-----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, Aswkb4MP/GJmJm5jT1+d/8HvFVsxhbYXsyWo9Kmdu+7WGWO4NOX8bd5eyp1LkLb3 /rrWTHuxWdvYhgTv5rpglw== 0000950144-99-002410.txt : 19990308 0000950144-99-002410.hdr.sgml : 19990308 ACCESSION NUMBER: 0000950144-99-002410 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 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: 99557645 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-MAUDUIT 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, 1998 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, 1998, 15,924,065 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 $246 million. (Continued) 1 2 DOCUMENTS INCORPORATED BY REFERENCE Schweitzer-Mauduit International, Inc.'s 1999 Proxy Statement, filed with the Commission dated March 12, 1999, 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 1999 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 - ----------------------------- ----------------------- 1999 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 St. 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 St. 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 90 percent of the Company's 1998 consolidated net sales, include cigarette, tipping and plug wrap 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, lightweight printing and writing papers, papers for packaging and labeling applications, tea bag, coffee and other filter papers, 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, tipping and plug wrap papers -- serves a distinct purpose in the function of a cigarette. Cigarette paper wraps the column of tobacco in a cigarette. Certain properties of cigarette paper, such as basis weight, porosity, opacity, tensile strength, texture and whiteness must be closely controlled to tight tolerances. Many of these characteristics are critical to meet runnability standards of the high-speed 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 U.S. BUSINESS SEGMENTS. The Company is operated and managed based on the geographical location of its manufacturing operations: the U.S., 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 in that segment. MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies customers in North America, but also has significant sales in South America and Japan. The customer base for the U.S. operations consists of the major, and many of the smaller, cigarette manufacturers in North America, several cigar manufacturers and more than 50 manufacturers in approximately 30 countries outside North America. 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 approximately 180 customers in approximately 80 countries. The Company's Brazilian business primarily supplies customers in Brazil, with some sales to other South American countries. The current customer base of the Brazilian operations consists of the cigarette manufacturers in Brazil, as well as 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 ("Brown & Williamson"), 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 28 percent and 14 percent, respectively, of the Company's 1998 consolidated net sales. The Company's French paper businesses, together, are the largest exporter of cigarette paper to China with an estimated 40 percent share of that country's cigarette paper imports. LTR Industries, S.A. ("LTRI") is a 72-percent owned second-tier subsidiary of the Company which manufactures RTL in France. LTRI has many customers, consisting primarily of the large cigarette 4 5 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 U.S. at the beginning of 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 operation 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 can exercise its right, commencing in 1999 and continuing thereafter, to acquire up to ten percent of its prior year purchases of Cigarette Papers from other parties. Philip Morris had the right to purchase up to five percent of its direct purchases of Cigarette Papers from other suppliers in 1998, but chose 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. Philip Morris and the Company also have entered into a licensing and royalty agreement covering future commercialization of this potential new paper product, the commercial viability of which has not yet been tested. 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 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 has an initial term of three years 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 has an initial term of three years, with extensions to be negotiated prior to the date of expiration. EMPLOYEE AND LABOR RELATIONS. As of December 31, 1998, the Company had approximately 3,475 regular full-time active employees of whom approximately 670 hourly employees and 325 salaried employees were located in the U.S. and Canada, approximately 1,067 hourly employees and 622 salaried employees were located in France, and approximately 750 hourly employees and 41 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 1998, a new three-year collective bargaining agreement was reached at the Ancram mill, which will expire on September 30, 2001. The current collective bargaining agreements expire 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 19 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, St. Girons and Spay, France are union represented. During 1998, new two-year collective bargaining agreements were entered into at each of these mills. The current agreements for each of the mills will expire on December 31, 1999. 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. 5 6 Brazilian Operations -- Hourly employees at the Pirahy mill are represented by a union. The current collective bargaining agreement expires on May 31, 1999. 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 112,000 metric tons of wood pulp in 1998, including requirements of the newly-acquired companies, and 71,000 metric tons of wood pulp in 1997, 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 U.S. and France. Flax tow and flax pulp are also purchased externally, but these purchases only represent approximately 27 percent of the flax pulp currently consumed by the Company's U.S. and French operations. Certain specialty papers are manufactured with other cellulose fibers such as abaca and sisal fibers and small amounts of secondary and recycled fibers. All of these secondary and recycled fibers are purchased. To ensure an adequate supply of wood pulp at competitive prices, the Company and Kimberly-Clark agreed that Kimberly-Clark will, for a fee, make available to the Company its pulp sourcing services. The Company continues to utilize these services. The Company believes that the fibers identified above and the remaining raw materials purchased by the Company are readily available from several sources and that the loss of a single supplier would not have a material adverse effect on the Company's ability to procure needed raw materials. COMPETITION. The Company is the leading producer of Cigarette Papers in the world. LTRI is the leading independent producer of RTL for use in cigarettes. The Company does not sell its products directly to consumers or advertise its products in consumer media. The specialized nature of these tobacco-related papers requires research and development capability to develop them and special papermaking equipment and skills to meet exacting customer specifications. These factors have limited the number of competitors in each of the tobacco-related paper categories discussed separately below. Cigarette Paper -- Management believes that the Company has an estimated 57 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, 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 66 percent of its products (cigarette paper and porous and conventional plug wrap) in Western Europe and China. Management believes that the bases of competition for PdM's products are the same as for the Company's U.S. operations. 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 65 percent market share of cigarette paper in Brazil and an estimated 44 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 a 78 percent share of the North American plug wrap market. The remaining 22 percent 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. 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 61 percent share of the South American plug wrap market. Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens are the Company's principal competitors in that market. Management believes that the primary basis of competition for high porosity plug wrap is technical capability with price being a less important consideration. On the other hand, conventional plug wrap entails less technical capability with the result that price and quality are the primary bases of competition. Tipping Paper -- Management believes that the Company's U.S. business has an estimated 59 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 exporter. Management believes that the bases for competition are consistent quality, price and, most importantly, the ability to meet the runnability and printability requirements of converting equipment and high-speed cigarette-making machines. Papeteries de Malaucene S.A. ("PdMal"), another of the Company's indirect wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene, France, and ranks among the largest converted tipping paper producers in Western Europe, with an estimated 13 percent market share. PdMal produces printed and unprinted, and laser and electrostatically perforated tipping papers. PdMal's principal European competitors are Tann-Papier GmbH (Austria), Benkert GmbH (Germany) and Miquel y Costas. Management believes that the bases of competition for perforated tipping paper in Europe are perforation technology, consistent quality and price. The Company's Brazilian business has an estimated 58 percent share of the South American market for base tipping paper which is subsequently printed by converters. The Company's principal competitors in South America are Ecusta (including Schoeller & Hoesch) and Miquel y Costas. Management believes that the bases of cigarette 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 R.J. Reynolds 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 85-90 percent of cigar wrapper and binder used in the U.S. market is produced internally by domestic cigar manufacturers. The Company's Ancram mill and Nuway Microflake Partnership, a cast process manufacturer, produce the balance. Other Products -- The Company and its subsidiaries produce wrapping paper for drinking straws, filter papers, as well as papers for lightweight printing and writing, papers for packaging and labeling applications, business forms and battery separators. Management believes that price is the primary basis of competition for drinking straw wrap and filter papers (collectively, "Filler Papers"), while consistent quality and customer service are believed to be the primary competitive factors for battery separator and business forms papers. 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 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 $6.5 million, $6.4 million and $6.0 million in 1998, 1997 and 1996, respectively. The Company believes that the research and product development capabilities of its U.S. and French operations are unsurpassed in the industry and have played an important role in establishing the Company's reputation for high quality, superior products. The Company's commitment to research and development has enabled the Company, for example, to (i) produce high-performance papers designed to run on the high-speed manufacturing machines of its customers, (ii) produce papers to exacting specifications with very high uniformity, (iii) produce cigarette paper with extremely low basis weights, and (iv) have an acceptance rate by its customers in excess of 99 percent. The Company also believes it is in the forefront of the manufacturing process, having invested heavily in modern technology, including laser technology and modern paper-slitting equipment. The Company believes that its commitment to research and development, coupled with its investment in new technology and equipment, has positioned the Company to take advantage of growth opportunities abroad for American-style premium cigarettes. As of December 31, 1998, the Company and its subsidiaries collectively owned approximately 72 patents and had pending 70 patent applications covering a variety of Cigarette Papers, RTL and cigar wrapper and binder products and processes in the United States, Western Europe and several other countries. The Company believes that such patents, together with its papermaking expertise and technical sales support, have been instrumental in establishing it as the leading worldwide supplier of Cigarette Papers, RTL and reconstituted wrapper and binder made by the papermaking process. Management believes that the Company's POROWRAP(R) trademark, the "PdM" logo, the "Job papier a cigarette," 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 $24 and $21 million on December 31, 1998 and 1997, respectively. This represented approximately 44 and 50 days of Cigarette Paper sales in 1998 and 1997, respectively. LTRI's RTL business operates under a number of annual supply agreements. The order backlog for RTL was approximately $56 and $57 million on December 31, 1998 and 1997, respectively. The Brazilian business does not calculate or maintain records of order backlogs. Approximately one-half 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 U.S. where customer shutdowns of one to two weeks in duration typically occur in July and December, and in Brazil where customer orders are typically lower in December due to a January and February holiday season. SALES AND DISTRIBUTION. Essentially all sales of tobacco-related products by the U.S. and French businesses are sold by the Company's marketing, sales and customer service organizations directly to cigarette manufacturers or their designated converters, and to cigar manufacturers, except in China where sales are 8 9 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 to $4 million annually in 1999 and 2000. Based on the Company's analysis, the first phase of the Cluster Rules governing wastewater discharges promulgated by the U.S. Environmental Protection Agency ("EPA"), as published in April 1998, does not affect the Company's three U.S. mills. The EPA is currently engaged in further rule-making. The later phases of the Cluster Rules and National Pollutant Discharge Elimination System Permit renewals may require the Company to install water pollution controls at its U.S. facilities sometime after the year 2000. The 1999 and 2000 estimates include amounts previously planned for earlier periods, but which have been postponed in order to ensure compliance with final governmental regulations, when published, and to take advantage of emerging enhanced technologies. These expenditures have been anticipated for several years and are not expected to have a material adverse effect on the Company's financial condition, results of operations or competitive position; however, these estimates could be modified as a result of changes in the Company's plans, changes in legal requirements or other factors. RISKS FOR FOREIGN OPERATIONS. In addition to its U.S. operations, the Company has manufacturing facilities in France, Brazil and Canada. Products made in France, Brazil or in the U.S. are marketed in approximately 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, 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. 9 10 ITEM 2. PROPERTIES As of December 31, 1998, the Company operated eight mills (which include four fiber pulping operations) in the U.S., France and Brazil that produce specialty papers and/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, 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. Only the mill in Spay, France is currently operating at or close to capacity. The Company's U.S., French and Brazilian paper operations all experienced downtime on certain machines during the fourth quarter of 1998 because of reduced demand and to reduce inventories of Cigarette Papers. 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 operation. 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. 10 11 The following are locations of the Company's principal facilities and operating equipment as of December 31, 1998:
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 5 Paper Machines Cigarette Paper, Plug Wrap Paper Spotswood, New Jersey Pulping Equipment Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and Ancram, New York 1 Reconstituted Tobacco Binder, Porous Plug Wrap and Wrapper and Binder Specialty Papers Machine Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing Manitoba, Canada 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 3 Printing Presses 11 Laser Perforating Lines 1 Electrostatic Perforating Line Papeteries de St. Girons Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper, St. 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 FUNCTIONS ------------------------ ------------ --------- Alpharetta, Georgia Leased Office Space Company World Headquarters, Administration, Sales and Research & Development -- 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 Leased Office Space Sales Office for French Businesses Santanesia, Brazil Owned Office Space Administrative Offices for Brazilian Business Rio de Janeiro, Brazil Leased Office Space Sales Office for Brazilian Business
11 12 ITEM 3. LEGAL PROCEEDINGS The following is a brief description of potentially material legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their properties is subject: LITIGATION Under the terms of the Distribution, the Company assumed liability for and agreed to indemnify Kimberly-Clark from litigation arising out of the operation of the Businesses, including the following cases: - A purported class action, defining a class of plaintiffs who allegedly sustained injuries as a result of being exposed to tobacco smoke and respirable asbestos fibers, and three individual actions have been filed in the Circuit Court of Kanawha County, West Virginia in 1998 against several tobacco companies, tobacco industry trade associations and consultants, tobacco wholesalers and cigarette component manufacturers, including Kimberly-Clark and LTRI. The class representative and each individual plaintiff, respectively, seek compensatory damages of $2 to $3 million, punitive damages of $3 million and, for class members, compensatory and punitive damages in an unspecified amount. Cleo Huffman, Denny L. Parsons, Linda Morris and Sinette Newkirk, the named plaintiffs in these actions, filed their respective complaints on February 13, 1998, February 27, 1998, March 13, 1998 and July 22, 1998. The complaints allege several theories of liability against the defendants including negligence, product liability, misrepresentation, breach of warranty, conspiracy and other theories of liability. The Company has filed motions to dismiss that are currently pending in each of these cases. - In September 1998, Luanne Jividen and Jerry Jividen filed a complaint in the Circuit Court of Mason County, West Virginia against several tobacco companies, industry trade associations and consultants, tobacco wholesalers and cigarette component manufacturers, including Kimberly-Clark and LTRI, seeking equitable relief, $1 million in compensatory damages and $3 million in punitive damages for mental suffering, physical injury and loss of consortium allegedly sustained as a result of Ms. Jividen's contracting breast cancer as a result of her addiction to smoking Marlboro and other brands of cigarettes. The fourteen count complaint sets forth several theories of liability including willful and negligent misrepresentation, violations of state consumer protection laws, breach of express and implied warranties, intentional infliction of emotional distress, product liability, conspiracy, sale of an unreasonably dangerous product and accomplice liability. - In October 1998, Edward J. Sweeney, Stephen R. Micarek and Lisa A. Figura filed, in the Court of Common Pleas of Allegheny County, Pennsylvania, on behalf of themselves and certain residents of Pennsylvania, a purported class action against several tobacco companies, industry trade associations and consultants, tobacco wholesalers and retailers and cigarette component manufacturers, including Kimberly-Clark, seeking equitable relief and punitive damages for the class in an unspecified amount. The class consists of those Pennsylvania residents who, "commencing before age 18 . . . purchased, smoked . . . and continue to smoke cigarettes manufactured, marketed and sold by defendants". The five count complaint alleges that the defendants are liable to the plaintiffs under a number of theories, including product liability, consumer fraud, breach of special duty, negligence and civil conspiracy. Among other things, the complaint alleges that nicotine is an addictive substance, that the tobacco companies, by using reconstituted tobacco and other additives, are able to control the precise amount and/or the bioavailability of nicotine in their cigarettes and that LTRI, formerly a subsidiary of Kimberly-Clark, specializes in the tobacco reconstitution process and in helping tobacco companies control the nicotine in their cigarettes. The defendants have sought to remove the case to the U.S. District Court for the Western District of Pennsylvania. Plaintiff's motion to remand the case to state court is pending. As a component supplier, the Company believes that Kimberly-Clark has meritorious defenses to each of these cases. LTRI also has meritorious defenses to each of the cases in which it has been named as a defendant and will seek to be dismissed from such actions on the grounds that it is not subject to the personal jurisdiction of the West Virginia courts and also on the grounds that it did not sell its products in the United States. Due to the uncertainties of litigation, the Company cannot predict the outcome of these cases and is 12 13 unable to make a meaningful estimate of the amount or range of loss which could result from an unfavorable outcome of these actions. These cases will be vigorously defended. During 1998, Kimberly-Clark was voluntarily dismissed, with prejudice, from a purported tobacco class action brought by James E. McCune in 1997 in the Circuit Court of Kanawha County, West Virginia, and, in December 1998, the federal district court in Utah dismissed Kimberly-Clark, with prejudice, from a tobacco class action brought by three union health and welfare funds. Also, the Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material 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 ("CERCLA"), or analogous state statutes, in connection with two waste disposal sites utilized by the Company's Spotswood mill. Prior to the Distribution, the Spotswood mill also responded to an information request by the New Jersey Department of Environmental Protection and Energy ("NJDEP") with respect to another landfill site allegedly used by the Spotswood mill. The Company has assumed Kimberly-Clark's liabilities at each of these sites but does not believe that any of these proceedings will result in the imposition of monetary sanctions or have a material adverse effect on the Company's business or financial condition. In December 1997, the Company received notification from the EPA that, pursuant to CERCLA, it may be named as a PRP in connection with a 1986 shipment of transformer oil containing polychlorinated biphenyl which the Company's Lee mills had contracted to have transported to a disposal site by a transporter. The transporter has agreed to indemnify the Company for any liability connected with such shipment. The Company also assumed responsibility to administer a consent order between Kimberly-Clark and the Massachusetts Department of Environmental Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee, Massachusetts. The Company is obligated to maintain the integrity of the cover and to sample groundwater by means of monitoring wells, in addition to other long-term maintenance responsibilities for this former non-hazardous waste disposal facility. Under the terms of a January 24, 1997 Administrative Consent Order with MDEP, as amended ("Consent Order"), the Company was required to reduce concentrations of landfill gases at the landfill property line to specified levels by September 15, 1998. The Company has met the specified levels at 22 of 26 gas monitoring wells, but four monitoring wells have not yet attained such levels at 30 feet below ground level. Since such noncompliance does not create a safety risk, the Company has applied to MDEP to modify the Consent Order so that gas concentration measurements are restricted to 20 feet below ground level and monitoring frequency is reduced to twice per month. Pending a decision on the Company's request to modify the Consent Order, the Company must continue to monitor gas concentrations at the property line as specified in the Consent Order. Although the literal terms of the Consent Order could subject the Company to penalties for failing to meet the September 15, 1998 deadline, the Company does not expect the imposition of penalties based on the absence of a safety risk and current progress toward full compliance. The estimated cost of the remaining corrective action and annual operating expenses 13 14 expected to be incurred under the Consent Order, without the modifications requested by the Company, is $0.2 million, which amount has been accrued as of December 31, 1998. On December 7, 1998, the Company's Lee mills received a Notice of Enforcement Conference concerning self-reported exceedances of its National Pollutant Discharge Elimination System Permit limit on biological oxygen demand ("BOD") for four consecutive months (June 1998 through September 1998). Company representatives presented an action plan to MDEP that the Company believes will prevent future exceedances of its BOD limits. MDEP proposed that the Company enter into an Administrative Consent Order With Penalty that would detail the corrective actions to be taken, a timeline for implementation and stipulated penalties for any future, as well as past, violations. MDEP has proposed a total penalty of $15,000 for past exceedances of the BOD limits. The Company does not believe that the cost of any corrective action or the amount of any administrative penalties will have a material adverse effect on the Company's business or financial condition. Certain of the Company's facilities comprising the Lee mills and the Spotswood mill were subject to Title V of the Clean Air Act Amendments of 1990 and were, therefore, required to apply for Operating Permits under that title. The Columbia mill and the Niagara mill (portions of the Lee mills) received final Title V Operating Permits on April 21, 1998 and May 4, 1998, respectively. On February 4, 1999, the Spotswood mill filed an amended Operating Permit Application in response to NJDEP's Notice of Administrative Incompleteness issued to the mill. No material capital expenditures or operating expenses are expected to be incurred by the U.S. business as a result of this permitting process. The Company's U.S. operations were not impacted by the first phase of the revised Cluster Rules. Subsequent phases of the Cluster Rules could impact the Company's U.S. facilities; however, the potential impact cannot be estimated until after the EPA proposes applicable requirements, if any. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $1.7 million in 1998, and anticipates that it will incur approximately $2 to $4 million annually in 1999 and 2000. 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. 14 15 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 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the executive officers of the Company as of February 25, 1999, 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 Luiz Jose de Saboia e Silva....................... President - Brazilian Operations Paul C. Roberts................................... Chief Financial Officer and Treasurer William J. Sharkey................................ General Counsel and Secretary Wayne L. Grunewald................................ Controller
MR. WAYNE H. DEITRICH, 55, 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, 55, 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, 36, 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. LUIZ JOSE DE SABOIA E SILVA, 56, has served as President - Brazilian Operations of the Company since February 2, 1998, the date of the closing of the Pirahy acquisition. He served as a consultant to the Company effective January 1, 1998 through the closing date. Prior to January 1, 1998, but subsequent to his retirement from Souza Cruz in March 1995, Mr. Saboia worked on various production consultant projects with BAT. Before his retirement from Souza Cruz, Mr. Saboia had served as Industrial Director of Souza Cruz from 1991 to 1995, President - Cigarette Division of Souza Cruz from 1987 to 1991, Production Director of Souza Cruz from 1983 to 1987 and Production Director - BAT - Spain from 1980 to 1983. MR. PAUL C. ROBERTS, 50, has served as Chief Financial Officer and Treasurer of the Company since August 1995. From June 1995 through August 1995, he served as Chief Financial Officer - Specialty Products Sector of Kimberly-Clark. From January 1995 through May 1995, he was Director - Corporate Strategic Analysis of Kimberly-Clark, and from 1988 through 1994, Mr. Roberts was Director - Operations Analysis and Control, Pulp and Paper Sector of Kimberly-Clark. MR. WILLIAM J. SHARKEY, 67, has served as General Counsel and Secretary of the Company since August 1995. Prior to that time, Mr. Sharkey was Senior Counsel for Kimberly-Clark. MR. WAYNE L. GRUNEWALD, 47, 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. 15 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET Since the Distribution of the Company's Common Stock by Kimberly-Clark on November 30, 1995, the Common Stock has been listed on the New York Stock Exchange under the trading symbol "SWM". APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of February 25, 1999, there were 7,492 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. 16 17 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, 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 has been derived from historical combined financial statements for the eleven months ended November 30, 1995, and the consolidated results of the Company for the one month ended December 31, 1995, which have been audited by Deloitte & Touche LLP, independent auditors. The financial statement data as of and for the year ended December 31, 1994 has been derived from historical combined financial statements audited by Deloitte & Touche LLP. The historical combined financial statements of SWM and its predecessors for 1995 and 1994 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, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net Sales........................................... $546.7 $460.6 $471.3 $462.9 $404.2 Gross Profit........................................ 106.1 121.9 114.2 101.2 92.1 Operating Profit.................................... 59.1 81.9 74.0 58.7 58.7 Interest income from affiliates, net(1)............. -- -- -- 3.3 5.1 Net Income.......................................... 31.0 45.3 38.7 36.8 35.1 Net Income Per Share: Basic............................................ $ 1.94 $ 2.82 $ 2.41 Diluted.......................................... $ 1.92 $ 2.77 $ 2.38 Unaudited Pro Forma Basic and Diluted Net Income Per Share(2).......................... $ 1.81 $ 1.66 Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .45 CASH FLOW AND BALANCE SHEET DATA: Capital Spending.................................... $ 36.7 $ 35.8 $ 51.5 $ 22.5 $ 16.8 Depreciation and amortization....................... 24.8 14.4 13.4 13.4 11.7 Cash Provided By Operations......................... 67.1 67.3 90.4 64.9 53.7 Receivables from affiliated companies(1)(3)......... -- -- -- -- 210.1 Payables to affiliated companies(1)................. -- -- -- -- 157.9 Total Assets(3)..................................... 474.7 391.0 380.6 347.0 527.3 Long-Term Debt(3)................................... 108.4 80.8 86.6 91.6 13.4 Equity(3)........................................... 197.0 179.5 156.0 129.9 245.1
- --------------- (1) Prior to the Distribution, SMF acted as the financing entity in connection with the Kimberly-Clark European cash management program. Receivables and payables with affiliates and related interest income and expense with affiliates reflect financing activities related to other operations of Kimberly-Clark and certain of its affiliates 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 the periods presented. The pro forma financial data is unaudited, is presented for informational purposes only and does not reflect the future earnings or results of operations of the Company or what the earnings or results of operations of the Company would have been had the Businesses been operated as a separate, independent company for the periods prior to the Distribution. Pro forma net income per 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. (3) During 1995, the stockholders of SMF approved the conversion of $65.0 million of receivables due from an affiliated company to an equity investment. Such affiliated company was merged with another Kimberly-Clark wholly-owned subsidiary unrelated to the Businesses, and the shares of the merged entity were distributed to Kimberly-Clark prior to the Distribution. This transaction reduced receivables from affiliated companies and equity. Additionally, various payments were made to, and debt assumed from, Kimberly-Clark in connection with the Distribution, totaling $89.2 million, that also reduced the amount of total assets and equity. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN BACKGROUND INFORMATION Schweitzer-Mauduit International, Inc. was incorporated on August 21, 1995 as a wholly-owned subsidiary of Kimberly-Clark Corporation for the purpose of effectuating the tax-free spin-off of Kimberly-Clark's U.S., French and Canadian business operations that manufacture and sell tobacco-related papers and other specialty paper products. Through the November 30, 1995 Distribution date, the Businesses in the U.S. and Canada were conducted as operating divisions of Kimberly-Clark and one of its Canadian subsidiaries, respectively. The Businesses in France were conducted by LTRI, a 72 percent-owned subsidiary of Kimberly-Clark, and two indirect wholly-owned Kimberly-Clark subsidiaries, PdM and PdMal. These latter two companies are owned by SMF, which prior to the Distribution was a wholly-owned subsidiary of Kimberly-Clark. On February 2, 1998, SM-Spain, a wholly-owned Spanish holding company established in 1997, acquired Pirahy, a Brazilian specialty paper manufacturer. On February 11, 1998, SM-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 ten percent of the Company's net sales in 1998. 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 U.S., 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 in that segment. For purposes of the segment disclosure in the following tables, the term "United States" includes operations in the U.S. 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. 18 19 RESULTS OF OPERATIONS 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 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 U.S. 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 is no longer expected to be used due to 19 20 changed market conditions and one-time labor payments, the majority of which related to operational changes in Brazil. Additionally, production downtime was taken in the U.S., 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 U.S. 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 the 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 profit by $2.8 million, although this benefit was offset by changes in selling prices. 1997 Compared to 1996 By Segment for the Years Ended December 31, 1997 and 1996 (U.S. $ in millions)
% OF CONSOLIDATED % CHANGE ------------------ NET SALES 1997 1996 VS. 1996 1997 1996 - --------- ------ ------ -------- ------- ------- United States..................................... $195.5 $212.3 -7.9% 42.4% 45.0% France............................................ 268.8 263.5 +2.0 58.4 55.9 Eliminations...................................... (3.7) (4.5) (0.8) (0.9) ------ ------ ----- ----- Consolidated............................ $460.6 $471.3 -2.3% 100.0% 100.0% ====== ====== ===== =====
% RETURN % OF CONSOLIDATED ON SALES % CHANGE ------------------ ----------- OPERATING PROFIT 1997 1996 VS. 1996 1997 1996 1997 1996 - ---------------- ----- ----- -------- ------- ------- ---- ---- United States........................ $21.2 $23.7 -10.5% 25.9% 32.0% 10.8% 11.2% France............................... 66.4 55.5 +19.6 81.1 75.0 24.7 21.1 Unallocated/Eliminations............. (5.7) (5.2) (7.0) (7.0) ----- ----- ----- ----- Consolidated............... $81.9 $74.0 +10.7% 100.0% 100.0% 17.8% 15.7% ===== ===== ===== =====
Net Sales Net sales decreased by $10.7 million due primarily to unfavorable changes in currency exchange rates, which decreased net sales by $26.4 million. The Company's U.S. business exited the U.S. RTL product line in early 1996, which resulted in an unfavorable effect of $2.9 million on the net sales comparison versus 1997. Without these two unfavorable effects, net sales in 1997 would have increased by $18.6 million or four percent. Worldwide sales volumes increased by three percent, adding $8.7 million to net sales. Excluding RTL volumes in the U.S. in the first quarter of 1996, worldwide sales volumes increased by four percent. Sales volumes increased in every major product line in France, with total volumes from the French businesses up 14 percent for the year. Excluding RTL volumes in the U.S. in the first quarter of 1996, sales volumes declined at the 20 21 U.S. business unit by eight percent primarily as a result of lower domestic shipments, relating to a reduction in the export of cigarettes by U.S. cigarette manufacturers and changes in the Company's internal sourcing of selected customers from the U.S. to France. Changes in average worldwide selling prices and sales mix had a favorable effect of $7.0 million for the year. Average selling prices increased in the U.S. compared to the prior year as a result of an improved mix of products, offsetting contractual price reductions related to a decline in the per ton cost of wood pulp. Average worldwide selling prices increased in France compared to the prior year because of an improved mix of products, offsetting slight price decreases on certain products. Operating Profit Operating profit improved by $7.9 million for 1997 compared to 1996. The improvement was primarily a result of the increased French sales volumes, improved sales mix, better mill operations and a decline in per ton wood pulp costs. Decreases in per ton wood pulp costs favorably impacted operating profit by $4.2 million compared to the prior year, although this benefit was offset by changes in selling prices. Non-manufacturing expenses were $0.2 million less than in 1996. The above favorable effects for the year were partially offset by lower U.S. sales volumes, higher U.S. manufacturing costs in 1997 and changes in currency exchange rates. During the fourth quarter of 1997, U.S. operating profit decreased by approximately $1.8 million from reduced operating schedules to reduce inventories. In addition, $0.7 million in start-up costs were incurred during the fourth quarter of 1997 to restart operation of the U.S. RTL production line in support of increased French sales volumes. Changes in currency exchange rates had an unfavorable impact of $2.4 million on the operating profit change. NON-OPERATING EXPENSES 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 and 1996 was primarily associated with debt incurred in connection with the Distribution (see "Liquidity and Capital Resources"). The decline in interest expense in 1997 as compared to 1996 was primarily due to lower interest rates, currency translation rate changes and a lower average amount of debt outstanding. The weighted average effective interest rate on the Company's term loans was approximately 5.1 percent in 1998, 4.7 percent in 1997 and 5.2 percent in 1996. Other income, net in 1998, 1997 and 1996 consisted primarily of interest income from investment of cash generated by operations of the Company and royalty income. 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 distributed 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 taxes until the NOLs have been fully utilized. Additionally, the noncurrent deferred income tax asset as of December 31, 1998 includes amounts related to NOLs of SWM-B, some of which were obtained in the acquisition of this Brazilian business. Additional information concerning these NOLs is disclosed in Note 6 to the Consolidated Financial Statements. The effective income tax rates for the years ended December 31, 1998, 1997 and 1996 were 32.1 percent, 36.0 percent and 37.2 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 in the second quarter of 1998. 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. 21 22 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 provision for income taxes in 1997 was impacted by an increase in the effective statutory income tax rate enacted in France during November 1997 from 36.67 percent to 41.67 percent for 1997 and 1998, retroactive to January 1, 1997, and to 40.0 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 $1.0 million reserve for a previously reported tax claim in France. (See additional information concerning this tax claim in Note 6 to the Consolidated Financial Statements.) Including the effect of the change in French income tax rates on the 1997 current provision for income taxes, but excluding the effect on the deferred provision for income taxes, and excluding the effect of the elimination of taxation of a "provision for fluctuating value of raw materials" and the reserve for the tax claim, the effective 1997 income tax rate would have been 39.9 percent. The increase from this adjusted 1997 rate of 39.9 percent to the above-adjusted 41.7 percent 1998 effective income tax rate is due to a greater proportion of the Company's 1998 earnings being in France which has higher income tax rates than other countries in which the Company operates. LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ------ ------ ----- (U.S.$ IN MILLIONS) Cash Provided by (Used for): Changes in operating working capital...................... $ (1.9) $(10.8) $18.5 Operations................................................ 67.1 67.3 90.4 Capital spending.......................................... (36.7) (35.8) (51.5) Capitalized software costs................................ (4.0) (7.6) (2.7)
The Company's primary source of liquidity is cash flow from operations, which is principally obtained through operating earnings. Impacting the cash flow from operations are changes in operating working capital. In 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 project and purchased software costs included in accounts payable at December 31, 1996. During 1997, the cash flow impact of lower accounts receivable, due to the timing of collections, offset the impact of higher inventory levels. In 1996, changes in operating working capital contributed favorably to cash flow by $18.5 million primarily due to decreases in inventories as a result of lower inventory levels and lower per ton wood pulp costs, decreases in accounts receivable due to the timing of collections, and increases in accounts payable primarily for several large capital expenditures included in accounts payable at December 31, 1996. Cash flow from operations during these periods exceeded the level of capital spending. Capital spending in 1998 included (i) $3.9 million toward the expansion of converted tipping paper capacity at the Malaucene, France mill, (ii) $3.0 million toward speed-ups of both RTL machines and replacement of a yankee dryer hood at the Spay, France 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 St. 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 22 23 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. Capital spending in 1996 included (i) $18.8 million for the new long fiber paper machine at the Quimperle mill, (ii) $3.6 million at the Quimperle mill for a production reorganization project, (iii) $3.4 million to complete the installation of new high-speed cigarette paper converting equipment at the Spotswood mill, (iv) $2.7 million toward upgrading the flax pulping operations at the Spotswood mill, and (v) $2.1 million to furnish the Company's newly leased corporate and U.S. business unit headquarters and U.S. research facilities. In addition to capital spending, the Company incurred, and deferred on the balance sheet, additional software development costs of $4.0 million in 1998, related to new integrated information systems in France and the U.S. These systems replaced the Kimberly-Clark systems formerly used in the U.S. 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 155,700 shares of its common stock in the third quarter of 1998 for $3.8 million under a previous program which was effective through December 31, 1998. On January 28, 1999, 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 8, 1999 to stockholders of record on February 8, 1999. 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, each amounting to $2.4 million ($0.15 per share), since the second quarter of 1996. Management currently expects to continue this level of quarterly dividend. Other than expenditures associated with environmental matters (see Note 12 of the Notes to Consolidated Financial Statements), as of December 31, 1998 the Company had unrecorded outstanding commitments for capital expenditures of approximately $8.6 million. In addition to capital spending, the Company is incurring software development costs related to new integrated computer systems that replaced in the U.S. the formerly used Kimberly-Clark systems beginning January 1998. The portion of software development costs which were capitalized beginning in 1996 totaled $14.3 million through 1998 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 U.S., 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. The Company will continue to incur costs in France in 1999 and 2000 as software modules are purchased, designed and installed. As of December 31, 1998, the Company had approximately $26 million still available under its revolving credit facilities in the U.S. and France, and on January 29, 1999, the Company renewed these facilities to January 28, 2000. The Company also has other bank credit facilities available in the U.S., France and Brazil. 23 24 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 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 in the balance sheet. SFAS No. 133 will be effective no later than for the Company's first quarter of 2000. The Company is evaluating the effects of this new statement and when to implement the new requirements. OUTLOOK The difficult market conditions experienced in the second half of 1998 are continuing. U.S. cigarette consumption is being impacted by adverse publicity and by increases in the retail selling price of cigarettes. U.S. cigarette consumption and the export of cigarettes manufactured in the United States declined in 1998 from prior year levels. Continued lower sales to China, Russia and southeast Asia are expected for the foreseeable future due to import controls, currency convertibility and decreased demand. With weakness in demand, pricing has come under pressure in some markets. The uncertain pricing environment for the Company's paper products is expected to continue into 1999 due to market conditions and the results of global pricing negotiations with multi-national cigarette manufacturers. With weakening demand for the Company's paper products, some production downtime was taken during the fourth quarter of 1998 in France, the United States and Brazil to manage inventory levels. The Company entered 1999 with what management believes is an appropriate level of inventories and expects less production downtime and improved operations in the first half of 1999 compared with the fourth quarter of 1998. Compared with the prior year, the Company's net sales will benefit in the first quarter of 1999 from sales by companies acquired in Brazil and France in February of 1998. The Company continues to integrate these acquisitions. Earnings of the Company's Brazilian operations are expected to improve during 1999. The Company's objective is to achieve at least break-even operating profit at that business unit. The recent devaluation of the Brazilian real is expected to have a positive impact on the Company's Brazilian operations since some of its sales in Brazil are tied to U.S. dollar selling prices. The ultimate impact the currency devaluation will have on the economy of Brazil remains uncertain. Changes in both inflation rates and economic growth rates could have a future impact on the Brazilian business. Cost savings are expected to continue from recently implemented capital projects and from various cost savings programs, including the Spotswood mill restructuring program that was announced in the second quarter of 1998 and the recent change in the Brazilian operations. With the uncertain market conditions, the Company is making cost improvement a major priority in each of its business units. The per ton cost of wood pulp declined during 1998. The Company does not expect significant increases or decreases in the per ton cost of wood pulp during 1999, although per ton wood pulp costs may be somewhat lower during the first half of the year compared to the levels during the first half of 1998. The French corporate income tax rate will decline from 41.67 percent in 1998 to 40.0 percent in 1999. The amortization of capitalized software costs and operating expenses related to the new integrated computer systems in the U.S. will continue in 1999 at approximately the same level as in 1998. The Company expects to incur $3 to $4 million of capitalized software costs in 1999, primarily in France, and an additional $1 to $2 million of capitalized software costs in 2000. Start-up of the new systems in France will occur in phases, commencing in mid-1999. The company expects capital spending for 1999 to be approximately $35 million, focused primarily on internal capacity expansion, product quality improvements and cost reduction opportunities. In the second quarter of 1998, the Company initiated an expansion of the Malaucene mill, which is expected to increase the mill's capacity for finished tipping paper by approximately 45 percent and should be completed in the second 24 25 half of 1999. Capital spending in 1999 will also include spending for a $9.9 million project authorized to increase reconstituted tobacco leaf ("RTL") production capacity at the Spay, France mill by approximately 10 percent. With the authorization of this project, current inventory levels and customer order patterns, the decision was made to cease production of RTL products at the Spotswood mill in the fourth quarter of 1998. The Spotswood RTL production line had been temporarily restarted during the fourth quarter of 1997 to support the French RTL operation until a plan for adding permanent RTL capacity was developed. 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 1999 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 utilize 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 major governmental and business systems failures or miscalculations causing disruptions in operations. This problem is 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 anticipates that there may be some disruption in its business due to the Year 2000 issue. Due to the interdependent nature of the Company and its systems with those of so many customers, vendors and service providers, such as fuel oil suppliers and electric utilities, as well as domestic and foreign governmental agencies, the Company and its operating subsidiaries are exposed to many possible systems failures or processing errors. As a result, the Company and its operating subsidiaries could be materially adversely affected if utilities, private businesses and governmental agencies with which they do business or that provide essential materials or services are not Year 2000 compliant. The Company believes that the most reasonably likely worst case scenarios would be temporary mill closings, delays in the receipt of supplies, delays in the delivery of its products, delays in collection of amounts due the Company, delays in payment of amounts owed by the Company to others, and delays in receipt of needed services. As a consequence of one or more of these scenarios, the Company's results of operations could be materially adversely impacted by a temporary inability to conduct its business in the ordinary course for some period of time. However, the Company believes that its plans, including its contingency planning discussed below should minimize the adverse effect of any such business disruptions if they should occur. Each of the Company's business segments has inventoried its business operations, assessed its susceptibility to system failures or processing errors as a result of Year 2000 issues and developed a plan to address those issues, focusing on three elements: information systems software and hardware, mill process controls and operating systems, and vendors and service providers. Each element is being subdivided according to risk potential of high, medium and low. High risk is defined as being critical to uninterrupted operation of the business. Medium risk is defined as being necessary to support the business but temporary work-arounds can be accomplished. Low risk is defined as being minor inconveniences that should not impact the Company's business. Those issues which are considered most critical to continuing operations are being given the highest priority. On January 1, 1998, the Company's U.S. operations, including the research and headquarters areas, began utilizing new integrated information systems to replace the Kimberly-Clark systems formerly used in the U.S. A benefit of the new systems is that they are expected to provide Year 2000 compliance in the area of information systems. In the U.S., mill process controls and operating systems have been reviewed for nearly 3,000 pieces of equipment and systems. Only six high risk equipment or systems issues have been identified. 25 26 For these issues, modification requirements and a schedule for compliance have been developed with the applicable equipment and systems vendors. Such corrective action is expected to be completed during the third quarter of 1999. The Company's French businesses have inventoried and evaluated all their information systems. Approximately one-fourth of these information systems are believed to be Year 2000 compliant. Upon implementation in mid-1999 of certain new integrated computer systems in France, substantially all of the French businesses' information systems are expected to be Year 2000 compliant. Less than three percent of the approximately 2,000 pieces of mill process control equipment and operating systems will require modification or replacement. Adequate progress has occurred to-date, with several modifications and replacements already completed. Such corrective action is expected to be completed by the end of the second quarter of 1999. The Company's Brazilian business has inventoried and evaluated all of its information systems. Nine of its systems will require modifications to become Year 2000 compliant. Upgrades for all nine systems have been developed and are expected to be implemented by the end of the second quarter of 1999. Of its mill process control equipment and operating systems, ten will require modification and upgrades for these systems have been developed. The required modifications for nine of the ten systems have already been implemented, and the required modifications for the remaining system are expected to be implemented by the end of the second quarter of 1999. Inquiries have been mailed to vendors and service providers for the Company's U.S., French and Brazilian operations as to the status of their Year 2000 compliance. Thus far, approximately one-half have responded. Second requests have been sent to those vendors and service providers that had not yet responded to the first inquiry and to those whose responses were incomplete or inadequate. Critical vendors and suppliers are being contacted either by phone or in person to review the status of their Year 2000 compliance plans. Coincident with the actions described above, the Company and its operating subsidiaries are developing and evaluating contingency plans to further mitigate the effects of possible disruptions that may occur and are developing and evaluating related cost estimates for such plans. All of the Company's operations are assessing the need for alternative supply arrangements and increased inventory levels of raw materials, supplies and finished goods, as well as other possible measures based on the responses from vendors and service providers. Contingency plans will be developed to try to reasonably ensure that operations are not interrupted and unexpected costs are minimized. However, there can be no assurances that all possible negative consequences can be identified and avoided. The Company presently plans to address each of its systems which are critical to its operations by the end of the second quarter of 1999. The Company currently estimates that the total cost of implementing its Year 2000 compliance plans will be in the range of $1 to $2 million, substantially all to be incurred in 1999, excluding the costs of the new integrated computer systems. Approximately two-thirds of this amount is expected to be expensed and one-third included in capital projects. These preliminary estimates are subject to change, since they are based on presently available information, and will be updated as the Company continues its assessments, proceeds with implementation of modifications and replacements necessary to become compliant, receives further feedback from vendors and service providers and formulates reasonable and necessary contingency plans. 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. 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 26 27 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 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's international operations 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 is subject to income tax laws in each of the countries in which it does business through wholly-owned subsidiaries and through affiliates. The Company makes a comprehensive review of the income tax requirements of each of its operations, files appropriate returns and makes appropriate income tax planning analyses directed toward the minimization of its income tax obligations in these countries. Appropriate income tax provisions are determined on an individual subsidiary level and at the corporate level on both an interim and annual basis. These processes are followed using an appropriate combination of internal staff at both the subsidiary and corporate levels as well as independent outside advisors in review of the various tax laws and in compliance reporting for the various operations. Dividend distributions are regularly made to the U.S. from certain foreign subsidiaries and are appropriately considered in the provision for U.S. income taxes. The Company intends for the undistributed earnings of certain other foreign subsidiaries to be reinvested indefinitely. These undistributed earnings are not subject to either additional foreign income taxes or U.S. income taxes unless remitted as dividends. Accordingly, no provision has been made for U.S. taxes on those earnings. The Company regularly reviews the status of the accumulated earnings of each of its foreign subsidiaries and reevaluates the aforementioned dividend policy as part of its overall financing plans. Hedging Activities and Foreign Currency Exchange Risks Management selectively hedges the Company's foreign currency risks, as well as its exposure to interest rate increases on its variable rate long-term debt, when it is practical and cost effective to do so. The instruments used to hedge foreign currency risks are forward contracts and, to a lesser extent, option contracts. The Company utilizes various forms of interest rate hedge agreements, including interest rate swap agreements and forward rate agreements. These instruments are purchased from well-known money center banks, insurance companies or government agencies (counterparties). Usually, the contracts extend for no more than 12 months, although their contractual term has been as long as 18 months. Management believes that credit risks with respect to the counterparties and the foreign currency risks that would not be hedged, were the counterparties to fail to fulfill their obligations under the contracts, are minimal in view of the financial strength of the counterparties. In addition to the effect of changes in currency exchange rates on operating profit, foreign currency 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. 27 28 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 112,000 metric tons of wood pulp in 1998, including requirements of the newly-acquired companies, and 71,000 and 65,000 metric tons of wood pulp in 1997 and 1996, respectively. During the period from January 1996 through December 1998, 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 $860 per metric ton. 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 U.S. and Brazil. In the U.S., 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. 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 is 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 approximately 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. 28 29 Tobacco Products and Governmental Actions In recent years, governmental entities, particularly in the U.S., have taken or have proposed actions that may have the effect of reducing consumption of tobacco products. Reports and speculation with respect to the alleged harmful physical effects of cigarette smoking and use of tobacco products have been publicized for many years and, together with actions to restrict or prohibit advertising and promotion of cigarettes or other tobacco products and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other such products. In 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 over the course of the last approximately 18 months. Domestic cigarette consumption has declined, in part due to these price increases which, in turn, decreases demand for the Company's products. In addition, litigation is pending against the major manufacturers of consumer tobacco products seeking damages for health problems allegedly resulting from the use of tobacco in various forms. It is not possible to predict the outcome of such litigation or what effect adverse developments in pending or future litigation may have on the tobacco industry. Nor is it possible to predict what additional legislation or regulations relating to tobacco products will be enacted, or to what extent, if any, such legislation or regulations might affect the consumer tobacco products industry in general. Approximately 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 1999 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. 29 30 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, 1998, 1997 and 1996...................... 31 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................. 32 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.................................................. 33 Consolidated Statements of Cash Flow for the years ended December 31, 1998, 1997 and 1996................ 34 Notes to Consolidated Financial Statements............. 35 Report of Independent Auditors.............................. 59 Management's Responsibility for Financial Reporting......... 60
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. 30 31 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net Sales................................................ $546.7 $460.6 $471.3 Cost of products sold.................................. 440.6 338.7 357.1 ------ ------ ------ Gross Profit............................................. 106.1 121.9 114.2 Selling expense........................................ 21.0 17.4 18.2 Research expense....................................... 6.5 6.4 6.0 General expense........................................ 19.5 16.2 16.0 ------ ------ ------ Operating Profit......................................... 59.1 81.9 74.0 Interest expense....................................... (6.4) (4.1) (5.3) Other income, net...................................... 1.2 1.6 1.2 ------ ------ ------ Income Before Income Taxes and Minority Interest......... 53.9 79.4 69.9 Provision for income taxes............................. 17.3 28.6 26.0 ------ ------ ------ Income Before Minority Interest.......................... 36.6 50.8 43.9 Minority interest in earnings of subsidiaries.......... 5.6 5.5 5.2 ------ ------ ------ Net Income............................................... $ 31.0 $ 45.3 $ 38.7 ====== ====== ====== Net Income Per Common Share: Basic.................................................. $ 1.94 $ 2.82 $ 2.41 ====== ====== ====== Diluted................................................ $ 1.92 $ 2.77 $ 2.38 ====== ====== ======
See Notes to Consolidated Financial Statements 31 32 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- (U.S. $ IN MILLIONS) ASSETS Current Assets Cash and cash equivalents................................. $ 6.7 $ 37.2 Accounts receivable....................................... 69.5 57.0 Inventories............................................... 69.4 56.3 Current income tax refunds receivable..................... 2.8 -- Deferred income tax benefits.............................. 5.2 3.3 Prepaid expenses.......................................... 2.7 3.8 ------ ------ Total Current Assets............................... 156.3 157.6 ------ ------ Property Land and improvements..................................... 7.2 5.9 Buildings and improvements................................ 69.0 45.6 Machinery and equipment................................... 379.6 296.1 Construction in progress.................................. 23.5 22.4 ------ ------ Gross Property.......................................... 479.3 370.0 Less accumulated depreciation............................. 196.1 168.9 ------ ------ Net Property....................................... 283.2 201.1 ------ ------ Noncurrent Deferred Income Tax Benefits..................... 19.7 18.4 ------ ------ Deferred Charges and Other Assets........................... 15.5 13.9 ------ ------ Total Assets....................................... $474.7 $391.0 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt......................... $ 4.4 $ 2.5 Other short-term debt..................................... 11.3 0.5 Accounts payable.......................................... 58.1 43.4 Accrued expenses.......................................... 50.7 43.0 Income taxes payable...................................... -- 1.1 ------ ------ Total Current Liabilities.......................... 124.5 90.5 ------ ------ Long-Term Debt.............................................. 108.4 80.8 ------ ------ Deferred Income Taxes....................................... 12.7 11.2 ------ ------ Other Noncurrent Liabilities................................ 24.1 21.9 ------ ------ Minority Interest........................................... 8.0 7.1 ------ ------ Contingencies (See Notes 6, 10, 11 and 12) Stockholders' Equity Preferred Stock -- $.10 par value -- 10,000,000 shares authorized, none issued................................. -- -- Common Stock -- $.10 par value -- 100,000,000 shares authorized, 16,078,733 and 16,065,443 shares issued at December 31, 1998 and 1997, respectively................ 1.6 1.6 Additional paid-in capital................................ 60.7 60.3 Common stock in treasury, at cost -- 154,668 shares at December 31, 1998....................................... (3.8) -- Retained earnings......................................... 134.8 113.5 Accumulated other comprehensive income -- Unrealized foreign currency translation adjustments..... 3.7 4.1 ------ ------ Total Stockholders' Equity......................... 197.0 179.5 ------ ------ Total Liabilities and Stockholders' Equity................ $474.7 $391.0 ====== ======
See Notes to Consolidated Financial Statements 32 33 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 ----------------------------------------------------------------------------------------- ACCUMULATED COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER --------------------- ---------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL ---------- -------- ------- ------ ---------- -------- ------------- ------ (U.S. $ IN MILLIONS) BALANCE, DECEMBER 31, 1995............ 16,051,109 $ 1.6 $ 60.0 $ 46.3 $22.0 $129.9 Net income.......................... 38.7 38.7 Adjustments to unrealized foreign currency translation.............. (5.4) (5.4) ------ Comprehensive income................ 33.3 Dividends declared ($0.45 per share)............................ (7.2) (7.2) Stock issued to directors as compensation...................... 1,512 -- ---------- ------ ------ ------ ----- ------ 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 ========== ====== ======= ====== ====== ====== ===== ======
See Notes to Consolidated Financial Statements 33 34 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ------- ----- ----- (U.S. $ IN MILLIONS) Operations Net income................................................ $ 31.0 $45.3 $38.7 Depreciation and amortization............................. 24.8 14.4 13.4 Deferred income tax provision............................. 5.0 9.9 8.6 Minority interest in earnings of subsidiaries............. 5.6 5.5 5.2 Non-cash utilization of restructuring reserve............. -- -- 4.7 Other..................................................... 2.6 3.0 1.3 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable.................................... (1.2) 8.1 4.4 Inventories............................................ (1.4) (7.1) 6.8 Accounts payable....................................... 2.4 (11.1) 10.2 Accrued expenses....................................... 0.3 0.5 (1.1) Prepaid expenses....................................... 1.2 (1.7) (1.1) Accrued income taxes................................... (3.2) 0.5 (0.7) ------- ----- ----- Net changes in operating working capital............. (1.9) (10.8) 18.5 ------- ----- ----- Cash Provided by Operations....................... 67.1 67.3 90.4 ------- ----- ----- Investing Capital spending.......................................... (36.7) (35.8) (51.5) Capitalized software costs................................ (4.0) (7.6) (2.7) Acquisitions, net of cash acquired........................ (65.4) -- -- Other..................................................... (1.3) (4.7) (1.7) ------- ----- ----- Cash Used for Investing........................... (107.4) (48.1) (55.9) ------- ----- ----- Financing Cash dividends paid to SWM stockholders................... (9.6) (9.6) (7.2) Cash dividends paid to minority owner..................... (5.3) (4.5) (0.9) Changes in short-term debt................................ 8.4 (0.8) (1.2) Proceeds from issuances of long-term debt................. 24.8 5.6 5.4 Payments on long-term debt................................ (5.0) (3.9) (5.6) Purchases of treasury stock............................... (3.8) -- -- Issuances of capital stock................................ 0.3 0.3 -- ------- ----- ----- Cash Provided by (Used for) Financing............. 9.8 (12.9) (9.5) ------- ----- ----- Increase (Decrease) in Cash and Cash Equivalents............ (30.5) 6.3 25.0 Cash and Cash Equivalents at beginning of year.............. 37.2 30.9 5.9 ------- ----- ----- Cash and Cash Equivalents at end of year.................... $ 6.7 $37.2 $30.9 ======= ===== =====
See Notes to Consolidated Financial Statements 34 35 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 manufacture and sell 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 St. 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 St. Girons S.A. ("PdStG"). 35 36 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 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 1998, 1997 and 1996 were 16,018,700, 16,059,900 and 16,052,100, respectively. Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding. The average number of common and potential common shares used in the calculation of diluted net income per common share for 1998, 1997 and 1996 were 16,161,300, 16,338,600 and 16,216,900, respectively. The only potential common shares are those related to stock options outstanding during the respective years. 36 37 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 U.S. are valued at the lower of cost, using the First-In, First-Out ("FIFO") and weighted average methods, or market. Property and Depreciation Property, plant and equipment are stated at cost. Depreciable property is depreciated on the straight-line method for accounting purposes. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the balance sheet, and any gain or loss on the transaction is included in income. The depreciable lives for the principal asset categories are as follows:
ASSET CATEGORY DEPRECIABLE LIFE - -------------- ---------------- Machinery and Equipment................................ 5 to 20 years Buildings.............................................. 20 to 40 years Building Improvements.................................. Lesser of 20 years or remaining life of the relevant building or lease
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 37 38 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS with management's plans with respect to the operations, are considered in assessing the recoverability of property and purchased intangibles. Income Taxes Income tax expense and deferred income tax assets and liabilities are determined under the asset and liability method. Deferred income taxes have been provided on the differences between the financial reporting and tax basis of assets and liabilities by applying enacted tax rates in effect for the years in which the differences are expected to reverse. In France, 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 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 in the balance sheet. SFAS No. 133 will be effective no later than for the Company's first quarter of 2000. The Company is evaluating the effects of this new statement and when to implement the new requirements. 38 39 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, ------------------ 1998 1997 ------ ------ Summary of Accounts Receivable: Trade..................................................... $57.4 $45.3 Other..................................................... 14.0 12.1 Less allowances for doubtful accounts and sales discounts.............................................. (1.9) (0.4) ----- ----- Total............................................. $69.5 $57.0 ===== ===== Summary of Inventories by Major Class: At the lower of cost on the FIFO and weighted average methods or market: Raw materials.......................................... $25.9 $20.1 Work in process........................................ 9.3 11.3 Finished goods......................................... 26.6 21.4 Supplies and other..................................... 13.2 9.7 ----- ----- 75.0 62.5 Excess of FIFO cost over LIFO cost..................... (5.6) (6.2) ----- ----- Total............................................. $69.4 $56.3 ===== =====
Total inventories included $30.8 and $31.3 of inventories subject to the LIFO method of valuation at December 31, 1998 and 1997, respectively. If LIFO inventories had been valued at FIFO cost, net income would have been decreased by $0.4, $0.6 and $1.4 in 1998, 1997 and 1996, respectively.
AS OF DECEMBER 31, ------------------ 1998 1997 ------ ------ Summary of Accrued Expenses: Accrued salaries, wages and employee benefits............. $26.8 $22.2 Other accrued expenses.................................... 23.9 20.8 ----- ----- Total............................................. $50.7 $43.0 ===== =====
39 40 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, 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 ==== ==== ===== ===== ==== AS OF DECEMBER 31, 1996 Allowance for doubtful accounts...... $0.5 $ -- -- $ -- $0.5 Allowance for sales discounts........ -- 0.1 (0.1) -- -- ---- ---- ----- ----- ---- Total...................... $0.5 $0.1 $(0.1) $ -- $0.5 ==== ==== ===== ===== ====
Supplemental Cash Flow Information
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Interest paid............................................... $ 6.2 $ 4.2 $ 4.4 Interest capitalized........................................ 0.1 0.5 0.4 Income taxes paid (1)....................................... 15.6 17.7 17.5 Decrease in cash and cash equivalents due to exchange rate changes................................................... $(1.0) $(2.5) $(0.7)
- --------------- (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 $67 at December 31, 1998 and $63 at December 31, 1997) 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 $45 at December 31, 1998 and $42 at December 31, 1997) (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 $22 at December 31, 1998 and $21 at December 31, 1997) (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 Facilities"). In connection with the Distribution, the Company made cash distributions to Kimberly-Clark 40 41 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS principally financed by borrowings of the full amounts by SWM and SMF under the U.S. and French Term Loan Facilities, respectively. 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. 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 29, 1999, the interest rates under the Revolving Credit Facilities are based, at the election of the Company, on either (a) the sum of (i) 0.45 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 practical and cost effective to do so. The weighted average effective interest rates on the Term Loan Facilities for the years ended December 31, 1998, 1997 and 1996 were 5.1 percent, 4.7 percent and 5.2 percent, respectively. At both December 31, 1998 and 1997, 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, 1998 and 1997) and are generally payable in the fifth year subsequent to the year the profit sharing is accrued. Following are the balances of long-term debt obligations as of December 31:
1998 1997 ------ ----- French Term Loan............................................ $ 44.7 $41.8 U.S. Term Loan.............................................. 25.0 25.0 Spanish Term Loan........................................... 20.0 -- French Employee Profit Sharing.............................. 17.4 15.0 Other....................................................... 5.7 1.5 ------ ----- 112.8 83.3 Less current portion........................................ (4.4) (2.5) ------ ----- $108.4 $80.8 ====== =====
41 42 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Following are the scheduled maturities for these long-term debt obligations as of December 31, 1998: 1999...................................................... $ 4.4 2000...................................................... 3.8 2001...................................................... 3.9 2002...................................................... 64.7 2003...................................................... 34.4 Thereafter................................................ 1.6 ------ $112.8 ======
At December 31, 1998, the U.S. and the French operations of the Company together had approximately $37 of Revolving Credit Facilities available, of which approximately $26 was unused. These facilities permit borrowing at competitive interest rates and are available for general corporate purposes. Beginning January 29, 1999, the Company pays commitment fees on the unused portion of these Revolving Credit Facilities at an annual rate of .15 percent and may cancel the facilities without penalty at any time prior to their expiration at January 28, 2000. The Company also had other bank credit facilities available totaling approximately $19, of which $0.3 was outstanding at December 31, 1998. No commitment fees are paid on the unused portion of these facilities. At December 31, 1998 and 1997, 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. NOTE 6. INCOME TAXES An analysis of the provision (benefit) for income taxes for the years ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996 ----- ----- ----- Current income taxes: U.S. Federal.............................................. $(1.7) $ 3.8 $ 4.9 U.S. State................................................ (0.3) 0.7 0.9 Foreign................................................... 14.3 14.2 11.6 ----- ----- ----- 12.3 18.7 17.4 ----- ----- ----- Deferred income taxes: U.S. Federal.............................................. 1.9 1.5 1.2 U.S. State................................................ (0.1) 0.3 0.2 Foreign................................................... 3.2 8.1 7.2 ----- ----- ----- 5.0 9.9 8.6 ----- ----- ----- Total............................................. $17.3 $28.6 $26.0 ===== ===== =====
Income before income taxes included income of $52.6 in 1998, $63.5 in 1997, and $51.8 in 1996 from operations outside the U.S. 42 43 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS A reconciliation of income tax computed at the U.S. federal statutory income tax rate to the provision for income taxes is as follows for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Tax at U.S. statutory rate...................... $18.9 35.0% $27.8 35.0% $24.5 35.0% State income taxes, net of federal tax benefit....................................... (0.3) (0.5) 0.6 0.8 0.7 1.0 Statutory rates outside the U.S in excess of U.S. statutory rate, net...................... 3.9 7.2 4.2 5.3 0.7 1.0 French income tax rate increase -- deferred benefit....................................... -- -- (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 0.1 0.1 0.2 ----- ---- ----- ---- ----- ---- Provision for income taxes...................... $17.3 32.1% $28.6 36.0% $26.0 37.2% ===== ==== ===== ==== ===== ====
The provision for income taxes in 1998 included the benefit of a reduction in the valuation allowance recorded against certain French deferred income tax assets arising from net operating loss carryforwards ("NOLs"). This adjustment reduced the deferred provision for income taxes by $5.2. 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. The provision for income taxes in 1997 was impacted by an increase in the effective statutory income tax rate enacted in France in November 1997 from 36.67 percent to 41.67 percent for 1997 and 1998, retroactive 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. 43 44 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Deferred income tax assets (liabilities) as of December 31, 1998 and 1997 are comprised of the following:
1998 1997 ------ ------ Current deferred income tax assets attributable to: Inventories............................................... $ (0.8) $ (1.1) Postretirement and other employee benefits................ 3.5 2.4 Other accrued liabilities................................. 1.8 2.3 Other..................................................... 0.7 (0.3) ------ ------ Net current deferred income tax asset............. $ 5.2 $ 3.3 ====== ====== Net noncurrent deferred income tax assets attributable to: Operating and capital loss carryforwards.................. $ 60.9 $ 60.6 Accumulated depreciation and amortization................. (28.2) (24.7) Other..................................................... (0.2) (1.1) Valuation allowances...................................... (12.8) (16.4) ------ ------ Net noncurrent deferred income tax asset.......... $ 19.7 $ 18.4 ====== ====== Net noncurrent deferred income tax liabilities attributable to: Accumulated depreciation and amortization................. $(19.8) $(17.2) Postretirement and other employee benefits................ 7.9 8.0 Other..................................................... (0.8) (2.0) ------ ------ Net noncurrent deferred income tax liability...... $(12.7) $(11.2) ====== ======
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 $62.0 and $56.9 at December 31, 1998 and 1997, respectively. Total deferred income tax liabilities were $49.8 and $46.4 at December 31, 1998 and 1997, respectively. 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 have been generated during 1998 by SWM-B and SM-Spain. 44 45 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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, 1998, 1997 and 1996:
TOTAL VALUATION NET NOLS ASSET ALLOWANCE ASSET ------ ----- --------- ----- Amount at December 31, 1995....................... $190.0 $69.7 $ (4.2) $65.5 Increase related to filing of 1995 French tax returns......................................... 40.9 15.0 (15.0) -- 1996 utilization.................................. (18.6) (6.8) -- (6.8) Currency translation effect....................... (11.6) (4.3) 1.1 (3.2) ------ ----- ------ ----- Amount at December 31, 1996....................... 200.7 73.6 (18.1) 55.5 Decrease related to filing of 1996 French tax returns......................................... (1.4) (0.5) -- (0.5) French income tax rate increase................... -- 2.6 (0.5) 2.1 1997 utilization.................................. (14.8) (6.2) -- (6.2) Currency translation effect....................... (24.3) (8.9) 2.2 (6.7) ------ ----- ------ ----- Amount at December 31, 1997....................... 160.2 60.6 (16.4) 44.2 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 ====== ===== ====== =====
Under current tax laws governing the tax jurisdictions in which the Company has NOLs, certain NOLs in France expire five years subsequent to the year generated while others carry forward indefinitely, NOLs in Brazil carry forward indefinitely and NOLs in Spain expire seven years subsequent to the year generated. Of the $165.8 of NOLs still available at December 31, 1998, $28.6 and $2.5 will expire in 1999 and 2005, respectively, if not utilized against taxable income of the respective jurisdiction. The remaining $134.7 of NOLs have no expiration date. The Company intends to elect to include newly-acquired PdStG in the SMF consolidated tax group beginning January 1, 1999. After the 1998 adjustment of the French valuation allowance, establishment of a valuation allowance to reduce the noncurrent deferred income tax asset related to the Spanish NOLs and currency exchange rate changes during the year, valuation allowances totaled $12.8 as of December 31, 1998, reducing the related net deferred tax asset to an amount which is estimated to be realized through utilization of the NOLs prior to their expiration. 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. The tax claim against PdM by the French taxing authority is $1.9 as of December 31, 1998, including penalties for "abuse of the law" and late payment. A court decision has held that another purchaser of the bonds was not liable for "abuse of the law", thus eliminating the "abuse of law" portion of the claim. The amount of penalties related to "abuse of the law" included in the tax claim against PdM is approximately $0.8. If the same decision were applied to the tax claim against PdM, PdM's exposure as of December 31, 1998 would be reduced to approximately $1.1. The Company is vigorously defending the claim based on the merits and has filed claims against each bank on the basis of their misrepresentation of certain facts. The Company's claim against one of the banks was rejected by a trial court in 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. A reserve of $1.0 was established for this tax claim against PdM during 1997. Based on information 45 46 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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, 1998, 1997 and 1996 were as follows:
1998 1997 1996 ----- ----- ----- Service cost................................................ $ 2.3 $ 2.1 $ 2.3 Interest cost............................................... 4.4 3.6 3.4 Expected return on plan assets.............................. (4.3) (3.9) (3.2) Amortizations and other..................................... 0.1 -- 0.2 ----- ----- ----- Net periodic pension cost................................... 2.5 1.8 2.7 Special termination benefits charge......................... 1.1 -- -- ----- ----- ----- Total pension cost.......................................... $ 3.6 $ 1.8 $ 2.7 ===== ===== =====
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 1998, 1997, and 1996. 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 6.75 percent and 7.25 percent at December 31, 1998 and 1997, 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, 1998 and 1997. 46 47 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, 1998 and 1997 were as follows:
1998 1997 ----- ----- Change in Projected Benefit Obligation: Projected benefit obligation at beginning of year......... $54.4 $45.6 Service cost........................................... 2.3 2.1 Interest cost.......................................... 4.4 3.6 Actuarial (gains) losses............................... 8.4 3.4 Special termination benefits........................... 1.1 -- Gross benefits paid.................................... (1.3) (0.3) ----- ----- Projected benefit obligation at end of year............... 69.3 54.4 ----- ----- Change in Plan Assets: Fair value of plan assets at beginning of year............ 45.1 39.3 Actual return on plan assets........................... 10.3 6.1 Employer contributions................................. 3.1 -- Gross benefits paid.................................... (1.3) (0.3) ----- ----- Fair value of plan assets at end of year.................. 57.2 45.1 ----- ----- Funded status at end of year................................ (12.1) (9.3) Unrecognized actuarial (gains) losses....................... 6.0 3.6 Unrecognized prior service cost and net transition obligation................................................ 0.2 0.2 ----- ----- Net accrued pension liability............................... $(5.9) $(5.5) ===== =====
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 $2.4 and $0.9, respectively, as of December 31, 1998, and $2.6 and $1.4, respectively, as of December 31, 1997. 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 $1.6, $1.1 and $1.0 for the years ended December 31, 1998, 1997 and 1996, respectively. The assumed long-term rates of return on pension assets for purposes of pension expense recognition for the French plans were 7.0 percent for 1998 and 8.0 percent for 1997 and 1996. Transition adjustments for these plans are being amortized on the straight-line method over 19 to 20 years. The discount rates used to determine the projected benefit obligation and accumulated benefit obligation for the French plans were 6.0 percent and 8.0 percent at December 31, 1998 and 1997, respectively. The assumed long-term rates of compensation increases used to determine the projected benefit obligation for these plans were approximately 2.5 percent and 4.0 percent at December 31, 1998 and 1997, respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the French pension plans were $15.4, $8.0 and $4.0, respectively, as of December 31, 1998, and $10.3, $4.4 and 47 48 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS $3.8, respectively, as of December 31, 1997. The Company's net accrued pension liability for the French plans was $4.5 and $1.7 at December 31, 1998 and 1997, 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, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Service cost................................................ $0.3 $0.3 $0.3 Interest cost............................................... 0.5 0.5 0.7 Amortizations and other..................................... (0.5) (0.4) (0.1) ---- ---- ---- Net periodic postretirement benefit cost.................... 0.3 0.4 0.9 Special termination benefits charge......................... 0.3 -- -- ---- ---- ---- Total postretirement benefit cost........................... $0.6 $0.4 $0.9 ==== ==== ====
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, 1998 and 1997 were as follows:
1998 1997 ------ ------ Change in Benefit Obligation: Benefit obligation at beginning of year................... $ 7.1 $ 10.1 Service cost........................................... 0.3 0.3 Interest cost.......................................... 0.5 0.5 Actuarial (gains) losses............................... 0.8 (3.4) Plan amendments........................................ (0.3) (0.4) Special termination benefits........................... 0.3 -- Gross benefits paid by the Company..................... (0.6) -- ------ ------ Benefit obligation at end of year......................... 8.1 7.1 ------ ------ Funded status at end of year................................ (8.1) (7.1) Unrecognized actuarial (gains) losses....................... (5.3) (6.5) Unrecognized prior service cost............................. (1.3) (1.1) ------ ------ Net accrued postretirement benefit liability................ $(14.7) $(14.7) ====== ======
For purposes of measuring the benefit obligation at December 31, 1998, a 6.125 percent annual rate of increase in the per capita cost of covered 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. For purposes of measuring the benefit 48 49 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS obligation at December 31, 1997, a 7.75 percent annual increase in the per capita cost of health care benefits was assumed for 1998. The rate was assumed to decrease to 5.5 percent in 2000 and remain at that level thereafter. Discount rates of 6.75 percent and 7.25 percent were used to determine the postretirement benefit obligations at December 31, 1998 and 1997, 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, 1998. A one percentage point increase in the healthcare cost trend rate would increase the total postretirement benefit obligation by $0.1 at December 31, 1998. 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, 1998. 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 each of the accompanying consolidated income statements for the years ended December 31, 1998, 1997 and 1996 was $1.0. At December 31, 1998, 1997 and 1996, 500,000 shares of the Company's Common Stock were reserved for issuance under these plans, none of which had been issued as of December 31, 1998. 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 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 49 50 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Series A Preferred Stock will have 100 votes, voting together with the Common Stock. In the event of any merger, consolidation or other transaction in which common shares are exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. The rights of the Series A Preferred Stock as to dividends, liquidation and voting are protected by antidilution provisions. The Company's Equity Participation Plan (the "Plan") provides that eligible employees may be granted stock options which, when exercised, give the recipient the right to purchase the Company's Common Stock at a price no less than the "fair market value" (as defined in the Plan) of such stock at grant date. Options awarded under the Plan only become exercisable after specified periods of employment after the grant thereof (30 percent after the first year, 30 percent after the second 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 options 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 options under the fair value method of that statement. For purposes of the pro forma disclosures, the estimated fair value of the options 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:
1998 1997 1996 ----- ----- ----- Net Income: As reported............................................... $31.0 $45.3 $38.7 Pro forma................................................. $29.8 $44.3 $37.4 Basic net income per share: As reported............................................... $1.94 $2.82 $2.41 Pro forma................................................. $1.86 $2.76 $2.33 Diluted net income per share: As reported............................................... $1.92 $2.77 $2.38 Pro forma................................................. $1.84 $2.71 $2.31
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 24 percent for the 1998 awards, 30 percent for the 1997 awards and 32 percent for the 1996 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, 1998 and 1997, 1,500,000 shares of the Company's Common Stock were reserved under the Plan. At December 31, 1998 and 1997, there were 608,040 and 724,000 shares available for future awards. 50 51 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, 1998, 1997 and 1996:
1998 1997 1996 -------------------- -------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------- --------- -------- --------- -------- --------- Outstanding at beginning of year.... 764,360 $23.11 699,400 $22.09 598,800 $21.06 Granted........................... 135,900 36.22 76,600 32.54 100,600 28.19 Forfeited......................... (19,940) 32.81 -- -- Exercised......................... (11,940) 23.93 (11,640) 23.51 -- -------- -------- -------- Outstanding at end of year.......... 868,380 24.93 764,360 23.11 699,400 22.09 ======== ======== ======== Options exercisable at year-end..... 655,200 $21.99 381,860 $21.60 179,640 $21.06 ======== ======== ======== Weighted-average per share fair value of options granted during the year.......................... $ 15.00 $ 12.40 $ 9.13 ======== ======== ========
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ------------------------ WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------------------------------- ----------- ----------- --------- ----------- --------- $21.06 to $28.19..................... 671,380 6.9 years $22.00 634,020 $21.64 $32.43 to $34.07..................... 92,700 8.3 32.88 21,180 32.55 $34.62 to $37.38..................... 104,300 9.1 36.72 -- ------- ------- $21.06 to $37.38..................... 868,380 7.3 years $24.93 655,200 $21.99 ======= =======
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 1998, 1997 and 1996. 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 practical 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. 51 52 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS At December 31, 1998, there were outstanding forward contracts, which were held for purposes other than trading, maturing at various dates in 1999, to purchase $4.0 of various foreign currencies. These contracts have not given rise to any significant net deferred gains or losses as of December 31, 1998. 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, 1998 are less than $1 annually over the next five years. Rental expense under operating leases was $5.1, $4.0 and $3.9 for the years ended December 31, 1998, 1997 and 1996, respectively. Other Commitments During 1998, PdM entered into a ten 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 has agreed to construct and operate an on-site plant at the Quimperle, France mill. The cost to construct the necessary building and equipment will be approximately $7. PdM has 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. 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 far exceed their respective contractual minimum commitments. The Company has entered into certain other contracts for the purchase of certain raw materials. Minimum purchase commitments, at current prices, are approximately $0.7 in 1999. These purchase commitments are not expected to result in losses. The Company has also entered into certain contracts for the purchase of equipment and related costs in connection with its ongoing capital projects. These commitments at December 31, 1998 totaled approximately $8.6. 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, 1998 of approximately $9.1, of which approximately $2.7 was being utilized. 52 53 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 the following cases: - A purported class action, defining a class of plaintiffs who allegedly sustained injuries as a result of being exposed to tobacco smoke and respirable asbestos fibers, and three individual actions have been filed in the Circuit Court of Kanawha County, West Virginia in 1998 against several tobacco companies, tobacco industry trade associations and consultants, tobacco wholesalers and cigarette component manufacturers, including Kimberly-Clark and LTRI. The class representative and each individual plaintiff, respectively, seek compensatory damages of $2 to $3, punitive damages of $3 and, for class members, compensatory and punitive damages in an unspecified amount. Cleo Huffman, Denny L. Parsons, Linda Morris and Sinette Newkirk, the named plaintiffs in these actions, filed their respective complaints on February 13, 1998, February 27, 1998, March 13, 1998 and July 22, 1998. The complaints allege several theories of liability against the defendants including negligence, product liability, misrepresentation, breach of warranty, conspiracy and other theories of liability. The Company has filed motions to dismiss that are currently pending in each of these cases. - In September 1998, Luanne Jividen and Jerry Jividen filed a complaint in the Circuit Court of Mason County, West Virginia against several tobacco companies, industry trade associations and consultants, tobacco wholesalers and cigarette component manufacturers, including Kimberly-Clark and LTRI, seeking equitable relief, $1 in compensatory damages and $3 in punitive damages for mental suffering, physical injury and loss of consortium allegedly sustained as a result of Ms. Jividen's contracting breast cancer as a result of her addiction to smoking Marlboro and other brands of cigarettes. The fourteen count complaint sets forth several theories of liability including willful and negligent misrepresentation, violations of state consumer protection laws, breach of express and implied warranties, intentional infliction of emotional distress, product liability, conspiracy, sale of an unreasonably dangerous product and accomplice liability. - In October 1998, Edward J. Sweeney, Stephen R. Micarek and Lisa A. Figura filed, in the Court of Common Pleas of Allegheny County, Pennsylvania, on behalf of themselves and certain residents of Pennsylvania, a purported class action against several tobacco companies, industry trade associations and consultants, tobacco wholesalers and retailers and cigarette component manufacturers, including Kimberly-Clark, seeking equitable relief and punitive damages for the class in an unspecified amount. The class consists of those Pennsylvania residents who, "commencing before age 18 . . . purchased, smoked . . . and continue to smoke cigarettes manufactured, marketed and sold by defendants". The five count complaint alleges that the defendants are liable to the plaintiffs under a number of theories, including product liability, consumer fraud, breach of special duty, negligence and civil conspiracy. Among other things, the complaint alleges that nicotine is an addictive substance, that the tobacco companies, by using reconstituted tobacco and other additives, are able to control the precise amount and/or the bioavailability of nicotine in their cigarettes and that LTRI, formerly a subsidiary of Kimberly-Clark, specializes in the tobacco reconstitution process and in helping tobacco companies control the nicotine in their cigarettes. The defendants have sought to remove the case to the U.S. District Court for the Western District of Pennsylvania. Plaintiff's motion to remand the case to state court is pending. As a component supplier, the Company believes that Kimberly-Clark has meritorious defenses to each of these cases. LTRI also has meritorious defenses to each of the cases in which it has been named as a defendant and will seek to be dismissed from such actions on the grounds that it is not subject to the personal jurisdiction of the West Virginia courts and also on the grounds that it did not sell its products in the United States. Due to the uncertainties of litigation, the Company cannot predict the outcome of these cases and is 53 54 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS unable to make a meaningful estimate of the amount or range of loss which could result from an unfavorable outcome of these actions. These cases will be vigorously defended. During 1998, Kimberly-Clark was voluntarily dismissed, with prejudice, from a purported tobacco class action brought by James E. McCune in 1997 in the Circuit Court of Kanawha County, West Virginia, and, in December 1998, the federal district court in Utah dismissed Kimberly-Clark, with prejudice, from a tobacco class action brought by three union health and welfare funds. Also, the Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material effect on the Company's consolidated financial statements. 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 ("CERCLA"), or analogous state statutes, in connection with two waste disposal sites utilized by the Company's Spotswood, New Jersey mill. Prior to the Distribution, the Spotswood mill also responded to an information request by the New Jersey Department of Environmental Protection and Energy ("NJDEP") with respect to another landfill site allegedly used by the Spotswood mill. The Company has assumed Kimberly-Clark's liabilities at each of these sites but does not believe that any of these proceedings will result in the imposition of monetary sanctions or have a material adverse effect on the Company's business or financial condition. The Company also assumed responsibility to administer a consent order between Kimberly-Clark and the Massachusetts Department of Environmental Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee, Massachusetts. The Company is obligated to maintain the integrity of the cover and to sample groundwater by means of monitoring wells, in addition to other long-term maintenance responsibilities for this former non-hazardous waste disposal facility. Under the terms of a January 24, 1997 Administrative Consent Order with MDEP, as amended ("Consent Order"), the Company was required to reduce concentrations of landfill gases at the landfill property line to specified levels by September 15, 1998. The Company has met the specified levels at 22 of 26 gas monitoring wells, but four monitoring wells have not yet attained such levels at 30 feet below ground level. Since such noncompliance does not create a safety risk, the Company has applied to MDEP to modify the Consent Order so that gas concentration measurements are restricted to 20 feet below ground level and monitoring frequency is reduced to twice per month. Pending a decision on the Company's request to modify the Consent Order, the Company must continue to monitor gas concentrations at the property line as specified in the Consent Order. Although the literal terms of the Consent Order could subject the Company to penalties for failing to meet the September 15, 1998 deadline, the Company does not expect the imposition of penalties based on the absence of a safety risk and current progress toward full compliance. The estimated cost of the remaining corrective action and annual operating expenses 54 55 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS expected to be incurred under the Consent Order, without the modifications requested by the Company, is $0.2, which amount has been accrued as of December 31, 1998. On December 7, 1998, the Company's Lee mills received a Notice of Enforcement Conference concerning self-reported exceedances of its National Pollutant Discharge Elimination System Permit limit on biological oxygen demand ("BOD") for four consecutive months (June 1998 through September 1998). Company representatives presented an action plan to MDEP that the Company believes will prevent future exceedances of its BOD limits. MDEP proposed that the Company enter into an Administrative Consent Order With Penalty that would detail the corrective actions to be taken, a timeline for implementation and stipulated penalties for any future, as well as past, violations. MDEP has proposed a total penalty of fifteen thousand dollars for past exceedances of the BOD limits. The Company does not believe that the cost of any corrective action or the amount of any administrative penalties will have a material adverse effect on the Company's business or financial condition. Certain of the Company's facilities comprising the Lee mills and the Spotswood mill were subject to Title V of the Clean Air Act Amendments of 1990 and were, therefore, required to apply for Operating Permits under that title. The Columbia mill and the Niagara mill (portions of the Lee mills) received final Title V Operating Permits on April 21, 1998 and May 4, 1998, respectively. On February 4, 1999, the Spotswood mill filed an amended Operating Permit Application in response to NJDEP's Notice of Administrative Incompleteness issued to the mill. No material capital expenditures or operating expenses are expected to be incurred by the U.S. business as a result of this permitting process. The Company's U.S. operations were not impacted by the first phase of the revised U.S. Environmental Protection Agency's ("EPA's") "Cluster Rules". Subsequent phases of the Cluster Rules could impact the Company's U.S. facilities; however, the potential impact cannot be estimated until after the EPA proposes applicable requirements, if any. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $1.7 in 1998, and anticipates that it will incur approximately $2 to $4 annually in 1999 and 2000. 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 has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Information presented herein is in accordance with this new disclosure standard and closely aligns with geographic information presented by the Company in previous years. The Company is operated and managed based on the geographical location of its manufacturing operations: the U.S., France and Brazil. These business segments manufacture and sell cigarette, tipping and plug wrap 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 55 56 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS segment occur where specific product needs cannot be cost effectively met by the manufacturing operations in that segment. Tobacco industry products comprised 90 percent of the Company's consolidated net sales in 1998, and 94 percent in 1997 and 1996. 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 U.S. 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. 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 ------------------------ --------------------- --------------- 1998 1997 1996 1998 1997 1996 1998 1997 ------ ------ ------ ----- ----- ----- ------ ------ United States................................ $186.0 $195.5 $212.3 $ 6.2 $21.2 $23.7 $156.3 $155.4 France....................................... 312.0 268.8 263.5 60.3 66.4 55.5 254.5 237.6 Brazil....................................... 57.9 N.A. N.A. (2.3) N.A. N.A. 67.3 N.A. ------ ------ ------ ----- ----- ----- ------ ------ Subtotal............................ 555.9 464.3 475.8 64.2 87.6 79.2 478.1 393.0 ------ ------ ------ Intersegment sales by: United States.............................. (7.1) (1.2) (2.6) France..................................... (2.1) (2.5) (1.9) Brazil..................................... -- N.A. N.A. ------ ------ ------ Subtotal............................ (9.2) (3.7) (4.5) ------ ------ ------ Unallocated items and eliminations, net...... -- -- -- (5.1) (5.7) (5.2) (3.4) (2.0) ------ ------ ------ ----- ----- ----- ------ ------ Consolidated................... $546.7 $460.6 $471.3 $59.1 $81.9 $74.0 $474.7 $391.0 ====== ====== ====== ===== ===== ===== ====== ======
CAPITAL SPENDING DEPRECIATION AND AMORTIZATION ------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ------- ------- ------- United States........................ $ 9.2 $16.3 $18.5 $11.6 $ 6.8 $ 5.9 France............................... 25.3 19.5 33.0 9.5 7.6 7.5 Brazil............................... 2.2 N.A. N.A. 3.7 N.A. N.A. ----- ----- ----- ----- ----- ----- Consolidated........... $36.7 $35.8 $51.5 $24.8 $14.4 $13.4 ===== ===== ===== ===== ===== =====
- --------------- N.A. -- Not Applicable Consolidated Operations by Geographic Area Long-lived assets, excluding deferred income tax assets and certain other deferred charges, were $102.9, $144.4 and $49.1 in the U.S., France and Brazil, respectively, as of December 31, 1998, and $104.9 and $106.5 in the U.S. and France, respectively at December 31, 1997. 56 57 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 ------------------------ 1998 1997 1996 ------ ------ ------ United States............................................... $156.2 $169.3 $180.9 Europe and the former Commonwealth of Independent States.... 224.7 192.7 190.5 Asia/Pacific (including China).............................. 76.8 68.3 68.1 Latin America(1)............................................ 67.4 10.5 7.5 Other foreign countries..................................... 21.6 19.8 24.3 ------ ------ ------ Consolidated...................................... $546.7 $460.6 $471.3 ====== ====== ======
- --------------- (1) Substantially all of the Company's net sales to Latin America were to customers in Brazil in each of the periods presented. NOTE 14. MAJOR CUSTOMERS Two of the Company's customers have accounted for a significant portion of the Company's net sales in one or more 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. Net sales to Philip Morris Incorporated ("Philip Morris"), together with its affiliates and designated converters, accounted for approximately 28 percent, 36 percent and 35 percent, of total consolidated net sales for the years ended December 31, 1998, 1997 and 1996, respectively. As a result of the acquisition of the Brazilian business in 1998, a substantial portion of whose sales are to a subsidiary of B.A.T. Industries PLC ("BAT"), net sales to BAT, together with its affiliates and designated converters, increased to approximately 14 percent of consolidated net sales for the year ended December 31, 1998. For periods 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 $16.8, $14.0 and $18.4 in 1998, 1997 and 1996, respectively. The Company's consolidated accounts receivable at December 31, 1998 and 1997 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 approximately the same as 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. 57 58 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, 1998, there were 7,690 stockholders of record of the Company's Common Stock. This number does not include shares held in "nominee" or "street" name.
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
1997 ------------------------------------------------ FIRST SECOND THIRD FOURTH YEAR ------ --------- ------ --------- ------ Net Sales.......................................... $113.0 $116.3 $113.4 $117.9 $460.6 Gross Profit....................................... 30.8 33.5 30.3 27.3 121.9 Operating Profit................................... 21.0 22.9 20.6 17.4 81.9 Net Income......................................... $ 11.3 $ 12.7 $ 11.2 $ 10.1 $ 45.3 Net Income Per Share: Basic............................................ $ .70 $ .79 $ .70 $ .63 $ 2.82 Diluted.......................................... .69 .78 .68 .62 2.77 Cash Dividends Declared and Paid Per Share......... $ .15 $ .15 $ .15 $ .15 $ .60 Market Price Per Share: High............................................. $35.63 $40.63 $43.66 $44.50 $44.50 Low.............................................. 30.25 29.88 36.56 33.00 29.88 Close............................................ $30.25 $37.50 $42.50 $37.25 $37.25
- --------------- (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. 58 59 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, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flow for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Atlanta, Georgia January 22, 1999 59 60 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 22, 1999 60 61 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 12, 1999 (the "1999 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 1999 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 1999 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 1999 Proxy Statement is incorporated in this Item 13 by reference. 61 62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) and (2) Financial Statements and Financial Statement Schedules: See the Index to Financial Statements included in Item 8 of Part II under the caption "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA". Schedules have been omitted because they were not applicable or because the required information has been included in the financial statements or notes thereto. (3) Exhibits: See the Index to Exhibits that appears at the end of this document and which is incorporated by reference herein. (b) Reports on Form 8-K (i) The Company filed a Current Report on Form 8-K dated October 8, 1998, which reported the Company's expected third quarter 1998 earnings. (ii) The Company filed a Current Report on Form 8-K dated December 3, 1998, which reported that the Company's Board of Directors authorized the repurchase of the Company's common stock during the period January 1, 1999 through December 31, 2000 in an aggregate amount not to exceed $20 million. (iii) The Company filed a Current Report on Form 8-K dated December 18, 1998, which reported the Company's announcement of a fourth quarter 1998 charge to earnings and expected fourth quarter 1998 earnings, and reiterated the share repurchase program reported on Form 8-K dated December 3, 1998. 62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: /s/ WAYNE H. DEITRICH --------------------------------------- Wayne H. Deitrich Chairman of the Board and Chief Executive Officer (principal executive officer) Dated: March 4, 1999 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 4, 1999 - ----------------------------------------------------- Chief Executive Officer Wayne H. Deitrich (principal executive officer) /s/ PAUL C. ROBERTS Chief Financial Officer March 4, 1999 - ----------------------------------------------------- and Treasurer Paul C. Roberts (principal financial officer) /s/ WAYNE L. GRUNEWALD Controller March 4, 1999 - ----------------------------------------------------- (principal accounting Wayne L. Grunewald officer) * Director March 4, 1999 - ----------------------------------------------------- Claire L. Arnold * Director March 4, 1999 - ----------------------------------------------------- K.C. Caldabaugh * Director March 4, 1999 - ----------------------------------------------------- Laurent G. Chambaz * Director March 4, 1999 - ----------------------------------------------------- Richard D. Jackson * Director March 4, 1999 - ----------------------------------------------------- Leonard J. Kujawa * Director March 4, 1999 - ----------------------------------------------------- Jean-Pierre Le Hetet * Director March 4, 1999 - ----------------------------------------------------- Larry B. Stillman *By: /s/ WILLIAM J. SHARKEY March 4, 1999 ------------------------------------------------- William J. Sharkey Attorney-In-Fact
63 64 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 -- Distribution Agreement (incorporated by reference to Exhibit 2.1 to Form 10/A Amendment 2, dated October 27, 1995). 2.2 -- Stock Purchase Agreement by and between SWM, Souza Cruz S.A. and Contab Participacoes Ltda. dated December 16, 1997 for the purchase of Companhia Industrial de Papel Pirahy (incorporated by reference to Exhibit 2.1 to Form 8-K, dated February 2, 1998). 3.1 -- Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10, dated September 12, 1995). 3.2 -- By-Laws, as amended on and through February 27, 1996 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1995). 4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Form 10/A Amendment 2, dated October 27, 1995). 4.2 -- Rights Agreement (incorporated by reference to Exhibit 4.2 to Form 10/A Amendment 2, dated October 27, 1995). 10.1 -- Transfer, Contribution and Assumption Agreement (incorporated by reference to Exhibit 10.1 to Form 10/A Amendment 2, dated October 27, 1995). 10.2 -- Corporate Services Agreement (incorporated by reference to Exhibit 10.2 to Form 10/A Amendment 2, dated October 27, 1995). 10.3 -- Employee Matters Agreement (incorporated by reference to Exhibit 10.3 to Form 10/A Amendment 2, dated October 27, 1995). 10.4 -- Tax Sharing Agreement (incorporated by reference to Exhibit 10.4 to Form 10/A Amendment 2, dated October 27, 1995). 10.5 -- Outside Directors' Stock Plan (incorporated by reference to Exhibit 10.5 to Form 10/A Amendment 2, dated October 27, 1995). 10.6* -- Annual Incentive Plan Amended and Restated as of February 25, 1999. 10.7* -- Equity Participation Plan Amended and Restated as of February 25, 1999. 10.8* -- Long-Term Incentive Plan Amended and Restated as of February 25, 1999. 10.9.1 -- 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). 10.9.2 -- 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). 10.10.1* -- Supply Agreement between Companhia Industrial de Papel Pirahy and Souza Cruz S.A. dated as of February 2, 1998+. 10.11* -- Supplemental Benefit Plan Amended and Restated as of February 25, 1999. 10.12* -- Executive Severance Plan Amended and Restated as of February 25, 1999.
64 65 INDEX TO EXHIBITS -- CONTINUED
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.13.1 -- 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). 10.13.2* -- Amendment No. 1, dated January 29, 1999, 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. 65 EX-10.6 2 ANNUAL INCENTIVE PLAN 1 EXHIBIT 10.6 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. ANNUAL INCENTIVE PLAN AMENDED AND RESTATED As of February 25, 1999 1. PURPOSE The purpose of this Annual Incentive Plan (the "Plan") of Schweitzer-Mauduit International, Inc. (the "Company") is to further unite the interests of the stockholders of the Company and its key executives through: (a) the annual establishment of Company objectives which are deemed by the Company's Board to be in the best short-and long-range interests of the Company, and (b) the annual payment of incentive awards to each Participant in the form of a cash award, provided his or her performance has meaningfully contributed to the attainment of the Company's objectives. 2. EFFECTIVE DATE The Plan, as amended and restated, is adopted effective as of January 1, 1996. 3. DEFINITIONS "Affiliate" means any company in which the Company owns 20% or more of the equity interest (collectively, the "Affiliates"). "Performance Percentage" means the respective percentages applicable to achievement of the following benchmark Performance Levels for a given Objective as follows: Threshold 50%, Target 100%, Outstanding 150%, Maximum 200%; and, if actual performance of such Objective falls between any two of such benchmark Performance Levels, the percentage amount applicable to the performance level actually achieved will be prorated. "Board" means the Board of Directors of the Company. "CEO" means the Chief Executive Officer of the Company. "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 2 before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company. "Committee" means the Compensation Committee of the Board. "Control Measures" shall have the meaning as set forth in Section 8 of this Plan. "Incentive Award" means the cash award payable to a Participant as determined in accordance with Section 10 of this Plan and is the sum of the Objective Awards for each Objective Area. "Measurement Period" means the fiscal year of the Company. "Objective Areas" means the general areas for which Objectives may be established and shall include the Company Objective Area, Unit Objective Area and Individual/Function Objective Area. "Objective(s)" means the objective(s) established for each Participant. "Participant" shall have the meaning set forth in Section 5 of this Plan. "Percentage Weighting" shall have the meaning set forth in Section 7 of this Plan. "Performance Levels" shall have the meaning set forth in Section 6 of this Plan. "Objective Award" shall mean the amount determined by multiplying a Participant's base salary at the beginning of the Measurement Period, by the Percentage Weighting applicable for the Objective Area, by the Performance Percentage for the Performance Level achieved, and by the Target Incentive Award Percentage. "Target Incentive Award Percentage" means the target percentage of a Participant's base salary designated by the Committee in its sole discretion at the beginning of the Measurement Period, which percentage need not be the same for each Participant. 4. ADMINISTRATION The Plan shall be administered by the Committee, which in its absolute discretion shall have the power to interpret and construe the Plan, and to resolve all questions arising hereunder. Any action by the Committee shall be final and conclusive as to all individuals affected thereby. The Committee may delegate to any officer or employee such ministerial or administrative duties relating to the Plan as deemed appropriate by the Committee. No member of the Committee or the CEO shall be liable for any act done or omitted to be 2 3 done in connection with the Plan, except for willful misconduct or as expressly provided by statute. 5. ELIGIBILITY The CEO, or the Committee in the case of the CEO and all officer employees, shall, in his/its sole discretion, specify in writing for each Measurement Period those officers and employees of the Company or any Affiliate who shall be eligible to participate in the Plan (the "Participants") for such Measurement Period based upon such Participants' opportunity to have a substantial impact on the Company's operating results. Nothing contained in the Plan shall be construed as or be evidence of any contract of employment with any Participant for a term of any length, or as a limitation on the right of the Company to discharge any Participant with or without cause. Notwithstanding the foregoing and without otherwise limiting the Committee's or the CEO's discretion to designate the officers and employees eligible to participate in the Plan, if a Change of Control occurs in a Measurement Period prior to the date the Objectives, Objective Areas, Performance Levels, Percentage Weightings, Control Measures and Target Incentive Award Percentages are established for such Measurement Period, the Objectives, Objective Areas, Performance Levels, Percentage Weightings and Target Incentive Award Percentages shall be established by the Committee for such Measurement Period for those officers and employees who were Participants in the Plan in the immediately preceding Measurement Period and such Objectives, Objective Areas, Performance Levels, Percentage Weightings, Target Incentive Award Percentages and any Control Measures established for such Participants shall be no less favorable than those established for each such Participant in the immediately preceding Measurement Period. 6. OBJECTIVE AREAS AND PERFORMANCE LEVELS Prior to the beginning of each Measurement Period, or as soon thereafter as reasonably practicable, Objective(s) shall be established for each Participant in one or more Objective Areas. The Board shall establish the Objective(s) and any Control Measures in the Company Objective Area. The CEO, or the Committee in the case of the CEO, shall establish the Individual/Function Objective(s) and any Control Measures for all other Objective Areas, unless otherwise determined by the Committee. For each Objective there shall be established performance levels ("Performance Levels") which, whenever possible, shall consist of successively better standards or ranges, taking into consideration actual progress in the Measurement Period, in accomplishing the objective(s). These Performance Levels shall be defined as "Threshold", "Target", "Outstanding", and "Maximum". Performance below the "Threshold" level shall not result in the payment of an award. 3 4 From time to time, it may be desirable to establish Objective(s) in such a manner that specific Performance Levels cannot be defined. In such cases, Performance Levels will be determined pursuant to Section 9 of this Plan. The Objective(s) in the Individual Objective Area for a Participant may be defined to include specific target areas on which such Participant should focus during the year. The original definition of any and all Objectives, Objective Areas, Performance Levels, Percentage Weightings and Control Measures shall not be changed during the Measurement Period, except by the approval of the person(s) who originally approved the same. When changes in the Company's accounting or internal reporting policies have the effect of making the financial results between two periods not fairly comparable for the purpose of properly measuring performance where Objectives are stated in financial terms, such results may be adjusted in such manner as shall be deemed fair and appropriate by the person(s) who originally approved the Objective. If during a Measurement Period, the Company, or any of its Affiliates, purchases substantially all of the assets or shares of a business owned by any other person or entity ("Business"), the earnings attributable to such Business, which are included in the Company's consolidated income statement for the Measurement Period, shall be taken into account in calculating achievement of any earnings Objective for the Measurement Period. 7. OBJECTIVE AREA WEIGHTINGS Coincident with the establishment of Objective Areas, Objectives and Performance Levels, the CEO, or the Committee in the case of the CEO and all employees who are officers of the Company, shall establish a percentage weighting ("Percentage Weighting") applicable to each Objective Area, or, where applicable, to each Objective within an Objective Area. The total of all Percentage Weightings in all Objectives and/or Objective Areas for each Participant shall be 100 percent. 8. CONTROL MEASURES At the time the Objectives are established, there may also be established certain conditions known as control measures ("Control Measures") which are either personal as to one individual, or general as to a group of individuals. Failure to fulfill a Control Measure may partially or totally deprive the individual to whom the Control Measure applies of the right to receive an award, notwithstanding the level of performance attained on any or all Objectives, or in any or all Objective Areas. 9. ASCERTAINMENT OF PERFORMANCE LEVELS The Performance Level actually attained with respect to any Objective or Control Measure stated in financial terms, and the payment with respect thereto, shall be 4 5 determined upon the completion of audited results of the Company and its subsidiaries by the person(s) who originally approved or defined such Objective or Control Measure, or the Committee if such person is no longer employed by or a director of the Company. When specific Performance Levels have not been defined in the Company Objective Area under Section 6 of this Plan, the Committee will determine the Performance Level attained following the end of the Measurement Period. The Performance Level attained with respect to any other Objective Area or Control Measure shall be determined and approved by the person(s) who originally approved or defined such Objective or Control Measure (or the Committee if such person is no longer employed by or a director of the Company) following the end of the Measurement Period. Notwithstanding the above, the Committee may, in its sole discretion, authorize that such determination of the Performance Levels attained be made prior to the end of the Measurement Period, and that the payment of awards be made pursuant to Section 12 of this Plan. 10. AMOUNT OF INCENTIVE AWARD Except as otherwise hereinafter provided, the Incentive Award a Participant is eligible to receive is the sum of the values attributable to performance actually attained for each Objective or Objective Area ("Objective Award"), as determined by the following paragraphs. The amount of Objective Award a Participant is eligible to receive depends upon: (a) Participant's base salary, (b) the Percentage Weighting applicable to that Objective or Objective Area, (c) the Performance Percentage which applies as a consequence of the Performance Level attained in that area, and (d) the Target Incentive Award Percentage established for the Participant. The amount of the Objective Award for each Objective or Objective Area shall be determined by multiplying (a) times (b) times (c) times (d). 11. ADJUSTMENT OF INCENTIVE AWARD Except as otherwise determined by the Committee, in its sole and absolute discretion, the amount of any Incentive Award may be adjusted by the CEO, or the Committee in the case of the CEO and employees who are officers of the Company, in his 5 6 or its sole discretion, to more accurately reflect an individual Participants's performance during the Measurement Period. In the event of transfers to, from or between eligible positions, the amount of the Incentive Award may be reviewed, and may be adjusted or prorated, on such basis as shall be determined fair and appropriate by the Committee. Termination of employment for any reason other than Change of Control, death, retirement, or total and permanent disability during the Measurement Period shall result in a forfeiture of any Incentive Award attributable to performance during the Measurement Period in which termination occurred. Termination of employment because of a Participant's death, retirement or total and permanent disability during the Measurement Period shall result in the pro rata or other adjustment to the amount of the Incentive Award on such basis as shall be determined to be fair and appropriate by the Committee. Termination of employment within two years following a Change of Control shall result in the payment of a pro rata portion of the Incentive Award at the Target Performance Percentage, without regard to achievement or preestablished Objectives; however, the Committee shall have the right to increase the Incentive Award payable upon such termination as the Committee deems fair and appropriate. Notwithstanding any provision of this Plan, no Incentive Award shall be paid to any Participant who, in any Measurement Period other than a Measurement Period occurring within two years following a Change of Control, has discharged the principal responsibilities of his or her position in an unsatisfactory manner. 12. PAYMENT OF INCENTIVE AWARDS Incentive Awards shall be paid in one lump sum in cash in the first calendar quarter following the Measurement Period for which the Objectives were established. Notwithstanding the above, the Committee may make payments at such earlier times as it may, in its sole discretion, determine, and the Committee, or the CEO, in their sole discretion, will make such determinations as to performance, and establish procedures (including repayment of any overpayment which is determined after the completion of the final audit), implementing such early payment. The Company shall have the right to deduct from the payment any taxes required by law to be withheld thereon. 13. MISCELLANEOUS (a) Except as provided in this Plan, no right of any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, attachment, garnishment, execution, levy, bankruptcy, or any other disposition of any kind, whether voluntary or involuntary, prior to actual payment of an Incentive Award. No Participant or any other person shall have any interest in any fund, or in any specific asset or assets of the Company, by reason of an Incentive Award that has been made but has not been paid or distributed. 6 7 (b) The Board may, at any time, amend this Plan, order the temporary suspension of its application, or terminate it in its entirety, provided, however, that no such action shall adversely affect the rights or interests of Participants theretofore vested hereunder. Notwithstanding the foregoing, this Plan may not be amended, suspended or terminated within the two-year period following a Change of Control. (c) The terms of the Plan shall be governed, construed, administered, and regulated by the laws of the State of Georgia and applicable Federal law. In the event that any provision of the Plan shall be determined to be illegal or invalid for any reason, the other provisions shall continue in full force and effect as if such illegal or invalid provision had never been included herein. Annual Inc. Plan Amended & Restated 7 EX-10.7 3 EQUITY PARTICIPATION PLAN 1 EXHIBIT 10.7 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. 1995 EQUITY PARTICIPATION PLAN AMENDED AND RESTATED AS OF FEBRUARY 25, 1999 1. PURPOSE This 1995 Equity Participation Plan (the "Plan") of Schweitzer-Mauduit International, Inc. (the "Corporation") is intended to encourage those employees who materially contribute to the success of the Corporation or of an Affiliate, to acquire an ownership interest in the Corporation, thereby increasing their motivation for and interest in the Corporation's or Affiliate's long-term success. 2. EFFECTIVE DATE The Plan is effective as of the date of its adoption by the Board, subject to approval by the stockholders of the Corporation at the Corporation's 1996 Annual Meeting of stockholders. 3. DEFINITIONS "Affiliate" means any company in which the Corporation owns 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 Disinterested Persons, the Plan shall be administered by a committee, all of whom are Disinterested Persons, 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. "Disinterested Person" 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. "Incentive Stock Option" means an Option which is so defined for purposes of section 422 of the Code or any successor section. "Insider" has the meaning set forth in subsection 12(g) of this Plan. "Nonqualified Stock Option" means any Option which is not an Incentive Stock Option. "Option" means a right to purchase a specified number of shares of Common Stock at a fixed option price equal to no less than 100% of the Fair Market Value of the Common Stock on the date the Option is granted pursuant to an Option Agreement. "Option Agreement" means a written agreement entered into between the Corporation and a Participant setting forth the terms and conditions applicable to the Option granted to the Participant. "Option Price" has the meaning set forth in subsection 6(b) of this Plan. "Participant" means an officer or employee who the Committee selects to participate in and receive Options under this Plan (collectively, the "Participants"). "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 its Affiliates 2 3 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. "SAR" has the meaning set forth in subsection 6(j) of this Plan. "Securities Act" means the Securities Exchange Act of 1933, as amended. "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 Plan and all Options granted pursuant thereto shall be administered by the Committee. The Committee, in its absolute discretion, shall have the power to interpret and construe the Plan and any Option Agreements; provided, however, that no action or determination may be made 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. Any interpretation or construction of any provisions of this Plan or the Option Agreements 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 Options under the Plan during the prior year, the number of Options to the individual employees, and the status of prior Options. 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 Option Agreements. The Committee may authorize persons other than its members to carry out its policies and directives to the limitations and guidelines set by the Committee, except that: (a) the authority to grant Options, the selection of employees for participation and decisions concerning the timing, pricing and amount of an Option shall not be delegated by the Committee; (b) the authority to administer Options 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) or any successor section. Any person to whom such authority is granted shall continue to be eligible to receive Options under the Plan. 3 4 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 Affiliate 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. No incentive Stock Option may be granted to an employee of an Affiliate unless such Affiliate is a corporation which the Corporation owns at least 50% of the equity interest. 6. OPTION TERMS The Committee shall determine and designate from time to time those Participants to whom Options are to be granted and the number of shares of Common Stock to be optioned to each. Such Options may be in the form of Incentive Stock Options or in the form of Nonqualified Stock Options. After granting an Option to a Participant, the Committee shall cause to be delivered to the Participant an Option Agreement evidencing the granting of the Option. The Option Agreement shall be in such form as the Committee shall from time to time approve. The terms and conditions of all Options granted under the Plan need not be the same, but all Options must meet the applicable terms and conditions specified in subsections 6(a) through 6(h). (a) Period of Option. The period of each Option shall be no more than 10 years from the date it is granted. (b) Option Price. The Option price shall be determined by the Committee, but shall not in any instance be less than the Fair Market Value of the Common Stock at the time that the Option is granted (the "Option Price"). (c) Vesting. The Option shall not be exercisable until at least one year has expired after the granting of the Option, during which time the Participant shall have been in the continuous employ of the Corporation or an Affiliate. At any time during the period of the Option after the end of the first year, the Participant may purchase up to 30 percent of the shares covered by the Option; after the end of the second year, an additional 30 percent; and after the end of the third year, the remaining 40 percent of the total number of shares covered by the Option. Notwithstanding the foregoing, in the event of a Change of Control the remaining portion of the Option shall become immediately vested and exercisable in full. (d) Exercise upon Termination. If the Participant's employment with the Corporation or an Affiliate is terminated for any reason other than death, Retirement or Total and Permanent Disability, the Option shall be exercisable only for three months following such termination (or the expiration of the option term, if earlier) and only for the number of shares of Common Stock which were exercisable on the date of such termination. A termination of employment with the Corporation or an Affiliate to accept 4 5 immediate reemployment with the Corporation or an Affiliate shall not be deemed to be a termination of employment for purposes of the Plan. (e) Exercise after Death, Retirement and Disability. If a Participant dies or becomes Totally and Permanently Disabled, without having exercised the Option in full, the remaining portion of such Option may be exercised, without regard to the limitations in subsection 6(c), within a period not to exceed (i) three years from the date of any such death or Total and Permanent Disability or (ii) the remaining period of the Option, whichever is earlier. Upon a Participant's death, the Option may be exercised by the person or persons to whom such Participant's rights under the Option shall pass by will or by applicable law or, if no such person has such rights, by his executor or administrator. If a Participant Retires without having exercised the Option in full, the remaining portion of such Option may be exercised, without regard to the limitations in subsection 6(c), within a period not to exceed (i) five years or such longer period established by the Committee on the date the Option is granted) from the date of such event or (ii) the remaining period of the Option, whichever is earlier. (f) Non-transferability. During the Participant's lifetime, Options shall be exercisable only by such Participant. Options shall not be transferable other than by will or the laws of descent and distribution upon the Participant's death. Notwithstanding anything in this subsection 6(e) to the contrary, at the same time as Nonqualified Stock Options are granted the Committee may also grant to designated Participants the right to transfer such Options, to the extent allowed under rule 16b-3 of the Exchange Act, subject to terms and conditions of the Committee Rules on the date of grant. (g) Exercise; Notice Thereof. Options shall be exercised by delivering to the Corporation, at the office of the Treasurer, written notice of the number of shares with respect to which Option rights are being exercised and by paying in full the Option Price of the shares at the time being acquired. Payment may be made in cash, a check payable to the Corporation or in shares of Common Stock transferable to the Corporation and having a Fair Market Value on the transfer date equal to the amount payable to the Corporation. The date of exercise shall be deemed to be the date the Corporation receives the written notice and payment for the shares being purchased. A Participant shall have none of the rights of a stockholder with respect to shares covered by such Option until the Participant becomes the record holder of such shares; provided, however that the Participant shall be deemed to be the record holder of shares as of the date an Option is exercised with respect to such shares. (h) Purchase for Investment. It is contemplated that the Corporation will register shares sold to Participants pursuant to the Plan under the Securities Act. In the absence of an effective registration, however, a Participant exercising an Option hereunder may be required to give a representation that he/she is acquiring such shares as an investment and not with a view to distribution thereof. (i) Limitations on Incentive Stock Option Grants. 5 6 (i) An Incentive Stock Option shall be granted only to an individual who, at the time the Option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Corporation or Affiliates. (ii) The aggregate Fair Market Value of all shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. The aggregate Fair Market Value of such shares shall be determined at the time the Option is granted. (j) Options for Nonresident Aliens. In the case of any Option awarded to a Participant who is not a resident of the United States or who is employed by an Affiliate other than an Affiliate that is incorporated, or whose place of business is, in a State of the United States, the Committee may (i) waive or alter the conditions set forth in subsections 6(a) through 6(h) to the extent that such action is necessary to conform such Option to applicable foreign law, or (ii) take any action, either before or after the award of such Option, which it deems advisable to obtain approval of such Option by an appropriate governmental entity; provided, however, that no action may be taken hereunder if such action would (1) materially increase any benefits accruing to any Participants under the Plan, (2) materially increase the number of securities which may 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 (5) result in the disallowance of a deduction to the Corporation under section 162(m) of the code or any successor section. (k) Election to Receive Cash Rather than Stock. (i) At the same time as Nonqualified Stock Options are granted the Committee may also grant to designated Participants the right to convert a specified number of shares of Common Stock covered by such Nonqualified Stock Options to cash, subject to terms and conditions of this subsection 6(k). For each such Option so converted, the Participant shall be entitled to receive cash equal to the difference between the Participant's Option Price and the Fair Market Value of the Common Stock on the date of conversion. Such a right shall be referred to herein as a Stock Appreciation Right ("SAR"). Participants to whom an SAR has been granted shall be notified of such grant and of the Options to which such SAR pertains. An SAR may be revoked by the Committee, in its sole discretion, at any time, provided, however, that no such revocation may be taken hereunder if such action would result in the disallowance of a deduction to the Corporation under section 162(m) of the Code or any successor section. (ii) A person who has been granted an SAR and who is an insider for purposes of section 16 of the Exchange Act may exercise such SAR during such 6 7 periods as provided for in the rules promulgated under section 16 of the Exchange Act. The SAR shall expire when the period of the subject Option expires. (iii) At the time a Participant pursuant to an SAR converts one or more shares of Common Stock covered by an Option to cash, such Participant must exercise one or more Nonqualified Stock Options, which were granted at the same time as the Option subject to such SAR, for an equal or greater number of shares of Common Stock. In the event that the number of shares and the Option Price per share of all shares of Common Stock subject to outstanding Options is adjusted as provided in section 9 hereof, the above SARs shall automatically be adjusted in the same ratio which reflects the adjustment to the number of shares and the Option Price per share of all shares of Common Stock subject to outstanding Options. 7. SHARES SUBJECT TO THE PLAN The number of shares of Common Stock available with respect to Options granted under this Plan shall not exceed 1,500,000 in the aggregate, subject to the adjustment provision set forth in section 9 hereof. The shares of Common Stock subject to the Plan may consist in whole or in part of authorized but unissued shares or of treasury shares, as the Board may from time to time determine. Shares subject to Options which become ineligible for purchase will be available for grant under the Plan to the extent permitted by section 16 of the Exchange Act (or the rules and regulations promulgated thereunder) and to the extent determined to be appropriate by the Committee. 8. INDIVIDUAL LIMITS The maximum number of shares of Common Stock covered by Options which may be granted to any Participant within any 2 consecutive calendar year period shall not exceed 400,000, in the aggregate. If an Option which had been granted to a Participant is canceled, the shares of Common Stock which had been subject to such canceled Option shall continue to be counted against the maximum number of shares for which Options may be granted to the Participant. In the event that the number of Options which 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 with 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 7 8 corporate structure, appropriate adjustments and changes shall be made by the Committee, to the extent necessary to preserve the benefit to the Participants contemplated hereby, to reflect such changes in (a) the aggregate number of shares subject to the Plan, (b) the maximum number of shares for which Options may be granted to any Participant, (c) the number of shares and Option Price per share of all shares of Common Stock subject to outstanding options, and (d) such other provisions of the Plan as may be necessary and equitable to carry out the foregoing purposes; 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. 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 employees. 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 Option may be granted after the termination date of the Plan, but Options theretofore granted shall continue in force beyond that date pursuant to their terms. 12. 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. 8 9 (c) Inalienability of Benefits and Interest. Except as provided in subsection 6(e), 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) Use of Proceeds. The proceeds received by the Corporation from the sale of Common Stock pursuant to the exercise of Options shall be used for general corporate purposes. (g) 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 exercise of an Option or may elect to have any portion of the federal, state or local income tax withholding required with respect to an exercise of a Nonqualified Stock Option satisfied by tendering to the Corporation shares of Common Stock, which, in the absence of such an election, would have been issued to such Participant in connection with such exercise. In the event that the value of the shares of Common Stock tendered to satisfy the withholding tax required with respect to an exercise exceeds the amount of such tax, the excess of such market value over the amount of such tax 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 12(g) shall be the Fair Market Value of the Common Stock on the date on which such shares are tendered to the Corporation. An election pursuant to this subsection 12(g) shall be made in writing and signed by the Participant. An election pursuant to this subsection 12(g) is irrevocable. A Participant who exercises an Option 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 exercise pursuant to this subsection 12(g) by withholding shares under the Option 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. 9 10 (h) Amendments. The Committee may at any time amend, suspend, or discontinue the Plan or alter or amend any or all Options and Option Agreements 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 to the Corporation under section 162(m) of the Code or any successor section (including the rules and regulations promulgated thereunder); provided, however, that if any of the foregoing requires the approval by stockholders of any such amendment, suspension or discontinuance, then the Committee may take such action subject to the approval of the stockholders. Except as provided in subsection 6(i) no such amendment, suspension, or termination of the Plan shall, without the consent of the Participant, adversely alter or change any of the rights or obligations under any Options or other rights previously granted the Participant under the Plan. 10 EX-10.8 4 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.8 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. LONG-TERM INCENTIVE PLAN AMENDED AND RESTATED AS OF FEBRUARY 25, 1999 1. PURPOSE The purpose of this Long-Term Incentive Plan (the "Plan") of Schweitzer-Mauduit International, Inc. (the "Company") is to promote the long-term financial success of the Company by: (a) attracting and retaining executive personnel of outstanding ability; (b) strengthening the Company's capability to develop, maintain and direct a competent management team; and (c) motivating executive personnel by means of performance-related incentives to achieve longer-range performance goals. 2. EFFECTIVE DATE The Plan is adopted effective as of January 1, 1996, subject to approval by the stockholders of the Company at the Company's 1996 Annual Meeting of stockholders. 3. DEFINITIONS "Affiliate" means any company in which the Company owns 20% or more of the equity interest (collectively, the "Affiliates"). "Board" means the Board of Directors of the Company. "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 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. 2 "Committee" means the Compensation Committee of the Board, provided that if the requisite number of members of the Compensation Committee are not Disinterested Persons, the Plan shall be administered by a committee, all of whom are Disinterested Persons, 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. "Disinterested Person" means a person who is 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. "Participant" means an officer or employee who the Committee selects to participate in this Plan (collectively, the "Participants") in accordance with Section 5 of this Plan. "Potential Change of Control" shall mean the date as of which: (a) the Company enters into an agreement the consummation of which, or the approval by shareholders of which, would constitute a Change of Control; (b) proxies for the election of Directors of the Company are solicited by anyone other than the Company; (c) any person (including, but not limited to, any individual, partnership, joint venture, corporation, association or trust) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change of Control; or (d) any other event occurs which is deemed to be a Potential Change of Control by the Board and the Board adopts a resolution to the effect that a Potential Change of Control has occurred. "Performance Cycle" or "Cycle" means each three-year period, as determined by the Committee, during which the performance of the Company is measured for the purposes of determining the extent to which the Performance Units which have been contingently allotted for such Cycle may be earned. "Performance Goals" means the objectives for the Company established by the Committee for a Performance Cycle, for the purpose of determining the extent to which Performance Units which have been contingently allotted for such Cycle are earned. "Performance Units" means the units contingently awarded for a Performance Cycle to Participants under this Plan. "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 Company or an Affiliate; provided, however, if the Participant is not eligible to participate under a qualified retirement plan of the Company or its Affiliates 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. 2 3 "Threshold" means the minimum level of performance in relation to the Performance Goals for which any Performance Units may be earned. "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 Plan shall be administered by the Committee, which in its absolute discretion, shall have the power to interpret and construe the Plan, and to resolve all questions arising hereunder. Any action by the Committee shall be final and conclusive as to all individuals affected thereby. The Committee shall have sole and complete authority to determine the employees to whom Performance Units shall be allotted for each Performance Cycle, to determine the basis for measuring the value of such Performance Units, and to determine the number of such Performance Units, if any, to be allotted to each Participant. Performance Units may be based on such unit of value as the Committee may in its sole discretion designate. The Committee may delegate to any director, officer, or employee such ministerial or administrative duties relating to the Plan as deemed appropriate by the Committee; provided that such delegation does not result in the disallowance of a deduction to the Company under section 162(m) of the Code or any successor section. No member of the Board or of the Committee shall be liable for any act done or omitted to be done by such member or by any other member in connection with the Plan, except for such member's own willful misconduct or as expressly provided by statute. 5. ELIGIBILITY The Committee shall, in its sole discretion, specify in writing for each Performance Cycle those officers and employees of the Company or any Affiliate who shall be eligible to participate in the Plan for such Performance Cycle based upon such Participants' ability to have a substantial impact on the Company's longer-term results. Only employees of the Company and its Affiliates are eligible to participate in the Plan. Nothing contained in the Plan shall be construed as or be evidence of any contract of employment with any Participant for a term of any length, or as a limitation on the right of the Company to discharge any Participant with or without cause. 6. PERFORMANCE UNITS AND PERFORMANCE GOALS Any Performance Units allotted to a Participant shall be credited to a bookkeeping account to be maintained by the Company for such Participant. At the start of each Cycle, the Committee shall establish the value of each Performance Unit to be allotted for the Cycle. The Committee shall establish Performance Goals for each Cycle to accomplish such objectives as the Committee may from time to time determine; provided that where applicable, 3 4 such Performance Goals shall be established so as not to result in the disallowance of a deduction to the Company under section 162(m) of the Code or any successor provision (including the rules and regulations promulgated thereunder). The Committee may establish different Performance Goals for different Participants. Such Performance Goals may be based on one or more of the following criteria: compounded growth in operating profit; compounded growth in gross revenues; net income; return on equity; cash flow; and total shareholder return. During any Cycle, the Committee may adjust the Performance Goals for such Cycle as it deems appropriate in recognition of unusual or non-recurring events experienced by the Company during the Cycle; provided, however, that no such adjustments will be made which would result in the disallowance of a deduction to the Company under section 162(m) of the Code or any successor section (including the rules and regulations promulgated thereunder). To recognize a range of Company performance, participants may earn from 75% to 150% of the Performance Units allocated to them as specified by the Committee, based upon actual Company performance compared to the specified Performance Goals. At Threshold, 75% of the Performance Units will be earned. No Performance Units will be earned for performance below Threshold. Target performance will result in a Participant earning 100% of the Performance Units. Maximum performance will result in a Participant earning 150% of the allocated Performance Units. 7. DETERMINATION AND PAYMENT OF PERFORMANCE UNITS (a) The Committee shall determine the number of Performance Units which have been earned by each Participant for the Cycle on the basis of the Company's performance in relation to the established Performance Goals. (b) Payment in respect of the Performance Units which are earned by a Participant shall be made in one lump sum in cash in the first calendar quarter following the end of the Performance Cycle for which the Performance Units were earned or within 60 days following termination of employment in the event of a termination within two years following a Change of Control. The Company shall have the right to deduct from the payment any taxes required by law to be withheld thereon. (c) Termination of employment for any reason other than Change of Control, death, Retirement or Total and Permanent Disability during a Performance Cycle will result in a forfeiture of any award attributable to performance during the Performance Cycle in which termination occurred. Termination of employment due to death, Retirement or Total and Permanent Disability shall result in the payment of a pro rata portion of the Performance Units allotted to the Participant that the Participant would have earned if the Participant had remained employed until the end of each Performance Cycle during which such termination occurred. Termination of employment within two years following a Change of Control will result in the payment of a pro rata portion of the Performance Units allotted to the Participant based upon Target performance. Notwithstanding anything herein to the contrary, in the event a Participant's employment is involuntarily terminated by the Company or an Affiliate or the Participant is constructively discharged from his employment with the Company or an Affiliate 4 5 within two years following a Potential Change of Control, such Participant shall be entitled to payment of a pro rata portion of the Performance Units allotted to the Participant based upon Target performance. For purposes of this Plan, a constructive discharge shall include, but not be limited to, any of the following actions taken by the Company or an Affiliate without the Participant's written consent following a Potential Change of Control: (a) the assignment of duties inconsistent with, or the reduction of the powers, duties, responsibilities, and prerogatives associated with, the Participant's position, office, and status with the Company or an Affiliate; (b) a demotion of the Participant or any removal of the Participant from or failure to re-elect or reappoint the Participant to any title or office; (c) a reduction in the Participant's base salary or bonus potential or the Company's or an Affiliate's failure to increase the Participant's base salary (within 12 months of the Participant's last increase in base salary); and (d) any other similar actions or inactions by the Company or an Affiliate. 8. MAXIMUM AWARD The maximum cash award paid under this Plan to any Participant for any Performance Cycle will be limited to the lesser of (a) 100% of the Participant's highest annual base salary during such Performance Cycle or (b) $600,000. 9. MISCELLANEOUS PROVISIONS (a) Except as provided in this Plan, no right of any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, attachment, garnishment, execution, levy, bankruptcy, or any other disposition of any kind, whether voluntary or involuntary, prior to actual payment of a Performance Unit award. No Participant or any other person shall have any interest in any fund, or in any specific asset or assets of the Company, by reason of a Performance Unit award that has been made but has not been paid or distributed. (b) The Board may, at any time, amend this Plan, order the temporary suspension of its application, or terminate it in its entirety, provided, however, that no such action (1) shall adversely affect the rights or interests of Participants theretofore earned hereunder or (2) would result in the disallowance of a deduction to the Company under section 162(m) of the Code or any successor section (including the rules and regulations promulgated thereunder). (c) The terms of the Plan shall be governed, construed, administered, and regulated by the laws of the state of Georgia and applicable federal law. In the event that any provision of the Plan shall be determined to be illegal or invalid for any reason, the other provisions shall continue in full force and effect as if such illegal or invalid provision had never been included herein. 5 EX-10.10.1 5 SUPPLY AGREEMENT 1 EXHIBIT 10.10.1 4 ____ DECEMBER 1997 SUPPLY AGREEMENT This Agreement is made between on one side, COMPANHIA INDUSTRIAL DE PAPEL PIRAHY ("Supplier") and, on the other side, SOUZA CRUZ S.A. ("Purchaser"). NOW THEREFORE, the Parties have agreed and contracted. as follows: I Purpose Subject to the terms and conditions set forth herein, Supplier agrees to supply to Purchaser [********] for those types and grades of cigarette related paper specified in Annex I (including any update of such Annex pursuant to Clauses V and VIII) ("THE PRODUCTS") and Purchaser agrees to purchase from Supplier [********] for the Products according to the terms of this Agreement. II Volume (a) Purchaser has indicated to Supplier in Annex 2 the current forecast of its projected requirements for the Products for the calendar year beginning 1 January 1998. Such forecast will be updated on an annual basis during the life of this Agreement in accordance with Clause VII. It will not form the basis of a commitment on the part of Purchaser to purchase the amount stated in the forecast. (b) Purchaser shall purchase [********] for Products from Supplier. Supplier commits to manufacture and to supply to Purchaser and Purchaser commits to buy from Supplier the quantities of Products specified in the orders referred to in Clause VII (b) ("THE GUARANTEED VOLUME"). (c) If any two monthly order from Purchaser exceeds the output capacity or available stocks of Supplier, Supplier will be entitled, but not obliged, to meet such excess from any other source from within its own Group (as defined below). If Supplier is unable, or elects not to meet such excess from within its own Group, it will notify Purchaser within the first week of such two monthly cycle and thereafter Purchaser shall be entitled to obtain from any other person only such quantity of the Product as Supplier is unable or elects not to supply. Purchaser will have no right of termination on the grounds that Supplier has not supplied such excess quantities of the Product. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 2 "Group" means, in relation to any company, that company and any company under common ownership or control with or which owns or controls such company. III Price and Sale Terms (a) The price per tonne for each of the types and grades of Products specified in Annex I will be the [********] (as defined in sub-clause (c)) for such type or grade, [********] which will be paid in Reais (the "Invoice Price"). (b) As used herein, [********] (c) Subject to sub-clause (e) the [********] will be in US dollars, will be [********] of this Agreement and thereafter for each succeeding [********] and will be comprised of the aggregate of the [********] and the [********] which would be applicable to [********]. At the beginning of each succeeding [********] the Parties agree to re-negotiate the [********] so that on the first day of such period the [********] is the same as the [********] on such date. (d) Subject to sub-clause (e) for the [********] beginning on the date of this Agreement the [********] for each type and grade of Product shall be as set out in Annex 5. (e) The [********] may be [********] at any time within each [********] period if: (i) [********] (ii) [********] (iii) [********] (f) If, due to any [********] as per (e) (iii) above, the resulting [********] turns out to be higher or lower than the [********] at the start of the [********] following the adjustment, the Parties will [********] to reflect the current [********]. (g) In circumstances where Supplier is unwilling to accept the [********] suggested by Purchaser, Supplier will be entitled to receive verification of [********] from Seller by [********]. To the extent that the Parties are still unable to agree following delivery of such [********] either Party shall be entitled to have the dispute referred to an auditor from an internationally recognised local firm of chartered accountants (the identity of whom will be agreed upon by the Parties at the beginning of each year of the Agreement unless both Parties subsequently agree otherwise). The Parties thereafter agree to be bound by the decision of such auditor as to the [********] at such time. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 3 (h) Supplier agrees with Purchaser that it will not, during the continuance of this Agreement, [********]. (i) At the end of each month [********] of this Agreement, [********]. IV Quality (a) The Purchaser shall not be obliged to buy any quantity of the Products which do not meet the specifications set out in Annex I or any amendment thereto made in accordance with Clauses V and VIII. (b) Purchaser shall be entitled to reject any quantity of the Products which does not meet the criteria referred to in sub-clause (a) above, subject to Sellers verification of the stated defect. Sellers sole obligation shall be to replace Product not meeting the criteria referred to in sub-clause (a) and, in no event shall Supplier be liable to Purchaser for damages of any nature or kind whatsoever arising out of or relating to such defective Product. Payment of any part of the purchase price shall not affect Purchasers right of rejection. Subject to Clause X (a) (i), if Supplier or any member of Suppliers Group is unable to resupply expeditiously Product which does meet the criteria referred to in sub-clause (a) above, Purchaser shall be entitled to obtain such Product from such third parties as it chooses. Seller shall not be liable to Purchaser for any portion of the price Purchaser must pay to obtain supply from such third party or, for other damages of any kind whatsoever. (c) Purchaser and Seller shall work together to ensure that the Products optimise the speed and performance of Purchasers machines, and to achieve enhancement in product quality, product technology and security of supply. V New Products and Improvements (a) If, at any time during the term of this Agreement, Purchaser wishes to purchase cigarette related paper with different specifications from that currently manufactured as referred to in Annex I ("NEW PRODUCT"), Purchaser must first request Supplier to supply such paper. (b) To the extent that: (i) Supplier or any member of Supplier's Group has such New Product commercially available and elects and is able to deliver such New Product within the time period reasonably required by Purchaser it will, thereafter, "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 4 be deemed to be Product, will become part of the Guaranteed Volume and Annexes I and 2 will be amended accordingly; (ii) neither Supplier nor any member of its Group has the New Product commercially available Supplier will be given [********] to decide whether it wishes to develop such New Product (including the modification of any similar existing product). If Supplier agrees to develop the New Product, the Parties will agree on specifications and a product development program for the New Product, including a time frame for development and production. When the New Product meets the specifications, it will be deemed to be Product, will thereafter become part of the Guaranteed Volume and Annexes I and 2 will be amended accordingly. (c) Supplier and Purchaser will agree on the price for each New Product (which shall thereafter be the [********]) based on factors such as the [********]. (d) During the period between the original request by Purchaser, pursuant to sub-clause (a) above, and production of the New Product by Supplier, Purchaser will be entitled to purchase its requirement for such paper from such third parties as it chooses only in such quantities as Purchaser shall require for use during this period. If Supplier decides not to develop such New Product or fails to develop and produce it within the agreed time frame Purchaser shall thereafter be entitled to purchase such paper from third parties in such quantities as it chooses. (e) The Parties agree to consult with each other from time to time in order to ensure that the specification of the Products set out in Annex 1 represents best industry practice. Supplier agrees that it will, to the extent that it is able to do so [********]. (f) Supplier will only use skilled employees, as determined in Supplier's sole discretion, for the purpose of fulfilling its obligations under this Agreement and will, jointly with the Purchaser, set up a programme of activity aimed at continuous improvement of the security of supply, the levels of Product quality and customer services and at reducing costs for both Supplier and Purchaser. The Parties will work together to develop mutually agreeable objectives to (i) improve the quality and increase the efficiency of the Products, and (ii) make such other joint efforts as the Parties shall deem appropriate. (g) If Purchaser's volume of Product purchased from Supplier declines by more than [********] as a result of changes in the Specifications, the Parties shall [********]. VI Force Majeure and Recovery Plan "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 5 (a) The Parties shall, at all times during the life of this Agreement, maintain in force the recovery plan existing immediately prior to the date of this Agreement as set out in Annex 4, covering the procedures to be followed if Supplier is not able to meet its commitments to Purchaser due to events of Force Majeure (as defined below). The recovery plan shall be updated annually by agreement between the Parties. "Force Majeure" means any circumstances beyond the control of the relevant Party which cannot be reasonably avoided by such Party. The Party experiencing an event of Force Majeure shall exercise reasonable efforts to endeavour to overcome the event of Force Majeure. (b) In the case of an event of Force Majeure, and for as long as it subsists, Supplier will [********]. (c) Neither Party will be in breach of this Agreement for any delay in performance or the non-performance of any of its obligations under this Agreement to the extent that the delay or non-performance is due to an event of Force Majeure. (d) For such time as Supplier or any member of its Group is unable to provide Product to the Purchaser because of an event of Force Majeure, Purchaser will be entitled to obtain the relevant Product from third parties only in such quantities as Purchaser shall use during the period of the event of Force Majeure and the Guaranteed Volume for such period shall be reduced by the amount Purchaser used during such event of Force Majeure. (e) If, as a result of an event of Force Majeure it is not foreseeable that Supplier or any member of its Group will be able to recommence the supply of Product within a reasonable time (and the execution of the disaster recovery plan is in such circumstances, in the reasonable opinion of the Purchaser, unsatisfactory) Purchaser shall [********]. VII Ordering and Inventory Procedures (a) At least 120 days prior to the beginning of each calendar year, or at any other time, if significant market changes occur, Purchaser will provide Supplier with a revised annual estimate of its overall requirements for Product and Annex 2 shall be deemed amended accordingly. (b) During each such year Purchaser through its electronic ordering link with Supplier, will provide a detailed rolling two monthly order for Product which will be updated on a weekly basis. All Product ordered shall be subject to the terms of this Agreement. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 6 (c) Supplier will, at all times, in accordance with the recovery plan referred to in Clause VI, [********] (based on the most recent detailed rolling two monthly order) of Product at its premises. (d) Supplier will, at all times, maintain an [********] and will replenish such inventory on a daily basis in accordance with electronic instructions issued by Purchaser, or as otherwise agreed to between Purchaser and Supplier. (e) Purchaser will [********] in respect of Product withdrawn from inventory (in full bobbin quantities or tonnes, as applicable) on the previous day. (f) [********]. Ownership of Product will remain with Supplier until it is withdrawn from inventory by the Purchaser. VIII Term (a) This Agreement will remain in force for an initial period of three years from the date of its execution. Thereafter it shall automatically renew for additional three year terms, unless either Party shall give to the other written notice of [********]. If a Party gives [********], the Agreement will continue for an additional [********] during which Purchaser's obligation to purchase its [********] period, all other terms and conditions of this Agreement shall remain in effect. (b) During the term of the Agreement, Purchaser undertakes to keep Supplier continuously updated in relation to its predicted future requirements in terms of changes to and improvements on the types, grades and specifications of Product referred to Annex 1. (c) Prior to each renewal term, the Parties will amend Annex 1 to reflect the enhancement, if any, in product quality and technology achieved by Supplier during the previous term of the Agreement. IX Dispute Resolution (a) The Parties shall attempt, in good faith, to resolve any dispute arising out of or relating to this Agreement (including, without limitation, any dispute as to whether Products supplied are in accordance with the specifications set out in Annex 1) promptly by negotiations between representatives of the Parties who have authority to settle the dispute. (b) If such negotiations are unsuccessful either Party may, give to the other written notice of the dispute and executives of both Parties at appropriate levels above such representatives shall meet at a mutually acceptable time and place "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 7 within 30 days after such notification, and thereafter as often as they reasonably deem necessary, to exchange relevant information in an attempt to resolve the dispute. X Termination (a) Either Party shall be entitled to terminate this Agreement with immediate effect if: (i) the other Party commits any material breach of any of the provisions of this Agreement and, in the case of a breach which is capable of remedy, fails to remedy the same within 30 days after receipt of a written notice giving full particulars of the breach and requiring it to be remedied; (ii) the other Party goes into involuntary liquidation, becomes insolvent or makes any arrangement with its creditors ("Concordata"). XI Macro Economic Change It is understood that, without prejudice to any of the provisions of this contract, if a material adverse change occurs in the Brazilian economy as a whole or in the specific market conditions which changes in an unforseeable way the commercial relationship between the Parties, the Parties will in good faith to discuss how, if at all, this situation can be redressed to the mutual benefit of both Parties. XII Confidential Information The Parties hereby acknowledge that all information disclosed to each other pursuant to this Agreement, either orally, in writing or by observation, including, but not limited to, the contents of this Agreement and its Exhibits (hereafter "Confidential Information") shall at all times, both during and after the term of this Agreement, remain the exclusive property of the Party making the disclosure and that, in receiving such disclosure, the other Party shall not disclose such information except as required by law, nor acquire any proprietary interest whatsoever therein. Each Party shall make use of the other party's Confidential Information only during the term of and solely to carry out the purposes and intent of this Agreement. XIII Law and Forum (a) This Agreement shall be governed by the laws of Brazil. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 8 (b) Any dispute concerning this agreement, if not otherwise settled, shall be subject to the Courts of the City of Rio de Janeiro, State of Rio de Janeiro, Brazil. BEING THUS CONTRACTED AND AGREED the Parties sign this Agreement in two copies for one sole purpose. COMPANHIA INDUSTRIAL DE PAPEL PIRAHY - -------------------------------- SOUZA CRUZ S.A. - -------------------------------- "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 9 ANNEXES Annex 1: Product Specifications Annex 2: Annual Requirement Estimates Annex 3: [********] Annex 4: Disaster Recovery Plan Annex 5: [********] "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 10 ANNEX I PRODUCT SPECIFICATIONS "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 11 ================================================================================ ANNEX I PRODUCT SPECIFICATIONS 1. GENERAL GUIDELINES INTERLAB CROSS - CHECKS To ensure that the results of Supplier's measurements, based on their own test procedures, can be converted to Purchaser's requirements (targets and tolerances) regular cross-checks with Supplier are necessary. CIGARETTE PAPER AND PLUG WRAP BOBBIN PERFORMANCE BOBBIN UNIFORMITY All materials must be wound and slit in a uniform manner under even tension to ensure that no core slippage occurs and bobbins do not exhibit any detrimental non-circularity. The paper must be free from slitting debris. SPLICES Any splices should not compromise the runnability of the material. Adhesive width: [********] Overlap, adhesive free: [********] Number of splices per delivery: [********] [********] [********] BOBBIN LABELING Each bobbin must have a unique identifying label which enables the production history of the bobbin to be traced back through Supplier's manufacturing process. In addition the label should have the following specific information: - - bobbin width - - bobbin length - - relevant customer material code - - material identification - - identification for slitter and master roll ANALYSIS DATA The following criteria have to be analyzed and documented by Supplier, at a frequency to be determined between the Supplier and Purchaser: - - Permeability - - Paper weight - - Elongation at break, machine direction "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 12 - - Tensile strength, machine direction - - Additive content (cigarette paper only) - - Calcium carbonate content - - Degree of whiteness/Opacity (cigarette paper only) For all criteria mean values and standard deviations, as defined in terms agreed between the Supplier and Purchaser, are to be indicated. Documents must be retained for a two years period. APPEARANCE The cigarette paper should be uniform and free of the following defects, as specified by objective standards agreed between the Supplier and Purchaser: - - Dirt - - Folds - - Cutting dust - - Foreign matter - - Stains - - Structural defects - - Impressions - - Fluorescence - - Tears - - Grooves - - Core defects - - Faulty core position - - Faulty cutting - - Faulty winding This list makes no claim to be comprehensive and in particular does not exclude the possibilities that defects other than those listed can also lead to complaints on shipments. CIGARETTE PAPER Cigarette paper must have the following characteristics: 1) Permeability: targets from [********], with tolerance [********] from target, per pallet (140 bobbins) - see Notes 2) Machine direction tensile strength: [********] minimum 3) Opacity: [********] minimum. 4) Paper weight: targets from [********] from target 5) Burn additives: targets from [********] 6) Verge Marking: homogeneous throughout bobbin 7) Formation: homogeneous throughout bobbin PLUG WRAP Plug wrap must have the following characteristics: "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 13 1) Permeability: nonporous plug wrap - lower than [********] 2) Machine direction tensile strength: [********] 3) Paper weight: targets from [********] TIPPING BASE PAPER COMPATIBILITY WITH OTHER MATERIALS Tipping base paper must be compatible with other materials used in the manufacture of cigarettes. Upon request Purchaser will advise Supplier of the adhesives and plug wraps used to ensure that the appropriate validation testing can be performed. ANALYSIS DATA The following criteria have to be analyzed and documented by Supplier, at a frequency to be determined between the Supplier and Purchaser: - - Permeability - - Basis weight - - Elongation at break, machine direction - - Tensile strength, machine direction - - Degree of whiteness/Color consistency of cork - - Coefficient of friction - see Note - - Bendtsen roughness - - Absorbency For all criteria mean values and standard deviations, as defined in terms agreed between the Supplier and Purchaser, are to be indicated. Documents must be retained for a two years period. TIPPING BASE PAPER Tipping base paper must have the following characteristics, measured on jumbo rolls average: WHITE TIPPING BASE PAPER 1) Permeability: [********] 2) Thickness: target [********] from target 3) Paper weight: targets from [********] from target 4) Machine direction tensile strength: [********] minimum - see Notes 5) Elongation at break, MD: [********] maximum 6) Opacity: [********] minimum 7) Degree of whiteness: [********] minimum 8) Coefficient of friction: [********] maximum - see Notes "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 14 9) Bendtsen roughness (both sides): [********] maximum - see Notes CORK TIPPING BASE PAPER 1) Permeability: lower than [********] 2) Thickness: target [********] from target 3) Paper weight: targets from [********] from target 4) Machine direction tensile strength: [********] minimum - see Notes 5) Elongation at break, MD: [********] maximum 6) Coefficient of friction: [********] maximum - see Notes 7) Bendtsen roughness (both sides): [********] maximum - see Notes NOTES: 1) Despite the fact, both Pirahy and SWM (Supplier), [********] the specification for this [********] maximum) was maintained in the Product Specification Guidelines, for both white and cork tipping base paper. The idea is to keep this point open for future discussions, between Supplier and Purchaser, regarding measurement procedures. 2) The proposed specification of [********], for Tensile Strength MD, [********]. It was agreed between both parties that this should be a target for future 3) The proposed specification of [********], for Bendtsen Roughness, [********]. It was agreed between both parties that this should be a target for future 4) Regarding cigarette paper permeability, item (1) of characteristics, Supplier must have as a target, to reach coefficient of variation lower than [********]. APPEARANCE The tipping base paper should be uniform and free of the following defects, as specified by objective standards agreed between the Supplier and Purchaser: - - Dirt - - Folds - - Cutting dust - - Foreign matter - - Stains - - Structural defects - - Impressions - - Fluorescence - - Tears - - Grooves - - Core defects - - Faulty core position - - Faulty cutting - - Faulty winding 2. RAW MATERIAL SPECIFICATION Attached are detailed technical specification by type and grade of product. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 15 Attached are detailed technical specification by type and grade of product. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 16 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02 DESCRIPTION: T-442(Colomy)RYO paper
DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - --- --------------- ------ ------ ---- ----------- --------- 1 No. of splices per bobbin A -- counts -- [*****] 2 Basis weight B ISO 536/76(E) gsm [*****] [*****] 3 Thickness C -- u. [*****] [*****]
Dated issued: July 08, 1997 Supersedes issue dated: No. 230057 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 17 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02 DESCRIPTION: T-450(Trevo)RYO paper
DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - --- --------------- ------ ------ ---- ----------- --------- 1 No. of splices per bobbin A -- counts -- [*****] 2 Basis weight B ISO 536/76(E) gsm [*****] [*****] 3 Thickness C -- u. [*****] [*****]
Dated issued: July 08, 1997 Supersedes issue dated: No. 230058 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 18 - ------------------------------------------------------------------------------- Material Acceptance Conditions According to Brazilian Standard ABNT NBR 5426--Single, Normal (or Rigorous*) Sampling Plan. *Souza Cruz reserves the right to use the single and rigorous sampling plan whenever constancy is identified of any deviation compromising the use of the material. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information - ------------------------------------------------------------------------------- Notes 1-Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2-Specification copy control is responsibility of the person in charge of the Site. /s/ SOUZA CRUZ - -------------------------------- -------------------------------- Souza Cruz Supplier Supersedes issue dated: May 06, 1996 Date issued: June 20, 1996 No. 470001 Note: original document approved by Research & Development Center 19 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02 DESCRIPTION: Printing base paper; type 411, 33gsm, yellow tipping paper base
DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ---------------------------------------------------------------------------------------------------------------------------------- 1 Roll direction A -- -- [*****] -- 2 Shade A -- -- [*****] -- 3 Core type B -- -- [*****] -- 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm [*****] [*****] 6 No. of splices per bobbin B -- -- -- [*****] 7 Minimum weight per bobbin A -- kg [*****] -- 8 Machinability A [*****] -- -- -- Machines 9 Splice type B -- -- [*****] -- 10 Loose dust A * -- [*****] -- 11 Wrinkle, crease, and ply A * -- [*****] -- 12 Loose side A * -- [*****] -- 13 Basis weight A IS0 536/76(E) gsm [*****] [*****] 14 Permeability A -- C0RESTA -- [*****] 15 Lengthwise tensile strength A ASTM D3759 g/mm -- [*****] 16 Cobb absorption B ASTM D3285 gsm -- [*****] 17 Roughness (Bendtsen) (wire & opposite side) B ISO 5636-3/84 cu.cm/min -- [*****] 18 Thickness C ASTM D645 um [*****] [*****] 19 Moisture B TAPPI 4120M 90 % [*****] [*****] 20 Color index (opposite side) A -- -- [*****] [*****]
* gravure machine test at [*****] FS felt side WS wire side Date issued: June 20, 1996 Supersedes issue dated: May 06, 1996 No. 470002 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 20 Packaging and Identification Packaging Roll packaging should be moisture proof in order to ensure roll stowing; preferably use bituminous paper. Sides should be protected with corrugated cardboard discs. Core sides should be protected with wooden or plastic discs (bungs). Identification Each roll should bear an identification tag containing the following information: 1 - Paper type 6 - Date manufactured 2 - Basis weight 7 - Number of splices 3 - Shape 8 - Gross weight 4 - Diameter 9 - Net weight 5 - Material code 10 - Bill number - ------------------------------------------------------------------------------- Sampling System According to Brazilian standard ABNT NBR 5426 - single, Normal Sampling Plan - following the classification below:
PARAMETER INSPECTION LEVEL -------------------------- DEFECT CLASS [*****] [*****] [*****] -------------------------------------------------------------------------- Critical (A) [*****] [*****] [*****] -------------------------------------------------------------------------- Serious (B) [*****] [*****] [*****] -------------------------------------------------------------------------- Tolerable (C) [*****] [*****]
AQL=acceptable quality level. Date issued: June 20, 1996 Supersedes issue dated: May 06, 1996 No. 470002 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 21 - ------------------------------------------------------------------------------- Material Acceptance Conditions According to Brazilian Standard ABNT NBR 5426--Single, Normal (or Rigorous*) Sampling Plan. *Souza Cruz reserves the right to use the single and rigorous sampling plan whenever constancy is identified of any deviation compromising the use of the material. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information - ------------------------------------------------------------------------------- Notes 1-Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2-Specification copy control is responsibility of the person in charge of the Site. /s/ SOUZA CRUZ - -------------------------------- -------------------------------- Souza Cruz Supplier Supersedes issue dated: May 06, 1996 Date issued: June 20, 1996 No. 470002 Note: original document approved by Research & Development Center 22 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02 DESCRIPTION: Printing base paper; 38 gsm, white, alkaline tipping paper base (Exp 51/96)
DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ---------------------------------------------------------------------------------------------------------------------------------- 1 Roll direction A -- -- [*****] -- 2 Shade A -- -- -- 3 Core type B -- -- [*****] -- 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm [*****] [*****] 6 No. of splices per bobbin B -- -- [*****] [*****] 7 Minimum weight per bobbin A -- kg [*****] -- 8 Machinability A Bobst/Profama -- -- -- Machines 9 Splice type B -- -- [*****] -- 10 Loose dust A * -- [*****] -- 11 Wrinkle, crease, and ply A * -- [*****] -- 12 Loose side A * -- [*****] -- 13 Basis weight A ISO 536/76(E) gsm [*****] [*****] 14 Permeability A -- CORESTA [*****] [*****] 15 Lengthwise tensile strength A ASTM D3759 g/mm -- [*****] 16 Cobb absorption B ASTM D3285 gsm -- [*****] [*****] 17 Roughness (Bendtsen) (wire & opposite side) B ISO 5636-3/84 cu.cm/min -- [*****] 18 Thickness C ASTM D645 um [*****] [*****] 19 Capacity B ISO 1924/76 % -- [*****] 20 Whiteness A ASTM D985 % -- [*****] 21 Moisture B TAPPI 4120M 90 % [*****] [*****]
* gravure machine test at [*****] FS felt side WS wire side Date issued: June 20, 1996 Supersedes issue dated: May 06, 1996 No. 470003 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 23 Packaging and Identification Packaging Roll packaging should be moisture proof in order to ensure roll stowing; preferably use bituminous paper. Sides should be protected with corrugated cardboard discs. Core sides should be protected with wooden or plastic discs (bungs). Identification Each roll should bear an identification tag containing the following information: 1 - Paper type 6 - Date manufactured 2 - Basis weight 7 - Number of splices 3 - Shape 8 - Gross weight 4 - Diameter 9 - Net weight 5 - Material code 10 - Bill number
- ----------------------------------------------------------------------------- Sampling System According to Brazilian Standard ABNT NBR 5426 - Single, Normal Sampling Plan - following the classification below:
PARAMETER INSPECTION LEVEL DEFECT CLASS [*****] [*****] [*****] ------------------------------------------------------------------------- Critical (A) [*****] [*****] [*****] ------------------------------------------------------------------------- Serious (B) [*****] [*****] [*****] ------------------------------------------------------------------------- Tolerable (C) [*****] [*****] -------------------------------------------------------------------------
AQL = acceptable quality level. Date issued: June 20, 1996 Supersedes issue dated: May 06, 1996 No .470003 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 24 - ------------------------------------------------------------------------------- Material Acceptance Conditions According to Brazilian Standard ABNT NBR 5426--Single, Normal (or Rigorous*) Sampling Plan. *Souza Cruz reserves the right to use the single and rigorous sampling plan whenever constancy is identified of any deviation compromising the use of the material. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information - ------------------------------------------------------------------------------- Notes 1-Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2-Specification copy control is responsibility of the person in charge of the Site. /s/ SOUZA CRUZ - -------------------------------- -------------------------------- Souza Cruz Supplier Supersedes issue dated: May 06, 1996 Date issued: June 20, 1996 No. 470003 Note: original document approved by Research & Development Center 25 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02 DESCRIPTION: Printing base paper; type 611, 33 gsm, yellow, antiflame tipping paper base
DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ---------------------------------------------------------------------------------------------------------------------------------- 1 Roll direction A -- -- [*****] -- 2 Shade A -- -- [*****] -- 3 Core type B -- -- [*****] -- 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm [*****] [*****] 6 No. of splices per bobbin B -- -- -- [*****] 7 Minimum weight per bobbin A -- kg [*****] -- 8 Machinability A Bobst/Profama -- -- -- Machines 9 Splice type B -- -- [*****] -- 10 Loose dust A * -- [*****] -- 11 Wrinkle, crease, and ply A * -- [*****] -- 12 Loose side A * -- [*****] -- 13 Basis weight A IS0 536/76(E) gsm [*****] [*****] 14 Permeability A -- C0RESTA -- [*****] 15 Lengthwise tensile strength A ASTM D3759 g/mm -- [*****] 16 Cobb absorption B ASTM D3285 gsm -- [*****] 17 Roughness (Bendtsen) (wire & opposite side) B ISO 5636-3/84 cu.cm/min -- [*****] 18 Thickness C ASTM D645 um [*****] [*****] 19 Moisture B TAPPI 4120M 90 % [*****] [*****] 20 Color index (opposite side) A -- -- [*****] [*****]
* gravure machine test at [*****] FS felt side WS wire side Date issued: Jan. 16, 1997 Supersedes issue dated: No. 470004 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 26 Packaging and Identification Packaging Roll packaging should be moisture proof in order to ensure roll stowing; preferably use bituminous paper. Sides should be protected with corrugated cardboard discs. Core sides should be protected with wooden or plastic discs (bungs). Identification Each roll should bear an identification tag containing the following information: 1 - Paper type 6 - Date manufactured 2 - Basis weight 7 - Number of splices 3 - Shape 8 - Gross weight 4 - Diameter 9 - Net weight 5 - Material code 10 - Bill number
- ----------------------------------------------------------------------------- Sampling System According to Brazilian Standard ABNT NBR 5426 - Single, Normal Sampling Plan - following the classification below:
PARAMETER INSPECTION LEVEL DEFECT CLASS [*****] [*****] [*****] ------------------------------------------------------------------------- Critical (A) [*****] [*****] [*****] ------------------------------------------------------------------------- Serious (B) [*****] [*****] [*****] ------------------------------------------------------------------------- Tolerable (C) [*****] [*****] -------------------------------------------------------------------------
AQL = acceptable quality level. Date issued: Jan. 16, 1997 Supersedes issue dated: No. 470004 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 27 - ------------------------------------------------------------------------------- Material Acceptance Conditions According to Brazilian Standard ABNT NBR 5426--Single, Normal (or Rigorous*) Sampling Plan. *Souza Cruz reserves the right to use the single and rigorous sampling plan whenever constancy is identified of any deviation compromising the use of the material. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information - ------------------------------------------------------------------------------- Notes 1-Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2-Specification copy control is responsibility of the person in charge of the Site. /s/ SOUZA CRUZ - -------------------------------- -------------------------------- Souza Cruz Supplier Supersedes issue dated: May 06, 1996 Date issued: Jan. 16, 1997 No. 470004 Note: original document approved by Research & Development Center 28 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 402, 26.0 gsm, <= 7 CU filter plug wrap with stearate DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ---------------------------------------------------------------------------------------------------------------------------------- 1 Core type A -- mm [*****] [*****] [*****] [*****] 2 Splice type A -- mm [*****] [*****] [*****] 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter (maximum) B -- mm [*****] -- 6 Machinability A MK5 and PM 5 -- -- -- Machines 7 Width A -- mm [*****] [*****] 8 Basis weight B ISO 536/76(E) gsm [*****] [*****] 9 Thickness C ASTM D645 u.m [*****] [*****] 10 Tensile strength A ASTM D3759 g/mm -- [*****] 11 Permeability A -- CORESTA -- [*****] 12 Length per bobbin A -- m [*****] [*****]
Date issued: Dec. 13, 1996 Supersedes issue dated: Dec. 06, 1996 No. 230001 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 29 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured 8 - Corresponding sampling number - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System Supplier should sample a bobbin from each manufactured reel. Samples should be packed and identified with the words "SAMPLING NUMBER". Sampling number should be that of the week in the year the sample is shipped to R&D Center for analysis. - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: Dec. 13, 1997 Supersedes issue dated: Dec. 06, 1996 No. 230001 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 30 - -------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - -------------------------------------------------------------------------------- Additional Information Pallet dimensions: 1,130 MM +0 -30 depth, 1,130 mm +0 -30 width, 100 mm height to allow forks to enter. - -------------------------------------------------------------------------------- NOTES 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ - ----------------------------- -------------------------- Souza Cruz Supplier Date issued: Dec. 13, 1996 Supersedes issue dated: Dec. 06, 1996 No. 230001 Note: original document approved by Research & Development Center 31 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 512, 26.0 gsm, 25 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------- 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm [*****] [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA [*****] [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: Feb. 24, 1997 Supersedes issue dated: Dec. 13, 1996 No. 230040 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 32 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: Feb. 24, 1997 Supersedes issue dated: Dec. 13, 1996 No. 230040 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 33 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- NOTES 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: Feb. 24, 1997 Supersedes Issue dated: Dec. 13, 1996 No. 230040 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 34 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 512, 26.0 gsm, 26.5 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] [*****] 3 No. of splices per bobbin A -- counts [*****] [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm [*****] [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm [*****] [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: Feb. 24, 1997 Supersedes issue dated:Dec. 13, 1996 No. 230041 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 35 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: Feb. 24, 1997 Supersedes issue dated: Dec. 13, 1996 No. 230041 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 36 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- NOTES 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: Feb. 24, 1997 Supersedes Issue dated: Dec. 13, 1996 No. 230041 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 37 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 513, 26 gsm, 26.5 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] [*****] 3 No. of splices per bobbin A -- counts [*****] [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm [*****] [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: Feb. 24, 1997 Supersedes issue dated: Dec. 13, 1996 No. 230044 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 38 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: Feb. 24, 1997 Supersedes issue dated: Dec. 13, 1996 No. 230044 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 39 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: Feb. 24, 1997 Supersedes Issue dated: Dec. 13, 1996 No. 230044 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 40 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 648, 26 gsm, 19 mm, 30 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] [*****] 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes issue dated: No. 230050 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 41 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes issue dated: No. 230050 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 42 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230050 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 43 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 648, 26 gsm, 25 mm, 30 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes issue dated: No. 230051 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 44 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes issue dated: No. 230051 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 45 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230051 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 46 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 648, 26 gsm, 26.5 mm, 30 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] [*****] 2 Splice type A -- -- [*****] [*****] 3 No. of splices per bobbin A -- counts [*****] [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA [*****] [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] [*****] [*****] --
Date issued: July 08, 1997 Supersedes issue dated: No. 230052 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 47 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes issue dated: No. 230052 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 48 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230052 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 49 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 649, 26 gsm, 26.5 mm, 30 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI [*****] [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes Issue dated: No. 230053 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 50 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes issue dated: No. 230053 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 51 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230053 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 52 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 612, 26 gsm, 25 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type 6A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes Issue dated: No. 230054 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 53 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes Issue dated: No. 230054 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 54 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230054 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 55 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 612, 26 gsm, 26.5 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm [*****] [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes Issue dated: No. 230055 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 56 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes Issue dated: No. 230055 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 57 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only one nonapproved bobbin from the group of five will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230055 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 58 SOUZA CRUZ QUALITY SYSTEM RAW MATERIALS SPECIFICATION QM/06-02
DESCRIPTION: Type 613, 26 gsm, 26.5 mm, 50 CU marking press cigarette paper DEFECT NO. CHARACTERISTICS CLASS METHOD UNIT RATED VALUE TOLERANCE - ------------------------------------------------------------------------------------------------ 1 Core type A -- mm [*****] [*****] [*****] 2 Splice type A -- -- [*****] -- 3 No. of splices per bobbin A -- counts -- [*****] 4 Core inner diameter A -- mm [*****] [*****] 5 Bobbin outer diameter B -- mm -- [*****] 6 Bobbin making A -- -- -- -- 7 Machinability A MK8 and MK9 -- -- -- Machines 8 Width A -- mm [*****] [*****] 9 Basis weight B ISO 536/76(E) gsm [*****] [*****] 10 Thickness C ASTM D645 u.m [*****] [*****] 11 Tensile strength A ASTM D3759 g/mm -- [*****] 12 Permeability Rated per bobbin and pallet A -- CORESTA [*****] [*****] Std dev per pallet A -- CORESTA -- [*****] Individual A -- CORESTA [*****] [*****] 13 Opacity A -- %COI -- [*****] 14 Calcium carbonate A -- % [*****] [*****] 15 Sodium citrate A -- % [*****] [*****] 16 Combustibility A -- s [*****] [*****] 17 Length per bobbin A -- m [*****] [*****] 18 Fiber composition A -- % [*****] -- [*****]
Date issued: July 08, 1997 Supersedes issue dated: No. 230056 NOTE: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 59 Packaging Conditions One-way wooden pallet containing 140 bobbins each. A tag containing the following information should be stuck onto the outside of each pallet: 1 - Supplier name 5 - Net weight 2 - Material code 6 - Gross weight 3 - Paper type 7 - Product code 4 - Date manufactured - -------------------------------------------------------------------------------- Minimum Material Identification Each roll should bear an identification tag inside the core with the following information: 1 - Paper maker No. 2 - Month manufactured 3 - Original reel number 4 - Paper type - -------------------------------------------------------------------------------- Sampling System - -------------------------------------------------------------------------------- Material Acceptance Conditions The mean results of each variable for each supplied batch should be within the set tolerance limits, with [*****] of individual results out of tolerance being accepted. Date issued: July 08, 1997 Supersedes Issue dated: No. 230056 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 60 Permeability 1 - For each bobbin (among the fifteen bobbins measured) only [*****] value out of the [*****] range tolerance will be accepted, that is, if [*****] nonconforming values are found, the bobbin will not be accepted. Also, any bobbin with the mean out of the [*****] range will not be accepted. 2 - Only [*****] nonapproved bobbin from the group of [*****] will be accepted. - ------------------------------------------------------------------------------- ISO Standard for supplier quality system evaluation - ------------------------------------------------------------------------------- Additional Information: Pallet dimensions: 1,100 mm +0 -30 depth, 1,100 mm +0 -30 width, 100 mm height to allow forks to enter. - ------------------------------------------------------------------------------- Notes 1 - Any material modification even if not influencing the above specified parameters, should be communicated by the supplier in order that Souza Cruz can evaluate possible influences on its process. 2 - Specification copy control is responsibility of the person in charge of the Site. /s/ Souza Cruz - ----------------------- ------------------------- Souza Cruz Supplier Dated issued: July 08, 1997 Supersedes Issue dated: No. 230056 Note: original document approved by Research & Development Center "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 61 ANNEX 2 ANNUAL REQUIREMENT ESTIMATES As referred to in Clause II (a), Purchaser's projected requirements for the Products for the calendar year beginning 1 January 1998 are set out below. It should be noted that these projections are estimates only and do not impose any purchase obligation on Purchaser. Orders are referred in Clause VII (b). Volumes - January to December/1998 (in metric tons) Tissue [*****] Tipping [*****] Plug Wrap [*****] RYO (1) [*****] ---- Total [*****] (1) This grade has to be sold to Purchaser through a converter company and not directly. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 62 ANNEX 3 1. [*****] 2. [*****] 3. [*****] "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 63 ANNEX 4 DISASTER RECOVER PLAN 64 1 - Risk Analysis [*****] "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 65 1.2 - RISK GRADE ANALYSIS/MINIMIZATION ACTIONS [*****] 2-CONCLUSION "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 66 Maintenance of the present [*****] of finished bobbins: [*****] for any fabrication item destined to Souza Cruz. "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." 67 ANNEX 5 [*****]
CHARACTERISTICS PRICE(3) IN US$ TYPE/GRADE FIBER G/M2 UNIT WIDTH PRESENT USS/TON - ---------- ----- ---- ---- ----- ------- ------- (4) (5) [*****]
[*****] "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." EX-10.11 6 SUPPLEMENT BENEFIT PLAN 1 EXHIBIT 10.11 SUPPLEMENTAL BENEFIT PLAN AMENDED AND RESTATED AS OF FEBRUARY 25, 1999 SUPPLEMENTAL BENEFIT PLAN TO THE SCHWEITZER-MAUDUIT INTERNATIONAL, INC. RETIREMENT PLAN Effective as of December 1, 1995 1. Use of Defined Terms. Capitalized terms used herein have the respective meanings ascribed to such terms as set forth in Section 5 below. 2. Purpose. The Supplemental Benefit Plan is for the purpose of providing Participants and their Survivors with such benefits, in addition to the Retirement Plan, as are necessary to fulfill the intent of the Retirement Plan without regard to Section 415 and Section 401(a)(17) of the Code. It is intended that the Supplemental Benefit Plan constitute an unfunded plan of deferred compensation for a select group of management or highly compensated employees, within the meaning of Title I of ERISA. 3. Benefit. The Benefit of a Participant or a Survivor under the Supplemental Benefit Plan shall be the difference between: (a) the monthly amount payable under the Retirement Plan, which monthly amount shall be calculated (i) without regard to Article XI of the Retirement Plan and (ii) using the term Earnings defined as set forth in Section 5(e) of the Supplemental Benefit Plan below; less (b) the monthly amount payable under the Retirement Plan. 4. Amendment and Termination. The Company, by action of its Board of Directors, may amend the Supplemental Benefit Plan in any respect, or terminate the Supplemental Benefit Plan at any time; provided, however, that no such amendment or termination shall be effective to the extent it adversely impacts the Benefit of any Participant or Survivor accrued as of the effective date of such amendment or termination. 2 5. DEFINITIONS. The following capitalized terms shall have the respective meanings set forth below: (a) "Benefit" shall mean a benefit payable pursuant to, and determined in accordance with the provisions of the Supplemental Benefit Plan. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Company" shall mean Schweitzer-Mauduit International, Inc. (d) "Committee" shall mean the Committee named under the Retirement Plan. (e) "Earnings" shall be determined in accordance with the provisions of Article X of the Retirement Plan without regard to any limitation under Section 401(a)(17) of the Code. (f) "Employer" shall mean the Company or any participating employer shown in Appendix A to the Retirement Plan. (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (h) "Participant" shall mean a participant in the Retirement Plan who (i) is a member of a "select group of management or highly compensated employees" of the Company, within the meaning of Title I of ERISA, and (ii) has earnings in excess of the limit provided under Section 401(a)(17) of the Code for any calendar year in which the Participant participates in the Retirement Plan, except that no individual shall be a participant herein to the extent that such participation in this Supplemental Benefit Plan would prevent this Supplemental Benefit Plan from being maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, or is precluded by an agreement between the Company and such individual. 2 3 (i) "Retirement Plan" shall mean the Schweitzer-Mauduit International, Inc. Retirement Plan, or any successor defined benefit pension plan. (j) "Supplemental Benefit Plan" shall mean this Supplemental Benefit Plan to the Schweitzer-Mauduit International, Inc. Retirement Plan. (k) "Survivor" shall refer to any of a Designated Beneficiary, surviving spouse or Surviving Minor Children of a Participant, within the meaning of the Retirement Plan. 6. MISCELLANEOUS (a) The Company is the Plan Sponsor of this Supplemental Benefit Plan, within the meaning of ERISA. (b) The Committee shall administer the Supplemental Benefit Plan and shall have all such powers and duties in its discretion as may be necessary to discharge its duties, including, but not limited to, the power to construe and interpret the Supplemental Benefit Plan, determine all questions of eligibility, and compute the amount and determine the method of payment of any Benefits hereunder. (c) Amounts paid under the Supplemental Benefit Plan shall be paid to such person on the same terms and conditions, at the same times, and pursuant to the same elections made by the Participant, as they would have been paid under the Retirement Plan, were it not for the limitation on benefits under Code Sections 415 and 401(a)(17). (d) An application or claim for a benefit under the Retirement Plan shall constitute a claim for a Benefit under the Supplemental Benefit Plan. In the event a claim for a Benefit under the Supplemental Benefit Plan is denied, a Participant or Survivor shall be entitled to request a review of such denied claim in accordance with the provisions of Section 6.8 of the Retirement Plan. 3 4 (e) The Supplemental Benefit Plan shall not be a funded plan, and the Company shall be under no obligation to set aside any funds for the purpose of making payments under this Plan. Any payments hereunder shall be made out of the general assets of the Company. (f) Subject to the provisions of Section 4, the Supplemental Benefit Plan shall automatically terminate when the Retirement Plan terminates. (g) There shall be deducted from the payment of any Benefits due a Participant or a Survivor under the Supplemental Benefit Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Company or other person or entity paying Benefits under this Supplemental Benefit Plan to such governmental authority for the account of the Participant or Survivor entitled to such payment. (h) Neither the Participant, his Survivor, nor his legal representative shall have any rights to sell, assign, transfer, or otherwise convey the right to receive the payment of any portion or all of the Benefits payable hereunder. Any attempt to assign or transfer the right to Benefit payments under this Supplemental Benefit Plan shall be null and void and of no effect. (i) Participation hereunder shall not be construed as creating any contract of employment between the Company and a Participant, nor shall it limit the right of the Company to suspend, terminate, alter, modify, whether or not for cause, the employment relationship between the Company and a Participant. (j) This Supplemental Benefit Plan shall be construed in accordance with the laws of the State of Georgia, to the extent such laws are not otherwise superseded by the laws of the United States. 4 5 IN WITNESS WHEREOF, the Corporation has adopted this SUPPLEMENTAL BENEFIT PLAN TO THE SCHWEITZER-MAUDUIT INTERNATIONAL, INC. RETIREMENT PLAN as of _____________, 1995. SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: __________________________________ Wayne H. Deitrich Chairman of the Board and Chief Executive Officer 5 EX-10.12 7 EXECUTIVE SERERANCE PLAN 1 EXHIBIT 10.12 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. EXECUTIVE SEVERANCE PLAN Amended and Restated - As of February 25, 1999 2 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. EXECUTIVE SEVERANCE PLAN FOR KEY EMPLOYEES AMENDED AND RESTATED AS OF FEBRUARY 25, 1999 ARTICLE 1 - PURPOSE AND ADOPTION OF PLAN 1.1 Adoption of Plan. Schweitzer-Mauduit International, Inc. ("Company") hereby amends and restates the Schweitzer-Mauduit International, Inc. Executive Severance Plan as of February 25, 1999. The Company intends that this Plan qualify as and come within the various exceptions and exemptions under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, for an unfunded plan maintained primarily for a select group of management or highly compensated employees, and any ambiguities in this Plan shall be construed to effect that intent. The benefits of this Plan for U.S. Employees (as hereinafter defined) shall be paid solely from the general assets of the Company. The benefits of this Plan for French Employees (as hereinafter defined) shall be paid by the French Employer (as hereinafter defined) but, if as a result of applicable French laws, a French Employer would be prohibited from paying the benefits of this Plan to a French Employee, any such benefits shall be paid by the Company to such French Employee. 1.2 Purpose. The Plan is primarily designed to provide benefits to certain Key Employees (as hereinafter defined) upon termination of employment as a result of a Change of Control or otherwise. 1.3 Effect on Other Plans Sponsored by the Company or by a French Employer. The benefits payable under the Plan are in addition to the coverage and benefits generally afforded by Other Plans (as hereinafter defined) to Key Employees terminating from the 1 3 service of the Company or, as the case may be, from the service of a French Employer and any other programs sponsored by the Company or provided to Participants who are French Employees including, but not limited to, vested benefits under any qualified employee benefit plans. However, nothing herein is intended to or shall be construed to require the Company or a French Employer to institute or continue in effect any particular plan or benefit sponsored by the Company or such French Employer, and the Company and each French Employer hereby reserve the right to amend or terminate any of their Other Plans or benefit programs at any time in accordance with the procedures set forth in each such plan or program and any applicable law. The masculine pronoun shall be construed to include the feminine pronoun and singular shall include the plural where the context so requires. ARTICLE 2 - DEFINITIONS 2.1 "Administrator" shall mean the Compensation Committee of the Board. 2.2 "Agreement" shall mean the participation agreement provided to a Key Employee by the Administrator as provided in Section 3.2. 2.3 "Annual Compensation" shall mean: a) For U.S. Employees, a Participant's rate of base salary paid or payable for a calendar year by the Company and any incentive award paid or payable to such Participant pursuant to the Schweitzer-Mauduit International, Inc. Annual Incentive Plan (the "SMI Annual Incentive Plan") or any replacement or successor to such plan for such calendar year. b) For French Employees, a Participant's rate of base salary paid or payable for a calendar year by his French Employer, plus any incentive award paid 2 4 or payable to such Participant pursuant to the SMI Annual Incentive Plan or any replacement or successor to such plan for such calendar year, plus any profit-sharing paid or payable by his French Employer attributable to such calendar year minus the aggregate amount of (i) any Convention Collective payments, (ii) Assedic Payments, or (iii) private insurance payments paid or payable to such Participant as a result of a Change of Control Termination. 2.4 "Basic Plan" shall mean the Securite Sociale retirement benefit plan sponsored by the French Government. 2.5 "Board" shall mean the Board of Directors of Schweitzer-Mauduit International, Inc. 2.6 "Cause" shall mean the termination of the Participant's employment by the Company or by his French Employer, as the case may be on the basis of criminal or civil fraud on the part of the Participant. 2.7 "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. 3 5 2.8 "Change of Control Termination" shall mean the termination of a Participant's employment by the Company or his French Employer, as the case may be, within two years of a Change of Control for any reason other than Retirement, Disability or the Participant's death. 2.9 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.10 "Company" shall mean Schweitzer-Mauduit International, Inc. and each of its successors and assigns. 2.11 "Complementary Plan" shall mean the national pension plans for French Employees and workers sponsored by the Association des Regimes de Retraite Complementaires ("ARRCO") and the Association Generale des Institutions de Retraite des Cadres ("AGIRC"), respectively. 2.12 "Disability" shall mean Totally and Permanently Disabled, within the meaning of the Retirement Plan, provided that the Administrator shall make any such determination with respect to a Participant hereunder. 2.13 "French Employee" shall mean an individual employed by one of the French Employers. 2.14 "French Employer(s)" mean Schweitzer-Mauduit France, S.A.R.L. or LTR Industries, S.A. and their respective subsidiaries. 2.15 "French Supplementary Plans" shall mean the supplementary pension benefit plans provided, respectively, by Papeteries de Mauduit, S.A. and LTR Industries, S.A. to their employees. 2.16 "Key Employee" shall mean an individual who is a member of a select group of management or highly compensated French Employees and/or U.S. Employees, as determined from time to time by the Administrator. 4 6 2.17 "Other Plans" shall mean other plans of the Company or of the French Employer, including but not limited to the Schweitzer-Mauduit International, Inc. Annual Incentive Plan, the Schweitzer-Mauduit International, Inc. Equity Participation Plan, the Schweitzer-Mauduit International, Inc. Long-Term Incentive Plan, and the Supplemental Plan. 2.18 "Participant" shall mean a Key Employee who has entered into an Agreement with the Administrator in accordance with Section 3.2. 2.19 "Plan" shall mean this Schweitzer-Mauduit International, Inc. Executive Severance Plan. 2.20 "Retirement" shall mean a. For U.S. Employees, the voluntary termination of the Participant's employment by the Company pursuant to the terms of the qualified defined benefit pension plan of the Company, which termination was initiated by such Participant in writing pursuant to the procedures of such qualified defined benefit pension plan prior to a Change of Control notwithstanding the Participant's actual retirement date occurs after a Change of Control. b. For French Employees, the voluntary termination of the Participant's employment by his French Employer as a result of such Participant's retirement pursuant to the terms of the Basic Plan, the Complementary Plan and, if applicable, the French Supplementary Plan, which termination was initiated by such Participant in writing pursuant to the procedures of such Basic Plan, Complementary Plan and, if applicable, French Supplementary Plan prior Change of Control, notwithstanding that the Participant's actual retirement date occurs after a Change of Control. 5 7 2.21 "Retirement Plan" shall mean the Schweitzer-Mauduit International, Inc. Retirement Plan. 2.22 "Supplemental Plan" shall mean the Supplemental Benefit Plan to the Schweitzer-Mauduit International, Inc. Retirement Plan. 2.23 "U.S. Employee" shall mean individuals employed by the Company. 2.24 "Voluntary Resignation" shall mean termination of a Participant's employment with the Company or the French Employer(s) as a result of a resignation initiated by the Participant which is unrelated to any act or omission of the Company or the French Employer, as the case may be, which could reasonably be construed to be a constructive discharge of such Participant. ARTICLE 3 - ELIGIBILITY 3.1 Eligibility to Participate. The Administrator shall from time to time determine in writing the Key Employees who are eligible to participate in this Plan. A list of current Participants shall be set forth on Appendix A hereto, as updated by the Committee from time to time. 3.2 Agreement. The Administrator shall enter into a participation agreement with each Key Employee the Administrator determines to be eligible for participation in this Plan. Such Agreement shall identify the Key Employee as a Participant in this Plan and shall contain such terms as deemed appropriate by the Administrator, but shall be consistent with and governed by the terms of this Plan. 6 8 ARTICLE 4 - SEVERANCE BENEFITS 4.1 Termination Following Change of Control. (a) If a Participant's employment with the Company or his French Employer, as the case may be, shall terminate within two years of a Change of Control for any reason other than Retirement, Disability or the Participant's death, the Company or, subject to the provisions of Section 1.1, the French Employer, as the case may be, shall pay or, with respect to certain benefits hereinafter described, shall cause to be paid to the Participant the following benefits: (1) an amount equal to three times the Participant's highest Annual Compensation for any calendar year beginning with or within the three-year period terminating on the date of termination of the Participant's employment, which amount shall be paid to the Participant in cash on or before the fifth day following the date of termination; (2) for a period of three years following the date of termination of employment, the Participant and anyone entitled to claim under or through the Participant shall be entitled to benefits as follows: i) For U.S. Employees, all benefits under the group health care plan, dental care plan, life or other insurance or death benefit plan, or other present or future similar group employee benefit plan or program of the Company for which key executives are eligible at the date of a Change of Control, to the same extent as if the Participant had continued to be an employee of the Company during such period and such benefits shall, to the extent not fully paid under any such plan or program, be paid by the Company; and 7 9 ii) for French Employees, all medical and dental benefits provided by "Social Securite", medical, dental and life insurance or death benefit plans, or other present or future similar medical, dental, life or other insurance or death benefit plans or programs generally available to French Employees for which such Participant is eligible at the date of the Change of Control, to the same extent as if the Participant had continued to be a French Employee during such period and such benefits shall, to the extent not fully paid under any such plan or program, be paid by the French Employer. (3) for U.S. Employees, an amount equal to the Actuarial Equivalent (as defined in the Retirement Plan) of the accrued benefit the Participant would have earned under the Retirement Plan and the Supplemental Plan for the three-year period following the date of the termination of his employment with the Company based on the Participant's earnings in effect for purposes of the Retirement Plan and the Supplemental Plan on the date of such termination, which amount shall be paid to the Participant in cash on or before the fifth day following the date of termination; and (4) for French Employees, a lump sum equal to the sum of the following amounts which sum shall be payable in cash on or before the tenth day following the date of termination: (i) the cost of purchasing any pension credits lost by a Participant under the Basic Plan as a result of a Change of Control 8 10 Termination, but in no event shall the pension credits so purchased exceed 12 quarters of pension credits; (ii) a lump sum equal to (x) the purchase price of any pension credits lost by a Participant under the Complementary Plan plus (y) the present value of any portion of lost pension credits which may not be purchased back from the Complementary Plan, each as a result of a Change of Control Termination provided, however, that in no event shall such lost Complementary Plan benefits exceed the present worth of three years of such lost pension benefits; and (iii) for pension benefits lost under the French Supplementary Plan as a result of a Change of Control Termination, payment of a lump sum calculated as follows: a) if the Participant is terminated between ages 62 and 65, a lump sum equal to the present worth of the difference between the pension benefits the Participant would have received at age 65 absent the Change of Control Termination and the reduced pension benefit such Participant will receive at age 65 as a result of such termination; b) if the Participant is terminated between ages 60 and 62, payment of a lump sum as calculated in (a) above multiplied by the ratio of A to B where A = three years and B = the number of years between 9 11 the Change of Control Termination and attainment of age 65. c) if the Participant is terminated before age 60 or with less than 20 years service with a French Employer, a lump sum equal to the present worth of the pension benefit the Participant would have received at age 65, absent the Change of Control Termination multiplied by the ratio of A to B where A = three years and B = the number of years between the Change of Control Termination and the date on which the Participant would attain age 65 provided, however, that no such lump sum shall be payable unless such Participant could have earned 20 years service with a French Employer on or before attainment of age 65, absent a Change of Control Termination. (b) If a Participant is or may be liable for Federal income taxes in the United States, such Participant's Agreement shall provide that the parties agree that the payments provided in Section 4.1(a) hereof are reasonable compensation in light of the Participant's services rendered to the Company or the French Employer, as the case may be, and that neither party shall contest the payment of such benefits as constituting an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. 10 12 (c) In the event that (i) the Participant becomes entitled to the compensation and benefits described in Section 4.1(a) hereof ("Compensation Payments"), (ii) the Company determines, based upon the advice of tax counsel selected by the Company's independent auditors and acceptable to the Participant, that, as a result of such Compensation Payments and any other benefits or payments required to be taken into account under Code Section 280G(b)(2) ("Parachute Payments"), any of such Parachute Payments must be reported by the Company as "excess parachute payments", and (iii) such Parachute Payments are 3.5 or more times the "base amount" as defined in Code Section 280G(b)(3) with respect to such Participant ("Base Amount"), the Company shall pay to the Participant at the time specified in Section 4.1(a) above an additional amount ("Gross-Up Payment") such that the net amount retained by the Participant, after deduction of any of the tax imposed on the Participant by Section 4999 of the Code ("Excise Tax") and any Federal, state and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Parachute Payments determined prior to the application of this paragraph. The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors. For purposes of determining the amount of the Gross-Up Payment, the Participant shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of the Participant's residence on the date of termination of his employment, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax payable by the Participant is subsequently determined to be less than the amount, if any, taken into account hereunder at the time of termination of the Participant's employment, the Participant shall repay 11 13 to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided for in Section 1274(b)(2)(B) of the Code ("Repayment Amount"). In the event that the Excise Tax payable by the Participant is determined to exceed the amount, if any, taken into account hereunder at the time of the termination of the Participant's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest and penalty payable with respect to such excess) immediately prior to the time that the amount of such excess is required to be paid by Participant (regardless of any contest of such payment pursuant to Section 4.1(e)) ("Additional Gross-up Payment"), such that the net amount retained by the Participant, after deduction of any Excise Tax on the Parachute Payments and any Federal, state and local income tax and Excise Tax upon the Additional Gross-Up Payment, shall be equal to the Parachute Payments determined prior to the application of this paragraph. In the event that the Excise Tax payable by the Participant is subsequently determined to be less than the amount of the Additional Gross-up Payment paid to the participant, the Participant shall repay to the Company at the time that the amount of such reduction in the Additional Gross-up Payment is determined the portion of the Additional Gross-up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided for in Section 1274(h)(2)(B) of the Code ("Additional Repayment Amount"). The obligation to pay any Repayment Amount, Additional Gross-up or Additional Repayment Amount shall remain in effect under this Agreement for the entire period during which the Participant remains liable for the Excise Tax, including the period during which any applicable statute of limitation remains open. 12 14 (d) In the event the Participant's Parachute Payments are less than 3.5 times the Base Amount, the Company shall limit the Compensation Payments provided hereunder to the extent necessary so that the Participant's Parachute Payments do not exceed 2.99 times the Base Amount. (e) Unless the Company determines that any Parachute Payments made hereunder must be reported as "excess parachute payments" in accordance with Section 4.1(c) above, neither party shall file any return taking the position that the payment of such benefits constitutes an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. If the Internal Revenue Service proposes an assessment of Excise Tax against the Participant in excess of the amount, if any, taken into account at the time specified in Section 4.1(c) and the Company notifies the Participant in writing that the Company elects to contest such assessment at its own expense, the Participant shall cooperate in good faith with the Company in contesting such proposed assessment and agrees not to settle such contest without the written consent of the Company. Any such contest shall be controlled by the Company, provided, however, that the Participant shall have the right to participate in such contest. Notwithstanding the Company's election to contest the assessment of an Excise Tax, the Participant shall be entitled to an Additional Gross-Up Payment under Section 4.l(c) at the time set forth therein. 4.2 Termination of Employment. If a Participant's employment with the Company or his French Employer shall terminate during the term of his Agreement for any reason other than death, Retirement, Voluntary Resignation or Cause, the Company or (if such payment is not inconsistent with any relevant French law) his French Employer, shall pay the Participant or the Participant's beneficiary, as the case may be, in cash a lump sum payment in the amount set forth in the Agreement with such Participant under this Plan within 30 days of his termination of 13 15 employment. Such amount shall be set forth on Appendix A hereto and shall not be more than the Participant's monthly base salary multiplied by 24. No benefits shall be payable pursuant to this Section 4.2 in the event a Participant is entitled to severance payments under Section 4.1 hereof. ARTICLE 5 - ADMINISTRATION 5.1 Administrator. The Administrator is responsible for the general administration of the Plan. 5.2 Duties of the Administrator. The Administrator shall be responsible for the daily administration of the Plan and may appoint other persons or entities to perform or assist in the performance of any of its duties, subject to its review and approval. The Administrator shall have the right to remove any such appointee from his position without cause upon notice. 5.3 Powers. The Administrator shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan as more particularly set forth herein. The Administrator shall have discretionary authority to interpret the Plan, and to determine all questions arising in the administration, interpretation, and application of the Plan; provided, however, that such discretionary authority shall be exercised in good faith in order to achieve the principal purposes of the Plan to provide severance benefits, including enhanced severance benefits upon a Change of Control, as described in Article 4. All such determinations shall be conclusive and binding on all interested persons. The Administrator shall adopt such procedures and regulations necessary and/or desirable for the discharge of its duties hereunder and may appoint such accountants, counsel, actuaries, specialists, and other agents as it deems necessary and/or desirable in connection with the administration of this Plan. 14 16 5.4 Compensation of the Administrator. The Administrator shall not receive any compensation from the Plan for its services. 5.5 Indemnification. The Company shall indemnify the Administrator against any and all claims, losses, damages, expenses, and liability arising from its actions or omissions, except when the same is finally adjudicated to be due to the Administrator's gross negligence or willful misconduct. The Company may purchase at its own expense sufficient liability insurance for the Administrator to cover any and all claims, losses, damages, and expenses arising from any action or omission in connection with the execution of the duties as the Administrator. ARTICLE 6 - SUCCESSOR TO THE COMPANY 6.1 The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume this Plan and agree to perform the obligations of the Company under this Plan and each Participant's Agreement in the same manner and to the same extent that the Company would be required to perform such obligations if no such succession or assignment had taken place. ARTICLE 7 - MISCELLANEOUS 7.1 Funding of Benefits. The benefits payable to a Participant under the Plan shall not be funded in any manner and shall be paid by the Company or the French employer, as the case may be, out of its general assets, which assets are subject to the claims of the Company's or the French Employer's creditors. 15 17 7.2 Settlement of Accounts. Except as prohibited by applicable law, there shall be deducted from the payment of any benefit due under the Plan the amount of any uncontested indebtedness, obligation, or liability which the Participant has acknowledged in writing as owing to the Company or the French Employer as the case may be, or any of their respective subsidiaries and the amount of which has been agreed to by the Participant. 7.3 Withholding. There shall be deducted from the payment of any benefit due under the Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Company or the French Employer, as the case may be, to such governmental authority for the account of the Participant entitled to such payment. 7.4 Assignment by the Participant. Unless required by court order, no Participant or beneficiary shall have any rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. 7.5 Amendment and Termination. The Plan may be amended or terminated at any time by the Company, by resolution of the Board; provided that no termination or amendment reducing the severance benefits provided hereunder shall be effective until the expiration of the two-year period following the date of the Board resolution providing for such termination. Further, no amendment or termination shall be effective during the two-year period following the date of a Change of Control of the Company without the consent of all the Participants. Any termination of this Plan shall cause the immediate termination of all outstanding Agreements hereunder. No amendment or termination shall affect the rights of any Participant who is entitled to severance benefits pursuant to Article 4 at the time of such amendment or termination. 16 18 7.6 No Guarantee of Employment. Participation hereunder shall not be construed as creating any contract of employment between the Company or a French Employer and any Key Employee, nor shall it limit the right of the Company or such French Employer to terminate a Key Employee's employment at any time for any reason whatsoever. 7.7 Construction. This Plan shall be construed in accordance with and governed by the laws of the State of Georgia, to the extent such laws are not otherwise superseded by the laws of the United States. 17 19 APPENDIX A Participants in the Schweitzer-Mauduit International, Inc. Executive Severance Plan and Number of Months of Base Salary Pursuant to Section 4.2 of the Plan
Number of Months of Participant's Base Salary in the Event of Termination, Pursuant to Name Section 4.2 of the Plan ---- ----------------------- Wayne H. Deitrich 24 Paul C. Roberts 12 William J. Sharkey 12 William R. Foust 12 Wayne L. Grunewald 6 Jean-Pierre Le Hetet 12 Raymond Nedellec 6 Alain Charet 6 John W. Rumely, Jr. 6 Peter J. Thompson 12
18 EX-10.13.2 8 AMEND #1 TO AMEND & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.13.2 AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT DATED JANUARY 29, 1999 This Amendment No. 1 dated as of January 29, 1999 ("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"), Schweitzer-Mauduit Spain, S.L., sociedad unipersonal, a, Spanish corporation with a sole shareholder ("SMS", together with the Company, SMF and PDM, 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, 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 29, 1999 to January 28, 2000, (2) consent to the assignment and assumption of the obligations of SMS under the Spanish Term Note to the Company, and (3) make certain other modifications 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. (a) Upon the satisfaction of each of the conditions precedent set forth in Section 6 below, the Credit Agreement will be amended as follows: (i) Section 1.01 of the Credit Agreement is hereby amended as follows: (A) by deleting the date "January 29, 1999" in the definition of "Maturity Date" and replacing it with the date "January 28, 2000"; and (B) by deleting the percentage ".20%" in the definition of "Applicable Margin" and replacing it with the percentage ".45%". (ii) Section 2.03(a) of the Credit Agreement is hereby amended as follows: 2 (A) by deleting the percentage ".10%" and replacing it with the percentage ".15%"; and (B) by deleting the date "March 31, 1998" and replacing it with the date "March 31, 1999". (b) Upon the satisfaction of each of the conditions precedent set forth in Section 7 below, the Credit Agreement will be amended as follows: (i) Section 1.01 of the Credit Agreement is hereby amended as follows: (A) the definition of "Borrower" is amended in its entirety as follows: "Borrower" means (a) with respect to the U.S. Revolving Advances, the U.S. Term Advances and the Spanish Term Advances, the Company, (b) with respect to the French Revolving Advances, SMF and PDM, and (c) with respect to the French Term Advances, SMF, and "Borrowers" shall refer to all such Persons collectively. (B) the definition of "Spanish Term Advance" is amended by replacing "SMS" with "the Company". (C) the definition of "Spanish Term Note" is amended in its entirety as follows: "Spanish Term Note" means a promissory note of the Company payable to the order of any Bank in substantially the form of the attached Exhibit B-5, evidencing indebtedness of the Company to such Bank resulting from any Spanish Term Advance of such Bank. (ii) The last sentence of Section 2.02(g) of the Credit Agreement is amended in its entirety as follows: The indebtedness of the Company to each Bank resulting from the Spanish Term Advance owing to such Bank shall be evidenced by the Spanish Term Note of the Company payable to the order of such Bank. (iii) Exhibit B-5 to the Credit Agreement is hereby amended in its entirety by attaching the attached "Exhibit B-5 - Form of Spanish Term Note". (iv) Section 2.05(b)(iii) of the Credit Agreement is hereby amended in its entirety as follows: The Company shall ratably repay the Spanish Term Advances to the Banks based on each Bank's Spanish Term Share in installments in the aggregate amounts and on the dates indicated as follows: 2 3
Date Amount ---- ------ January 31, 2002 $6,666,666 July 31, 2002 $6,666,667 January 31, 2003 $6,666,667
Section 3. Assignment and Assumption. Upon the assignment and assumption of the obligations of SMS under the Spanish Term Note to the Company (the "Assignment and Assumption Date"), the Company assumes and agrees to be primarily liable for the payment and performance of, all of SMS's obligations now or hereafter arising under, or in connection with, the Spanish Term Note (collectively, the "SMS Obligations"). The Company's obligations under the Spanish Term Note shall apply to and cover all amendments, modifications, supplements or restatements of the Credit Agreement or the SMS Obligations thereunder. Additionally, as of the Assignment and Assumption Date, the Company agrees to be substituted for SMS as a Borrower under the Credit Agreement and undertakes to perform all the obligations expressed therein, respectively, of SMS as a Borrower and agrees to be bound by all of the provisions and covenants of the Spanish Term Note and the other Credit Documents to which SMS is a party as if the Company had been an original party to such agreements in such capacity. Section 4. 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). The Company's obligations under the Guaranty shall continue to be enforceable against it notwithstanding the assumption of liabilities by the Company pursuant to Section 3 of this Amendment. Section 5. Representations and Warranties. The Borrowers and the Guarantor represent and warrant to the Agent and the Banks as of the date hereof and as of the Assignment and Assumption Date that: (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 6. Effectiveness. This Amendment shall become effective and the Credit Agreement shall be amended as provided in Section 2(a) of this Amendment upon the occurrence of the following conditions precedent: (a) The Agent shall have received this Amendment duly and validly executed by all the parties thereto, in form and substance satisfactory to the Agent; and 3 4 (b) The representations and warranties in this Amendment shall be true and correct in all material respects. Section 7. Effectiveness. The Credit Agreement shall be amended as provided in Section 2(b) of this Amendment upon the occurrence of the following conditions precedent: (a) The Agent shall have received the following duly and validly executed by all the parties thereto, in form and substance satisfactory to the Agent of: (i) replacement Spanish Term Notes dated as of the Assignment and Assumption Date executed by the Company payable to the order of each of the Banks evidencing the indebtedness of the Company to the Banks resulting from the outstanding Spanish Term Advances of the Bank (the "New Spanish Term Notes"); (ii) certificates from the appropriate Governmental Authority certifying as to the good standing, existence and authority of the Company in all jurisdictions where the Company is organized or does business; (iii) copies, certified as of the Assignment and Assumption Date by a Responsible Officer of the Company of (A) the resolutions of the Board of Directors of the Company approving this Amendment, the New Spanish Term Notes and the other Credit Documents to which the Company is a party, (B) the articles or certificate (as applicable) of incorporation and bylaws of the Company, and (C) all other documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Amendment, the New Spanish Term Notes, and the other Credit Documents to which the Company is a party; and (iv) certificates of a Responsible Officer of the Company certifying the names and true signatures of officers of the Company authorized to sign this Amendment, the New Spanish Term Note and the other Credit Documents to which the Company is a party; and (b) The representations and warranties in this Amendment shall be true and correct in all material respects. Section 8. Release of SMS. Upon the satisfaction of the conditions precedent set forth in Section 7 and on and after the Assignment and Assumption Date, the Agent and the Banks hereby release and discharge SMS from all present and future obligations and liabilities under the Credit Agreement and the Spanish Term Notes. Section 9. 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 10. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original. 4 5 EXECUTED as of the 29th day of January, 1999. BORROWERS: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: /s/ WAYNE H. DEITRICH ------------------------------------------- Wayne H. Deitrich Chairman and Chief Executive Officer SCHWEITZER-MAUDUIT FRANCE S.A.R.L. By: /s/ JEAN-PIERRE LE HETET ------------------------------------------- Jean-Pierre Le Hetet Gerant (Manager) PDM INDUSTRIES S.N.C. By: Papeteries de Mauduit S.A., as Manager By: /s/ JEAN-PIERRE LE HETET ------------------------------------------- Jean-Pierre Le Hetet Legal Representative SCHWEITZER-MAUDUIT SPAIN, S.L. By: /s/ RAYMOND NEDELLEC ------------------------------------------- Raymond Nedellec Board Delegate GUARANTOR: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: /s/ WAYNE H. DEITRICH ------------------------------------------- Wayne H. Deitrich Chairman and Chief Executive Officer 5 6 AGENT: SOCIETE GENERALE By: /s/ RICHARD M. LEWIS -------------------- Richard M. Lewis Director BANKS: SOCIETE GENERALE By: /s/ RICHARD M. LEWIS -------------------- Richard M. Lewis Director BANQUE NATIONALE DE PARIS By: /s/ -------------------- Name: Title: CREDIT LYONNIAS By: /s/ -------------------- Name: Title: CREDIT NATIONAL By: /s/ -------------------- Name: Title: NATEXIS BANQUE By: /s/ -------------------- Name: Title: By: /s/ -------------------- Name: Title: 6 7 SUNTRUST BANK, ATLANTA By: /s/ -------------------- Name: Title: By: /s/ -------------------- Name: Title: WACHOVIA BANK OF GEORGIA, N.A. By: /s/ -------------------- Name: Title: 7 8 EXHIBIT B-5 SPANISH TERM NOTE $___________________ [Assignment and Assumption Date] For value received, the undersigned, Schweitzer-Mauduit International, Inc., a Delaware corporation (the "Company"), hereby promises to pay to ____________________________________("Bank") the principal amount of ______________________ and __/100 Dollars ($________________) or, if less, the aggregate outstanding principal amount of each Spanish Term Advance (as defined in the Credit Agreement referred to below) made by the Bank to the Company, together with interest on the unpaid principal amount of each such Spanish Term Advance from the date of such Spanish Term Advance until such principal amount is paid in full, at such interest rates, and at such times, as are specified in the Credit Agreement. This Note is one of the Spanish Term Notes referred to in, and is entitled to the benefits of, and is subject to the terms of, the Amended and Restated Credit Agreement dated as of January 30, 1998 (as the same may be amended or modified from time to time, the "Credit Agreement"), among Schweitzer-Mauduit International, Inc., a Delaware corporation, Schweitzer-Mauduit France S.A.R.L., a French corporation, PDM Industries S.N.C., a French corporation, Schweitzer-Mauduit Spain, S.L., sociedad unipersonal, a Spanish corporation with a sole shareholder, the Banks and Societe Generale, as Agent for the Banks. Capitalized terms used in this Note that are defined in the Credit Agreement and not otherwise defined in this Note have the meanings assigned to such terms in the Credit Agreement. The Credit Agreement, among other things, (a) provides for the maintaining of Spanish Term Advances by the Bank to the Company from time to time in an aggregate amount not to exceed at any time outstanding the Dollar amount first above mentioned, the indebtedness of the Company resulting from each such Spanish Term Advance being evidenced by this Note and (b) contains provisions for acceleration of the maturity of this Note upon the happening of certain events stated in the Credit Agreement and for prepayments of principal prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to the Agent at 4800 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201 (or at such other location or address as may be specified by the Agent in writing to the Company) in same day funds. The Bank shall record all Spanish Term Advances and payments of principal made under this Note, but no failure of the Bank to make such recordings shall affect the Company's repayment obligations under this Note. Except as specifically provided in the Credit Agreement, the Company hereby waives presentment, demand, protest, notice of intent to accelerate, notice of acceleration, and any other notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder of this Note shall operate as a waiver of such rights. Subject to applicable federal law, this Note shall be governed by and construed and enforced in accordance with the laws of the state of New York. SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- 8 EX-21.1 9 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF SCHWEITZER-MAUDUIT INTERNATIONAL, INC. The subsidiaries of the Company at December 31, 1998 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 - SWM Brasil, Ltda......................................... Brazil -- 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 St. Girons S.A..................... France
EX-23.1 10 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 22, 1999, appearing in the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. and subsidiaries for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Atlanta, Georgia March 4, 1999 EX-24.1 11 POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWERS OF ATTORNEY 2 POWER OF ATTORNEY The undersigned, Claire L. Arnold, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ CLAIRE L. ARNOLD ---------------------------------- Claire L. Arnold 3 POWER OF ATTORNEY The undersigned, K.C. Caldabaugh, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ K.C. CALDABAUGH ---------------------------------- K.C. Caldabaugh 4 POWER OF ATTORNEY The undersigned, Laurent G. Chambaz, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ LAURENT G. CHAMBAZ ---------------------------------- Laurent G. Chambaz 5 POWER OF ATTORNEY The undersigned, Richard D. Jackson, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ RICHARD D. JACKSON ----------------------------------- Richard D. Jackson 6 POWER OF ATTORNEY The undersigned, Leonard J. Kujawa, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ LEONARD J. KUJAWA ---------------------------------- Leonard J. Kujawa 7 POWER OF ATTORNEY The undersigned, Jean-Pierre Le Hetet, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ JEAN-PIERRE LE HETET ---------------------------------- Jean-Pierre Le Hetet 8 POWER OF ATTORNEY The undersigned, Larry B. Stillman, hereby constitutes and appoints William J. Sharkey 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, 1998, 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 25th day of February, 1999 /s/ LARRY B. STILLMAN ---------------------------------- Larry B. Stillman EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 6,700 0 69,500 1,900 69,400 156,300 479,300 196,100 474,700 124,500 108,400 0 0 1,600 195,400 474,700 546,700 546,700 440,600 440,600 47,000 500 6,400 53,900 17,300 31,000 0 0 0 31,000 1.94 1.92
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