-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G0WP/wCLdM8S6yQJNc3gW+UqkdVPB9jYOH4+hin2ZUj/bbxZ8nG0g9+iZ39WZKaq 0Nq1s/b1pwNbL6oWAKK21Q== 0000950144-00-002914.txt : 20000307 0000950144-00-002914.hdr.sgml : 20000307 ACCESSION NUMBER: 0000950144-00-002914 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWEITZER MAUDUIT INTERNATIONAL INC CENTRAL INDEX KEY: 0001000623 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 621612879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13948 FILM NUMBER: 560943 BUSINESS ADDRESS: STREET 1: 100 NORTH POINT CENTER EAST STREET 2: SUITE 600 CITY: ALPHARETTA STATE: GA ZIP: 30022-8246 BUSINESS PHONE: 8005140186 MAIL ADDRESS: STREET 1: 100 NORTH POINT CENTER EAST STREET 2: SUITE 600 CITY: ALPHARETTA STATE: GA ZIP: 30022-8246 10-K 1 SCHWEITZER-MAUDIT INTERNATIONAL, INC. 1 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, 1999 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, 1999, 15,636,888 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 $210 million. (Continued) 1 2 DOCUMENTS INCORPORATED BY REFERENCE Schweitzer-Mauduit International, Inc.'s 2000 Proxy Statement, filed with the Commission dated March 14, 2000, 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 2000 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 - ----------------------------- ----------------------- 2000 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
2 3 PART I ITEM 1. BUSINESS BACKGROUND Schweitzer-Mauduit International, Inc. ("SWM") was incorporated in Delaware on August 21, 1995 as a wholly-owned subsidiary of Kimberly-Clark Corporation ("Kimberly-Clark") for the purpose of effectuating the tax-free spin-off of Kimberly-Clark's U.S., French and Canadian business operations that manufacture and sell tobacco-related papers and other specialty paper products (the "Businesses"). Pursuant to a distribution agreement dated October 23, 1995, Kimberly-Clark agreed to distribute in the form of a dividend to its stockholders all of the common stock of SWM and on November 30, 1995, each Kimberly-Clark stockholder of record on November 13, 1995 received one share of SWM common stock for every ten shares of Kimberly-Clark common stock held on the date of record (the "Distribution"). As a result of the Distribution, SWM became an independent public company. (As used herein, the Company means SWM, SWM and its several subsidiaries or, as determined by the context, one or more of its several subsidiaries.) On February 2, 1998, Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a wholly-owned subsidiary of SWM, acquired 99.97 percent of the outstanding shares of Companhia Industrial de Papel Pirahy ("Pirahy"), a specialty paper manufacturer located in Santanesia, Brazil, near Rio de Janeiro. Pirahy, subsequently renamed Schweitzer-Mauduit do Brasil, S.A. ("SWM-B"), is the largest supplier of tobacco-related papers to the South American market. It also produces printing and writing papers as well as papers for packaging and labeling applications. 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 specialty paper manufacturing subsidiaries, Groupe SAPAM S.A. ("Groupe SAPAM") and Papeteries de la Moulasse S.A., located in Saint-Girons in the southwestern part of France. Subsequently, SM-Enterprises acquired all the remaining shares of Groupe SAPAM. SM-Enterprises and Ingefico, S.A. were then merged into Groupe SAPAM. Papeteries de la Moulasse S.A. was renamed Papeteries de Saint-Girons S.A. ("PdStG"). Approximately 90 percent of the net sales of PdStG are of fine papers to the tobacco industry. Financial information about foreign and domestic operations, contained under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing in Part II, Item 7 herein and in Note 13 to Consolidated Financial Statements contained in "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" appearing in Part II, Item 8 herein, are incorporated in this Item 1 by reference. DESCRIPTION OF THE BUSINESS GENERAL. The Company manufactures and sells paper and reconstituted tobacco products to the tobacco industry as well as specialized paper products for use in other applications. Tobacco industry products, which comprised 89 percent of the Company's 1999 consolidated net sales, include cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette ("Cigarette Papers"), reconstituted tobacco leaf ("RTL") for use as filler in cigarettes and cigars, reconstituted tobacco wrappers and binders for cigars, and paper products used in cigarette packaging. These products are sold directly to the major tobacco companies or their designated converters in North and South America, Eastern and Western Europe, China and elsewhere. Non-tobacco industry products include drinking straw wrap, filter papers, lightweight printing and writing papers, coated papers for packaging and labeling applications, business forms, furniture laminates, battery separator paper and other specialized papers primarily for the North American, Western European and Brazilian markets. These products are generally sold directly to converters and other end-users in North America and Western Europe and through brokers in Brazil. The non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine operations. 3 4 PRODUCTS. Each of the three principal types of paper used in cigarettes -- cigarette, plug wrap and tipping papers -- serves a distinct purpose in the function of a cigarette. Cigarette paper wraps the column of tobacco in a cigarette. Certain properties of cigarette paper, such as basis weight, porosity, opacity, tensile strength, texture and whiteness must be closely controlled to tight tolerances. Many of these characteristics are critical to meet runnability standards of the high-speed production processes utilized by 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 using a furnish consisting of "long fibers", such as abaca, and wood pulp. Porosity, a measure of air permeability, ranges from a typical level of less than 100 Coresta on conventional plug wrap to 35,000 Coresta on high porosity papers. High porosity plug wrap is sold under the registered trademark POROWRAP(R) and is used on filter-ventilated cigarettes. High porosity papers can also be used for such specialty products as battery separator paper. Tipping paper, produced in white or buff color, joins the filter element to the tobacco section of the cigarette. The ability to produce tipping paper which is both printable and glueable at high speeds is critical to producing a cigarette with a distinctive finished appearance. Reconstituted tobacco is used by manufacturers of cigarettes, cigars and other tobacco products 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 United States. BUSINESS SEGMENTS. The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. As such, these geographical operations also represent the Company's business segments for reporting purposes. While the products are comparable in each segment, they vary based on the technological capabilities of each of the manufacturing operations and the respective markets and customers served. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies the major, and many of the smaller, cigarette manufacturers in North America, and also has significant sales in South America and Japan. The customer base for the U.S. operations consists of approximately 60 customers in approximately 30 countries. The Company's French businesses rely predominantly on worldwide exports, primarily to Western Europe, China, Eastern Europe and the former Commonwealth of Independent States, and, in lesser but substantial amounts, to Asia (excluding China), Africa, the Middle East and Australia. The customer base for the French operations consists of a diverse group of over 200 customers in more than 80 countries. The Company's Brazilian business primarily supplies customers in Brazil, but with increasing sales to other South American countries. The current customer base of the Brazilian operations consists of the cigarette manufacturers in Brazil, as well as approximately 20 customers in approximately ten countries outside Brazil. Customers of all three units include international tobacco companies, regional tobacco manufacturers and government monopolies. Philip Morris Incorporated ("Philip Morris"), including its subsidiaries, and B.A.T. Industries PLC ("BAT"), including its U.S. subsidiary Brown & Williamson Tobacco Corporation, its Brazilian subsidiary Souza Cruz S.A. ("Souza Cruz") and its other subsidiaries, are the Company's two largest customers. Philip Morris and BAT, together with their respective affiliates and designated converters, accounted for approximately 30 percent and 18 percent, respectively, of the Company's 1999 consolidated net sales. The Company's French paper businesses, together, are the largest exporter of cigarette paper to China with an estimated 45 to 50 percent share of that country's cigarette paper imports. However, as cigarette paper manufacturers in China continue to increase capacity, the total volume of cigarette paper imports into China is expected to continue to decline. 4 5 LTR Industries, S.A. ("LTRI") is a 72-percent owned second tier subsidiary of the Company which manufactures RTL in France. LTRI has many customers, consisting primarily of the large cigarette manufacturers in Eastern and Western Europe. A small number of these large customers account for a substantial portion of LTRI's net sales. The loss of any one or more of these large customers could have a significant adverse effect on LTRI's and the Company's results of operations. The Company exited the RTL business in the United States in the second quarter of 1996. In the fourth quarter of 1997, the U.S. business temporarily restarted operation of the U.S. RTL production line, but only to support the growth of the French RTL business while alternatives for additional capacity were being considered. The U.S. RTL production line ceased operations in the fourth quarter of 1998. PHILIP MORRIS SUPPLY AGREEMENT. In 1992, the Company's U.S. unit was chosen to be the single source of supply of Cigarette Papers to Philip Morris' U.S. operations. The initial five-year term of the supply agreement (the "Supply Agreement") was extended by mutual agreement. In July 1998, Philip Morris and the Company signed an Amended and Restated Supply Agreement for Fine Paper Supply ("Amended Supply Agreement"). The Amended Supply Agreement extends the Company's position as the supplier of Cigarette Papers to Philip Morris' U.S. operations until June 30, 2002, except that Philip Morris has the right, commencing in 1999 and continuing thereafter, to acquire up to ten percent of its prior year purchases of Cigarette Papers from other suppliers, although to-date it has chosen not to do so. By its terms, the Amended Supply Agreement automatically renews for three successive terms of two years each unless either party gives notice of non-renewal 24 months before the end of the then current term. A supplement to the Amended Supply Agreement creates the potential for a seven-year exclusive supply arrangement with Philip Morris U.S.A. for an experimental new paper product currently being jointly developed. In January 2000, Philip Morris announced that it would conduct consumer testing of this new product, a new type of cigarette paper that may make a cigarette less likely to ignite certain fabrics. Philip Morris and the Company also have entered into a licensing and royalty agreement covering future commercialization of this new paper product, the commercial viability of which has not yet been determined. SOUZA CRUZ SUPPLY AGREEMENT. On February 2, 1998, as part of the Company's agreement to purchase Pirahy, the Brazilian operations entered into two exclusive supply agreements with its former owner and its largest customer, Souza Cruz, to supply all of Souza Cruz's needs for papers which SWM-B is capable of producing. The supply agreement for tobacco-related papers, as amended in February 2000, has an initial term of six years until February 2, 2004 and automatically renews for additional three-year terms unless either party provides notice of phase-out prior to the date of expiration. The supply agreement for coated paper used in the packaging of cigarette products, as amended in February 2000, has an initial term of six years until February 2, 2004, with extensions to be negotiated prior to the date of expiration. EMPLOYEE AND LABOR RELATIONS. As of December 31, 1999, the Company had 3,402 regular full-time active employees of whom 611 hourly employees and 281 salaried employees were located in the United States and Canada, 1,096 hourly employees and 643 salaried employees were located in France and 728 hourly employees and 43 salaried employees were located in Brazil. North American Operations -- Hourly employees at the Lee, Massachusetts, Spotswood, New Jersey and Ancram, New York mills are represented by locals of the PACE International Union. During 1999, the Spotswood bargaining agreement was modified to provide for lump sum payments in lieu of general wage increases for 1999 through 2001. The current collective bargaining agreements expire at the Ancram mill on September 30, 2001, at the Spotswood mill on June 15, 2002 and at the Lee mills on August 1, 2002. There have been no strikes or work stoppages at any of these locations for approximately 20 years, and the Company believes employee and union relations are positive. The fiber operations of the Company's Canadian subsidiary are non-union. The Company believes that employee relations are positive. French Operations -- Hourly employees at the Company's mills in Quimperle, Malaucene, Saint-Girons and Spay, France are union represented. The most recent two-year collective bargaining agreements for each of the mills expired on December 31, 1999. The French subsidiaries are in the process of negotiating new 5 6 contracts at all of the 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. Brazilian Operations -- Hourly employees at the Pirahy mill are represented by a union. The current collective bargaining agreement expires on May 31, 2000. The Company believes that, overall, employee relations are positive and comparable to similar Brazilian manufacturing operations. RAW MATERIALS. Wood pulp is the primary fiber used in the Company's operations. These operations consumed approximately 107,000 and 112,000 metric tons of wood pulp in 1999 and 1998, 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, respectively. While tobacco stems and scraps are generally the property of the cigarette manufacturer for whom the reconstitution is contracted, the Company and LTRI 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 United States and France. Flax tow and flax pulp are also purchased externally, but these purchases only represent approximately 30 percent of the flax pulp currently consumed by the Company's U.S. and French operations. Certain specialty papers are manufactured with other cellulose fibers, such as abaca, and small amounts of secondary and recycled fibers. All of these secondary and recycled fibers are purchased. The Company believes that the raw materials purchased by the Company are readily available from several sources and that the loss of a single supplier would not have a material adverse effect on the Company's ability to procure needed raw materials. COMPETITION. The Company is the leading producer of Cigarette Papers in the world. LTRI is the leading independent producer of RTL for use in cigarettes. The Company does not sell its products directly to consumers or advertise its products in consumer media. The specialized nature of these tobacco-related papers requires research and development capability to develop them and special papermaking equipment and skills to meet exacting customer specifications. These factors have limited the number of competitors in each of the tobacco-related paper categories discussed separately below. Cigarette Paper -- Management believes that the Company has between 55 and 60 percent share of the North American cigarette paper market. The Ecusta division of P.H. Glatfelter Company ("Ecusta") is the Company's major competitor in the sale of cigarette paper in North America. 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. Management believes that the bases of cigarette paper competition are price, consistent quality, level of technical service and performance requirements of the customer's cigarette-making equipment. The principal competitors of the Company's French cigarette paper businesses are Wattens GmbH ("Wattens"), an Austrian subsidiary of Trierenberg Holding ("Trierenberg"), Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), a German company 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 65 to 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. business. The principal competitors of the Company's Brazilian cigarette paper business are Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens. SWM-B has an estimated 75 percent market share of cigarette paper in Brazil and an estimated 50 percent market share of cigarette paper in South America. Management believes that the bases of cigarette paper competition for SWM-B are the same as for the Company's U.S. business. 6 7 Plug Wrap Paper -- Management believes that the Company's U.S. business has between 70 and 75 percent share of the North American market for plug wrap papers. The remainder of the North American market is shared by three competitors: Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens. The Company's French businesses hold an estimated 65 percent of the Western European high porosity plug wrap market. Schoeller & Hoesch is the Company's principal competitor in that market along with Wattens. Through the Brazilian business' supply of conventional plug wrap papers and the U.S. business' supply of porous plug wrap papers, the Company has an estimated 75 percent share of the South American market for plug wrap papers. Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens are the Company's principal competitors in that market. Management believes that the primary basis of competition for high porosity plug wrap is technical capability with price being a less important consideration. On the other hand, conventional plug wrap entails less technical capability with the result that price and quality are the primary bases of competition. Tipping Paper -- Management believes that the Company's U.S. business has between 60 and 65 percent share of the North American market for base tipping paper which is subsequently printed by converters. Its principal competitors in these markets are Ecusta and Tervakoski Oy, a Finnish subsidiary of Trierenberg. Management believes that the bases for competition are consistent quality, price and, most importantly, the ability to meet the runnability and printability requirements of converting equipment and high-speed cigarette-making machines. Papeteries de Malaucene S.A. ("PdMal"), another of the Company's indirect wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene, France, and ranks among the largest converted tipping paper producers in Western Europe, with an estimated 15 percent market share. PdMal produces printed and unprinted, and laser and electrostatically perforated tipping papers. PdMal's principal European competitors are Tann-Papier GmbH, an Austrian subsidiary of Trierenberg, Benkert GmbH (Germany) and Miquel y Costas. Management believes that the bases of competition for perforated tipping paper in Europe are perforation technology, consistent quality and price. The Company's Brazilian business has between 55 and 60 percent share of the South American market for base tipping paper which is subsequently printed by converters. The Company's principal competitors in Latin America are Ecusta (including Schoeller & Hoesch) and Miquel y Costas. Management believes that the bases of tipping paper competition for SWM-B are the same as for the Company's U.S. business. Reconstituted Tobacco -- LTRI is the leading independent producer of RTL. Management believes that the basis of competition in this market is primarily quality. However, sales volumes are influenced by worldwide virgin tobacco prices (lower prices of virgin tobacco may result in lower reconstituted tobacco sales volumes). LTRI's principal competitors are (i) R.J. Reynolds Tobacco Company, which produces RTL for both internal and external use, (ii) Yelets, an affiliate of Japan Tobacco Inc. which operates in Russia, (iii) B.V. Deli-HTL Tabak Maatschappiji B.V., an independent producer which operates in Holland, and (iv) cigarette companies such as Philip Morris and BAT, which produce RTL primarily for internal use. Management estimates that approximately 50 percent of reconstituted cigar wrapper and binder used in the U.S. market is produced internally by domestic cigar manufacturers. The Company's Ancram mill and Nuway Microflake Partnership, a cast process manufacturer, produce the balance. Other Products -- As noted above, the Company and its subsidiaries produce wrapping paper for drinking straws, filter papers, as well as papers for lightweight printing and writing, coated papers for packaging and labeling applications, business forms, furniture laminates and battery separators. Management believes that price is the primary basis of competition for drinking straw wrap, printing and writing and filter papers (collectively, "Filler Papers"), while consistent quality and customer service are believed to be the primary competitive factors for battery separator and business forms papers. The Company does not possess a significant market share in any of the above segments, except for battery separator papers, where it holds approximately 25 percent of the worldwide market. The Company continues, to the extent feasible, to convert its production of less profitable Filler Papers to more profitable niche applications. 7 8 RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. The Company has research and laboratory facilities in Spay, France, Santanesia, Brazil and Alpharetta, Georgia and employs more than 40 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 the Company's major customers. The Company spent in the aggregate on product research and development $6.7 million, $6.5 million and $6.4 million in 1999, 1998 and 1997, respectively. The Company believes that its research and product development capabilities are unsurpassed in the industry and have played an important role in establishing the Company's reputation for high quality, superior products. The Company's commitment to research and development has enabled the Company, for example, to (i) produce high-performance papers designed to run on the high-speed manufacturing machines of its customers, (ii) produce papers to exacting specifications with very high uniformity, (iii) produce cigarette paper with extremely low basis weights, and (iv) have an acceptance rate by its customers in excess of 99 percent. The Company also believes it is in the forefront of the 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, 1999, the Company and its subsidiaries collectively owned 82 patents and had pending 52 patent applications covering a variety of Cigarette Papers, RTL and cigar wrapper and binder products and processes in the United States, Western Europe and several other countries. The Company believes that such patents, together with its papermaking expertise and technical sales support, have been instrumental in establishing it as the leading worldwide supplier of Cigarette Papers, RTL and reconstituted wrapper and binder made by the papermaking process. Management believes that the Company's "POROWRAP(R)" trademark for highly porous plug wrap paper, the "PDM" logo and the "JOB PAPIER A CIGARETTES", "PAPETERIES DE MAUDUIT" and "SCHWEITZER" trade names also have been significant contributors to the marketing of the Company's products. BACKLOG; SEASONALITY. The Company has historically experienced a steady flow of orders. Its mills typically receive and ship orders within a 30-day period, except in the case of RTL where orders are generally placed well in advance of delivery. The Company plans its manufacturing schedules and raw material purchases based on its evaluation of customer forecasts and current market conditions. The U.S. business does not calculate or maintain records of order backlogs. Philip Morris, its largest customer, provides forecasts of future demand, but actual orders for Cigarette Papers are typically placed two weeks in advance of shipment. The French businesses do maintain records of order backlogs. For Cigarette Papers, the order backlog was approximately $22 million and $24 million on December 31, 1999 and 1998, respectively. This represented approximately 40 and 44 days of Cigarette Paper sales for the French businesses in 1999 and 1998, respectively. LTRI's RTL business operates under a number of annual supply agreements. The order backlog for RTL was approximately $44 million and $56 million on December 31, 1999 and 1998, respectively. The Brazilian business does not calculate or maintain records of order backlogs. Approximately 40 percent of its sales are on a consignment basis with Souza Cruz, its largest customer. Souza Cruz also provides forecasts of future demand in order for the Brazilian operations to manage levels of consignment inventories. Sales of the Company's products are not subject to seasonal fluctuations, except in the United States where customer shutdowns of one to two weeks in duration typically occur in July and December, and in Brazil where customer orders are typically lower in December due to a January and February holiday season. 8 9 SALES AND DISTRIBUTION. Essentially all sales of tobacco-related products by the U.S. and French businesses are sold by the Company's marketing, sales and customer service organizations directly to cigarette manufacturers or their designated converters, and to cigar manufacturers, except in China where sales are generally made to trading companies for resale to cigarette producers. The Brazilian business' tobacco-related products are sold by the Brazilian marketing and sales organization directly to cigarette manufacturers, and through brokers for non-tobacco related products. Most of the Company's U.S. and French businesses' non-tobacco related products are sold on a direct basis. ENVIRONMENTAL MATTERS. Capital expenditures for environmental controls to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada are estimated to be approximately $2 million to $4 million annually in 2000 and 2001. These expenditures are not expected to have a material adverse effect on the Company's financial condition, results of operations or competitive position; however, these estimates could be modified as a result of changes in the Company's plans, changes in legal requirements or other factors. RISKS FOR FOREIGN OPERATIONS. In addition to its U.S. operations, the Company has manufacturing facilities in France, Brazil and Canada. Products made in France, Brazil or in the United States are marketed in more than 90 countries. Because these countries are so numerous, it is not feasible to generally characterize the risks involved. Such risks vary from country to country and include such factors as tariffs, trade restrictions, monetary exchange controls, changes in currency value, economic conditions and international relations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Factors That May Affect Future Results" appearing in Part II, Item 7 herein. INSURANCE. The Company maintains coverage for most insurable risks that are incident to its operations. ITEM 2. PROPERTIES As of December 31, 1999, the Company operated eight mills (which include four fiber pulping operations) in the United States, France and Brazil that produce specialty papers or reconstituted tobacco products. The Company also operates flax fiber processing operations in France and Canada. The Company or one of its subsidiaries owns each of these facilities except for a flax tow storage facility in Killarney, Manitoba, which is leased. The Company and its subsidiaries maintain administrative and sales offices in Alpharetta, Georgia, in Quimperle and Paris, France, in Hong Kong, China, in Santanesia and Rio de Janeiro, Brazil, and in Madrid, Spain. The Company's world headquarters are also located in Alpharetta. All of these offices are leased except for the Quimperle and Santanesia offices, which are owned by PdM and SWM-B, respectively. Management believes that each of these facilities is well-maintained, suitable for conducting the Company's operations and business, and adequately insured. The Company's U.S., French and Brazilian paper operations experienced downtime on certain machines during 1999 because of reduced demand. Additional paper production downtime is likely to be taken in 2000 in each of the Company's three operations but to a lesser extent than in 1999. The U.S. RTL production line had been temporarily restarted during the fourth quarter of 1997, in support of increased sales volumes of LTRI while alternatives for additional capacity were considered. During the fourth quarter of 1998, the Company announced an expansion project for the French RTL business, and the U.S. RTL production line ceased operations. In addition to the operating equipment listed on the following page, the Company and its subsidiaries have additional equipment which has been taken out of service. These pieces of equipment are in various states of condition and may or may not be usable should the Company need additional capacity. Further, it may not be cost-effective to make upgrades which may be necessary to bring this equipment back into service. 9 10 The following are locations of the Company's principal facilities and operating equipment as of December 31, 1999:
PRODUCTION LOCATIONS EQUIPMENT PRODUCTS - -------------------- --------- -------- Lee Mills 4 Paper Machines Base Tipping and Specialty Papers Lee, Massachusetts Pulping Equipment Plug Wrap Paper (4 mill sites) Spotswood Mill 4 Paper Machines Cigarette Paper, Straw Wrap Paper Spotswood, New Jersey Pulping Equipment Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and Ancram, New York 1 Reconstituted Tobacco Binder and Porous Plug Wrap Paper Wrapper and Binder Machine Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing Manitoba, Canada Papeteries de Mauduit Mill 10 Paper Machines Cigarette Paper, Plug Wrap Paper Quimperle, France Pulping Equipment and Long Fiber Specialties Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers Malaucene, France 4 Printing Presses 11 Laser Perforating Lines 1 Electrostatic Perforating Line Papeteries de Saint-Girons Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper, Saint-Girons, France Pulping Equipment Base Tipping and Specialty Papers, Flax Pulp LTR Industries Mill 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax Spay, France Leaf Machines Fiber Processing, Research & 1 Fiber Mill Development Pirahy Mill 4 Paper Machines Cigarette Paper, Plug Wrap Paper, Santanesia, Brazil 1 Coating Machine Base Tipping and Specialty Papers
ADMINISTRATIVE LOCATIONS OFFICE SPACE FUNCTION - ------------------------ ------------ -------- Alpharetta, Georgia Leased Office Space Company World Headquarters, Research & Development, and Administrative and Sales -- U.S. Business Madrid, Spain Leased Office Space Administrative Office for International Investments Quimperle, France Owned Office Space Administrative Offices for French Businesses Paris, France Leased Office Space Administrative and Sales Offices for French Businesses Hong Kong, China Leased Office Space Sales Office for French Businesses Santanesia, Brazil Owned Office Space Administrative Offices for Brazilian Business, Research & Development Rio de Janeiro, Brazil Leased Office Space Administrative and Sales Offices for Brazilian Business
10 11 ITEM 3. LEGAL PROCEEDINGS The following is a brief description of potentially material legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their properties is subject: LITIGATION 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 certain tobacco industry class action and individual lawsuits in which certain component suppliers to the tobacco industry were named, including Kimberly Clark and in some cases LTRI. During 1999, Kimberly-Clark and LTRI were dismissed from all tobacco-related litigation pending against them. The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material adverse effect on the Company's consolidated financial statements. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental matters. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims, 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 and analogous New Jersey statutes in connection with the Global Landfill Reclaiming Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey. The Global Landfill was utilized by Kimberly-Clark's Spotswood mill. The Company has assumed Kimberly-Clark's liabilities for the Global Landfill site. The Company continues to participate in the remediation of the Global Landfill as a member of a group of PRP's that entered into a consent decree with the state of New Jersey in 1993. The Company previously recorded its pro-rata portion of the estimated liability for remediation of this site, the remainder of which is not material. The Company 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. Recent test results show that the Company has achieved compliance with the consent order and has reduced the concentration of landfill gases to the levels specified in the consent order at 30 feet below ground level in all of the gas monitoring wells. The Company will continue its current remediation activities on a reduced monitoring schedule approved by MDEP for this landfill, the remaining cost of which was previously accrued and is not material. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $0.5 million in 1999, and anticipates that it will incur approximately $2 million to $4 million annually in 2000 and 2001. The major projects included in these estimates include upgrading wastewater treatment facilities at various locations and installation of ink solvent treatment equipment in France. The foregoing capital expenditures are not expected to reduce the Company's ability to invest in capacity expansion, quality improvements, capital replacements, productivity improvements, or cost containment projects, and are not expected to have a material adverse effect on the Company's financial condition or results of operations. 11 12 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 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the executive officers of the Company as of March 1, 2000, together with certain biographical information, are as follows:
NAME POSITION ---- -------- Wayne H. Deitrich............................ Chief Executive Officer Jean-Pierre Le Hetet......................... Chief Operating Officer and President -- French Operations Peter J. Thompson............................ President -- U.S. Operations Otto R. Herbst............................... President -- Brazilian Operations Paul C. Roberts.............................. Chief Financial Officer and Treasurer John W. Rumely, Jr........................... General Counsel and Secretary Wayne L. Grunewald........................... Controller
MR. WAYNE H. DEITRICH, 56, has served as Chief Executive Officer of the Company since August 1995 and was elected Chairman of the Board of Directors immediately after the Distribution. From June 1995 through August 1995, Mr. Deitrich served as President -- Specialty Products Sector of Kimberly-Clark. From 1993 through May 1995, Mr. Deitrich was the President -- Paper and Specialty Products Sector of Kimberly-Clark, and from 1992 to 1993, he was President -- Paper Sector of Kimberly-Clark. From 1988 through 1992, Mr. Deitrich served as the President of Neenah Paper, a business unit of Kimberly-Clark. MR. JEAN-PIERRE LE HETET, 56, has served as Chief Operating Officer of the Company since April 1998 in addition to having served as President -- French Operations of the Company since August 1995. Mr. Le Hetet was elected to the Board of Directors immediately after the Distribution. From 1991 through August 1995, Mr. Le Hetet was the President of Specialty Products, France, a business unit of Kimberly-Clark. Prior to that time, Mr. Le Hetet served as General Manager of Specialty Products, France. MR. PETER J. THOMPSON, 37, has served as President -- U.S. Operations of the Company since November 1998. From April 1998 through November 1998, Mr. Thompson was Director -- Sales and Marketing for the U.S. Operations of the Company. Mr. Thompson joined the Company in January 1997 as a Marketing Manager in the U.S. Operations. Prior to joining the Company, he was employed by Tape, Inc. from May 1995 through January 1997, where he held several senior management positions in marketing, sales and finance. Mr. Thompson was employed by Kimberly-Clark from June 1984 through May 1995 in a variety of financial positions. MR. OTTO R. HERBST, 40, has served as President -- Brazilian Operations of the Company since April 1999. Prior to April 1999, he served as General Manager for New Business and Services from 1997 through March 1999 for Interprint, a manufacturer of security documents, telephone cards and business forms. From 1990 through 1997, Mr. Herbst served as Director of Agaprint, a manufacturer of packaging materials, business forms, commercial printing papers, personalized documents and envelopes. MR. PAUL C. ROBERTS, 51, has served as Chief Financial Officer and Treasurer of the Company since August 1995. From June 1995 through August 1995, he served as Chief Financial Officer -- Specialty Products Sector of Kimberly-Clark. From January 1995 through May 1995, he was Director -- Corporate Strategic Analysis of Kimberly-Clark, and from 1988 through 1994, Mr. Roberts was Director -- Operations Analysis and Control, Pulp and Paper Sector of Kimberly-Clark. MR. JOHN W. RUMELY, JR., 46, has served as General Counsel and Secretary of the Company since January 1, 2000. From March 1998 through December 31, 1999, he served as Associate General Counsel of the Company. From May 1989 through February 1998, Mr. Rumely was Assistant General Counsel of Alumax Inc. MR. WAYNE L. GRUNEWALD, 48, 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. 12 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET Since the Distribution of the Company's Common Stock by Kimberly-Clark on November 30, 1995, the Common Stock has been listed on the New York Stock Exchange under the trading symbol "SWM". APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 1, 2000, there were 6,561 stockholders of record of the Company's Common Stock. This number does not include shares held in "nominee" or "street" name. STOCK PRICE AND DIVIDEND INFORMATION The dividend and market price data included in Note 15 to Consolidated Financial Statements contained in "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" appearing in Part II, Item 8 herein is incorporated in this Item 5 by reference. 13 14 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, 1999, 1998, 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, which has been audited by Deloitte & Touche LLP, independent auditors, 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. The historical combined financial statements of SWM and its predecessors for 1995 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, ----------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net Sales........................................... $504.4 $546.7 $460.6 $471.3 $462.9 Gross Profit........................................ 110.4 106.1 121.9 114.2 101.2 Operating Profit.................................... 64.6 59.1 81.9 74.0 58.7 Interest income from affiliates, net(1)............. -- -- -- -- 3.3 Net Income.......................................... 31.4 31.0 45.3 38.7 36.8 Net Income Per Share: Basic............................................ $ 1.99 $ 1.94 $ 2.82 $ 2.41 Diluted.......................................... $ 1.99 $ 1.92 $ 2.77 $ 2.38 Unaudited Pro Forma Basic and Diluted Net Income Per Share(2).......................... $ 1.81 Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .60 $ .45 CASH FLOW AND BALANCE SHEET DATA: Capital Spending.................................... $ 26.3 $ 36.7 $ 35.8 $ 51.5 $ 22.5 Depreciation and amortization....................... 22.2 24.8 14.4 13.4 13.4 Cash Provided By Operations......................... 60.7 67.1 67.3 90.4 64.9 Total Assets........................................ 436.6 474.7 391.0 380.6 347.0 Long-Term Debt...................................... 100.9 108.4 80.8 86.6 91.6 Equity.............................................. 184.2 197.0 179.5 156.0 129.9
- --------------- (1) Prior to the Distribution, SMF acted as the financing entity in connection with the Kimberly-Clark European cash management program. Interest income from affiliates reflects financing activities related to other operations of Kimberly-Clark and certain of its affiliates until November 30, 1995, the date of the Distribution, at which time the Company became a separate independent company. (2) Pro forma net income per share 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 those transactions occurred at the beginning of 1995. 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 1995. 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. 14 15 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 manufactured and sold tobacco-related papers and other specialty paper products. Through the November 30, 1995 Distribution date, the Businesses in the United States 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, which prior to the Distribution was a wholly-owned subsidiary of Kimberly-Clark. On February 2, 1998, Schweitzer-Mauduit Spain, S.L., a wholly-owned Spanish holding company established in 1997, acquired Companhia Industrial de Papel Pirahy, a Brazilian specialty paper manufacturer. On February 11, 1998, Schweitzer-Mauduit Enterprises, a second-tier French subsidiary of the Company, acquired a French business named Ingefico, S.A. and its pulp and specialty paper manufacturing subsidiaries. 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 the tobacco industry, manufacturing and selling papers used in the manufacturing of cigarettes, paper products used in cigarette packaging and reconstituted tobacco products. The Company's non-tobacco industry products represented eleven percent of the Company's net sales in 1999. The non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine operations. The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. While the products are comparable in each segment, they vary based on the technological capabilities of each of the manufacturing operations and the respective markets and customers served. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. For purposes of the segment disclosure in the following tables, the term "United States" includes operations in the United States and Canada. The Canadian operations only produce flax fiber used as raw material in the U.S. operations. The Company's Brazilian operations, acquired on February 2, 1998, and the operations of the French business acquired on February 11, 1998, are included in the Company's Consolidated Financial Statements since the beginning of February 1998. Adjustments to net sales set forth in the following tables consist of eliminations of intercompany sales of products between segments. Adjustments to operating profit consist of unallocated overhead expenses not associated with a segment and eliminations of inter-segment transactions. This section should be read in conjunction with the Company's Consolidated Financial Statements included herein. 15 16 RESULTS OF OPERATIONS 1999 Compared to 1998 By Segment for the Years Ended December 31, 1999 and 1998 (U.S. $ in millions)
% OF CONSOLIDATED % CHANGE ------------------ NET SALES 1999 1998 VS. 1998 1999 1998 - --------- ------ ------ -------- ------- ------- United States................................ $166.3 $186.0 -10.6% 33.0% 34.0% France....................................... 284.6 312.0 -8.8 56.4 57.1 Brazil....................................... 54.0 57.9 -6.7 10.7 10.6 Eliminations................................. (0.5) (9.2) (0.1) (1.7) ------ ------ ----- ----- Consolidated....................... $504.4 $546.7 -7.7% 100.0% 100.0% ====== ====== ===== =====
% RETURN % OF CONSOLIDATED ON SALES % CHANGE ------------------ ------------ OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998 - ---------------- ----- ----- -------- ------- ------- ---- ---- United States..................... $ 9.3 $ 6.2 +50.0% 14.4% 10.5% 5.6% 3.3% France............................ 55.2 60.3 -8.5 85.4 102.0 19.4 19.3 Brazil............................ 5.2 (2.3) N.M. 8.1 (3.9) 9.6 (4.0) Unallocated/Eliminations.......... (5.1) (5.1) (7.9) (8.6) ----- ----- ----- ----- Consolidated............ $64.6 $59.1 +9.3% 100.0% 100.0% 12.8% 10.8% ===== ===== ===== =====
- --------------- N.M. -- Not meaningful Net Sales Net sales decreased by $42.3 million as a result of lower average selling prices, unfavorable currency exchange rates and reduced sales volumes. Lower world-wide selling prices and unfavorable sales mix had an unfavorable effect of $18.4 million. The net sales comparison was unfavorably affected by $12.6 million from changes in currency exchange rates, primarily related to a strengthened U.S. dollar versus the French franc and the Brazilian real. Worldwide sales volumes declined by one percent, which unfavorably affected net sales by $11.3 million. Sales volumes from the U.S. and French business units declined by seven and two percent, respectively, while sales volumes of the Brazilian business unit improved by eight percent. U.S. and French business unit volumes declined in most major product lines. The improvement in the Brazilian business' sales volumes was primarily in nontobacco-related papers and sales outside Brazil. Sales volumes in 1999 benefited in each of the three business units from sales related to Year 2000 concerns as certain customers increased their year-end inventories. Operating Profit Despite lower net sales, operating profit increased by $5.5 million, with higher operating profit in Brazil and the United States more than offsetting a decline in France. The impact of sales volumes related to customers' Year 2000 concerns may have benefited 1999 operating profit by as much as $1.3 million to $1.8 million. Operating profit in 1998 was negatively affected by one-time pre-tax charges of $1.7 million and $4.2 million in the second and fourth quarters, respectively. In Brazil, operating profit improved by $7.5 million for the year as a result of cost reduction activities, improved mill operations, increased sales volumes, the lack of its portion of the fourth quarter 1998 charge and the positive impact of the Brazilian currency devaluation which occurred in the first quarter of 1999. These favorable items were partially offset by lower average selling prices. The currency devaluation was a positive impact for the Brazilian business unit since a portion of its sales are tied to the U.S. dollar. 16 17 The U.S. business unit's operating profit improved by $3.1 million as a result of the benefits of cost savings programs and the lack of its portion of the 1998 charges, which more than offset the effects of lower selling prices, unfavorable sales mix and lower sales and production volumes. In France, operating profit declined by $5.1 million as a result of lower selling prices, unfavorable sales mix and lower sales and production volumes. These negative effects were partially offset by the benefits of the French business unit's cost reduction activities, improved mill operations and the lack of its portion of the fourth quarter 1998 charge. Non-manufacturing expenses decreased by $1.2 million, primarily due to a reduction in selling expenses of the French business unit. Changes in the average per ton wood pulp costs compared with the prior year favorably impacted operating expenses by $2.7 million, although this benefit was offset by changes in selling prices. 1998 Compared to 1997 By Segment for the Years Ended December 31, 1998 and 1997 (U.S. $ in millions)
% OF CONSOLIDATED % CHANGE ------------------ NET SALES 1998 1997 VS. 1997 1998 1997 - --------- ------ ------ -------- ------- ------- United States................................ $186.0 $195.5 -4.9% 34.0% 42.4% France....................................... 312.0 268.8 +16.1 57.1 58.4 Brazil....................................... 57.9 N.A. 10.6 Eliminations................................. (9.2) (3.7) (1.7) (0.8) ------ ------ ----- ----- Consolidated....................... $546.7 $460.6 +18.7% 100.0% 100.0% ====== ====== ===== =====
% RETURN % OF CONSOLIDATED ON SALES % CHANGE ------------------ ------------ OPERATING PROFIT 1998 1997 VS. 1997 1998 1997 1998 1997 - ---------------- ----- ----- -------- ------- ------- ---- ---- United States................... $ 6.2 $21.2 -70.8% 10.5% 25.9% 3.3% 10.8% France.......................... 60.3 66.4 -9.2 102.0 81.1 19.3 24.7 Brazil.......................... (2.3) N.A. (3.9) (4.0) Unallocated/Eliminations........ (5.1) (5.7) (8.6) (7.0) ----- ----- ----- ----- Consolidated.......... $59.1 $81.9 -27.8% 100.0% 100.0% 10.8% 17.8% ===== ===== ===== =====
- --------------- N.A. -- Not applicable Net Sales Net sales increased by $86.1 million due primarily to sales at the two newly-acquired companies, whose results are included in the Company's consolidated results beginning in February 1998, and stronger sales volumes in France. Net sales of the newly-acquired companies contributed $90.9 million in the period. Excluding the acquisitions, worldwide sales volumes increased by three percent, favorably affecting net sales by $11.7 million. Sales volumes from the French businesses grew by nine percent, excluding the French acquisition. Although unit sales volumes at the French paper operations increased during the year, excluding the French acquisition, sales volumes over the second half of the year for those operations were lower compared with the prior year period. This second semester decline in French paper unit sales was primarily due to reduced shipments to China, Russia and southeast Asia because of import controls, currency convertibility and decreased demand as a result of economic conditions in those countries. RTL volumes in France improved versus the prior year, supported in part by production from the U.S. business unit's RTL operation at its Spotswood mill, which ceased operation in the fourth quarter of 1998. Sales volumes at the U.S. business unit, excluding its RTL production for the French business, declined by a total of six percent due to reduced domestic cigarette production by the Company's customers. Changes in average world-wide selling prices and sales mix had an unfavorable effect of $10.2 million. The net sales comparison was 17 18 unfavorably affected by $6.3 million from changes in currency exchange rates, primarily related to a strengthened U.S. dollar versus the French franc. Operating Profit Operating profit decreased by $22.8 million, with lower operating profit in the United States and France and an operating loss in Brazil. Operating profit in 1998 included pre-tax charges of $1.7 million and $4.2 million in the second and fourth quarters, respectively. The second quarter 1998 charge was for a voluntary retirement program in connection with an agreement with the labor union at the Company's Spotswood mill to modify work rules and eliminate 67 hourly positions. The fourth quarter 1998 pre-tax charge consisted of non-cash write-downs of assets related primarily to idled equipment that was no longer expected to be used due to changed market conditions and one-time labor payments, the majority of which related to operational changes. Additionally, production downtime was taken in the United States, France and Brazil to control inventory levels. The U.S. business unit's operating profit declined by $15.0 million primarily as a result of the one-time charges, lower sales and production volumes, increased computer systems expenses, unfavorable sales mix and lower selling prices. Amortization of capitalized software costs related to the new integrated computer systems in the United States and associated incremental operating expenses began in January 1998 and totaled $3.6 million for the year. Additionally, start-up costs of $1.2 million were incurred in the first quarter related to the new U.S. computer systems. In France, operating profit declined by $6.1 million as a result of its portion of the fourth quarter one-time charge, machine downtime at its paper operations to control inventory levels, unfavorable changes in average selling prices and sales mix, higher cost of RTL manufactured at and shipped from the Spotswood mill and changes in currency exchange rates, partially offset by higher sales volumes. Changes in currency exchange rates had an unfavorable impact of approximately $1.1 million. The Brazilian operations had an operating loss of $2.3 million for the year primarily because of unfavorable second quarter results and one-time labor payments. Non-manufacturing expenses increased by $7.0 million solely caused by expenses at the two acquired companies. Excluding expenses of the acquired companies, non-manufacturing expenses were the same as the prior year. Per ton wood pulp cost decreases compared with the prior year favorably impacted operating expenses by $2.8 million, although this benefit was offset by changes in selling prices. NON-OPERATING EXPENSES The decline in interest expense in 1999 compared to 1998 was primarily due to lower average interest rates, changes in currency exchange rates and a lower average amount of debt outstanding. The increase in interest expense in 1998 compared to 1997 was primarily a result of increased debt related to acquisitions in Brazil and France in February 1998 and higher interest rates. Interest expense in 1997 was primarily associated with debt incurred in connection with the Distribution (see "Liquidity and Capital Resources"). The weighted average effective interest rate on the Company's term loans was approximately 4.5 percent in 1999, 5.1 percent in 1998 and 4.7 percent in 1997. Other income, net consisted primarily of interest income, royalty income and foreign currency transaction gains and losses in each of the years presented and recovery of prior period business taxes in 1999. INCOME TAXES The noncurrent deferred income tax asset is primarily due to net operating loss carryforwards ("NOLs") incurred through December 31, 1994 by other businesses of Kimberly-Clark in France previously owned by SMF. Prior to the spin-off, those other Kimberly-Clark businesses were merged and dividended to Kimberly-Clark. Under French tax law, the NOLs of those other businesses 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 18 19 taxes until the NOLs have been fully utilized. Additionally, the noncurrent deferred income tax asset beginning in 1998 includes amounts related to NOLs of SWM-B, some of which were obtained in the 1998 acquisition of this Brazilian business. Additional information concerning these NOLs is disclosed in Note 6 to the Consolidated Financial Statements. The effective tax rates for the years ended December 31, 1999, 1998 and 1997 were 39.0 percent, 32.1 percent and 36.0 percent, respectively. The provision for income taxes in 1998 included the benefit of a reduction in the valuation allowance recorded against certain French deferred income tax assets arising from NOLs. This adjustment reduced the deferred provision for income taxes by $5.2 million. The reduction in the valuation allowance was recorded because of continued earnings and projected future earnings at the French businesses that utilize the NOLs, reducing the uncertainty that these NOLs will be fully utilized in the future. Excluding the impact of this adjustment, the effective income tax rate for the year ended December 31, 1998 would have been 41.7 percent. The decrease from this adjusted 1998 effective income tax rate of 41.7 percent to 39.0 percent in 1999 was due to the reduction in the French statutory income tax rate from 41.7 percent in 1998 to 40.0 percent in 1999 and due to a greater proportion of the Company's 1999 earnings being in Brazil and the United States, which had lower income tax rates than France. 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 36.7 percent to 41.7 percent for 1997 and 1998, retroactive to January 1, 1997, and to 40.0 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 NOLs 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. (See additional information concerning this tax claim in Note 6 to the Consolidated Financial Statements.) Including the effect of the change in French income tax rates on the 1997 current provision for income taxes, but excluding the effect on the deferred provision for income taxes, and excluding the effect of the elimination of taxation of a "provision for fluctuating value of raw materials" and the reserve for the tax claim, the effective 1997 income tax rate would have been 39.9 percent. The increase from this adjusted 1997 rate of 39.9 percent to the above-adjusted 41.7 percent 1998 effective income tax rate was due to a greater proportion of the Company's 1998 earnings being in France, which had higher income tax rates than other countries in which the Company operates. LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ------- (U.S. $ IN MILLIONS) Cash Provided by (Used for): Changes in operating working capital...................... $(9.0) $(1.9) $(10.8) Operations................................................ 60.7 67.1 67.3 Capital spending.......................................... (26.3) (36.7) (35.8) Capitalized software costs................................ (3.1) (4.0) (7.6)
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 1999, changes in operating working capital contributed unfavorably to cash flow by $9.0 million due primarily to lower accounts payable. Accounts payable were lower in 1999 compared to 1998 as a result of 19 20 payments in early 1999 for several large capital costs included in accounts payable at December 31, 1998. In 1998, changes in operating working capital contributed unfavorably to cash flow by $1.9 million, excluding the acquired working capital balances of the Brazilian and French businesses acquired in 1998. 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. Cash flow from operations during these periods exceeded the level of capital spending. Capital spending in 1999 included (i) $8.1 million toward the speed-up of two machines in the French mills, (ii) $3.2 million toward the expansion of converted tipping paper capacity at the Malaucene, France mill, and (iii) $1.1 million toward replacement of a yankee dryer in the Spay, France mill. Capital spending in 1998 included (i) $3.9 million toward the expansion of the Malaucene mill, (ii) $3.0 million toward speed-ups of both RTL machines and replacement of a yankee dryer hood at the Spay mill, (iii) $2.3 million for speed-up of a paper machine at the Quimperle, France mill, (iv) $1.4 million to modify a paper machine at the newly-acquired Saint-Girons mill, (v) $1.2 million toward upgrades to a paper machine at the Spotswood mill, (vi) $1.0 million to upgrade a coating machine at the newly-acquired Pirahy mill, and (vii) $1.0 million toward improvements at the Quimperle pulping facility. Capital spending in 1997 included (i) $3.6 million to complete the new long fiber paper machine at the Quimperle mill, (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 temporarily restart operation of the RTL production line at the Spotswood mill, (iv) $1.5 million toward an effluent biological treatment station at the Quimperle 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. In addition to capital spending, the Company incurred, and deferred on the balance sheet, additional software development costs of $3.1 million in 1999. These costs were incurred primarily in France, related to new integrated information systems, and in Brazil to replace certain modules of its integrated computer systems used by its former Brazilian parent company. In February 1998, two acquisitions of tobacco-related paper suppliers were completed. On February 2, 1998, SM-Spain paid approximately $62.0 million in cash for 99.97 percent ownership interest in Pirahy. In connection with the acquisition of Pirahy, the Company modified its existing credit agreement to provide a $20.0 million term loan to SM-Spain. SM-Spain borrowed the remaining funds for the transaction from SMF, which in turn utilized its existing cash balances and borrowings from its revolving credit facilities. Additionally, on February 11, 1998, SM-Enterprises paid 37.2 million French francs (approximately $6.1 million) in cash and assumed approximately $5.8 million in existing net debt for all of the outstanding shares of Ingefico, S.A. and 97.1 percent of the outstanding shares of its pulp and specialty paper manufacturing subsidiaries, Groupe SAPAM and Papeteries de la Moulasse S.A. Subsequently, SM-Enterprises acquired all the remaining shares of Groupe SAPAM for $0.2 million in cash. In December 1998, the Company announced that the Board of Directors had authorized the repurchase of shares of the Company's common stock during the period January 1, 1999 through December 31, 2000 in an amount not to exceed $20 million. The Company repurchased a total of 294,350 shares of its common stock during 1999 for $4.3 million. The Company repurchased 155,700 shares of its common stock during 1998 for $3.8 million under a previous program which was effective through December 31, 1998. On January 27, 2000, the Company announced that the Board of Directors had declared a quarterly cash dividend of fifteen cents per share of common stock. The dividend will be payable on March 13, 2000 to stockholders of record on February 14, 2000. The Company's ongoing requirements for cash are expected to consist principally of amounts required for capital expenditures, stockholder dividends and working capital. The Company has declared and paid quarterly dividends of fifteen cents per share since the second quarter of 1996. Management currently expects to continue this level of quarterly dividend. Other than expenditures associated with environmental matters 20 21 (see Note 12 of the Notes to Consolidated Financial Statements), as of December 31, 1999 the Company had unrecorded outstanding commitments for capital expenditures of approximately $0.6 million. In addition to capital spending, the Company is incurring software development costs related to new integrated computer systems. The portion of software development costs which were capitalized beginning in 1996 totaled $17.4 million through 1999 and 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 United States, where the largest portion of the costs to-date have been incurred, most of the deferred costs began amortizing at the beginning of 1998 over a period of seven years using the straight-line method. In France, a large portion of the installation of its new systems has been completed and successfully began operation during 1999 without significant start-up expenses. The Company will continue to incur costs in 2000, but to a lesser extent, primarily in France and Brazil, as additional software modules are purchased, designed and installed. As of December 31, 1999, the Company had approximately $27 million still available under its revolving credit facilities in the United States and France, and on January 7, 2000, the Company renewed these facilities to January 26, 2001. The Company also has other bank credit facilities available in the United States, France and Brazil. The Company believes its cash flow from operations, together with borrowings still available under its revolving and other credit facilities, will be sufficient to fund its ongoing cash requirements. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will require that all derivative financial instruments be recognized as either assets or liabilities on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays the effective date for the new requirements of SFAS No. 133 by one year. As a result, SFAS No. 133 will be effective no later than for the Company's first quarter of 2001. The Company is evaluating the effects of this new statement and when to implement the new requirements. OUTLOOK Cigarette consumption and production in both the United States and Brazil were lower in 1999 than in the prior year. U.S. cigarette consumption was impacted by adverse publicity and by increases in the retail selling price of cigarettes. The export of cigarettes manufactured in the United States also declined in 1999 from prior year levels. These trends are expected to continue in 2000. There appear to be signs of recovery in the Russian, Eastern European and Asian cigarette markets as these economies are improving. The Company's Brazilian business also expects to continue to increase its sales to Latin American countries outside of Brazil. Worldwide cigarette production is expected to increase approximately one percent in 2000, driven by growth in emerging markets as well as growth in the ventilated and blended cigarette segments. There continues to be excess worldwide manufacturing capacity for tobacco-related papers, however, the amount of excess capacity is decreasing as paper manufacturers, including the Company, are shutting down unneeded and less efficient capacity. Pricing appears to be stabilizing in most key markets and there may be opportunities for price increases as pulp prices rise. Some production downtime was experienced on certain machines during 1999 in the Company's U.S., French and Brazilian paper operations because of reduced demand. Additional paper production downtime is likely to be taken in 2000 in each of the Company's three operations but to a lesser extent than in 1999. Fourth quarter 1999 sales benefited in each of the Company's three business units from sales to certain customers that increased their year-end inventories related to concerns of possible Year 2000 issues. This may have improved the Company's consolidated fourth quarter operating profit by as much as $1.3 to $1.8 million. Sales and operating results in the first quarter of 2000 are expected to be negatively impacted by the positive timing impact experienced in the fourth quarter of 1999. 21 22 Cost savings are expected to continue from recently implemented capital projects and from various cost savings programs, including the Company's headcount reductions in the United States during 1999. With current market conditions, cost reduction continues to be a priority in each of the Company's business units. The per ton costs of wood pulp have steadily increased during the latter half of 1999 and a further increase was effective at the beginning of 2000. The Company expects further increases in the per ton cost of wood pulp during 2000. The French corporate income tax rate was scheduled to decline from 40.0 percent for 1999 to 36.7 percent for 2000. However, as a result of a tax law enacted in December 1999, the rate applicable to the Company's French businesses will be approximately 37.7 percent effective beginning January 1, 2000. The company expects capital spending for 2000 to be approximately $20 to $25 million, focused primarily on product quality improvements and cost reduction opportunities. Capitalized software costs in 2000 are expected to total approximately $2 million. FACTORS THAT MAY AFFECT FUTURE RESULTS Many factors outside the control of the Company could impact the Company's results. The following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual results for 2000 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Year 2000 Compliance Historically, many computer systems and other equipment with embedded chips or processors utilized computer programs written using two digits to represent the year rather than four digits. These programs may not properly recognize a year "20XX". As a result, these programs may be unable to accurately process certain data before, during or after the year 2000 and could result in governmental and business systems failures or miscalculations causing disruptions in operations. This problem has been commonly referred to as the "Year 2000" issue. Because of the numerous information systems, mill process controls and operating systems, and vendors and service providers that the Company uses, as well as the Company's many customers and customer locations around the world, the Company could not exclude the possibility that some disruption in its business due to the Year 2000 issue could occur. Therefore, the Company developed and implemented plans to minimize the adverse effect of any such potential business disruptions. Prior to the end of 1999, each of the Company's business segments inventoried its business operations, assessed its susceptibility to system failures or processing errors as a result of Year 2000 issues and developed plans to address those issues. The plans focused on three elements: information systems software and hardware, mill process controls and operating systems, and vendors and service providers. Each element was subdivided according to risk potential. Those issues which were considered most critical to continuing operations were given the highest priority. Plans were implemented and, where necessary, modifications or corrective actions were completed in each of the Company's businesses for all high risk issues identified, as well as most of the medium risk issues identified. In addition to the costs of new integrated computer systems which were necessary irrespective of the approach to Year 2000, the Company's cost of implementing its Year 2000 compliance plans totaled approximately $1.5 million. Approximately two-thirds of the total cost was expensed and one-third included in capital projects. The Company has not experienced any business disruptions related to the Year 2000 issue to-date. The Company is also not aware of any such issues with respect to its information systems, mill process controls or operating systems. Furthermore, the Company is not aware of any such issues at its many customers, vendors and service providers. However, until the potential for such issues arising has been eliminated by the passage 22 23 of time, it is not possible to state with certainty that the Company's operations will not be disrupted by Year 2000 issues. Euro Currency Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legal currencies") and one common currency -- the euro. The euro now trades on currency exchanges and may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legal currencies will be withdrawn from circulation by no later than June 2002. The Company established a committee to identify and implement changes necessary to address the systems and business issues raised by the euro currency conversion. These issues include, among others, the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions, competitive implications of increased price transparency within European Union countries, changes in currency exchange costs and rate exposures, continuity of contracts that require payment in a legal currency and tax implications of the conversion. The Company's French subsidiaries currently utilize multi-currency software that was capable of euro-denominated sales and purchase transactions on January 1, 1999. Consideration has also been given to other potential issues in connection with the conversion, including those mentioned above. The Company's French subsidiaries are in the process of implementing already-purchased software capable of translating current and historical data into euro currency data, which implementation will be fully completed no later than January 1, 2002, at which time the euro will become the functional currency of the French subsidiaries. The Company does not anticipate any significant negative consequences of these issues and does not anticipate that the euro conversion will have a material adverse impact on its financial condition or results of operations. International Business Risks The Company and its subsidiaries are subject to international business risks, including unsettled political and economic conditions, expropriation, import and export controls and restrictions, exchange controls, inflationary economies, currency risks 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 United States from certain foreign subsidiaries and are appropriately considered in the provision for U.S. income taxes. The Company intends for the undistributed earnings of certain other foreign subsidiaries to be reinvested indefinitely. These undistributed earnings are not subject to either additional foreign income taxes or U.S. income taxes unless remitted as dividends. Accordingly, no provision has been made for U.S. taxes on those earnings. The Company regularly reviews the status of the accumulated earnings of each of its foreign subsidiaries and reevaluates the aforementioned dividend policy as part of its overall financing plans. Hedging Activities and Foreign Currency Exchange Risks Management selectively hedges the Company's foreign currency risks, as well as its exposure to interest rate increases on its variable rate long-term debt, when it is practical and economical to do so. The instruments used to hedge foreign currency risks are forward contracts and, to a lesser extent, option contracts. The 23 24 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 gains and losses have arisen from the remeasurement of non-local currency denominated monetary assets and liabilities into the currency of the country in which the operation is domiciled. These gains and losses, related primarily to trade receivable and payable balances, are included in other income, net. Additional information concerning foreign currency related matters is disclosed in Note 9 of the Notes to Consolidated Financial Statements. Inflation In recent years, inflation has not had a significant impact on the Company's cost structure. Effect of Changing Pulp Costs Per ton pulp costs tend to be cyclical in nature and are a large component of product costs. The Company consumed approximately 107,000 and 112,000 metric tons of wood pulp in 1999 and 1998, respectively, including requirements of the two companies acquired in 1998, and 71,000 metric tons of wood pulp in 1997. During the period from January 1997 through December 1999, the U.S. list price of the primary pulp grade used by the Company, northern bleached softwood kraft pulp, ranged from a low of $500 per metric ton to a high of $610 per metric ton, and increased to $640 per metric ton in January 2000. Generally, over time, the Company has been able to increase its selling prices in response to increased per ton 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 United States and Brazil. In the United States, customer shutdowns typically occur in July and December and typically have resulted in reduced net sales and operating profit during those two months. Additionally, the U.S. mills shut down equipment to perform additional maintenance during these months, resulting in higher product costs and reduced operating profit. In Brazil, customer orders are typically lower in December due to a holiday season through much of January and February. Environmental Matters The Company is subject to federal, state, local and foreign environmental protection laws and regulations with respect to the environmental impact of air, water and other emissions from its mills as well as its disposal of solid waste generated by its operations. The Company believes it is operating in compliance with, or is taking action aimed at ensuring compliance with, such laws and regulations. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with these laws and regulations, these costs are not expected to materially affect the Company's business or results of operations. The Company, or its predecessor, 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 12 of the Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL PROCEEDINGS" herein. 24 25 Legal Proceedings Information concerning legal proceedings is disclosed in Note 11 of the Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL PROCEEDINGS" herein. In addition, the Company and its subsidiaries are involved in legal actions and claims arising in the ordinary course of business. Litigation is subject to many uncertainties and, while it is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries, management believes that such actions and claims will be resolved without a material adverse effect on the Company's financial statements. Reliance on Significant Customers Most of the Company's customers are manufacturers of tobacco products located in more than 90 countries around the world. Two such customers have accounted for a significant portion of the Company's net sales in each of the last several years, and the loss of one or both such customers, or a significant reduction in one or both of these customers' purchases, could have a material adverse effect on the Company's results of operations. See Note 14 of the Notes to Consolidated Financial Statements. Tobacco Products and Governmental Actions In recent years, governmental entities, particularly in the United States, have taken or have proposed actions that may have the effect of reducing consumption of tobacco products. Reports and speculation with respect to the alleged harmful physical effects of cigarette smoking and use of tobacco products have been publicized for many years and, together with actions to restrict or prohibit advertising and promotion of cigarettes or other tobacco products and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other such products. In the fourth quarter of 1998, the major U.S. cigarette manufacturers reached agreement with all 50 U.S. states and several commonwealths and territories to settle health care cost recovery and other claims. In anticipation of these settlements and as a direct result of these settlements, most of the U.S. cigarette manufacturers have increased prices of cigarettes significantly. Domestic cigarette consumption has declined, in part due to these price increases which, in turn, decreases demand for the Company's products. During 1999, the U.S. Department of Justice filed a multi-billion dollar civil suit against the tobacco industry. In addition, litigation is pending against the major manufacturers of consumer tobacco products seeking damages for health problems allegedly resulting from the use of tobacco in various forms and for alleged violations of antitrust laws. It is not possible to predict the outcome of such litigation or what effect adverse developments in pending or future litigation may have on the tobacco industry, its financial liquidity or relationships with its suppliers. 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 89 to 90 percent of the Company's net sales are from products used by the tobacco industry in the making and packaging of cigarettes or other tobacco products. Management is unable to predict the effects that the above-described legal and governmental actions might have on the Company's results of operations and financial condition. FORWARD-LOOKING STATEMENTS Certain sections of this report, particularly the foregoing discussion regarding the "Outlook" of the Company and "Factors That May Affect Future Results", 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 above-mentioned important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual results for 2000 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. 25 26 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, 1999, 1998 and 1997...................... 27 Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................. 28 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.............................................. 29 Consolidated Statements of Cash Flow for the years ended December 31, 1999, 1998 and 1997................ 30 Notes to Consolidated Financial Statements............. 31 Report of Independent Auditors.............................. 54 Management's Responsibility for Financial Reporting......... 55
Schedules have been omitted because they are either not required, not applicable or the required information is included in the financial statements or notes thereto. 26 27 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 --------- --------- --------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net Sales.................................... $504.4 $546.7 $460.6 Cost of products sold...................... 394.0 440.6 338.7 ------ ------ ------ Gross Profit................................. 110.4 106.1 121.9 Selling expense............................ 19.5 21.0 17.4 Research expense........................... 6.7 6.5 6.4 General expense............................ 19.6 19.5 16.2 ------ ------ ------ Operating Profit............................. 64.6 59.1 81.9 Interest expense........................... (5.8) (6.4) (4.1) Other income, net.......................... 1.9 1.2 1.6 ------ ------ ------ Income Before Income Taxes and Minority Interest................................... 60.7 53.9 79.4 Provision for income taxes................. 23.7 17.3 28.6 ------ ------ ------ Income Before Minority Interest.............. 37.0 36.6 50.8 Minority interest in earnings of subsidiaries............................ 5.6 5.6 5.5 ------ ------ ------ Net Income................................... $ 31.4 $ 31.0 $ 45.3 ====== ====== ====== Net Income Per Common Share: Basic...................................... $ 1.99 $ 1.94 $ 2.82 ====== ====== ====== Diluted.................................... $ 1.99 $ 1.92 $ 2.77 ====== ====== ======
See Notes to Consolidated Financial Statements 27 28 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, -------------------- 1999 1998 ------- ------- (U.S. $ IN MILLIONS) ASSETS Current Assets Cash and cash equivalents................................. $ 15.1 $ 6.7 Accounts receivable....................................... 72.1 69.5 Inventories............................................... 62.9 69.4 Current income tax refunds receivable..................... 2.2 2.8 Deferred income tax benefits.............................. 4.1 5.2 Prepaid expenses.......................................... 2.8 2.7 ------ ------ Total Current Assets............................... 159.2 156.3 ------ ------ Property Land and improvements..................................... 7.0 7.2 Buildings and improvements................................ 63.4 69.0 Machinery and equipment................................... 370.9 379.6 Construction in progress.................................. 10.6 23.5 ------ ------ Gross Property.......................................... 451.9 479.3 Less accumulated depreciation............................. 199.8 196.1 ------ ------ Net Property....................................... 252.1 283.2 ------ ------ Noncurrent Deferred Income Tax Benefits..................... 6.9 19.7 ------ ------ Deferred Charges and Other Assets........................... 18.4 15.5 ------ ------ Total Assets....................................... $436.6 $474.7 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt......................... $ 3.2 $ 4.4 Other short-term debt..................................... 8.8 11.3 Accounts payable.......................................... 46.3 58.1 Accrued expenses.......................................... 49.1 50.7 ------ ------ Total Current Liabilities.......................... 107.4 124.5 ------ ------ Long-Term Debt.............................................. 100.9 108.4 ------ ------ Deferred Income Taxes....................................... 13.1 12.7 ------ ------ Other Noncurrent Liabilities................................ 23.9 24.1 ------ ------ Minority Interest........................................... 7.1 8.0 ------ ------ Contingencies (See Notes 6, 10, 11 and 12) Stockholders' Equity Preferred Stock -- $.10 par value -- 10,000,000 shares authorized, none issued................................. -- -- Common Stock -- $.10 par value -- 100,000,000 shares authorized, 16,078,733 shares issued at both December 31, 1999 and 1998, respectively......................... 1.6 1.6 Additional paid-in capital................................ 60.7 60.7 Common stock in treasury, at cost -- 441,845 and 154,668 shares at December 31, 1999 and 1998, respectively...... (8.0) (3.8) Retained earnings......................................... 156.7 134.8 Accumulated other comprehensive income (loss) -- Unrealized foreign currency translation adjustments..... (26.8) 3.7 ------ ------ Total Stockholders' Equity......................... 184.2 197.0 ------ ------ Total Liabilities and Stockholders' Equity................ $436.6 $474.7 ====== ======
See Notes to Consolidated Financial Statements 28 29 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 --------------------------------------------------------------------------------------- ACCUMULATED COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER ------------------- ---------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL ---------- ------ ------- ------ ---------- -------- ------------- ------ (U.S. $ IN MILLIONS) BALANCE, DECEMBER 31, 1996.............. 16,052,621 $1.6 $60.0 $ 77.8 $ 16.6 $156.0 Net income............................ 45.3 45.3 Adjustments to unrealized foreign currency translation................ (12.5) (12.5) ------ Comprehensive income.................. 32.8 ------ 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 ---------- ---- ----- ------ ------ ------ BALANCE, DECEMBER 31, 1997.............. 16,065,443 1.6 60.3 113.5 4.1 179.5 Net income............................ 31.0 31.0 Adjustments to unrealized foreign currency translation................ (0.4) (0.4) ------ Comprehensive income.................. 30.6 ------ Dividends declared ($0.60 per share).............................. (9.6) (9.6) Purchases of treasury stock........... 155,700 $(3.8) (3.8) Stock issued to directors as compensation........................ 1,350 (1,032) -- Stock issued for options exercised.... 11,940 0.3 0.3 Adjustments due to rounding........... 0.1 (0.1) -- ---------- ---- ------- ----- ----- ------ ------ ------ BALANCE, DECEMBER 31, 1998.............. 16,078,733 1.6 154,668 (3.8) 60.7 134.8 3.7 197.0 Net income............................ 31.4 31.4 Adjustments to unrealized foreign currency translation................ (30.5) (30.5) ------ Comprehensive income.................. 0.9 ------ Dividends declared ($0.60 per share).............................. (9.5) (9.5) Purchases of treasury stock........... 294,350 (4.3) (4.3) Stock issued to directors as compensation........................ (7,173) 0.1 0.1 ---------- ---- ------- ----- ----- ------ ------ ------ BALANCE, DECEMBER 31, 1999.............. 16,078,733 $1.6 441,845 $(8.0) $60.7 $156.7 $(26.8) $184.2 ========== ==== ======= ===== ===== ====== ====== ======
See Notes to Consolidated Financial Statements 29 30 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------- ------ (U.S. $ IN MILLIONS) Operations Net income................................................ $ 31.4 $ 31.0 $ 45.3 Depreciation and amortization............................. 22.2 24.8 14.4 Deferred income tax provision............................. 10.4 5.0 9.9 Minority interest in earnings of subsidiaries............. 5.6 5.6 5.5 Other..................................................... 0.1 2.6 3.0 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable.................................... (2.6) (1.2) 8.1 Inventories............................................ 6.5 (1.4) (7.1) Accounts payable....................................... (11.8) 2.4 (11.1) Accrued expenses....................................... (1.6) 0.3 0.5 Prepaid expenses....................................... (0.1) 1.2 (1.7) Accrued income taxes................................... 0.6 (3.2) 0.5 ------ ------- ------ Net changes in operating working capital............. (9.0) (1.9) (10.8) ------ ------- ------ Cash Provided by Operations....................... 60.7 67.1 67.3 ------ ------- ------ Investing Capital spending.......................................... (26.3) (36.7) (35.8) Capitalized software costs................................ (3.1) (4.0) (7.6) Acquisitions, net of cash acquired........................ -- (65.4) -- Other..................................................... (2.5) (1.3) (4.7) ------ ------- ------ Cash Used for Investing........................... (31.9) (107.4) (48.1) ------ ------- ------ Financing Cash dividends paid to SWM stockholders................... (9.5) (9.6) (9.6) Cash dividends paid to minority owner..................... (5.2) (5.3) (4.5) Changes in short-term debt................................ (2.5) 8.4 (0.8) Proceeds from issuances of long-term debt................. 6.5 24.8 5.6 Payments on long-term debt................................ (5.4) (5.0) (3.9) Purchases of treasury stock............................... (4.3) (3.8) -- Issuances of capital stock................................ -- 0.3 0.3 ------ ------- ------ Cash Provided by (Used for) Financing............. (20.4) 9.8 (12.9) ------ ------- ------ Increase (Decrease) in Cash and Cash Equivalents............ 8.4 (30.5) 6.3 Cash and Cash Equivalents at beginning of year.............. 6.7 37.2 30.9 ------ ------- ------ Cash and Cash Equivalents at end of year.................... $ 15.1 $ 6.7 $ 37.2 ====== ======= ======
See Notes to Consolidated Financial Statements 30 31 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 1. BACKGROUND On November 30, 1995, Kimberly-Clark Corporation ("Kimberly-Clark") distributed all of the outstanding common stock of Schweitzer-Mauduit International, Inc. (the "Distribution") to its stockholders, through a tax-free spin-off of its U.S., French and Canadian business operations that manufactured and sold tobacco-related papers and other specialty paper products (the "Businesses"). Effective at the close of business on November 30, 1995, the Company became an independent, publicly owned company as a result of the Distribution. In order to effectuate the spin-off of the Businesses, on August 21, 1995 and July 31, 1995, respectively, Schweitzer-Mauduit International, Inc. ("SWM") and Schweitzer-Mauduit Canada, Inc. ("SM-Canada") were incorporated and nominally capitalized. Prior to the Distribution, Kimberly-Clark transferred to SWM (the "Transfer") (i) the assets and liabilities of its U.S.-based specialty products business; (ii) all of the issued and outstanding shares of SM-Canada and of Schweitzer-Mauduit France, S.A.R.L., a French corporation ("SMF"); and (iii) 72 percent of the issued and outstanding shares of LTR Industries, S.A., a French corporation ("LTRI"). After the Transfer, the Company consisted of the operating assets and liabilities of Kimberly-Clark's U.S. specialty products business and investments in SM-Canada (100 percent owned), SMF (100 percent owned) and LTRI (72 percent owned). SMF, directly or indirectly, then owned 100 percent of two principal French operating subsidiaries, Papeteries de Mauduit S.A. ("PdM") and Papeteries de Malaucene S.A. ("PdMal"), and a French holding company, Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"). The Transfer was accounted for at historical cost in a manner similar to that in pooling of interests accounting as the entities were all under common control. (As used herein, the Company means SWM, SWM and its several subsidiaries or, as determined by the context, one or more or its several subsidiaries.) During 1997, the Company established and nominally capitalized Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a 100 percent owned holding company organized under the Spanish holding company regime. NOTE 2. ACQUISITIONS On February 2, 1998, SM-Spain paid approximately $62.0 in cash for 99.97 percent ownership interest in Companhia Industrial de Papel Pirahy ("Pirahy"), a specialty paper manufacturer located near Rio de Janeiro, Brazil. In connection with the acquisition of Pirahy, the Company modified its existing credit agreement to provide a $20.0 term loan to SM-Spain. SM-Spain borrowed the remaining funds for the transaction from SMF, which in turn utilized its existing cash balances and borrowings from its revolving credit facilities. Subsequently, Pirahy was renamed Schweitzer-Mauduit do Brasil, S.A. ("SWM-B"). On February 11, 1998, SM-Enterprises paid 37.2 million French francs (approximately $6.1) in cash and assumed approximately $5.8 in existing net debt for all of the outstanding shares of Ingefico, S.A. and 97.1 percent of the outstanding shares of its pulp and specialty paper manufacturing subsidiaries, Groupe SAPAM S.A. ("Groupe SAPAM") and Papeteries de la Moulasse S.A., located in Saint-Girons, France. Subsequently, SM-Enterprises acquired all the remaining shares of Groupe SAPAM for $0.2 in cash. SM-Enterprises and Ingefico, S.A. were then merged into Groupe SAPAM. Papeteries de la Moulasse S.A. was renamed Papeteries de Saint-Girons S.A. ("PdStG"). 31 32 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The above acquisitions were accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values as of the respective dates of the acquisitions. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired............................... $95.7 Less: Cash paid for the stock............................... (68.3) Direct costs incurred................................. (2.0) ----- Liabilities assumed....................................... $25.4 =====
The operating results of the newly-acquired companies are included in the Consolidated Statements of Income beginning February 1, 1998. Unaudited consolidated pro forma net sales, net income, basic earnings per share and diluted earnings per share, assuming the acquisitions had occurred at the beginning of 1997, would have been $570.4, $44.2, $2.76 and $2.71, respectively. Unaudited consolidated pro forma net sales and net income for 1998 would have been $555.9 and $31.1, respectively. Unaudited consolidated pro forma basic and diluted earnings per share for 1998 would have been $1.94 and $1.92, the same as the Company's audited consolidated basic and diluted earnings per share. NOTE 3. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These financial statements have been prepared in conformity with 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 are presented on a consolidated basis and include the accounts of SWM and all its majority-owned subsidiaries. All material intercompany and interdivisional transactions are eliminated. Revenue Recognition Sales are generally recognized upon shipment of the product to the customer. Foreign Currency Translation The income statements of foreign entities are translated into U.S. dollars at average exchange rates prevailing during the periods. The balance sheets of these entities are translated at period-end exchange rates, and the differences from historical exchange rates are reflected in a separate component of accumulated other comprehensive income (loss) as unrealized foreign currency translation adjustments. Foreign currency gains and losses arising from settlement of transactions in non-local currencies and remeasurement of non-local currency denominated monetary assets and liabilities are included in other income, net. Earnings Per Share Basic net income per common share is computed based on net income divided by the weighted average number of common shares outstanding. The average number of common shares used in the calculation of basic net income per common share for 1999, 1998 and 1997 were 15,805,700, 16,018,700 and 16,059,900, 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 1999, 1998 and 1997 were 15,807,200, 16,161,300 and 16,338,600, respectively. The only potential common shares are those related to stock options outstanding during the respective years. 32 33 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Cash and Cash Equivalents Cash and cash equivalents include cash, time deposits and readily marketable securities with original maturities of three months or less. The recorded amount reported in the balance sheet approximates fair value. Inventories Most U.S. inventories are valued at cost on the Last-In, First-Out ("LIFO") method. The balance of the U.S. inventories and inventories of entities outside the United States are valued at the lower of cost, using the First-In, First-Out ("FIFO") and weighted average methods, or market. Property and Depreciation Property, plant and equipment are stated at cost. Depreciable property is depreciated on the straight-line method for accounting purposes. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the balance sheet, and any gain or loss on the transaction is included in income. The depreciable lives for the principal asset categories are as follows:
ASSET CATEGORY DEPRECIABLE LIFE -------------- ---------------- Machinery and Equipment.................. 5 to 20 years Buildings................................ 20 to 40 years Building Improvements.................... Lesser of 20 years or remaining life of the relevant building or lease
Capitalized Software Costs The Company accounts for costs incurred in connection with software developed for internal use in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" issued in March 1998 by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The Company capitalizes certain purchases of software and software design and installation costs in connection with major projects for software development for internal use. These costs are included in Deferred Charges and Other Assets on the consolidated balance sheet and are amortized on the straight line method for accounting purposes over the estimated useful life not to exceed seven years. Costs associated with business process redesign, end-user training, system start-up and ongoing software maintenance are expensed as incurred. Environmental Spending Environmental spending is capitalized if such spending qualifies as property, plant and equipment, substantially increases the economic value or extends the useful life of an asset. All other such spending is expensed as incurred. Environmental spending relating to an existing condition caused by past operations is expensed. Liabilities are accrued when environmental assessments or remedial efforts are probable, and the costs can be reasonably estimated. Generally, timing of these accruals coincides with completion of a feasibility study or commitment to a formal plan of action. 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. 33 34 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Income Taxes Income tax expense and deferred income tax assets and liabilities are determined under the asset and liability method. Deferred income taxes have been provided on the differences between the financial reporting and tax basis of assets and liabilities by applying enacted tax rates in effect for the years in which the differences are expected to reverse. In France, prior to the Distribution, SMF, PdM, PdMal and SMF's other French subsidiaries unrelated to the tobacco-related and specialty papers businesses were included in the consolidated income tax group of SMF, while LTRI separately filed its own income tax returns. Those other SMF subsidiaries were merged together, and the shares of the merged entity were distributed to Kimberly-Clark prior to the Distribution. SMF remained part of SWM to permit PdM and PdMal to utilize income tax loss carryforwards previously generated by those other French operations. Subsequent to the Distribution, those other French subsidiaries were no longer included in the consolidated income tax group of SMF, and LTRI continues to separately file its own income tax returns. Stock Compensation Compensation cost for stock options is measured based on the intrinsic value method under APB No. 25, "Accounting for Stock Issued to Employees" (See Note 8). Payments in the form of shares of the Company made to third parties, including the Company's outside Directors, are recorded at fair value based on the market value of the Company's common stock at the time of payment. New Accounting Standard In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will require that all derivative financial instruments be recognized as either assets or liabilities on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays the effective date for the new requirements of SFAS No. 133 by one year. As a result, SFAS No. 133 will be effective no later than for the Company's first quarter of 2001. The Company is evaluating the effects of this new statement and when to implement the new requirements. 34 35 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 4. SUPPLEMENTAL DISCLOSURES Supplemental Balance Sheet Data
AS OF DECEMBER 31, ------------------- 1999 1998 ------- ------- Summary of Accounts Receivable: Trade..................................................... $56.8 $57.4 Other..................................................... 17.2 14.0 Less allowances for doubtful accounts and sales discounts.............................................. (1.9) (1.9) ----- ----- Total............................................. $72.1 $69.5 ===== ===== Summary of Inventories by Major Class: At the lower of cost on the FIFO and weighted average methods or market: Raw materials.......................................... $29.0 $28.1 Work in process........................................ 5.6 7.1 Finished goods......................................... 21.1 26.6 Supplies and other..................................... 12.0 13.2 ----- ----- 67.7 75.0 Excess of FIFO cost over LIFO cost..................... (4.8) (5.6) ----- ----- Total............................................. $62.9 $69.4 ===== =====
Total inventories included $25.5 and $30.8 of inventories subject to the LIFO method of valuation at December 31, 1999 and 1998, respectively. If LIFO inventories had been valued at FIFO cost, net income would have been decreased by $0.5, $0.4 and $0.6 in 1999, 1998 and 1997, respectively.
AS OF DECEMBER 31, ------------------- 1999 1998 ------- ------- Summary of Accrued Expenses: Accrued salaries, wages and employee benefits............. $29.2 $26.8 Other accrued expenses.................................... 19.9 23.9 ----- ----- Total............................................. $49.1 $50.7 ===== =====
35 36 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Analysis of Allowances for Doubtful Accounts and Sales Discounts:
BALANCE AT WRITE-OFFS BALANCE BEGINNING BALANCES CHARGED TO AND CURRENCY AT END OF OF PERIOD ACQUIRED EXPENSE DISCOUNTS TRANSLATION PERIOD ---------- -------- ---------- ---------- ----------- --------- AS OF DECEMBER 31, 1999 Allowance for doubtful accounts...... $1.9 $0.6 $(0.1) $(0.5) $1.9 Allowance for sales discounts........ -- 0.1 (0.1) -- -- ---- ---- ----- ----- ---- Total...................... $1.9 $0.7 $(0.2) $(0.5) $1.9 ==== ==== ===== ===== ==== AS OF DECEMBER 31, 1998 Allowance for doubtful accounts...... $0.4 $1.5 $0.3 $(0.1) $(0.2) $1.9 Allowance for sales discounts........ -- -- 0.2 (0.2) -- -- ---- ---- ---- ----- ----- ---- Total...................... $0.4 $1.5 $0.5 $(0.3) $(0.2) $1.9 ==== ==== ==== ===== ===== ==== AS OF DECEMBER 31, 1997 Allowance for doubtful accounts...... $0.5 $ -- $(0.1) $ -- $0.4 Allowance for sales discounts........ -- 0.2 (0.2) -- -- ---- ---- ----- ----- ---- Total...................... $0.5 $0.2 $(0.3) $ -- $0.4 ==== ==== ===== ===== ====
Supplemental Cash Flow Information
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 ------- ------- ------- Interest paid............................................... $ 6.4 $ 6.2 $ 4.2 Interest capitalized........................................ 0.2 0.1 0.5 Income taxes paid (1)....................................... 12.3 15.6 17.7 Decrease in cash and cash equivalents due to exchange rate changes................................................... $ 0.9 $ 1.0 $ 2.5
- --------------- (1) 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. NOTE 5. DEBT In 1995, the Company, SMF and PdM Industries S.N.C. ("PdM Industries"), a subsidiary owned 99 percent by PdM and one percent by SMF, entered into an unsecured credit agreement (the "Credit Agreement") with a group of banks to provide term and revolving loans totaling 375 million French francs (or approximately $57 at December 31, 1999 and $67 at December 31, 1998) to SMF and PdM Industries (the "French Credit Facility") and term and revolving loans totaling $40.0 to the Company (the "U.S. Credit Facility" and, together with the French Credit Facility, the "Credit Facilities"). The French Credit Facility consists of a term loan to SMF in the amount of 250 million French francs (or approximately $38 at December 31, 1999 and $45 at December 31, 1998) (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 $19 at December 31, 1999 and $22 at December 31, 1998) (the "French Revolving Credit Facility"). Borrowings under the French Credit Facility are guaranteed by the Company. The U.S. Credit Facility consists of a term loan to the Company in the amount of $25.0 (the "U.S. Term Loan Facility", and, together with the French Term Loan Facility, the "Term Loan Facilities") and a renewable 364-day revolving credit facility available to the Company in an amount of up to $15.0 (the "U.S. Revolving Credit Facility" and, together with the French Revolving Credit Facility, the "Revolving Credit 36 37 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Facilities"). In connection with the Distribution, the Company made cash distributions to Kimberly-Clark principally financed by borrowings of the full amounts by SWM and SMF under the Term Loan Facilities. In February 1998, the Company completed the Brazilian and French acquisitions (see Note 2). In anticipation of these acquisitions, the Company modified its then existing Credit Agreement. The terms of the "Amended and Restated Credit Agreement" entered into on January 30, 1998 were substantially the same as the prior Credit Agreement, except that it (i) provided an additional $20.0 term loan to SM-Spain (adding it to the Term Loan Facilities), (ii) extended the maturities of the Term Loan Facilities by approximately two years, and (iii) renewed the Revolving Credit Facilities. During January 1999, the Revolving Credit Facilities were renewed with an expiration date of January 28, 2000 and in January 2000, the Revolving Credit Facilities were renewed again with an expiration date of January 26, 2001. Loans under each of the Term Loan Facilities are payable in three equal semi-annual installments beginning in January 2002. 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 Amended and Restated Credit Agreement) plus (ii) the London interbank offered rate ("LIBOR"), or (b) an alternate base rate. Beginning January 28, 2000, the interest rates under the Revolving Credit Facilities are based, at the election of the Company, on either (a) the sum of (i) 0.75 percent per annum plus (ii) LIBOR, or (b) an alternate base rate. The Amended and Restated Credit Agreement contains representations and warranties which are customary for facilities of this type and covenants and provisions that, among other things, require the Company maintain certain defined financial ratios (a minimum Tangible Net Worth, a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio, all as defined in the Amended and Restated Credit Agreement). Events of default under the Amended and Restated Credit Agreement include, among other things, termination of the Company's supply agreement with Philip Morris without entry into one or more suitable replacement agreements. The Company selectively enters into interest rate hedge agreements with respect to its variable rate long-term borrowings under the Credit Facilities to manage its exposure to interest rate increases when it is practicable and cost-effective to do so. The weighted average effective interest rates on the Term Loan Facilities for the years ended December 31, 1999, 1998 and 1997 were 4.5 percent, 5.1 percent and 4.7 percent, respectively. At both December 31, 1999 and 1998, long-term debt other than the Term Loan Facilities primarily consisted of obligations of the French operations related to government-mandated profit sharing. These amounts bear interest at the five year treasury note rate in France (6.0 percent at both December 31, 1999 and 1998) and are generally payable in the fifth year subsequent to the year the profit sharing is accrued. 37 38 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Following are the balances of long-term debt obligations as of December 31:
1999 1998 ------ ------ French Term Loan............................................ $ 38.4 $ 44.7 U.S. Term Loan.............................................. 25.0 25.0 Spanish Term Loan........................................... 20.0 20.0 French Employee Profit Sharing.............................. 16.1 17.4 Other....................................................... 4.6 5.7 ------ ------ 104.1 112.8 Less current portion........................................ (3.2) (4.4) ------ ------ $100.9 $108.4 ====== ======
Following are the scheduled maturities for these long-term debt obligations as of December 31, 1999: 2000........................................................ $ 3.2 2001........................................................ 3.9 2002........................................................ 59.8 2003........................................................ 31.6 2004........................................................ 4.4 Thereafter.................................................. 1.2 ------ $104.1 ======
At December 31, 1999, the U.S. and French operations of the Company together had approximately $34 of Revolving Credit Facilities available, of which approximately $27 was unused. These facilities permit borrowing at competitive interest rates and are available for general corporate purposes. The Company pays commitment fees on the unused portion of these Revolving Credit Facilities at an annual rate of .20 percent and may cancel the facilities without penalty at any time prior to their expiration at January 26, 2001. The Company also had other bank credit facilities available totaling approximately $23, of which $1.8 was outstanding at December 31, 1999. No commitment fees are paid on the unused portion of these facilities. At December 31, 1999 and 1998, 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. 38 39 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 6. INCOME TAXES An analysis of the provision (benefit) for income taxes for the years ended December 31, 1999, 1998 and 1997 follows:
1999 1998 1997 ----- ----- ----- Current income taxes: U.S. Federal.............................................. $ 0.4 $(1.7) $ 3.8 U.S. State................................................ 0.1 (0.3) 0.7 Foreign................................................... 12.8 14.3 14.2 ----- ----- ----- 13.3 12.3 18.7 ----- ----- ----- Deferred income taxes: U.S. Federal.............................................. 0.6 1.9 1.5 U.S. State................................................ 0.1 (0.1) 0.3 Foreign................................................... 9.7 3.2 8.1 ----- ----- ----- 10.4 5.0 9.9 ----- ----- ----- Total............................................. $23.7 $17.3 $28.6 ===== ===== =====
Income before income taxes included income of $56.9 in 1999, $52.6 in 1998, and $63.5 in 1997 from operations outside the United States. A reconciliation of income taxes computed at the U.S. federal statutory income tax rate to the provision for income taxes is as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Tax at U.S. statutory rate...................... $21.2 35.0% $18.9 35.0% $27.8 35.0% State income taxes, net of federal tax benefit....................................... 0.1 0.1 (0.3) (0.5) 0.6 0.8 Statutory rates outside the United States in excess of U.S. statutory rate, net............ 2.7 4.4 3.9 7.2 4.2 5.3 French income tax rate increase -- deferred benefit....................................... (0.2) (0.3) -- -- (2.0) (2.6) Change in French tax law........................ -- -- -- -- (2.1) (2.6) Adjustment of French valuation allowances....... -- -- (5.2) (9.6) -- -- Other, net...................................... (0.1) (0.2) -- -- 0.1 0.1 ----- ---- ----- ---- ----- ---- Provision for income taxes...................... $23.7 39.0% $17.3 32.1% $28.6 36.0% ===== ==== ===== ==== ===== ====
The provision for income taxes in 1999 was impacted by an increase in the effective statutory income tax rate enacted in France in December 1999 for years beginning in 2000 from the scheduled rate of 36.7 percent to 37.7 percent. The favorable effect of $0.2 on the deferred provision for income taxes was due to the increased value of deferred tax assets, primarily attributable to the tax benefits from net operating loss carryforwards ("NOLs") of the SMF tax group estimated to be realizable in future years, net of the increased value of deferred tax liabilities. The provision for income taxes in 1998 included the benefit of a reduction in the valuation allowance recorded against certain French deferred income tax assets arising from NOLs. This adjustment reduced the deferred provision for income taxes by $5.2. The reduction in the valuation allowance was recorded because of continued earnings and projected future earnings at the French businesses that utilize the NOLs, reducing the uncertainty that these NOLs would be fully utilized in the future. 39 40 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 36.7 percent to 41.7 percent for 1997 and 1998, retroactive to January 1, 1997, and to 40.0 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 NOLs 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 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 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, 1999 and 1998 were comprised of the following:
1999 1998 ------ ------ Current deferred income tax assets attributable to: Inventories............................................... $ (0.8) $ (0.8) Postretirement and other employee benefits................ 3.4 3.5 Other accrued liabilities................................. 1.6 1.8 Other..................................................... (0.1) 0.7 ------ ------ Net current deferred income tax asset............. $ 4.1 $ 5.2 ====== ====== Net noncurrent deferred income tax assets attributable to: Operating and capital loss carryforwards.................. $ 44.9 $ 60.9 Accumulated depreciation and amortization................. (26.6) (28.2) Other..................................................... 0.6 (0.2) Valuation allowances...................................... (12.0) (12.8) ------ ------ Net noncurrent deferred income tax asset.......... $ 6.9 $ 19.7 ====== ====== Net noncurrent deferred income tax liabilities attributable to: Accumulated depreciation and amortization................. $(21.3) $(19.8) Postretirement and other employee benefits................ 7.9 7.9 Other..................................................... 0.3 (0.8) ------ ------ Net noncurrent deferred income tax liability...... $(13.1) $(12.7) ====== ======
In the above presentation, the net noncurrent deferred income tax asset relates to the French, Brazilian and Spanish tax jurisdictions, and the net noncurrent deferred income tax liability relates to the U.S. and Canadian tax jurisdictions. Total deferred income tax assets were $46.7 and $62.0 at December 31, 1999 and 1998, respectively. Total deferred income tax liabilities were $48.8 and $49.8 at December 31, 1999 and 1998, respectively. 40 41 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Under French tax law, the NOLs incurred through December 31, 1994 by the SMF subsidiaries unrelated to the Businesses, which were distributed to Kimberly-Clark prior to the Distribution, were retained by SMF as of January 1, 1995. In addition to SMF's remaining NOLs, NOLs were obtained in the acquisition of Pirahy and were generated during 1998 by SWM-B and during 1998 and 1999 by SM-Spain. The following summarizes the changes in the Company's NOLs and the related noncurrent deferred income tax asset and valuation allowance for the years ended December 31, 1999, 1998 and 1997:
TOTAL VALUATION NET NOL'S ASSET ALLOWANCE ASSET ------ ----- --------- ----- 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 Obtained in acquisition............................ 10.3 3.2 -- 3.2 French valuation allowance adjustment.............. -- -- 5.2 5.2 1998 utilization, net of generated................. (13.9) (6.3) (0.8) (7.1) Currency translation effect........................ 9.2 3.4 (0.8) 2.6 ------ ----- ------ ----- Amount at December 31, 1998........................ 165.8 60.9 (12.8) 48.1 French income tax rate increase.................... -- 1.1 (0.3) 0.8 1999 utilization, net of generated................. (21.5) (8.3) (0.6) (8.9) Currency translation effect........................ (24.2) (8.8) 1.7 (7.1) ------ ----- ------ ----- Amount at December 31, 1999........................ $120.1 $44.9 $(12.0) $32.9 ====== ===== ====== =====
Under current tax laws governing the tax jurisdictions in which the Company has NOLs, remaining NOLs in France and Brazil carry forward indefinitely and NOLs in Spain expire the later of ten years subsequent to the year generated or ten years subsequent to the first year of taxable income in Spain. Of the $120.1 of NOLs still available at December 31, 1999, $3.8 will expire in 2009 or later if not utilized against taxable income in Spain. The remaining $116.3 of NOLs have no expiration date. The Company elected to include PdStG, acquired in February 1998, in the SMF consolidated tax group beginning January 1, 1999. Valuation allowances totaled $12.0 as of December 31, 1999, reducing the related net deferred tax asset to an amount which is estimated to be realizable through utilization of the NOLs. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. However, that amount could change if, among other considerations, estimates of future taxable income or income tax regulations or interpretations change during the carryforward periods. Along with numerous other companies and banks in France, PdM is subject to a tax claim with respect to its purchase of certain bonds in 1988 which were represented by the two selling banks as carrying specific tax benefits. The French taxing authority is challenging the use by PdM of those benefits. In 1999, the French taxing authority reduced its claim against PdM to exclude an "abuse of law" penalty and to include instead a "bad faith" penalty. The total claim by the French taxing authority is now $0.9 as of December 31, 1999, including penalties and interest. The amount of penalties and interest related to "bad faith" included in the tax claim against PdM is approximately $0.2. PdM's adjusted accrual related to this exposure as of December 31, 1999 is $0.7. 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 1996 and the Company appealed this decision. In 1997, the case against the other bank was stayed until the claim filed by the French taxing authority against PdM has been resolved. 41 42 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 NOLs of the SMF consolidated tax group. NOTE 7. POSTRETIREMENT AND OTHER BENEFITS North American Pension Benefits In connection with the Distribution, retirees of the Company's U.S. and Canadian businesses prior to the Distribution remained participants of their respective Kimberly-Clark plans. Subsequent to the Distribution, the Company and its subsidiary in Canada established defined benefit retirement plans covering substantially all full-time employees. Retirement benefits are based on years of service and generally on the average compensation earned in the highest five of the last 15 years of service. Employees as of the date of the Distribution retained credit for prior service while employees of Kimberly-Clark. 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, 1999, 1998 and 1997 were as follows:
1999 1998 1997 ----- ----- ----- Service cost.............................................. $ 2.4 $ 2.3 $ 2.1 Interest cost............................................. 4.8 4.4 3.6 Expected return on plan assets............................ (5.1) (4.3) (3.9) Amortizations and other................................... 0.3 0.1 -- ----- ----- ----- Net periodic pension cost................................. 2.4 2.5 1.8 Special termination benefits charge....................... 0.4 1.1 -- ----- ----- ----- Total pension cost........................................ $ 2.8 $ 3.6 $ 1.8 ===== ===== =====
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 1999, 1998, and 1997. Transition adjustments for these plans are being amortized on the straight-line method over 14 to 18 years. The discount rates used to determine the projected benefit obligation and accumulated benefit obligation for the U.S. employee pension plans were 8.00 percent and 6.75 percent at December 31, 1999 and 1998, 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, 1999 and 1998. 42 43 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 pension plans as of December 31, 1999 and 1998 were as follows:
1999 1998 ------ ----- Change in Projected Benefit Obligation: Projected benefit obligation at beginning of year......... $ 69.3 $54.4 Service cost........................................... 2.4 2.3 Interest cost.......................................... 4.8 4.4 Actuarial (gains) losses............................... (11.1) 8.4 Special termination benefits........................... 0.4 1.1 Gross benefits paid.................................... (1.8) (1.3) ------ ----- Projected benefit obligation at end of year............... 64.0 69.3 ------ ----- Change in Plan Assets: Fair value of plan assets at beginning of year............ 57.2 45.1 Actual return on plan assets........................... 7.4 10.3 Employer contributions................................. 2.6 3.1 Gross benefits paid.................................... (1.8) (1.3) ------ ----- Fair value of plan assets at end of year.................. 65.4 57.2 ------ ----- Funded status at end of year................................ 1.4 (12.1) Unrecognized actuarial (gains) losses....................... (7.6) 6.0 Unrecognized prior service cost and net transition obligation................................................ 0.1 0.2 ------ ----- Net accrued pension liability............................... $ (6.1) $(5.9) ====== =====
The projected benefit obligation and accumulated benefit obligation for a U.S. supplemental executive pension plan with accumulated benefit obligations in excess of plan assets were $1.7 and $1.4, respectively, as of December 31, 1999, and $2.4 and $0.9, respectively, as of December 31, 1998. This particular plan is unfunded and therefore has no plan assets. French Pension Benefits In France, employees are covered under a government administered program. In addition, the Company's French operations sponsor retirement indemnity plans which pay a lump sum retirement benefit to employees who retire from the Company. The Company's French operations also sponsor a supplemental executive pension plan which is designed to provide a retirement benefit equal to between 50 and 65 percent of final earnings, depending upon years of service, after considering other government and Company sponsored retirement plans. Plan assets are principally invested in the general asset portfolio of a French insurance company. The Company's net pension expense for the French pension plans was $1.5, $1.6 and $1.1 for the years ended December 31, 1999, 1998 and 1997, respectively. The assumed long-term rates of return on pension assets for purposes of pension expense recognition for the French plans were 6.5 percent for 1999, 7.0 percent for 1998 and 8.0 percent for 1997. Transition adjustments for these plans are being amortized on the straight-line method over 19 to 20 years. The discount rates used to determine the projected benefit obligation and accumulated benefit obligation for the French plans were 5.5 percent and 6.0 percent at December 31, 1999 and 1998, respectively. The assumed long-term rates of compensation increases used to determine the projected benefit obligation for these plans were 2.5 percent at both December 31, 1999 and 1998. 43 44 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the French pension plans were $14.3, $7.2 and $3.5, respectively, as of December 31, 1999, and $15.4, $8.0 and $4.0, respectively, as of December 31, 1998. The Company's net accrued pension liability for the French plans was $5.3 and $4.5 at December 31, 1999 and 1998, respectively. Brazilian Pension Benefits In Brazil, employees are covered under a government administered program. Postretirement Health Care and Life Insurance Benefits In connection with the Distribution, retirees of the Company's U.S. and Canadian businesses prior to the Distribution remained participants of their respective Kimberly-Clark plans. Subsequent to the Distribution, the Company and its subsidiary in Canada established unfunded health care and life insurance benefit plans which will cover substantially all future retirees of the Company. Eligibility for benefits under the Company's plans is based on years of service and age at retirement. Employees as of the date of the Distribution retained credit for prior service while employees of Kimberly-Clark. The Company's plans are noncontributory for certain long service employees when they retire, but are contributory for most other future retirees. The components of U.S. employee postretirement health care and life insurance benefit costs were as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ----- ----- ----- Service cost................................................ $ 0.3 $ 0.3 $ 0.3 Interest cost............................................... 0.6 0.5 0.5 Amortizations and other..................................... (0.3) (0.5) (0.4) ----- ----- ----- Net periodic postretirement benefit cost.................... 0.6 0.3 0.4 Special termination benefits charge......................... -- 0.3 -- ----- ----- ----- Total postretirement benefit cost........................... $ 0.6 $ 0.6 $ 0.4 ===== ===== =====
The components of the unfunded U.S. employee postretirement health care and life insurance benefit obligation included in other noncurrent liabilities as of December 31, 1999 and 1998 were as follows:
1999 1998 ------ ------ Change in Benefit Obligation: Benefit obligation at beginning of year................... $ 8.1 $ 7.1 Service cost........................................... 0.3 0.3 Interest cost.......................................... 0.6 0.5 Actuarial (gains) losses............................... 0.6 0.8 Plan amendments........................................ -- (0.3) Special termination benefits........................... -- 0.3 Gross benefits paid by the Company..................... (0.7) (0.6) ------ ------ Benefit obligation at end of year......................... 8.9 8.1 ------ ------ Funded status at end of year................................ (8.9) (8.1) Unrecognized actuarial (gains) losses....................... (4.7) (5.3) Unrecognized prior service cost............................. (1.1) (1.3) ------ ------ Net accrued postretirement benefit liability................ $(14.7) $(14.7) ====== ======
44 45 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS For purposes of measuring the benefit obligation at December 31, 1999, a 5.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000 and thereafter. For purposes of measuring the benefit obligation at December 31, 1998, a 6.125 percent annual increase in the per capita cost of health care benefits was assumed for 1999. The rate was assumed to decrease to 5.0 percent for 2000 and remain at that level thereafter. Discount rates of 8.00 percent and 6.75 percent were used to determine the postretirement benefit obligations at December 31, 1999 and 1998, respectively. A one-percentage point increase or decrease in the healthcare cost trend rate would have a nominal effect on the total of the service and interest cost components of the postretirement benefit obligation at December 31, 1999. A one percentage point increase in the healthcare cost trend rate would increase the total postretirement benefit obligation by $0.1 at December 31, 1999. Likewise, a one percentage point decrease in the healthcare cost trend rate would decrease the total postretirement benefit obligation by $0.1 at December 31, 1999. Other Benefits 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 cost under the plans reflected in the accompanying consolidated income statements was $0.9 for 1999 and $1.0 for 1998 and 1997. At December 31, 1999, 1998 and 1997, 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, 1999. 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 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 45 46 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 provides that eligible employees may be granted stock options which, when exercised, give the recipient the right to purchase the Company's Common Stock at a price no less than the "fair market value" (as defined in the Equity Participation Plan) of such stock at grant date. Options awarded under the Equity Participation Plan only become exercisable after specified periods of employment after the grant thereof (30 percent after the first year, 30 percent after the second year and the remaining 40 percent after the third year). Generally, such options expire ten years subsequent to the date of grant. SFAS No. 123 "Accounting for Stock Based Compensation" defines a fair value based method of accounting for stock compensation, including stock options, to employees. This statement provides entities a choice of recognizing related compensation expense by adopting the fair value method or to measure compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25 ("APB No. 25"). The Company has elected to continue to measure compensation cost for stock compensation based on the intrinsic value method under APB No. 25, "Accounting for Stock Issued to Employees". Payments in the form of shares of the Company made to third parties, including the Company's outside Directors, are recorded at fair value based on the market value of the Company's common stock at the time of payment. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock compensation under the fair value method of that statement. For purposes of the pro forma disclosures, the estimated fair value of the stock compensation is amortized to expense over the vesting period. Under the fair value method, the Company's net income and earnings per share would have been the pro forma amounts indicated below:
1999 1998 1997 ----- ----- ----- Net Income: As reported............................................... $31.4 $31.0 $45.3 Pro forma................................................. $29.8 $29.8 $44.3 Basic net income per share: As reported............................................... $1.99 $1.94 $2.82 Pro forma................................................. $1.89 $1.86 $2.76 Diluted net income per share: As reported............................................... $1.99 $1.92 $2.77 Pro forma................................................. $1.89 $1.84 $2.71
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 27 percent for the 1999 awards, 24 percent for the 1998 awards and 30 percent for the 1997 awards, a risk-free rate of return based upon the zero coupon government bond yield and an assumed quarterly dividend of $0.15 per share. At both December 31, 1999 and 1998, 1,500,000 shares of the Company's Common Stock were reserved under the Equity Participation Plan. At December 31, 1999 and 1998, there were 70,410 and 607,040 shares, respectively, available for future awards. 46 47 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The following stock options were outstanding as of December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------------- -------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- --------- -------- --------- -------- --------- Outstanding at beginning of year............................ 869,380 $24.95 764,360 $23.11 699,400 $22.09 Granted......................... 562,300 15.60 136,900 36.23 76,600 32.54 Forfeited....................... (17,170) 21.27 (19,940) 32.81 -- Cancelled....................... (8,500) 35.05 -- -- Exercised....................... -- (11,940) 23.93 (11,640) 23.51 ---------- -------- -------- Outstanding at end of year........ 1,406,010 21.19 869,380 24.95 764,360 23.11 ========== ======== ======== Options exercisable at year-end... 793,590 $22.83 655,200 $21.60 381,860 $21.60 ========== ======== ======== Weighted-average per share fair value of options granted during the year........................ $ 6.57 $ 15.00 $ 12.40 ========== ======== ========
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ----------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------- ----------- ----------- --------- ----------- --------- $12.15 to $15.91.......................... 552,800 9.0 years $15.60 48,500 $15.69 $21.06 to $28.19.......................... 665,360 6.0 21.97 665,360 21.97 $32.43 to $34.07.......................... 88,100 7.3 32.91 47,390 32.75 $34.62 to $37.38.......................... 99,750 8.1 36.69 32,340 36.74 ---------- -------- $12.15 to $37.38.......................... 1,406,010 7.4 years $21.19 793,590 $22.83 ========== ========
Effective December 2, 1999, the Company established a Restricted Stock Plan which is intended to promote the long-term financial success of the Company by attracting to the Company and retaining outstanding executive personnel and to motivate such personnel by means of restricted stock grants. The Compensation Committee of the Company's Board of Directors selects participants and establishes the terms of any grant of restricted stock. The Company's Restricted Stock Plan provides that such a grant immediately transfers ownership rights in shares of the Company's Common Stock to the recipient of the grant, including the right to vote the shares and to receive dividends thereon, at a share price established by the Compensation Committee in its discretion. The recipient's continued ownership of and right to freely transfer the restricted stock is subject to such conditions on transferability and to such risks of forfeiture as are established by the Compensation Committee at the time of grant, which may include continued employment with the Company for a defined period, achievement of specified management performance objectives or other conditions established by the Compensation Committee. The number of shares which may be issued under this Restricted Stock Plan is limited to the lesser of 200,000 shares or the number of treasury shares held by the Company as of the date of any grant. No single participant may be awarded, in the aggregate, more than 50 percent of the shares authorized to be issued under the Restricted Stock plan. As of December 31, 1999, no restricted shares had been issued under the Restricted Stock Plan. 47 48 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 9. FOREIGN CURRENCY Foreign currency losses have arisen from settlement of transactions in non-local currencies and the remeasurement of non-local currency denominated monetary assets and liabilities into the currency of the country in which the operation is domiciled. Such losses included in other income, net were nominal in 1999, 1998 and 1997. Foreign currency risks arise from transactions and commitments denominated in non-local currencies. These transactions and commitments may include the purchase of inventories or property, plant and equipment, the sale of products and the repayment of loans. Management selectively hedges the Company's foreign currency risks when it is practicable and cost effective to do so. The instruments are purchased from well-known money center banks, insurance companies or government agencies (counterparties). Usually the contracts extend for no more than 12 months, although their contractual term has been as long as 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 or expense based on the period-end market price of the instrument. At December 31, 1999, there were outstanding forward contracts, which were held for purposes other than trading, maturing at various dates in 2000, to purchase $7.6 of various foreign currencies. These contracts have not given rise to any significant net deferred gains or losses as of December 31, 1999. NOTE 10. COMMITMENTS Operating Leases Future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 1999 are less than $1 annually over the next five years. Rental expense under operating leases was $4.3, $5.1 and $4.0 for the years ended December 31, 1999, 1998 and 1997, respectively. Other Commitments During 1998, PdM entered into a 10 year agreement with one of its vendors in connection with PdM's purchases of calcium carbonate, a raw material used in the manufacturing of some paper products. The vendor agreed to construct and operate an on-site plant at the Quimperle, France mill. The cost to construct the necessary building and equipment was approximately $7. PdM agreed to annual minimum purchase commitments at prices which will vary according to quantities consumed. If PdM buys less than the minimum purchase commitments, the vendor can terminate the contract and require PdM to pay to the vendor the then net book value of the building and equipment, determined using a straight-line method of depreciation over the life of the agreement. Similarly, a vendor of SWM-B operates a calcium carbonate plant on-site at the Pirahy, Brazil mill. Under that agreement, which will expire in 2006, the net raw material prices vary according to the quantities produced, however, SWM-B is committed to pay at least the monthly fixed costs of the calcium carbonate plant which are less than $0.1 per month. 48 49 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Under each of the above agreements, the net raw material prices expected to be paid are less than the net prices at which the raw material could otherwise be purchased, and thus the commitments are not expected to result in losses. Additionally, PdM's and SWM-B's current levels of calcium carbonate usage exceed their respective contractual minimum commitments. The Company enters into certain other immaterial contracts from time to time for the purchase of certain raw materials. The Company also enters into certain contracts for the purchase of equipment and related costs in connection with its ongoing capital projects which, at December 31, 1999, totaled approximately $0.6. SWM-B has arrangements with local financial institutions through which certain customers selected by SWM-B that desire extended payment terms can obtain financing directly with such financial institutions. SWM-B negotiates the terms of the financing and, upon agreement by all parties, SWM-B receives immediate payment from the financial institution upon the sale of the related product. Under these arrangements, SWM-B retains an unrecorded commitment to the financial institutions in the event the customer defaults. SWM-B has total arrangements available as of December 31, 1999 of approximately $4.5, of which approximately $1.9 was being utilized. NOTE 11. 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 certain tobacco industry class action and individual lawsuits in which certain component suppliers to the tobacco industry were named, including Kimberly Clark and, in some cases, LTRI. During 1999, Kimberly-Clark and LTRI were dismissed from all tobacco-related litigation pending against them. The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material adverse effect on the Company's consolidated financial statements. NOTE 12. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental matters. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims, 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 and analogous New Jersey statutes in connection with the Global Landfill Reclaiming Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey. The Global Landfill was utilized by Kimberly-Clark's Spotswood mill. The Company has assumed Kimberly-Clark's liabilities for the Global Landfill site. The Company continues to participate in the remediation of the Global Landfill as a member of a group of PRP's that entered into a consent decree with the state of New Jersey in 1993. The Company previously recorded its pro-rata portion of the estimated liability for remediation of this site, the remainder of which is not material. 49 50 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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. Recent test results show that the Company has achieved compliance with the consent order and has reduced the concentration of landfill gases to the levels specified in the consent order at 30 feet below ground level in all of the gas monitoring wells. The Company will continue its current remediation activities on a reduced monitoring schedule approved by MDEP for this landfill, the remaining cost of which was previously accrued and is not material. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $0.5 in 1999, and anticipates that it will incur approximately $2 to $4 annually in 2000 and 2001. The major projects included in these estimates include upgrading wastewater treatment facilities at various locations and installation of ink solvent treatment equipment in France. The foregoing capital expenditures are not expected to reduce the Company's ability to invest in capacity expansion, quality improvements, capital replacements, productivity improvements or cost containment projects, and are not expected to have a material adverse effect on the Company's financial condition or results of operations. NOTE 13. BUSINESS SEGMENTS AND GEOGRAPHY Business Segment Reporting The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. These business segments manufacture and sell cigarette, plug wrap and tipping papers, used to wrap various parts of a cigarette, reconstituted tobacco products, and paper products used in cigarette packaging, primarily to the tobacco industry. While the products are comparable in each segment, they vary based on the technological capabilities of each of the manufacturing operations and the respective markets and customers served. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. Tobacco industry products comprised 89 to 90 percent of the Company's consolidated net sales in 1999 and 1998, and 94 percent in 1997. The Company's non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine operations. Consolidated Operations by Segment For purposes of the segment disclosure in the following tables, the term "United States" includes operations in the United States and Canada. The Canadian operations only produce flax fiber used as raw material in the U.S. operations. The Company's Brazilian operations acquired on February 2, 1998 and the operations of the French business acquired on February 11, 1998 are included in the Company's consolidated financial statements since the beginning of February 1998. Intercompany sales of products between segments are made at market prices and are referred to as intersegment items. Expense amounts not associated with segments are referred to as unallocated items. 50 51 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Assets reported by segment represent assets which are directly used and an allocated portion of jointly used assets. These assets include receivables from other segments and are included in eliminations.
NET SALES OPERATING PROFIT TOTAL ASSETS ------------------------ --------------------- --------------- 1999 1998 1997 1999 1998 1997 1999 1998 ------ ------ ------ ----- ----- ----- ------ ------ United States................................ $166.3 $186.0 $195.5 $ 9.3 $ 6.2 $21.2 $147.6 $156.3 France....................................... 284.6 312.0 268.8 55.2 60.3 66.4 237.7 254.5 Brazil....................................... 54.0 57.9 N.A. 5.2 (2.3) N.A. 53.0 67.3 ------ ------ ------ ----- ----- ----- ------ ------ Subtotal............................ 504.9 555.9 464.3 69.7 64.2 87.6 438.3 478.1 ------ ------ ------ Intersegment sales by: United States.............................. (0.2) (7.1) (1.2) France..................................... (0.3) (2.1) (2.5) Brazil..................................... -- -- N.A. ------ ------ ------ Subtotal............................ (0.5) (9.2) (3.7) ------ ------ ------ Unallocated items and eliminations, net...... -- -- -- (5.1) (5.1) (5.7) (1.7) (3.4) ------ ------ ------ ----- ----- ----- ------ ------ Consolidated................... $504.4 $546.7 $460.6 $64.6 $59.1 $81.9 $436.6 $474.7 ====== ====== ====== ===== ===== ===== ====== ======
CAPITAL SPENDING DEPRECIATION AND AMORTIZATION ------------------------- ------------------------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ------- ------- ------- United States........................ $ 5.0 $ 9.2 $16.3 $ 8.9 $11.6 $ 6.8 France............................... 18.9 25.3 19.5 10.7 9.5 7.6 Brazil............................... 2.4 2.2 N.A. 2.6 3.7 N.A. ----- ----- ----- ----- ----- ----- Consolidated........... $26.3 $36.7 $35.8 $22.2 $24.8 $14.4 ===== ===== ===== ===== ===== =====
- --------------- N.A. -- Not Applicable Consolidated Operations by Geographic Area Long-lived assets, excluding deferred income tax assets and certain other deferred charges, were $99.1, $134.3 and $32.3 in the United States, France and Brazil, respectively, as of December 31, 1999, and $102.9, $144.4 and $49.1 in the United States, France and Brazil, respectively, at December 31, 1998. For purposes of the geographic disclosure in the following table, net sales are attributed to geographic locations based on the location of the Company's direct customers.
NET SALES ------------------------ 1999 1998 1997 ------ ------ ------ United States............................................... $142.9 $156.2 $169.3 Europe and the former Commonwealth of Independent States.... 214.4 224.7 192.7 Asia/Pacific (including China).............................. 66.4 76.8 68.3 Latin America(1)............................................ 60.2 67.4 10.5 Other foreign countries..................................... 20.5 21.6 19.8 ------ ------ ------ Consolidated.................................. $504.4 $546.7 $460.6 ====== ====== ======
- --------------- (1) Substantially all of the Company's net sales to Latin America were to customers in Brazil in each of the periods presented. 51 52 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 14. MAJOR CUSTOMERS Two of the Company's customers have accounted for a significant portion of the Company's net sales in the periods presented in the financial statements, and the loss of one or both such customers, or a significant reduction in one or both of these customers' purchases, could have a material adverse effect on the Company's results of operations. Net sales to Philip Morris Companies, Inc. ("Philip Morris"), together with its affiliates and designated converters, accounted for approximately 30 percent, 28 percent and 36 percent of total consolidated net sales for the years ended December 31, 1999, 1998 and 1997, respectively. As a result of the acquisition of the Brazilian business in 1998, a substantial portion of whose sales are to subsidiaries of B.A.T. Industries PLC ("BAT"), net sales to BAT, together with its affiliates and designated converters, increased to approximately 18 percent and 14 percent of consolidated net sales for the years ended December 31, 1999 and 1998, respectively. Prior to 1998, BAT was a significant customer, but accounted for less than ten percent of the Company's consolidated net sales. Each of the Company's segments reported sales to these customers for each of the respective periods reported above. The Company had sales to the minority shareholder of LTRI of $24.2, $16.8 and $14.0 in 1999, 1998 and 1997, respectively. The Company's consolidated accounts receivable at December 31, 1999 and 1998 included balances from Philip Morris and BAT, together with their respective affiliates and designated converters. The percentage of these customers' balances of consolidated accounts receivable is less than each of their respective percentages of consolidated net sales. The Company performs ongoing credit evaluations on all of its customers' financial condition and generally does not require collateral or other security to support customer receivables. A substantial portion of the Company's consolidated accounts receivable are due from companies in the tobacco industry which has been and continues to be under substantial pressure from legal, regulatory and tax developments. It is not possible to predict the outcome of such litigation or what effect adverse developments in pending or future litigation, regulatory actions and additional taxes may have on the tobacco industry, its financial liquidity or relationships with its suppliers. Nor is it possible to predict what additional legislation or regulations relating to tobacco products will be enacted, or to what extent, if any, such legislation or regulations might affect the tobacco products industry in general. 52 53 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 15. UNAUDITED QUARTERLY FINANCIAL DATA AND COMMON STOCK INFORMATION The Company's Common Stock is listed on the New York Stock Exchange under the ticker symbol "SWM". As of December 31, 1999, there were 6,712 stockholders of record of the Company's Common Stock. This number does not include shares held in "nominee" or "street" name.
1999 ------------------------------------------ FIRST SECOND THIRD FOURTH YEAR ------ ------ ------ ------ ------ Net Sales............................................. $128.6 $119.7 $125.5 $130.6 $504.4 Gross Profit.......................................... 29.4 24.7 27.2 29.1 110.4 Operating Profit...................................... 18.0 13.6 16.2 16.8 64.6 Net Income............................................ $ 9.1 $ 7.1 $ 7.6 $ 7.6 $ 31.4 Net Income Per Share: Basic............................................... $ .57 $ .45 $ .48 $ .49 $ 1.99 Diluted............................................. .57 .45 .48 .49 1.99 Cash Dividends Declared and Paid Per Share............ $ .15 $ .15 $ .15 $ .15 $ .60 Market Price Per Share: High................................................ $16.50 $17.50 $17.50 $13.88 $17.50 Low................................................. 11.50 11.50 12.81 11.69 11.50 Close............................................... $11.50 $15.00 $12.94 $13.44 $13.44
1998 ------------------------------------------------ FIRST SECOND(1) THIRD FOURTH(2) YEAR ------ --------- ------ --------- ------ Net Sales.......................................... $134.3 $144.0 $134.4 $134.0 $546.7 Gross Profit....................................... 31.1 27.7 26.7 20.6 106.1 Operating Profit................................... 20.6 15.6 15.2 7.7 59.1 Net Income......................................... $ 10.0 $ 12.2 $ 6.8 $ 2.0 $ 31.0 Net Income Per Share: Basic............................................ $ .62 $ .76 $ .43 $ .13 $ 1.94 Diluted.......................................... .61 .75 .43 .13 1.92 Cash Dividends Declared and Paid Per Share......... $ .15 $ .15 $ .15 $ .15 $ .60 Market Price Per Share: High............................................. $38.63 $35.38 $29.19 $22.19 $38.63 Low.............................................. 32.25 27.94 21.31 13.00 13.00 Close............................................ $34.50 $29.00 $21.75 $15.44 $15.44
- --------------- (1) Results for the second quarter 1998 included a deferred income tax benefit as a result of an adjustment of valuation allowances against French NOLs of $5.2, or $.32 per share, partially offset by a $1.7 pre-tax charge related to a restructuring of the Spotswood mill workforce, the net income effect of which was $(1.0), or $(.06) per share. (2) Results for the fourth quarter 1998 included a $4.2 pre-tax charge, the net income effect of which was $(2.2), or $(.14) per share, related to write-downs of idled equipment and one-time labor payments. 53 54 SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Schweitzer-Mauduit International, Inc.: We have audited the accompanying consolidated balance sheets of Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 1999, 1998 and 1997. 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 financial position of Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP Atlanta, Georgia January 21, 2000 54 55 SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Schweitzer-Mauduit International, Inc. is responsible for conducting all aspects of the business, including the preparation of the financial statements in this Annual Report. The financial statements have been prepared using 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, an Audit Committee of the Board of Directors which oversees the financial reporting process, and independent audits. As part of that responsibility, the Audit Committee recommended to the Board of Directors the selection of the Company's independent 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. Dietrich Wayne H. Deitrich Chairman of the Board and Chief Executive Officer /s/Paul C. Roberts Paul C. Roberts Chief Financial Officer and Treasurer January 21, 2000 55 56 PART II, CONTINUED ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section of the Company's Proxy Statement dated March 14, 2000 (the "2000 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 2000 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 2000 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 2000 Proxy Statement is incorporated in this Item 13 by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) and (2) Financial Statements and Financial Statement Schedules: See the Index to Financial Statements included in Item 8 of Part II under the caption "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA". Schedules have been omitted because they were not applicable or because the required information has been included in the financial statements or notes thereto. (3) Exhibits: See the Index to Exhibits that appears at the end of this document and which is incorporated by reference herein. (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the fourth quarter of 1999. 56 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: /s/ WAYNE H. DEITRICH --------------------------------------- Wayne H. Deitrich Chairman of the Board and Chief Executive Officer (principal executive officer) Dated: March 3, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME POSITION DATE ---- -------- ---- /s/ WAYNE H. DEITRICH Chairman of the Board and March 3, 2000 - ----------------------------------------------------- Chief Executive Officer Wayne H. Deitrich (principal executive officer) /s/ PAUL C. ROBERTS Chief Financial Officer March 3, 2000 - ----------------------------------------------------- and Treasurer Paul C. Roberts (principal financial officer) /s/ WAYNE L. GRUNEWALD Controller March 3, 2000 - ----------------------------------------------------- (principal accounting Wayne L. Grunewald officer) * Director March 3, 2000 - ----------------------------------------------------- Claire L. Arnold * Director March 3, 2000 - ----------------------------------------------------- Alan R. Batkin * Director March 3, 2000 - ----------------------------------------------------- K.C. Caldabaugh * Director March 3, 2000 - ----------------------------------------------------- Laurent G. Chambaz * Director March 3, 2000 - ----------------------------------------------------- Richard D. Jackson * Director March 3, 2000 - ----------------------------------------------------- Leonard J. Kujawa * Director March 3, 2000 - ----------------------------------------------------- Jean-Pierre Le Hetet * Director March 3, 2000 - ----------------------------------------------------- Larry B. Stillman *By: /s/ JOHN W. RUMELY, JR. March 3, 2000 ------------------------------------------------ John W. Rumely, Jr. Attorney-In-Fact
57 58 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 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 Amended and Restated as of April 22, 1999. 10.1 -- Transfer, Contribution and Assumption Agreement (incorporated by reference to Exhibit 10.1 to Form 10/A Amendment 2, dated October 27, 1995). 10.2 -- Employee Matters Agreement (incorporated by reference to Exhibit 10.3 to Form 10/A Amendment 2, dated October 27, 1995). 10.3 -- Tax Sharing Agreement (incorporated by reference to Exhibit 10.4 to Form 10/A Amendment 2, dated October 27, 1995). 10.4 -- Outside Directors' Stock Plan (incorporated by reference to Exhibit 10.5 to Form 10/A Amendment 2, dated October 27, 1995). 10.5 -- Annual Incentive Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1998). 10.6 -- Equity Participation Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1998). 10.7 -- Long-Term Incentive Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 1998). 10.9* -- Restricted Stock Plan effective as of December 2, 1999.
58 59 INDEX TO EXHIBITS -- CONTINUED
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.10 -- Supplemental Benefit Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 1998). 10.11 -- Executive Severance Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 1998). 10.12.1 -- Amended and Restated Agreement between Philip Morris Incorporated and Schweitzer-Mauduit International, Inc. for Fine Paper Supply, effective April 1, 1998+ (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1998). 10.12.2 -- Technology Ownership, Technical Assistance and Technology License Agreement by and among Philip Morris Incorporated, Philip Morris Products, Inc. and Schweitzer-Mauduit International, Inc., effective April 1, 1998+ (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1998). 10.13 -- Supply Agreement between Companhia Industrial de Papel Pirahy and Souza Cruz S.A. dated as of February 2, 1998+ (incorporated by reference to Exhibit 10.10.1 to the Company's Form 10-K for the year ended December 31, 1998). 10.14.1 -- Amended and Restated Credit Agreement dated January 29, 1998 between the Company, as Borrower and Guarantor, SMF, as Borrower, PdM Industries, as Borrower, SM-Spain, as Borrower, the Banks named therein and Societe Generale, as Agent (the "Amended and Restated Credit Agreement") (incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended March 31, 1998). 10.14.2 -- Amendment No. 1, dated January 29, 1999, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.13.2 to the Company's Form 10-K for the year ended December 31, 1998). 10.14.3 -- Amendment No. 2, dated May 6, 1999, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended June 30, 1999). 10.14.4* -- Amendment No. 3, dated January 7, 2000, to the Amended and Restated Credit Agreement. 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. 59 EX-4.2 2 RIGHTS AGREEMENT AMENDED AND RESTATED 1 EXHIBIT 4.2 - -------------------------------------------------------------------------------- SCHWEITZER-MAUDUIT INTERNATIONAL, INC. and BANKBOSTON, N.A. (formerly known as The First National Bank of Boston) Rights Agent Rights Agreement Dated as of October 1, 1995 Amended and Restated as of April 22, 1999 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- Section 1. Certain Definitions.............................................................................1 Section 2. Appointment of Rights Agent.....................................................................4 Section 3. Issue of Right Certificates.....................................................................4 Section 4. Form of Right Certificates......................................................................5 Section 5. Countersignature and Registration...............................................................6 Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.........................................6 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................................7 Section 8. Cancellation and Destruction of Right Certificates..............................................8 Section 9. Availability of Preferred Shares................................................................8 Section 10. Preferred Shares Record Date....................................................................9 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights..............................9 Section 12. Certificate of Adjusted Purchase Price or Number of Shares.....................................16 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...........................16 Section 14. Fractional Rights and Fractional Shares........................................................17 Section 15. Rights of Action...............................................................................18 Section 16. Agreement of Right Holders ....................................................................18 Section 17. Right Certificate Holder Not Deemed a Stockholder..............................................19 Section 18. Concerning the Rights Agent....................................................................19 Section 19. Merger or Consolidation or Change of Name of Rights Agent......................................19 Section 20. Duties of Rights Agent.........................................................................20 Section 21. Change of Rights Agent.........................................................................22 Section 22. Issuance of New Right Certificates.............................................................23
i 3 Section 23. Redemption.....................................................................................23 Section 24. Exchange.......................................................................................24 Section 25. Notice of Certain Events.......................................................................25 Section 26. Notices........................................................................................26 Section 27. Supplements and Amendments.....................................................................26 Section 28. Successors.....................................................................................27 Section 29. Benefits of this Agreement.....................................................................27 Section 30. Severability...................................................................................27 Section 31. Governing Law..................................................................................27 Section 32. Counterparts...................................................................................27 Section 33. Descriptive Headings...........................................................................28
ii 4 RIGHTS AGREEMENT Agreement, as of October 1, 1995, between Schweitzer-Mauduit International, Inc., a Delaware corporation (the "Company"), and BankBoston, N.A. (formerly known as The First National Bank of Boston), a national banking association ("Rights Agent") amended and restated as of April 22, 1999. The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share (as hereinafter defined) of the Company outstanding as of the close of business on November 6, 1995 (the "Record Date"), each Right representing the right to purchase one one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined). Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares of the Company then outstanding, but shall not include the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing: (i) no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person"; (ii) no Person shall become an "Acquiring Person" if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person", as defined pursuant to the foregoing provisions of this paragraph (a) has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this 1 5 paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement; (iii) until such time as the Spinoff (as such term is hereinafter defined) occurs, Kimberly-Clark Corporation shall not be deemed an "Acquiring Person" for purposes of this Agreement. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section l(c)(ii)(B)) or disposing of any securities of the Company. 2 6 Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (d) "Business Day" shall mean any day other than a Saturday, a Sunday, or day on which banking institutions in Massachusetts, or the location of the principal office of the Rights Agent, are authorized or obligated by law or executive order to close. (e) "Close of business" on any given date shall mean 5:00 P.M., Boston, Massachusetts time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Boston, Massachusetts time, on the next succeeding Business Day. (f) "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $0.10 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Distribution Date" shall have the meaning set forth in Section 3 hereof. (h) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof. (i) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (j) "Preferred Shares" shall mean shares of Series A Junior Participating Preferred Stock, par value $0.10 per share, of the Company having the rights and preferences set forth in Exhibit A hereto. (k) "Redemption Date" shall have the meaning set forth in Section 7 hereof. (l) "Shares Acquisition Date" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such. (m) "Spinoff" shall mean the distribution by Kimberly-Clark Corporation to its shareholders of all of the issued and outstanding shares of the Company. 3 7 (n) "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable, upon ten (10) days' prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agent. Section 3. Issue of Right Certificates. (a) Until the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 15% or more of the then outstanding Common Shares (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates, and (y) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right for each Common Share so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in substantially 4 8 the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Certificates for Common Shares which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Schweitzer-Mauduit International, Inc. and The First National Bank of Boston, dated as of October 1, 1995 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Schweitzer-Mauduit International, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Schweitzer-Mauduit International, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) shall become null and void. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. Form of Right Certificates. The Right Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification 5 9 or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with, any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-hundredths of a Preferred Share as shall be set forth therein at the price per one one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but the number of such one one-hundredths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, any of its Vice Presidents, or its Treasurer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purpose, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject to the provisions of Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 1l(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such 6 10 request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose. Thereupon the Rights Agent shall countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights: Purchase Price: Expiration Date of Rights. (a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each one one-hundredth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on October 1, 2005 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (b) The Purchase Price for each one one-hundredth of a Preferred Share pursuant to the exercise of a Right shall be $65.00 as of October 1, 1995 and shall be subject to adjustment from time to time as provided in Section 11 or 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and certificate duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary 7 11 agent depositary receipts representing such number of one one-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of such Right Certificate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported transfer or exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate following the form of assignment or election to purchase set forth on the reverse side of the Rights Certificate surrendered for such assignment or exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. Availability of Preferred Shares. The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with Section 7. The Company covenants and agrees that it will take all such action as may be necessary to 8 12 ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each person in whose name any certificate for Preferred Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. Adjustment of Purchase Price. Number of Shares or Number of Rights. The Purchase Price, the number of Preferred Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11 (a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, 9 13 combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. (ii) Subject to Section 24 of this Agreement, in the event any Person becomes an Acquiring Person, each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11 (d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. From and after the occurrence of such event, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled. (iii) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii), the 10 14 Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exercise of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as defined in Section 11 (d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made 11 15 in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11 (b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11 (d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market pride per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the 12 16 Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 1l (d)(i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one ten-thousandth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11 (a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 13 17 (h) Unless the Company shall have exercised its election as provided in Section 11 (i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-hundredths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. 14 18 (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders. (n) In the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (A) the number of one one-hundredths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one one-hundredths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (B) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this 15 19 Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on such certificate and on any adjustment therein contained. The Rights Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 13. Consolidation. Merger or Sale or Transfer of Assets or Earning Power. In the event, directly or indirectly, at any time after a Person has become an Acquiring Person, (a) the Company shall consolidate with, or merge with and into, any other Person and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (b) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 1l(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company 16 20 and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such 17 21 depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11 (d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Company and the Rights Agent may deem and treat the person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the 18 22 Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and expenses and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights 19 23 Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such 20 24 statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Rights Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five Business Days after the date any such officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. 21 25 (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or any state of the United States or the District of Columbia, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the 22 26 resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. Section 23. Redemption. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the close of business on the tenth day (as such period may be extended pursuant to the provisions of Section 27 hereof) following the Shares Acquisition Date (or, if the Shares Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth day (as such period may be extended pursuant to the provisions of Section 27 hereof) following the Record Date), or (ii) the Final Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $.0l per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), such Redemption Price to be payable in cash, shares of Common Stock (based on the "current market price," as defined in Section 11 (d) hereof, of the Common Stock at the time of redemption) or such other form of consideration as may be deemed appropriate by the Board of Directors of the Company; provided, however, if the Board of Directors of the Company authorizes redemption of the Rights in either of the circumstances set forth in clauses (i) and (ii) below, such authorization shall require the concurrence of a majority of the entire Board of Directors: (i) such authorization occurs on or after the time a Person becomes an Acquiring Person, or (ii) such authorization occurs on or after the date of a change (resulting from a proxy or consent solicitation) in a majority of the directors in office at the commencement of such solicitation if any Person who is a participant in such solicitation has stated (or, if upon the commencement of such solicitation, a majority of the entire Board of Directors of the Company has determined in good faith) that such Person (or any of its Affiliates or Associates) intends to take, or may consider taking, any action which would result in such Person becoming an Acquiring Person or which would cause the occurrence of any event described in Section 11(a)(ii) or in Section 13(a), (b) or (c). (b) Immediately upon the action of the Board of Directors of the Company of ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23 and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of redemption; provided, however, that the failure to give, or any defect in, any such notice shall not 23 27 affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. Exchange. (a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11 (a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have 24 28 become void pursuant to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exchange of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. (d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (d), the current market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. Notice of Certain Events. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the 25 29 date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Schweitzer-Mauduit International, Inc. 100 North Point Center East, Suite 600 Alpharetta, Georgia 30022 Attention: General Counsel Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: BankBoston, N.A. (formerly known as The First National Bank of Boston) c/o Equiserve L.P. 150 Royall Street Canton, MA 02021 Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. This Agreement may be supplemented or amended at the times and for the purposes set forth below; provided, however, that no proposed supplement or amendment to this Agreement shall be effective 26 30 unless (i) a majority of the entire Board of Directors, at a meeting of Directors duly called and held, or the entire Board of Directors acting by unanimous consent in lieu of a meeting, votes in favor of the adoption of such proposed supplement or amendment. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided, however, that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Without limiting the foregoing, the Company may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) hereof from 15% to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding Common Shares then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and (ii) 10%. Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares). Section 30. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 32. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 27 31 Section 33. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 28 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. SCHWEITZER-MAUDUIT INTERNATIONAL, INC. Attest: By: By: ----------------------------------- ------------------------------ Title: General Counsel and Secretary Title: Chief Executive Officer BANKBOSTON, N.A. (formerly known as The First National Bank of Boston) Attest: By: By: ----------------------------------- ------------------------------ Title: Title: -------------------------------- --------------------------- 29 33 EXHIBIT A EXCERPT FROM CERTIFICATE OF INCORPORATION of SCHWEITZER-MAUDUIT INTERNATIONAL, INC. designating the SERIES A JUNIOR PARTICIPATING PREFERRED STOCK ------------------- Series A Junior Participating Preferred Stock: Designation and Amount. Of the Ten Million (10,000,000) shares of authorized Preferred Stock, One Million (1,000,000) shall be designated as "Series A Junior Participating Preferred Stock", with the par value of Ten Cents ($0.10) per share (the "Series A Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. a. Dividends and Distributions. (1) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend 34 Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (1) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (3) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. b. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (1) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all 35 matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) Except as otherwise provided herein, in any Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (3) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. c. Certain Restrictions. (1) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section (a)(2) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (a) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (b) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (c) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any 36 time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (d) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (2) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration shares of stock of the Corporation unless the Corporation could, under paragraph (1) of this Section (c), purchase or otherwise acquire such shares at such time and in such manner. d. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. e. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in 37 shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. f. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. g. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. h. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. i. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. 38 Exhibit B Form of Right Certificate Certificate No. R- _____ Rights NOT EXERCISABLE AFTER OCTOBER 1, 2005 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $[.01] PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. Right Certificate SCHWEITZER-MAUDUIT INTERNATIONAL, INC. This certifies that _______________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of ___________________, (the "Rights Agreement"), between Schweitzer-Mauduit International, Inc., a Delaware corporation (the "Company"), and [The First National Bank of Boston] (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Boston, Massachusetts time, on October 1, 2005 at the office of the Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $0.10 per share (the "Preferred Shares"), of the Company, at a purchase price of $________ per one one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of _______________ 199___, based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned offices of the Rights Agent. 39 This Right Certificate, with or without other Right Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $[.01] per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company's Common Stock, par value $0.10 per share. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of ____________________, 19___. ATTEST: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By - ------------------- ----------------------------------------- 40 Countersigned: BANKBOSTON, N.A. (formerly known as THE FIRST NATIONAL BANK OF BOSTON) By: - --------------------------------- Authorized Signature 41 Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED ________________________________ hereby sells, assigns transfers unto (Please print name and address of Transferee) this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _____________________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated: , 19 ------------------ --- ------------------------------------------ Signature Signature Guaranteed: Signatures must be guaranteed by a bank or trust company, broker, dealer or other eligible institution participating in a recognized signature guarantee medallion program. ================ CERTIFICATE The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------------------ Signature ================ 42 Form of Reverse Side of Right Certificate -- continued FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Right Certificate) To Schweitzer-Mauduit International, Inc. The undersigned hereby irrevocably elects to exercise _______________ Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of: Please insert social security or other identifying number --------------------- - ------------------------------------------------- (Please print name and address) - ------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number --------------------- - ------------------------------------------------- (Please print name and address) - ------------------------------------------------- Dated: , 19 ------------ --- ------------------------------------------ Signature Signature Guaranteed: Signatures must be guaranteed by a bank or trust company, broker, dealer or other eligible institution participating in a recognized signature guarantee medallion program. 43 Form of Reverse Side of Right Certificate -- continued ================ CERTIFICATE The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------------------ Signature ================ NOTICE The signature in the foregoing Form of Assignment and Election must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored. 44 EXHIBIT C SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES On October 23, 1995, the Board of Directors of Schweitzer-Mauduit International, Inc. (the "Company") acting by unanimous consent in lieu of meeting, declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $0.10 per share (the "Common Shares"), of the Company. The dividend is payable on November 6, 1995, (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.10 per share (the "Preferred Shares"), of the Company at a price of $65.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Bank Boston (formerly known as The First National Bank of Boston), as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the entire Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Shares (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the Record Date, upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Shares, outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. 45 The Rights are not exercisable until the Distribution Date. The Rights will expire on October 1, 2005 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, in each case, as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one-hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. Each Preferred Share will have 100 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that (i) any person becomes an Acquiring Person (unless such person first acquires 15% or more of the outstanding Common Shares by a purchase pursuant to a tender offer for all of the Common 46 Shares for cash, which purchase increases such person's beneficial ownership to 80% or more of the outstanding Common Shares) or (ii) during such time as there is an Acquiring Person, there shall be a reclassification of securities or a recapitalization or reorganization of the Company or other transaction or series of transactions involving the Company which has the effect of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its subsidiaries beneficially owned by the Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. At any time after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding Common Shares and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one Common Share, or one one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will be issued (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. At any time until ten days following the Shares Acquisition Date (as such period may be extended by the Board of Directors pursuant to the Rights Agreement), the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $[.01] per Right provided that in certain circumstances such redemption will require the concurrence of a majority of the entire Board of Directors. The redemption of the rights may be made effective at such time on such basis and with such conditions as the Board of Directors in its sole discretion may establish. The Rights Agreement may be amended in certain instances so long as a majority of the entire Board of Directors votes in favor of the proposed amendment. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to lower the threshold for exercisability of the Rights from 15% to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Common Shares then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, except that from and after such time as any person becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. 47 Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 10 dated September 12, 1995. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. EX-10.9 3 RESTRICTED STOCK PLAN 1 EXHIBIT 10.9 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. RESTRICTED STOCK PLAN EFFECTIVE AS OF DECEMBER 2, 1999 1. PURPOSE This Restricted Stock Plan ("Plan") of Schweitzer-Mauduit International, Inc. (the "Corporation") is intended to (i) promote the long-term financial success of the Corporation by attracting to and retaining for the Corporation and its Affiliates outstanding executive personnel and (ii) to motivate such personnel by means of Restricted Stock grants to contribute to the Corporation's financial success. 2. EFFECTIVE DATE The Plan shall be effective as of the date of its adoption by the Board. 3. DEFINITIONS "Affiliate" means any company in which the Corporation owns, directly or indirectly, 20% or more of the equity interest (collectively, the "Affiliates"). "Board" means the Board of Directors of the Corporation. "Change of Control" shall mean the date as of which: (a) a third person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, acquires actual or beneficial ownership of shares of the Company having 15% or more of the total number of votes that may be cast for the election of Directors of the Company; or (b) as the result of any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder, as amended from time to time. "Committee" means the Compensation Committee of the Board, provided that if the requisite number of members of the Compensation Committee are not Non-Employee Directors, the Plan shall be administered by a committee, all of whom are Non-Employee Directors, appointed by the Board and consisting of two or more directors with full authority to act in the matter. The term "Committee" shall mean the Compensation Committee or the committee appointed by the Board, as the case may be. 2 "Common Stock" means the common stock, par value $0.10 per share, of the Corporation and shall include both treasury shares and authorized but unissued shares and shall also include any security of the Corporation issued in substitution, in exchange for, or in lieu of the Common Stock. "Covered Employee" means a Participant who is, or is determined by the Committee to be likely to become a "covered employee" within the meaning of Section 162(m) of the Code (or any successor provision). "Date of Grant" means the date specified by the Committee on which a grant of Restricted Shares shall become effective (which date shall not be earlier than the date on which the Committee takes action with respect thereto). "Non-Employee Director" means a person who is so defined for purposes of rule 16b-3 under the Exchange Act, or any successor provision, and who is also defined as an "outside director" for purposes of section 162(m) of the Code or any successor section. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, as amended from time to time. "Fair Market Value" means the mean between the high and low sales prices of the Common Stock, on the relevant date as reported on the composite list used by the Wall Street Journal for reporting stock prices, or if no such trading in the Common Stock shall have taken place on that day, on the last preceding day on which there was such trading in the Common Stock. "Insider" has the meaning set forth in subsection 14(f) of this Plan. "Immediate Family" has the meaning set forth in Rule 16(a)-1(e) of the Exchange Act and any successor provision to the same effect. "Management Objectives" means the measurable performance objective or objectives established pursuant to this Plan that may, in the Committee's discretion, apply to grants of Restricted Shares pursuant to this Plan. Management Objectives may be described in terms of Corporation-wide objectives or objectives that are related to the performance of the individual Participant, or of an Affiliate, division, operating unit, department, region, function, or other organizational unit within the Corporation or an Affiliate in which the Participant is employed. The Management Objectives may be made relative to the performance of other corporations or business units of other corporations provided they are Affiliates of the Corporation. The Management Objectives applicable at the discretion of the Committee to any award to a Covered Employee shall be based on specified and pre-established levels of or growth in one or more of the following criteria: 1. the price of Common Stock; 2. market share; 2 3 3. sales; 4. return on equity, assets, capital or sales; 5. economic profit; 6. total shareholder return; 7. costs; 8. margins; 9. earning or earnings per share; 10. cash flow; 11. customer satisfaction; 12. pre-tax profit; 13 earnings before interest and taxes; 14. earnings before interest, taxes, depreciation and amortization; 15. debt/capital ratio; 16. revenues from new product development; 17. percentage of revenues derived from designated lines of business; and 18. any combination of the foregoing. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Corporation or an Affiliate, or the manner in which it conducts its business, or other events or circumstances render the Management Objectives unsuitable, the Committee may in its discretion modify such Management Objectives or the related pre-established level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case of a Covered Employee where such action would result in the loss of an exemption of the award under Section 162(m) of the Code that would otherwise have been available. In such case, the Committee shall not make any modification of the Management Objectives or the pre-established level of achievement. "Participant" means a person who is selected by the Committee to receive benefits under this Plan and who is at the time an officer or other key employee of the Corporation or any one or more of its Affiliates, or who has agreed to commence serving in any of such capacities (collectively, the "Participants"). "Restricted Shares" means shares of Common Stock granted pursuant to Section 6 of this Plan as to which neither the Substantial Risk of Forfeiture nor the prohibition on Transferability referred to in Section 6 has expired. "Retirement" and "Retire" means the termination of employment on or after the date the Participant is entitled to receive immediate payments under a qualified retirement plan of the Corporation or an Affiliate; provided, however, if the Participant is not eligible to participate under a qualified retirement plan of the Corporation or an Affiliate then such Participant shall be deemed to have retired if his termination of employment is on or after the date such Participant has attained age 55. "Securities Act" means the Securities Act of 1933, as amended. 3 4 "Substantial Risk of Forfeiture" shall have the meaning given to such term in Section 83 (c)(1) of the Code and Treasury Regulation 1.83-3 (c) or any successor section. "Substantially Vested" shall have the meaning given to such term in Treasury Regulation 1.83-3(b) or any successor section. "Transfer" or "Transferability" shall have the meaning given to such terms in Treasury Regulation 1.83-3(d) or any successor section. "Total and Permanent Disability" means Totally and Permanently Disabled as defined in the Schweitzer-Mauduit International, Inc. Retirement Plan, provided the Committee shall make a determination of Total and Permanent Disability for any Participant hereunder. 4. ADMINISTRATION The Committee shall administer the Plan and all agreements governing the grant of Restricted Shares. The Committee, in its absolute discretion, shall have the power to interpret and construe the Plan and any agreements pursuant to which any Restricted Shares are granted. Should the Plan become qualified under section 162(m) of the Code, the Committee shall thereafter take no action and shall not make any determination in a manner that would result in the disallowance of a deduction to the Corporation under section 162(m) of the Code or any successor section that was intended to apply at the Date of Grant and that would otherwise have been available for such grant. Any interpretation or construction of any provisions of this Plan or the terms of any agreements that grant Restricted Shares to a Participant by the Committee shall be final and conclusive upon all persons. No member of the Board or the Committee shall be liable for any action or determination made in good faith. Within 60 days following the close of each calendar year that the Plan is in operation, the Committee shall make a report to the Board specifying the employees who received Restricted Shares under the Plan during the prior year, the number and type of Restricted Shares granted to the individual employees and the status of all prior Restricted Shares granted to such employees. The Committee shall have the power to promulgate rules and other guidelines in connection with the performance of its obligations, powers and duties under the Plan, including its duty to administer and construe the Plan and the agreements pursuant to which Restricted Shares are granted under the Plan. The Committee may authorize persons other than its members to carry out its policies and directives, subject to the limitations and guidelines set by the Committee, except that: (a) the authority to grant Restricted Shares, the selection of employees for 4 5 participation and decisions concerning the timing, duration of restrictions on Transferability, pricing, determination of Management Objectives and amount of an award or grant of Restricted Shares shall not be delegated by the Committee; (b) the authority to administer agreements granting Restricted Shares with respect to persons who are subject to section 16 of the Exchange Act shall not be delegated by the Committee; (c) any delegation shall satisfy all applicable requirements of Rule 16b-3 of the Exchange Act, or any successor provision; and (d) no such delegation shall result in the disallowance of a deduction to the Corporation under section 162(m) of the Code or any successor section that would otherwise have been available to such grant of Restricted Shares. Any person to whom such authority is granted shall continue to be eligible to receive Restricted Shares under the Plan. 5. ELIGIBILITY The Committee shall from time to time select the Plan Participants from those employees whom the Committee determines either to be in a position to contribute materially to the success of the Corporation or its Affiliates or to have in the past so contributed. Only employees (including officers and directors who are employees) of the Corporation and its Affiliates are eligible to participate in the Plan. 6. RESTRICTED SHARES The Committee shall determine and designate from time to time those Participants to whom Restricted Shares are to be granted and the number of such shares to be granted to each Participant. For each grant, the Committee shall cause to be delivered to the Participant a Restricted Share Agreement which shall specify each restriction on Transferability and any Management Objectives and other risks of forfeiture that shall apply to the shares so granted. The Restricted Share Agreement may be in such form as the Committee may authorize from time to time for the grant of Restricted Shares to Participants. Each such grant shall be subject to all of the requirements contained in the following provisions: (a) The grant shall constitute an immediate transfer of the ownership of shares of Common Stock to the Participant in consideration of the performance of services, as such term is defined in Treasury Regulation 1.83-3(f) or any successor section, entitling such Participant to voting, dividend and other ownership rights, but subject to Substantial Risk of Forfeiture and restrictions on Transferability, which shall be noted in an appropriate legend on any stock certificates evidencing Restricted Shares, hereinafter referred to. (b) The grant may be made in consideration of a payment by such Participant that is less than the Fair Market Value per share on the Date of Grant. 5 6 (c) Each grant shall provide that the Restricted Shares shall become fully vested and all risk of forfeiture shall lapse in the event of a Change of Control or upon the Total and Permanent Disability of the Participant and, at the discretion of the Committee, upon the occurrence of such other circumstances designated at the Date of Grant by the Committee; provided, that the period in which the Restricted Shares become Substantially Vested complies with the requirements of Rule 16 of the Exchange Act. (d) The grant shall provide that during the period a Substantial Risk of Forfeiture is to continue, Transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee at the Date of Grant (which restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Shares to a continuing Substantial Risk of Forfeiture in the hands of any transferee). (e) Any grant of Restricted Shares may, but need not, specify Management Objectives that, if achieved, will result in termination or early termination of the restrictions on Transferability or the risk of forfeiture applicable to such shares, Each grant may specify in respect of such Management Objectives a minimum acceptable level of achievement and may set forth a formula for determining the number of Restricted Shares on which restrictions will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified Management Objectives. (f) Any such grant of Restricted Shares may, but need not, require that any or all dividends or other distributions paid thereon during the period of such restrictions be automatically deferred and reinvested in additional Restricted Shares, which may be subject to the same restrictions as the underlying award. (g) Each grant of Restricted Shares shall be evidenced by an agreement executed on behalf of the Corporation by an officer and delivered to and accepted by the Participant and shall contain such terms and provisions, consistent with this Plan, as the Committee may approve. (h) All certificates representing Restricted Shares shall bear a legend noting Transferability of the shares is subject to the terms of this Plan and the Restricted Stock Agreement. Upon satisfaction of all restrictions on Transferability and the lapse of any risk of forfeiture of the Restricted Shares, the Participant shall surrender the Restricted Share certificate to the Company for cancellation and the Company shall issue a new stock certificate, without a restrictive legend, for the same number of shares of Common Stock represented by the surrendered Restricted Shares certificate. 6 7 7. SHARES SUBJECT TO THE PLAN (a) Subject to adjustment as provided in Section 9 hereof, the number of shares of Common Stock that: (i) may be issued or transferred as Restricted Shares and released from Substantial Risk of Forfeiture or (ii) in payment of dividend equivalents paid with respect to Restricted Shares granted under the Plan shall not exceed in the aggregate the shares of treasury stock held by the Corporation on the Date of Grant, less the number of shares of treasury stock subject to any outstanding awards of Restricted Shares which have not Substantially Vested. (b) The use of any shares of Common Stock other than treasury shares to award grants of Restricted Shares under this Plan shall require the prior consent of the Board and the approval of the Corporation's shareholders as well as compliance with the requirements of state and federal securities laws and the rules of any exchange on which the Corporation's Common Stock is registered. 8. INDIVIDUAL AND SHARE LIMITS (a) No Participant shall be granted Restricted Shares, in the aggregate, for more than fifty percent (50%) of the shares of Common Stock authorized to be issued as Restricted Shares under this Plan. (b) The number of shares of Common Stock issued as Restricted Shares to all Participants during the term of this Plan shall not, in the aggregate, exceed Two Hundred Thousand (200,000) shares of Common Stock. (c) If Restricted Shares which had been granted to a Participant are canceled, as such term is applied in section 162(m) of the Code, the shares of Common Stock which had been subject to such canceled Restricted Shares shall continue to be counted against the maximum number of shares of Common Stock that can be issued under this Plan and the maximum number of Restricted Shares that may be granted to such Participant pursuant to Section 8 (a) herein. In the event that the number of Restricted Shares that may be granted is adjusted as provided in section 9 hereof, the above limits shall automatically be adjusted in the same ratio. 9. CHANGES IN CAPITALIZATION In the event there are any changes in the Common Stock or the capitalization of the Corporation through a corporate transaction, such as any merger, any acquisition through the issuance of capital stock of the Corporation, any consolidation, any separation of the Corporation (including a spin-off or other distribution of stock by the Corporation), any reorganization of the Corporation (whether or not such reorganization comes within the definition of such term in section 368 of the Code), or any partial or complete liquidation by the Corporation, recapitalization, stock dividend, stock split or other change in the corporate capital structure, appropriate adjustments and changes in the 7 8 number of Restricted Shares previously granted to each Participant shall be made by the Committee, to the extent necessary, to preserve the benefit to the Participants contemplated by the Plan and any such previous grant of Restricted Shares and a comparable adjustment shall be made to the limitations contained in sections 8(a) and (b) of the Plan; provided, however, that no such adjustment or change may be made to the extent that such adjustment or change will result in the disallowance of a deduction to the Corporation under section 162(m) of the Code, or any successor section, that would otherwise have been available for a previous grant of Restricted Shares. 10. EFFECT ON OTHER PLANS All benefits under the Plan shall constitute special compensation and shall not affect the level of benefits provided to or received by any Participant (or the Participant's estate or beneficiaries) as part of any employee benefit plan of the Corporation or an Affiliate. The Plan shall not be construed to affect in any way a Participant's rights and obligations under any other plan maintained by the Corporation or an Affiliate on behalf of others including such Participants. 11. TERM OF THE PLAN The Plan shall remain in effect until the tenth anniversary of the date of its adoption by the Board, unless the Plan is terminated prior thereto by the Committee. No Restricted Shares may be granted after the termination date of the Plan, but Restricted Shares theretofore granted shall continue in force beyond that date pursuant to their terms. 12. NONRESIDENT ALIENS In order to facilitate the making of any grant under this Plan, the Committee may provide for such special terms for awards to Participants who are foreign nationals, or who are employed by the Corporation or any Affiliate outside of the United States of America, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to or amendments, restatements or alternative versions of this Plan as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for any other purposes, and the Secretary or other appropriate officer of the Corporation may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements, amendments or restatements, however, shall include any provisions that are inconsistent with the terms of this Plan then in effect unless this Plan could be amended to eliminate such inconsistency without approval by the stockholders of the Corporation; provided further, that no action may be taken under this section 12 if such action would (1) materially increase any benefits accruing to any Participant under the Plan, (2) materially increase the number of securities which would be issued under the Plan, (3) modify the requirements for eligibility to participate in the Plan, (4) result in a failure to comply with applicable provisions of the Securities Act, the Exchange Act or the Code or 8 9 (5) result in the disallowance of a deduction that would otherwise have been available to the Corporation under section 162(m) of the Code, or any successor section. 13. TRANSFERABILITY (a) Except as otherwise determined by the Committee, no Restricted Shares that have not yet Substantially Vested in the Participant and no right to receive dividends thereon shall be transferable by a Participant other than by will or the laws of descent and distribution. (b) The Committee, in its discretion, may specify at the Date of Grant that part or all of the shares of Common Stock that are not subject to a Substantial Risk of Forfeiture and restrictions on Transferability referred to in Section 6 of this Plan, shall be subject to further restrictions on transfer. (c) Notwithstanding the provisions of Section 13(a), but subject to the prior approval of the Committee, Restricted Shares shall be transferable by a Participant, without payment of consideration therefore by the transferee, to any one or more members of the Participant's Immediate Family (or to one or more trusts established solely for the benefit of one or more members of the Participant's Immediate Family or to one or more partnerships in which the only partners are members of the Participant's Immediate Family); provided, however, that (i) no such transfer shall be effective unless reasonable prior notice thereof is delivered to the Corporation and such transfer is thereafter effected in accordance with any terms and conditions that shall have been made applicable thereto by the Corporation or the Committee and (ii) any such transferee shall be subject to the same terms and conditions thereunder as the Participant. 14. GENERAL PROVISIONS (a) No Right of Continued Employment. Neither the establishment of the Plan nor the payment of any benefits hereunder nor any action of the Corporation, its Affiliates, the Board of Directors of the Corporation or its Affiliates, or the Committee shall be held or construed to confer upon any person any legal right to be continued in the employ of the Corporation or its Affiliates, and the Corporation and its Affiliates expressly reserve the right to discharge any Participant without liability to the Corporation, its Affiliates, the Board of Directors of the Corporation or its Affiliates, or the Committee, except as to any rights which may be expressly conferred upon a Participant under the Plan. (b) Binding Effect. Any decision made or action taken by the Corporation, the Board or by the Committee arising out of or in connection with the construction, administration, interpretation and effect of the Plan shall be conclusive and binding upon all persons. 9 10 (c) Inalienability of Benefits and Interest. Except as provided in subsections 6(d) and 13(c), no benefit payable or interest in the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action shall be void and no such benefit or interest shall be in any manner liable for or subject to debts, contracts, liabilities, engagements, or torts of any Participant or beneficiary. (d) Georgia Law to Govern. All questions pertaining to the construction, interpretation, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Georgia. (e) Purchase of Common Stock. The Corporation and its Affiliates may purchase from time to time shares of Common Stock in such amounts as they may determine for purposes of the Plan. The Corporation and its Affiliates shall have no obligation to retain, and shall have the unlimited right to sell or otherwise deal with for their own account, any shares of Common Stock purchased pursuant to this paragraph. (f) Withholding. The Committee shall require the withholding of all taxes as required by law. A Participant shall pay in cash any amount required to be withheld under federal, state or local law with respect to the Substantial Vesting of Restricted Shares or the Participant may elect with respect to payment of any portion of the federal, state or local income tax withholding required with respect to the Substantial Vesting of Restricted Shares be satisfied by tendering to the Corporation Restricted Shares, which, in the absence of such an election, would have been unrestricted as to such Participant in connection with such Substantial Vesting. In the event that the Fair Market Value of such shares tendered to satisfy the withholding tax exceeds the sum of the consideration due from the Participant and the amount of such tax, the excess amount shall be returned to the Participant, to the extent possible, in whole shares of Common Stock, and the remainder in cash. The value of a share of Common Stock tendered pursuant to this subsection 14(f) shall be the Fair Market Value of the Common Stock, adjusted to reflect any non-lapse conditions, on the date on which such shares are tendered to the Corporation. An election pursuant to this subsection 14(f) shall be made in writing and signed by the Participant. An election pursuant to this subsection 14(f) is irrevocable. A Participant who Substantially Vests in Restricted Shares and who is required to report to the Securities and Exchange Commission under section 16(a) of the Exchange Act (an "Insider") may satisfy the income tax withholding due in respect of such substantial vesting event pursuant to this subsection 14(f) by tendering shares only if the Insider also satisfies an exemption under section 16(a) of the Exchange Act (or the rules or regulations promulgated thereunder) for such withholding. (g) Code Section 83(b) Election. A Participant may elect to include in his gross income for the taxable year in which Restricted Shares are granted the excess of the Fair Market Value of the Restricted Shares on the Date of Grant over the amount paid by the Participant for such shares by giving the Corporation written notice of such election within thirty (30) days of the Date of Grant in a manner that meets all Code requirements. 10 11 (h) Amendments. The Committee may at any time amend, suspend, or discontinue the Plan or alter or amend any or all Restricted Shares and any agreements pursuant to which Restricted Shares are granted under the Plan to the extent (1) permitted by law, (2) permitted by the rules of any stock exchange on which the Common Stock or any other security of the Corporation is listed, (3) permitted under applicable provisions of the Securities Act and the Exchange Act (including rule 16b-3); and (4) that such action would not result in the disallowance of a deduction that would have otherwise have been available to the Corporation under section 162(m) of the Code or any successor section (including the rules and regulations promulgated thereunder) on such grants; provided, however, that if any of the foregoing requires the approval by stockholders of the Corporation of any such amendment, suspension or discontinuance, then the Committee may take such action subject to the approval of such stockholders. No such amendment, suspension, or termination of the Plan shall, without the consent of the Participant, adversely alter or change any of the Restricted Shares or the terms of any agreement pursuant to which Restricted Shares were previously granted to the Participant under the Plan. 11 EX-10.14.4 4 AMEND NO. 3 TO AMENDED AND RESTATED CREDIT AGRMT. 1 EXHIBIT 10.14.4 AMENDMENT NO. 3 TO AMENDED AND RESTATED CREDIT AGREEMENT DATED JANUARY 7, 2000 This Amendment No. 3 dated as of January 7, 2000 ("Amendment") is among Schweitzer-Mauduit International, Inc., a Delaware corporation ("Company" or "Guarantor"), Schweitzer-Mauduit France S.A.R.L., a French corporation ("SMF"), PDM Industries, S.N.C., a French corporation ("PDM", together with the Company and SMF, the "Borrowers"), the banks party hereto ("Banks") and Societe Generale, as agent for the Banks ("Agent"). INTRODUCTION A. The Borrowers, the Guarantor, the Banks and the Agent are party to the Amended and Restated Credit Agreement dated as of January 30, 1998, as amended by Amendment No. 1 dated as of January 29, 1999 and Amendment No. 2 dated as of May 6, 1999 (as amended, the "Credit Agreement"). B. The Borrowers have requested that the Banks agree to (1) extend the Maturity Date of the U.S. Revolving Commitments and the French Revolving Commitments under the Credit Agreement from January 28, 2000 to January 26, 2001 and (2) make certain other amendments to the Credit Agreement. THEREFORE, the Borrowers, the Guarantor, the Agent and the Banks hereby agree as follows: Section 1. Definitions; References. Unless otherwise defined in this Amendment, terms used in this Amendment which are defined in the Credit Agreement shall have the meanings assigned to such terms in the Credit Agreement. Section 2. Amendments. Upon the satisfaction of each of the conditions precedent set forth in Section 4 below, the Credit Agreement is hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended as follows: (i) by deleting the date "January 28, 2000" in the definition of "Maturity Date" and replacing it with the date "January 26, 2001"; and (ii) by deleting the percentage ".45%" in the definition of "Applicable Margin" and replacing it with the percentage ".75%". (b) Section 2.03(a) of the Credit Agreement is hereby amended as follows: (i) by deleting the percentage ".15%" and replacing it with the percentage ".20%"; and 2 (ii) by deleting the date "March 31, 1999" and replacing it with the date "March 31, 2000". (c) Section 6.09(vi) of the Credit Agreement is amended in its entirety as follows: (vi) Debt of SMS and Schweitzer-Mauduit do Brasil S.A. in an aggregate principal amount not to exceed $7,500,000. Section 3. Representations and Warranties. The Borrowers and the Guarantor represent and warrant to the Agent and the Banks as of the date hereof: (a) Any representations and warranties set forth in the Credit Agreement and in the other Credit Documents (other than those made as of a specific date) are true and correct in all material respects; (b) (i) The execution, delivery and performance of this Amendment are within the corporate power and authority of the Borrowers and the Guarantor and have or will have been duly authorized by appropriate proceedings and (ii) this Amendment constitutes a legal, valid, and binding obligation of the Borrowers and the Guarantor enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity; (c) No Default or Event of Default has occurred and is continuing;and (d) No Potential Phaseout Event has occurred. Section 4. Effectiveness. This Amendment shall become effective and the Credit Agreement shall be amended as provided in Section 2 of this Amendment when the Agent shall have received this Amendment duly and validly executed by the Borrowers, the Agent and the Banks. Section 5. Reaffirmation of Guaranty. The Company hereby reaffirms its obligations under Article VIII of the Credit Agreement and agrees to remain liable for the repayment of the Guaranteed Obligations (as defined therein), as such Guaranteed Obligations have been amended hereby. Section 6. Choice of Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York. Section 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original. -2- 3 EXECUTED as of the date first set forth above. BORROWERS: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: --------------------------------------- Wayne H. Deitrich Chairman and Chief Executive Officer SCHWEITZER-MAUDUIT FRANCE S.A.R.L. By: --------------------------------------- Jean-Pierre Le Hetet Gerant (Manager) PDM INDUSTRIES S.N.C. By: Papeteries de Mauduit S.A., as Manager By: --------------------------------------- Jean-Pierre Le Hetet Legal Representative GUARANTOR: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: --------------------------------------- Wayne H. Deitrich Chairman and Chief Executive Officer AGENT: SOCIETE GENERALE By: --------------------------------------- Nicolas Guerin Vice President -3- 4 BANKS: SOCIETE GENERALE By: --------------------------------------- Nicolas Guerin Vice President BANQUE NATIONALE DE PARIS By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ CREDIT LYONNAIS By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ NATEXIS BANQUE By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ SUNTRUST BANK, ATLANTA By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ WACHOVIA BANK, N.A. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ -4- EX-21.1 5 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF SCHWEITZER-MAUDUIT INTERNATIONAL, INC. The subsidiaries of the Company at December 31, 1999 were as follows:
JURISDICTION OF INCORPORATION OR NAME ORGANIZATION - ---- -------------------------- Schweitzer-Mauduit Canada, Inc.................................... Manitoba Province (Canada) Schweitzer-Mauduit Spain, S.L..................................... Spain - LTR Industries S.A................................... France - Schweitzer-Mauduit do Brasil, S.A.................... Brazil Schweitzer-Mauduit France S.A.R.L................................. France - Papeteries de Mauduit S.A............................ France -- PDM Industries S.N.C............................ France -- Papeteries de Malaucene S.A..................... France -- Malaucene Industries S.N.C.................. France - Groupe SAPAM S.A..................................... France -- Papeteries de Saint-Girons S.A.................. France
EX-23.1 6 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-99812, No. 33-99814, No. 33-99816, and No. 33-99848 of Schweitzer-Mauduit International, Inc. and subsidiaries on Form S-8 of our report dated January 21, 2000, appearing in the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. and subsidiaries for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Atlanta, Georgia March 3, 2000 EX-24.1 7 POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWERS OF ATTORNEY 2 POWER OF ATTORNEY The undersigned, Claire L. Arnold, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, her true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ CLAIRE L. ARNOLD ------------------------ Claire L. Arnold 3 POWER OF ATTORNEY The undersigned, Alan R. Batkin, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ ALAN R. BATKIN ------------------------ Alan R. Batkin 4 POWER OF ATTORNEY The undersigned, K.C. Caldabaugh, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ K.C. CALDABAUGH ------------------------ K.C. Caldabaugh 5 POWER OF ATTORNEY The undersigned, Laurent G. Chambaz, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ LAURENT G. CHAMBAZ ------------------------ Laurent G. Chambaz 6 POWER OF ATTORNEY The undersigned, Richard D. Jackson, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ RICHARD D. JACKSON ------------------------ Richard D. Jackson 7 POWER OF ATTORNEY The undersigned, Leonard J. Kujawa, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ LEONARD J. KUJAWA ------------------------ Leonard J. Kujawa 8 POWER OF ATTORNEY The undersigned, Jean-Pierre Le Hetet, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ JEAN-PIERRE LE HETET ------------------------ Jean-Pierre Le Hetet 9 POWER OF ATTORNEY The undersigned, Larry B. Stillman, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 1999, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated this 24th day of February, 2000 /s/ LARRY B. STILLMAN ------------------------ Larry B. Stillman EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 15,100 0 72,100 1,900 62,900 159,200 451,900 199,800 436,600 107,400 100,900 0 0 1,600 182,600 436,600 504,400 504,400 394,000 394,000 45,800 700 5,800 60,700 23,700 31,400 0 0 0 31,400 1.99 1.99
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