -- -- 210.1 161.1
Payables to affiliated companies(1).......... -- -- -- 157.9 128.2
Total Assets(3).............................. 391.0 380.6 347.0 527.3 436.6
Long-Term Debt(3)............................ 80.8 86.6 91.6 13.4 13.2
Equity(3).................................... 179.5 156.0 129.9 245.1 196.9
- ---------------
(1) Receivables and payables with affiliates and related interest income and
expense with affiliates reflect financing activities related to other
operations of Kimberly-Clark and certain of its affiliates, primarily in
France, up to November 30, 1995, the date of the spin-off, at which time the
Company became a separate independent company. See Note 1 of the Notes to
Consolidated Financial Statements.
(2) See Note 2 of the Notes to Consolidated Financial Statements.
(3) On July 27, 1995, the stockholders of Schweitzer-Mauduit France S.A.R.L., a
wholly-owned subsidiary of Kimberly-Clark, approved the conversion of $65.0
million of receivables due from an affiliated company to an equity
investment. Such affiliated company was merged with another Kimberly-Clark
wholly-owned consumer and service products subsidiary, and the shares of the
merged entity were distributed to Kimberly-Clark prior to the Distribution.
Balances at December 31, 1995, reflect this transaction as a reduction of
receivables and deduction from owners' equity. Additionally, various
payments were made to and debt was assumed from Kimberly-Clark in connection
with the Distribution, totaling $89.2 million, that also reduced the amount
of equity. See Notes 1 and 5 of the Notes to Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN BACKGROUND INFORMATION
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 manufacture and sell tobacco-related papers and other
specialty paper products. Through the November 30, 1995 Distribution date, the
Businesses in the U.S. and Canada were conducted as operating divisions of
Kimberly-Clark and one of its Canadian subsidiaries, respectively. The
Businesses in France were conducted by LTRI, a 72 percent-owned subsidiary of
Kimberly-Clark, and two indirect wholly-owned Kimberly-Clark subsidiaries, PdM
and PdMal. These latter two companies are owned by SMF, previously named
Kimberly-Clark France S.A.R.L., which prior to the Distribution was a
wholly-owned subsidiary of Kimberly-Clark.
Two Kimberly-Clark consumer and service products ("C&S") businesses located
in France, which were unrelated to the Company and the Businesses, were also
subsidiaries of SMF's predecessor. The French C&S subsidiaries were merged
together and the shares of the merged entity were distributed to Kimberly-Clark
prior to the Distribution. SMF, however, remained part of the Company in order
to permit PdM and PdMal to utilize substantial net operating loss carryforwards
previously generated by the French C&S operations.
The French C&S businesses were operated and managed independently of the
Businesses, with totally separate facilities, no common sales forces or
purchasing functions, no substantive intercompany transactions (except in the
ordinary course of managing Kimberly-Clark's intercompany financing activities)
and no other commonalities. Accordingly, the French C&S operations have been
excluded from the consolidated financial statements of the Company included
herein and from the following discussion of results of operations.
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.
OVERVIEW
The Company operates principally in one industry segment, which consists of
papers used in the tobacco industry and reconstituted tobacco products. The
Company's non-tobacco industry products represented six percent of the Company's
net sales in 1997.
Interest expense, interest income and other nonoperating expenses reported
for the periods prior to the Distribution relate primarily to financing
activities associated with the French C&S operations. See Note 10 of the Notes
to Consolidated Financial Statements.
For purposes of the geographic disclosure in the following tables, the term
"United States" includes operations in the U.S. and Canada. The Canadian
operations exist solely to produce flax fiber used as raw material in the U.S.
operations and have no material effect on such geographic disclosure.
Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between geographic areas.
Adjustments to operating profit consist of unallocated overhead expenses not
associated with geographic areas and eliminations of intercompany transactions.
This section should be read in conjunction with the Company's consolidated
financial statements included herein.
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RESULTS OF OPERATIONS
1997 Compared to 1996
By Geography for the Years Ended December 31, 1997 and 1996
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1997 1996 VS. 1996 1997 1996
- --------- ------ ------ -------- ------- -------
United States................................ $195.5 $212.3 -7.9% 42.4% 45.0%
Outside United States........................ 268.8 263.5 +2.0 58.4 55.9
Eliminations................................. (3.7) (4.5) (0.8) (0.9)
------ ------ ----- -----
Consolidated....................... $460.6 $471.3 -2.3% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1997 1996 VS. 1996 1997 1996 1997 1996
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States..................... $21.2 $23.7 -10.5% 25.9% 32.0% 10.8% 11.2%
Outside United States............. 66.4 55.5 +19.6 81.1 75.0 24.7 21.1
Unallocated/Eliminations.......... (5.7) (5.2) (7.0) (7.0)
----- ----- ----- -----
Consolidated............ $81.9 $74.0 +10.7% 100.0% 100.0% 17.8% 15.7%
===== ===== ===== =====
Net Sales
Net sales decreased by $10.7 million due primarily to unfavorable changes
in currency exchange rates, which decreased net sales by $26.4 million. Exiting
the U.S. RTL product line in early 1996 (see "Restructuring Charge" in the
following discussion related to the "Results of Operations -- 1996 Compared to
1995" below) had an unfavorable effect of $2.9 million on the net sales
comparison. Without these two unfavorable effects, net sales in 1997 would have
increased by $18.6 million or four percent. Worldwide sales volumes increased by
three percent, adding $8.7 million to net sales. Excluding RTL volumes in the
U.S. in the first quarter of 1996, worldwide sales volumes increased by four
percent. Sales volumes increased in every major product line in France, with
total volumes from the French businesses up 14 percent for the year. Excluding
RTL volumes in the U.S. in the first quarter of 1996, sales volumes declined at
the U.S. business unit by eight percent primarily as a result of lower domestic
shipments, relating to a reduction in the export of cigarettes by U.S. cigarette
manufacturers, and changes in the Company's internal sourcing of selected
customers from the U.S. to France. Changes in average worldwide selling prices
and sales mix had a favorable effect of $7.0 million for the year. Average
selling prices increased in the U.S. compared to the prior year as a result of
an improved mix of products, offsetting contractual price reductions related to
a decline in the per ton cost of wood pulp. Average worldwide selling prices
increased in France compared to the prior year because of an improved mix of
products, offsetting slight price decreases on certain products.
Operating Profit
Operating profit improved by $7.9 million for 1997 compared to 1996. The
improvement was primarily a result of the increased French sales volumes,
improved sales mix, better mill operations and a decline in per ton wood pulp
costs. Decreases in per ton wood pulp costs favorably impacted operating profit
by $4.2 million compared to the prior year. Non-manufacturing expenses were $0.2
million less than in 1996.
The above favorable effects for the year were partially offset by lower
U.S. sales volumes, non-recurring U.S. manufacturing costs in 1997 and changes
in currency exchange rates. During the fourth quarter of 1997, U.S. operating
profit decreased by approximately $1.8 million from reduced operating schedules
to reduce inventories. In addition, $0.7 million in start-up costs were incurred
to restart operation of the U.S. RTL production line in support of the increased
French sales volumes. Changes in currency exchange rates had an unfavorable
impact of $2.4 million on the operating profit change.
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1996 Compared to 1995
By Geography for the Years Ended December 31, 1996 and 1995
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1996 1995 VS. 1995 1996 1995
- --------- ------ ------ -------- ------- -------
United States.................................. $212.3 $219.9 -3.5% 45.0% 47.5%
Outside United States.......................... 263.5 251.7 +4.7 55.9 54.4
Eliminations................................... (4.5) (8.7) (0.9) (1.9)
------ ------ ------- -------
Consolidated......................... $471.3 $462.9 +1.8% 100.0% 100.0%
====== ====== ======= =======
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1996 1995 VS. 1995 1996 1995 1996 1995
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States......................... $23.7 $16.1 +47.2% 32.0% 27.4% 11.2% 7.3%
Outside United States................. 55.5 44.3 +25.3 75.0 75.5 21.1 17.6
Unallocated/Eliminations.............. (5.2) (1.7) (7.0) (2.9)
----- ----- ------- -------
Consolidated................ $74.0 $58.7 +26.1% 100.0% 100.0% 15.7% 12.7%
===== ===== ======= =======
Net Sales
Net sales increased by $8.4 million due primarily to changes in sales
volumes. However, 1996 net sales were unfavorably affected by exiting the RTL
product line in the U.S. at the beginning of the second quarter of 1996 ($10.4
million). Excluding the U.S. RTL product line, sales volumes increased in every
major product line and worldwide sales volumes increased by seven percent,
thereby adding $24.7 million to net sales. Excluding RTL volumes in the U.S.,
sales volumes improved at the U.S. business unit by six percent, with volumes
from the French businesses up seven percent for the year. Changes in currency
exchange rates decreased net sales by $4.7 million. Additionally, changes in
average worldwide selling prices and sales mix had an unfavorable effect of $1.2
million for the year. Average selling prices declined in the U.S. compared to
the prior year primarily because of contractual price reductions related to a
decline in the per ton cost of wood pulp. Average worldwide selling prices
increased for most major product lines produced in France compared to the prior
year because of price increases implemented in late 1995 and the early part of
1996.
Operating Profit
Operating profit improved by $15.3 million for 1996 compared to 1995. The
improvement was primarily a result of the increased worldwide sales volumes in
product lines other than RTL in the U.S., higher selling prices in France, a
decline in per ton wood pulp costs and a one-time $7.3 million restructuring
charge taken in 1995 (see "Restructuring Charge" below). Decreases in per ton
wood pulp costs favorably impacted operating profit by $16.2 million compared to
the prior year.
The above favorable effects for the year were partially offset by lower
selling prices in the U.S. and higher research and general expenses. Research
expenses were higher primarily because of differences in the amount of machine
time and other trial costs shared with customers. General expenses increased due
to additional administrative costs incurred to operate as an independent
company. These stand-alone costs are primarily reflected in the above table as
Unallocated expenses. Changes in currency exchange rates had a nominal impact on
the operating profit change.
Restructuring Charge
In December 1995, the Company decided to exit the RTL product line in the
U.S. The Company's decision was driven by the loss of its two largest RTL
customers in the U.S., which represented 85 percent of the U.S. RTL revenues.
One of the customers elected to utilize available internal RTL capacity obtained
19
20
through an acquisition. Due to the other customer's concern over the Company's
loss of this RTL volume, the other of its two largest customers decided to phase
out its RTL purchases from the Company. A pre-tax charge of $5.9 million and an
associated reserve were recorded in 1995 to exit the U.S. RTL product line, of
which $4.7 million was utilized for a 1996 non-cash write-down of assets related
to the manufacture of this product in the U.S. Annual net sales were reduced by
$13.3 million ($10.4 million reduction in 1996 and $2.9 million reduction in
1997).
The Company also restructured its manufacturing facility at Malaucene,
France. This restructuring streamlined operations, improved productivity,
reduced manufacturing costs and increased sales volumes. A pre-tax charge of
$1.4 million and an associated reserve were recorded in 1995 to implement this
restructuring program, which was fully in place by mid-1996. Annual pre-tax
savings as a result of this restructuring program are approximately $2.0
million.
The Company incurred all costs associated with these restructuring plans
during 1996, and the associated reserves were closed out.
NON-OPERATING EXPENSES
Interest expense in 1997 and 1996 was primarily associated with debt
incurred in connection with the Distribution (see "Liquidity and Capital
Resources"). The decline in interest expense in 1997 as compared to 1996 was
primarily due to lower interest rates in France, currency translation rate
changes and a lower average amount of debt outstanding. The weighted average
effective interest rate on the Company's term loans decreased from approximately
5.2 percent in 1996 to approximately 4.7 percent in 1997. Prior to the
Distribution, overall net interest income principally resulted from the
Company's financing activities in connection with the Kimberly-Clark European
cash management program (see Note 10 of the Notes to Consolidated Financial
Statements). Other income, net in 1997 and 1996 consisted primarily of interest
income from investment of cash generated by operations of the Company.
INCOME TAXES
The noncurrent deferred income tax asset is principally due to the
previously mentioned net operating loss carryforwards incurred through December
31, 1994 by the C&S operations in France. Under French tax law, these net
operating losses were retained by SMF. The SMF consolidated tax group in France
has not paid income taxes, except nominal amounts of minimum required income
taxes, in the periods presented in the financial statements and is not expected
to pay normal income taxes until the net operating loss carryforwards have been
fully utilized. Additional information concerning these net operating loss
carryforwards is disclosed in Note 6 to the Consolidated Financial Statements.
The effective tax rates for the years ended December 31, 1997, 1996 and
1995 were 36.0 percent, 37.2 percent and 30.1 percent, respectively.
The provision for income taxes in 1997 was impacted by an increase in the
effective statutory income tax rate enacted in France during November 1997 from
36.67 percent to 41.67 percent for 1997 and 1998, retroactive to January 1,
1997, and to 40.00 percent for 1999. The unfavorable effect on current taxes of
the tax rate increase, including a retroactive adjustment for the eleven-month
period ended November 30, 1997, was offset by the favorable effect on the
deferred provision for income taxes due to the increased value of the tax
benefits to be recognized from the net operating loss carryforwards retained by
SMF estimated to be realized during 1997, 1998 and 1999, the periods of the
higher income tax rates. The impact in 1997 attributable to deferred tax assets,
net of liabilities, was a favorable $2.0 million on the deferred provision for
income taxes. Also impacting the 1997 provision for income taxes was the
enactment in France during December 1997 of a law that eliminated taxation of a
"provision for the fluctuating value of raw materials" that had been included in
French deferred taxes. Cancellation of this deferred tax liability reduced the
provision for income taxes by $2.1 million, which was partially offset by
establishment of a $1.0 million reserve for a previously reported tax claim in
France.
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The provision for income taxes was higher in 1996 and lower in 1995
primarily due to an increase in the effective statutory income tax rate enacted
in France during July 1995 from 33.33 percent to 36.67 percent, retroactive to
January 1, 1995. The net effect of the tax rate increase was favorable for 1995
because it increased the value of the tax benefits to be recognized from the net
operating loss carryforwards retained by SMF. The impact in 1995 attributable to
deferred tax assets, net of liabilities, was a favorable $4.5 million on the
deferred provision for income taxes, partially offset by an unfavorable impact
on the current provision for income taxes of $1.3 million, including a
retroactive adjustment for the six-month period ended June 30, 1995.
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. A $1.0
million reserve was established during 1997 for this tax claim. See additional
information concerning this claim in Note 6 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations, that portion attributable to changes in
operating working capital, and the amount of cash used for capital spending and
capitalized software costs for the years ended December 31, 1997, 1996 and 1995
were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------ ------
(U.S. $ IN MILLIONS)
Net cash provided by operations............................. $ 67.3 $90.4 $64.9
Decrease (increase) in operating working capital............ (10.8) 18.5 10.4
Capital spending............................................ 35.8 51.5 22.5
Capitalized software costs.................................. 7.6 2.7 --
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 1997, changes
in operating working capital contributed unfavorably to cash flow by $10.8
million due principally to lower accounts payable. Accounts payable were lower
in 1997 compared to 1996 as a result of payments in early 1997 for several large
capital and purchased software costs included in accounts payable at December
31, 1996. During 1997, the cash flow impact of lower accounts receivable, due to
the timing of collections, offset the impact of higher inventory levels. In
1996, changes in operating working capital contributed favorably to cash flow by
$18.5 million primarily due to decreases in inventories as a result of lower
inventory levels and lower per ton wood pulp costs, decreases in accounts
receivable due to the timing of collections, and increases in accounts payable
primarily for several large capital expenditures included in accounts payable at
December 31, 1996. In 1995, changes in operating working capital contributed
favorably to cash flow by $10.4 million due principally to increases in accrued
expenses and accounts payable primarily associated with the establishment of a
restructuring reserve, spin-off related activities settled after the 1995
year-end, higher raw material purchase costs and increased capital expenditures,
partially offset by increases in inventories from reduced December 1995 sales
and higher raw material costs, and in accounts receivable.
Cash flow from operations during these periods exceeded the level of
capital spending. Capital spending for 1997 and 1996 were higher than the
historical level of 1995 as the Company upgraded equipment to enhance capacity
and efficiency at its U.S. and French mills. Capital spending in 1997 included
(i) $3.6 million to complete the new $23 million long fiber paper machine in
France, (ii) $2.9 million at the Ancram mill toward upgrading the forming
section of a long fiber paper machine, (iii) $2.3 million for equipment
necessary to restart operation of the RTL production line at the Spotswood mill,
(iv) $1.5 million toward an effluent biological treatment station at the
Quimperle, France mill, (v) $1.0 million to complete upgrading the flax pulping
operations at the Spotswood mill, and (vi) $1.0 million toward a paper machine
upgrade project at the Spotswood mill. Capital spending in 1996 included (i)
$18.8 million for the new long fiber paper machine in France, (ii) $3.6 million
at the Quimperle, France mill for the production reorganization project, (iii)
$3.4 million to complete the installation of new high-speed cigarette paper
converting equipment at the
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Spotswood mill, (iv) $2.7 million toward upgrading the flax pulping operations
at the Spotswood mill, and (v) $2.1 million to furnish the Company's newly
leased corporate and U.S. business unit headquarters and U.S. research
facilities. Capital spending in 1995 included (i) $2.5 million toward
installation of new high-speed cigarette paper converting equipment at the
Spotswood mill, (ii) $1.7 million for upgrades to a tipping paper machine at the
Lee mills, (iii) $0.6 million of initial spending for the mill production
reorganization project at Quimperle, and (iv) $0.5 million toward the new paper
machine in France.
The Company's ongoing requirements for cash consist principally of amounts
required for capital expenditures, stockholder dividends and working capital.
The Company has declared and paid quarterly dividends, each amounting to $2.4
million ($0.15 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 14 of the Notes to
Consolidated Financial Statements), as of December 31, 1997 the Company had
unrecorded outstanding commitments for capital expenditures of approximately
$4.9 million. In addition to capital spending, the Company is incurring software
development costs related to a new company-wide integrated computer system that
replaced in the U.S. the formerly used Kimberly-Clark systems beginning January
1998. The portion of software development costs which were capitalized totaled
$7.6 million in 1997 and, together with $2.7 million capitalized in 1996, were
deferred on the balance sheet until such systems are placed in service (see Note
3 of the Notes to Consolidated Financial Statements). In the U.S., where the
largest portion of the costs to-date have been incurred, most of the deferred
costs will begin amortizing at the beginning of 1998 over a period of seven
years using the straight-line method. The Company will continue to incur costs
in France and, to a much lesser degree, in the U.S. in 1998 and 1999 as software
modules are designed and installed.
As discussed in greater detail in Note 5 of the Notes to Consolidated
Financial Statements, the Company and its subsidiaries, SMF and PdM Industries,
entered into a "Credit Agreement" dated November 27, 1995 which provides for
term and revolving credit loans then totaling approximately $75 million and $40
million, respectively. On the Distribution date, the Company assumed $25 million
of Kimberly-Clark debt, which it repaid with borrowings of the full amount under
the U.S. term loan facility. Immediately prior to the Distribution, SMF made a
cash payment to Kimberly-Clark of approximately $56 million, principally
financed by borrowings of the full amount (approximately $50 million) by SMF
under the French term loan facility. Additionally, in connection with the
Distribution (i) SMF also retained $10.8 million of debt related to other
Kimberly-Clark businesses, and (ii) LTRI paid an $8.2 million cash dividend to
Kimberly-Clark.
On February 2, 1998, SM-Spain, the Company's wholly-owned subsidiary,
established in 1997 under the Spanish holding company regime, paid approximately
$62.0 million in cash for 99.97 percent ownership interest in Pirahy , a
specialty paper manufacturer located near Rio de Janeiro, Brazil. In connection
with the acquisition of Pirahy, the Company modified its existing Credit
Agreement in order to ensure sufficient funds for the transaction and to retain
availability of funds sufficient to meet its ongoing cash requirements. The
terms of the amended and restated Credit Agreement entered into on January 30,
1998 are substantially the same as in the prior Credit Agreement, except that it
(i) provides an additional $20.0 million term loan to SM-Spain, (ii) extends the
maturities of the term loan facilities by approximately two years, and (iii)
extends the expiration date of the revolving credit facilities to January 29,
1999. 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.
Additionally, on February 11, 1998, SM-Enterprises, a wholly-owned
subsidiary of SMF, paid approximately $6.1 million 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 and Papeteries de
la Moulasse, located in St. Girons in the southwestern part of France. Total net
debt of approximately $5.8 million was also retained by the acquired companies.
This acquisition, while important to the strategic growth of the Company and its
ability to meet the demands of its customers, is not considered material to the
consolidated financial statements.
The Company believes its cash flow from operations, together with
borrowings still available under its revolving credit facilities, will be
sufficient to fund its ongoing cash requirements.
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NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
statements, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting of Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which will both be effective
for the Company's 1998 Annual Report to Stockholders. These two new statements
will affect the Company's financial statement disclosures. The Company is
evaluating how to implement these new disclosure requirements.
OUTLOOK
During 1998, the Company expects to benefit from continued growth in sales
volumes outside the U.S., reflecting increased demand for the Company's
products, and from cost savings as a result of recently implemented capital
projects. However, the higher corporate income tax rate in France is expected to
negatively impact 1998 earnings by $.15 to $.20 per share compared with 1997.
Amortization of capitalized software costs related to the new integrated
computer systems in the U.S. will begin and is expected to reduce earnings by
approximately $.05 per share in 1998 compared to 1997. Additionally, operating
expenses for the new computer network in the U.S. over and above the amount
previously paid to Kimberly-Clark for utilization of its systems are expected to
have an unfavorable effect of approximately $.07 per share in 1998 compared to
1997. Start-up costs in the first quarter of 1998 related to the new U.S.
computer systems will further reduce earnings by approximately $.04 per share.
The Company will be integrating the Brazilian and French acquisitions,
which occurred in February 1998, into SWM during 1998 but does not expect either
to begin contributing positively to earnings until 1999. Also, the direction of
the U.S. cigarette market remains unclear at this time, given the potential
tobacco settlement legislation, the effect of lower exports of cigarettes by the
Company's customers in the U.S. and the continuing adverse publicity for the
tobacco industry.
The per ton cost of wood pulp was relatively stable throughout 1997, but
the wood pulp market is weakening entering 1998. The Company does not expect
significant increases or decreases in the per ton cost of wood pulp during 1998
although per ton wood pulp costs may be somewhat lower during the first six
months of the year. The Company expects to continue incurring due diligence
costs, as it did in 1997, as potential external growth opportunities are
explored. These kinds of costs vary significantly and cannot necessarily be
predicted. In summary, the Company does not anticipate for 1998 the earnings
increases experienced in 1996 and 1997.
The Company expects capital spending for 1998 to be approximately $35 to
$40 million in total. Capital spending for 1998, excluding that of acquired
businesses, is estimated at approximately $30 million, focused primarily on
internal capacity expansion, cost reduction opportunities and upgrades to
environmental treatment facilities (see Note 14 of the Notes to Consolidated
Financial Statements). In addition to capital spending, the Company expects to
incur approximately $4 million of additional capitalized software costs in 1998
in the U.S., France and Canada.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain sections of this report, particularly the foregoing discussion
regarding the "Outlook" of the Company, contain certain forward-looking
statements, generally identified by phrases such as "the Company expects" or
words of similar effect. 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 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 1998 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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24
Year 2000 Compliance
The Year 2000 compliance issue creates risk for the Company from unforeseen
problems in its own software and hardware systems and from third parties with
whom the Company transacts business around the world. Failure of the Company or
third parties to effectively handle the Year 2000 issue could have a material
impact on the Company's ability to conduct business after December 31, 1999.
Although the aforementioned company-wide integrated corporate information
systems project was initiated as a result of the Company's need to replace the
Kimberly-Clark systems formerly used in the U.S., a benefit of the new systems
is that they provide Year 2000 compliance in the area of corporate information
systems. The Company is in the process of developing a comprehensive plan to
ensure that its manufacturing process systems, administrative systems,
interfaces with vendor and customer systems and other areas will be ready for
the Year 2000. Other than the costs related to the corporate information
systems, management does not expect the costs which the Company will incur to be
Year 2000 compliant to be material to the Company's business, operations or
financial condition.
International Business Risks
The Company's international operations are subject to international
business risks, including unsettled political conditions, expropriation, import
and export restrictions, exchange controls, inflationary economies, currency
risks and risks related to the restrictions of repatriation of earnings or
proceeds from liquidated assets of foreign subsidiaries.
Tax and Repatriation Matters
The Company and its subsidiaries are subject to 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 income tax
requirements of each of its operations, files appropriate returns and makes
appropriate income tax planning analyses directed toward the minimization of its
income tax obligations in these countries. Appropriate 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 an appropriate
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 U.S. 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
18 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 losses have arisen from the remeasurement of
non-local currency denominated monetary assets and liabilities into
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the currency of the country in which the operation is domiciled. These losses,
most of which related to receivables from and payables to affiliated companies
unrelated to the Businesses prior to the spin-off, are included in other income
(expense) net. These receivables from and payables to such affiliated companies
were settled as of the Distribution date.
Additional information concerning foreign currency related matters is
disclosed in Note 11 of the Notes to Consolidated Financial Statements.
Inflation
In recent years, inflation has not had a significant impact on the
Company's cost structure.
Effect of Changing Pulp Costs
Pulp costs tend to be cyclical in nature and are a large component of
product costs. The Company consumed approximately 71,000, 65,000 and 68,000
metric tons of wood pulp in 1997, 1996 and 1995, respectively. During the period
from January 1995 through December 1997, the U.S. list price of the primary pulp
grade used by the Company, northern bleached softwood kraft pulp, ranged from a
low of $520 per metric ton to a high of $970 per metric ton. Generally, over
time, the Company has been able to increase its selling prices in response to
increased pulp costs and has generally reduced them 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 U.S. where customer shutdowns typically occurring in July and
December 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.
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
and water emissions and noise 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, has been named as a potentially responsible party at several
waste disposal sites, none 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 14 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 13 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein. In addition, the Company is involved in legal actions and
claims arising in the ordinary course of business. Management believes that such
actions and claims will be resolved without a material effect on the Company's
financial statements.
Reliance on Significant Customers
Most of the Company's customers are manufacturers of tobacco products
located in 88 countries around the world. One such customer has accounted for a
significant portion of the Company's net sales in each of the
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last several years, and the loss of such customer, or a significant reduction in
that customer's purchases, could, at least temporarily, have a material adverse
effect on the Company's results of operations. See Note 17 of the Notes to
Consolidated Financial Statements.
Tobacco Products and Governmental Actions
In recent years, governmental entities, particularly in the U.S., 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 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. The
possibility of a legislative settlement of such litigation in the United States
may affect demand for the Company's products. 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. 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 consumer tobacco products industry in general.
Approximately 94 percent of the Company's net sales are from products used
by the tobacco industry in the making 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.
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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, 1997, 1996 and 1995...................... 29
Consolidated Balance Sheets as of December 31, 1997 and
1996.................................................. 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................ 31
Notes to Consolidated Financial Statements............. 32
Report of Independent Auditors.............................. 58
Management's Responsibility for Financial Reporting......... 59
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.
27
28
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28
29
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales................................................ $460.6 $471.3 $462.9
Cost of products sold.................................. 338.7 357.1 361.7
------ ------ ------
Gross Profit............................................. 121.9 114.2 101.2
Selling expense........................................ 17.4 18.2 17.4
Research expense....................................... 6.4 6.0 4.5
General expense........................................ 16.2 16.0 13.3
Restructuring charge................................... -- -- 7.3
------ ------ ------
Operating Profit......................................... 81.9 74.0 58.7
Interest expense....................................... (4.1) (5.3) (3.1)
Interest expense to affiliated companies............... -- -- (10.4)
Interest income from affiliated companies.............. -- -- 13.7
Other income (expense), net............................ 1.6 1.2 (0.4)
------ ------ ------
Income Before Income Taxes and Minority Interest......... 79.4 69.9 58.5
Provision for income taxes............................. 28.6 26.0 17.6
------ ------ ------
Income Before Minority Interest.......................... 50.8 43.9 40.9
Minority interest in earnings of subsidiary............ 5.5 5.2 4.1
------ ------ ------
Net Income............................................... $ 45.3 $ 38.7 $ 36.8
====== ====== ======
Net Income Per Common Share:
Basic.................................................. $ 2.82 $ 2.41
====== ======
Diluted................................................ $ 2.77 $ 2.38
====== ======
Unaudited Pro Forma -- Basic and Diluted (See Note
2).................................................. $ 1.81
======
See Notes to Consolidated Financial Statements
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30
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
--------------------
1997 1996
------- -------
(U.S. $ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 37.2 $ 30.9
Accounts receivable....................................... 57.0 65.1
Inventories............................................... 56.3 49.2
Deferred income tax benefits.............................. 3.3 3.3
Prepaid expenses.......................................... 3.8 2.1
------ ------
Total Current Assets.............................. 157.6 150.6
------ ------
Property
Land and improvements..................................... 5.9 5.4
Buildings and improvements................................ 45.6 42.2
Machinery and equipment................................... 296.1 272.0
Construction in progress.................................. 22.4 41.4
------ ------
Gross Property......................................... 370.0 361.0
Less accumulated depreciation............................. 168.9 166.8
------ ------
Net Property...................................... 201.1 194.2
------ ------
Noncurrent Deferred Income Tax Benefits..................... 18.4 30.2
------ ------
Deferred Charges and Other Assets........................... 13.9 5.6
------ ------
Total Assets................................................ $391.0 $380.6
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 2.5 $ 2.9
Other short-term debt..................................... 0.5 1.3
Accounts payable.......................................... 43.4 54.5
Accrued expenses.......................................... 43.0 42.5
Income taxes payable...................................... 1.1 0.6
------ ------
Total Current Liabilities......................... 90.5 101.8
------ ------
Long-Term Debt.............................................. 80.8 86.6
------ ------
Deferred Income Taxes....................................... 11.2 9.5
------ ------
Other Noncurrent Liabilities................................ 21.9 19.7
------ ------
Minority Interest........................................... 7.1 7.0
------ ------
Contingencies (See Notes 6, 13 and 14)
Stockholders' Equity
Preferred Stock -- $.10 par value -- 10,000,000 shares
authorized, none issued................................ -- --
Common Stock -- $.10 par value -- 100,000,000 shares
authorized, 16,065,443 and 16,052,621 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 1.6 1.6
Additional paid-in capital................................ 60.3 60.0
Retained earnings......................................... 113.5 77.8
Unrealized currency translation adjustments............... 4.1 16.6
------ ------
Total Stockholders' Equity........................ 179.5 156.0
------ ------
Total Liabilities and Stockholders' Equity.................. $391.0 $380.6
====== ======
See Notes to Consolidated Financial Statements
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31
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(U.S. $ IN MILLIONS)
Operations
Net income................................................ $ 45.3 $ 38.7 $ 36.8
Depreciation.............................................. 14.4 13.4 13.4
Deferred income tax provision (benefit)................... 9.9 8.6 (0.1)
Minority interest in earnings of subsidiary............... 5.5 5.2 4.1
Non-cash utilization of restructuring reserve............. -- 4.7 --
Other..................................................... 3.0 1.3 0.3
Changes in operating working capital:
Accounts receivable.................................... 8.1 4.4 (5.1)
Inventories............................................ (7.1) 6.8 (7.9)
Accounts payable....................................... (11.1) 10.2 8.5
Accrued expenses....................................... 0.5 (1.1) 12.2
Prepaid expenses....................................... (1.7) (1.1) 1.4
Income taxes payable................................... 0.5 (0.7) 1.3
------ ------ ------
Net changes in operating working capital............. (10.8) 18.5 10.4
------ ------ ------
Cash Provided by Operations....................... 67.3 90.4 64.9
------ ------ ------
Investing
Capital spending.......................................... (35.8) (51.5) (22.5)
Capitalized software costs................................ (7.6) (2.7) --
Advances to affiliates.................................... -- -- (2.5)
Other..................................................... (4.7) (1.7) 3.6
------ ------ ------
Cash Used for Investing........................... (48.1) (55.9) (21.4)
------ ------ ------
Financing
Cash dividends paid to SWM stockholders................... (9.6) (7.2) --
Cash dividends paid to minority owner..................... (4.5) (0.9) (7.2)
Cash dividends paid to affiliates......................... -- -- (18.5)
Return of capital......................................... -- -- (56.0)
Changes in receivables from affiliates.................... -- -- 144.7
Changes in short-term debt................................ (0.8) (1.2) 1.8
Changes in debt payable to affiliates within one year..... -- -- (155.7)
Proceeds from issuances of long-term debt................. 5.6 5.4 81.4
Payments on long-term debt................................ (3.9) (5.6) (28.7)
Issuance of capital stock................................. 0.3 -- --
------ ------ ------
Cash Used for Financing........................... (12.9) (9.5) (38.2)
------ ------ ------
Increase in Cash and Cash Equivalents....................... 6.3 25.0 5.3
Cash and Cash Equivalents at beginning of year.............. 30.9 5.9 0.6
------ ------ ------
Cash and Cash Equivalents at end of year.................... $ 37.2 $ 30.9 $ 5.9
====== ====== ======
See Notes to Consolidated Financial Statements
31
32
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. BACKGROUND
In April 1995, the Board of Directors of Kimberly-Clark Corporation
("Kimberly-Clark") approved a plan providing for a distribution (the
"Distribution") to its stockholders through a tax-free spin-off of its U.S.,
French and Canadian business operations that manufacture and sell
tobacco-related papers and other specialty paper products (the "Businesses").
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., (previously named Kimberly-Clark
France S.A.R.L., or "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, owns 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 and/or one or more of its several subsidiaries, as
determined by the context.)
In July 1995, the stockholders of SMF, then a wholly-owned subsidiary of
Kimberly-Clark, approved the conversion of $65.4 of receivables from an
affiliated company to an equity investment in such company. Such affiliated
company was one of two wholly-owned consumer and service products ("C&S")
subsidiaries (unrelated to the tobacco-related and specialty papers businesses)
which were merged together, and the shares of the merged entity were distributed
to Kimberly-Clark prior to the Distribution. The conversion of receivables to an
equity investment was recorded as a return of capital to Kimberly-Clark,
reducing the par value of common stock of SMF by $37.1, with the $28.3 excess
recorded as a non-cash dividend reducing retained earnings. SMF remained part of
SWM to permit PdM and PdMal to utilize income tax loss carryforwards previously
generated by the French C&S operations.
On November 1, 1995, Kimberly-Clark announced that its Board of Directors
had approved the Distribution of all outstanding shares of common stock of SWM
to Kimberly-Clark stockholders. The Distribution was made on November 30, 1995
to stockholders of record on November 13, 1995. Effective at the close of
business on November 30, 1995 (the "Distribution Date"), the Company became an
independent, publicly owned company as a result of the Distribution.
Pursuant to a Distribution Agreement, SWM and Kimberly-Clark entered into
various agreements that govern certain relationships between them, as well as
having provided an orderly transition to the status of two separate companies,
including a Tax Sharing Agreement, an Employee Matters Agreement, a Corporate
Services Agreement and a Transfer, Contribution and Assumption Agreement
("Transfer Agreement").
The Distribution Agreement established and provided for the principal
corporate transactions necessary to effect the Distribution, including the
transfer of assets to the Company and assumption by the Company of liabilities
associated with the operation of the Businesses, as well as the cash payments to
Kimberly-Clark. Other ancillary agreements continue to govern the relationship
between Kimberly-Clark and the Company with respect to or in consequence of the
Distribution, including allocation of responsibility for certain pending legal
proceedings, indemnities between the two companies and certain post-Distribution
covenants.
32
33
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The Tax Sharing Agreement provides for, among other things, the treatment
of tax matters for periods prior to the Distribution Date and responsibility for
adjustments as a result of audits by taxing authorities and is designed to
preserve the status of the Distribution as a tax-free distribution.
Under the Corporate Services Agreement, Kimberly-Clark provided certain
administrative, technical, and other services for a limited period of time. It
has also provided, and will continue during 1998 to provide, certain limited
information systems support. Charges for such services have been equal to or
based on the cost of rendering such services. In addition, through January 31,
1996, Kimberly-Clark provided the Company tenancy services with respect to the
office and research space which the Company had occupied in Kimberly-Clark's
Roswell, Georgia facilities.
The Employee Matters Agreement provides for the Company's and
Kimberly-Clark's respective obligations to employees and former employees who
are or were associated with the Businesses and for other employment and employee
benefit matters.
Under the Transfer Agreement, Kimberly-Clark assigned to the Company all
intellectual property rights (such as patent and trademark rights, trade secrets
and know-how) related to the operations of the Businesses, except for certain
rights which were retained by Kimberly-Clark and licensed to the Company on a
perpetual, non-exclusive, royalty-free and, in certain cases, non-transferable
basis. The Transfer Agreement also established time periods during which the
Company has agreed to comply with certain restrictions on its ability to compete
with certain Kimberly-Clark foreign affiliates in the countries such affiliates
currently sell cigarette paper, tipping paper and plug wrap paper used to wrap
various parts of a cigarette ("Cigarette Papers").
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. SM-Spain is intended to be
used as a holding company for certain of SWM's foreign investments, including
foreign investments acquired in the future.
NOTE 2. BASIS OF PRESENTATION AND PRO FORMA DATA
Basis of Presentation
These financial statements have been prepared in conformity with generally
accepted accounting principles, 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 include the accounts of
SWM and its majority-owned subsidiaries. All material intercompany and
interdivisional transactions are eliminated.
All of the 1997 and 1996 financial statements are presented on a
consolidated basis. The Statements of Income and Cash Flow for the year ended
December 31, 1995 include the combined results of operations and cash flows of
the Businesses under Kimberly-Clark for the eleven months prior to the
Distribution Date, as if the Businesses had been operating as a single entity
prior to the Distribution, and the consolidated results of operations and cash
flows of the Company for the one month period ended December 31, 1995. The
combined statements include historical information and reflect the net income
and cash flows of the Businesses, of which Kimberly-Clark's U.S. business had
been reported as a division (not a separate legal entity) of Kimberly-Clark, the
Canadian business had been reported as a division of a Canadian subsidiary of
Kimberly-Clark, and the French businesses had been reported as consolidated
subsidiaries of Kimberly-Clark.
The French C&S operations have been excluded from the financial statements
of SWM prior to the Distribution because the Businesses and the French C&S
operations had been independently operated and
33
34
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
managed, had totally separate facilities, no common sales forces or purchasing
functions, no substantive intercompany transactions (except in the ordinary
course of managing Kimberly-Clark's intercompany financing activities), and no
other commonalities, in substance or in form. The accompanying financial
statements accordingly reflect the distribution of the French C&S subsidiaries
to Kimberly-Clark as of the beginning of the earliest period presented.
Pro Forma Data (Unaudited)
Pro forma net income is presented based on data prepared under assumptions
as to the effects on the Company's financial statements of certain intercompany,
equity and operating transactions related to the Distribution as though these
transactions occurred at the beginning of the periods presented. The pro forma
financial data is unaudited, is presented for informational purposes only and
does not reflect the future earnings or results of operations of the Company or
what the earnings or results of operations of the Company would have been had
the Businesses been operated as a separate, independent company for the periods
presented. Pro forma net income per common share has been computed based on the
assumption that pro forma average shares outstanding for all periods prior to
the Distribution Date were the actual number of shares issued and distributed in
the Distribution. The number of shares outstanding from the Distribution date to
December 31, 1995 did not change.
The following summarizes the effects of the pro forma adjustments and the
pro forma weighted average common shares outstanding:
1995
----------
Historical net income....................................... $36.8
Pro forma adjustments:
Incremental operating expense(1).......................... (4.5)
Incremental interest expense(2)........................... (4.9)
Reversal of interest expense and income to (from)
affiliates, net(3)..................................... (3.3)
Net tax benefit of adjustments............................ 4.9
-----
Pro forma net income........................................ $29.0
=====
Pro forma net income per common share -- Basic and
Diluted................................................... $1.81
=====
Pro forma weighted average common shares outstanding........ 16,051,109
==========
- ---------------
(1) Estimated incremental information systems, administration and management
expense associated with being a stand-alone publicly-owned entity.
(2) Estimated incremental interest expense associated with new debt issued and
debt assumed from Kimberly-Clark, and to adjust other interest expense for
the estimated effect of the pro forma adjustments.
(3) Reversal of intercompany interest income and expense related to
inter-company receivables and liabilities attributable to Kimberly-Clark's
European cash management program.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies conform to generally accepted accounting
principles. Significant policies followed are described below.
Revenue Recognition
Sales are generally recognized upon shipment of the product to the
customer.
34
35
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Foreign Currency Translation
Income and expense items attributable to the operations in Canada and
France are translated into U.S. dollars at average exchange rates prevailing
during the periods. The balance sheets of these operations are translated at
period-end exchange rates, and the differences from historical exchange rates
are reflected in stockholders' equity as unrealized 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
(expense), net.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which simplifies standards for computing earnings per share ("EPS")
information. SFAS No. 128 replaces the presentation of "primary" and, when
required, "fully diluted" EPS with a presentation of "basic" and "diluted" EPS.
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
1997 and 1996 were 16,059,900 and 16,052,100, 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 1997 and 1996 were 16,338,600 and 16,216,900, respectively.
The only potential common shares are those related to stock options outstanding
during the respective years. All earnings per share information for 1996, and
for interim periods of 1997, has been restated to conform to the requirements of
SFAS No. 128.
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 operations
outside the U.S. 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
35
36
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Capitalized Software Costs
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
and system start-up are expensed as incurred.
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
Prior to the Distribution, for United States federal and state income tax
return purposes, taxable income of the Businesses' U.S. operations was included
in the consolidated income tax returns of Kimberly-Clark. Prior to the
Distribution, for Canadian federal and provincial income tax purposes, taxable
income of the Businesses' Canadian operations was included in the income tax
returns of Canadian subsidiaries of Kimberly-Clark. In France, prior to the
Distribution, SMF, PdM, PdMal and SMF's other subsidiaries, the French C&S
subsidiaries, were included in the consolidated income tax group of SMF, while
LTRI separately filed its own income tax returns. Subsequent to the
Distribution, the French C&S subsidiaries are no longer included in the
consolidated income tax group of SMF, and LTRI will continue to separately file
its own income tax returns. Income tax expense and deferred income tax assets
and liabilities attributable to these operations in the consolidated and
separate filings 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.
Employee Benefits
Prior to the Distribution, most U.S. and Canadian employees of the Company
participated in employee benefit plans, including pension, savings, medical and
dental insurance, disability and other plans administered by Kimberly-Clark and
its Canadian subsidiaries. The Company was charged for its portion of the costs
of such plans, but Kimberly-Clark generally recorded the associated assets and
liabilities, with the exception of postretirement benefits other than pensions,
and did not allocate them to the Company. Subsequent to the Distribution, the
Company established substantially all the same employee benefit plans as those
previously provided by Kimberly-Clark. In connection with the Distribution,
Kimberly-Clark retained the employee benefit obligations for the Company's
retired participants as of the Distribution Date, and the Company assumed the
benefit obligations for its active employees. As a result, certain of the
Company's employee benefit liabilities were adjusted as of the Distribution
Date. The net amount of such assets and liabilities transferred in connection
with the Distribution was not significant.
Stock Compensation
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
("APB") Opinion No. 25. The Company has elected to continue to measure
compensation cost for stock options based on the intrinsic
36
37
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
value method under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (See Note 8). Payments in the form of shares of the Company made to
third parties are recorded at fair value based on the market value of the
Company's common stock at the time of payment.
Environmental Spending
Environmental spending related to current operations which qualifies as
property, plant and equipment, substantially increases the economic value or
extends the useful life of an asset is capitalized. All other such spending is
expensed as incurred. Environmental spending relating to an existing condition
caused by past operations is expensed. Liabilities are recorded 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.
New Accounting Standards
In June 1997, the FASB issued two new statements, SFAS No. 130, "Reporting
of Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which will both be effective for the
Company's 1998 Annual Report to Stockholders. These two new statements will
affect the Company's financial statement disclosures. The Company is evaluating
how to implement these new disclosure requirements.
NOTE 4. SUPPLEMENTAL DISCLOSURES
Supplemental Balance Sheet Data
AS OF DECEMBER 31,
------------------
1997 1996
------ ------
Summary of Accounts Receivable:
Trade..................................................... $45.3 $53.1
Other..................................................... 12.1 12.5
Less allowances for doubtful accounts and sales
discounts.............................................. (0.4) (0.5)
----- -----
Total............................................. $57.0 $65.1
===== =====
AS OF DECEMBER 31,
------------------
1997 1996
------ ------
Summary of Inventories by Major Class:
At the lower of cost on the First-In, First-Out (FIFO) and
weighted average methods or market:
Raw materials.......................................... $20.1 $19.7
Work in process........................................ 11.3 10.4
Finished goods......................................... 21.4 16.3
Supplies and other..................................... 9.7 10.0
----- -----
62.5 56.4
Excess of FIFO cost over Last-In, First-Out (LIFO)
cost.................................................. (6.2) (7.2)
----- -----
Total............................................. $56.3 $49.2
===== =====
Total inventories included $31.3 and $27.9 of inventories subject to the
LIFO method of valuation at December 31, 1997 and 1996, respectively. If LIFO
inventories had been valued at FIFO cost, net income would have been decreased
by $0.6 in 1997, decreased by $1.4 in 1996 and increased by $1.3 in 1995.
37
38
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AS OF DECEMBER 31,
------------------
1997 1996
------ ------
Summary of Accrued Expenses:
Accrued salaries, wages and employee benefits............... $22.2 $22.9
Other accrued expenses...................................... 20.8 19.6
----- -----
Total............................................. $43.0 $42.5
===== =====
Analysis of Allowances for Doubtful Accounts and Sales Discounts:
BALANCE AT WRITE-OFFS BALANCE
BEGINNING CHARGED TO AND AT END OF
OF PERIOD EXPENSES DISCOUNTS PERIOD
---------- ---------- ---------- ----------
AS OF DECEMBER 31, 1997
Allowances for doubtful accounts....................... $0.5 $ -- $0.1 $0.4
Allowances for sales discounts......................... -- 0.2 0.2 --
---- ---- ---- ----
Total........................................ $0.5 $0.2 $0.3 $0.4
==== ==== ==== ====
AS OF DECEMBER 31, 1996
Allowances for doubtful accounts....................... $0.5 $ -- $ -- $0.5
Allowances for sales discounts......................... -- 0.1 0.1 --
---- ---- ---- ----
Total........................................ $0.5 $0.1 $0.1 $0.5
==== ==== ==== ====
AS OF DECEMBER 31, 1995
Allowances for doubtful accounts....................... $0.3 $0.2 $ -- $0.5
Allowances for sales discounts......................... -- 0.1 0.1 --
---- ---- ---- ----
Total........................................ $0.3 $0.3 $0.1 $0.5
==== ==== ==== ====
Supplemental Cash Flow Information
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
Interest paid to non-affiliated companies................... $ 4.2 $ 4.4 $ 2.9
Interest capitalized........................................ 0.5 0.4 0.2
Income taxes paid(1)........................................ 17.7 17.5 7.1
Increase (decrease) in cash and cash equivalents due to
exchange rate changes..................................... $(2.5) $(0.7) $ 0.1
- ---------------
(1) Amounts for 1995 represent income taxes paid by LTRI. In 1995 subsequent to
the Distribution, SWM and SM-Canada paid no income taxes. Prior to the
Distribution, the Businesses' U.S. and Canadian operations were divisions of
U.S. and Canadian corporations, respectively. Income tax payments related to
these divisions are not included in the amounts presented, because such
payments are not separately identifiable. Had income tax payments been made
equivalent to the current portions of the income tax provisions reflected in
the accompanying financial statements for these divisions, such payments
would have been $6.9 in 1995. The SMF consolidated tax group paid only
nominal amounts of minimum required income taxes in all periods presented
due to the net operating loss carryforwards retained in the Distribution.
38
39
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 5. DEBT
On November 27, 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 $63 at December 31, 1997 and $72 at December 31, 1996) 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 five-year term loan to SMF in the amount of 250 million French
francs (or approximately $42 at December 31, 1997 and $48 at December 31, 1996)
(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 $21 at December 31, 1997 and $24 at
December 31, 1996) (the "French Revolving Credit Facility"). Borrowings under
the French Credit Facility are guaranteed by the Company. The U.S. Credit
Facility consists of a five-year 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 Facilities"). The Revolving Credit Facilities
were renewed to extend the facilities to November 23, 1998. Loans under each of
the Term Loan Facilities are payable in three equal semi-annual installments
beginning four years following the making of the term loans thereunder.
The interest rates under the Term Loan Facilities are 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 Credit Agreement)
plus (ii) the London interbank offered rate ("LIBOR"), or (b) an alternate base
rate. The interest rates under the Revolving Credit Facilities are based, at the
election of the Company, on either (a) the sum of (i) 0.200 percent per annum
plus (ii) LIBOR, or (b) an alternate base rate.
The 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 Credit Agreement). Events of default under
the 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.
On the Distribution date, the Company in the U.S. assumed $25.0 of
Kimberly-Clark debt, which it repaid with borrowings of the full amount under
the U.S. Term Loan Facility. In France, SMF retained $10.8 of Kimberly-Clark
debt outstanding which related to the French C&S operations of Kimberly-Clark.
In addition and immediately prior to the Distribution, SMF made a cash payment
to Kimberly-Clark of approximately $56, principally financed by borrowings of
the full amount by SMF under the French Term Loan Facility.
In January 1996, the Company entered into a six month interest rate hedge
agreement related to its French Term Loan Facility having a total notional
principal amount of 250 million French francs to fix the LIBOR rate at 4.4
percent, beginning July 30, 1996 and ending January 30, 1997. In December 1996,
the Company entered into a new interest rate hedge agreement to fix the LIBOR
rate at approximately 3.5 percent on a notional principal amount of 170 million
French francs (or approximately $28 at December 31, 1997 and $32 at December 31,
1996) beginning January 30, 1997 and ending January 30, 1998. In December 1997,
the Company entered into a new interest rate hedge agreement to fix the LIBOR
rate at approximately 3.9 percent on a notional principal amount of 250 million
French francs beginning January 30, 1998 and ending July 30,
39
40
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
1998 and at approximately 4.1 percent on the same notional principal amount
beginning July 30, 1998 and ending January 30, 1999.
In January 1996, the Company entered into a six month interest rate hedge
agreement related to its U.S. Term Loan Facility having a total notional
principal amount of $25.0 to fix the LIBOR rate at 5.0 percent, beginning July
30, 1996 and ending January 30, 1997. In October 1996, the Company entered into
a new interest rate hedge agreement for the same notional amount to fix the
LIBOR rate at 6.1 percent beginning January 30, 1997 and ending January 30,
1998. In September 1997, the Company entered into a new interest rate hedge
agreement for the same notional amount to fix the LIBOR rate at 5.9 percent
beginning January 30, 1998 and ending July 30, 1998.
The effective interest rates on the Term Loan Facilities at December 31,
1997 and 1996 for France were 3.8 percent and 4.8 percent, respectively, and for
the U.S. were 6.4 percent and 5.4 percent, respectively.
At both December 31, 1997 and 1996, long-term debt other than the Term
Loans 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 and 5.8 percent as of December 31,
1997 and 1996, respectively) and are generally payable in the fifth year
subsequent to the year the profit sharing is accrued.
Following are the balances for these long-term debt obligations as of
December 31:
1997 1996
----- -----
French Term Loan............................................ $41.8 $47.7
U.S. Term Loan.............................................. 25.0 25.0
French Employee Profit Sharing.............................. 15.0 15.5
Other....................................................... 1.5 1.3
----- -----
83.3 89.5
Less current portion........................................ (2.5) (2.9)
----- -----
$80.8 $86.6
===== =====
Following are the scheduled maturities for these long-term debt obligations
as of December 31, 1997:
1998........................................................ $ 2.5
1999........................................................ 25.6
2000........................................................ 47.6
2001........................................................ 3.1
2002........................................................ 4.0
Thereafter.................................................. 0.5
-----
$83.3
=====
At December 31, 1997, the French and the U.S. operations of the Company had
approximately $21 and $15.0, respectively of Revolving Credit Facilities. These
facilities, which were unused at December 31, 1997, permit borrowing at
competitive interest rates and are available for general corporate purposes. The
Company pays commitment fees on the unused portion of these facilities at an
annual rate of .10 percent and may cancel the facilities without penalty at any
time prior to their expiration at November 23, 1998.
The Company also had another bank credit facility available in the U.S. of
$5.0, none of which was outstanding at December 31, 1997. Additionally, SMF had
approximately $8 of other bank credit facilities available, of which $0.5 was
outstanding at December 31, 1997. No commitment fees are paid on the unused
portion of these facilities.
40
41
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
At December 31, 1997 and 1996, 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.
In early February 1998, the Company completed two previously announced
acquisitions (see Note 16). In anticipation of these, the Company modified its
existing Credit Agreement in order to ensure sufficient funds for the
transactions and to retain availability of funds sufficient to meet its ongoing
cash requirements. The terms of the Amended and Restated Credit Agreement
entered into on January 30, 1998 are substantially the same as the prior Credit
Agreement, except that it (i) provides an additional $20.0 term loan to SM-
Spain, (ii) extends the maturities of the Term Loan Facilities by approximately
two years, and (iii) extends the expiration date of the Revolving Credit
Facilities to January 29, 1999.
NOTE 6. INCOME TAXES
An analysis of the provision (benefit) for income taxes for the years ended
December 31, 1997, 1996, and 1995 follows:
1997 1996 1995
------ ----- -----
Current income taxes:
U.S. Federal.............................................. $ 3.8 $ 4.9 $ 5.2
U.S. State................................................ 0.7 0.9 1.2
Canada and France......................................... 14.2 11.6 11.3
------ ----- -----
18.7 17.4 17.7
------ ----- -----
Deferred income taxes:
U.S. Federal.............................................. 1.5 1.2 (1.7)
U.S. State................................................ 0.3 0.2 (0.4)
Canada and France......................................... 8.1 7.2 2.0
------ ----- -----
9.9 8.6 (0.1)
------ ----- -----
Total............................................. $ 28.6 $26.0 $17.6
====== ===== =====
Income before income taxes included income of $63.5 in 1997, $51.8 in 1996,
and $43.3 in 1995 from operations outside the U.S.
A reconciliation of income tax 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, 1997, 1996 and 1995:
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax at U.S. statutory rate...................... $27.8 35.0% $24.5 35.0% $20.5 35.0%
State income taxes, net of federal tax
benefit....................................... 0.6 0.8 0.7 1.0 0.8 1.4
Statutory rates outside the U.S. (less than) in
excess of U.S. statutory rate................. 4.2 5.3 0.7 1.0 0.5 0.9
French income tax rate increase -- deferred
benefit....................................... (2.0) (2.6) -- -- (4.5) (7.7)
Change in French tax law........................ (2.1) (2.6) -- -- -- --
Other -- net.................................... 0.1 0.1 0.1 0.2 0.3 0.5
----- ---- ----- ---- ----- ----
Provision for income taxes...................... $28.6 36.0% $26.0 37.2% $17.6 30.1%
===== ==== ===== ==== ===== ====
The provision for income taxes in 1997 was impacted by an increase in the
effective statutory income tax rate enacted in France in November 1997 from
36.67 percent to 41.67 percent for 1997 and 1998, retroactive
41
42
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
to January 1, 1997, and to 40.00 percent for 1999. The unfavorable effect on
current taxes of the tax rate increase, including a retroactive adjustment for
the eleven-month period ended November 30, 1997, was offset by the favorable
effect on the deferred provision for income taxes due to the increased value of
the tax benefits to be recognized from the net operating loss carryforwards
retained by SMF estimated to be realized during 1997, 1998 and 1999, the periods
of the higher income tax rates. The impact in 1997 attributable to deferred tax
assets, net of liabilities, was a favorable $2.0 on the deferred provision for
income taxes. Also impacting the 1997 provision for income taxes was the
enactment in France in December 1997 of a law that eliminated taxation of a
"provision for the fluctuating value of raw materials" that had been included in
French deferred taxes. Cancellation of this deferred tax liability reduced the
provision for income taxes by $2.1.
The provision for income taxes was higher in 1996 and lower in 1995
primarily due to an increase in the effective statutory income tax rate enacted
in France in July 1995 from 33.33 percent to 36.67 percent, retroactive to
January 1, 1995. The net effect of the tax rate increase was favorable for 1995
because it increased the value of the tax benefits to be recognized from the net
operating loss carryforwards retained by SMF. The impact in 1995 attributable to
deferred tax assets, net of liabilities, was a favorable $4.5 on the deferred
provision for income taxes, partially offset by an unfavorable impact on the
current provision for income taxes of $1.3, including a retroactive adjustment
for the six-month period ended June 30, 1995.
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, 1997 and 1996
are comprised of the following:
1997 1996
------ ------
Current deferred income tax assets attributable to:
Inventories............................................... $ (1.1) $ (1.0)
Postretirement and other employee benefits................ 2.4 2.3
Other accrued liabilities................................. 2.3 1.9
Other..................................................... (0.3) 0.1
------ ------
Net current deferred income tax asset............. $ 3.3 $ 3.3
====== ======
Net noncurrent deferred income tax assets attributable to:
Operating and capital loss carryforwards.................. $ 60.6 $ 73.6
Accumulated depreciation.................................. (24.7) (22.0)
Other..................................................... (1.1) (3.3)
Valuation allowances...................................... (16.4) (18.1)
------ ------
Net noncurrent deferred income tax asset.......... $ 18.4 $ 30.2
====== ======
Net noncurrent deferred income tax liabilities attributable
to:
Accumulated depreciation.................................. $(17.2) $(16.0)
Postretirement and other employee benefits................ 8.0 7.2
Other..................................................... (2.0) (0.7)
------ ------
Net noncurrent deferred income tax liability...... $(11.2) $ (9.5)
====== ======
42
43
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
In the above presentation, the net noncurrent deferred income tax assets
relate to the French tax jurisdiction, and the net noncurrent deferred income
tax liabilities relate to the U.S. and Canadian tax jurisdictions. Total
deferred income tax assets were $56.9 and $67.0 at December 31, 1997 and 1996,
respectively. Total deferred income tax liabilities were $46.4 and $43.0 at
December 31, 1997 and 1996, respectively.
Under French tax law, the net operating losses incurred through December
31, 1994 by the previously discussed C&S operations in France (see Note 1) were
retained by SMF as of January 1, 1995. For the financial statements presented,
the tax benefits from these net operating losses were recorded as a noncurrent
deferred income tax asset and as a contribution to additional paid-in capital on
the balance sheet in the year such losses arose.
The following summarizes the changes in French net operating loss
carryforwards ("NOL's") and the related noncurrent deferred income tax asset and
valuation allowance for the years ended December 31, 1997, 1996 and 1995:
TOTAL VALUATION NET
NOL'S ASSET ALLOWANCE ASSET
------ ----- --------- -----
Amount at December 31, 1994........................... $179.8 $59.9 $ -- $59.9
French income tax rate increase....................... -- 6.0 -- 6.0
Increase related to spin-off.......................... 11.4 4.2 (4.2) --
1995 utilization...................................... (19.0) (7.0) -- (7.0)
Currency translation effect........................... 17.8 6.6 -- 6.6
------ ----- ------ -----
Amount at December 31, 1995........................... 190.0 69.7 (4.2) 65.5
Increase related to filing of 1995 French tax
returns............................................. 40.9 15.0 (15.0) --
1996 utilization...................................... (18.6) (6.8) -- (6.8)
Currency translation effect........................... (11.6) (4.3) 1.1 (3.2)
------ ----- ------ -----
Amount at December 31, 1996........................... 200.7 73.6 (18.1) 55.5
Decrease related to filing of 1996 French tax
returns............................................. (1.4) (0.5) -- (0.5)
French income tax rate increase....................... -- 2.6 (0.5) 2.1
1997 utilization...................................... (14.8) (6.2) -- (6.2)
Currency translation effect........................... (24.3) (8.9) 2.2 (6.7)
------ ----- ------ -----
Amount at December 31, 1997........................... $160.2 $60.6 $(16.4) $44.2
====== ===== ====== =====
The 1995 French income tax rate increase effect of $6.0 on the deferred
income tax asset shown above was partially offset by the effect on the French
entities' net deferred income tax liabilities related to other items in arriving
at the net effect of $4.5 on the deferred provision for income taxes previously
mentioned. The valuation allowance of $4.2 was recorded to offset deferred
income tax assets arising from additional tax loss carryforwards of $11.4
generated in 1995 related to the Distribution transactions. In addition, the
Company's 1995 French income tax returns, filed in April 1996, included tax net
loss carryforward amounts which were $40.9 greater than those which had
previously been reflected on the Company's balance sheet. Thus, the Company
recorded $15.0 of additional deferred tax assets in 1996. There is uncertainty,
however, whether the benefit of these additional amounts will ultimately be
realized by the Company. Accordingly, an additional valuation allowance of $15.0
was recorded to fully offset the additional deferred tax asset, resulting in no
impact on net income for the year ended December 31, 1996.
In April 1997, upon filing the Company's 1996 French income tax returns, an
adjustment was recorded for an additional $1.4 of 1996 NOL utilization. The
offset was a reduction to current income taxes payable related to 1996. The 1997
French income tax rate increase effect of $2.1 on the net deferred income tax
asset shown above was slightly offset by the effect on the French entities' net
deferred income tax liabilities related
43
44
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
to other items in arriving at the net effect of $2.0 on the deferred provision
for income taxes previously mentioned. The effect of the income tax rate
increase on the valuation allowance relates to the increased value of the gross
NOL's for which it is more likely than not that such benefits will not be
realized. To the extent that the asset related to those NOL's increased, the
valuation allowance was increased by the same amount.
Of the $160.2 of NOL's still available at December 31, 1997, $25.7 and
$26.7 will expire in 1998 and 1999, respectively, if not utilized against
taxable income. The remaining $107.8 of NOL's have no expiration date. Although
not assured, PdM and PdMal are expected to generate taxable income in the
future, as they have in the past, in amounts sufficient to permit utilization of
most of the NOL's prior to their expiration. In addition, the Company intends to
elect to include the newly acquired French entities (see Note 16) in the SMF
consolidated tax group, although this will not be effective until January 1,
1999 because of French income tax rules. After the effects of the increased
French income tax rates and currency exchange rate changes during the year,
valuation allowances totaled $16.4 as of December 31, 1997, reducing the net
asset to an amount which is estimated can be realized through utilization of the
NOL's by the SMF consolidated income tax group. 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 period.
The SMF consolidated tax group has not paid income taxes, except nominal
amounts related to minimum required income taxes, in the periods presented in
the financial statements and is not expected to pay income taxes until the NOL's
are utilized.
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. The tax
claim against PdM by the French taxing authority is $1.9 as of December 31,
1997, including penalties for "abuse of the law" and late payment. A recent
court decision has held that another purchaser of the bonds was not liable for
"abuse of the law", thus eliminating that portion of the claim. The amount of
penalties related to "abuse of the law" included in the tax claim against PdM is
approximately $0.8. If the same decision were applied to the tax claim against
PdM, PdM's exposure as of December 31, 1997 would be reduced to approximately
$1.1. The Company is vigorously defending the claim based on the merits and has
filed claims against each 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 May 1996 and the Company has appealed this decision. In December
1997, the case against the other bank was stayed until the claim filed by the
French taxing authority against PdM has been resolved. A reserve of $1.0 was
established for this tax claim against PdM during the fourth quarter of 1997.
Based on information currently available, there exists a reasonable possibility
of an unfavorable outcome for this claim. Since the claim relates to a period
prior to PdM joining the consolidated tax group, any unfavorable outcome could
not be offset with the NOL's of the SMF consolidated tax group.
44
45
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 7. POSTRETIREMENT AND OTHER BENEFITS
North American Pension Benefits
Prior to the Distribution, substantially all of the U.S. and Canadian
employees of the Company were covered by defined benefit pension plans and
participated in pension plans covering employees of Kimberly-Clark and its
Canadian subsidiaries at various locations. The portion of Kimberly-Clark's and
its Canadian subsidiaries' pension costs attributable to the Company's U.S. and
Canadian employees and reflected in the accompanying income statements was $1.5
for the eleven months ended November 30, 1995.
Subsequent to the Distribution, the Company and its subsidiary in Canada
established defined benefit retirement plans covering substantially all
full-time employees. Retirees of the Company prior to the Distribution remained
participants of their respective Kimberly-Clark plans. Retirement benefits are
based on years of service and generally on the average compensation earned in
the highest five of the last 15 years of service, essentially the same as the
plans in which the employees had participated under Kimberly-Clark. Employees
retained credit for prior service while employees of Kimberly-Clark. 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 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, 1997 and 1996, and for the one month ended December 31, 1995
(subsequent to the Distribution), using estimated amounts related to assets to
be transferred to the Company's plans from Kimberly-Clark's plans as well as
estimates related to return on plan assets for the respective periods, were as
follows:
1997 1996 1995
---- ---- ----
Benefits earned............................................. $2.1 $2.3 $0.2
Interest on projected benefit obligation.................... 3.6 3.4 0.3
Amortizations and other..................................... -- 0.2 --
---- ---- ----
5.7 5.9 0.5
Less expected return on plan assets (actual return on plan
assets was a gain of $6.1, $5.2 and $0.3 in 1997, 1996 and
1995, respectively)....................................... 3.9 3.2 0.3
---- ---- ----
Net pension expense......................................... $1.8 $2.7 $0.2
==== ==== ====
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 1997, 1996 and 1995. Transition adjustments for these plans
are being amortized on the straight-line method over 14 to 18 years.
45
46
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The funded status of the U.S. employee plans as of December 31, 1997 and
1996 are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
PLANS IN WHICH PLANS IN WHICH
------------------------- -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
Actuarial present value of benefit
obligations:
Vested........................... $(32.6) $(1.0) $(32.1) $(1.0)
Nonvested........................ (7.1) (0.4) (1.3) --
------ ----- ------ -----
Accumulated benefit
obligation.................. (39.7) (1.4) (33.4) (1.0)
Effects of projected future
compensation levels......... (12.0) (1.2) (10.8) (0.4)
------ ----- ------ -----
Projected benefit
obligation.................. (51.7) (2.6) (44.2) (1.4)
Plan assets at fair value............. 45.1 -- 39.3 --
------ ----- ------ -----
Plan assets less than projected
benefit obligation................. (6.6) (2.6) (4.9) (1.4)
Unrecognized net loss (gain).......... 2.9 0.6 2.8 (0.4)
Unamortized transition adjustments.... 0.1 0.1 0.1 0.1
Unamortized prior service costs....... -- -- -- 0.1
------ ----- ------ -----
Net accrued pension cost.............. $ (3.6) $(1.9) $ (2.0) $(1.6)
====== ===== ====== =====
The discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the U.S. employee plans were 7.25 percent and
7.75 percent at December 31, 1997 and 1996, respectively. The assumed long-term
rates of compensation increases used to determine the projected benefit
obligations for these plans were 4.0 percent for both December 31, 1997 and
1996.
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 $1.1,
$1.0 and $0.9 for the years ended December 31, 1997, 1996 and 1995,
respectively. The assumed long-term rates of return on pension assets for
purposes of pension expense recognition for the French plans were 8.0 percent
for each of the years 1997, 1996 and 1995. Transition adjustments for these
plans are being amortized on the straight-line method over 19 to 20 years.
The Company's prepaid pension cost for the French plans whose assets
exceeded accumulated benefits was $0.3 and $0.6 at December 31, 1997 and 1996,
respectively. The Company's accrued pension cost for the French plans whose
accumulated benefits exceeded assets was $2.0 and $1.2 at December 31, 1997 and
1996, respectively. The discount rate used to determine the projected benefit
obligation and accumulated benefit obligation for the French plans was 8.0
percent at both December 31, 1997 and 1996. The assumed long-term
46
47
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
rates of compensation increases used to determine the projected benefit
obligation for these plans were approximately 4.0 percent at both December 31,
1997 and 1996.
Postretirement Health Care and Life Insurance Benefits
Prior to the Distribution, substantially all U.S. and Canadian retired
employees of the Company were covered by unfunded health care and life insurance
benefit plans of Kimberly-Clark or its Canadian subsidiaries. Eligibility for
such benefits was based on years of service and age at retirement. The plans
were principally noncontributory for current retirees, and were contributory for
most future retirees. The portion of Kimberly-Clark's and its Canadian
subsidiaries' postretirement health care and life insurance benefits costs
attributable to the Company's employees and reflected in the accompanying income
statements was $1.5 for the eleven months ended November 30, 1995.
Subsequent to the Distribution, the Company and its subsidiary in Canada
established unfunded health care and life insurance benefit plans which will
cover substantially all future retirees of the Company. Retirees of the
Businesses prior to the Distribution remained participants of their respective
Kimberly-Clark plans. Eligibility for benefits under the Company's plans is
based on years of service and age at retirement, essentially the same as the
plans in which the employees participated under Kimberly-Clark. Employees
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.
The components of U.S. employee postretirement health care and life
insurance benefit costs were as follows for the years ended December 31, 1997
and 1996, and for the one month ended December 31, 1995 (subsequent to the
Distribution):
1997 1996 1995
------ ----- -----
Benefits earned............................................. $ 0.3 $ 0.3 $ --
Interest on accumulated postretirement benefit obligation... 0.5 0.7 0.1
Amortizations and other..................................... (0.4) (0.1) --
------ ----- -----
Net periodic postretirement benefit cost.................... $ 0.4 $ 0.9 $ 0.1
====== ===== =====
The components of the U.S. employee postretirement health care and life
insurance benefit obligation included in other noncurrent liabilities as of
December 31, 1997 and 1996 are as follows:
1997 1996
----- -----
Accumulated postretirement benefit obligation:
Retirees.................................................. $ -- $ --
Fully eligible active plan participants................... 7.1 10.1
Other active plan participants............................ -- --
----- -----
Total............................................. 7.1 10.1
Unrecognized prior service cost............................. 1.1 0.1
Favorable actuarial experience.............................. 6.5 4.2
----- -----
Total accrued postretirement benefit liability.............. 14.7 14.4
Less current portion........................................ -- --
----- -----
Noncurrent portion.......................................... $14.7 $14.4
===== =====
The December 31, 1997 accumulated postretirement benefit obligation for
these plans was determined using an assumed health care cost trend rate of 7.75
percent in 1998, declining to 5.5 percent in 2000 and thereafter. The December
31, 1996 accumulated postretirement benefit obligation was determined using an
47
48
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
assumed health care cost trend rate of 9.375 percent in 1997, declining to 6.00
percent in 2000 and thereafter. Discount rates of 7.25 percent and 7.75 percent
were used to determine the accumulated postretirement benefit obligations at
December 31, 1997 and 1996, respectively.
A one-percentage point increase in the healthcare cost trend rate would
increase accumulated postretirement benefit obligations by $0.1 at December 31,
1997 and would have a nominal effect on postretirement benefit expense for 1997.
Other Benefits
Prior to the Distribution, voluntary contributory investment plans were
provided to substantially all U.S. employees. Under the plans, Kimberly-Clark
matched a portion of employee contributions. The portion of Kimberly-Clark's
costs under the plans attributable to the Company and reflected in the
accompanying income statements was $0.6 for the eleven months ended November 30,
1995.
Subsequent to the Distribution, substantially all U.S. employees have been
given the opportunity to participate in voluntary investment plans. Under the
plans, the Company matches a portion of employee contributions. The Company's
costs under the plan reflected in the accompanying consolidated income
statements for the years ended December 31, 1997 and 1996, and for the one month
ended December 31, 1995 (subsequent to the Distribution), were $1.0, $1.0 and
less than $0.1, respectively. At December 31, 1997 and 1996, 500,000 shares of
the Company's Common Stock were reserved for issuance under these plans, none of
which had been issued as of December 31, 1997. The shares may, at the Company's
option, be used by the Company to satisfy the Company's liability for its
matching contributions.
NOTE 8. STOCKHOLDERS' EQUITY
As explained in Note 1, SWM was not capitalized with the net assets of the
Businesses until immediately before the Distribution. Stockholders' equity,
prior to the Distribution, therefore, consisted of the separately presented
Predecessors' Capital Stock (the historical Common Stock amounts of SMF and
LTRI), the historical combined amounts of paid-in capital and retained earnings
for these corporations (as adjusted to exclude operations unrelated to the
Businesses and to include the benefit of certain French tax net operating loss
carryforwards generated by such businesses) and the combined division equity
amounts of the U.S. and Canadian tobacco-related and other specialty paper
businesses. The latter businesses were part of the operations of Kimberly-Clark
and one of its Canadian subsidiaries, and all aspects of cash management for
such divisions with respect to intercompany sales, receivables, accounts
payable, pensions, taxes, and similar corporate activities were controlled by
Kimberly-Clark and one of its Canadian subsidiaries.
48
49
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The net interdivisional advances and transfers for the period prior to the
Distribution are presented in the "Advances to affiliates" caption in the
following summary of changes in stockholders' equity of the Company and its
predecessors for the years ended December 31, 1997, 1996 and 1995:
COMMON STOCK PREDECESSORS' ADDITIONAL UNREALIZED
------------------- CAPITAL PAID-IN RETAINED DIVISION CURRENCY
SHARES AMOUNT STOCK(1) CAPITAL EARNINGS EQUITY TRANSLATION TOTAL
---------- ------ ------------- ---------- -------- -------- ----------- ------
BALANCE, DECEMBER 31, 1994........ $ 37.2 $ 65.7 $ 69.2 $ 68.0 $ 5.0 $245.1
Net income for the eleven months
ended November 30, 1995....... 26.5 12.9 39.4
Advances to affiliates.......... (2.5) (2.5)
Dividends declared(2)........... (46.8) (46.8)
Return of capital(2)(3)......... (37.1) (56.0) (93.1)
Adjustments due to
translation................... 15.1 15.1
Debt assumed from
Kimberly-Clark(2)............. (25.0) (25.0)
Stock distribution to holders of
Kimberly-Clark stock.......... 16,051,109 $1.6 (0.1) 50.3 -- (53.4) 1.6 --
---------- ---- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 1, 1995......... 16,051,109 1.6 -- 60.0 48.9 -- 21.7 132.2
Net loss for the month ended
December 31, 1995............. (2.6) (2.6)
Adjustments due to
translation................... 0.3 0.3
---------- ---- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1995........ 16,051,109 1.6 -- 60.0 46.3 -- 22.0 129.9
Net income for the year ended
December 31, 1996............. 38.7 38.7
Dividends declared ($0.45 per
share)........................ (7.2) (7.2)
Stock issued to directors as
compensation.................. 1,512 --
Adjustments due to
translation................... (5.4) (5.4)
---------- ---- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1996........ 16,052,621 1.6 -- 60.0 77.8 -- 16.6 156.0
Net income for the year ended
December 31, 1997............. 45.3 45.3
Dividends declared ($0.60 per
share)........................ (9.6) (9.6)
Stock issued to directors as
compensation.................. 1,182 --
Stock issued for options
exercised..................... 11,640 0.3 0.3
Adjustments due to
translation................... (12.5) (12.5)
---------- ---- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1997........ 16,065,443 $1.6 $ -- $ 60.3 $113.5 $ -- $ 4.1 $179.5
========== ==== ====== ====== ====== ====== ====== ======
- ---------------
(1) Changes relate to SMF. The issuances of SWM and SM-Canada stock to
Kimberly-Clark and Kimberly-Clark, Inc. (an indirect wholly-owned Canadian
subsidiary of Kimberly-Clark), respectively, on August 21, 1995 and August
17, 1995, respectively, solely for the purpose of effecting the Distribution
(see Note 1) were nominal amounts and thus are not reflected in the above
summary. $0.1 was attributable to LTRI and was unchanged during all the
periods presented through November 30, 1995.
(2) In connection with the Distribution, the Company paid $56.0 to
Kimberly-Clark as a return of capital, in addition to the debt of
Kimberly-Clark which the Company assumed in the US. ($25.0) and retained in
France ($10.8), as well as a cash dividend from LTRI to Kimberly-Clark on
the Distribution Date of $8.2. The total of these items represents a
distribution of $100.0 to Kimberly-Clark in connection with the spin-off.
(3) Represents contributions to SMF equity by Kimberly-Clark which were, in turn
invested in whole or in part in the French C&S subsidiaries of SMF. The
investments in these subsidiaries have been retroactively reflected in the
accompanying Consolidated Financial Statements as having been distributed to
Kimberly-Clark. Accordingly, these additional C&S investments have been
shown as return of capital distributions to Kimberly-Clark (or as dividends
to the extent the investment exceeded SMF's available common stock amount).
See Note 1.
49
50
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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, 2005,
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.
The Company's Equity Participation Plan (the "Plan"), adopted on October
23, 1995 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 Plan)
of such stock at grant date. Options awarded under the Plan only become
exercisable after specified periods of employment after the grant thereof (30
percent after the first year, 30 percent after the second and the remaining 40
percent after the third year). Generally, such options expire ten years
subsequent to the date of grant.
The Company has adopted the expanded disclosures of SFAS No. 123. The
Company has elected to continue to apply the intrinsic value method of measuring
compensation under APB Opinion No. 25 in accounting for its stock-based
compensation awards to employees. No charge is made against earnings in the
Company's financial statements for employee stock-based compensation awards
under its current Plan. Had compensation cost for the Plan been determined based
on the fair value at the grant date consistent with the
50
51
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1997 1996 1995
----- ----- -----
Net Income:
As reported............................................... $45.3 $38.7 $36.8
Pro forma................................................. $44.3 $37.4 $36.7
Basic net income per share:
As reported............................................... $2.82 $2.41 $1.81
Pro forma................................................. $2.76 $2.33 $1.80
Diluted net income per share:
As reported............................................... $2.77 $2.38 $1.81
Pro forma................................................. $2.71 $2.31 $1.80
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 1997
awards and 32 percent for the 1996 and 1995 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. Certain grants awarded after the spin-off in 1995
were considered modifications of Kimberly-Clark stock options previously held by
employees of the Company. At both December 31, 1997 and 1996, 1,500,000 shares
of the Company's Common Stock were reserved under the Plan. At December 31, 1997
and 1996, there were 724,000 and 800,600 shares available for future awards.
The following stock options were outstanding as of December 31, 1997, 1996
and 1995:
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
Outstanding at beginning of year....... 699,400 $22.0873 598,800 $21.0625 --
Granted.............................. 76,600 32.5436 100,600 28.1875 598,800 $21.0625
Exercised............................ (11,640) 23.5110 -- --
------- ------- -------
Outstanding at end of year............. 764,360 23.1135 699,400 22.0873 598,800 21.0625
======= ======= =======
Options exercisable at end of year..... 381,860 21.6032 179,640 21.0625 None
======= ======= =======
Weighted-average per share fair value
of options granted during the year... $ 12.40 $ 9.13 $ 6.82
======= ======= =======
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
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
- -------------------------------------- ----------- ------------ ---------- ------------ ----------
$21.0625 to $28.1875.................. 687,760 8.0 years $22.0633 381,860 $21.6032
$32.4375 to $34.0625.................. 76,600 9.0 32.5436 --
------- --------
$21.0625 to $34.0625.................. 764,360 8.1 $23.1135 381,860 $21.6032
======= ========
51
52
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 9. RESTRUCTURING CHARGE
In December 1995, the Company announced its decision to exit the U.S.
reconstituted tobacco leaf ("RTL") product line and to restructure operations in
France, which resulted in a one-time restructuring charge against operating
profit in the amount of $7.3 ($5.9 in the U.S. and $1.4 in France).
Approximately $4.7 of the reserve was utilized during 1996 for a non-cash
write-down of assets. The cash charges were primarily for severance related
costs in France and costs of mothballing the equipment of the U.S. RTL
operations. The plan was completed on schedule and the associated restructuring
reserve was closed out at the end of the third quarter, 1996. The Company's
decision to exit the U.S. RTL product line had no impact on the Company's U.S.
wrapper and binder business, its RTL business in France, or the Company's
commitment to reconstituted tobacco worldwide.
During the fourth quarter of 1997, the U.S. RTL production line was
restarted to support the growth of the French RTL business while alternatives
for additional capacity are being considered.
NOTE 10. RELATED PARTY TRANSACTIONS
Prior to the Distribution, Kimberly-Clark was a related party and
subsidiaries of Kimberly-Clark were affiliates. For all periods presented,
Kimberly-Clark and affiliated companies have provided services to and incurred
costs on behalf of the Company. The costs of certain services, including, but
not limited to, property and casualty insurance coverage under the
Kimberly-Clark insurance program, administrative services, management
information services, employee benefits administration, environmental
consultation and administration, central purchasing, transportation services,
tax services, treasury services, accounting and reporting, and the
Kimberly-Clark Equity Participation Plan were allocated to the Businesses for
the period prior to the Distribution and billed to the Company after the
Distribution. The allocations and billings of costs and expenses for these
services were based on methods that management believes are reasonable including
use of time estimates, headcount and transaction statistics, and similar
activity-based data. The actual costs to be incurred by the Company in the
future to replace the services still provided by Kimberly-Clark and affiliated
companies may increase from currently billed amounts due to differences in
scale, organizational structure, management structure and other factors.
The costs allocated and other intercompany and interdivisional transactions
between Kimberly-Clark and affiliated companies and the Company were as follows
for the eleven months ended November 30, 1995 (the period prior to the
Distribution):
1995
-----
Operating expenses (costs for services described above)..... $15.0
Interest expense............................................ 10.4
Interest income............................................. 13.7
Purchases of wood pulp...................................... 13.9
Prior to the Distribution, the Company participated in Kimberly-Clark's and
certain affiliated companies' cash management programs, under which the
Company's cash needs were funded by Kimberly-Clark and certain affiliates
thereof, and the Company's excess cash was transferred to Kimberly-Clark and
such affiliates. In the U.S. and Canada, such advances and transfers prior to
the Distribution are shown as interdivisional transactions and were noninterest
bearing. In France, prior to the Distribution, SMF functioned as a cash
management and financing entity for other Kimberly-Clark affiliates, primarily
in France. The financial statements accordingly reflected affiliate loans, notes
payable, interest income and expense and stockholder's equity transactions to
accomplish Kimberly-Clark financing objectives for the periods prior to the
Distribution.
The Company had sales to the minority shareholder of LTRI of $14.0, $18.4
and $15.0 in 1997, 1996 and 1995, respectively.
52
53
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 11. 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 were primarily related to receivables from
and payables to affiliated companies unrelated to the Businesses prior to the
Distribution. Such losses included in other expense, net were nominal in 1997,
1996 and 1995.
Foreign currency risks arise from transactions and commitments denominated
in non-local currencies. In addition to affiliated company debt, 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 economical 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 18 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 based on the period-end market price of the
instrument.
At December 31, 1997, there were outstanding forward contracts, which were
held for purposes other than trading, maturing at various dates in 1998, to
purchase $4.1 of various foreign currencies. These contracts have not given rise
to any significant net deferred gains or losses as of December 31, 1997.
NOTE 12. 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, 1997 are less
than $1 annually over the next five years. Rental expense under operating leases
was $4.0, $3.9 and $3.9 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Other Commitments
The Company has entered into long-term contracts for the purchase of
certain raw materials. Minimum purchase commitments, at current prices, are
approximately $0.6 in 1998. These purchase commitments are not expected to
result in losses.
The Company has also entered into certain contracts for the purchase of
equipment and related costs in connection with its ongoing capital projects.
These commitments at December 31, 1997 totaled approximately $4.9.
NOTE 13. LEGAL PROCEEDINGS
Under the terms of the Distribution, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Businesses, including the following cases:
- In January 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several
tobacco companies, industry trade associations and consultants, tobacco
53
54
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
wholesalers and cigarette component manufacturers, including
Kimberly-Clark, seeking equitable relief and compensatory and punitive
damages in an unspecified amount for mental suffering and physical
injuries allegedly sustained as a result of having smoked cigarettes. The
nine-count complaint sets forth several theories of liability, including
intentional and negligent misrepresentation, negligence, product
liability, breach of warranty and conspiracy. Among other things, the
complaint alleges that nicotine is an addictive substance, that the
tobacco companies, by using reconstituted tobacco, are able to control the
precise amount of nicotine in their cigarettes and that LTRI specializes
in the reconstitution process to help the tobacco companies control
nicotine levels.
- On February 13, 1998, Cleo Huffman, on behalf of herself and her deceased
husband, filed a complaint in the Circuit Court of Kanawha County, West
Virginia, against several tobacco companies, industry trade associations
and consultants, tobacco wholesalers, Kimberly-Clark, LTRI and others,
seeking equitable relief, $2.0 in compensatory damages and $3.0 in
punitive damages allegedly sustained as a result of the death of her
husband which plaintiff contends was caused by his "addiction" to smoking
Camel cigarettes. The fourteen-count complaint sets forth several theories
of liability, including intentional and negligent misrepresentation,
breach of express and implied warranties, intentional infliction of
emotional distress, product liability, sale of an unreasonably dangerous
product and conspiracy.
As a component supplier, the Company believes that it has meritorious
defenses to each of these cases, but due to the uncertainties of litigation, the
Company cannot predict their outcome. The Company is unable to make a meaningful
estimate of the amount or range of loss which could result from an unfavorable
outcome of these actions. These cases will be vigorously defended.
Also, 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 effect on the
Company's financial statements.
NOTE 14. 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, 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.
Prior to the Distribution, Kimberly-Clark was named a potentially
responsible party ("PRP") under the provisions of the U.S. Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or analogous
state statutes, in connection with two waste disposal sites utilized by the
Company's Spotswood, New Jersey mill and one site used by the Company's former
Mt. Holly Springs, Pennsylvania mill. Prior to the Distribution, the Spotswood
mill also responded to an information request by the New Jersey Department of
Environmental Protection and Energy with respect to another landfill site
allegedly used by the Spotswood mill. The Company has assumed Kimberly-Clark's
liabilities at each of these sites but does not believe that any of these
proceedings will result in the imposition of monetary sanctions or have a
material adverse effect on the Company's business or financial condition.
54
55
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
In December 1997, the Company received notification from the Environmental
Protection Agency ("EPA") that, pursuant to CERCLA, it may be named as a
potentially responsible party in connection with a 1986 shipment of transformer
oil containing polychlorinated biphenyl ("PCB's") for which the Company's Lee
mills had contracted to have transported to a disposal site by a transporter.
The Company expects to be indemnified by the transporter for any liability
connected with such shipment.
The Company assumed responsibility to administer a consent order between
Kimberly-Clark and the Massachusetts Department of Environmental Protection
("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee,
Massachusetts. The Company is obligated to maintain the integrity of the cover
and to sample groundwater by means of monitoring wells, in addition to other
long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Under the terms of a consent order signed on January 24, 1997
with MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
had until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system. Since the passive venting system did not bring the
site into compliance by mid-September 1997, the Company, as required by the
consent order, submitted to MDEP a revised compliance plan which employs an
active gas collection system. The Company expects that the required permits for
such system will be issued in the first quarter of 1998. The Company must
activate the system no later than 120 days after issuance of such permits. The
estimated total cost of such plan, including annual operating expenses, is $0.5,
which amount has been accrued as of December 31, 1997.
All of the Company's U.S. facilities may be affected by revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". Although the EPA originally indicated that the proposed rules
would be finalized in 1996, final rules have just recently been "issued".
However the final rules have not yet been published. The first phase of the
Cluster Rules would affect only wastewater discharges from the Ancram, New York
mill and the Lee mills and would require compliance within three years after the
issuance of the new rules. The Spotswood mill discharges its effluent to a
publicly-owned treatment works. Capital expenditures for compliance with the
first phase of the Cluster Rules at the Ancram and Lee mills are estimated to be
between $4 and $7 in the aggregate. However, due to uncertainty concerning
applicable requirements under the final Cluster Rules, the Company can give no
assurance that this estimate will accurately reflect the actual cost of
compliance. In addition, the later phases of the Cluster Rules (and/or Title V
of the Clean Air Act Amendments of 1990) may further regulate air emissions and
wastewater discharges from the Spotswood mill and require the Company to install
additional air pollution controls at its other U.S. facilities sometime after
the year 2000. Potential capital expenditures to comply with this subsequent
phase of the Cluster Rules and/or Title V of the Clean Air Act Amendments cannot
be estimated until after the EPA proposes applicable requirements, if any.
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 and Canada, including the aforementioned
Cluster Rules. For these purposes, the Company incurred total capital
expenditures of $2.7 in 1997, and anticipates that it will incur approximately
$3 to $5 annually in 1998 and 1999. The major projects included in these
estimates include upgrading wastewater treatment facilities at various locations
and installation of equipment to treat volatile organic compound emissions in
France. Approximately $2 of the total environmental capital spending estimates
for 1998 and 1999 relate to projects anticipated as necessary to comply with the
wastewater discharge requirements of the initial phase of the Cluster Rules. The
balance of expenditures required for compliance with the initial phase of the
Cluster Rules is expected to occur in 2000. 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.
55
56
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 15. BUSINESS SEGMENTS AND GEOGRAPHY
Business Segment Reporting
The Company essentially operates in one business segment, "Tobacco Industry
Products", which consists of tobacco-related papers and reconstituted tobacco
products. The Company's non-tobacco industry products are less than ten percent
of total consolidated net sales.
Consolidated Operations by Geographic Area
For purposes of the geographic disclosure in the following tables, the term
"United States" includes operations in the U.S. and Canada. The Canadian
operations exist solely to produce flax fiber used as raw material in the U.S.
operations and have no material effect on such geographic disclosure.
NET SALES OPERATING PROFIT ASSETS
------------------------ --------------------- ---------------
1997 1996 1995 1997 1996 1995 1997 1996
------ ------ ------ ----- ----- ----- ------ ------
United States...................... $195.5 $212.3 $219.9 $21.2 $23.7 $16.1 $155.4 $143.7
Outside United States.............. 268.8 263.5 251.7 66.4 55.5 44.3 237.6 237.8
------ ------ ------ ----- ----- ----- ------ ------
Subtotal......................... 464.3 475.8 471.6 87.6 79.2 60.4 393.0 381.5
Intergeographic items.............. (3.7) (4.5) (8.7) -- -- -- (2.0) (0.9)
Unallocated items and
eliminations -- net.............. -- -- -- (5.7) (5.2) (1.7) -- --
------ ------ ------ ----- ----- ----- ------ ------
Consolidated............. $460.6 $471.3 $462.9 $81.9 $74.0 $58.7 $391.0 $380.6
====== ====== ====== ===== ===== ===== ====== ======
Intercompany sales of products between geographic areas are made at market
prices and are referred to as intergeographic items. Expense amounts not
associated with geographic areas are referred to as unallocated items. Assets
reported by geographic area represent assets which are directly used and an
allocated portion of jointly used assets. These assets include receivables from
other geographic areas and are referred to as intergeographic items.
NOTE 16. ACQUISITIONS
On February 2, 1998, the Company's wholly-owned subsidiary, 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. Pirahy provides the Company with a manufacturing
facility on a third continent. Pirahy is the largest supplier of tobacco-related
papers to South America. It also produces printing and writing papers as well as
papers for packaging and labeling applications.
In connection with the acquisition of Pirahy, the Company entered into a
bridge loan arrangement with a bank, which was in place at December 31, 1997, in
the amount of $20.0 in order to assure the sellers of its ability to finance the
purchase. Subsequent to December 31, 1997, the Company modified its existing
Credit Agreement to provide an additional $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 the Revolving Credit
Facilities.
Additionally, on February 11, 1998, the Company's second tier subsidiary,
SM-Enterprises paid 37.2 million French francs (approximately $6.1) in cash and
assumed approximately $5.8 in existing 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 and Papeteries de la
Moulasse, located in St. Girons in the southwestern part of France. This
acquisition, while important to the strategic growth of the Company and its
ability to meet the demands of its customers, is not considered material to the
consolidated financial statements.
56
57
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 17. MAJOR CUSTOMER
Net sales to Philip Morris Companies, Inc., together with its affiliates
and designated converters, accounted for $166.6, $165.6 and $165.6, or 36.2
percent, 35.1 percent and 35.8 percent, of total consolidated net sales for the
years ended December 31, 1997, 1996 and 1995, respectively. Accounts receivable
includes balances due from Philip Morris Companies, Inc., together with its
affiliates and designated converters, of $13.2 and $11.5 at December 31, 1997
and 1996, respectively. 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.
NOTE 18. UNAUDITED QUARTERLY FINANCIAL DATA AND COMMON STOCK INFORMATION
The Company's Common Stock trades on the New York Stock Exchange under the
ticker symbol "SWM". As of December 31, 1997, there were 8,673 stockholders of
record of the Company's Common Stock. This number does not include shares held
in "nominee" or "street" name.
1997
-------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------- ------ ------
Net Sales............................................. $113.0 $116.3 $ 113.4 $117.9 $460.6
Gross Profit.......................................... 30.8 33.5 30.3 27.3 121.9
Operating Profit...................................... 21.0 22.9 20.6 17.4 81.9
Net Income............................................ $ 11.3 $ 12.7 $ 11.2 $ 10.1 $ 45.3
Net Income Per Share:
Basic............................................... $ .70 $ .79 $ .70 $ .63 $ 2.82
Diluted............................................. .69 .78 .68 .62 2.77
Cash Dividends Declared and Paid Per Share............ $ .15 $ .15 $ .15 $ .15 $ .60
Market Price:
High................................................ $35 5/8 $40 5/8 $43 21/32 $44 1/2 $44 1/2
Low................................................. 30 1/4 29 7/8 36 9/16 33 29 7/8
Close............................................... $30 1/4 $37 1/2 $42 1/2 $37 1/4 $37 1/4
1996
------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------ ------
Net Sales............................................. $119.8 $117.5 $118.5 $115.5 $471.3
Gross Profit.......................................... 28.8 29.8 28.6 27.0 114.2
Operating Profit...................................... 18.0 19.8 18.8 17.4 74.0
Net Income............................................ $ 9.4 $ 10.5 $ 9.8 $ 9.0 $ 38.7
Net Income Per Share:
Basic............................................... $ .59 $ .65 $ .61 $ .56 $ 2.41
Diluted............................................. .58 .65 .60 .55 2.38
Cash Dividends Declared and Paid Per Share............ $ -- $ .15 $ .15 $ .15 $ .45
Market Price:
High................................................ $28 7/8 $28 3/4 $33 1/2 $33 5/8 $33 5/8
Low................................................. 22 3/4 25 5/8 27 1/2 28 7/8 22 3/4
Close............................................... $27 1/2 $28 1/8 $33 1/2 $31 5/8 $31 5/8
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58
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, 1997
and 1996, and the related consolidated statements of income and cash flow for
the years ended December 31, 1997, 1996 and 1995. 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 generally-accepted auditing
standards. 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 consolidated financial position of Schweitzer-Mauduit
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Atlanta, Georgia
January 23, 1998 (February 11, 1998 as to Note 16 and
February 13, 1998 as to the third paragraph of Note 13)
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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 generally accepted accounting principles 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, independent audits, and the establishment of an Audit
Committee of the Board of Directors which oversees the financial reporting
process. As part of that responsibility, the Audit Committee recommended to the
Board of Directors the selection of the Company's independent public
accountants, 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 23, 1998
59
60
PART II, CONTINUED
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
60
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section of the Company's Proxy Statement dated March 13, 1998 (the
"1998 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 1998 Proxy Statement captioned
"Executive Compensation" under "Proposal 1. Election of Directors" 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 1998 Proxy Statement captioned
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Holders" under "Proposal 1. Election of Directors" is incorporated in this Item
12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section captioned "Certain Transactions and Business
Relationships" under "Proposal 1. Election of Directors" of the 1998 Proxy
Statement is incorporated in this Item 13 by reference.
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62
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
(i) The Company filed a Current Report on Form 8-K dated November 14,
1997, which reported the impact on the Company of higher corporate income
tax rates enacted in France.
(ii)The Company filed a Current Report on Form 8-K dated December 17,
1997, which reported the Company's agreement to acquire a controlling
interest in Companhia Industrial de Papel Pirahy, a Brazilian specialty
paper manufacturer.
62
63
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. DIETRICH
---------------------------------------
Wayne H. Deitrich
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
Dated: March 6, 1998
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. DIETRICH Chairman of the Board and Chief March 6, 1998
- ----------------------------------------------------- Executive Officer
Wayne H. Deitrich (principal executive officer)
/s/ PAUL C. ROBERTS Chief Financial Officer March 6, 1998
- ----------------------------------------------------- and Treasurer
Paul C. Roberts (principal financial officer)
/s/ WAYNE L. GRUNEWALD Controller March 6, 1998
- ----------------------------------------------------- (principal accounting
Wayne L. Grunewald officer)
* Director March 6, 1998
- -----------------------------------------------------
Claire L. Arnold
* Director March 6, 1998
- -----------------------------------------------------
K.C. Caldabaugh
* Director March 6, 1998
- -----------------------------------------------------
Laurent G. Chambaz
* Director March 6, 1998
- -----------------------------------------------------
Richard D. Jackson
* Director March 6, 1998
- -----------------------------------------------------
Leonard J. Kujawa
* Director March 6, 1998
- -----------------------------------------------------
Jean-Pierre Le Hetet
* Director March 6, 1998
- -----------------------------------------------------
Larry B. Stillman
*By: /s/ WILLIAM J. SHARKEY March 6, 1998
-------------------------------------------------
William J. Sharkey
Attorney-In-Fact
63
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (incorporated by reference
to Exhibit 4.1 to Form 10/A Amendment 2, dated October 27,
1995).
4.2 -- Rights Agreement (incorporated by reference to Exhibit 4.2
to Form 10/A Amendment 2, dated October 27, 1995).
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 -- Corporate Services Agreement (incorporated by reference to
Exhibit 10.2 to Form 10/A Amendment 2, dated October 27,
1995).
10.3 -- Employee Matters Agreement (incorporated by reference to
Exhibit 10.3 to Form 10/A Amendment 2, dated October 27,
1995).
10.4 -- Tax Sharing Agreement (incorporated by reference to Exhibit
10.4 to Form 10/A Amendment 2, dated October 27, 1995).
10.5 -- Outside Directors' Stock Plan (incorporated by reference to
Exhibit 10.5 to Form 10/A Amendment 2, dated October 27,
1995).
10.6.1 -- Annual Incentive Plan as Amended and Restated (incorporated
by reference to Exhibit 10.6 to the Company's Form 10-K for
the year ended December 31, 1995).
10.6.2 -- Amendments to the Annual Incentive Plan dated December 5,
1996 (incorporated by reference to Exhibit 10.6.2 to the
Company's Form 10-K for the year ended December 31, 1996).
10.7.1 -- Equity Participation Plan (incorporated by reference to
Exhibit 10.7 to Form 10/A Amendment 2, dated October 27,
1995).
10.7.2 -- First Amendment to Equity Participation Plan (incorporated
by reference to Exhibit 10.7.2 to the Company's Form 10-K
for the year ended December 31, 1995).
10.8.1 -- Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.8 to Form 10/A Amendment 2, dated October 27,
1995).
10.8.2 -- First Amendment to Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K for
the year ended December 31, 1995).
10.8.3 -- Amendment to Long-Term Incentive Plan dated December 5, 1996
(incorporated by reference to Exhibit 10.8.3 to the
Company's Form 10-K for the year ended December 31, 1996).
64
65
INDEX TO EXHIBITS -- CONTINUED
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.9.1 -- Philip Morris Supply Agreement+ (incorporated by reference
to Exhibit 10.9.1 to Form 10/A Amendment 2, dated October
27, 1995).
10.9.2 -- Amendment No. 1 to Philip Morris Supply Agreement
(incorporated by reference to Exhibit 10.9.2 to Form 10,
dated September 12, 1995).
10.9.3 -- Amendment No. 2 to Philip Morris Supply Agreement+
(incorporated by reference to Exhibit 10.9.3 to the
Company's Form 10-K for the year ended December 31, 1996).
10.9.4 -- Amendment No. 3 to Philip Morris Supply Agreement
(incorporated by reference to Exhibit 10 to the Company's
Form 10-Q dated August 11, 1997).
10.9.5* -- Amendment No. 4 to Philip Morris Supply Agreement.
10.10.1 -- Supplemental Benefit Plan (incorporated by reference to
Exhibit 10.10 to Form 10/A Amendment 2, dated October 27,
1995).
10.10.2 -- First Amendment to Supplemental Benefit Plan (incorporated
by reference to Exhibit 10.10.2 to the Company's Form 10-K
for the year ended December 31, 1995).
10.11 -- Amended and Restated Executive Severance Plan as of February
27, 1997 (incorporated by reference to Exhibit 10.11 to the
Company's Form 10-K for the year ended December 31, 1996).
10.12.1 -- Credit Agreement dated as of November 27, 1995, between the
Company, as Borrower and Guarantor, SMF, as Borrower, PdM
Industries, as Borrower, the Banks named therein and Societe
Generale, as Agent (the "Credit Agreement") (incorporated by
reference to Exhibit 4 to the Company's Form 10-Q dated
December 13, 1995).
10.12.2 -- Amendment No. 1 to Credit Agreement (incorporated by
reference to Exhibit 10.12.2 to the Company's Form 10-Q
dated December 13, 1996).
10.12.3* -- Amendment No. 2 to Credit Agreement dated November 24, 1997.
21.1* -- Subsidiaries of the Company.
23.1* -- Independent Auditors' Consent.
24.1* -- Powers of Attorney.
27.1* -- Financial Data Schedule (for SEC use only).
- ---------------
* Filed herewith.
+ Exhibit has been redacted pursuant to a Confidentiality Request under Rule
24(b)-2 of the Securities Exchange Act of 1934.
65
66
BOARD OF DIRECTORS OFFICERS
CLAIRE LEWIS ARNOLD(1,2) WAYNE H. DEITRICH
Private Investor Chairman of the Board and
Former Chief Executive Officer, NCC Chief Executive Officer
L.P. WILLIAM R. FOUST
K.C. CALDABAUGH(1,3) Vice President -- Administration
Chairman of the Board and WAYNE L. GRUNEWALD
Chief Executive Officer Controller
Brown-Bridge Industries, Inc. JEAN-PIERRE LE HETET
LAURENT G. CHAMBAZ(3) President -- French Operations
Partner RAYMOND NEDELLEC
Chambaz & Suermondt Vice President -- Finance
WAYNE H. DEITRICH PAUL C. ROBERTS
Chairman of the Board and Chief Financial Officer and Treasurer
Chief Executive Officer LUIZ JOSE DE SABOIA E SILVA
Schweitzer-Mauduit International, President -- Brazilian Operations
Inc. WILLIAM J. SHARKEY
RICHARD D. JACKSON(2) General Counsel and Secretary
Retired Vice Chairman N. DANIEL WHITFIELD
First Financial Management President -- U.S. Operations
Corporation
LEONARD J. KUJAWA(1)
Retired Partner
Arthur Andersen LLP
JEAN-PIERRE LE HETET
President -- French Operations
Schweitzer-Mauduit International,
Inc.
LARRY B. STILLMAN(2,3)
Vice President Northwest Group
xpedex
- ---------------
(1) Audit Committee
Chairman -- Leonard J. Kujawa
(2) Compensation Committee
Chairman -- Richard D. Jackson
(3) Nominating Committee
Chairman -- Larry B. Stillman
66
67
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
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
BankBoston N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, MA 02266-8040
Phone -- 800-730-4001 or 781-575-3170
INDEPENDENT AUDITORS
Deloitte & Touche LLP
100 Peachtree Street, Suite 1700
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 23, 1998, at
11:00 a.m. at the Holiday Inn Hotel,
1075 Holcomb Bridge Road,
Roswell, Georgia.
67
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