-----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, A3a4u12PcGlwbUltEnqSzbDer7oioLz5o7RJMm6hBvVYGhXcpvLkcoAPX516+ZGx v2dSVHKM3kN+rBVe01Pj5g== 0000950144-02-002150.txt : 20020415 0000950144-02-002150.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-002150 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020308 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: 1934 Act SEC FILE NUMBER: 001-13948 FILM NUMBER: 02570737 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 g74537e10-k.txt SCHWEITZER-MAUDUIT INTERNATIONAL, INC. 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, 2001 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 February 28, 2002, 14,851,935 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 $338 million. (Continued) 1 DOCUMENTS INCORPORATED BY REFERENCE Schweitzer-Mauduit International, Inc.'s 2002 Proxy Statement, filed with the Commission dated March 14, 2002, 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 2002 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 - ----------------------------- ----------------------- 2002 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 PART I ITEM 1. BUSINESS BACKGROUND Schweitzer-Mauduit International, Inc. ("SWM"), headquartered in the United States of America ("United States" or U.S."), 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. Pursuant to a distribution agreement dated October 23, 1995, Kimberly-Clark distributed to its stockholders all of the common stock of SWM on November 30, 1995 (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. The Company's wholly-owned direct subsidiaries are Schweitzer-Mauduit Canada, Inc. ("SM-Canada") and Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a holding company organized under the Spanish holding company regime and the primary foreign investment holding company for SWM. The Company indirectly through SM-Spain has subsidiaries in France and Brazil. SM-Spain owns directly 100 percent of Schweitzer-Mauduit France S.A.R.L., a French corporation ("SMF"), and 72 percent of the issued and outstanding shares of LTR Industries S.A., a French corporation ("LTRI"). SMF, directly or indirectly, owns 100 percent of three principal French operating subsidiaries, Papeteries de Mauduit S.A.S. ("PdM"), Papeteries de Malaucene S.A.S. ("PdMal") and Papeteries de Saint-Girons S.A.S. ("PdStG"). SM-Spain also owns directly 99.99 percent of the issued and outstanding shares of Schweitzer-Mauduit do Brasil S.A., a Brazilian corporation ("SWM-B"). The Company does not have any unconsolidated subsidiaries, joint ventures or special purpose entities. 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 Notes 5, 6 and 13 ("Debt", "Income Taxes" and "Business Segments and Geography," respectively,) 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. Schweitzer-Mauduit International, Inc. is a diversified producer of premium specialty papers and the world's largest supplier of fine papers to the tobacco industry. 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 91 percent, 88 percent and 89 percent of the Company's 2001, 2000 and 1999 consolidated net sales, respectively, include cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette ("Cigarette Papers"), reconstituted tobacco leaf ("RTL") for use as filler in cigarettes, reconstituted tobacco wrappers and binders for cigars and paper products used in cigarette packaging. These products are sold directly to the major tobacco companies or their designated converters in North and South America, Western and Eastern Europe, Asia and elsewhere. Non-tobacco industry products include lightweight printing and writing papers, coated papers for packaging and labeling applications, business forms, furniture laminates, battery separator paper, drinking straw wrap, filter papers and other specialized papers primarily for the North American, Western European and Brazilian markets. These products are generally sold directly to converters and other end-users. The non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine utilization. 3 PRODUCTS. Each of the three principal types of paper used in cigarettes -- cigarette, plug wrap and tipping papers -- serves a distinct purpose in the function of a cigarette. Cigarette paper wraps the column of tobacco in a cigarette. Certain properties of cigarette paper, such as basis weight, porosity, opacity, tensile strength, texture and burn rate must be controlled to tight tolerances. Many of these characteristics are critical to meet the requirements of high-speed production processes utilized by cigarette manufacturers as well as their desired attributes of finished cigarettes such as reduced fire risk or reduced deliveries of tobacco-related smoke constituents. 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 air permeable 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 flow 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-filled column of the cigarette. The ability to produce tipping paper which is both printable and glueable at high speeds is critical to producing a cigarette with a distinctive finished appearance. Reconstituted tobacco is used by manufacturers of cigarettes, cigars and other tobacco products. The Company currently produces reconstituted tobacco in two forms: leaf in France, which is manufactured by LTRI, and wrapper and binder in the United States. Reconstituted tobacco leaf is used by manufacturers of cigarettes primarily as a filler that is blended with virgin tobacco as a design aid to achieve certain attributes of finished cigarettes, such as taste characteristics and reduced deliveries of tobacco-related smoke constituents, and to cost-effectively utilize tobacco leaf by-products. Wrapper and binder are reconstituted tobacco products used by manufacturers of machine-made cigars. Binder is used to hold the tobacco leaves in a cylindrical shape during the production process. Wrapper is used to cover the outside of the cigar, providing a uniform, finished appearance. BUSINESS SEGMENTS. The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. As such, these geographical operations also represent the Company's business segments for reporting purposes. These business segments manufacture and sell cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette, reconstituted tobacco products and paper products used in cigarette packaging. While the products are similar in each segment, they vary based on customer requirements and the manufacturing capabilities of each of the operations. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies the major, and many of the smaller, cigarette manufacturers in North America, and also has significant sales in South America and Japan. The customer base for the U.S. operations consists of more than 100 customers in approximately 30 countries. The Company's French businesses rely predominantly on worldwide exports, primarily to Western Europe, Asia, Eastern Europe and the former Commonwealth of Independent States, and, in lesser but substantial amounts, to Africa, the Middle East and Australia. The customer base for the French operations consists of a diverse group of over 200 customers in more than 80 countries. The Company's Brazilian business primarily supplies customers in Brazil, but with increasing sales to other South American countries. The current customer base of the Brazilian operations consists of the cigarette manufacturers in Brazil, as well as approximately 20 customers in approximately ten countries outside Brazil. Customers of all three business units include international tobacco companies, regional tobacco manufacturers and government monopolies. Philip Morris Incorporated ("Philip Morris"), including its subsidiaries, and B.A.T. Industries PLC ("BAT"), including its U.S. subsidiary Brown & Williamson Tobacco Corporation, its Brazilian subsidiary Souza Cruz S.A. ("Souza Cruz") and its other subsidiaries, are the Company's two largest customers. Philip 4 Morris and BAT, together with their respective affiliates and designated converters, accounted for approximately 32 percent and 18 percent, respectively, of the Company's 2001 consolidated net sales. Although the loss of one or both of these large customers could have a material adverse effect on the Company's results of operations, this is not considered likely given the significant share that SWM's capacity represents of the total world-wide supply available to meet the demand for cigarette-related fine papers. PHILIP MORRIS SUPPLY AGREEMENT. Since 1992, the Company's U.S. unit has been the single source of supply of Cigarette Papers to Philip Morris' U.S. operations. In May 2000, Philip Morris and the Company reached agreement on a Second Amended and Restated Supply Agreement for Fine Paper Supply ("Second Amended Supply Agreement"). The Second Amended Supply Agreement extends the Company's position as the supplier of Cigarette Papers to Philip Morris' U.S. operations through December 31, 2004, except that Philip Morris has the continuing right to acquire up to ten percent of its prior year purchases of Cigarette Papers from other suppliers, although to-date it has chosen not to do so. By its terms, the Second Amended Supply Agreement automatically renews for three successive terms of two years each unless either party gives notice of non-renewal 24 months before the end of the then-current contract term. Further, a June 2000 notice to proceed, given in accordance with the terms of an addendum to the Second Amended Supply Agreement, initiated an exclusive supply arrangement with Philip Morris U.S.A. for a new jointly developed banded cigarette paper that may make a cigarette less likely to ignite certain fabrics. In January 2000, Philip Morris began consumer testing of cigarettes made with this new paper and in 2001 began limited commercial sales of cigarettes made with banded cigarette paper. Philip Morris and the Company also have entered into a licensing and royalty agreement covering future commercialization of this new paper. SOUZA CRUZ SUPPLY AGREEMENT. On February 2, 1998, as part of the Company's agreement to purchase a Brazilian specialty paper manufacturer named Companhia Industrial de Papel Pirahy ("Pirahy"), the predecessor of the Company's Brazilian operations, SWM-B entered into two exclusive supply agreements with its former owner and its largest customer, Souza Cruz, to supply all of Souza Cruz's needs for papers which SWM-B is capable of producing. The supply agreement for tobacco-related papers, as amended in February 2000, has an initial term of six years until February 2, 2004 and automatically renews for additional three-year terms unless either party provides notice of phase-out prior to the date of expiration. The supply agreement for coated paper used in the packaging of cigarette products, as amended in February 2000, has an initial term of six years until February 2, 2004, with extensions to be negotiated prior to the date of expiration. EMPLOYEE AND LABOR RELATIONS. As of December 31, 2001, the Company had 3,359 regular full-time active employees of whom 643 hourly employees and 302 salaried employees were located in the United States and Canada, 1,140 hourly employees and 638 salaried employees were located in France and 591 hourly employees and 45 salaried employees were located in Brazil. North American Operations -- Hourly employees at the Lee, Massachusetts, Spotswood, New Jersey and Ancram, New York mills are represented by locals of the Paper, Allied-Industrial, Chemical and Energy Workers International Union ("PACE"). A new three-year collective bargaining agreement was signed during 2001 for the Ancram mill expiring on September 30, 2004. 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 20 years, and the Company believes employee and union relations are positive. The fiber operations of the Company's Canadian subsidiary are non-union. The Company believes that employee relations are positive. French Operations -- Hourly employees at the Company's mills in Quimperle, Malaucene, Saint-Girons and Spay, France are union represented. A new one-year collective bargaining agreement has been signed in 2002 in Spay expiring February 28, 2003. New two-year collective bargaining agreements have been signed in 2002 in Malaucene and Quimperle expiring December 31, 2003. The current agreement in Saint-Girons is scheduled to expire on April 30, 2002. The Company's French management expects to reach agreement on a new contract at the Saint-Girons mill in 2002 without any significant work stoppages. 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 Brazilian Operations -- Hourly employees at the Pirahy mill are represented by a union. The current annual collective bargaining agreement expires on May 31, 2002. The Company believes that, overall, employee relations are positive and comparable to similar Brazilian manufacturing operations. RAW MATERIALS AND ENERGY. Wood pulp is the primary fiber used in the Company's operations. These operations consumed approximately 105,000 and 116,000 metric tons of wood pulp in 2001 and 2000, respectively, all of which was purchased. Company operations also use other cellulose fibers, the most significant of which are in the form of flax fiber and tobacco leaf by-products, as the primary raw materials for the Company's Cigarette Papers and reconstituted tobacco products, respectively. While tobacco leaf by-products are generally the property of the cigarette manufacturer for whom the reconstitution is contracted, the Company and LTRI purchase some tobacco leaf by-products for use in the production of RTL and wrapper and binder products. Flax straw is purchased and subsequently processed into flax tow at processing facilities in Canada and France. The flax tow is then converted into flax pulp at pulping facilities in the United States and France. Flax tow and flax pulp are also purchased externally, but these purchases only represent approximately 30 percent of the flax pulp currently consumed by the Company's operations in the United States, France and Brazil. Certain specialty papers are manufactured by the Company's operations in France with other cellulose fibers, such as abaca, and small amounts of secondary and recycled fibers. All of these secondary and recycled fibers are purchased. The Company believes that the raw materials purchased by the Company are readily available from several sources and that the loss of a single supplier would not have a material adverse effect on the Company's ability to procure needed raw materials from other suppliers. The papermaking processes use significant amounts of energy, primarily electricity and natural gas, to run the paper machines and other equipment used in the manufacture of pulp and paper. In France and in the United States, availability of energy is generally not expected to be an issue, although prices can fluctuate significantly based on variations in demand. In Brazil, where that country's production of electricity is heavily reliant upon hydroelectric plants, availability of electricity has been affected in the past by weather variations. The Company's Brazilian business currently has a sufficient supply of energy to continue its current level of operation. WORKING CAPITAL. The Company normally maintains approximately 30 to 60 days of inventories to support its operations. The Company's sales terms average between 30 and 60 days for payment by its customers, dependent upon the products and markets served. For a portion of the Company's business, particularly the Company's French businesses' export sales, extended terms are provided. With respect to the Company's accounts payable, the Company typically carries approximately a 30 to 60 day level, in accordance with its purchasing terms, which vary by business segment. The accounts payable balance varies in relationship to changes in the Company's manufacturing operations, particularly due to changes in prices of wood pulp and the level and timing of capital expenditures related to projects in progress. COMPETITION. The Company is the leading producer of Cigarette Papers in the world. LTRI is the leading independent producer of RTL for use in cigarettes. The Company does not sell its products directly to consumers or advertise its products in consumer media. The specialized nature of these tobacco-related papers requires research and development capability to develop them and special papermaking equipment and skills to meet exacting customer specifications. These factors have limited the number of competitors in each of the tobacco-related paper categories discussed separately below. Cigarette Paper -- Management believes that the Company has an estimated 60 to 65 percent share of the North American cigarette paper market. RFS Ecusta Inc. ("Ecusta"), a subsidiary of Purico (IOM) Ltd., is the Company's sole domestic competitor in the sale of cigarette paper in North America. Ecusta's hourly workforce effected a work stoppage of one month duration commencing in October 2001 which reduced its sales of paper to the cigarette industry. Subsequently, the Company along with European suppliers, such as Wattens GmbH ("Wattens"), an Austrian subsidiary of Trierenberg Holding ("Trierenberg"), and Miquel y Costas & Miquel S.A., a Spanish corporation ("Miquel y Costas"), increased their 6 shares of the North American market. Management believes that the bases of cigarette paper competition are security of supply, 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, Miquel y Costas and Julius Glatz GmbH. PdM and PdStG, indirect wholly-owned subsidiaries of the Company in France, sell approximately 60 percent of their products in Western Europe and Asia. Management believes that the bases of competition for PdM's and PdStG's products are the same as for the Company's U.S. business. The principal competitors of the Company's Brazilian cigarette paper business are Wattens, Miquel y Costas and Cartieira Del Maglio S.p.A. SWM-B has an estimated 80 percent share of the cigarette paper market in Brazil and an estimated 60 to 65 percent share of the cigarette paper market in South America. Management believes that the bases of cigarette paper competition for SWM-B are the same as for the Company's U.S. business. Plug Wrap Paper -- Management believes that the Company's U.S. business has an estimated 70 to 75 percent share of the North American market for plug wrap papers. The remainder of the North American market is shared by two competitors: Miquel y Costas and Wattens. The Company's French businesses hold an estimated 60 percent of the Western European high porosity plug wrap market. Wattens 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 70 percent share of the South American market for plug wrap papers. Miquel y Costas and Wattens are the Company's principal competitors in that market. Management believes that the primary basis of competition for high porosity plug wrap is technical capability with price being a less important consideration. On the other hand, conventional plug wrap entails less technical capability with the result that price and quality are the primary bases of competition. Tipping Paper -- Management believes that the Company's U.S. business has an estimated 60 to 65 percent share of the North American market for base tipping paper which is subsequently printed by converters. Its principal competitors in this market are Ecusta and Tervakoski Oy, a Finnish subsidiary of Trierenberg. Ecusta's sales of tipping paper have declined in recent months (see comment under "Cigarette Paper" above). 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. PdMal, another of the Company's indirect wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene, France, and ranks among the largest converted tipping paper producers in Western Europe, with an estimated 15 percent market share. PdMal produces printed and unprinted, and laser and electrostatically perforated tipping papers. PdMal's principal European competitors are Tann-Papier GmbH, an Austrian subsidiary of Trierenberg, Benkert GmbH (Germany) and Miquel y Costas. Management believes that the bases of competition for perforated tipping paper in Europe are perforation technology, consistent quality and price. The Company's Brazilian business has an estimated 65 to 70 percent share of the South American market for base tipping paper which is subsequently printed by converters. The Company's principal competitor in Latin America is Miquel y Costas. Management believes that the bases of tipping paper competition for SWM-B are the same as for the Company's U.S. business. Reconstituted Tobacco -- LTRI is the leading independent producer of RTL. Management believes that the basis of competition in this market is primarily quality. However, sales volumes are influenced by worldwide virgin tobacco prices as lower prices of virgin tobacco may result in lower reconstituted tobacco sales volumes. LTRI's principal competitors are (i) R.J. Reynolds Tobacco Company, which produces RTL for both internal and external use, (ii) Yelets, an affiliate of Japan Tobacco Inc. which operates in Russia, (iii) B.V. 7 Deli-HTL Tabak Maatschappiji B.V., an independent producer which operates in Holland, and (iv) cigarette companies such as Philip Morris and BAT, which produce RTL primarily for internal use. Management estimates that approximately 50 percent of reconstituted cigar wrapper and binder used in the U.S. market is produced internally by domestic cigar manufacturers. The Company's Ancram mill and Nuway Microflake Partnership, a cast process manufacturer, produce the balance. Other Products -- As noted above, the Company and its subsidiaries produce papers for lightweight printing and writing, coated papers for packaging and labeling applications, business forms, furniture laminates, battery separator papers, wrapping paper for drinking straws, filter papers and other specialized papers. Management believes that price is the primary basis of competition for drinking straw wrap, printing and writing and filter papers, 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 papers to more profitable niche applications. RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. The Company has research and laboratory facilities in Spay, France, Santanesia, Brazil and Alpharetta, Georgia and employs more than 50 research personnel. The Company is dedicated to developing Cigarette Papers, reconstituted tobacco and non-tobacco paper product innovations and improvements to meet the needs of individual customers. The development of new components for tobacco products and the development of new non-tobacco paper products are the primary focuses of these research and development functions, including several development projects for the Company's major customers. The Company expensed $7.6 million, $6.3 million and $6.7 million in 2001, 2000 and 1999, respectively, on product research and development. The Company believes that its research and product development capabilities are unsurpassed in the industry and have played an important role in establishing the Company's reputation for high quality, superior products. The Company's commitment to research and development has enabled the Company, for example, to (i) produce high-performance papers designed to run on the high-speed manufacturing machines of its customers, (ii) produce papers to exacting specifications with very high uniformity, (iii) produce cigarette paper with extremely low basis weights, and (iv) produce papers with specifically engineered properties required for end-product performance attributes. The Company also believes it is in the forefront of the specialty paper manufacturing process, having invested heavily in modern technology, including on-line banding capabilities for reduced fire risk papers, laser technology and modern paper-slitting equipment. The Company believes that its commitment to research and development, coupled with its investment in new technology and equipment, has positioned the Company to take advantage of growth opportunities abroad where the demand for American-style premium cigarettes continues to increase. As of December 31, 2001, the Company and its subsidiaries collectively owned 95 patents and had pending 73 patent applications covering a variety of Cigarette Papers, RTL and cigar wrapper and binder products and processes in the United States, Western Europe and several other countries. The Company believes that such patents, together with its papermaking expertise and technical sales support, have been instrumental in establishing it as the leading worldwide supplier of Cigarette Papers, RTL and reconstituted wrapper and binder made by the papermaking process. Management believes that the Company's "POROWRAP(R)" trademark for highly porous plug wrap paper, the "PDM" logo and the "JOB PAPIER A CIGARETTES", "PAPETERIES DE MAUDUIT" and "SCHWEITZER" trade names also have been important 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. 8 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 $30 million and $31 million on December 31, 2001 and 2000, respectively. This represented approximately 48 and 50 days of Cigarette Paper sales for the French businesses in 2001 and 2000, respectively. LTRI's RTL business operates under a number of annual supply agreements. The order backlog for RTL was approximately $59 million and $48 million on December 31, 2001 and 2000, respectively. The Brazilian business does not calculate or maintain records of order backlogs. After exiting the printing and writing uncoated papers business during 2001, approximately one-half of its sales are to Souza Cruz, its largest customer. Souza Cruz provides forecasts of its future demand, typically eight weeks in advance, in order for the Brazilian operations to manage production and ensure a sufficient supply to meet Souza Cruz's anticipated requirements. Sales of the Company's products are not subject to seasonal fluctuations, except in the United States where customer shutdowns of one to two weeks in duration typically occur in July and December, and in Brazil where customer orders are typically lower in December due to a January and February holiday season. SALES AND DISTRIBUTION. Essentially all sales of tobacco-related products by the U.S. and French businesses are sold by the Company's marketing, sales and customer service organizations directly to cigarette manufacturers or their designated converters, and to cigar manufacturers, except in China where sales are generally made to trading companies for resale to cigarette producers. Most of the Company's U.S. and French businesses' non-tobacco related products, which represent approximately five percent of each of their respective net sales, are sold on a direct basis. The Brazilian business' tobacco-related products are sold by the Brazilian marketing and sales organization directly to cigarette manufacturers, and its non-tobacco related products are sold through brokers. 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 $4 to $5 million in 2002 and $1 to $2 million in 2003, none of which is the result of environmental violations. These expenditures are not expected to have a material adverse effect on the Company's financial condition, results of operations or competitive position; however, these estimates could be modified as a result of changes in the Company's plans, changes in legal requirements or other factors. RISKS FOR FOREIGN OPERATIONS. In addition to its U.S. operations, the Company has manufacturing facilities in France, Brazil and Canada. The Company, principally through its French and Brazilian subsidiaries, markets and sells products in over 90 countries, many of which are third world markets. While not an exhaustive list of the various risks that may impact its foreign operations, and while the level of risk varies amongst countries, the Company's operations in foreign countries are subject to possible material international business risks, including unsettled political and economic conditions; expropriation; import and export tariffs, controls and restrictions; monetary exchange controls; inflationary economies; changes in currency value; changes in business and income tax regulations and risks related to restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. INSURANCE. The Company maintains insurance coverage with reputable insurers in such amounts and against such risks as is customarily maintained by companies of similar size and engaged in similar businesses. 9 ITEM 2. PROPERTIES As of December 31, 2001, the Company operated eight mills (which include four fiber pulping operations) in the United States, France and Brazil that produce specialty papers or reconstituted tobacco products. The Company also operates flax fiber processing operations in France and Canada. The Company or one of its subsidiaries owns each of these facilities and the associated operating equipment except for a flax tow storage facility in Killarney, Manitoba, which is leased. The Company and its subsidiaries maintain administrative and sales offices in Alpharetta, Georgia, in Quimperle and Paris, France, in Hong Kong, China, in Santanesia and Rio de Janeiro, Brazil and in Madrid, Spain. The Company's world headquarters are also located in Alpharetta. All of these offices are leased except for the Quimperle and Santanesia offices, which are owned by PdM and SWM-B, respectively. Management believes that each of these facilities is well-maintained, suitable for conducting the Company's operations and business, and adequately insured. Following the shut-down of a paper machine in Brazil in mid-2001, as a result of the Company's Brazilian business exiting the printing and writing uncoated papers market in Brazil, machine schedules during 2001 at all the Company's locations were at or near capacity. Currently no market-related production downtime is expected in 2002. 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, has been fully written off and for which there are no current or anticipated plans to operate or replace this equipment in the future. 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 The following are locations of the Company's principal facilities and operating equipment as of December 31, 2001, which are owned by the Company except as noted otherwise:
PRODUCTION LOCATIONS EQUIPMENT PRODUCTS - -------------------- --------- -------- Lee Mills (four mill sites) 4 Paper Machines Base Tipping and Specialty Lee, Massachusetts Pulping Equipment Papers, Plug Wrap Paper and Straw Wrap Paper Spotswood Mill 6 Paper Machines Cigarette Paper and Straw Wrap Spotswood, New Jersey Pulping Equipment Paper Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and Ancram, New York 1 Reconstituted Tobacco Binder and Porous Plug Wrap Paper Wrapper and Binder Machine Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing Manitoba, Canada Papeteries de Mauduit Mill 11 Paper Machines Cigarette Paper, Plug Wrap Paper Quimperle, France Pulping Equipment and Long Fiber Specialties Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers Malaucene, France 4 Printing Presses 11 Laser Perforating Lines 3 Electrostatic Perforating Lines Papeteries de Saint-Girons Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper, Saint-Girons, France Pulping Equipment Base Tipping and Specialty Papers and Flax Pulp LTR Industries Mill 2 Reconstituted Tobacco Leaf Reconstituted Tobacco Leaf, Flax Spay, France Machines Fiber Processing and Research & 1 Fiber Mill Development Pirahy Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper, Santanesia, Brazil 1 Coating Machine Base Tipping, Specialty and Coated Papers
ADMINISTRATIVE LOCATIONS OFFICE SPACE FUNCTION - ------------------------ ------------ -------- Alpharetta, Georgia Leased Office Space Company World Headquarters, Research & Development, and Administrative and Sales - U.S. Business Madrid, Spain Leased Office Space Administrative Office for International Investments Quimperle, France Owned Office Space Administrative Offices for French Businesses Paris, France Leased Office Space Administrative and Sales Offices for French Businesses Hong Kong, China Leased Office Space Sales Office for French Businesses Santanesia, Brazil Owned Office Space Administrative Offices for Brazilian Business and Research & Development Rio de Janeiro, Brazil Leased Office Space Sales Office for Brazilian Business
11 ITEM 3. LEGAL PROCEEDINGS The following is a brief description of potentially material legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their properties is subject: LITIGATION On December 27, 2000, SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax, consisting of unpaid ICMS taxes from January 1995 through November 2000, together with interest and penalties in the total amount of approximately $13.6 million, based on the foreign currency exchange rate at December 31, 2000 (collectively, the "Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically that are immune from the tax to offset ICMS taxes otherwise owed on the sale of products that are not immune. A portion of the Assessment, estimated at December 31, 2000 at approximately $6.9 million, related to tax periods that predated the Company's acquisition of Pirahy and is covered by an indemnification from the sellers of Pirahy ("Assessment 1"). The second assessment pertains exclusively to periods that SWM-B owned the Pirahy mill ("Assessment 2"). While SWM-B is primarily responsible for the full payment of the Assessment in the event of an ultimate unfavorable outcome, SWM-B is not aware of any difficulties that would be encountered in obtaining reimbursement of that portion of any payment resulting from Assessment 1 from the previous owner under the indemnification. SWM-B contests the Assessment based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers used in the production of books, newspapers and periodicals ("immune papers") and the raw material inputs used to produce immune papers. SWM-B further contends that the statutory provision relied on by the State of Rio de Janeiro to argue that ICMS tax credits generated in the course of the production of immune papers must be reversed rather than applied to other ICMS taxes owed violates the Brazilian Federal Constitution and the legal principle of "non-cumulativity" for ICMS tax set forth in Article 155, Section 2, II, of the Brazilian Federal Constitution of 1988. Additionally, SWM-B contends that the statutory provisions relied on by the government do not address "immunity" from the incidence of the ICMS tax, but are addressed to "exception" from the tax. This distinction is central to SWM-B's further contention that the only exceptions permitted to the constitutionally mandated principle of non-cumulativity are for exemptions from tax and no exceptions from this principle are permitted in cases of immunity from tax. Administrative appeals were filed on the Assessment, and in April 2001 and August 2001 decisions were rendered on these administrative appeals. The State of Rio de Janeiro tax authorities denied the appeal of Assessment 2 in its entirety and reduced the original amount of Assessment 1 by approximately $1.6 million based on SWM-B's argument that Assessment 1 covered periods barred by the applicable statute of limitations. Following these decisions at the administrative level, judicial actions to annul the tax and to enjoin enforcement of the Assessment pending adjudication were filed in Rio de Janeiro on behalf of SWM-B. The courts issued injunctions, which were upheld on appeal, against enforcement of the Assessment without the requirement for any bond or posting of other collateral by SWM-B, pending final determination of SWM-B's action to annul the tax debts. SWM-B continues to vigorously contest the Assessment and believes that the Assessment will ultimately be resolved in its favor. However, the final resolution of this matter will most likely entail judicial proceedings up to and including presentation of the matter to the Supreme Court of Brazil and is not likely to be finally resolved for several years. Based on the foreign currency exchange rate at December 31, 2001, the Assessment, as reduced in August 2001, totaled approximately $10.8 million as of December 31, 2001, of which approximately $4.7 million is covered by the above discussed indemnification. No liability has been recorded in the Company's consolidated financial statements for the Assessment based on the Company's evaluation that SWM-B is more likely than not to prevail in its challenge of the Assessment under the facts and law as presently understood. In December 2000, SWM-B suspended the further accrual and application of ICMS tax credits generated on immune products to reduce its possible exposure to future ICMS tax assessments due to the 12 punitive nature of penalties associated with such assessments and SWM-B's plans to transition from immune products to other non-immune products. A reserve of $1.1 million was recorded for the entire asset balance of unused ICMS tax credits as of December 31, 2000. Subsequently during 2001, SWM-B exited the Brazilian market for printing and writing uncoated papers, which includes the immune papers. Under the belief that the ICMS tax audit of SWM-B discussed above was closed, during February 2001, SWM-B revised its prior-period ICMS treatment related to consignment pulp purchases. As a result, SWM-B decreased the asset and corresponding reserve on its books associated with these ICMS tax credits from $1.1 million to $0.2 million, still fully reserving this remaining asset balance of unused ICMS tax credits. SWM-B took this action to eliminate the risk of a new ICMS tax assessment while it awaited the final outcome of its challenge to the Assessment. In April 2001, SWM-B received a third ICMS tax assessment for penalty only in the amount of approximately $0.2 million related to its revised treatment of the ICMS tax credits relating to consignment pulp. The State of Rio de Janeiro tax authorities informed SWM-B that its February 2001 action revised its position on the credits associated with consignment pulp in response to an open tax audit and was therefore subject to penalties. This assessment was paid in December 2001. The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material adverse effect on the Company's consolidated financial statements. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental matters. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims and its obligation to participate in the remediation or the monitoring of certain hazardous waste disposal sites, will not have a material adverse effect on the Company's financial condition or results of operations. However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material adverse effect on the Company's financial condition or results of operations. At Distribution, the Company assumed responsibility to administer a July 25, 1994 landfill closure permit between Kimberly-Clark and the Massachusetts Department of Environmental Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee, Massachusetts. Pursuant to an amended Comprehensive Site Assessment Landfill Post-Closure Maintenance and Monitoring Permit issued to the Company by MDEP dated May 15, 1996 (the "Permit"), groundwater and landfill gas monitoring tests were conducted from which it was determined that landfill gas levels at and beyond the property boundary exceeded the statutory maximum of 25 percent of the lower explosive limit ("LEL"). Based on these findings, on January 24, 1997, the Company and MDEP entered into an Administrative Consent Order ("ACO") pursuant to which the Company was required to reduce concentrations of landfill gases at the landfill property line to specified levels by September 15, 1998. Compliance with the ACO was predicated on the Company demonstrating that landfill gases were at or below the LEL for one full year at 26 gas monitoring wells. The Company achieved full compliance with the ACO effective October 2, 2001. The ACO is now closed and the Company will henceforth perform its continuing obligations for the post-closure care of the landfill as set forth in the terms of the Permit. The Permit incorporates standard statutory requirements for the ongoing maintenance and care of closed non-hazardous landfills. The Company does not believe that this matter will have a material adverse effect on the Company's business or financial condition. At Distribution, the Company assumed Kimberly-Clark's liabilities as a potentially responsible party ("PRP") under the provisions of the U.S. Comprehensive Environmental Response, Compensation and 13 Liability Act and analogous New Jersey statutes in connection with the Global Landfill Reclaiming Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey. The Company continues to participate in the remediation of the Global Landfill as a member of a group of PRPs that entered into a consent decree with the state of New Jersey in 1993. The Company previously recorded its pro-rata portion of the estimated liability for remediation of this site, the remainder of which is not material. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $1.6 million in 2001, and anticipates that it will incur approximately $4 to $5 million in 2002 and $1 to $2 million in 2003, none of which is the result of environmental violations. The major projects included in these estimates are $2.7 million toward upgrading wastewater treatment facilities and $1.1 million for installation of ink solvent treatment equipment in France. The foregoing capital expenditures are not expected to reduce the Company's ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on the Company's financial condition or results of operations. 14 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 2001. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the executive officers of the Company as of February 28, 2002, together with certain biographical information, are as follows:
NAME POSITION - ---- -------- Wayne H. Deitrich............................ Chief Executive Officer Jean-Pierre Le Hetet......................... Chief Operating Officer and President - French Operations Peter J. Thompson............................ President - U.S. Operations Otto R. Herbst............................... President - Brazilian Operations Paul C. Roberts.............................. Chief Financial Officer and Treasurer John W. Rumely, Jr. ......................... General Counsel and Secretary Wayne L. Grunewald........................... Controller
MR. WAYNE H. DEITRICH, 58, 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 on November 30, 1995, and has served continuously in that capacity since that date. 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, 58, 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 on November 30, 1995, and has served continuously since that date. 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, 39, has served as President - U.S. Operations of the Company since November 1998. From April 1998 through November 1998, Mr. Thompson was Director - Sales and Marketing for the U.S. Operations of the Company. Mr. Thompson joined the Company in January 1997 as a Marketing Manager in the U.S. Operations. Prior to joining the Company, he was employed by Tape, Inc. from May 1995 through January 1997, where he held several senior management positions in marketing, sales and finance. Mr. Thompson was employed by Kimberly-Clark from June 1984 through May 1995 in a variety of financial positions. MR. OTTO R. HERBST, 42, has served as President - Brazilian Operations of the Company since April 1999. Prior to April 1999, he served as General Manager for New Business and Services from 1997 through March 1999 for Interprint, a manufacturer of security documents, telephone cards and business forms. From 1990 through 1997, Mr. Herbst served as Director of Agaprint, a manufacturer of packaging materials, business forms, commercial printing papers, personalized documents and envelopes. MR. PAUL C. ROBERTS, 53, has served as Chief Financial Officer and Treasurer of the Company since August 1995. From June 1995 through August 1995, he served as Chief Financial Officer - Specialty Products Sector of Kimberly-Clark. From January 1995 through May 1995, he was Director - Corporate Strategic Analysis of Kimberly-Clark, and from 1988 through 1994, Mr. Roberts was Director - Operations Analysis and Control, Pulp and Paper Sector of Kimberly-Clark. MR. JOHN W. RUMELY, JR., 48, has served as General Counsel and Secretary of the Company since January 1, 2000. From March 1998 through December 31, 1999, he served as Associate General Counsel of the Company. From May 1989 through February 1998, Mr. Rumely was Assistant General Counsel of Alumax Inc., an international integrated producer of aluminum products that was subsequently acquired by Alcoa Inc. MR. WAYNE L. GRUNEWALD, 50, 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 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 28, 2002, there were 5,404 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. The Company has declared and paid quarterly dividends of fifteen cents per share since the second quarter of 1996. Management currently expects to continue this level of quarterly dividend. The Company has credit agreement covenants that require the Company to maintain certain financial ratios, as disclosed in Note 5 to the Consolidated Financial Statements, none of which under normal business conditions materially limit the Company's ability to pay such dividends, and the Company does not currently anticipate any change in business conditions of a nature that would cause future restrictions on dividend payments as a result of its need to maintain these financial ratios. COMPANY WEB SITE The Company's Web site address is http://www.schweitzer-mauduit.com. The Web site provides background information about the Company, including information on the Company's history, products, locations and employment opportunities. The Web site also allows access to the Company's historical financial information, press releases and quarterly earnings conference calls. The Company's quarterly earnings conference calls are available via a webcast accessible through the Company's Web site. The tentative dates for the Company's quarterly earnings conference calls related to 2002 financial results are April 25, 2002, July 25, 2002, October 31, 2002 and January 30, 2003. These dates are subject to change. Instructions on how to listen to the webcasts and updated information on times and actual dates are available through the Web site. 16 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are qualified in their entirety by reference to, and should be read in conjunction with, the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Annual Report. The financial statement data is presented on a consolidated basis.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net Sales........................................... $499.5 $496.8 $504.4 $546.7 $460.6 Gross Profit........................................ 98.7 91.9 110.4 106.1 121.9 Operating Profit(1)(2).............................. 47.3 49.7 64.6 59.1 81.9 Net Income(1)(2)(3)................................. 24.5 27.8 31.4 31.0 45.3 Net Income Per Share: Basic(1)(2)(3)................................... $ 1.66 $ 1.82 $ 1.99 $ 1.94 $ 2.82 Diluted(1)(2)(3)................................. $ 1.63 $ 1.82 $ 1.99 $ 1.92 $ 2.77 Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .60 $ .60 $ .60 CASH FLOW AND BALANCE SHEET DATA: Capital Spending(4)................................. $ 73.8 $ 29.4 $ 26.3 $ 36.7 $ 35.8 Depreciation and amortization....................... 22.8 22.1 22.2 24.8 14.4 Cash Provided By Operations(5)...................... 106.8 71.7 60.7 67.1 67.3 Total Assets........................................ 497.9 441.7 436.6 474.7 391.0 Long-Term Debt(6)................................... 56.4 97.7 100.9 108.4 80.8 Equity.............................................. 179.5 179.9 184.2 197.0 179.5
- --------------- (1) 2001 operating profit included a $5.1 million pre-tax restructuring charge related to the Company's Brazilian business exiting the Brazilian market for printing and writing uncoated papers and the resulting shutdown of one of its paper machines. This restructuring charge reduced net income by $3.4 million, or $.23 per share. (2) 1998 operating profit included a $4.2 million pre-tax charge, the net income effect of which was $2.2 million, or $.14 per share, related to write-downs of idled equipment and one-time labor payments, and a $1.7 million pre-tax charge related to a restructuring of the Spotswood mill workforce, the net income effect of which was $1.0 million, or $.06 per share. (3) 1998 net income included a deferred income tax benefit as a result of an adjustment of valuation allowances against French net operating loss carryforwards of $5.2 million, or $.32 per share. (4) Capital spending for 2001 included $50.1 million for the banded cigarette paper capital project at the Company's Spotswood mill. (5) Cash provided by operations included advance payments from customers for future product sales amounting to $50.6 million in 2001, $8.0 million in 2000 and $2.0 million in 1998. (6) As of December 31, 2001, $37.6 million of the Company's term loan maturities were classified as current liabilities. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a diversified producer of premium specialty papers and the world's largest supplier of fine papers to the tobacco industry. 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 principal products include cigarette, tipping and plug wrap papers used to wrap various parts of a cigarette, reconstituted tobacco leaf for use as filler in cigarettes, reconstituted tobacco wrappers and binders for cigars and paper products used in cigarette packaging. The Company's non-tobacco industry products comprised 9 to 12 percent of the Company's consolidated net sales in the periods presented. The non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine utilization. The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. These business segments manufacture and sell cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette, reconstituted tobacco products and paper products used in cigarette packaging. While the products are similar in each segment, they vary based on customer requirements and the manufacturing capabilities of each of the operations. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. For purposes of the segment disclosure in the following tables, the term "United States" includes operations in the United States and Canada. The Canadian operations only produce flax fiber used as raw material in the U.S. operations. Elimination of intercompany sales of products between segments are referred to in the following tables as intersegment sales. Expense amounts not associated with segments are referred to as unallocated expenses. Management believes that the following commentary and tables appropriately discuss and analyze the comparative results of operations and the financial condition of the Company for the periods covered. This section should be read in conjunction with the Company's Consolidated Financial Statements included herein. 18 RESULTS OF OPERATIONS 2001 Compared to 2000 By Segment for the Years Ended December 31, 2001 and 2000 (U.S. $ in millions)
% OF CONSOLIDATED % CHANGE ------------------ NET SALES 2001 2000 VS. 2000 2001 2000 --------- ------ ------ -------- ------- ------- United States................................ $172.0 $163.7 +5.1% 34.4% 33.0% France....................................... 280.1 264.9 +5.7 56.1 53.3 Brazil....................................... 53.4 70.0 -23.7 10.7 14.1 Eliminations................................. (6.0) (1.8) (1.2) (0.4) ------ ------ ----- ----- Consolidated....................... $499.5 $496.8 +0.5% 100.0% 100.0% ====== ====== ===== =====
% RETURN % OF CONSOLIDATED ON SALES % CHANGE ------------------ ------------ OPERATING PROFIT 2001 2000 VS. 2000 2001 2000 2001 2000 ---------------- ----- ----- -------- ------- ------- ---- ---- United States................... $ 1.8 $ 2.6 -30.8% 3.8% 5.2% 1.0% 1.6% France.......................... 50.1 47.2 +6.1 105.9 95.0 17.9 17.8 Brazil.......................... 1.8 4.5 -60.0 3.8 9.1 3.4 6.4 Unallocated/Eliminations........ (6.4) (4.6) (13.5) (9.3) ----- ----- ----- ----- ---- Consolidated.......... $47.3 $49.7 -4.8% 100.0% 100.0% 9.5% 10.0% ===== ===== ===== ===== ====
Net Sales Net sales increased by $2.7 million in 2001 compared with the prior year. This increase was a result of the net favorable effects of changes in sales volumes and higher average selling prices, partially offset by unfavorable currency exchange rate changes. Although worldwide sales volumes decreased in total by four percent, changes in the mix of sales volumes by segment contributed favorably to the net sales comparison by $11.3 million. Sales volumes of the French businesses increased by six percent. Sales volumes of the U.S. business unit were essentially unchanged. Sales volumes of the Brazilian business decreased by 29 percent, primarily as a result of decisions made during 2001 to exit the Brazilian printing and writing uncoated papers market and to shut down one of its paper machines. Higher average selling prices had a favorable effect of $3.2 million. The net sales comparison was unfavorably affected by $11.8 million from changes in currency exchange rates, primarily related to a strengthened U.S. dollar versus the French franc and the Brazilian real. Operating Profit Operating profit decreased by $2.4 million in 2001 compared with the prior year, with an improvement in the French business segment more than offset by decreases in the Brazilian and U.S. business segments. Excluding a $5.1 million pre-tax restructuring charge recorded by the Company's Brazilian business (see "Brazilian Restructuring" below), operating profit increased by $2.7 million. Lower per ton wood pulp costs in all three business segments favorably impacted operating profit by $10.5 million. Operating profit was unfavorably impacted in all three business segments by increased energy prices having a total $4.2 million effect. Operating profit for the French businesses increased by $2.9 million as a result of higher sales volumes, higher average selling prices and lower per ton wood pulp costs partially offset by increased costs of energy and other materials, as well as increased nonmanufacturing expenses. Excluding the $5.1 million restructuring charge, operating profit in Brazil increased by $2.4 million primarily as a result of lower per ton wood pulp costs, higher average selling prices and the benefits of increased tobacco-related paper sales volumes. Operating profit in the United States declined by $0.8 million as a result of increased operating expenses at the Spotswood mill, which were unfavorable by $6.3 million for 2001 compared with the prior year, and 19 higher purchased energy and nonmanufacturing expenses. These unfavorable factors were partially offset by the effects of lower per ton wood pulp costs, higher average selling prices and improved mill operations other than at the Spotswood mill. Total nonmanufacturing expenses increased by $4.1 million as a result of higher general, research and selling expenses. Higher general expense was caused primarily by increased compensation and benefit costs. Research expense increased in the United States and Brazil in support of new product development activities. Higher selling expense was incurred in France as a result of increased employee and agent compensation. Brazilian Restructuring The Brazilian printing and writing uncoated papers market experienced weakness in late 2000 and through the first half of 2001, resulting in pressure on the Company's operating margins for these products. Beginning in January 2001, the Company also reduced its sales of certain grades of these papers that had been negatively impacted by ICMS, a form of value-added business tax. In addition, in May 2001, the Brazilian government enacted an electricity rationing program which had an overall objective of a 20 percent reduction in electricity consumption in Brazil and mandated a 25 percent reduction in electricity consumption by the paper industry in the most populated and industrialized regions of Brazil. In response to the Brazilian government's electricity reduction directive, the Company's Brazilian business implemented an electricity reduction program; however, to achieve the required 25 percent reduction, it was necessary to institute production curtailments. Machine downtime was taken to reduce production of the Company's least profitable products. The printing and writing uncoated papers business had been the Company's least profitable product line in Brazil while also being its largest electricity user. The duration of the government's electricity reduction directive was uncertain, although it was expected to initially last at least six months through the traditional "dry period" in Brazil. The Brazilian government's forced electricity reduction program was in response to unusually low water levels in the lakes and reservoirs supplying Brazil's hydroelectric facilities that provide 90 percent of that country's electricity. As a result of these business conditions, the Company decided during the second quarter of 2001 to exit the printing and writing uncoated papers business in Brazil, which permitted the Company's Brazilian operations to comply with the government's electricity rationing program and to better focus on and service its other more profitable product lines. This plan to restructure its Brazilian operations resulted in the Company recording a pre-tax charge in 2001 of $5.1 million, primarily for the non-cash write-down of assets related to the printing and writing uncoated papers business and employee termination and severance costs. 20 2000 Compared to 1999 By Segment for the Years Ended December 31, 2000 and 1999 (U.S. $ in millions)
% OF CONSOLIDATED % CHANGE -------------- NET SALES 2000 1999 VS. 1999 2000 1999 - --------- ------ ------ -------- ----- ----- United States................................... $163.7 $166.3 -1.6% 33.0% 33.0% France.......................................... 264.9 284.6 -6.9 53.3 56.4 Brazil.......................................... 70.0 54.0 +29.6 14.1 10.7 Eliminations.................................... (1.8) (0.5) (0.4) (0.1) ------ ------ ----- ----- Consolidated........................... $496.8 $504.4 -1.5% 100.0% 100.0% ====== ====== ===== =====
% OF % RETURN CONSOLIDATED ON SALES % CHANGE ------------- ----------- OPERATING PROFIT 2000 1999 VS. 1999 2000 1999 2000 1999 - ---------------- ----- ----- -------- ----- ----- ---- ---- United States.................................... $ 2.6 $ 9.3 -72.0% 5.2% 14.4% 1.6% 5.6% France........................................... 47.2 55.2 -14.5 95.0 85.4 17.8 19.4 Brazil........................................... 4.5 5.2 -13.5 9.1 8.1 6.4 9.6 Unallocated/Eliminations......................... (4.6) (5.1) (9.3) (7.9) ----- ----- ----- ----- Consolidated............................ $49.7 $64.6 -23.1% 100.0% 100.0% 10.0% 12.8% ===== ===== ===== =====
Net Sales Net sales decreased by $7.6 million as a result of unfavorable currency exchange rates and lower average selling prices, partially offset by higher sales volumes. The net sales comparison was unfavorably affected by $31.0 million from changes in currency exchange rates, primarily related to a strengthened U.S. dollar versus the French franc. Lower average selling prices and changes in sales mix had an unfavorable effect of $3.9 million, as the impact of increased average selling prices of the Brazilian business was more than offset by the effects of lower average selling prices of the French businesses. Worldwide sales volumes increased by three percent, which favorably affected net sales by $27.3 million. Sales volumes of the Brazilian business increased by 15 percent, primarily as a result of increased sales of nontobacco-related papers and sales outside Brazil. Sales volumes of the French businesses increased by one percent. Sales volumes of the U.S. business unit declined by three percent. Operating Profit Operating profit decreased by $14.9 million, with lower operating profit in all three business segments, primarily as a result of higher wood pulp and energy costs, which in total increased operating expenses by $22.1 million. Changes in the average per ton wood pulp costs compared with the prior year unfavorably impacted operating expenses by $17.5 million, with energy costs increasing by $4.6 million. Partially offsetting these higher operating expenses were the favorable effects of increased sales volumes, improved mill operations and lower nonmanufacturing expenses. In France, operating profit declined by $8.0 million primarily as a result of higher wood pulp and energy costs and lower average selling prices. These negative effects were partially offset by the benefits of the French business unit's increased sales volumes, cost reduction activities and improved mill operations. The U.S. business unit's operating profit declined by $6.7 million primarily due to the higher wood pulp and energy costs and additional expenses associated with implementation of the banded cigarette paper project at the Spotswood mill. The effects of the decline in sales volumes were offset by cost reduction activities and lower nonmanufacturing expenses. In Brazil, operating profit declined by $0.7 million for the year as a result of higher wood pulp, energy and other material costs and increased business taxes. These negative factors were partially offset by the effects of increased sales volumes, higher average selling prices, cost reduction activities and improved mill operations. 21 Nonmanufacturing expenses decreased by $3.6 million, primarily due to a reduction in selling expenses of the French business unit and lower general expenses, in part from personnel reductions implemented during 1999. NON-OPERATING EXPENSES The decline in interest expense in 2001 compared with 2000 was primarily due to a larger amount of interest capitalized to capital projects as well as lower average interest rates. The increase in interest expense in 2000 compared with 1999 was primarily due to higher average interest rates, partially offset by a lower average amount of debt outstanding and the effects of changes in currency exchange rates. The weighted average effective interest rate on the Company's term loans was approximately 5.2 percent in 2001, 5.7 percent in 2000 and 4.5 percent in 1999. Other income, net consisted primarily of interest income, royalty income and foreign currency transaction gains and losses in each of the years presented, as well as a favorable settlement related to a prior-period claim in 2000 and recovery of prior-period business taxes in 1999. INCOME TAXES The effective income tax rates for the years ended December 31, 2001, 2000 and 1999 were 36.4 percent, 31.4 percent and 39.0 percent, respectively. The effective income tax rate in 2001 compared with 2000 was impacted by a decrease in the French corporate income tax rate from 37.7 percent for 2000 to 36.3 percent for 2001, which had been enacted in December 2000. The lower effective income tax rate in 2000 was due to several items, including a $1.0 million favorable adjustment to reduce Spanish deferred income tax valuation allowances, a favorable $0.4 million tax benefit related to settlement of a prior-period claim, a favorable $0.4 million tax benefit related to an equity- related payment from Brazil and $0.8 million of income tax benefits associated with treatment of certain repatriations during the year. Excluding the effects of these four items, the effective income tax rate for 2000 would have been 37.0 percent. In addition to the several items mentioned above, the effective income tax rate for 2000 compared with 1999 was in part a result of a decrease in the French corporate income tax rate from 40.0 percent for 1999 to 37.7 percent for 2000 and a decline in the Brazilian corporate income tax rate from 37.0 percent for most of 1999 to 34.0 percent for most of 2000. LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ (U.S. $ IN MILLIONS) Cash Provided by (Used for): Operations................................................ $106.8 $ 71.7 $ 60.7 Changes in operating working capital...................... (4.9) 2.6 (9.0) Advance payments from customers........................... 50.6 8.0 -- Capital spending.......................................... (73.8) (29.4) (26.3) Purchases of treasury stock............................... -- (13.2) (4.3)
The Company's primary source of liquidity is cash flow from operations, which is principally obtained through operating earnings. The Company's cash flow from operations has been relatively stable historically, reflecting typically consistent demand for its products. Since the Distribution, the Company's cash flow from operations has exceeded the Company's requirements for capital spending and dividends to stockholders by at least $15 million each year. Impacting the cash flow from operations are changes in operating working capital. In 2001, changes in operating working capital contributed unfavorably to cash flow by $4.9 million due primarily to lower accounts payable and accrued expenses. Accounts payable and accrued expenses were lower in 2001 compared with 2000 as a result of decreased liabilities at year-end 2001 associated with capital projects and maintenance costs. In 2000, changes in operating working capital contributed favorably to cash flow by $2.6 million due primarily to higher accounts payable and accrued expenses, partially offset by higher accounts receivable. 22 Accounts payable and accrued expenses were higher in 2000 compared with 1999 as a result of recorded liabilities associated with capital projects and maintenance costs at December 31, 2000. Accounts receivable was higher in 2000 compared with 1999 primarily because of increased French business unit export sales having longer payment terms. In 1999, changes in operating working capital contributed unfavorably to cash flow by $9.0 million due primarily to lower accounts payable. Accounts payable was lower in 1999 compared with 1998 as a result of payments in early 1999 for capital projects included in accounts payable at December 31, 1998. During 2000, the Company and Philip Morris reached agreement to proceed with the modification of paper machines and related manufacturing equipment at the Company's Spotswood mill to produce commercial quantities of a new proprietary banded cigarette paper for Philip Morris. Capital spending to implement the banded cigarette paper project was $50.1 million in 2001 and $12.7 million in 2000. The construction phase of this project has been completed. Pursuant to the terms of the Company's agreement with Philip Morris related to the modification of paper machines and related equipment at the Spotswood mill, the Company was solely responsible for obtaining any financing necessary to support this project. Funding for the Spotswood mill conversion and increased working capital requirements came from internal sources and from advance payments by Philip Morris against future product purchases. Capital spending in 2001 included (i) $50.1 million toward the banded cigarette paper project, (ii) $2.6 million to bring back into service a cigarette paper machine that had previously been shut down at the Spotswood mill and (iii) $1.1 million toward a wastewater treatment facility upgrade at the Spay, France mill. Capital spending in 2000 included (i) $12.7 million toward the banded cigarette paper project, (ii) $3.0 million toward a high-speed slitter at the Spotswood mill, and (iii) $1.3 million toward improvement of a reconstituted tobacco leaf machine in the Spay mill. Capital spending in 1999 included (i) $8.1 million toward the speed-up of two machines in the French mills, (ii) $3.2 million toward the expansion of converted tipping paper capacity at the Malaucene mill, and (iii) $1.1 million toward replacement of a yankee dryer in the Spay mill. In December 1998, the Company announced that the Board of Directors had authorized the repurchase of shares of the Company's common stock during the period January 1, 1999 through December 31, 2000 in an amount not to exceed $20 million. Under this authorization the Company repurchased a total of 1,177,050 shares of its common stock for $17.5 million, of which 882,700 shares were purchased during 2000 for $13.2 million. During 2000, the Company's Board of Directors authorized the further repurchase of shares of the Company's common stock during the period January 1, 2001 through December 31, 2002 in an amount not to exceed $20 million. Through December 31, 2001, no repurchases had been made by the Company under this authorization. The Company's ongoing requirements for cash are expected to consist principally of amounts required for capital expenditures, stockholder dividends, purchases of the Company's common stock and working capital. 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 $1.6 million in 2001, and anticipates that it will incur approximately $4 to $5 million in 2002 and $1 to $2 million in 2003, none of which is the result of environmental violations. The major projects included in these estimates are $2.7 million toward upgrading wastewater treatment facilities and $1.1 million for installation of ink solvent treatment equipment in France. Including expenditures associated with environmental matters, as of December 31, 2001 the Company had unrecorded outstanding commitments for capital expenditures of approximately $6.6 million. The Company's mills in Quimperle, France and in Brazil each have minimum annual commitments for calcium carbonate purchases, a raw material used in the manufacturing of some paper products, which together total approximately $2.5 million per year. The Company's prior and expected future purchases at these mills are at levels that exceed such minimum levels. The current calcium carbonate contracts expire in 2009 for the operations in France and in 2006 for the operations in Brazil. In addition, the Company's total 23 future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 2001 are less than $1.5 million annually over the next five years. The Company has declared and paid quarterly dividends of fifteen cents per share since the second quarter of 1996. Management currently expects to continue this level of quarterly dividend. The Company has credit agreement covenants that require the Company to maintain certain financial ratios, as disclosed in Note 5 to the Consolidated Financial Statements, none of which under normal business conditions materially limit the Company's ability to pay such dividends, and the Company does not currently anticipate any change in business conditions of a nature that would cause future restrictions on dividend payments as a result of its need to maintain these financial ratios. On January 31, 2002, 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 18, 2002 to stockholders of record on February 19, 2002. As of December 31, 2001, the Company had approximately $32 million available under its short-term revolving credit facilities in the United States and France, and on January 31, 2002, the Company renewed these short-term facilities to January 30, 2003. Coincident with renewal of these short-term facilities, the Company entered into new five-year revolving credit facilities which do not require any principal payments until their maturity on January 31, 2007, unless the Company were to violate its covenants under the new credit agreement. The Company does not currently anticipate any change in business conditions of a nature that would cause the Company to violate its covenants under the new credit agreement. Interest rates under these short-term and long-term credit facilities are at market rates. The Company also has other bank credit facilities available in the United States, France and Brazil. The Company's credit facilities are more fully described in Note 5 of the Notes to Consolidated Financial Statements. During the first quarter of 2001, the Company entered into interest rate swap agreements to fix the variable rate component of certain of its variable rate long-term debt. The combination of these interest rate swap agreements began with a notional amount of $45 million, declining to $30 million effective January 31, 2002, and declining again to $15 million effective July 31, 2002 through the remainder of the contract terms ending January 31, 2003. These interest rate swap agreements fix the London interbank offered rate for U.S. dollar deposits at 5.42 percent. This had the effect of fixing the Company's interest rate including margin at 5.72 percent on $45 million of its debt through January 31, 2002, the effective date of new credit facilities, 6.12 percent on $30 million of its debt from February 1, 2002 through July 31, 2002, and 6.12 percent on $15 million of its debt from August 1, 2002 through January 31, 2003. These interest rate swap contracts were designated as cash flow hedges and the Company applied the short-cut method treatment under Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." As such, the Company assumed there was no ineffectiveness of these hedge contracts, and accordingly, no gain or loss was recorded in the income statement relative to the changes in fair value of these interest rate swap contracts, but instead the changes in fair value of the contracts were reflected in other comprehensive income (loss). There were no other interest rate-related derivative contract agreements entered into by the Company during 2001. 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 STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method of accounting. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142, which will be effective for the Company beginning January 1, 2002. The Company expects no material effect on its financial statements as a result of these new accounting standards. 24 Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for the Company's financial statements for the period beginning January 1, 2003, with earlier application encouraged. The Company expects no material effect on its financial statements as a result of this new accounting standard. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Although SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains most of the concepts of that standard, except that it eliminates the requirement to allocate goodwill to long-lived assets for impairment testing purposes and it requires that a long-lived asset to be abandoned or exchanged for a similar asset be considered held and used until it is disposed, i.e. the depreciable life should be revised until the asset is actually abandoned or exchanged. Also, the new standard includes the basic provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity rather than a segment of a business, where that component can be clearly distinguished from the rest of the entity. This statement is effective for the Company's financial statements for the period beginning January 1, 2002, with earlier application encouraged. The provisions of this new statement generally are to be applied prospectively. The Company expects no material effect on its financial statements as a result of this new accounting standard. OUTLOOK The markets for the Company's products are expected to be relatively stable during 2002. Cigarette production in the United States continues to decline as a result of declines in domestic cigarette consumption and exports of cigarettes manufactured in the United States, however the declines in 2000 and 2001 were at a lower rate than in 1998 and 1999. Sales volumes of tobacco-related papers of the Company's U.S. business segment appear to have stabilized. The negative impact of lower U.S. cigarette production is being partially offset by the Company's increased market share within the North American market. Outside the United States, trends of improvement are expected to continue in tobacco-related paper sales in Eastern Europe and Russia. Sales of tobacco-related papers within the Brazilian market appear to have stabilized, and the Company's Brazilian business continues to benefit from increased sales to Latin American countries outside of Brazil. The Company's Brazilian business is expected to experience a decline in its net sales in the first half of 2002 compared with the comparable period of 2001 as a result of a decision in the second quarter of 2001 to exit the Brazilian printing and writing uncoated papers market (see "Brazilian Restructuring" above). The Company's Brazilian business segment's net sales of printing and writing uncoated papers totaled approximately $8 million during 2001, with most of those sales occurring in the first half of 2001. Without the sale of the marginally profitable printing and writing uncoated papers, an improved mix of products sold and better operating results are expected in 2002 as a result of the restructuring of the Brazilian operations. Selling prices for the Company's tobacco-related products are expected to be fairly stable during 2002, although the current level of wood pulp costs and the strong U.S. dollar versus the euro and other foreign currencies continue to exert some pressure on the Company's selling prices, limiting the Company's ability to implement price increases since several competitors have cost structures that are based upon those weaker currencies. The per ton cost of wood pulp appears to be near the bottom of the pulp price cycle. Cost of products sold for the first half of 2002 is expected to benefit from lower per ton wood pulp costs compared with comparable periods of the prior year. During the second half of 2002, per ton wood pulp costs are expected to be approximately the same as or slightly above the level of the comparable period of the prior year. 25 The Company expects its energy costs to be lower in 2002 than in 2001, although this benefit is expected to be largely offset by higher insurance expenses, primarily property insurance, and increased compensation and benefit costs, mainly due to medical and pension expenses. During 2000, the Company and Philip Morris reached agreement to proceed with the modification of paper machines and related manufacturing equipment at the Company's Spotswood mill to produce commercial quantities of a new proprietary banded cigarette paper for Philip Morris. The construction phase of the banded cigarette paper project was completed during the fourth quarter of 2001. The banded cigarette paper project had a negative impact on 2001 financial results because of additional expenses associated with its implementation. Additional expenses will be incurred during 2002 related to additional process checkouts, machine trials and product qualification, however Spotswood mill operating costs are expected to improve in 2002 compared with 2001. The banded cigarette paper project is expected to benefit future periods although it is not expected to result in a significant increase in the production and sale of banded cigarette paper during 2002. Cigarette manufacturers have not finalized their plans for the use of this new product. The Company expects its consolidated effective income tax rate to be approximately 35 percent for 2002 primarily as a result of a decline in the French corporate income tax rate from 36.3 percent for 2001 to 35.3 percent for 2002. The Company currently expects its capital spending to be in the range of $25 to $30 million for 2002, focused primarily on product quality improvements and cost reduction opportunities. During 2000, the Company's Board of Directors authorized the repurchase of shares of the Company's common stock during the period January 1, 2001 through December 31, 2002 in an amount not to exceed $20 million. The Company did not repurchase any of its common stock during 2001 under this program. Common stock repurchases in 2002 will be dependent upon various factors, including cash availability, the stock price and strategic opportunities. CRITICAL ACCOUNTING POLICIES The Company's accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported and disclosure of contingencies. Following are four critical accounting matters which are both very important to the portrayal of the Company's financial condition and results and required management's most difficult, subjective or complex judgements. The accounting for these matters was based on current facts and circumstances which, in management's judgement, hold potential for change which could affect management's future estimates such that future financial results could differ materially from financial results based on management's current estimates. Income Tax Valuation Allowances The Company records and maintains income tax valuation allowances as necessary to reduce deferred tax assets to an amount which is estimated more likely than not to be realizable in accordance with SFAS No. 109, "Accounting for Income Taxes." The Company has available net operating loss carryforwards, excess foreign tax credit carryforwards, alternative minimum tax credit carryforwards and other various tax credits in the jurisdictions in which it operates. Certain of these potential future benefits are not expected to be utilized in a favorable manner prior to their expiration. As a result, the Company has valuation allowances against certain of the above-mentioned assets which totaled $15.7 million as of December 31, 2001, reducing the related net deferred tax asset to an amount which is estimated to be realizable. Although realization of reserved amounts is possible, management currently believes it is more likely than not that the reserved amounts will not be realized in a favorable way prior to their expiration or review by taxing authorities. However, the Company continues to evaluate possible methods to favorably utilize those assets that are reserved, and the facts and circumstances on which the Company's estimates and judgements are based could change. Therefore, it is possible the Company could benefit in the future by some or all of the $15.7 million of deferred tax assets reserved as of December 31, 2001. 26 For additional information regarding income taxes and valuation allowances, see Note 6 of the Notes to Consolidated Financial Statements. ICMS Litigation The Company evaluates contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." Accordingly, when a material loss contingency exists, the Company accrues an estimated loss when the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability is probable and the amount of loss can be reasonably estimated. If no accrual is made for a material loss contingency because both of the above conditions are not met, or if an exposure to loss exists materially in excess of an accrual that is made, disclosure regarding the contingency is made when there is at least a reasonable possibility that a loss or additional loss may have been incurred. As described in detail under "Litigation" in Part I, Item 3, "Legal Proceedings", SWM-B received assessments from the taxing authorities of the State of Rio de Janeiro, Brazil related to ICMS taxes. As of December 31, 2001, the Assessment totaled approximately $10.8 million, of which approximately $4.7 million is covered by an indemnification agreement with the former owner of the predecessor of SWM-B, for a net exposure to the Company of approximately $6.1 million. The courts granted SWM-B relief from having to bond the potential tax liability while it challenges the Assessment. This matter is not currently expected to be resolved for several years. SWM-B continues to vigorously contest the Assessment and believes the matter will ultimately be resolved in its favor. The Company's current evaluation of the matter is that SWM-B is more likely than not to prevail in its challenge of the Assessment under the facts and law as presently understood. However, there is a reasonable possibility that SWM-B will ultimately be required to pay all or a portion of this contingent liability, which would adversely impact the Company's future financial statements. Property, Plant and Equipment Valuation Paper manufacturing, which is the Company's primary manufacturing process, is a mature and capital intensive process. As a result, the Company makes substantial investments in property, plant and equipment which are recorded at cost. The cost of depreciable property, plant and equipment is depreciated on the straight-line method for accounting purposes over the depreciable lives of the assets. Depreciable lives are based on the Company's estimates of the useful lives of the assets, that is the period over which the Company expects to benefit from the use of the asset. Paper machines and related equipment are not readily obsoleted and are generally depreciated over estimated useful lives of 20 years. Banded cigarette paper production assets are generally depreciated over estimated useful lives of 10 years. The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on its expectation of future profitability and undiscounted cash flow of the related operations. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, plant and equipment. Facts and circumstances upon which management's estimates and plans are based could change, thus the possibility exists of a material adjustment to the Company's financial statements in the future. Pension Accounting Estimates The Company recognizes the estimated compensation cost of employees' pension benefits over their approximate period of service to the Company in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The Company's earnings are impacted by amounts of expense recorded related to pension benefits, which primarily consist of U.S. and French pension benefits. Each year's recorded expense is an estimate based on actuarial calculations of the Company's accumulated and projected benefit obligations for its various plans. These actuarial calculations utilize several key actuarial assumptions which require management judgement, the most significant of which are the discount rate, used to determine the present value of estimated future retirement benefit payments, and the long-term rate of return on plan assets, which is the expected average rate of return on plan assets which are expected to pay future benefits. The Company believes that its selections for these key actuarial assumptions are reasonable estimates for its plans and experience. The discount rates used for the Company's determination of projected benefit 27 obligations and accumulated benefit obligations for its U.S. employee pension plans were 7.25 percent and 7.5 percent at December 31, 2001 and 2000, respectively. The discount rate fluctuates from year to year based on current market interest rates for high-quality fixed-income investments. The Company's assumed annual long-term rate of return on plan assets for its U.S. employee pension plan was 10 percent in both 2000 and 2001 and was lowered to 9.5 percent for 2002. Although the investment performance experience of the Company's plans during the last two years has been negative, directionally the same as a similarly weighted composite of the major U.S. equity and fixed income market indices, the plan achieved strong positive investment returns the three years prior to that such that the average rate of return on the Company's plan assets over the last five years has approximated the estimated long-term rate. Despite how reasonable the Company believes its estimates are for these key actuarial assumptions, future actual results will likely differ from the Company's estimates, and these differences could materially affect the Company's future financial statements either unfavorably or favorably. Additionally, it is possible that assets of the Company's plans could decline as a result of negative investment returns, which combined with increasing amounts of accumulated benefit obligations, could result in the Company being required to make significant cash contributions to its plans in future periods. For additional information regarding pension plan assets, benefit obligations and accounting assumptions, see Note 7 of the Notes to Consolidated Financial Statements. Summary While a material impact to its future financial results or financial condition related to one or more of the above matters is possible, the Company does not currently believe it is likely. The Company continually updates and assesses the facts and circumstances regarding these critical accounting matters and other significant accounting matters affecting estimates in its financial statements. In addition to these accounting matters, other factors may affect the Company's results, as described below. FACTORS THAT MAY AFFECT FUTURE RESULTS Many factors outside the control of the Company could impact the Company's results. While not an exhaustive list, the following important factors could cause the Company's actual results for 2002 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. International Business Risks In addition to its U.S. operations, the Company has manufacturing facilities in France, Brazil and Canada. The Company, principally through its French and Brazilian subsidiaries, markets and sells products in over 90 countries, many of which are third-world markets which are subject to international business risks, including unsettled political and economic conditions; expropriation; import and export tariffs, controls and restrictions; monetary exchange controls; inflationary economies; changes in currency value; changes in business and income tax regulations and risks related to restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. Euro Currency Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies ("legal currencies") and one common currency -- the euro. The euro now trades on currency exchanges and may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins were issued, and legal currencies are being 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 included 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 required payment in a legal currency and tax implications of the conversion. 28 The Company's French subsidiaries utilize multi-currency software that was capable of euro-denominated sales and purchase transactions on January 1, 1999. Consideration was also given to other potential issues in connection with the conversion, including those mentioned above. The Company's French subsidiaries purchased software for translating current and historical data into euro currency data, which was fully implemented by mid-January 2002. The Company did not experience any significant negative consequences of these issues, the euro has become the functional currency of the Company's European subsidiaries and the euro conversion had no material adverse impact on the Company's financial condition or results of operations. Tax and Repatriation Matters The Company and its subsidiaries are subject to various business and income tax laws in each of the countries in which it does business through wholly-owned subsidiaries and through affiliates. Although the Company believes it complies with the many business and income tax requirements of each of its operations, the Company is exposed to the possibility of changes in enacted laws and interpretations of laws which could have a material adverse impact on its financial condition or results of operations. Also, the Company evaluates its overall financing plans in the various jurisdictions in which it operates and manages international movements of cash from and amongst its foreign subsidiaries in a tax-efficient manner; however, an unanticipated international movement of funds due to unexpected changes in the Company's business or in needs of the business could result in a material adverse impact on the Company's financial condition or results of operations. Market Risk As a multinational entity, the Company is exposed to changes in foreign currency exchange rates, interest rates and commodity prices. The Company utilizes a variety of practices to manage these market risks, including operating and financing activities and, where considered appropriate, utilizing derivative instruments. The Company uses derivative instruments only for risk management purposes and not for trading or speculation. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. Foreign Currency Risk -- The Company has subsidiaries located in France, Brazil, Canada and Spain. The Company, together with its subsidiaries, conducts business in over 90 countries worldwide transacting some of its business in foreign currencies. Changes in foreign currency exchange rates may have an impact on the Company's operating profit. Since the Company and its subsidiaries transact business in many other countries, some of those sale and purchase transactions are denominated in a currency other than the local currency of the Company's operations. As a result, changes in exchange rates between the currency in which the transaction is denominated versus the local currency of the Company's operations into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction, and thus have an effect on operating profit of the Company. Additionally, changes in foreign currency exchange rates may have an impact on the amount reported in other income (expense), net. Once the above-indicated receivables and payables from the sale and purchase transactions have been recorded, to the extent currency exchange rates change prior to settlement of the balance, a gain or loss on the non-local currency denominated asset or liability balance may be experienced, in which case such gain or loss is included in other income (expense), net. The Company utilizes forward and swap contracts and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes because the gains or losses incurred on the derivative instrument will offset, in whole or in part, the loss or gain on the underlying foreign currency exposure. These instruments are entered into with well-known money center banks, insurance companies or government agencies ("counterparties"). Usually these contracts extend for no more than 12 months. The Company believes that 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. Management of foreign currency transactional exposures was not changed during 2001, and the Company does 29 not expect any significant change in such exposures or in the strategies it uses to manage such exposures in the near future. As of December 31, 2001, a ten percent unfavorable change in the exchange rate of the functional currencies of the Company and its subsidiaries against the prevailing market rates of non-local currencies involving the Company's transactional exposures would have resulted in a net pre-tax loss of approximately $2 million. These hypothetical gains or losses on foreign currency contracts and transactional exposures are defined as the difference between the contract rates and the hypothetical exchange rates. While the Company believes the above loss resulting from the hypothetical unfavorable changes in foreign currency exchange rates would be material to the Company's results of operations, the Company reduces this risk by selectively hedging its exposure when it is practical and economical to do so. Interest Rate Risk -- The Company holds a combination of variable- and fixed-rate debt consisting of short and long term instruments. The Company selectively hedges its exposure to interest rate increases on its variable rate long term debt when it is practical and economical to do so. The Company utilizes various forms of interest rate hedge agreements, including interest rate swap agreements and forward rate agreements. Most often the Company utilizes variable-to-fixed interest rate swap agreements, typically with contractual terms no longer than 24 months. The Company's strategy to manage exposure to interest rate changes did not change during 2001, and management does not expect any significant changes in its exposure to interest rate changes or in how such exposure is managed in the near future. Various outstanding interest-bearing instruments are sensitive to changes in interest rates. Interest rate changes would result in gains or losses in fair market value of fixed-rate debt due to differences between current market interest rates and the rates governing these instruments. With respect to the Company's fixed-rate debt outstanding at December 31, 2001, a ten percent change in interest rates would not result in a material change in the fair market value of such debt. With respect to the Company's variable-rate debt, a ten percent change in interest rates would impact the Company's future annual pre-tax earnings by approximately $0.4 million. Commodity Price Risk -- The Company is subject to commodity price risk, the most significant of which relates to the price of wood pulp, which is the Company's largest single component of cost. The per ton cost of wood pulp is cyclical in nature and more volatile than general inflation. The Company consumed approximately 105,000, 116,000 and 107,000 metric tons of wood pulp in 2001, 2000 and 1999, respectively. During the period from January 1999 through December 2001, the U.S. list price of northern bleached softwood kraft pulp, a representative pulp grade used by the Company, ranged from a low of $470 per metric ton in September 2001 to a high of $710 per metric ton in the latter half of 2000 and in January 2001. Selling prices of the Company's paper products are influenced, in part, by the market price for wood pulp, which is determined by worldwide industry supply and demand. Generally, over time, the Company has been able to increase its selling prices in response to increased per ton wood pulp costs and has generally reduced its selling prices when wood pulp costs have significantly declined. Increases in prices of wood pulp could adversely impact the Company's earnings if selling prices are not increased or if such increases do not fully compensate for or trail the increases in wood pulp prices. Derivative instruments have not been utilized by the Company to manage this risk. With respect to the Company's commodity price risk, a hypothetical ten percent change in per ton wood pulp prices would impact the Company's future annual pre-tax earnings by approximately $5 million, assuming no compensating change in the Company's selling prices. The Company believes that, while its exposure to commodity price risk is material to its results of operations, such risk is understood by its customers and over time changes in the price of wood pulp are typically reflected in selling prices. General Inflation Due to competitive pressures, the Company is not always able to pass along its cost increases through increased selling prices. The Company's main costs impacted by general inflation are wages and salaries, energy, chemicals, employee benefit costs, primarily medical and pension expenses, and costs of insurance, particularly property insurance. Seasonality Sales of the Company's products are not subject to seasonal fluctuations, except in the United States and Brazil. In the United States, customer shutdowns typically occur in July and December and typically have resulted in reduced net sales and operating profit during those two months. Additionally, the U.S. mills shut down equipment to perform additional maintenance during these months, resulting in higher product costs and 30 reduced operating profit. In Brazil, customer orders are typically lower in December due to a holiday season through much of January and February. Environmental Matters The Company is subject to federal, state, local and foreign environmental protection laws and regulations with respect to the environmental impact of air, water and other emissions from its mills as well as its disposal of solid waste generated by its operations. The Company believes it is operating in compliance with, or is taking action aimed at ensuring compliance with, such laws and regulations. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with these laws and regulations, these costs are not expected to materially affect the Company's business or results of operations. The Company, or its predecessor, is currently named as a potentially responsible party at one hazardous waste disposal site, the liability for which was previously recorded and the remainder of which is not material. However, there can be no assurance that a material adverse effect on the Company's financial statements will not occur at some future time as a result of environmental matters. Additional information concerning environmental matters is disclosed in Note 12 of the Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL PROCEEDINGS" herein. Legal Proceedings Information concerning legal proceedings is disclosed in Note 11 of the Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL PROCEEDINGS" herein. In addition, the Company and its subsidiaries are involved in legal actions and claims arising in the ordinary course of business. Litigation is subject to many uncertainties and, while it is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries, management believes that such actions and claims will be resolved without a material adverse effect on the Company's financial statements. Reliance on Significant Customers Most of the Company's customers are manufacturers of tobacco products located in more than 90 countries around the world. Two such customers have accounted for a significant portion of the Company's net sales in each of the last several years, and the loss of one or both such customers, or a significant reduction in one or both of these customers' purchases, could have a material adverse effect on the Company's results of operations. See Note 14 of the Notes to Consolidated Financial Statements. Tobacco Products and Governmental Actions In recent years, governmental entities around the world, particularly in the United States, have taken or have proposed actions that may have the effect of reducing consumption of tobacco products. Reports and speculation with respect to the alleged harmful physical effects of cigarette smoking and use of tobacco products have been publicized for many years and, together with actions to restrict or prohibit advertising and promotion of cigarettes or other tobacco products and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other such products. In the fourth quarter of 1998, the major U.S. cigarette manufacturers reached agreement with all 50 U.S. states and several commonwealths and territories to settle health care cost recovery and other claims. In anticipation of these settlements and as a direct result of these settlements, most of the U.S. cigarette manufacturers increased prices of cigarettes significantly. Domestic cigarette consumption has declined, in part due to these price increases which, in turn, decreases demand for the Company's products. During 1999, the U.S. Department of Justice filed a multi- billion dollar civil suit against the tobacco industry. In addition, litigation is pending against the major manufacturers of consumer tobacco products seeking damages for health problems allegedly resulting from the use of tobacco in various forms and for alleged violations of antitrust laws. It is not possible to predict the outcome of such litigation or what effect adverse developments in pending or future litigation may have on the tobacco industry, its financial liquidity or relationships with its suppliers. 31 Also in recent years, certain governmental entities, particularly in the United States, have considered or proposed actions that would require cigarettes to meet specifications aimed at reducing their likelihood of igniting fires when the cigarettes are not actively being smoked. The state of New York has enacted a law directing that such a set of requirements be implemented and scheduled to take effect beginning in mid-2003. Cigarette manufacturers are in varying stages of development of cigarettes with such characteristics. Philip Morris and the Company previously announced the joint development of a banded cigarette paper that may make a cigarette less likely to ignite certain fabrics and have entered into a licensing and royalty agreement covering future commercialization of this new paper. While the joint development effort with Philip Morris was undertaken in advance of legislative initiatives in certain states to make cigarettes less likely to ignite certain fabrics when left unattended, the banded cigarette paper product that resulted from the joint development program, marketed under the name "Paper Select" by Philip Morris, is directed toward the same objective as the legislation. This joint development effort is also discussed in Part I, Item 1 herein under the caption "Philip Morris Supply Agreement." The Company also has patents related to alternative means for addressing ignition control and continues to work on other possible innovations with other customers and on its own as the cigarette industry faces these evolving requirements. It is not possible to predict what additional legislation or regulations relating to tobacco products will be enacted, or to what extent, if any, such legislation or regulations might affect the consumer tobacco products industry in general. During 2001, 91 percent of the Company's net sales were from products used by the tobacco industry in the making and packaging of cigarettes or other tobacco products. Management is unable to predict the effects that the above-described legal and governmental actions might have on the Company's results of operations and financial condition. FORWARD-LOOKING STATEMENTS Certain matters discussed in this report, particularly in the foregoing discussion regarding the "Outlook" of the Company, "Critical Accounting Policies" and "Factors That May Affect Future Results", constitute forward-looking statements, generally identified by, but not limited to, phrases such as "the Company expects" or "the Company anticipates", as well as by use of words of similar effect, such as "appears", "could", "should", "may" and "typically". This report contains many such forward-looking statements, including statements regarding management's expectations of future selling prices for the Company's products, the Company's anticipated market shares, future market prices for wood pulp used by the Company, expected sales volumes trends, new product introductions, anticipated energy, compensation, benefit and insurance costs, anticipated financial and operational results, anticipated capital spending, anticipated tax and other governmental actions, contingencies, anticipated common stock share repurchases and other expected transactions of the Company. Forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company. There can be no assurances that such events will occur or that the results of the Company will be as estimated. Many factors outside the control of the Company also could impact the realization of such estimates. The above-mentioned important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual results for 2002 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. 32 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, 2001, 2000 and 1999...................... 34 Consolidated Balance Sheets as of December 31, 2001 and 2000.................................................. 35 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999.................................................. 36 Consolidated Statements of Cash Flow for the years ended December 31, 2001, 2000 and 1999................ 37 Notes to Consolidated Financial Statements............. 38 Report of Independent Auditors.............................. 66 Management's Responsibility for Financial Reporting......... 67
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. 33 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 2001 2000 1999 --------- --------- --------- (U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net Sales.................................... $499.5 $496.8 $504.4 Cost of products sold...................... 400.8 404.9 394.0 ------ ------ ------ Gross Profit................................. 98.7 91.9 110.4 Selling expense............................ 19.2 18.5 19.5 Research expense........................... 7.6 6.3 6.7 General expense............................ 19.5 17.4 19.6 Restructuring charge....................... 5.1 -- -- ------ ------ ------ Operating Profit............................. 47.3 49.7 64.6 Interest expense........................... (4.9) (6.1) (5.8) Other income, net.......................... 2.9 3.2 1.9 ------ ------ ------ Income Before Income Taxes and Minority Interest................................... 45.3 46.8 60.7 Provision for income taxes................. 16.5 14.7 23.7 ------ ------ ------ Income Before Minority Interest.............. 28.8 32.1 37.0 Minority interest in earnings of subsidiaries............................ 4.3 4.3 5.6 ------ ------ ------ Net Income................................... $ 24.5 $ 27.8 $ 31.4 ====== ====== ====== Net Income Per Common Share: Basic...................................... $ 1.66 $ 1.82 $ 1.99 ====== ====== ====== Diluted.................................... $ 1.63 $ 1.82 $ 1.99 ====== ====== ======
See Notes to Consolidated Financial Statements 34 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, --------------------- 2001 2000 ------- ------- (U.S. $ IN MILLIONS) ASSETS Current Assets Cash and cash equivalents................................. $ 50.9 $ 23.6 Accounts receivable....................................... 74.5 77.7 Inventories............................................... 62.7 64.5 Current income tax refunds receivable..................... 0.3 2.9 Deferred income tax benefits.............................. 3.0 4.8 Prepaid expenses.......................................... 2.3 1.7 ------ ------ Total Current Assets................................ 193.7 175.2 ------ ------ Property Land and improvements..................................... 6.9 7.0 Buildings and improvements................................ 62.3 61.5 Machinery and equipment................................... 428.8 368.7 Construction in progress.................................. 11.5 24.8 ------ ------ Gross Property.......................................... 509.5 462.0 Less accumulated depreciation............................. 221.9 212.5 ------ ------ Net Property........................................ 287.6 249.5 ------ ------ Noncurrent Deferred Income Tax Benefits..................... 1.3 1.0 ------ ------ Deferred Charges and Other Assets........................... 15.3 16.0 ------ ------ Total Assets.................................. $497.9 $441.7 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt......................... $ 41.4 $ 3.6 Other short-term debt..................................... 5.1 2.0 Accounts payable.......................................... 44.1 52.7 Accrued expenses.......................................... 48.8 52.1 Current deferred revenue.................................. 6.1 -- ------ ------ Total Current Liabilities........................... 145.5 110.4 ------ ------ Long-Term Debt.............................................. 56.4 97.7 ------ ------ Noncurrent Deferred Income Tax Liabilities.................. 15.4 14.9 ------ ------ Noncurrent Deferred Revenue................................. 53.1 10.0 ------ ------ Other Noncurrent Liabilities................................ 41.5 22.4 ------ ------ Minority Interest........................................... 6.5 6.4 ------ ------ Contingencies (See Notes 6, 10, 11 and 12) Stockholders' Equity Preferred Stock - $.10 par value - 10,000,000 shares authorized, none issued................................. -- -- Common Stock - $.10 par value - 100,000,000 shares authorized, 16,078,733 shares issued at both December 31, 2001 and 2000, respectively (14,835,984 and 14,790,262 shares outstanding at December 31, 2001 and 2000, respectively)..................................... 1.6 1.6 Additional paid-in capital................................ 60.6 60.5 Common stock in treasury, at cost - 1,242,749 and 1,288,471 shares at December 31, 2001 and 2000, respectively............................................ (19.8) (20.5) Retained earnings......................................... 190.9 175.3 Unearned compensation on restricted stock................. (0.5) (0.3) Accumulated other comprehensive income (loss), net of tax - Minimum pension liability adjustments................... (3.8) -- Unrealized fair value of derivative instruments......... (0.7) -- Unrealized foreign currency translation adjustments..... (48.8) (36.7) ------ ------ Total Stockholders' Equity.......................... 179.5 179.9 ------ ------ Total Liabilities and Stockholders' Equity.... $497.9 $441.7 ====== ======
See Notes to Consolidated Financial Statements 35 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 --------------------------------------------------------------------- COMMON STOCK ISSUED ADDITIONAL TREASURY STOCK ------------------- PAID-IN --------------------- RETAINED SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS ---------- ------ ----------- ----------- ------- --------- (U.S. $ IN MILLIONS, EXCEPT NUMBER OF SHARES) BALANCE, DECEMBER 31, 1998.................... 16,078,733 $1.6 $60.7 154,668 $ (3.8) $134.8 Net income.............. 31.4 Adjustments to unrealized foreign currency translation........... Comprehensive income.... Dividends declared ($0.60 per share)..... (9.5) Purchases of treasury stock................. 294,350 (4.3) Stock issued to directors as compensation.......... (7,173) 0.1 ---------- ---- ----- ---------- ------ ------ BALANCE, DECEMBER 31, 1999.................... 16,078,733 1.6 60.7 441,845 (8.0) 156.7 Net income.............. 27.8 Adjustments to unrealized foreign currency translation........... Comprehensive income.... Dividends declared ($0.60 per share)..... (9.2) Purchases of treasury stock................. 882,700 (13.2) Restricted stock issuances............. (0.2) (30,000) 0.6 Amortization of unearned compensation.......... Stock issued to directors as compensation.......... (5,474) 0.1 Issuance of shares for options exercised..... (600) ---------- ---- ----- ---------- ------ ------ BALANCE, DECEMBER 31, 2000.................... 16,078,733 1.6 60.5 1,288,471 (20.5) 175.3 Net income.............. 24.5 Adjustments to minimum pension liability..... Changes in fair value of derivative instruments........... Adjustments to unrealized foreign currency translation........... Comprehensive income.... Dividends declared ($0.60 per share)..... (8.9) Restricted stock issuances............. 0.1 (20,000) 0.3 Amortization of unearned compensation.......... Stock issued to directors as compensation.......... (2,922) 0.1 Issuance of shares for options exercised..... (22,800) 0.3 ---------- ---- ----- ---------- ------ ------ BALANCE, DECEMBER 31, 2001.................... 16,078,733 $1.6 $60.6 1,242,749 $(19.8) $190.9 ========== ==== ===== ========== ====== ====== FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ------------------------------------- ACCUMULATED OTHER UNEARNED COMPREHENSIVE COMPENSATION INCOME (LOSS) TOTAL ------------ ------------- ------ BALANCE, DECEMBER 31, 1998.................... $ 3.7 $197.0 Net income.............. 31.4 Adjustments to unrealized foreign currency translation........... (30.5) (30.5) ------ Comprehensive income.... 0.9 ------ Dividends declared ($0.60 per share)..... (9.5) Purchases of treasury stock................. (4.3) Stock issued to directors as compensation.......... 0.1 ------ ------ BALANCE, DECEMBER 31, 1999.................... (26.8) 184.2 Net income.............. 27.8 Adjustments to unrealized foreign currency translation........... (9.9) (9.9) ------ Comprehensive income.... 17.9 ------ Dividends declared ($0.60 per share)..... (9.2) Purchases of treasury stock................. (13.2) Restricted stock issuances............. $(0.4) -- Amortization of unearned compensation.......... 0.1 0.1 Stock issued to directors as compensation.......... 0.1 Issuance of shares for options exercised..... -- ----- ------ ------ BALANCE, DECEMBER 31, 2000.................... (0.3) (36.7) 179.9 Net income.............. 24.5 Adjustments to minimum pension liability..... (3.8) (3.8) Changes in fair value of derivative instruments........... (0.7) (0.7) Adjustments to unrealized foreign currency translation........... (12.1) (12.1) ------ Comprehensive income.... 7.9 ------ Dividends declared ($0.60 per share)..... (8.9) Restricted stock issuances............. (0.4) -- Amortization of unearned compensation.......... 0.2 0.2 Stock issued to directors as compensation.......... 0.1 Issuance of shares for options exercised..... 0.3 ----- ------ ------ BALANCE, DECEMBER 31, 2001.................... $(0.5) $(53.3) $179.5 ===== ====== ======
See Notes to Consolidated Financial Statements 36 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ (U.S. $ IN MILLIONS) Operations Net income................................................ $ 24.5 $ 27.8 $ 31.4 Non-cash items included in net income: Depreciation and amortization.......................... 22.8 22.1 22.2 Amortization of deferred revenue....................... (1.4) -- -- Deferred income tax provision.......................... 4.6 6.1 10.4 Minority interest in earnings of subsidiaries.......... 4.3 4.3 5.6 Non-cash utilization of restructuring reserve.......... 4.1 -- -- Other.................................................. 2.2 0.8 0.1 Advance payments from customers........................... 50.6 8.0 -- Changes in operating working capital: Accounts receivable.................................... 3.2 (5.6) (2.6) Inventories............................................ 1.8 (1.6) 6.5 Accounts payable....................................... (8.6) 6.4 (11.8) Accrued expenses....................................... (3.3) 3.0 (1.6) Prepaid expenses....................................... (0.6) 1.1 (0.1) Accrued income taxes................................... 2.6 (0.7) 0.6 ------ ------ ------ Net changes in operating working capital............. (4.9) 2.6 (9.0) ------ ------ ------ Cash Provided by Operations....................... 106.8 71.7 60.7 ------ ------ ------ Investing Capital spending.......................................... (73.8) (29.4) (26.3) Capitalized software costs................................ (1.0) (1.4) (3.1) Other..................................................... 4.6 0.3 (2.5) ------ ------ ------ Cash Used for Investing........................... (70.2) (30.5) (31.9) ------ ------ ------ Financing Cash dividends paid to SWM stockholders................... (8.9) (9.2) (9.5) Cash dividends paid to minority owners.................... (3.4) (4.6) (5.2) Changes in short-term debt................................ 3.1 (6.8) (2.5) Proceeds from issuances of long-term debt................. 4.0 5.1 6.5 Payments on long-term debt................................ (4.4) (4.0) (5.4) Purchases of treasury stock............................... -- (13.2) (4.3) Proceeds from exercise of stock options................... 0.3 -- -- ------ ------ ------ Cash Used for Financing........................... (9.3) (32.7) (20.4) ------ ------ ------ Increase in Cash and Cash Equivalents....................... 27.3 8.5 8.4 Cash and Cash Equivalents at beginning of year.............. 23.6 15.1 6.7 ------ ------ ------ Cash and Cash Equivalents at end of year.................... $ 50.9 $ 23.6 $ 15.1 ====== ====== ======
See Notes to Consolidated Financial Statements 37 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 1. BACKGROUND Schweitzer-Mauduit International, Inc. is headquartered in the United States of America ("United States" or "U.S."), and together with its subsidiaries ("SWM" or the "Company") is a diversified producer of premium specialty papers and the world's largest supplier of fine papers to the tobacco industry. The Company's principal products include cigarette, tipping and plug wrap papers used to wrap various parts of a cigarette, reconstituted tobacco leaf for use as filler in cigarettes, reconstituted tobacco wrappers and binders for cigars and paper products used in cigarette packaging. The Company was formed as a result of a tax-free spin-off from Kimberly-Clark Corporation ("Kimberly-Clark") at the close of business on November 30, 1995 by distribution of all the outstanding common stock of SWM (the "Distribution") to Kimberly-Clark stockholders. Effective at the close of business on November 30, 1995, the Company became an independent, publicly owned company as a result of the Distribution. 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. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities reported, disclosure of contingencies 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. The Company's wholly-owned direct subsidiaries are Schweitzer-Mauduit Canada, Inc. ("SM-Canada") and Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a holding company organized under the Spanish holding company regime and the primary foreign investment holding company for SWM. The Company indirectly through SM-Spain has subsidiaries in France and Brazil. SM-Spain owns directly 100 percent of Schweitzer-Mauduit France S.A.R.L., a French corporation ("SMF"), and 72 percent of the issued and outstanding shares of LTR Industries S.A., a French corporation ("LTRI"). SMF, directly or indirectly, owns 100 percent of three principal French operating subsidiaries, Papeteries de Mauduit S.A.S. ("PdM"), Papeteries de Malaucene S.A.S. ("PdMal") and Papeteries de Saint-Girons S.A.S. ("PdStG"). SM-Spain also owns directly 99.99 percent of the issued and outstanding shares of Schweitzer-Mauduit do Brasil S.A., a Brazilian corporation ("SWM-B"). All material intercompany transactions and balances are eliminated. The Company does not have any unconsolidated subsidiaries, joint ventures or special purpose entities. Revenue Recognition Sales are recognized when ownership of the product and all risk of loss are transferred to the customer. Deferred revenue represents advance payments from customers which are earned based upon a mutually agreed-upon amount per unit of future product sales. Foreign Currency Translation The income statements of foreign entities are translated into U.S. dollars at average exchange rates prevailing during the periods. The balance sheets of these entities are translated at period-end exchange rates, and the differences from historical exchange rates are reflected in a separate component of accumulated other comprehensive income (loss) as unrealized foreign currency translation adjustments. Foreign currency gains 38 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 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 outstanding used in the calculation of basic net income per common share for 2001, 2000 and 1999 were 14,777,200, 15,224,100 and 15,805,700, respectively. Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding. The average number of common and potential common shares outstanding used in the calculation of diluted net income per common share for 2001, 2000 and 1999 were 15,038,300, 15,272,400 and 15,807,200, respectively. Potential common shares are those related to stock options and restricted stock outstanding and directors' accumulated deferred stock compensation during the respective years. See Note 8 for a reconciliation of the average number of common shares outstanding used in the calculation of basic net income per share to the average number of common and potential common shares outstanding used in the calculation of diluted net income per common share. Cash and Cash Equivalents Cash and cash equivalents include cash, time deposits and readily marketable securities with original maturities of three months or less. The recorded amount reported in the balance sheet approximates fair value. Inventories Most U.S. inventories are valued at cost on the Last-In, First-Out ("LIFO") method. The balance of the U.S. inventories and inventories of entities outside the United States are valued at the lower of cost, using the First-In, First-Out ("FIFO") and weighted average methods, or market. Property and Depreciation Property, plant and equipment are stated at cost. Depreciable property is depreciated on the straight-line method for accounting purposes. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the balance sheet, and any gain or loss on the transaction is included in income. The depreciable lives for the principal asset categories are as follows:
ASSET CATEGORY DEPRECIABLE LIFE - -------------- ---------------- Machinery and Equipment.................. 5 to 20 years Buildings................................ 20 to 40 years Building Improvements.................... Lesser of 20 years or remaining life of the relevant building or lease
Capitalized Software Costs The Company accounts for costs incurred in connection with software developed for internal use in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" issued in March 1998 by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The Company capitalizes certain purchases of software and software design and installation costs in connection with major projects for software development for internal use. These costs are included in Deferred Charges and Other Assets on the consolidated balance sheet and are amortized on the straight-line method for accounting purposes over the estimated useful life not to 39 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS exceed seven years. The balances of unamortized capitalized software costs on the Company's consolidated balance sheet were $10.5 and $12.6 as of December 31, 2001 and 2000, respectively. 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, including fines and penalties incurred in connection with environmental violations. Environmental spending relating to an existing condition caused by past operations is expensed. Liabilities are accrued when environmental assessments or remedial efforts are probable, and the costs can be reasonably estimated. Generally, timing of these accruals coincides with completion of a feasibility study or commitment to a formal plan of action. Impairment of Assets The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on its expectation of future profitability and undiscounted cash flow of the related operations. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property and purchased intangibles. Income Taxes Income tax expense and deferred income tax assets and liabilities are determined under the asset and liability method. Deferred income taxes have been provided on the differences between the financial reporting and tax basis of assets and liabilities by applying enacted tax rates in effect for the years in which the differences are expected to reverse. In France, SMF and its subsidiaries form a consolidated income tax group, while LTRI separately files its own income tax returns. Stock Compensation Compensation cost for stock options is measured based on the intrinsic value method under Accounting Principles Bulletin ("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. Derivative Financial Instruments and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The statement requires that all derivative financial instruments, whether designated in hedging relationships or not, be recognized as either assets or liabilities on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in current period earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives not designated as hedging instruments or that do not qualify for hedge treatment, as well 40 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS as the ineffective portion of a particular derivative instrument designated and qualifying as a hedge, must be recognized currently in the income statement. The Company selectively hedges its interest rate and foreign currency exposures when it is practicable and cost-effective to do so. The Company uses derivative instruments only for risk management purposes and not for trading or speculation. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The Company also enters into contracts with certain customers and vendors in which prices for the Company's normal sales and purchases may be fixed for periods of time, or may have automatic price adjustment features related to changes in costs of raw materials or other components. Based on the terms of these contracts, which provide for sale or purchase of items, other than a financial instrument or derivative instrument, that will result in physical delivery of such items in quantities expected to be sold or used by the Company over a reasonable period in the normal course of business, such contracts are deemed to meet the normal purchases and normal sales exceptions of SFAS No. 133 and, therefore, are neither considered to be nor accounted for as derivative financial instruments. The Company's only outstanding derivative financial instruments designated as hedges as of January 1, 2001, were foreign currency forward rate contracts, with fair values approximately equal to their carrying value. As a result, the Company recorded no cumulative effect of adopting SFAS 133. During the first quarter of 2001, the Company entered into interest rate swap agreements to fix the variable rate component of certain of its variable rate long-term debt (see Note 5). There were no other new derivative contract agreements entered into by the Company during 2001 other than foreign currency forward rate contracts which are summarized in Note 9. New Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method of accounting. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142, which will be effective for the Company beginning January 1, 2002. The Company expects no material effect on its financial statements as a result of these new accounting standards. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for the Company's financial statements for the period beginning January 1, 2003, with earlier application encouraged. The Company expects no material effect on its financial statements as a result of this new accounting standard. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Although SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains most of the concepts of that standard, except that it eliminates the requirement to allocate goodwill to long-lived assets for impairment testing purposes and it requires that a long-lived asset to be abandoned or exchanged for a similar asset be considered held and used until it is disposed, i.e. the depreciable life should be revised until the asset is actually abandoned or exchanged. Also, the new standard includes the basic provisions of Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for presentation of discontinued operations in the income statement but broadens that 41 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS presentation to include a component of an entity rather than a segment of a business, where that component can be clearly distinguished from the rest of the entity. This statement is effective for the Company's financial statements for the period beginning January 1, 2002, with earlier application encouraged. The provisions of this new statement generally are to be applied prospectively. The Company expects no material effect on its financial statements as a result of this new accounting standard. NOTE 3. RESTRUCTURING CHARGE In 2001, the Company recorded a pre-tax charge of $5.1 related to changes in business conditions of the Company's Brazilian business and the resulting decision to exit the printing and writing uncoated papers market in Brazil and shut down one of its paper machines and associated equipment. Non-cash write-downs of equipment represented $4.1 of the pre-tax charge. The balance of the charge was primarily for employee termination and severance costs and write-downs of related spare parts and machine clothing. Substantially all of the costs were incurred by December 31, 2001, leaving less than $0.1 of reserve as of that date. NOTE 4. SUPPLEMENTAL DISCLOSURES Supplemental Balance Sheet Data
AS OF DECEMBER 31, ------------------- 2001 2000 ------- ------- Summary of Accounts Receivable: Trade..................................................... $61.5 $64.2 Other..................................................... 14.5 15.3 Less allowances for doubtful accounts and sales discounts.............................................. (1.5) (1.8) ----- ----- Total............................................. $74.5 $77.7 ===== =====
Analysis of Allowances for Doubtful Accounts and Sales Discounts:
BALANCE AT WRITE-OFFS BALANCE BEGINNING CHARGED TO AND CURRENCY AT END OF OF PERIOD EXPENSE DISCOUNTS TRANSLATION PERIOD ---------- ---------- ---------- ----------- --------- AS OF DECEMBER 31, 2001 Allowance for doubtful accounts.............. $1.8 $0.2 $(0.4) $(0.1) $1.5 Allowance for sales discounts................ -- 0.1 (0.1) -- -- ---- ---- ----- ----- ---- Total.............................. $1.8 $0.3 $(0.5) $(0.1) $1.5 ==== ==== ===== ===== ==== AS OF DECEMBER 31, 2000 Allowance for doubtful accounts.............. $1.9 $0.3 $(0.3) $(0.1) $1.8 Allowance for sales discounts................ -- 0.1 (0.1) -- -- ---- ---- ----- ----- ---- Total.............................. $1.9 $0.4 $(0.4) $(0.1) $1.8 ==== ==== ===== ===== ==== AS OF DECEMBER 31, 1999 Allowance for doubtful accounts.............. $1.9 $0.6 $(0.1) $(0.5) $1.9 Allowance for sales discounts................ -- 0.1 (0.1) -- -- ---- ---- ----- ----- ---- Total.............................. $1.9 $0.7 $(0.2) $(0.5) $1.9 ==== ==== ===== ===== ====
42 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AS OF DECEMBER 31, ------------------- 2001 2000 ------- ------- Summary of Inventories by Major Class: At the lower of cost on the FIFO and weighted average methods or market: Raw materials.......................................... $26.9 $28.7 Work in process........................................ 7.2 6.1 Finished goods......................................... 22.6 23.7 Supplies and other..................................... 11.7 12.2 ----- ----- 68.4 70.7 Excess of FIFO cost over LIFO cost..................... (5.7) (6.2) ----- ----- Total............................................. $62.7 $64.5 ===== =====
Total inventories included $25.6 and $23.7 of inventories subject to the LIFO method of valuation at December 31, 2001 and 2000, respectively. If LIFO inventories had been valued at FIFO cost, net income would have been decreased by $0.3 in 2001, would have been increased by $0.9 in 2000 and would have been decreased by $0.5 in 1999.
AS OF DECEMBER 31, ------------------- 2001 2000 ------- ------- Summary of Accrued Expenses: Accrued salaries, wages and employee benefits............. $24.2 $24.4 Other accrued expenses.................................... 24.6 27.7 ----- ----- Total............................................. $48.8 $52.1 ===== =====
Supplemental Cash Flow Information
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ------ ------ ------- Interest paid............................................... $5.3 $6.7 $ 6.4 Interest capitalized........................................ 1.0 0.2 0.2 Income taxes paid(1)........................................ 9.2 8.8 12.3 Decrease in cash and cash equivalents due to exchange rate changes................................................... 0.2 0.1 0.9
- --------------- (1) The SMF consolidated tax group paid only nominal amounts of minimum required income taxes in all periods presented due to net operating loss carryforwards retained in the Distribution. NOTE 5. DEBT As of December 31, 2001, the Company had an unsecured credit agreement (the "Credit Agreement") with a group of banks which provided term and revolving loans totaling 57.2 million euros (or approximately $51 at December 31, 2001 and $54 at December 31, 2000) to SMF and PdM Industries S.N.C., a subsidiary owned 99 percent by PdM and one percent by SMF, (the "French Credit Facility") and term and revolving loans totaling $60 to the Company (the "U.S. Credit Facility" and, together with the French Credit Facility, the "Credit Facilities"). The French Credit Facility consisted of a term loan to SMF in the amount of 38.1 million euros (or approximately $34 at December 31, 2001 and $36 at December 31, 2000) (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 19.1 million euros (or approximately $17 at December 31, 2001 and $18 at December 31, 2000) (the "French Revolving Credit Facility"). Borrowings under the French Credit Facility 43 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS were guaranteed by the Company. The U.S. Credit Facility consisted of a term loan to the Company in the amount of $45 (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 (the "U.S. Revolving Credit Facility" and, together with the French Revolving Credit Facility, the "Revolving Credit Facilities"). Loans under the Term Loan Facilities were payable in three equal semi-annual installments on January 31, 2002, July 31, 2002 and January 31, 2003, however the Company has refinanced the Credit Agreement effective January 31, 2002. Effective January 31, 2002, the Company entered into new unsecured credit facilities with a group of banks ("New Credit Agreement") refinancing the amounts outstanding under the Term Loan Facilities and extinguishing its obligations under the Credit Agreement. The terms of the New Credit Agreement are similar to the prior Credit Agreement, except that it (i) provides for five-year revolving loans in place of the Term Loan Facilities, which gives the Company the flexibility to utilize cash balances to pay down the five-year revolving loans and subsequently draw on those facilities again when needed, (ii) provides somewhat higher available amounts for the euro facilities, (iii) extends the maturities of the five-year revolvers to January 31, 2007 and (iv) renews the Company's short-term revolving loans to January 30, 2003. As a result of the New Credit Agreement, SMF has five-year and 364-day revolving loan facilities available totaling up to 70 million euros (or approximately $62 using the December 31, 2001 currency exchange rate) (the "Euro Credit Facility") and the Company has five-year and 364-day revolving loan facilities available totaling up to $60 (the "New U.S. Credit Facility" and, together with the Euro Credit Facility, the "New Credit Facilities"). The Euro Credit Facility consists of a five-year revolving credit facility available to SMF in the amount of up to 50 million euros (or approximately $44 using the December 31, 2001 currency exchange rate) (the "Five-Year Euro Revolver") and a renewable 364-day revolving credit facility available to SMF in an amount of up to 20 million euros (or approximately $18 using the December 31, 2001 currency exchange rate) (the "364-Day Euro Revolver"). Borrowings by SMF under the Euro Credit Facility are guaranteed by the Company. The Company also has the ability to borrow under the Euro Credit Facility although it does not currently anticipate doing so. The New U.S. Credit Facility consists of a five-year revolving credit facility to the Company in the amount of up to $45 (the "Five-Year U.S. Revolver", and, together with the Five-Year Euro Revolver, the "Five-Year Revolvers") and a renewable 364-day revolving credit facility available to the Company in an amount of up to $15 (the "364-Day U.S. Revolver" and, together with the 364-Day Euro Revolver, the "364-Day Revolvers"). As of December 31, 2001, the Company included the first $15 scheduled installment of its U.S. Term Loan Facility in Current Portion of Long-Term Debt on its consolidated balance sheet, with the remainder classified as Long-Term Debt, since the remainder was subsequently refinanced under the New Credit Agreement. As of December 31, 2001, the Company classified the first two scheduled installments of the French Term Loan Facility totaling 25.4 million euros (approximately $22.6 using the December 31, 2001 currency exchange rate) in Current Portion of Long-Term Debt on its consolidated balance sheet, in accordance with the terms of the existing French Term Loan Facility, with the remaining 12.7 million euros (approximately $11.3 using the December 31, 2001 currency exchange rate) installment classified as Long-Term Debt, since the remainder was subsequently refinanced under the New Credit Agreement. On January 31, 2002, the Company retired the full amount outstanding under its U.S. Term Loan Facility and borrowed $30 under the Five-Year U.S. Revolver. Also on January 31, 2002, SMF drew 15 million euros under the Five-Year Euro Revolver and repaid the entire 38.1 million euros of its obligations under the French Term Loan Facility. Under the Five-Year Revolvers, the Company and SMF are not required to repay any portion of the balances outstanding prior to January 31, 2007, however, the Company and SMF have the flexibility to make earlier repayments of all or a portion of the outstanding balances. While 44 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS such plans may change, the Company and SMF do not currently plan to repay the outstanding balances under the Five-Year Revolvers prior to the January 31, 2007 maturity date. Under the New Credit Agreement, the interest rate under the Five-Year U.S. Revolver is the sum of (a) either 0.70 percent per annum or 0.80 percent per annum (the "Applicable Margin"), determined by reference to the Company's Net Debt to Equity Ratio (as defined in the New Credit Agreement) plus (b) the London interbank offered rate for U.S. dollar deposits ("LIBOR"). Under the New Credit Agreement, the interest rate under the Five-Year Euro Revolver is the sum of the Applicable Margin plus the euro zone interbank offered rate for euro deposits ("EURIBOR"). The interest rates under the U.S. and Euro 364-Day Revolvers are determined using the same formula for the respective Five-Year Revolvers except that the Applicable Margin is either 0.65 percent per annum or 0.75 percent per annum, determined by reference to the Company's Net Debt to Equity Ratio (as defined in the New Credit Agreement). The New 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 Net Debt to Equity Ratio and a maximum Net Debt to Adjusted EBITDA Ratio, all as defined in the New Credit Agreement). At December 31, 2001, the Company's Tangible Net Worth was approximately $30 above the minimum permitted amount while Net Debt was approximately $93 less than the maximum permitted amount under the most restrictive covenant. The Company does not currently anticipate any change in business conditions of a nature that would cause the Company to violate its covenants under the New Credit Agreement. The Company selectively enters into interest rate hedge agreements with respect to its variable rate long-term borrowings under its credit facilities to manage its exposure to interest rate increases when it is practicable and cost-effective to do so. During the first quarter of 2001, the Company entered into interest rate swap agreements to fix the variable rate component of certain of its variable rate long-term debt. The combination of these interest rate swap agreements began with a notional amount of $45, declining to $30 effective January 31, 2002, and declining again to $15 effective July 31, 2002 through the remainder of the contract terms ending January 31, 2003. These interest rate swap agreements fix the London interbank offered rate for U.S. dollar deposits at 5.42 percent. This had the effect of fixing the Company's interest rate including margin at 5.72 percent on $45 of its debt through January 31, 2002, the effective date of the New Credit Facilities, 6.12 percent on $30 of its debt from February 1, 2002 through July 31, 2002, and 6.12 percent on $15 of its debt from August 1, 2002 through January 31, 2003. These interest rate swap contracts were designated as cash flow hedges and the Company applied the short-cut method treatment under SFAS No. 133. As such, the Company assumed there was no ineffectiveness of these hedge contracts, and accordingly, no gain or loss was recorded in the income statement relative to the changes in fair value of these interest rate swap contracts, but instead the changes in fair value of the contracts were reflected in other comprehensive income (loss). There were no other interest rate-related derivative contract agreements entered into by the Company during 2001. The weighted average effective interest rates on the Term Loan Facilities for the years ended December 31, 2001, 2000 and 1999 were 5.2 percent, 5.7 percent and 4.5 percent, respectively. At both December 31, 2001 and 2000, long-term debt other than the Term Loan Facilities primarily consisted of obligations of the French operations related to government-mandated profit sharing. Each year, representatives of the workers at each of the French businesses can make an election for the profit sharing amounts from the most recent year ended as to whether to invest the funds in a financial institution or to invest the funds with their respective employer. To the extent that funds are invested with the Company, these amounts bear interest at the five-year treasury note rate in France (5.85 percent and 6.0 percent at December 31, 2001 and 2000, respectively) and are generally payable in the fifth year subsequent to the year the profit sharing is accrued. 45 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Following are the balances of long-term debt obligations as of December 31:
2001 2000 ------ ------ U.S. Term Loan.............................................. $ 45.0 $ 45.0 French Term Loan............................................ 33.9 35.9 French Employee Profit Sharing.............................. 15.9 16.7 Other....................................................... 3.0 3.7 ------ ------ 97.8 101.3 Less current portion........................................ (41.4) (3.6) ------ ------ $ 56.4 $ 97.7 ====== ======
Following are the scheduled maturities for these long-term debt obligations as of December 31, 2001, except that the scheduled $15 maturity of the U.S. Term Loan Facility has been reflected as maturing in 2007 as a result of the Company's refinancing of that balance with the Five Year U.S. Revolver under the New Credit Agreement effective January 31, 2002: 2002........................................................ $41.4 2003........................................................ 3.4 2004........................................................ 3.9 2005........................................................ 4.0 2006........................................................ 3.2 Thereafter.................................................. 41.9 ----- $97.8 =====
Under the New Credit Agreement, the Company pays commitment fees on the unused portion of its Five-Year Revolvers at an annual rate of .35 percent and may cancel all or a portion of the unused facilities without penalty at any time prior to their expiration. At December 31, 2001, the U.S. and French operations of the Company together had approximately $32 of 364-day Revolving Credit Facilities available, all of which was unused. These facilities permit borrowing at competitive interest rates and are available for general corporate purposes. The facilities available at December 31, 2001 were scheduled to expire January 25, 2002 and following their expiration were renewed to January 30, 2003 (see 364-Day Revolvers above). The Company pays commitment fees on the unused portion of these 364-Day Revolvers at an annual rate of .25 percent and may cancel all or a portion of the unused facilities without penalty at any time prior to their expiration. The Company also had other bank credit facilities available totaling approximately $26, of which $5.1 was outstanding at December 31, 2001. No commitment fees are paid on the unused portion of these facilities. At December 31, 2001 and 2000, 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. 46 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 6. INCOME TAXES An analysis of the provision (benefit) for income taxes for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 ----- ----- ----- Current income taxes: U.S. Federal.............................................. $ 1.5 $(0.2) $ 0.4 U.S. State................................................ 0.2 -- 0.1 Foreign................................................... 10.2 8.8 12.8 ----- ----- ----- 11.9 8.6 13.3 ----- ----- ----- Deferred income taxes: U.S. Federal.............................................. (2.7) (1.3) 0.6 U.S. State................................................ (0.3) (0.2) 0.1 Foreign................................................... 7.6 7.6 9.7 ----- ----- ----- 4.6 6.1 10.4 ----- ----- ----- Total............................................. $16.5 $14.7 $23.7 ===== ===== =====
Income before income taxes included income of $49.6 in 2001, $49.2 in 2000 and $56.9 in 1999 from operations outside the United States. A reconciliation of income taxes computed at the U.S. federal statutory income tax rate to the provision for income taxes is as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Tax at U.S. statutory rate...................... $15.9 35.0% $16.4 35.0% $21.2 35.0% State income taxes, net of federal tax benefit....................................... (0.1) (0.2) (0.1) (0.2) 0.1 0.1 Statutory rates outside the United States in excess of U.S. statutory rate, net............ 0.6 1.3 1.1 2.4 2.7 4.4 French income tax rate change - deferred benefit....................................... -- -- (0.1) (0.2) (0.2) (0.2) Net benefit of Brazilian equity - related payment....................................... (0.2) (0.4) (0.4) (0.9) -- -- Adjustment of valuation allowances.............. -- -- (1.0) (2.1) -- -- Claim settlement not taxable.................... -- -- (0.4) (0.9) -- -- Benefit of currency losses in connection with certain repatriations......................... -- -- (0.8) (1.7) -- -- Other, net...................................... 0.3 0.7 -- -- (0.1) (0.2) ----- ---- ----- ---- ----- ---- Provision for income taxes...................... $16.5 36.4% $14.7 31.4% $23.7 39.0% ===== ==== ===== ==== ===== ====
The provision for income taxes in 2001 compared with 2000 was impacted by a decrease in the French statutory corporate income tax rate from 37.7 percent for 2000 to 36.3 percent for 2001, which had been enacted in December 2000. The provision for income taxes in 2000 was impacted by several items, including a $1.0 favorable adjustment to reduce Spanish deferred income tax valuation allowances, a favorable $0.4 tax benefit related to settlement of a prior-period claim, a favorable $0.4 tax benefit related to an equity-related payment from Brazil and $0.8 of income tax benefits associated with treatment of certain repatriations during the year. Excluding the effects of these four items, the effective income tax rate for 2000 would have been 37.0 percent. 47 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS In addition to the several items mentioned above, the provision for income taxes in 2000 compared with 1999 was impacted by a decrease in the French corporate income tax rate from 40.0 percent for 1999 to 37.7 percent for 2000 and a decline in the Brazilian corporate income tax rate from 37.0 percent for most of 1999 to 34.0 percent for most of 2000. The effect of the changes in the French corporate income tax rate enacted in 2000 had a nominal favorable effect on the deferred income tax provision in 2000 related to the net balances of deferred income tax assets and liabilities. The provision for income taxes in 1999 was impacted by an increase in the effective statutory income tax rate enacted in France in December 1999 for years beginning in 2000 from the scheduled rate of 36.7 percent to 37.7 percent. The favorable effect of $0.2 on the deferred provision for income taxes was due to the increased value of deferred income tax assets, primarily attributable to the tax benefits from net operating loss carryforwards ("NOLs") of the SMF tax group estimated to be realizable in future years, net of the increased value of deferred income tax liabilities. The Company considers the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested or plans to repatriate such earnings only when tax-effective to do so. Accordingly, no provision for U.S. federal and state income taxes has been made thereon. Upon distribution of those earnings in the form of dividends, loans to the U.S. parent, or otherwise, the Company could be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to foreign tax authorities. Determination of the amount of unrecognized deferred U.S. tax liability is not practicable because of the complexities associated with its hypothetical calculation. Deferred income tax assets (liabilities) as of December 31, 2001 and 2000 were comprised of the following:
2001 2000 ------ ------ Current deferred income tax assets (liabilities) attributable to: Inventories............................................... $ (0.6) $ (0.9) Postretirement and other employee benefits................ 1.5 2.8 Other accrued liabilities................................. 2.2 2.1 Other..................................................... (0.1) 0.8 ------ ------ Net current deferred income tax asset............. $ 3.0 $ 4.8 ====== ====== Noncurrent deferred income tax assets (liabilities) attributable to: Operating and capital loss carryforwards.................. $ 2.4 $ 1.9 Accumulated depreciation and amortization................. (0.5) -- Valuation allowances...................................... (0.6) (0.9) ------ ------ Net noncurrent deferred income tax asset.......... $ 1.3 $ 1.0 ====== ====== Noncurrent deferred income tax assets (liabilities) attributable to: Accumulated depreciation and amortization................. $(45.8) $(47.9) Operating loss, capital loss and tax credit carryforwards.......................................... 33.6 37.0 Postretirement and other employee benefits................ 11.4 8.1 Valuation allowances...................................... (15.1) (10.9) Other..................................................... 0.5 (1.2) ------ ------ Net noncurrent deferred income tax liability...... $(15.4) $(14.9) ====== ======
In the 2001 presentation, the net noncurrent deferred income tax asset relates to the Spanish and Brazilian tax jurisdictions and the net noncurrent deferred income tax liability relates to the U.S., Canadian and French tax jurisdictions. In the 2000 presentation, the net noncurrent deferred income tax asset relates to 48 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS the Spanish tax jurisdiction and the net noncurrent deferred income tax liability relates to the U.S., Canadian, French and Brazilian tax jurisdictions. Total deferred income tax assets were $39.1 and $44.0 at December 31, 2001 and 2000, respectively. Total deferred income tax liabilities were $50.2 and $53.1 at December 31, 2001 and 2000, respectively. Under French tax law, NOLs incurred through December 31, 1994 by SMF subsidiaries unrelated to the businesses distributed to the Company, 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 the predecessor of SWM-B and were generated during 1998 by SWM-B, and during 1998 through 2000 by SM-Spain. The following summarizes the changes in the Company's NOLs and the related noncurrent deferred income tax asset and valuation allowance for the years ended December 31, 2001, 2000 and 1999:
TOTAL VALUATION NET NOLS ASSET ALLOWANCE ASSET ------ ----- --------- ----- Amount at December 31, 1998........................... $165.8 $60.9 $(12.8) $48.1 French income tax rate increase..................... -- 1.1 (0.3) 0.8 1999 utilization, net of generated.................. (21.5) (8.3) (0.6) (8.9) Currency translation effect......................... (24.2) (8.8) 1.7 (7.1) ------ ----- ------ ----- Amount at December 31, 1999........................... 120.1 44.9 (12.0) 32.9 French income tax rate decreases.................... -- (2.0) 0.6 (1.4) Spanish valuation allowance adjustment.............. -- -- 1.0 1.0 2000 utilization, net of generated.................. (5.8) (2.2) (0.5) (2.7) Currency translation effect......................... (8.2) (3.0) 0.7 (2.3) ------ ----- ------ ----- Amount at December 31, 2000........................... 106.1 37.7 (10.2) 27.5 2001 utilization.................................... (22.3) (7.9) -- (7.9) Currency translation effect......................... (6.0) (2.3) 0.9 (1.4) ------ ----- ------ ----- Amount at December 31, 2001........................... $ 77.8 $27.5 $ (9.3) $18.2 ====== ===== ====== =====
Under current tax laws governing the tax jurisdictions in which the Company has NOLs, remaining NOLs in France and Brazil carry forward indefinitely, NOLs in Spain expire the later of ten years subsequent to the year generated or ten years subsequent to the first year of taxable income in Spain (which was 2000). Of the $77.8 of NOLs still available at December 31, 2001, $4.2 will expire in 2010 if not utilized against taxable income in Spain. The remaining $73.6 of NOLs have no expiration date. Valuation allowances totaled $9.3 as of December 31, 2001, reducing the related net deferred tax asset to an amount which is estimated to be realizable through utilization of the NOLs. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. However, that amount could change if, among other considerations, estimates of future taxable income or income tax regulations or interpretations change during the carryforward periods. In addition to the NOLs above, the Company has generated foreign tax credits in excess of the amount of foreign tax credits utilized in its U.S. federal income tax returns, as well as federal research credits, certain state credits, primarily for investments in fixed assets in those states, and federal alternative minimum tax ("AMT") credits. The amount of cumulative excess foreign tax credits through the Company's U.S. federal income tax return for the year ended December 31, 2000, the most recent year filed, and including estimated excess credits expected to be generated in 2001, totaled $5.4. These credits carry forward five years from the date generated, however, because the Company does not currently foresee being able to realize the benefit of these credits prior to their expiration, the assets are fully reserved with a valuation allowance of $5.4. The federal research credits and various state tax credits are estimated to total $1.9 as of December 31, 2001, of 49 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS which the Company has estimated that approximately $0.9 of these credits will be realized prior to their expiration and thus has a valuation allowance of $1.0 at December 31, 2001. The Company's federal AMT credits, related to its filed 2000 and prior year tax returns, and including estimated federal AMT expected to be paid related to its 2001 tax return, totaled $1.2 at December 31, 2001. These federal AMT credits carry forward indefinitely. Along with numerous other companies and banks in France, PdM was 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 challenged the use by PdM of those benefits. In 1999, the French taxing authority reduced its claim against PdM to exclude an "abuse of law" penalty and to include instead a "bad faith" penalty. In November 2000, the Administrative Court of Rennes rendered a decision granting PdM relief of the "bad faith" penalty but maintaining the principal and interest portions of the claim. The total claim by the French taxing authority, excluding the "bad faith" penalty and including interest was $0.6 as of December 31, 2000, which was fully reserved by PdM. PdM appealed this most recent decision with respect to its maintaining the principal and interest portions of the claim, however in 2001, PdM was required to pay the $0.6 balance of the assessment. Since the claim against PdM by the French taxing authority related to a period prior to PdM joining the SMF consolidated tax group, the unfavorable outcome could not be offset with the NOLs of the consolidated tax group. PdM had filed claims against each selling bank on the basis of their misrepresentation of certain facts. The Company's claim against one of the banks was rejected by a trial court in 1996 and the Company appealed this decision. In 1997, the case against the other bank was stayed until the claim filed by the French taxing authority against PdM was resolved. PdM will continue to appeal the decisions of the courts, however, there is no remaining risk of loss. NOTE 7. POSTRETIREMENT AND OTHER BENEFITS North American Pension Benefits The Company and its subsidiary in Canada have defined benefit retirement plans which cover 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. Retirees as of the Distribution remained participants of their respective Kimberly-Clark plans. Employees as of the date of the Distribution retained credit for prior service while employees of Kimberly-Clark. Effective July 1, 2000, the Company amended its defined benefit retirement plan for U.S. employees to include a cash balance benefit formula that covers all salaried employees hired on or after July 1, 2000 and all salaried employees as of July 1, 2000, except those salaried employees who were "grandfathered" and chose to retain retirement benefits under the terms of the plan prior to this amendment. Salaried employees who, as of July 1, 2000, had either attained the sum of their age plus years of vesting service equal to 65 or more, or attained the sum of their age plus years of vesting service equal to 60 or more and had at least 15 years of vesting service were grandfathered under the plan and could elect either the new cash balance benefit formula or to retain retirement benefits under the terms of the plan prior to this amendment. For employees under the cash balance formula, the Company will annually credit to the employee's account balance a retirement contribution credit, which is a percentage of the employee's earnings with the percentage varying based on the years of vesting service in the plan, and an interest credit, based on the average yield for 30-year treasury bills. The Company's funding policy is generally to contribute assets that, at a minimum, fully fund the accumulated benefit obligation, subject to regulatory and tax deductibility limits. Plan assets are invested in a diversified portfolio consisting primarily of equity and debt securities. 50 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The components of net pension expense for U.S. employees for the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ----- ----- ----- Service cost................................................ $ 2.1 $ 1.9 $ 2.4 Interest cost............................................... 5.0 5.0 4.8 Expected return on plan assets.............................. (6.2) (5.9) (5.1) Amortizations and other..................................... (0.1) (0.1) 0.3 ----- ----- ----- Net periodic pension cost................................... 0.8 0.9 2.4 Special termination benefits charge......................... -- -- 0.4 ----- ----- ----- Total pension cost.......................................... $ 0.8 $ 0.9 $ 2.8 ===== ===== =====
The assumed long-term rate of return on pension assets for purposes of pension expense recognition for the U.S. employee plans was 10.0 percent for each of the years 2001, 2000 and 1999. Transition adjustments for these plans are being amortized on the straight-line method over 14 to 18 years. The discount rates used to determine the projected benefit obligation and accumulated benefit obligation for the U.S. employee pension plans were 7.25 percent and 7.5 percent at December 31, 2001 and 2000, respectively. The assumed long-term rate of compensation increases used to determine the projected benefit obligations for these plans was 3.5 percent for both December 31, 2001 and 2000. The funded status of the U.S. employee pension plans as of December 31, 2001 and 2000 were as follows:
2001 2000 ------ ----- Change in Projected Benefit Obligation: Projected benefit obligation at beginning of year......... $ 67.4 $64.0 Service cost........................................... 2.1 1.9 Interest cost.......................................... 5.0 5.0 Actuarial losses....................................... 1.1 1.1 Plan amendments........................................ -- (1.9) Gross benefits paid.................................... (3.1) (2.7) ------ ----- Projected benefit obligation at end of year............... 72.5 67.4 ------ ----- Change in Plan Assets: Fair value of plan assets at beginning of year............ 60.8 65.4 Actual return on plan assets........................... (3.6) (1.9) Gross benefits paid.................................... (3.1) (2.7) ------ ----- Fair value of plan assets at end of year.................. 54.1 60.8 ------ ----- Funded status at end of year................................ (18.4) (6.6) Unrecognized actuarial losses............................... 12.3 1.3 Unrecognized prior service cost and net transition obligation................................................ (1.6) (1.7) ------ ----- Net accrued pension liability............................... $ (7.7) $(7.0) ====== ===== Amounts recognized in the balance sheet consist of: Accrued pension liability................................. $ (7.7) $(7.0) Additional minimum liability.............................. (2.3) -- Accumulated other comprehensive loss...................... 2.3 -- ------ ----- Net amount recognized in the balance sheet.................. $ (7.7) $(7.0) ====== =====
51 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The projected benefit obligation and accumulated benefit obligation for U.S. pension plans with accumulated benefit obligations in excess of plan assets were $72.5 and $63.6, respectively, as of December 31, 2001, and $1.9 and $1.7, respectively, as of December 31, 2000. As of December 31, 2000, the supplemental executive plan, which is unfunded and therefore has no plan assets, was the only U.S. plan for which the accumulated benefit obligation exceeded 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 $1.4, $1.7 and $1.5 for the years ended December 31, 2001, 2000 and 1999, respectively. The assumed long-term rates of return on pension assets for purposes of pension expense recognition for the French plans were 5.0 percent for 2001, 4.5 percent for 2000, and 6.5 percent for 1999. Transition adjustments for these plans are being amortized on the straight-line method over 19 to 20 years. The discount rates used to determine the projected benefit obligation and accumulated benefit obligation for the French plans were 5.75 percent and 6.0 percent at December 31, 2001 and 2000, respectively. The assumed long-term rates of compensation increases used to determine the projected benefit obligation for these plans were 3.0 percent and 2.5 percent at December 31, 2001 and 2000, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the French pension plans were $18.4, $12.5 and $7.0, respectively, as of December 31, 2001, and $16.3, $8.6 and $5.7, respectively, as of December 31, 2000. The Company's net accrued pension liability for the French plans was $6.8 and $3.9 at December 31, 2001 and 2000, respectively. At December 31, 2001, the net accrued pension liability balance included an additional minimum pension liability of $3.7 million, which balance is also reflected net of tax in the balance of accumulated other comprehensive income (loss) on the consolidated balance sheet. Brazilian Pension Benefits In Brazil, employees are covered under a government-administered program. Postretirement Healthcare and Life Insurance Benefits The Company and its subsidiary in Canada have unfunded healthcare and life insurance benefit plans which cover substantially all retirees of the Company. Eligibility for benefits under the Company's plans is based on years of service and age at retirement. Retirees as of the Distribution remained participants of their respective Kimberly-Clark plans. Employees as of the date of the Distribution retained credit for prior service while employees of Kimberly-Clark. The Company's plans are noncontributory for certain long service employees when they retire, but are contributory for most other future retirees. Effective July 1, 2000, the Company amended its postretirement healthcare and group life insurance coverages for U.S. salaried employees, except certain grandfathered employees. Grandfathered employees will continue to receive retiree healthcare coverage and life insurance coverage at rates subsidized by the 52 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Company. For all other U.S. salaried employees, future retiree healthcare coverage access will be offered at full cost to the retiree. The components of U.S. employee postretirement healthcare and life insurance benefit costs were as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ----- ----- ----- Service cost................................................ $ 0.2 $ 0.2 $ 0.3 Interest cost............................................... 0.8 0.8 0.6 Amortizations and other..................................... (0.1) (0.3) (0.3) ----- ----- ----- Net periodic postretirement benefit cost.................... 0.9 0.7 0.6 Curtailment credits......................................... -- (0.5) -- ----- ----- ----- Total postretirement benefit cost........................... $ 0.9 $ 0.2 $ 0.6 ===== ===== =====
The components of the unfunded U.S. employee postretirement healthcare and life insurance benefit obligation included in other noncurrent liabilities as of December 31, 2001 and 2000 were as follows:
2001 2000 ------ ------ Change in Benefit Obligation: Benefit obligation at beginning of year................... $ 10.5 $ 8.9 Service cost........................................... 0.2 0.2 Interest cost.......................................... 0.8 0.8 Actuarial (gains) losses............................... 0.9 1.9 Plan amendments........................................ -- (0.1) Curtailment credits.................................... -- (0.3) Gross benefits paid by the Company..................... (0.9) (0.9) ------ ------ Benefit obligation at end of year......................... 11.5 10.5 ------ ------ Funded status at end of year................................ (11.5) (10.5) Unrecognized actuarial (gains) losses....................... (1.7) (2.5) Unrecognized prior service cost............................. (0.8) (0.9) ------ ------ Net accrued postretirement benefit liability................ $(14.0) $(13.9) ====== ======
For purposes of measuring the benefit obligation at December 31, 2001, a 6.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease to 5.0 percent for 2003 and remain at that level thereafter. For purposes of measuring the benefit obligation at December 31, 2000, a 6.5 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2001, with the annual rate declining to 5.0 percent for 2002 and thereafter. Discount rates of 7.25 percent and 7.5 percent were used to determine the postretirement benefit obligations at December 31, 2001 and 2000, 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, 2001. A one percentage point increase in the healthcare cost trend rate would increase the total postretirement benefit obligation by $0.1 at December 31, 2001. 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, 2001. 53 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Other Benefits Substantially all of the Company's U.S. employees have been given the opportunity to participate in a voluntary retirement savings plan. Under the plan, the Company matches a portion of employee contributions. Employees may reallocate their respective account balances, including any balances in the Company's common stock, amongst any number of the available investment choices under the plan provisions once each calendar quarter. The Company's cost under the plan reflected in the accompanying consolidated income statements was $0.9 for each of the years 2001, 2000 and 1999. At December 31, 2001 and 2000, 500,000 shares of the Company's Common Stock were reserved for issuance under the plan, none of which had been issued as of December 31, 2001. The shares may, at the Company's option, be used to satisfy the Company's liability for its matching contributions. Beginning in 2000, the Company also provides U.S. executives, certain other key personnel and its directors the opportunity to participate in deferred compensation plans. Those participating employees can elect to defer a portion of their salaries and certain other compensation. Those participating directors can elect to defer their meeting fees, as a cash deferral, as well as their quarterly retainer fees, as deferred stock unit credits. The Company's liability balance under these plans totaled $0.9 and $0.5 at December 31, 2001 and 2000, respectively, which is included on the consolidated balance sheet in Other Noncurrent Liabilities. In connection with these plans, as well as the Company's supplemental executive retirement and executive severance plans, the Company also established a grantor trust during 2000 into which the Company contributed funds toward its future obligations under the various plans. Grantor trust investments are primarily in company-owned life insurance policies. The balance of grantor trust assets totaled $0.8 and $0.5 at December 31, 2001 and 2000, respectively, which is included in Other Assets on the consolidated balance sheet. In accordance with French law, certain salaried employees in France may accumulate unused regular vacation and supplemental hours of paid leave that can be credited to an individual's Compte Epargne Temps ("CET"). The CET account may grow over an individual's career and the hours accumulated may be withdrawn upon retirement or under other special circumstances at the individual's then current rate of pay. The balance of the Company's liability for this program reflected in the accompanying consolidated balance sheets was $2.6 and $2.5 at December 31, 2001 and 2000, respectively. NOTE 8. STOCKHOLDERS' EQUITY The Company's Certificate of Incorporation authorizes the issuance of up to 100,000,000 shares of Common Stock, par value $.10 per share, and 10,000,000 shares of Preferred Stock, par value $.10 per share. Each share of presently outstanding Common Stock and each share of Common Stock issued after the date of this report will have attached to it, one right to purchase from the Company one one-hundredth (1/100) of a share of a series of Preferred Stock designated as the Series A Junior Participating Preferred Stock (the "Series A Preferred Stock") (a "Right"). Each Right entitles a shareholder to purchase from the Company one one-hundredth (1/100) of a share of the Series A Preferred Stock at a price of $65 per one one-hundredth (1/100) of a share, subject to certain anti-dilution adjustments. The Rights, however, become exercisable only at such time as a person or group acquires, or commences a public tender or exchange offer for, 15 percent or more of the Company's Common Stock. The Rights have certain anti-takeover effects since they may cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since they may be redeemed by the Company at $.01 per Right at any time until a person or group has obtained beneficial ownership of 15 percent or more of the voting stock. The Rights will expire at the close of business on October 1, 2010, unless redeemed earlier by the Company. 54 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The Series A Preferred Stock will be non-redeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, will be subordinate to any other series of the Company's preferred stock. Each share of Series A Preferred Stock will be entitled to receive when, as and if declared, a quarterly dividend in an amount equal to the greater of $1 per share or 100 times the cash dividends declared on the Company's Common Stock. In addition, the Series A Preferred Stock is entitled to 100 times any non-cash dividends (other than dividends payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock) declared on the Common Stock, in like kind. In the event of a liquidation, the holders of the Series A Preferred Stock will be entitled to receive a liquidation payment in an amount equal to the greater of $100 per share or 100 times the payment made per share of Common Stock. Each share of Series A Preferred Stock will have 100 votes, voting together with the Common Stock. In the event of any merger, consolidation or other transaction in which common shares are exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. The rights of the Series A Preferred Stock as to dividends, liquidation and voting are protected by antidilution provisions. Changes in the components of other comprehensive income (loss) are as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------------------------ ------------------------- ------------------------- NET NET NET PRE-TAX TAX OF TAX PRE-TAX TAX OF TAX PRE-TAX TAX OF TAX ------- ----- ------ ------- ------ ------ ------- ------ ------ Minimum pension liability adjustment.................. $ (6.0) $(2.2) $ (3.8) $ -- $ -- $ -- $ -- $ -- $ -- Unrealized fair value of derivative instruments...... (1.1) (0.4) (0.7) -- -- -- -- -- -- Unrealized translation adjustments................. (12.1) -- (12.1) (9.9) -- (9.9) (30.5) -- (30.5) ------ ----- ------ ----- ------ ----- ------ ------ ------ Other comprehensive loss.... $(19.2) $(2.6) $(16.6) $(9.9) $ -- $(9.9) $(30.5) $ -- $(30.5) ====== ===== ====== ===== ====== ===== ====== ====== ======
The Company's Equity Participation Plan provides that eligible employees may be granted stock options which, when exercised, give the recipient the right to purchase the Company's Common Stock at a price no less than the "fair market value" (as defined in the Equity Participation Plan) of such stock at grant date. Options awarded under the Equity Participation Plan only become exercisable after specified periods of employment after the grant thereof (30 percent after the first year, 30 percent after the second year and the remaining 40 percent after the third year). Generally, such options expire ten years subsequent to the date of grant. SFAS No. 123 "Accounting for Stock Based Compensation" defines a fair value based method of accounting for stock compensation, including stock options, to employees. This statement provides entities a choice of recognizing related compensation expense by adopting the fair value method or to measure compensation using the intrinsic value method under APB No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to measure compensation cost for stock compensation based on the intrinsic value method under APB No. 25. Payments in the form of shares of the Company made to third parties, including the Company's outside Directors, are recorded at fair value based on the market value of the Company's common stock at the time of payment. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock compensation under the fair value method of that statement. For purposes of the pro forma disclosures, the estimated fair value of the stock 55 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS compensation is amortized to expense over the vesting period. Under the fair value method, the Company's net income and earnings per share would have been the pro forma amounts indicated below:
2001 2000 1999 ----- ----- ----- Net Income: As reported............................................... $24.5 $27.8 $31.4 Pro forma................................................. 23.6 27.1 29.8 Basic net income per share: As reported............................................... 1.66 1.82 1.99 Pro forma................................................. 1.59 1.78 1.89 Diluted net income per share: As reported............................................... 1.63 1.82 1.99 Pro forma................................................. $1.57 $1.78 $1.89
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 33 percent for the 2001 awards, 30 percent for the 2000 awards and 27 percent for the 1999 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, 2001 and 2000, 1,500,000 shares of the Company's Common Stock were reserved under the Equity Participation Plan. At December 31, 2001 and 2000, there were 172,960 and 261,360 shares, respectively, available for future awards. The following stock options were outstanding as of December 31, 2001, 2000 and 1999:
2001 2000 1999 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year........................... 1,214,460 $19.74 1,406,010 $21.19 869,380 $24.95 Granted........................ 195,900 19.34 50,000 13.00 562,300 15.60 Forfeited...................... -- (112,950) 23.07 (17,170) 21.27 Cancelled...................... (107,500) 36.14 (128,000) 30.13 (8,500) 35.05 Exercised...................... (22,800) 15.65 (600) 15.69 -- ---------- ---------- ---------- Outstanding at end of year....... 1,280,060 18.37 1,214,460 19.74 1,406,010 21.19 ========== ========== ========== Options exercisable at year-end....................... 853,950 $19.01 772,400 $21.10 793,590 $22.83 ========== ========== ========== Weighted-average per share fair value of options granted during the year....................... $ 6.07 $ 4.92 $ 6.57 ========== ========== ==========
56 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The following table summarizes information about stock options outstanding at December 31, 2001:
OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ----------------------- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------------------------------- ----------- ----------- --------- ----------- --------- $12.15 to $15.91................... 573,000 7.1 years $15.38 342,790 $15.49 $18.15 to $20.90................... 193,400 9.0 19.40 -- $21.06 to $28.19................... 505,160 4.0 21.15 502,660 21.14 $32.43 to $37.38................... 8,500 5.8 34.82 8,500 34.82 --------- ------- $12.15 to $37.38................... 1,280,060 6.2 years $18.39 853,950 $19.01 ========= =======
Effective December 2, 1999, the Company established a Restricted Stock Plan which is intended to promote the long-term financial success of the Company by attracting to the Company and retaining outstanding executive personnel and to motivate such personnel by means of restricted stock grants. The Compensation Committee of the Company's Board of Directors selects participants and establishes the terms of any grant of restricted stock. The Company's Restricted Stock Plan provides that such a grant immediately transfers ownership rights in shares of the Company's Common Stock to the recipient of the grant, including the right to vote the shares and to receive dividends thereon, at a share price established by the Compensation Committee in its discretion. The recipient's continued ownership of and right to freely transfer the restricted stock is subject to such conditions on transferability and to such risks of forfeiture as are established by the Compensation Committee at the time of grant, which may include continued employment with the Company for a defined period, achievement of specified management performance objectives or other conditions established by the Compensation Committee. The number of shares which may be issued under this Restricted Stock Plan is limited to the lesser of 200,000 shares or the number of treasury shares held by the Company as of the date of any grant. No single participant may be awarded, in the aggregate, more than 50 percent of the shares authorized to be issued under the Restricted Stock Plan. As of December 31, 2001, 50,000 restricted shares had been issued under the Restricted Stock Plan which will not vest until four years of service from the date of the grant. The number of shares available for future awards is limited, as of December 31, 2001, to 150,000. A reconciliation of the average number of common shares outstanding used in the calculations of basic and diluted net income per share follows (in 000's):
2001 2000 1999 -------- -------- -------- Average number of common shares outstanding.............. 14,777.2 15,224.1 15,805.7 Dilutive effect of: -- stock options.................................... 203.7 15.9 1.5 -- restricted stock................................. 50.0 30.0 -- -- directors' deferred stock compensation........... 7.4 2.4 -- -------- -------- -------- Average number of common and potential common shares outstanding............................................ 15,038.3 15,272.4 15,807.2 ======== ======== ========
57 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS There were stock options outstanding that were not included in the calculation of diluted net income per share because their exercise price was greater than the average market price of the Company's common stock during the respective periods, as summarized below(shares in 000's and $ are per share amounts):
2001 2000 1999 -------- -------- -------- Average number of share equivalents not included........ 318.8 1,160.1 1,420.0 Weighted-average option price........................... $ 24.10 $ 21.37 $ 21.48 Expiration date of options.............................. 2006 2005 2005 to 2011 to 2008 to 2009 Options outstanding at year-end not included............ 16.4 618.7 1,391.0
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 gains (losses) included in other income (expense), net were $0.6 in 2001, ($0.6) in 2000 and were nominal in 1999. Foreign currency risks arise from transactions and commitments denominated in non-local currencies. These transactions and commitments may include the purchase of inventories or property, plant and equipment, the sale of products and the repayment of loans. Management selectively hedges the Company's foreign currency risks when it is practicable and cost effective to do so. The instruments are purchased from well-known money center banks, insurance companies or government agencies (counterparties). Usually the contracts extend for no more than 12 months, although their contractual term has been as long as 24 months. Credit risks with respect to the counterparties, and the foreign currency risks that would not be hedged if the counterparties fail to fulfill their obligations under the contracts, are minimal in view of the financial strength of the counterparties. Gains and losses on instruments that hedge firm commitments are deferred and included in the basis of the underlying hedged items. Premiums paid for options are amortized ratably over the life of the option. All other gains and losses are included in period income or expense based on the period-end market price of the instrument. At December 31, 2001, there were outstanding forward contracts, which were held for purposes other than trading, maturing at various dates in 2002, to purchase $16 of various foreign currencies. At December 31, 2000, there were outstanding forward contracts, which were held for purposes other than trading, maturing at various dates in 2001, to purchase $9.2 of various foreign currencies. These contracts were designated as cash flow hedges of foreign currency transactions to fix the Company's local currency cash flow. These contracts had not given rise to any significant net deferred gains or losses as of December 31, 2001 and December 31, 2000, and their fair values approximately equaled their carrying value. 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, 2001 are less than $1.5 annually over the next five years. Rental expense under operating leases was $4 for each of the years ended December 31, 2001 and 2000, and $4.3 for the year ended December 31, 1999. 58 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS Other Commitments During 1998, PdM entered into an agreement with one of its vendors in connection with PdM's purchases of calcium carbonate, a raw material used in the manufacturing of some paper products. The vendor agreed to construct and operate an on-site plant at the Quimperle, France mill. The cost to construct the necessary building and equipment was approximately 40 million French franc ($5.4 at December 31, 2001 exchange rate). PdM agreed to annual minimum purchase commitments at prices which will vary according to quantities consumed. Under the terms of the agreement, which is currently scheduled to expire at the end of 2009, the annual minimum contractual commitment is at a quantity and price which would require $1.8 of calcium carbonate purchases. 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, which amount was approximately $4.3 at December 31, 2001. 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 annual levels of calcium carbonate usage exceed their respective annual contractual minimum commitments. The Company enters into certain other immaterial contracts from time to time for the purchase of certain raw materials. The Company also enters into certain contracts for the purchase of equipment and related costs in connection with its ongoing capital projects which, at December 31, 2001, totaled approximately $6.6. NOTE 11. LEGAL PROCEEDINGS On December 27, 2000, SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax, consisting of unpaid ICMS taxes from January 1995 through November 2000, together with interest and penalties in the total amount of approximately $13.6, based on the foreign currency exchange rate at December 31, 2000 (collectively, the "Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically that are immune from the tax to offset ICMS taxes otherwise owed on the sale of products that are not immune. A portion of the Assessment, estimated at December 31, 2000 at approximately $6.9, related to tax periods that predated the Company's acquisition of Pirahy and is covered by an indemnification from the sellers of Pirahy ("Assessment 1"). The second assessment pertains exclusively to periods that SWM-B owned the Pirahy mill ("Assessment 2"). While SWM-B is primarily responsible for the full payment of the Assessment in the event of an ultimate unfavorable outcome, SWM-B is not aware of any difficulties that would be encountered in obtaining reimbursement of that portion of any payment resulting from Assessment 1 from the previous owner under the indemnification. SWM-B contests the Assessment based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers used in the production of books, newspapers and periodicals ("immune papers") and the raw material inputs used to produce immune papers. SWM-B further contends that the statutory provision relied on by the State of Rio de Janeiro to argue that ICMS tax credits generated in the course of the production of immune papers must be reversed rather than applied to other ICMS taxes owed violates the Brazilian Federal Constitution and the legal principle of "non-cumulativity" for 59 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS ICMS tax set forth in Article 155, Section 2, II, of the Brazilian Federal Constitution of 1988. Additionally, SWM-B contends that the statutory provisions relied on by the government do not address "immunity" from the incidence of the ICMS tax, but are addressed to "exception" from the tax. This distinction is central to SWM-B's further contention that the only exceptions permitted to the constitutionally mandated principle of non-cumulativity are for exemptions from tax and no exceptions from this principle are permitted in cases of immunity from tax. Administrative appeals were filed on the Assessment, and in April 2001 and August 2001 decisions were rendered on these administrative appeals. The State of Rio de Janeiro tax authorities denied the appeal of Assessment 2 in its entirety and reduced the original amount of Assessment 1 by approximately $1.6 based on SWM-B's argument that Assessment 1 covered periods barred by the applicable statute of limitations. Following these decisions at the administrative level, judicial actions to annul the tax and to enjoin enforcement of the Assessment pending adjudication were filed in Rio de Janeiro on behalf of SWM-B. The courts issued injunctions, which were upheld on appeal, against enforcement of the Assessment without the requirement for any bond or posting of other collateral by SWM-B, pending final determination of SWM-B's action to annul the tax debts. SWM-B continues to vigorously contest the Assessment and believes that the Assessment will ultimately be resolved in its favor. However, the final resolution of this matter will most likely entail judicial proceedings up to and including presentation of the matter to the Supreme Court of Brazil and is not likely to be finally resolved for several years. Based on the foreign currency exchange rate at December 31, 2001, the Assessment, as reduced in August 2001, totaled $10.8 as of December 31, 2001, of which approximately $4.7 is covered by the above discussed indemnification. No liability has been recorded in the Company's consolidated financial statements for the Assessment based on the Company's evaluation that SWM-B is more likely than not to prevail in its challenge of the Assessment under the facts and law as presently understood. In December 2000, SWM-B suspended the further accrual and application of ICMS tax credits generated on immune products to reduce its possible exposure to future ICMS tax assessments due to the punitive nature of penalties associated with such assessments and SWM-B's plans to transition from immune products to other non-immune products. A reserve of $1.1 was recorded for the entire asset balance of unused ICMS tax credits as of December 31, 2000. Subsequently during 2001, SWM-B exited the Brazilian market for printing and writing uncoated papers, which includes the immune papers. Under the belief that the ICMS tax audit of SWM-B discussed above was closed, during February 2001, SWM-B revised its prior-period ICMS treatment related to consignment pulp purchases. As a result, SWM-B decreased the asset and corresponding reserve on its books associated with these ICMS tax credits from $1.1 to $0.2, still fully reserving this remaining asset balance of unused ICMS tax credits. SWM-B took this action to eliminate the risk of a new ICMS tax assessment while it awaited the final outcome of its challenge to the Assessment. In April 2001, SWM-B received a third ICMS tax assessment for penalty only in the amount of approximately $0.2 related to its revised treatment of the ICMS tax credits relating to consignment pulp. The State of Rio de Janeiro tax authorities informed SWM-B that its February 2001 action revised its position on the credits associated with consignment pulp in response to an open tax audit and was therefore subject to penalties. This assessment was paid in December 2001. 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. 60 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 12. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental matters. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims and its obligation to participate in the remediation or the monitoring of certain hazardous waste disposal sites, will not have a material adverse effect on the Company's financial condition or results of operations. However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material adverse effect on the Company's financial condition or results of operations. The Company assumed responsibility to administer a July 25, 1994 landfill closure permit between Kimberly-Clark and the Massachusetts Department of Environmental Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee, Massachusetts. Pursuant to an amended Comprehensive Site Assessment Landfill Post-Closure Maintenance and Monitoring Permit issued to the Company by MDEP dated May 15, 1996 (the "Permit"), groundwater and landfill gas monitoring tests were conducted from which it was determined that landfill gas levels at and beyond the property boundary exceeded the statutory maximum of 25 percent of the lower explosive limit ("LEL"). Based on these findings, on January 24, 1997, the Company and MDEP entered into an Administrative Consent Order ("ACO") pursuant to which the Company was required to reduce concentrations of landfill gases at the landfill property line to specified levels by September 15, 1998. Compliance with the ACO was predicated on the Company demonstrating that landfill gases were at or below the LEL for one full year at 26 gas monitoring wells. The Company achieved full compliance with the ACO effective October 2, 2001. The ACO is now closed and the Company will henceforth perform its continuing obligations for the post-closure care of the landfill set forth in the terms of the Permit. The Permit incorporates standard statutory requirements for the ongoing maintenance and care of closed non-hazardous landfills. The Company does not believe that this matter will have a material adverse effect on the Company's business or financial condition. At Distribution, the Company assumed Kimberly-Clark's liabilities as a potentially responsible party ("PRP") under the provisions of the U.S. Comprehensive Environmental Response, Compensation and Liability Act and analogous New Jersey statutes in connection with the Global Landfill Reclaiming Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey. The Company continues to participate in the remediation of the Global Landfill as a member of a group of PRPs that entered into a consent decree with the state of New Jersey in 1993. The Company previously recorded its pro-rata portion of the estimated liability for remediation of this site, the remainder of which is not material. The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at the Company's facilities in the United States, France, Brazil and Canada. For these purposes, the Company incurred total capital expenditures of $1.6 in 2001, and anticipates that it will incur approximately $4 to $5 in 2002 and $1 to $2 in 2003, none of which is the result of environmental violations. The major projects included in these estimates are $2.7 toward upgrading wastewater treatment facilities and $1.1 for installation of ink solvent treatment equipment in France. The foregoing capital expenditures are not expected to reduce the Company's ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on the Company's financial condition or results of operations. 61 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS NOTE 13. BUSINESS SEGMENTS AND GEOGRAPHY Business Segment Reporting The Company is operated and managed based on the geographical location of its manufacturing operations: the United States, France and Brazil. These business segments manufacture and sell cigarette, plug wrap and tipping papers, used to wrap various parts of a cigarette, reconstituted tobacco products and paper products used in cigarette packaging. While the products are similar in each segment, they vary based on customer requirements and the manufacturing capabilities of each location. Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment. Tobacco industry products comprised 88 to 91 percent of the Company's consolidated net sales in each of the years 2001, 2000 and 1999. The Company's non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine operations. Consolidated Operations by Segment For purposes of the segment disclosure in the following tables, the term "United States" includes operations in the United States and Canada. The Canadian operations only produce flax fiber used as raw material in the U.S. operations. Elimination of intercompany sales of products between segments are referred to in the following table as intersegment sales. Expense amounts not associated with segments are referred to as unallocated items. Assets reported by segment represent assets which are directly used by that segment. Eliminations and unallocated items include receivables from other segments and immaterial balances of the Company's international holding company in Spain.
NET SALES ---------------------------------------------------------- 2001 2000 1999 ---------------- ---------------- ---------------- United States.................. $172.0 34.4% $163.7 33.0% $166.3 33.0% France......................... 280.1 56.1 264.9 53.3 284.6 56.4 Brazil......................... 53.4 10.7 70.0 14.1 54.0 10.7 ------ ----- ------ ----- ------ ----- Subtotal............. 505.5 101.2 498.6 100.4 504.9 100.1 ------ ----- ------ ----- ------ ----- Intersegment sales by: United States................ -- -- (0.2) -- (0.2) -- France....................... (2.6) (0.5) (0.3) (0.1) (0.3) (0.1) Brazil....................... (3.4) (0.7) (1.3) (0.3) -- -- ------ ----- ------ ----- ------ ----- Subtotal............. (6.0) (1.2) (1.8) (0.4) (0.5) (0.1) ------ ----- ------ ----- ------ ----- Consolidated... $499.5 100.0% $496.8 100.0% $504.4 100.0% ====== ===== ====== ===== ====== =====
OPERATING PROFIT TOTAL ASSETS --------------------------------------------- ------------------------------- 2001 2000 1999 2001 2000 ------------- ------------- ------------- -------------- -------------- United States................. $ 1.8 3.8% $ 2.6 5.2% $ 9.3 14.4% $246.5 49.5% $155.4 35.2% France........................ 50.1 105.9 47.2 95.0 55.2 85.4 209.5 42.1 232.6 52.7 Brazil........................ 1.8 3.8 4.5 9.1 5.2 8.1 42.4 8.5 53.9 12.2 ----- ----- ----- ----- ----- ----- ------ ----- ------ ----- Subtotal............. 53.7 113.5 54.3 109.3 69.7 107.9 498.4 100.1 441.9 100.1 Unallocated items and eliminations, net........... (6.4) (13.5) (4.6) (9.3) (5.1) (7.9) (0.5) (0.1) (0.2) (0.1) ----- ----- ----- ----- ----- ----- ------ ----- ------ ----- Consolidated... $47.3 100.0% $49.7 100.0% $64.6 100.0% $497.9 100.0% $441.7 100.0% ===== ===== ===== ===== ===== ===== ====== ===== ====== =====
62 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
CAPITAL SPENDING DEPRECIATION AND AMORTIZATION --------------------------------------------- --------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------- ------------- ------------- ------------- ------------- ------------- United States........... $58.5 79.3% $19.7 67.0% $ 5.0 19.0% $10.3 45.2% $ 9.0 40.7% $ 8.9 40.1% France.................. 13.4 18.2 7.3 24.8 18.9 71.9 10.5 46.0 10.3 46.6 10.7 48.2 Brazil.................. 1.9 2.5 2.4 8.2 2.4 9.1 2.0 8.8 2.8 12.7 2.6 11.7 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Consolidated... $73.8 100.0% $29.4 100.0% $26.3 100.0% $22.8 100.0% $22.1 100.0% $22.2 100.0% ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Consolidated Operations by Geographic Area Long-lived assets, excluding deferred income tax assets and certain other deferred charges, were $157.1 $120.3 and $20.7 in the United States, France and Brazil, respectively, as of December 31, 2001, and $108.8, $123.9 and $29.3 in the United States, France and Brazil, respectively, at December 31, 2000. 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 ------------------------ 2001 2000 1999 ------ ------ ------ United States............................................... $146.5 $143.0 $142.9 Europe and the former Commonwealth of Independent States.... 199.6 194.9 214.4 Asia/Pacific (including China).............................. 70.7 65.8 66.4 Latin America............................................... 60.5 75.7 60.2 Other foreign countries..................................... 22.2 17.4 20.5 ------ ------ ------ Consolidated................................ $499.5 $496.8 $504.4 ====== ====== ======
NOTE 14. MAJOR CUSTOMERS Two of the Company's customers have accounted for a significant portion of the Company's net sales in the periods presented in the financial statements, and the loss of one or both such customers, or a significant reduction in one or both of these customers' purchases, could have a material adverse effect on the Company's results of operations. Net sales to Philip Morris Incorporated ("Philip Morris"), together with its affiliates and designated converters, accounted for approximately 32 percent of total consolidated net sales for the year ended December 31, 2001 and approximately 30 percent in each of the years ended December 31, 2000 and 1999. Net sales to B.A.T. Industries PLC ("BAT"), together with its affiliates and designated converters, accounted for approximately 18 percent, 17 percent and 18 percent of consolidated net sales for the years ended December 31, 2001, 2000 and 1999, respectively. Each of the Company's segments reported sales to these customers for each of the respective periods reported above. The Company had sales to the minority shareholder of LTRI of $18.7, $19.1 and $24.2 in 2001, 2000 and 1999, respectively. The Company's consolidated accounts receivable at December 31, 2001 and 2000 included balances from Philip Morris and BAT, together with their respective affiliates and designated converters. The percentage of these customers' balances of consolidated accounts receivable is less than each of their respective percentages of consolidated net sales. 63 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS The Company performs ongoing credit evaluations on all of its customers' financial condition and generally does not require collateral or other security to support customer receivables. A substantial portion of the Company's consolidated accounts receivable are due from companies in the tobacco industry which has been and continues to be under substantial pressure from legal, regulatory and tax developments. It is not possible to predict the outcome of such litigation or what effect adverse developments in pending or future litigation, regulatory actions and additional taxes may have on the tobacco industry, its financial liquidity or relationships with its suppliers. Nor is it possible to predict what additional legislation or regulations relating to tobacco products will be enacted, or to what extent, if any, such legislation or regulations might affect the tobacco products industry in general. 64 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, 2001, there were 5,472 stockholders of record of the Company's Common Stock. This number does not include shares held in "nominee" or "street" name.
2001 ----------------------------------------------- FIRST SECOND(1) THIRD(1) FOURTH YEAR ------ --------- -------- ------ ------ Net Sales........................................... $124.1 $125.3 $123.4 $126.7 $499.5 Gross Profit........................................ 19.5 27.0 26.1 26.1 98.7 Operating Profit.................................... 7.8 9.9 14.7 14.9 47.3 Net Income.......................................... $ 3.8 $ 4.7 $ 8.2 $ 7.8 $ 24.5 Net Income Per Share: Basic............................................. $ .25 $ .33 $ .55 $ .53 $ 1.66 Diluted........................................... .25 .32 .54 .52 1.63 Cash Dividends Declared and Paid Per Share.......... $ .15 $ .15 $ .15 $ .15 $ .60 Market Price Per Share: High.............................................. $21.71 $24.50 $25.20 $25.54 $25.54 Low............................................... 15.50 15.19 18.50 20.50 15.19 Close............................................. $17.65 $23.60 $23.72 $23.75 $23.75
2000 ------------------------------------------ FIRST SECOND THIRD FOURTH YEAR ------ ------ ------ ------ ------ Net Sales............................................. $118.0 $121.7 $126.8 $130.3 $496.8 Gross Profit.......................................... 22.0 21.9 24.5 23.5 91.9 Operating Profit...................................... 11.4 11.1 14.3 12.9 49.7 Net Income............................................ $ 6.8 $ 6.4 $ 8.0 $ 6.6 $ 27.8 Net Income Per Share: Basic............................................... $ .44 $ .41 $ .53 $ .44 $ 1.82 Diluted............................................. .44 .41 .53 .44 1.82 Cash Dividends Declared and Paid Per Share............ $ .15 $ .15 $ .15 $ .15 $ .60 Market Price Per Share: High................................................ $16.94 $15.69 $15.19 $19.64 $19.64 Low................................................. 12.38 12.48 11.81 12.88 11.81 Close............................................... $12.94 $12.52 $13.38 $19.15 $19.15
- --------------- (1) 2001 results included pretax restructuring charges of $4.6 and $0.5 in the second and third quarters, respectively, in connection with the Company's exit of the Brazilian printing and writing uncoated papers market and the resulting shutdown of a paper machine in the Company's Brazilian operations. The net income effect of these charges were ($3.1) and ($0.3), or ($.21) and ($.02) per share, respectively, in the second and third quarters. 65 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, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Atlanta, Georgia January 25, 2002 (January 31, 2002 as to Note 5) 66 SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Schweitzer-Mauduit International, Inc. is responsible for conducting all aspects of the business, including the preparation of the financial statements in this Annual Report. The financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances to present fairly the Company's consolidated financial position, results of operations and cash flows on a consistent basis. Management also has prepared the other information in this Annual Report and is responsible for its accuracy and consistency with the financial statements. As can be expected in a complex and dynamic business environment, some financial statement amounts are based on management's estimates and judgments. Even though estimates and judgments are used, measures have been taken to provide reasonable assurance of the integrity and reliability of the financial information contained in this Annual Report. These measures include an effective control-oriented environment in which a company-wide internal control program plays an important role, an Audit Committee of the Board of Directors which oversees the financial reporting process, and independent audits. As part of that responsibility, the Audit Committee recommended to the Board of Directors the selection of the Company's independent public auditors, Deloitte & Touche LLP. One characteristic of a control-oriented environment is a system of internal control over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition, designed to provide reasonable assurance to management and the Board of Directors regarding preparation of reliable published financial statements and such asset safeguarding. The system is supported with written policies and procedures and contains self-monitoring mechanisms. Appropriate actions are taken by management to correct deficiencies as they are identified. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore, can provide only reasonable assurance as to financial statement preparation and such asset safeguarding. Management believes the Company's system of internal control maintains an appropriate cost-benefit relationship. The Company has also adopted a code of conduct which, among other things, contains policies for conducting business affairs in a lawful and ethical manner in each country in which it does business, for avoiding potential conflicts of interest, and for preserving confidentiality of information and business ideas. Internal controls have been implemented to provide reasonable assurance that the code of conduct is followed. The financial statements have been audited by Deloitte & Touche LLP. During their audits, the independent auditors were given unrestricted access to all financial records and related data. Management believes that all representations made to the independent auditors during their audits were valid and appropriate. During the audits conducted by the independent auditors, management received minor recommendations to strengthen or modify internal controls in response to developments and changes. Management has adopted, or is in the process of adopting, all recommendations which are cost-effective. /s/ Wayne H. Deitrich Wayne H. Deitrich Chairman of the Board and Chief Executive Officer /s/ Paul C. Roberts Paul C. Roberts Chief Financial Officer and Treasurer January 25, 2002 67 PART II, CONTINUED ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section of the Company's Proxy Statement dated March 14, 2002 (the "2002 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 2002 Proxy Statement captioned "Executive Compensation" is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the sections of the 2002 Proxy Statement captioned "Security Ownership of Management" and "Security Ownership of Certain Beneficial Holders" is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the section of the 2002 Proxy Statement captioned "Certain Transactions and Business Relationships" is incorporated in this Item 13 by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) and (2) Financial Statements and Financial Statement Schedules: See the Index to Financial Statements included in Item 8 of Part II under the caption "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA". Schedules have been omitted because they were not applicable or because the required information has been included in the financial statements or notes thereto. (3) Exhibits: See the Index to Exhibits that appears at the end of this document and which is incorporated by reference herein. (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the fourth quarter of 2001. 68 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 7, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME POSITION DATE ---- -------- ---- /s/ WAYNE H. DEITRICH Chairman of the Board and Chief March 7, 2002 - ----------------------------------------------------- Executive Officer Wayne H. Deitrich (principal executive officer) /s/ PAUL C. ROBERTS Chief Financial Officer and March 7, 2002 - ----------------------------------------------------- Treasurer Paul C. Roberts (principal financial officer) /s/ WAYNE L. GRUNEWALD Controller March 7, 2002 - ----------------------------------------------------- (principal accounting officer) Wayne L. Grunewald * Director March 7, 2002 - ----------------------------------------------------- Claire L. Arnold * Director March 7, 2002 - ----------------------------------------------------- Alan R. Batkin * Director March 7, 2002 - ----------------------------------------------------- K.C. Caldabaugh * Director March 7, 2002 - ----------------------------------------------------- Laurent G. Chambaz * Director March 7, 2002 - ----------------------------------------------------- Richard D. Jackson * Director March 7, 2002 - ----------------------------------------------------- Leonard J. Kujawa * Director March 7, 2002 - ----------------------------------------------------- Jean-Pierre Le Hetet * Director March 7, 2002 - ----------------------------------------------------- Larry B. Stillman *By: /s/ JOHN W. RUMELY, JR. March 7, 2002 ------------------------------------------------ John W. Rumely, Jr. Attorney-In-Fact
69 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 -- Distribution Agreement (incorporated by reference to Exhibit 2.1 to Form 10/A Amendment 2, dated October 27, 1995). 2.2 -- Stock Purchase Agreement by and between SWM, Souza Cruz S.A. and Contab Participacoes Ltda. dated December 16, 1997 for the purchase of Companhia Industrial de Papel Pirahy (incorporated by reference to Exhibit 2.1 to Form 8-K, dated February 2, 1998). 3.1 -- Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10, dated September 12, 1995). 3.2 -- By-Laws, as amended on and through February 27, 1996 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1995). 4.1 -- Form of Common Stock Certificate as of October 1, 2000 (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended September 30, 2000). 4.2 -- Rights Agreement Amended and Restated as of October 1, 2000 (incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q for the quarter ended September 30, 2000). 10.1 -- Transfer, Contribution and Assumption Agreement (incorporated by reference to Exhibit 10.1 to Form 10/A Amendment 2, dated October 27, 1995). 10.2 -- Employee Matters Agreement (incorporated by reference to Exhibit 10.3 to Form 10/A Amendment 2, dated October 27, 1995). 10.3 -- Tax Sharing Agreement (incorporated by reference to Exhibit 10.4 to Form 10/A Amendment 2, dated October 27, 1995). 10.4 -- Outside Directors' Stock Plan (incorporated by reference to Exhibit 10.5 to Form 10/A Amendment 2, dated October 27, 1995). 10.5 -- Annual Incentive Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1998). 10.6 -- Equity Participation Plan Amended and Restated as of April 26, 2001 (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 2000). 10.7* -- Long-Term Incentive Plan effective as of January 1, 2001. 10.8.1 -- Deferred Compensation Plan, Amended and Restated as of April 21, 2000 (incorporated by reference to Exhibit 10.8.1 to the Company's Form 10-Q for the quarter ended March 31, 2000). 10.8.2 -- Deferred Compensation Plan for Non-Employee Directors, effective April 1, 2000 (incorporated by reference to Exhibit 10.8.2 to the Company's Form 10-Q for the quarter ended March 31, 2000). 10.9 -- Restricted Stock Plan effective as of December 2, 1999 (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1999). 10.10 -- Supplemental Benefit Plan Amended and Restated as of February 25, 1999 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 1998). 10.11 -- Executive Severance Plan Amended and Restated as of February 24, 2000 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-Q for the quarter ended March 31, 2000). 10.12.1 -- Second Amended and Restated Agreement between Philip Morris Incorporated and Schweitzer-Mauduit International, Inc. for Fine Paper Supply, effective as of July 1, 2000+ (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 2000).
70 INDEX TO EXHIBITS -- CONTINUED
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.12.2 -- Amended and Restated Technology Ownership, Technical Assistance and Technology License Agreement by and among Philip Morris Incorporated, Philip Morris Products, Inc. and Schweitzer-Mauduit International, Inc., effective as of July 1, 2000+ (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 2000). 10.12.3 -- Amended and Restated Addendum to Second Amended and Restated Agreement between Philip Morris Incorporated and Schweitzer-Mauduit International, Inc. for Fine Paper Supply effective as of July 1, 2000+ (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 2000). 10.13 -- Supply Agreement between Companhia Industrial de Papel Pirahy and Souza Cruz S.A. dated as of February 2, 1998+ (incorporated by reference to Exhibit 10.10.1 to the Company's Form 10-K for the year ended December 31, 1998). 10.13.1 -- Amendment No. 1, dated February 23, 2000, to the Supply Agreement between Schweitzer-Mauduit do Brasil, S.A. (formerly known as Companhia Industrial de Papel Pirahy) and Souza Cruz S.A.+ (incorporated by reference to Exhibit 10.13.1 to the Company's Form 10-Q for the quarter ended March 31, 2000). 10.13.2 -- Amendment No. 1, dated February 23, 2000, to the Art-Coated Supply Agreement between Schweitzer-Mauduit do Brasil, S.A. (formerly known as Companhia Industrial de Papel Pirahy) and Souza Cruz S.A.+ (incorporated by reference to Exhibit 10.13.2 to the Company's Form 10-Q for the quarter ended March 31, 2000). 10.14.1 -- Amended and Restated Credit Agreement dated January 29, 1998 between the Company, as Borrower and Guarantor, SMF, as Borrower, PdM Industries, as Borrower, SM-Spain, as Borrower, the Banks named therein and Societe Generale, as Agent (the "Amended and Restated Credit Agreement") (incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended March 31, 1998). 10.14.2 -- Amendment No. 1, dated January 29, 1999, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.13.2 to the Company's Form 10-K for the year ended December 31, 1998). 10.14.3 -- Amendment No. 2, dated May 6, 1999, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended June 30, 1999). 10.14.4 -- Amendment No. 3, dated January 7, 2000, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.14.4 to the Company's Form 10-K for the year ended December 31, 1999). 10.14.5 -- Amendment No. 4, dated January 19, 2001, to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.14.5 to the Company's Form 10-K for the year ended December 31, 2000). 10.14.6* -- Credit Agreement dated January 31, 2002 between the Company, as Borrower and Guarantor, SMF, as Borrower, the Banks named therein and Societe Generale, as Agent. 21.1* -- Subsidiaries of the Company. 23.1* -- Independent Auditors' Consent. 24.1* -- Powers of Attorney.
- --------------- * Filed herewith. + Exhibit has been redacted pursuant to a Confidentiality Request under Rule 24(b)-2 of the Securities Exchange Act of 1934. 71
BOARD OF DIRECTORS OFFICERS CLAIRE L. ARNOLD(1,2) WAYNE H. DEITRICH Chief Executive Officer Chairman of the Board and Leapfrog Services, Inc. Chief Executive Officer ALAN R. BATKIN(1) WILLIAM R. FOUST Vice Chairman Vice President - Administration Kissinger Associates, Inc. WAYNE L. GRUNEWALD K.C. CALDABAUGH(1,3) Controller Principal Heritage Capital Group OTTO R. HERBST President - Brazilian Operations LAURENT G. CHAMBAZ(3) Partner JEAN-PIERRE LE HETET UGGC & Associes Chief Operating Officer and President - French Operations WAYNE H. DEITRICH Chairman of the Board and RAYMOND NEDELLEC Chief Executive Officer Vice President - Finance Schweitzer-Mauduit International, Inc. PAUL C. ROBERTS RICHARD D. JACKSON(2) Chief Financial Officer and Chairman of the Board Treasurer ebank.com JOHN W. RUMELY, JR. LEONARD J. KUJAWA(1) General Counsel and Secretary Retired Partner Arthur Andersen LLP PETER J. THOMPSON President - U.S. Operations JEAN-PIERRE LE HETET Chief Operating Officer and President - French Operations Schweitzer-Mauduit International, Inc. LARRY B. STILLMAN(2,3) Vice President, Northwest Group xpedx
- --------------- (1) Audit Committee (Chairman - Leonard J. Kujawa) (2) Compensation Committee (Chairman - Richard D. Jackson) (3) Nominating Committee (Chairman - Larry B. Stillman) 72 CORPORATE INFORMATION CORPORATE HEADQUARTERS 100 North Point Center East Suite 600 Alpharetta, GA 30022-8246 Phone -- 800-514-0186 or 770-569-4200 Facsimile -- 770-569-4275 http://www.schweitzer-mauduit.com STOCK EXCHANGE The Common Stock of Schweitzer-Mauduit International, Inc. is Listed on the New York Stock Exchange. The ticker symbol is SWM. TRANSFER AGENT/REGISTRAR American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 Phone -- 800-937-5449 or 718-921-8200 http://www.amstock.com INDEPENDENT AUDITORS Deloitte & Touche LLP 191 Peachtree Street, Suite 1500 Atlanta, GA 30303 INFORMATION REQUESTS Schweitzer-Mauduit International, Inc. welcomes inquiries from stockholders and other interested parties. Requests for information should be made in writing and sent to the Investor Relations Department at the Corporate Headquarters. ANNUAL MEETING The Annual Meeting of Stockholders will be held on Thursday, April 25, 2002, at 11:00 a.m. at the Company's Corporate Headquarters located at 100 North Point Center East, Suite 600, Alpharetta, Georgia. 73 EX-10.7 3 g74537ex10-7.txt LONG-TERM INCENTIVE PLAN EXHIBIT 10.7 SCHWEITZER-MAUDUIT INTERNATIONAL, INC. LONG-TERM INCENTIVE PLAN EFFECTIVE AS OF JANUARY 1, 2001 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, 2001. 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. "Committee" means the Compensation Committee of the Board. The Committee shall administer the Plan. "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. Participant's shall be listed on Addendum A hereto, as it may be amended from time to time. "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 Awards which have been contingently allotted for such Cycle may be earned. The term shall include any year within a Cycle when the Committee has established Performance Goals and the related Performance Award opportunities for the individual years that comprise a Cycle. "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 Awards which have been contingently allotted for such Cycle are earned. "Performance Award" means the units contingently earned during a Performance Cycle by 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. "Threshold" means the minimum level of performance in relation to the Performance Goals for which any Performance Award may be earned. "Total and Permanent Disability" means a condition arising out of injury or disease which the Schweitzer-Mauduit International, Inc. Human Resources Committee determines is permanent and prevents a Participant from engaging in any occupation with his Employer commensurate with his education, training and experience, excluding (i) any condition incurred in military service (other than temporary absence on military leave) if the Participant's service is not resumed at the end of his military service, (ii) any condition incurred as a result of or incidental to a felonious act perpetrated by the Participant, and (iii) any condition resulting from excessive use of drugs or narcotics or use of illegal drugs or (iv) from willful self-inflicted injury. 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 Award opportunities shall be allotted for each Performance Cycle, to determine the basis for measuring the value of such Performance Awards, and to determine the value of such Performance Award opportunities, if any, to be allotted to each Participant. Performance Awards 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. 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 AWARDS AND PERFORMANCE GOALS Any Performance Award earned by 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 Award opportunity 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. Performance Goals may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant, or of an Affiliate, division, operating unit, department, region, function, or other organizational unit within the Company or an Affiliate in which the Participant is employed. The Performance Goals may be made relative to the performance of other corporations or business units of other corporations provided they are Affiliates of the Company. The Performance Goals applicable at the discretion of the Committee to any award to a Participant shall be based on specified and pre-established levels of or growth in one or more of the following criteria: 1. the price of common stock; 2. market share; 3. sales; 4. unit sales volume; 5. return on equity, assets, capital or sales; 6. economic profit; 7. total shareholder return; 8. costs; 9. margins; 10. earning or earnings per share; 11. cash flow; 12. customer satisfaction; 13. pre-tax profit; 14. operating profit; 15. earnings before interest and taxes; 16. earnings before interest, taxes, depreciation and amortization; 17. debt/capital ratio; 18. revenues from new product development; 19. percentage of revenues derived from designated lines of business; and 20. any combination of the foregoing. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company or an Affiliate, or the manner in which it conducts its business, or other events or circumstances render the Performance Goals unsuitable, the Committee may in its discretion modify such Performance Goals or the related pre-established level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case of a Covered Employee where such action would result in the loss of an exemption of the award or a portion thereof under Section 162(m) of the Code that would otherwise have been available and would have been applicable to exempt all or a portion of the Covered Employee's compensation from the Section 162(m) limits for the relevant tax year. In such case, the Committee shall not make any modification of the Performance Goals or the pre-established level of achievement applicable to the Covered Employee for the impacted portion of the Performance Cycle. To recognize a range of Company performance, Participants may earn from 25% to 200% of the Performance Awards allocated to them as specified by the Committee, based upon actual Company performance compared to the specified Performance Goals. At Threshold, 25% of the Performance Award will be earned. No Performance Awards will be earned for performance below Threshold. Target performance will result in a Participant earning 100% of the Performance Award. Outstanding performance will result in a Participant earning 150% of the allocated Performance Award and Maximum performance will result in a Participant earning 200% of the allocated Performance Award. 7. DETERMINATION AND PAYMENT OF PERFORMANCE AWARDS (a) The Committee shall determine the number of Performance Awards that have been earned by each Participant for the Cycle on the basis of the Company's performance in relation to the established Performance Goals during the period of performance that has been completed and is being measured. (b) Performance Awards, if any, earned by a Participant shall be determined independently for each year of a Performance Cycle where the Committee has established Performance Objectives and related Performance Unit opportunities for each year within a Performance Cycle. Performance Awards shall be awarded to the Participant at the end of the year in which they are earned, if an opportunity is established to earn Performance Awards on other than a full Performance Cycle basis, or at the end of the Performance Cycle if the Committee has established Performance Objectives that are to be determined only at the completion of the Performance Cycle. A Performance Award earned in any one year of the Performance Cycle, where such an opportunity has been established by the Committee, shall not be lost or revoked because Performance Objectives are not achieved in any other year during such Performance Cycle or because an additional Performance Objective established for the entire Performance Cycle is not met. (c) Payment in respect of the Performance Awards 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 Awards were earned or within 60 days following termination of employment in the event of a termination within two years following a Change of Control or due to death or Retirement or following a determination of Total and Permanent Disability by the Company's Human Resources Committee. 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 Awards 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 Awards 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 within two years following a Potential Change of Control, such Participant shall be entitled to payment of a pro rata portion of the Performance Awards 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. TAX TREATMENT OF AWARDS The Company may, but shall not be required to, seek to qualify this Plan under Code Section 162(m) and for such purpose, the Company's Human Resources Committee is delegated the authority to amend this Plan to add a Maximum Award provision limiting the cash award payable to any Participant in the plan who is a Covered Employee to the maximum amount permitted by Section 162(m) or any successor section. The Board may in its sole discretion direct the payment of all or any portion of the Performance Awards attributable to a Covered Employee be made in the form of a Company Contribution to the Schweitzer - - Mauduit International, Inc. Deferred Compensation Plan. In such event, the Company Contribution shall be deferred until the first tax year in which the Participant is not a Covered Employee. Participants may elect to defer any Performance Unit payout in accordance with the terms of the Deferred Compensation Plan. 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 shall adversely affect the rights or interests of Participants theretofore earned hereunder. (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. EX-10.14.6 4 g74537ex10-14_6.txt CREDIT AGREEMENT EXHIBIT 10.14.6 ================================================================================ CREDIT AGREEMENT Dated as of January 31, 2002 Among SCHWEITZER-MAUDUIT INTERNATIONAL, INC. as Borrower and Guarantor, SCHWEITZER-MAUDUIT FRANCE S.A.R.L. as Borrower, THE BANKS NAMED IN THIS CREDIT AGREEMENT as Banks, and SOCIETE GENERALE as Agent ================================================================================ ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms......................................................................1 Section 1.02. Computation of Time Periods...............................................................16 Section 1.03. Accounting Terms; Changes in GAAP.........................................................16 Section 1.04. Classes and Types of Advances.............................................................17 Section 1.05. Miscellaneous.............................................................................17 ARTICLE II THE ADVANCES Section 2.01. The Advances..............................................................................17 Section 2.02. Method of Borrowing.......................................................................18 Section 2.03. Fees......................................................................................22 Section 2.04. Reduction of the Commitments..............................................................23 Section 2.05. Repayment.................................................................................23 Section 2.06. Interest..................................................................................23 Section 2.07. Prepayments...............................................................................25 Section 2.08. Funding Losses............................................................................27 Section 2.09. Increased Costs...........................................................................27 Section 2.10. Payments and Computations.................................................................29 Section 2.11. Taxes.....................................................................................29 Section 2.12. Sharing of Payments, Etc..................................................................32 Section 2.13. Bank Replacement..........................................................................32 ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Initial Advances..................................................33 Section 3.02. Conditions Precedent to Each Borrowing....................................................34 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence; Subsidiaries.........................................................35 Section 4.02. Corporate Power...........................................................................35 Section 4.03. Authorization and Approvals...............................................................35 Section 4.04. Enforceable Obligations...................................................................36 Section 4.05. Financial Statements......................................................................36 Section 4.06. True and Complete Disclosure..............................................................39
-i- Section 4.07. Litigation................................................................................39 Section 4.08. Use of Proceeds...........................................................................39 Section 4.09. Investment Company Act....................................................................39 Section 4.10. Taxes.....................................................................................39 Section 4.11. Pension Plans.............................................................................40 Section 4.12. Condition of Property; Casualties.........................................................40 Section 4.13. Insurance.................................................................................40 Section 4.14. No Burdensome Restrictions; No Defaults...................................................41 Section 4.15. Supply Agreement.........................................................................41 Section 4.16. Environmental Condition...................................................................41 Section 4.17. Liens and Encumbrances....................................................................42 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01. Compliance with Laws, Etc.................................................................42 Section 5.02. Maintenance of Insurance..................................................................42 Section 5.03. Preservation of Corporate Existence, Etc..................................................42 Section 5.04. Payment of Taxes, Etc.....................................................................42 Section 5.05. Reporting Requirements....................................................................43 Section 5.06. Maintenance of Property...................................................................45 Section 5.07. Inspection................................................................................45 Section 5.08. Use of Proceeds...........................................................................46 Section 5.09. Status of Obligations.....................................................................46 Section 5.10. Nature of Business........................................................................46 ARTICLE VI NEGATIVE COVENANTS Section 6.01. Liens, Etc................................................................................46 Section 6.02. Merger or Consolidation; Asset Sales......................................................47 Section 6.03. Investments...............................................................................48 Section 6.04. Transactions With Affiliates..............................................................48 Section 6.05. Compliance with ERISA.....................................................................49 Section 6.06. Tangible Net Worth........................................................................49 Section 6.07. Net Debt to Equity Ratio..................................................................49 Section 6.08. Net Debt to Adjusted EBITDA...............................................................49
-ii- Section 6.09. Debt......................................................................................49 Section 6.10. Special Provisions for Material Subsidiaries of SARL......................................50 Section 6.11. Stock Purchases...........................................................................50 ARTICLE VII REMEDIES Section 7.01. Events of Default.........................................................................50 Section 7.02. Optional Acceleration of Maturity.........................................................52 Section 7.03. Automatic Acceleration of Maturity........................................................52 Section 7.04. Non-exclusivity of Remedies...............................................................52 Section 7.05. Right of Set-off..........................................................................52 ARTICLE VIII THE GUARANTY Section 8.01. Guaranty..................................................................................53 Section 8.02. Guaranty Absolute.........................................................................53 Section 8.03. Waiver....................................................................................54 Section 8.04. Subrogation...............................................................................54 ARTICLE IX THE AGENT Section 9.01. Authorization and Action..................................................................55 Section 9.02. Agent's Reliance, Etc.....................................................................55 Section 9.03. The Agent and Its Affiliates..............................................................55 Section 9.04. Bank Credit Decision......................................................................56 Section 9.05. Indemnification...........................................................................56 Section 9.06. Successor Agent...........................................................................56 ARTICLE X MISCELLANEOUS Section 10.01. Amendments, Etc...........................................................................57 Section 10.02. Notices, Etc..............................................................................57 Section 10.03. No Waiver; Remedies.......................................................................57 Section 10.04. Costs and Expenses........................................................................57 Section 10.05. Binding Effect............................................................................58 Section 10.06. Bank Assignments and Participations.......................................................58 Section 10.07. Indemnification...........................................................................60 Section 10.08. Execution in Counterparts.................................................................61
-iii- Section 10.09. Survival of Representations, etc..........................................................61 Section 10.10. Severability..............................................................................61 Section 10.11. Usury Not Intended........................................................................61 Section 10.12. Global Effective Rate.....................................................................62 Section 10.13. Judgment Currency.........................................................................62 Section 10.14. Governing Law; Consent to Jurisdiction....................................................62 Section 10.15. Confidentiality...........................................................................63
EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B-1 - Form of Tranche A1 Note Exhibit B-2 - Form of Tranche A2 Note Exhibit B-3 - Form of Tranche B1 Note Exhibit B-4 - Form of Tranche B2 Note Exhibit C - Form of Notice of Borrowing Exhibit D - Form of Notice of Continuation Exhibit E - Form of Compliance Certificate Exhibit F-1 - Form of Company's General Counsel Opinion Exhibit F-2 - Form of SARL's Outside Counsel Opinion Exhibit F-3 - Form of Agent's Counsel Opinion Exhibit G - Form of Confidentiality Agreement SCHEDULES: Schedule 1 Notice Information for Banks Schedule 4.07 - Litigation Schedule 4.16 - Environmental Schedule 6.01 - Existing Liens
-iv- CREDIT AGREEMENT This Credit Agreement dated as of January 31, 2002 is among (a) Schweitzer-Mauduit International, Inc., a Delaware corporation ("Company"); (b) Schweitzer-Mauduit France S.A.R.L., a French corporation ("SARL"); (c) the Banks (as defined below); and (d) Societe Generale, as Agent for the Banks. The Company, SARL, the Banks, and the Agent agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the terms defined above shall have the meanings set forth therein and the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Additional Cost Rate" means (a) for any Bank lending from an Applicable Lending Office in a Participating Member State the percentage notified by that Bank to the Agent as the cost of complying with the minimum reserve requirements of the European Central Bank, (b) for any Bank lending from an Applicable Lending Office in the United Kingdom will be calculated by the Agent as follows: A x 0.01 per cent. per annum -------- 300 Where: "A" is the rate of charge payable by such Bank to the Financial Services Authority pursuant to the Fees Regulations (but, for this purpose, ignoring any minimum fee required pursuant to the Fees Regulations) and expressed in pounds per (pound)1,000,000 of the Fee Base of such Bank. "Adjusted EBITDA" means, for any period, (a) Adjusted Net Income for such period plus (b) to the extent deducted in determining Adjusted Net Income, the Company's consolidated Interest Expense, income taxes, and depreciation and amortization for such period less (c) amortization of Deferred Revenue (as defined in the Financial Statements of the Company), not including any increase in Deferred Revenues for such period. For the avoidance of doubt, when calculated as of the end of any fiscal quarter of the Company, Adjusted EBITDA will be calculated for the four-fiscal quarter period then ending. "Adjusted Net Income" means, for any period, the Company's consolidated net income for such period after taxes, as determined in accordance with GAAP, excluding, however, extraordinary or one-time items, including (a) any net gain or loss during such period arising from the sale, exchange, or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business and (b) any write-up or write-down of assets. "Adjusted U.S. Base Rate" means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the U.S. Base Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/4 %. "Advance" means a Tranche A1 Advance, a Tranche A2 Advance, a Tranche B1 Advance, or a Tranche B2 Advance, as the case may be. "Affected Bank" has the meanings set forth in Section 2.02(c)(iii) and 2.07(d), as applicable. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of a Control Percentage, by contract or otherwise. "Agent" means Societe Generale in its capacity as an agent pursuant to Article IX and any successor agent pursuant to Section 9.06. "Agreement" means this Credit Agreement dated as of January 31, 2002 among the Company, SARL, the Banks, and the Agent, as it may be amended or supplemented from time-to-time. "Applicable Accounting Rules" means, in respect of a particular Person, the body of generally accepted accounting principles which are applicable to the preparation and presentation of such Person's financial statements. "Applicable Lending Office" means, with respect to each Bank, such Bank's U.S. Lending Office in the case of a U.S. Base Rate Advance, such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance, and such Bank's Eurocurrency Lending Office in the case of a Eurocurrency Rate Advance or EONIA Rate Advance. "Applicable Mandatory Cost" of any Bank for the Interest Period for any Fixed Rate Advance, an addition to the Eurodollar Rate or Eurocurrency Rate to compensate such Bank for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other Governmental Authority which replaces all or any of its functions) or (b) the requirements of the European Central Bank in an amount equal to the Additional Cost Rate. On the first day of each Interest Period (or as soon as possible thereafter) the Agent shall calculate, the Additional Cost Rate for each Bank. The Applicable Mandatory Cost will be calculated by the Agent as a weighted average of the Banks' Additional Cost Rates (weighted in proportion to the percentage participation of each Bank in the relevant Borrowing) and will be expressed as a percentage rate per annum. -2- "Applicable Margin" means, at any time with respect to any Fixed Rate Advance, the following percentages determined as a function of the Net Debt to Equity Ratio on the last day of the immediately preceding fiscal quarter:
Ratio less than 0.55 Ratio greater than or equal to 0.55 -------------------- ----------------------------------- Tranche A Advances 0.65% 0.75% Tranche B Advances 0.70% 0.80%
For purposes of calculating the Applicable Margin, the Net Debt to Equity Ratio shall be determined from the consolidated financial statements of the Company and its Subsidiaries most recently delivered pursuant to Section 5.05 and certified to the Agent and the Banks in the Compliance Certificate required to be delivered by the Company in connection with such financial statements pursuant to Section 5.05(g); provided that the initial calculation of the Applicable Margin shall be based upon the consolidated financial statements of the Company and its Subsidiaries for the period ended September 30, 2001 and the related calculation of the Net Debt to Equity Ratio in the format set forth in the applicable section of Exhibit E hereto, certified by a Responsible Officer of the Company. If the Company fails to deliver such financial statements and Compliance Certificate within the times specified in Section 5.05, or if the Company fails to deliver the certified calculation of the Net Debt to Equity Ratio with respect to the period ended September 30, 2001 as set forth above prior to the Closing Date, the Net Debt to Equity Ratio shall be deemed to be greater than .55 until the Company delivers such financial statements and Compliance Certificate (or certified calculation, as applicable) to the Agent and the Banks. "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and executed by the Agent and the Company, in substantially the form of the attached Exhibit A. "Banks" means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 10.06. "Borrower" means (a) with respect to all Advances, the Company, and (b) with respect to the Tranche A1 Advances and the Tranche B1 Advances, the Company and SARL, and "Borrowers" shall refer to all such Persons collectively. "Borrowing" means a Tranche A1 Borrowing, a Tranche A2 Borrowing, a Tranche B1 Borrowing, or a Tranche B2 Borrowing. "Business Day" means, (a) with respect to U.S. Base Rate Advances, a day of the year on which banks are not required or authorized to close in Atlanta, Georgia or New York, New York, and (b) with respect to Eurodollar Rate Advances, a day of the year on which banks are not required or authorized to close in Atlanta, Georgia, New York, New York, or London, England, and (c) with respect to Eurocurrency Rate Advances and EONIA Rate Advances, a day of the -3- year on which banks are not required or authorized to close in Paris, France and which is also a TARGET Day. "Capital Leases" means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with Applicable Accounting Rules, be required to be classified and accounted for as a capital lease on the balance sheet of such Person. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Class" has the meaning set forth in Section 1.04. "Closing Date" means the date on which all conditions precedent set forth in Section 3.01 hereof have been satisfied or waived by the party entitled to performance thereof. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Commitments" means, as to any Bank, its Tranche A1 Commitment, its Tranche A2 Commitment, its Tranche B1 Commitment and its Tranche B2 Commitment. "Compliance Certificate" means a Compliance Certificate signed by a Responsible Officer of the Company in substantially the form of the attached Exhibit E. "Control Percentage" means, with respect to any Person, the percentage of the outstanding capital stock of such Person having ordinary voting power which gives the direct or indirect holder of such stock the power to elect a majority of the Board of Directors of such Person. "Controlled Group" means, all members of a controlled group of corporations and all trades (whether or not incorporated) under common control which, together with any Borrower, are treated as a single employer under Section 414 of the Code. "Continue", "Continuation", and "Continued" each refers to a continuation of Advances for an additional Interest Period upon the expiration of the Interest Period then in effect for such Advances. "Convert", "Conversion", and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type as may be required or permitted from time to time under the terms of Sections 2.02(c) and 2.07(d) of this Agreement. "Credit Documents" means this Agreement, the Notes, and each other agreement, instrument or document executed by the Borrowers, any of their Subsidiaries or any of their officers at any time in connection with this Agreement. "Currency" means Dollars or Euros, as applicable. -4- "Debt," for any Person, means without duplication: (a) indebtedness of such Person for borrowed money; (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable); (d) obligations of such Person as lessee under Capital Leases; (e) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d) above; (f) all obligations of such Person under any Interest Hedge Agreement or Financial Contract (excluding foreign exchange transactions not entered into for speculative purposes); and (g) indebtedness or obligations of others of the kinds referred to in clauses (a) through (f) secured by any Lien on or in respect of any Property of such Person. "Default" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Dollar Equivalent" means the equivalent in another currency of an amount in Dollars to be determined by reference to the rate of exchange quoted by Societe Generale, New York Branch at 10:00 a.m. (New York City time) on the date of determination, for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency. "Dollars" and "$" means lawful money of the United States of America. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any State thereof, and having primary capital (Tier I) of not less than $500,000,000 and approved by the Agent and the Company, which approval will not be unreasonably withheld, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $500,000,000 (or its Dollar Equivalent) and approved by the Agent and the Company, which approval by the Agent and the Company will not be unreasonably withheld, or (c) any other Person that has been approved by the Company in its sole discretion and the Agent, which approval by the Agent will not be unreasonably withheld. Without limiting any other basis upon which the Company may reasonably withhold its consent to a proposed assignee, the Company's consent shall not be deemed to have been unreasonably withheld if such assignment would be reasonably likely to result in (i) any Borrower becoming liable for any payment pursuant to Sections 2.09, 2.11(a) or 2.11(c) or (ii) such assignee asserting any rights under Sections 2.02(c)(iii) or 2.07(d). -5- "Environment" or "Environmental" shall have the meanings set forth in 43 U.S.C.ss. 9601(8) (1988). "Environmental Claim" means any third party (including governmental agencies and employees) action, lawsuit, claim, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation which seeks to impose liability under any Environmental Law. "Environmental Law" means, as to a particular Borrower or its Subsidiaries, all Legal Requirements applicable to such Borrower or its Subsidiaries arising from, relating to, or in connection with the Environment, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, medical, infectious, or toxic substances, materials or wastes; or (d) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or wastes. "Environmental Permit" means any permit, license, order, approval or other authorization under Environmental Law. "EONIA Rate" means, for each EONIA Rate Advance comprising part of the same Borrowing, the interest rate per annum set forth on Telerate Page 247 (or any replacement page on such service) as the Euro Overnight Index Average at or about 7:00 a.m. (Brussels time) on the next Business Day after the date of determination. "EONIA Rate Advance" means an Advance which bears interest based on the EONIA Rate. "Equity" means, for any period (a) Total Stockholders' Equity (as defined in the Financial Statements of the Company) plus (b) Minority Interests (as defined in the Financial Statements of the Company). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time-to-time. "Euro" and/or "_" means the euro referred to in Council Regulation (EC) No. 1103/97 dated June 17, 1997 passed by the Council of the European Union, or, if different, the then lawful currency of the member states of the European Union that participate in the third stage of Economic and Monetary Union. "Eurocurrency Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurocurrency Lending Office" opposite its name on Schedule 1 (or, if no such office is specified, its U.S. Lending Office) or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent. -6- "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Federal Reserve Board (or any successor), as in effect from time-to-time. "Eurocurrency Rate" means, for the Interest Period for each Eurocurrency Rate Advance comprising part of the same Borrowing, (a) the interest rate per annum set forth on Telerate Page 248 as the Euro Interbank Offered Rate at or about 11:00 a.m. (Brussels time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period; provided that, if no such quotation appears on Telerate Page 248, the Eurocurrency Rate shall be an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to the rate per annum at which deposits in Euros are offered by the Reference Banks to prime banks in the European interbank market at 11:00 a.m. (Brussels time) two Business Days before the first day of such Interest Period in an amount substantially equal to Societe Generale's Eurocurrency Rate Advance comprising part of such Borrowing and for a period equal to such Interest Period. "Eurocurrency Rate Advance" means an Advance which bears interest based on the Eurocurrency Rate. "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" opposite its name on Schedule 1 (or, if no such office is specified, its U.S. Lending Office) or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing, the interest rate per annum set forth on Telerate Page 3750 as the London Interbank Offered Rate at or about 11:00 a.m. (London time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period; provided that, if no such quotation appears on Telerate Page 3750, the Eurodollar Rate shall be an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to the rate per annum at which deposits in Dollars are offered by the Reference Banks to prime banks in the London interbank market at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to Societe Generale's Eurodollar Rate Advance comprising part of such Borrowing and for a period equal to such Interest Period. "Eurodollar Rate Advance" means an Advance which bears interest based on the Eurodollar Rate. "Events of Default" has the meaning set forth in Section 7.01. "Existing Credit Agreement" means the Amended and Restated Credit Agreement dated as of January 30, 1998 among the Company, SARL, PDM Industries S.N.C., Schweitzer-Mauduit Spain, S.L., the banks named therein and Societe Generale, as Agent. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business -7- Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any of its successors. "Fees Regulations" means the Banking Supervision (Fees) Regulations 1999 or such other law or regulation as may be in force from time to time in respect of the payment of fees for banking supervision. "Fee Base" has the meaning given to it in, and will be calculated in accordance with, the Fees Regulations. "Financial Contract" of a Person means (a) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics, or (b) any Rate Management Transaction. "Financial Statements" means (a) the audited consolidated balance sheet of the Company as at December 31, 2000 and the related audited consolidated statements of income, changes in stockholders' equity and cash flows of the Company and (b) the audited or unaudited, as applicable, combined or consolidated, as applicable, balance sheets and income, changes in owners' equity and cash flow statements of each of the other entities referred to in Section 4.05, each dated as of December 31, 2000. "Fixed Rate Advance" means any Eurodollar Rate Advance or Eurocurrency Rate Advance. "Fixed Rate Reserve Percentage" of any Bank for the Interest Period for any Fixed Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time-to-time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Fund," "Trust Fund," or "Superfund" means the Hazardous Substance Response Trust Fund, established pursuant to 42 U.S.C. ss. 9631 (1988) and the Post-closure Liability Trust Fund, established pursuant to 42 U.S.C. ss. 9641 (1988), which statutory provisions have been amended or repealed by the Superfunds Amendments and Reauthorization Act of 1986, and the "Fund," "Trust Fund," or "Superfund" that are now maintained pursuant to ss. 9507 of the Code. "GAAP" means United States generally accepted accounting principles as in effect from time-to-time, applied on a basis consistent with the requirements of Section 1.03. "Governmental Authority" means, as to any Person in connection with any subject, any foreign, national, state or provincial governmental authority, or any political subdivision of any -8- state thereof, or any agency, department, commission, board, authority or instrumentality, bureau or court, in each case having jurisdiction over such Person or such Person's Property in connection with such subject. "Governmental Proceedings" means any action or proceedings by or before any Governmental Authority, including, without limitation, the promulgation, enactment or entry of any Legal Requirement. "Guaranteed Obligations" means all Advances and other amounts payable by SARL to the Agent or the Banks under the Credit Documents. "Hazardous Substance" means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any Environmental Law. "Interest Hedge Agreement" means an interest hedge, rate swap, or cap, or similar arrangement between a Borrower and a financial institution providing for the exchange of nominal interest obligations or the cap of the interest rate on the Advances made under this Agreement. "Interest Period" means, for each Fixed Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance and ending on the last day of the period selected by a Borrower pursuant to the provisions below and Section 2.02 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by such Borrower pursuant to the provisions below and Section 2.02. The duration of each such Interest Period shall be one, two, three, or six months, in each case as the applicable Borrower may, upon notice received by the Agent at the Applicable Lending Office on the day and at the time required by Section 2.02 (and copies of which shall in any event be sent simultaneously to the Agent's U.S. Lending Office), select; provided, however, that: (a) Interest Periods commencing on the same date for Advances by each Bank comprising part of the same Borrowing shall be of the same duration; (b) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (c) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and -9- (d) no Borrower may select any Interest Period for any Advance which ends after the applicable Maturity Date for such Advance. "Interim Financial Statements" means (a) the unaudited consolidated balance sheet of the Company as at September 30, 2001 and the related unaudited consolidated statements of income, changes in stockholders' equity and cash flows of the Company and (b) the unaudited, combined or consolidated, as applicable, balance sheets and income, changes in owners' equity and cash flow statements of each of the other entities referred to in Section 4.05, each dated as of September 30, 2001. "Legal Requirement" means, as to any Person, any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority which is applicable to such Person. "Lien" means any mortgage, lien, pledge, assignment, charge, deed of trust, security interest, hypothecation, preference, deposit arrangement or encumbrance (or any other arrangement having the practical effect of the foregoing) to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement). "Liquid Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by (i) the government of Brazil, with respect to investments of amounts arising from or used in the conduct of such Person's business in Brazil, (ii) the United States, (iii) the Republic of France or (iv) the Kingdom of Spain; (b) (i) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within 180 days from the date of acquisition thereof ("bank debt securities"), issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other bank or trust company which has a combined capital surplus and undivided profit of not less than $500,000,000 or the Dollar Equivalent thereof, if at the time of deposit or purchase, such bank debt securities are rated not less than "A" (or the then equivalent) by the rating service of Standard & Poor's Ratings Group or of Moody's Investors Service, and (ii) commercial paper issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other Person if at the time of purchase such commercial paper is rated not less than "A-2" (or the then equivalent) by the rating service of Standard & Poor's Ratings Group or not less than "P-2" (or the then equivalent) by the rating service of Moody's Investors Service, or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by the Borrower with the consent of the Majority Banks; (c) repurchase agreements relating to investments described in clauses (a) and (b) above with a market value at least equal to the consideration paid in connection therewith, with any Person who regularly engages in the business of entering into repurchase agreements and has -10- a combined capital surplus and undivided profit of not less than $500,000,000 or the Dollar Equivalent thereof, if at the time of entering into such agreement the debt securities of such Person are rated not less than "A" (or the then equivalent) by the rating service of Standard & Poor's Ratings Group or of Moody's Investors Service; and (d) such other instruments (within the meaning of Article 9 of the Uniform Commercial Code as adopted in the State of New York) or money market funds as the Borrower may request and the Agent may approve in writing, which approval will not be unreasonably withheld. "Majority Banks" means, at any time, Banks holding at least 66-2/3% of the then aggregate unpaid principal amount of the Notes held by the Banks at such time, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the aggregate amount of the Commitments at such time. "Material Adverse Change" shall mean (a) a material adverse change in the business, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole, since the date of the Financial Statements, or (b) a material adverse effect on any Borrower's ability to perform its obligations under this Agreement, any Note or any other Credit Document. "Material Subsidiaries" means any Subsidiary of any Borrower, which Subsidiary holds or constitutes 5% or more of the consolidated assets of the Company. "Maturity Date" means (a) with respect to the Tranche A Commitments, the earlier of (i) January 30, 2003 and (ii) the earlier termination in whole of the Tranche A Commitments pursuant to Section 2.04 or Article VII and (b) with respect to the Tranche B Commitments, the earlier of (i) January 31, 2007 and (ii) the earlier termination in whole of the Tranche B Commitments pursuant to Section 2.04 or Article VII. "Maximum Rate" means the maximum nonusurious interest rate under applicable law (determined under such laws after giving effect to any items which are required by such laws to be construed as interest in making such determination, including without limitation if required by such laws, certain fees and other costs). "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which any Borrower or any member of the Controlled Group is making or accruing an obligation to make contributions. "Net Debt" means, for any period, the Company's consolidated (a) current portion of long term Debt plus (b) other short term Debt plus (c) long term Debt less (d) cash and cash equivalents (as defined in the Financial Statements of the Company), each as determined in accordance with GAAP. "Net Debt to Equity Ratio" means, at any time, the ratio of the Company's (a) Net Debt to (b) Equity at such time. -11- "Net Income" means, for any period, the Company's consolidated net income for such period after taxes, as determined in accordance with GAAP. "Note" means a Tranche A1 Note, a Tranche A2 Note, a Tranche B1 Note, or a Tranche B2 Note. "Notice of Borrowing" means a notice of borrowing in the form of the attached Exhibit C signed by a Responsible Officer of the applicable Borrower. "Notice of Continuation" means a notice of continuation in the form of the attached Exhibit D signed by a Responsible Officer of the applicable Borrower. "Obligations" means all Advances and other amounts payable by the Borrowers to the Agent or the Banks under the Credit Documents, including without limitation, the Company's obligations under Article VIII. "Participating Member State" means each state so described in any legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency (whether known as the Euro or otherwise), being in part the implementation of the third stage of Economic and Monetary Union as contemplated in the Treaty of Rome of 25 March 1957, as amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on 7 February 1992 and came into force on 1 November 1993). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means the Liens permitted to exist pursuant to Section 6.01. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. "Philip Morris" means Philip Morris Incorporated, a Virginia corporation. "Plan" means an employee benefit plan (other than a Multiemployer Plan) sponsored by the Company or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. "Property" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "Pro Rata Share" means, at any time with respect to any Bank, either (a) if the Commitments have not been canceled, the ratio (expressed as a percentage) of such Bank's uncancelled Commitments at such time to the aggregate uncancelled Commitments at such time, (b) if the Commitments have been terminated but no Advances are outstanding, the ratio (expressed as a percentage) of such Bank's Commitment immediately prior to such termination to the aggregate amount of the Commitments immediately prior to such termination or (c) if the -12- aggregate Commitments have been terminated and there are outstanding Advances, the ratio (expressed as a percentage) of such Bank's aggregate outstanding Advances at such time to the aggregate outstanding Advances of all the Banks at such time. "Rate Management Transactions" means any transaction (including an agreement with respect thereto) which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Reference Banks" means Societe Generale, Natexis Banque Populaires, and Credit Lyonnais. "Register" has the meaning set forth in paragraph (c) of Section 10.06. "Regulations T, U, X and D" means Regulations T, U, X, and D of the Federal Reserve Board, as the same is from time-to-time in effect, and all official rulings and interpretations thereunder or thereof. "Release" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA. "Response" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Responsible Officer" means, of any Person, the Chief Executive Officer, President, Chief Financial Officer, any Executive or Senior Vice President, Secretary (or the French equivalent of any of the foregoing) of such Person or any other member of senior management of such Person. "SEC" means the Securities and Exchange Commission, and any successor entity. "Subsidiary" of a Person means any corporation, association, partnership or other business entity of which 50% or more of the outstanding shares of capital stock (or other equivalent interests) having by the terms thereof ordinary voting power under ordinary circumstances to elect a majority of the board of directors or Persons performing similar functions (or, if there are no such directors or Persons, having general voting power) of such entity (irrespective of whether at the time capital stock (or other equivalent interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. -13- "Supply Agreement" means (a) the Amended and Restated Agreement for Fine Paper Supply dated as of July 1, 2000 between Philip Morris and the Company, and (b) the Amended and Restated Addendum to Amended and Restated Fine Papers Supply Agreement dated as of July 1, 2000, as such Agreements may be further amended or modified from time-to-time. "Tangible Net Worth" means, as of any date for the Company on a consolidated basis, the sum of (a) the par value (or value stated on the books of the Company) of the capital stock of all classes of the Company, plus (b) the additional paid-in capital of the Company, plus (c) the amount of the surplus and retained earnings, whether capital or earned, of the Company, all determined on a consolidated basis in accordance with GAAP, excluding, however, (i) the value of any redeemable preferred stock or similar capital stock of the Company, and (ii) accumulated other comprehensive income, minus (d) the absolute value of treasury stocks, minus (e) the sum of the value indicated on the Company's balance sheet of the following items: patents, trademarks, copyrights, deferred charges (excluding deferred taxes), deferred credits (excluding deferred revenues), and other intangible assets. "TARGET" means Trans-European Automated Real-time Gross settlement Express Transfer system. "TARGET Day" means a day on which payments in Euros are settled in the TARGET system. "Tax Group" has the meaning set forth in Section 4.10. "Termination Event" means (a) the occurrence of a Reportable Event with respect to a Plan, as described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of any Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the giving of a notice of intent to terminate a Plan under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Tranche A Advance" means a Tranche A1 Advance or a Tranche A2 Advance. "Tranche A Borrowing" means a Tranche A1 Borrowing or a Tranche A2 Borrowing. "Tranche A Commitment" means the Tranche A1 Commitment and the Tranche A2 Commitment. "Tranche A1 Advance" means any advance by a Bank to a Borrower as part of a Tranche A1 Borrowing and refers to an EONIA Rate Advance or a Eurocurrency Rate Advance. "Tranche A1 Borrowing" means a borrowing consisting of simultaneous Tranche A1 Advances of the same Type and to the same Borrower made by each Bank pursuant to Section 2.01(a). -14- "Tranche A1 Commitment" means, for each Bank, the amount in Euros set opposite such Bank's name on the signature pages hereof as its Tranche A1 Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche A1 Commitment in the Register maintained by the Agent pursuant to Section 10.06(c). "Tranche A1 Note" means the promissory note of a Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit B-1, evidencing indebtedness of such Borrower to such Bank resulting from Tranche A1 Advances owing to such Bank from such Borrower. "Tranche A1 Share" means, at any time with respect to any Bank with a Tranche A1 Commitment, the ratio (expressed as a percentage) of such Bank's Tranche A1 Commitment at such time to the aggregate Tranche A1 Commitments at such time. "Tranche A2 Advance" means any advance by a Bank to the Company as part of a Tranche A2 Borrowing and refers to a U.S. Base Rate Advance or a Eurodollar Rate Advance. "Tranche A2 Borrowing" means a borrowing consisting of simultaneous Tranche A2 Advances of the same Type made by each Bank pursuant to Section 2.01(b). "Tranche A2 Commitment" means, for each Bank, the amount in Dollars set opposite such Bank's name on the signature pages hereof as its Tranche A2 Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche A2 Commitment in the Register maintained by the Agent pursuant to Section 10.06(c). "Tranche A2 Note" means the promissory note of the Company payable to the order of any Bank, in substantially the form of the attached Exhibit B-2, evidencing indebtedness of the Company to such Bank resulting from Tranche A2 Advances owing to such Bank. "Tranche A2 Share" means, at any time with respect to any Bank with a Tranche A2 Commitment, the ratio (expressed as a percentage) of such Bank's Tranche A2 Commitment at such time to the aggregate Tranche A2 Commitments at such time. "Tranche B Advance" means a Tranche B1 Advance or a Tranche B2 Advance. "Tranche B Borrowing" means a Tranche B1 Borrowing or a Tranche B2 Borrowing. "Tranche B Commitment" means the Tranche B1 Commitment and the Tranche B2 Commitment. "Tranche B1 Advance" means any advance by a Bank to a Borrower as part of a Tranche B1 Borrowing and refers to an EONIA Rate Advance or a Eurocurrency Rate Advance. "Tranche B1 Borrowing" means a borrowing consisting of simultaneous Tranche B1 Advances of the same Type and to the same Borrower made by each Bank pursuant to Section 2.01(c). -15- "Tranche B1 Commitment" means, for each Bank, the amount in Euros set opposite such Bank's name on the signature pages hereof as its Tranche B1 Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche B1 Commitment in the Register maintained by the Agent pursuant to Section 10.06(c). "Tranche B1 Note" means the promissory note of a Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit B-3, evidencing indebtedness of such Borrower to such Bank resulting from Tranche B1 Advances owing to such Bank from such Borrower. "Tranche B1 Share" means, at any time with respect to any Bank with a Tranche B1 Commitment, the ratio (expressed as a percentage) of such Bank's Tranche B1 Commitment at such time to the aggregate Tranche B1 Commitments at such time. "Tranche B2 Advance" means any advance by a Bank to the Company as part of a Tranche B2 Borrowing and refers to a U.S. Base Rate Advance or a Eurodollar Rate Advance. "Tranche B2 Borrowing" means a borrowing consisting of simultaneous Tranche B2 Advances of the same Type made by each Bank pursuant to Section 2.01(d). "Tranche B2 Commitment" means, for each Bank, the amount in Dollars set opposite such Bank's name on the signature pages hereof as its Tranche B2 Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche B2 Commitment in the Register maintained by the Agent pursuant to Section 10.06(c). "Tranche B2 Note" means the promissory note of the Company payable to the order of any Bank, in substantially the form of the attached Exhibit B-4, evidencing indebtedness of the Company to such Bank resulting from Tranche B2 Advances owing to such Bank. "Tranche B2 Share" means, at any time with respect to any Bank with a Tranche B2 Commitment, the ratio (expressed as a percentage) of such Bank's Tranche B2 Commitment at such time to the aggregate Tranche B2 Commitments at such time. "Type" has the meaning set forth in Section 1.04. "U.S. Base Rate" means a fluctuating interest rate per annum as shall be in effect from time-to-time equal to the rate of interest publicly announced by Societe Generale, New York Branch as its prime rate, whether or not the applicable Borrower has notice thereof. "U.S. Base Rate Advance" means an Advance which bears interest as provided in Section 2.06(a). "U.S. Lending Office" means, with respect to any Bank, the office of such Bank specified as its "U.S. Lending Office" opposite its name on Schedule 1 or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent. -16- Section 1.02 Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03 Accounting Terms; Changes in GAAP. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Banks hereunder (which prior to the delivery of the first financial statements under Section 5.05 hereof, shall mean the Financial Statements). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with those used in the preparation of the annual or quarterly financial statements furnished to the Banks pursuant to Section 5.05 hereof most recently delivered prior to or concurrently with such calculations (or, prior to the delivery of the first financial statements under Section 5.05 hereof, used in the preparation of the Financial Statements) unless (i) either (A) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (B) the Majority Banks shall so object in writing within 30 days after the delivery of such financial statements and (ii) the Company and the Majority Banks have not agreed upon amendments to the financial covenants contained herein to reflect any change in such basis, in which event such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 5.05 hereof, shall mean the Financial Statements). (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 5.05 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the most recent preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of clause (a) of this Section 1.03 and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. Section 1.04 Classes and Types of Advances. Advances are distinguished by "Class" and "Type". The "Class" of an Advance refers to the determination of whether such Advance is a Tranche A1 Advance, a Tranche A2 Advance, a Tranche B1 Advance, or a Tranche B2 Advance, each of which constitutes a Class. The "Type" of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance, a Eurocurrency Rate Advance, a U.S. Base Rate Advance, or a EONIA Rate Advance, each of which constitutes a Type. -17- Section 1.05 Miscellaneous. Article, Section, Schedule and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. ARTICLE II THE ADVANCES Section 2.01 The Advances. (a) Tranche A1 Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche A1 Advances in Euros to each Borrower from time-to-time on any Business Day during the period from the date of this Agreement until the relevant Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank's Tranche A1 Commitment; provided that the sum of the aggregate outstanding principal amounts of all Tranche A1 Advances made by each Bank (whether to the Company or SARL) shall not exceed such Bank's Tranche A1 Commitment. Each Tranche A1 Borrowing shall be in an aggregate amount not less than 1,000,000 and in integral multiples of 100,000 in excess thereof and shall consist of Tranche A1 Advances of the same Type made on the same day to the same Borrower by the Banks ratably according to their respective Tranche A1 Commitments. Within the limits of each Bank's Tranche A1 Commitment, the Borrowers may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(a). (b) Tranche A2 Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche A2 Advances in Dollars to the Company from time-to-time on any Business Day during the period from the date of this Agreement until the relevant Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank's Tranche A2 Commitment. Each Tranche A2 Borrowing shall be in an aggregate amount not less than $1,000,000 and in integral multiples of $100,000 in excess thereof and shall consist of Tranche A2 Advances of the same Type made on the same day by the Banks ratably according to their respective Tranche A2 Commitments. Within the limits of each Bank's Tranche A2 Commitment, the Company may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(b). (c) Tranche B1 Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche B1 Advances in Euros to each Borrower from time-to-time on any Business Day during the period from the date of this Agreement until the relevant Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank's Tranche B1 Commitment; provided that the sum of the aggregate outstanding principal amounts of all Tranche B1 Advances made by each Bank (whether to the Company or SARL) shall not exceed such Bank's Tranche B1 Commitment. Each Tranche B1 Borrowing shall be in an aggregate amount not less than 5,000,000 and in integral multiples of 1,000,000 in excess thereof and shall consist of Tranche B1 Advances of the same Type made on the same day to the same Borrower by the Banks ratably according to their respective Tranche B1 Commitments. Within the limits of each Bank's Tranche B1 Commitment, the Borrowers may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(c). -18- (d) Tranche B2 Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche B2 Advances in Dollars to the Company from time-to-time on any Business Day during the period from the date of this Agreement until the relevant Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank's Tranche B2 Commitment. Each Tranche B2 Borrowing shall be in an aggregate amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof and shall consist of Tranche B2 Advances of the same Type made on the same day by the Banks ratably according to their respective Tranche B2 Commitments. Within the limits of each Bank's Tranche B2 Commitment, the Company may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(d). Section 2.02 Method of Borrowing. (a) Notice. Each Borrowing shall be made pursuant to a Notice of Borrowing, given not later than (i) 10:00 a.m. (Paris time) at least three Business Days before the date of a requested Tranche A1 Borrowing, (ii) 10:00 a.m. (New York time) at least three Business Days before the date of a requested Tranche A2 Borrowing, (iii) 10:00 a.m. (Paris time) at least five Business Days before the date of a requested Tranche B1 Borrowing, (iv) 10:00 a.m. (New York time) at least five Business Days before the date of a requested Tranche B2 Borrowing, or (v) 10:00 a.m. (New York time) on the day preceding the day of a requested Borrowing in the case of a Borrowing consisting of U.S. Base Rate Advances, by the applicable Borrower to the Agent's Applicable Lending Office. The Agent shall give to each Bank prompt notice on the day of receipt of a timely Notice of Borrowing of such requested Borrowing by telecopier or telex. Each Notice of a Borrowing shall be by telecopier, telex or telephone, confirmed promptly the same day in writing specifying (A) the requested date of such Borrowing (which shall be a Business Day), (B) the requested Type and Class of Advances comprising such Borrowing, (C) the requested aggregate amount of such Borrowing, (D) the applicable Borrower, and (E) with respect to any Borrowing consisting of Fixed Rate Advances, the requested Interest Period therefor. The Agent shall promptly notify each Bank of the applicable interest rate under Sections 2.06(b) or 2.06(c), as applicable. Each Bank shall (I) in the case of all Borrowings which are comprised of Tranche A1 Advances or Tranche B1 Advances, before 12:00 p.m. (Paris time) on the date of such Borrowing, and (II) in the case of all Borrowings which are comprised of Tranche A2 Advances or Tranche B2 Advances, before 12:00 p.m. (New York time) on the date of such Borrowing, make available through its Applicable Lending Office to the Agent at the Agent's Applicable Lending Office, or such other location as the Agent may specify by notice to the Banks, in same day funds, such Bank's Tranche A1 Share, Tranche A2 Share, Tranche B1 Share or Tranche B2 Share of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will promptly make such funds available to the applicable Borrower at such account as the applicable Borrower shall specify in writing to Agent. (b) Continuations; Repayment of U.S. Base Rate Advances. In order to elect to Continue a Fixed Rate Advance under this Section, the Borrower desiring a Continuation shall deliver an irrevocable Notice of Continuation to the Agent at the Agent's office no later than (i) 10:00 a.m. (Paris time) at least three Business Days in advance of such requested Continuation date in the case of a Continuation of a Tranche A1 Advance, (ii) 10:00 a.m. (New York time) at least three Business Days in advance of such requested Continuation date in the case of a -19- Continuation of a Tranche A2 Advance, (iii) 10:00 a.m. (Paris time) at least five Business Days in advance of such requested Continuation date in the case of a Continuation of a Tranche B1 Advance or (iv) 10:00 a.m. (New York time) at least five Business Days in advance of such requested Continuation date in the case of a Continuation of a Tranche B2 Advance. Each such Notice of Continuation shall be in writing or by telex, telecopier or telephone, confirmed promptly the same day in writing specifying (A) the requested Continuation date (which shall be a Business Day), (B) the amount, Type, and Class of the Advance to be Continued, and (C) the requested Interest Period. Promptly after receipt of a Notice of Continuation under this paragraph, the Agent shall provide each Bank with a copy thereof and notify each Bank of the applicable interest rate under Sections 2.06(b) or 2.06(c), as applicable. Notwithstanding anything in this Agreement to the contrary, Continuations of Advances may only be made at the end of the applicable Interest Period for such Advances. The applicable Borrower shall pay in full each Borrowing consisting of U.S. Base Rate Advances made pursuant to Section 2.02(a)(v) above (but excluding Borrowings or Advances Converted to bear interest at the U.S. Base Rate pursuant to Section 2.02(c) or 2.07(d)) on or before the 10th day following the date of such Borrowing. (c) Certain Limitations. Notwithstanding anything in paragraphs (a) and (b) above: (i) at no time shall there be more than five Interest Periods for each Tranche applicable to outstanding Fixed Rate Advances; provided that at no time shall there be more than 12 Interest Periods applicable to outstanding Fixed Rate Advances; (ii) except as otherwise specifically provided in Sections 2.02(c) and 2.07(d) herein, each Borrowing shall be comprised entirely of Fixed Rate Advances; (iii) (A) if any Bank shall, at least two Business Days before the date of any requested Borrowing, notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or any of its Applicable Lending Offices to perform its obligations under this Agreement to make Fixed Rate Advances of a certain Type, or to fund or maintain Fixed Rate Advances of a certain Type (each such Bank an "Affected Bank"), the obligation of the Affected Bank to make or maintain Fixed Rate Advances of the Type affected for such Borrowing or for any subsequent Borrowing shall be suspended until the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist, and the Advance of the Affected Bank comprising such Borrowing shall be in the case of a Eurodollar Rate Advance, a U.S. Base Rate Advance and in the case of a Eurocurrency Rate Advance, a EONIA Rate Advance, (B) each Bank that becomes an Affected Bank agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of the Affected Bank, be otherwise economically disadvantageous to the Affected Bank; and (C) if such condition shall continue for such Bank for 30 days, the Affected Bank may be replaced in accordance with the procedures in Section 2.13; provided that, if the Affected Bank is not replaced within 60 days after such initial 30-day period, the right of the Borrowers to select the affected Type of Fixed Rate Advances for -20- any subsequent Borrowing and the obligation of the Banks to make or maintain the affected Type of Fixed Rate Advances shall be suspended until (I) the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist or (II) the Affected Bank is replaced pursuant to Section 2.13; (iv) if the Agent is unable to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any requested Borrowing, the right of the Company to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Eurodollar Rate Advances shall be suspended until the Agent shall notify the Company and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a U.S. Base Rate Advance until receipt of such notification, whereupon the Company may again select Eurodollar Rate Advances for Borrowings; (v) if the Agent is unable to determine the Eurocurrency Rate for Eurocurrency Rate Advances comprising any requested Borrowing, the right of the Borrowers to select Eurocurrency Rate Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Eurocurrency Rate Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be an Advance which bears interest at a rate determined by the Agent to reflect the cost to each Bank of funding in Euros for the applicable Interest Period plus the Applicable Margin plus the Additional Cost Rate; (vi) if the Majority Banks shall (A) in the case of all Borrowings which are comprised of Tranche A1 Advances or Tranche B1 Advances, before 12:00 p.m. (Paris time) at least two Business Days before the date of any requested Borrowing, and (B) in the case of all Borrowings which are comprised of Tranche A2 Advances or Tranche B2 Advances, before 12:00 p.m. (New York time) at least two Business Days before the date of any requested Borrowing, notify the Agent that the Eurodollar Rate or Eurocurrency Rate, as the case may be, for Fixed Rate Advances comprising such Borrowing will not adequately reflect the cost to such Banks of making or funding their respective Fixed Rate Advances for such Borrowing, the right of the Borrowers to select Eurodollar Rate Advances or Eurocurrency Rate Advances, as the case may be, for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make Eurodollar Rate Advances or Eurocurrency Rate Advances, as the case may be, shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a U.S. Base Rate Advance or an Advance which bears interest at a rate determined by the Agent to reflect the cost to each Bank of funding in Euros for the applicable Interest Period plus the Applicable Margin plus the Additional Cost Rate, respectively; and (vii) if any Borrower shall fail to select the duration or Continuation of any Interest Period for any Fixed Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and paragraphs (a) and (b) above, the Agent will forthwith so notify such Borrower and the Banks and such Advances will be -21- made available to such Borrower on the date of such Borrowing of the class and type designated for a one month Interest Period. Notwithstanding the foregoing, if either U.S. Base Rate Advances or EONIA Rate Advances are not available because of circumstances substantially similar to those set forth in subsections (iii), (iv), (v) or (vi) with respect to Fixed Rate Advances, then the Borrowers shall either (y) Convert the then outstanding principal amount of the affected Advances to bear interest at a rate determined by the Agent from time to time to reflect the cost to each Bank of funding such Advances in Dollars or Euros, as applicable, and pay all interest accrued on the amount so Converted or (z) repay in full the then outstanding principal amount of the affected Advances, together with accrued interest thereon. Except as otherwise provided in (y) above, the right of the Borrowers to select such affected Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist. (d) Notices Irrevocable. Each Notice of Borrowing and Notice of Continuation shall be irrevocable and binding on the Borrower delivering such notice. Each Borrower shall indemnify each Bank against any loss, out-of-pocket cost or expense actually incurred by such Bank as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing or such Notice of Continuation for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Advance to be made by such Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (e) Agent Reliance. Unless the Agent shall have received notice from a Bank before the date of any Borrowing that such Bank will not make available to the Agent such Bank's Tranche A1 Share of any Tranche A1 Borrowing, Tranche A2 Share of any Tranche A2 Borrowing, Tranche B1 Share of any Tranche B1 Borrowing, or Tranche B2 Share of any Tranche B2 Borrowing, the Agent may assume that such Bank has made its Tranche A1 Share, Tranche A2 Share, Tranche B1 Share, or Tranche B2 Share, as the case may be, of such Borrowing available to the Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Tranche A1 Share, Tranche A2 Share, Tranche B1 Share, or Tranche B2 Share, as the case may be, of such Borrowing available to the Agent, such Bank and the applicable Borrower severally agree to immediately repay to the Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Borrowing and (ii) in the case of such Bank (A) for all Borrowings which are comprised of Tranche A1 Advances or Tranche B1 Advances, the EONIA Rate for such day, and (II) for all Borrowings which are comprised of Tranche A2 Advances or Tranche B2 Advances, the Federal Funds Rate for such day. If such Bank shall repay to the Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute -22- such Bank's Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing. (f) Bank Obligations Several. The failure of any Bank to make the Advance to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, to make its Advance on the date of such Borrowing. No Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Borrowing. (g) Notes. The indebtedness of the Company to each Bank resulting from Tranche A2 Advances and the Tranche B2 Advances owing to such Bank shall be evidenced by the Tranche A2 Note and Tranche B2 Note, respectively, of the Company payable to the order of such Bank. The indebtedness of each Borrower to each Bank resulting from the Tranche A1 Advances and the Tranche B1 Advances of such Borrower owing to such Bank shall be evidenced by the Tranche A1 Note and the Tranche B1 Note, respectively, of each Borrower payable to the order of such Bank. Section 2.03. Fees. (a) Tranche A1 Commitment Fees. The Company agrees to pay to the Agent for the account of each Bank a commitment fee payable in Euros on the average daily amount by which such Bank's Tranche A1 Commitment exceeds such Bank's outstanding Tranche A1 Advances from the Closing Date until the Maturity Date applicable to such Advances at the rate of .25% per annum. The fees payable pursuant to this clause (a) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing March 31, 2002 and on the Maturity Date applicable to such Commitments. (b) Tranche A2 Commitment Fees. The Company agrees to pay to the Agent for the account of each Bank a commitment fee payable in Dollars on the average daily amount by which such Bank's Tranche A2 Commitment exceeds such Bank's outstanding Tranche A2 Advances from the Closing Date until the Maturity Date applicable to such Advances at the rate of .25% per annum. The fees payable pursuant to this clause (b) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing March 31, 2002 and on the Maturity Date applicable to such Commitments. (c) Tranche B1 Commitment Fees. The Company agrees to pay to the Agent for the account of each Bank a commitment fee payable in Euros on the average daily amount by which such Bank's Tranche B1 Commitment exceeds such Bank's outstanding Tranche B1 Advances from the Closing Date until the Maturity Date applicable to such Advances at the rate of .35% per annum. The fees payable pursuant to this clause (c) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing March 31, 2002 and on the Maturity Date applicable to such Commitments. (d) Tranche B2 Commitment Fees. The Company agrees to pay to the Agent for the account of each Bank a commitment fee payable in Dollars on the average daily amount by which such Bank's Tranche B2 Commitment exceeds such Bank's outstanding Tranche B2 Advances from the Closing Date until the Maturity Date applicable to such Advances at the rate -23- of .35% per annum. The fees payable pursuant to this clause (d) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing March 31, 2002 and on the Maturity Date applicable to such Commitments. (e) Upfront Fees and Agent's Arrangement Fees. The Company agrees to pay to the Agent the arrangement fees referenced in the Commitment Letter dated October 31, 2001 from the Agent to the Borrowers. Such fees shall be fully earned and due upon execution of this Agreement, but shall not be payable until the Closing Date. Any fee referred to in the Commitment Letter and required to be paid under this clause (e) shall be paid exclusive of any value added tax or any other tax which might be chargeable in connection with that fee. If any value added tax or other tax is so chargeable with respect to such fee, it shall be paid by the relevant Borrower at the same time that it pays the relevant fee. Section 2.04. Reduction of the Commitments. The Borrowers shall have the right, upon at least fifteen Business Days' irrevocable written notice to the Agent, to terminate in whole or reduce ratably in part the unused portion of the Commitments without penalty or payment of any premium; provided that each partial reduction of the Commitments shall be in the minimum aggregate amount of 5,000,000 or an integral multiple of 1,000,000 in excess thereof or $5,000,000 or an integral multiple of $1,000,000 in excess thereof, as the case may be. Any reduction or termination of the Commitments pursuant to this Section 2.04 shall be permanent, with no obligation of the Banks to reinstate such Commitments and the commitment fees provided for in Section 2.03 shall thereafter be computed on the basis of the Commitments, as so reduced. Section 2.05. Repayment. The Borrowers obligated thereon shall repay the outstanding principal amount of the Advances on the Maturity Date applicable to such Advances. Section 2.06. Interest. Each of the Borrowers shall pay interest on the unpaid principal amount of each Advance made by each Bank to such Borrower from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum and in the Currency in which such Advance is made: (a) U.S. Base Rate Advances. If such Advance is a U.S. Base Rate Advance, a rate per annum equal at all times to the lesser of (i) the Adjusted U.S. Base Rate in effect from time-to-time and (ii) the Maximum Rate, payable in arrears on the last Business Day of each calendar quarter and on the date such U.S. Base Rate Advance shall be paid in full, provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the Adjusted U.S. Base Rate in effect from time-to-time plus 2% and (ii) the Maximum Rate. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the Eurodollar Rate for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest -24- Period; provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the greater of (A) the Adjusted U.S. Base Rate in effect from time-to-time plus 2% and (B) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate. (c) Eurocurrency Rate Advances. If such Advance is a Eurocurrency Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the Eurocurrency Rate for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period; provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the greater of (A) the EONIA Rate in effect from time-to-time plus 2% and (B) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate. (d) EONIA Rate Advances. If such Advance is a EONIA Rate Advance, a rate per annum equal at all times to the lesser of (i) the EONIA Rate in effect from time-to-time and (ii) the Maximum Rate, payable in arrears on the last Business Day of each calendar quarter and on the date such EONIA Rate Advance shall be paid in full, provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the EONIA Rate in effect from time-to-time plus 2% and (ii) the Maximum Rate. (e) Usury Recapture. In the event the rate of interest chargeable under this Agreement or the Notes at any time (calculated after giving affect to all items charged which constitute "interest" under applicable laws, including fees and margin amounts, if applicable) is greater than the Maximum Rate, the unpaid principal amount of the Notes shall bear interest at the Maximum Rate until the total amount of interest paid or accrued on the Notes equals the amount of interest which would have been paid or accrued on the Notes if the stated rates of interest set forth in this Agreement had at all times been in effect. In the event, upon payment in full of the Notes, the total amount of interest paid or accrued under the terms of this Agreement and the Notes is less than the total amount of interest which would have been paid or accrued if the rates of interest set forth in this Agreement had, at all times, been in effect, then the Borrowers shall, to the extent permitted by applicable law, pay the Agent for the account of the Banks an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been charged on the Notes if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued on the Notes if the rates of interest set forth in this Agreement had at all times been in effect and (ii) the amount of interest actually paid under this Agreement on the Notes. -25- In the event the Banks ever receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall, to the extent permitted by law, be applied to the reduction of the principal balance of the Notes, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrowers. Section 2.07. Prepayments. (a) Right to Prepay. The Borrowers shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.07. (b) Optional. Any Borrower may elect to prepay any of the Tranche B Advances owing by it to the Banks, after giving prior written notice of such election by (i) in the case of Tranche B1 Advances, before 12:00 p.m. (Paris time), and (ii) in the case of Tranche B2 Advances, before 12:00 p.m. (New York time) fifteen Business Days before such prepayment date to the Agent stating the proposed date and aggregate principal amount of such prepayment. If any such notice is given, the Borrower giving such notice shall prepay such Tranche B Advances comprising part of the same Tranche B Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date; provided, however, that each partial prepayment shall be in an aggregate principal amount not less than (i) in the case of Tranche B1 Advances 5,000,000 and (ii) in the case of Tranche B2 Advances, $5,000,000. (c) Mandatory. (i) On the date of any reduction of the Commitments pursuant to Section 2.04, the applicable Borrower agrees to make a prepayment in respect of the outstanding amount of the applicable Advances to the extent, if any, that the aggregate unpaid principal amount of all such Advances exceeds the applicable aggregate Commitment, as so reduced. (ii) Each prepayment pursuant to this Section 2.07(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date. (d) Illegality. If any Bank shall notify the Agent and the Borrowers that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Bank, its Eurodollar Lending Office or its Eurocurrency Lending Office to perform its obligations under this Agreement to make or maintain a Type of Fixed Rate Advances of such Bank then outstanding hereunder (each such Bank being an "Affected Bank"), (i) the Borrowers shall, (A) in the case of all Borrowings which are comprised of Tranche A1 Advances or Tranche B1 Advances, no later than 12:00 p.m. (Paris time), and (B) in the case of all Borrowings which are comprised of Tranche A2 Advances or Tranche B2 Advances, no later than 12:00 p.m. (New York time), (I) if not prohibited by law or regulation to maintain such -26- Type of Fixed Rate Advances for the duration of the Interest Period, on the last day of the Interest Period for each outstanding Fixed Rate Advance or (II) if prohibited by law or regulation to maintain such Type of Fixed Rate Advances for the duration of the Interest Period, on the second Business Day following its receipt of such notice, Convert the Fixed Rate Advances of that Type of the Affected Bank to either (1) in the case of Eurodollar Rate Advances, a single U.S. Base Rate Advance or (2) in the case of Eurocurrency Rate Advances, a single EONIA Rate Advance, each in an amount equal to the aggregate principal amount of the affected Fixed Rate Advances of such Borrowers, and (ii) the obligation of the Affected Bank to make or maintain the affected Type of Fixed Rate Advances shall be suspended until the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist. Each Bank which becomes an Affected Bank agrees to use commercially reasonable efforts (consistent with its internal policies and subject to legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise economically disadvantageous to such Bank. If the condition requiring the Conversion under this paragraph shall continue for the Affected Bank for 30 days, the Affected Bank may be replaced in accordance with the procedures in Section 2.13; provided that, if the Affected Bank is not replaced within 60 days after such initial 30-day period, (A) all Fixed Rate Advances of the affected Type shall be Converted in accordance with the procedures described above, and (B) the right of the Borrowers to select the affected Type of Fixed Rate Advances for any subsequent Borrowing and the obligation of the Banks to make or maintain the affected Type of Fixed Rate Advances shall be suspended until (I) the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist or (II) the Affected Bank is replaced pursuant to Section 2.13. Notwithstanding the foregoing, if either U.S. Base Rate Advances or EONIA Rate Advances are not available because of the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Bank and its Applicable Lending Office to perform its obligations under this Agreement to make or maintain such Advances, then the Borrowers shall repay in full the then outstanding principal amount of the affected Advances, together with accrued interest thereon, and the right of the Borrowers to select such affected Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist. (e) Ratable Payments; Effect of Notice. Each payment of any Advance pursuant to this Section 2.07 or any other provision of this Agreement shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. All notices given pursuant to this Section 2.07 shall be irrevocable and binding upon the Borrowers. Section 2.08. Funding Losses. If any payment of principal of any Fixed Rate Advance is made other than on the last day of the Interest Period for such Advance as a result of any payment pursuant to Section 2.07 or the acceleration of the maturity of the Notes pursuant to Article VII, such Borrower shall, within 10 days of any written demand sent by any Bank to such Borrower through the Agent, pay to the Agent for the account of such Bank any amounts (without duplication of any other amounts payable in respect of breakage costs) required to compensate such Bank for any additional losses, out-of-pocket costs or expenses which it may actually incur as a result of such payment or nonpayment, including, without limitation, any loss, -27- cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such Advance (but excluding loss of profits). Section 2.09. Increased Costs. (a) Fixed Rate Advances. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or Eurocurrency Rate Advances (including, without limitation, (A) additional interest to compensate such Bank for reserve costs actually incurred by such Bank associated with Eurocurrency Liabilities, such additional interest to be calculated by subtracting (1) the Eurodollar Rate or Eurocurrency Rate, as applicable, for the relevant Advance from (2) the rate obtained by dividing such applicable interest rate for such Advance (excluding the Applicable Margin) by a percentage equal to one minus the applicable Fixed Rate Reserve Percentage of such Bank for such Interest Period and (B) any Applicable Mandatory Costs), then the applicable Borrowers shall from time-to-time, upon demand by such Bank (with a copy of such demand to the Agent), immediately pay to the Agent for the account of such Bank additional amounts (without duplication of other amounts payable in respect of increased costs) sufficient to compensate such Bank for such increased cost; provided, however, that, before making any such demand, each Bank agrees to use commercially reasonable efforts (consistent with its internal policy and subject to legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Bank, be otherwise economically disadvantageous to such Bank (except that no Bank shall be required to redesignate its Applicable Lending Office to avoid the incurrence of increased costs associated with additional interest required to be paid by the Borrowers to any Bank in connection with reserve costs attributable to Eurocurrency Liabilities). A certificate shall be submitted to the Borrowers and the Agent by such Bank (a) indicating the amount of such increased cost and detailing the calculation of such cost, (b) stating that such Bank is generally charging such amounts to other customers similarly situated with the Borrowers, and (c) that all such costs are being charged within 90 days of the date the Bank learned of such costs, such certificate to be conclusive and binding for all purposes, absent manifest error. (b) Capital Adequacy. If any Bank determines in good faith that compliance with any generally applicable law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) implemented or effective after the date of this Agreement increases or would increase the amount of capital required or expected to be maintained by such Bank or any corporation controlling such Bank and that the amount of such capital is increased by or based upon the existence of such Bank's commitment to lend and other commitments of this type, then, upon 30 days prior written notice by such Bank (with a copy of any such demand to the Agent), the Borrowers shall immediately pay to the Agent for the account of such Bank as the case may be, from time-to-time as specified by such Bank, additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Bank, in light of such circumstances, with respect to such Bank, to the extent that such Bank reasonably determines such increase in capital to be -28- allocable to the existence of such Bank's commitment to lend under this Agreement. A certificate shall be submitted to the Borrowers and the Agent by such Bank (a) indicating the amount of such capital adequacy costs and detailing the calculation of such costs, (b) stating that such Bank is generally charging such amounts to other customers similarly situated with the Borrowers, and (c) certifying that all such costs are being charged within 90 days of the date the Bank learned of such costs, such certificate to be conclusive and binding for all purposes, absent manifest error. (c) Special Provisions regarding Applicable Mandatory Costs. Each Bank shall supply any information required by the Agent for the purpose of calculating its Additional Cost Rate. In particular, but without limitation, each Bank shall supply the following information in writing on or prior to the date on which it becomes a Bank: (a) its jurisdiction of incorporation and the jurisdiction of its Applicable Lending Offices; and (b) any other information that the Agent may reasonably require for such purpose. Each Bank shall promptly notify the Agent in writing of any change to the information provided by it pursuant to this paragraph. The percentages or rates of charge of each Bank for the purpose of determining "A" in the definition of "Additional Cost Rate" shall be determined by the Agent based upon the information supplied to it pursuant hereto and on the assumption that, unless a Bank notifies the Agent to the contrary, each Bank's obligations in relation to the Fees Regulations are the same as those of a typical bank from its jurisdiction of incorporation with an Applicable Lending Office in the same jurisdiction as its Applicable Lending Office. The Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Bank and shall be entitled to assume that the information provided by any Bank pursuant hereto is true and correct in all respects. The Agent shall distribute the additional amounts received as a result of the Applicable Mandatory Cost to the Banks on the basis of the Additional Cost Rate for each Bank based on the information provided by each Bank pursuant hereto. Any determination by the Agent pursuant to this Agreement in relation to a formula, the Applicable Mandatory Cost, an Additional Cost Rate or any amount payable to a Bank shall, in the absence of manifest error, be conclusive and binding. The Agent may from time to time, after consultation with the Borrower and the Banks, determine and notify to all parties hereto any amendments which are required to be made to this Agreement in order to comply with any change in law, regulation or any requirements from time to time imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any other Governmental Authority which replaces all or any of its functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all parties. Section 2.10. Payments and Computations. (a) Payment Procedures. The Borrowers shall make each payment under this Agreement and under their respective Notes not later than 12:00 p.m. (New York time) on the day when due in Dollars with respect to Tranche A2 Advances and Tranche B2 Advances, and (ii) not later than 12:00 p.m. (Paris, France time) on the day when due in Euros with respect to Tranche A1 Advances and Tranche B1 Advances, and in each case to the Agent at the location referred to in the Notes (or such other location as the Agent shall designate in writing to the Borrowers) in same day funds. The Agent will promptly thereafter, and in any event prior to the close of business on the day any timely payment is made, cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to -29- the Agent, or a specific Bank pursuant to Section 2.03(e), 2.08, 2.09, or 2.11, but after taking into account payments effected pursuant to Section 10.04) (i) before the acceleration of the Advances pursuant to Section 7.02 or 7.03, (A) in the case of payments in respect of Tranche A1 Advances, Tranche A2 Advances, Tranche B1 Advances and Tranche B2 Advances, in accordance with each Bank's Tranche A1 Share, Tranche A2 Share, Tranche B1 Share and Tranche B2 Share, as applicable and (ii) after the acceleration of the Advances pursuant to Section 7.02 or 7.03, in accordance with each Bank's Pro Rata Share to the Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Computations. All computations of interest based on the U.S. Base Rate or the EONIA Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate, the Eurocurrency Rate, the Federal Funds Rate, and of fees shall be made by the Agent, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent of an interest rate shall be conclusive and binding for all purposes, absent manifest error. (c) Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be. (d) Agent Reliance. Unless the Agent shall have received written notice from a Borrower prior to the date on which any payment is due to the Banks that such Borrower will not make such payment in full, the Agent may assume that such Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due to such Bank. If and to the extent such Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate for such day. Section 2.11. Taxes. (a) No Deduction for Certain Taxes. Any and all payments by the Borrowers shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise taxes imposed on it by the United States or any political subdivision thereof, the jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or any political subdivision of the jurisdiction and (ii) in the case of each Bank, taxes imposed by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision of such jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Borrower shall be -30- required by law to deduct any Taxes from or in respect of any sum payable to any Bank or the Agent, (A) the sum payable shall be increased as may be necessary so that, after making all required deductions, such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if such Borrower's obligation to deduct or withhold Taxes is caused solely by such Bank's or the Agent's failure to provide the forms described in paragraph (e) of this Section 2.11 and such Bank or the Agent could have provided such forms, no such increase shall be required; (B) such Borrower shall make such deductions; and (C) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, the Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). (c) Indemnification. Each of the Borrowers indemnifies each Bank and the Agent for the full amount of Taxes or Other Taxes paid by such Bank or the Agent (as the case may be) and any liability (including interest and expenses) arising therefrom or with respect thereto, in either case, attributable to such Borrower. Each payment required to be made by the Borrowers in respect of this indemnification shall be made to the Agent for the benefit of any party claiming such indemnification within 30 days from the date the Borrowers receive written demand detailing the calculation of such amounts therefor from the Agent on behalf of itself as Agent or any such Bank. If any Bank or the Agent receives a refund or credit in respect of any taxes paid by any Borrower under this paragraph (c), such Bank or the Agent, as the case may be, shall promptly pay to such Borrower such Borrower's share of such refund or credit. (d) Evidence of Tax Payments. Each of the Borrowers will pay prior to delinquency all Taxes payable in respect of any payment. Upon the request of the applicable Bank, the Borrower making such payment will furnish to the Agent, at its address referred to in Section 10.02, the original or a certified copy of a receipt evidencing payment of such Taxes. (e) Foreign Bank Withholding Exemption. (i) Each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrowers and the Agent on the date of this Agreement or upon, and as a condition to, the effectiveness of any Assignment and Acceptance (i) two duly completed copies of United States Internal Revenue Service Form W-8ECI, W-8BEN, W-8EXP or W-8IMY or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8ECI, W-8BEN, W-8EXP or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower. Each Bank which delivers -31- to the Borrowers and the Agent a Form W-8ECI, W-8BEN, W-8EXP, W-8IMY or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrowers and the Agent two further copies of Form W-8ECI, W-8BEN, W-8EXP, W-8IMY or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrowers and the Agent certifying in the case of a Form W-8ECI, W-8BEN, W-8EXP, or W-8IMY that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrowers and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such forms. The Borrowers may withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to timely provide the requisite Internal Revenue Service forms. (ii) Each Bank that is not incorporated under the laws of the Republic of France or any province thereof agrees that it will deliver to the Borrowers and the Agent on the date of this Agreement or upon, and as a condition to, the effectiveness of any Assignment and Acceptance such governmental forms which may be necessary, appropriate or required under the applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax imposed by the Republic of France or any political subdivision thereof ("French Withholding Taxes"). Each Bank which delivers to the Borrowers and the Agent any such governmental form pursuant to the next preceding sentence further undertakes to deliver to the Borrowers and the Agent two (2) further copies of said governmental forms or successor forms, or other manner of certification as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers and the Agent, and such extensions or renewals thereof as may be reasonably requested by the Borrowers or the Agent certifying that such Bank is entitled to receive payments under this agreement without deduction or withholding of any French Withholding Taxes. If an event (including, without limitation, any change in treaty, law, or regulation) has occurred prior to the date on which any delivery is required by the preceding sentence and would otherwise be required which render any such forms inapplicable or which would prevent any Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrowers and the Agent that it is not capable of receiving payments without any deduction or withholding of French Withholding Taxes, such Bank shall not be required to deliver such forms. The Borrowers may withhold tax at the rate and in the matter required by the laws of the Republic of France with respect to payments made to a Bank failing to timely provide the requisite governmental forms. The Borrowers agree to use reasonable efforts to notify -32- any Bank upon any such Borrower becoming aware of any change in the laws of the Republic of France or any tax treaty which would cause such Bank to not be capable of receiving payments of interest without French Withholding Taxes. (f) Repayment under Certain Circumstances. If any Borrower is required by any law or regulation to make any deduction or withholding from any sum payable by it under this Agreement and is prevented by law from fulfilling the related gross-up obligation, upon written notice to the relevant Borrower from the Agent (which shall give such notice if, and only if, so requested by any Bank) the relevant Advances shall be repaid within 180 days of the date such notice is received by the relevant Borrower together with accrued interest and any amounts owing under Section 2.08. Section 2.12. Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) on account of the Advances made by it in excess of its Pro Rata Share, Tranche A1 Share, Tranche A2 Share, Tranche B1 Share, or Tranche B2 Share, as applicable, of payments on account of the Advances obtained by all the Banks, such Bank shall notify the Agent and forthwith purchase from the other Banks such participations in the Advances made or held by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably in accordance with the requirements of this Agreement with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (a) the amount of the participation sold by such Bank to the purchasing Bank as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Bank's ratable share (according to the proportion of (a) the amount of such Bank's required repayment to the purchasing Bank to (b) the total amount of all such required repayments to the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Each Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.12 may, to the fullest extent permitted by law, unless and until rescinded as provided above, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of such Borrower in the amount of such participation. Section 2.13. Bank Replacement. The Borrowers shall be permitted to replace with an Eligible Assignee any Bank which (a) makes an assertion of the type described in Section 2.02(c)(iii) or requests reimbursement for amounts owing pursuant to Section 2.09 (either for its own account or for the account of any of its participants), (b) is affected in the manner described in Section 2.07(d), (c) requires any Borrower to pay Taxes in respect of such Bank or (d) fails to make any Advance requested by it if the Majority Banks have made the Advances requested of them pursuant to the same Notice of Borrowing; provided that (i) such replacement does not conflict with any Legal Requirement, (ii) no Default or Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Bank being replaced shall not have eliminated the continued need for repayment of amounts owing pursuant to Section 2.02(c)(iii); and (iv) the Company shall repay (or cause to be repaid) or the Eligible Assignee shall pay to the Bank being replaced, the amount of the Obligations owing to such Bank on the date of replacement (including any amounts owing under Section 2.02(c)(iii)). -33- ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Initial Advances. The obligation of each Bank to make its initial Advances as part of the initial Borrowings is subject to the conditions precedent that: (a) Documentation. On or before the day on which the initial Borrowing is made, the Agent and the Banks shall have received the following, each dated on or before such day, duly executed by all the parties thereto, in form and substance satisfactory to the Agent and the Banks: (i) this Agreement and the other Credit Documents and all attached Exhibits and Schedules and the Notes payable to the order of the Banks, respectively; (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) certificates from a Responsible Officer of each of the Borrowers stating that (A) all representations and warranties of such Borrower set forth in this Agreement are true and correct in all material respects; (B) no Default has occurred and is continuing; and (C) the conditions in this Section 3.01 have been met; (iv) copies, certified as of the date of this Agreement by a Responsible Officer of the appropriate Person of (A) the resolutions of the Board of Directors of the Company approving this Agreement, the Notes, and the other Credit Documents, (B) the articles or certificate (as applicable) of incorporation and bylaws of the Company, (C) the extrait K-bis and the statuts for SARL and any other documents authorizing the transactions contemplated by the Credit Documents, and (D) all other documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Notes, and the other Credit Documents; (v) certificates of a Responsible Officer of each of the Borrowers certifying the names and true signatures of officers of the Borrowers authorized to sign this Agreement, the Notes, Notices of Borrowing and the other Credit Documents; (vi) a favorable opinion of John W. Rumely, General Counsel to the Company, substantially in the form of the attached Exhibit F-1; (vii) a favorable opinion of UGGC & Associes, counsel to SARL, substantially in the form of the attached Exhibit F-2; (viii) a favorable opinion of Bracewell & Patterson, L.L.P., counsel to the Agent, substantially in the form of the attached Exhibit F-3; and -34- (ix) such other documents, governmental certificates, agreements, lien searches as the Agent and the Banks may reasonably request. (b) Payment of Fees. On the Closing Date, the Borrowers shall have paid the fees required to be paid to the Agent and the Banks and all costs and expenses which have been invoiced and are payable pursuant to Section 10.04. (c) Delivery of Financial Statements. The Agent and the Banks shall have received true and correct copies of (i) the Financial Statements, (ii) the Interim Financial Statements, (iii) the other financial statements referred to in Section 4.05 and (iv) the Consolidated annual business and financial plan, including without limitation, financial projections, of the Borrower and its Subsidiaries for fiscal years 2001, 2002, and 2003, all in reasonable detail. (d) No Default. No Default or Event of Default shall have occurred and be continuing or would result from such Advance or from the application of the proceeds therefrom. (e) Representations and Warranties. The representations and warranties contained in Article IV hereof and in each other Credit Document shall be true and correct in all material respects on and as of the Closing Date before and after giving effect to the initial Advances and to the application of the proceeds from such Advances as though made on and as of such date. (f) No Material Adverse Change. No event or events which, individually or in the aggregate, has had or is reasonably likely to cause a Material Adverse Change shall have occurred. (g) Termination of Existing Credit Agreement. The Agent and the Banks shall have received sufficient evidence indicating that contemporaneously with the making of the initial Advances, the obligations of the Borrowers under the Existing Credit Agreement will be repaid with the proceeds of such Advances and thereafter all obligations of the Borrowers and the lenders under the Existing Credit Agreement shall be terminated (including, without limitation, any obligations of any Subsidiary of the Borrower in respect of guaranties, security agreements executed in connection with such Existing Credit Agreement but excluding any obligations which expressly survive the repayment of the amounts owing under the Existing Credit Agreement). Section 3.02. Conditions Precedent to Each Borrowing. The obligation of each Bank to make an Advance on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing, the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Notice of Continuation and the acceptance by the Borrowers of the proceeds of such Advance shall constitute a representation and warranty by the Borrowers that on the date of such Advance such statements are true): (a) the representations and warranties contained in Article IV (except for the representations and warranties set forth in clauses (a) through (h) of Section 4.05, Section 4.07, and Section 4.15, which representations and warranties shall only apply to the initial Advance and the representation and warranty contained in Section 4.05(i) which shall apply to all Advances except for Advances which are made as part of a Continuation of any existing -35- Advance) and in each other Credit Document are correct in all material respects on and as of the date of such Advance before and after giving effect to such Advance and to the application of the proceeds from such Advance as though made on and as of such date; and (b) no Default or Event of Default has occurred and is continuing or would result from such Advance or from the application of the proceeds therefrom. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrowers represent and warrant, as of the date of this Agreement, as follows: Section 4.01. Corporate Existence; Subsidiaries. Each of the Borrowers is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change. Section 4.02. Corporate Power. The execution, delivery, and performance by the Borrowers of this Agreement, the Notes, and the other Credit Documents to which each is a party and the consummation of the transactions contemplated hereby and thereby (a) are within such Borrower's corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) such Borrower's articles or certificate of incorporation or statuts (as applicable) or bylaws or (ii) any law or any contractual restriction binding on or affecting such Borrower, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Advance, such Advance and the use of the proceeds of such Advance will be within such Borrower's corporate powers, will have been duly authorized by all necessary corporate action, will not contravene (i) such Borrower's articles or certificate of incorporation or statuts (as applicable) or bylaws or (ii) any law or any contractual restriction binding on or affecting such Borrower and will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section 4.03. Authorization and Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrowers of this Agreement, the Notes, or the other Credit Documents to which the Borrowers are a party or the consummation of the transactions contemplated thereby, other than those that have been duly obtained. At the time of each Advance, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Advance or the use of the proceeds of such Advance. Section 4.04. Enforceable Obligations. This Agreement, the Notes, and the other Credit Documents to which the Borrowers are a party have been duly executed and delivered by the Borrowers. Each Credit Document to which the Borrowers are a party is the legal, valid, and binding obligation of the Borrowers and is enforceable against the Borrowers in accordance with -36- its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally. Section 4.05. Financial Statements. (a) The audited consolidated balance sheet of the Company as at December 31, 2000, and the related audited consolidated statements of income, changes in owners' equity and cash flows of the Company for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited consolidated balance sheet of the Company as at September 30, 2001, and the related unaudited consolidated statements of income, changes in owners' equity and cash flows of the Company for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein and, in the case of said balance sheet as at September 30, 2001 and said statements of income, changes in owners' equity and cash flows for the nine months then ended, subject to year-end audit adjustments, the consolidated financial condition of the Company as at such dates and the consolidated result of the operations of the Company for the periods ended on such dates, and such balance sheet and statements of income, changes in owners' equity and cash flows were prepared in accordance with GAAP. (b) The unaudited, unconsolidated balance sheet of SARL as at December 31, 2000, and the related unaudited, unconsolidated statement of income for SARL for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of SARL as at September 30, 2001, and the related unaudited, unconsolidated statement of income of SARL for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of SARL as at such dates and the results of the operations of SARL for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (c) The unaudited, combined, unconsolidated balance sheet of Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. as at December 31, 2000, and the related unaudited, combined, unconsolidated statement of income for Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, combined, unconsolidated balance sheet of Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. as at September 30, 2001, and the related unaudited, combined, unconsolidated statement of income of Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. as at such dates and the results of the operations of Papeteries de Mauduit S.A.S. and PDM Industries S.N.C. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (d) The unaudited, combined, unconsolidated balance sheet of Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. as at December 31, 2000, and the related unaudited, combined, unconsolidated statement of income for Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. for the fiscal year then ended, copies of which have been -37- furnished to the Banks, and the unaudited, combined, unconsolidated balance sheet of Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. as at September 30, 2001, and the related unaudited, combined, unconsolidated statement of income of Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. as at such dates and the results of the operations of Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (e) The unaudited, unconsolidated balance sheet of LTR Industries S.A. as at December 31, 2000, and the related unaudited, unconsolidated statement of income for LTR Industries S.A. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of LTR Industries S.A. as at September 30, 2001, and the related unaudited, unconsolidated statement of income of LTR Industries S.A. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of LTR Industries S.A. as at such dates and the results of the operations of LTR Industries S.A. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (f) The unaudited, unconsolidated balance sheet of Schweitzer-Mauduit Spain, S.L. as at December 31, 2000, and the related unaudited, unconsolidated statement of income for Schweitzer-Mauduit Spain, S.L. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of Schweitzer-Mauduit Spain, S.L. as at September 30, 2001, and the related unaudited, unconsolidated statement of income of Schweitzer-Mauduit Spain, S.L. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Schweitzer-Mauduit Spain, S.L. as at such dates and the results of the operations of Schweitzer-Mauduit Spain, S.L. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (g) The unaudited, unconsolidated balance sheet of Schweitzer-Mauduit do Brasil S.A. as at December 31, 2000, and the related unaudited, unconsolidated statement of income for Schweitzer-Mauduit do Brasil S.A. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of Schweitzer-Mauduit do Brasil S.A. as at September 30, 2001, and the related unaudited, unconsolidated statement of income of Schweitzer-Mauduit do Brasil S.A. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Schweitzer-Mauduit do Brasil S.A. as at such dates and the results of the operations of Schweitzer-Mauduit do Brasil S.A. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. -38- (h) The unaudited, combined, unconsolidated balance sheet of Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. as at December 31, 2000, and the related unaudited, combined, unconsolidated statement of income for Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, combined, unconsolidated balance sheet of Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. as at September 30, 2001, and the related unaudited, combined, unconsolidated statement of income of Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. for the nine months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. as at such dates and the results of the operations of Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP. (i) Since September 30, 2001, no Material Adverse Change has occurred. Section 4.06. True and Complete Disclosure. (a) The Company's annual report on Form 10-K most recently filed with the SEC and the Company's quarterly report on Form 10-Q most recently filed with the SEC, copies of which have been furnished by the Company to the Agent and the Banks, did not, as of the respective dates such Form 10-K and Form 10-Q were filed with the SEC, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) from the date of filing of the Company's most recent quarterly or annual report on Form 10-Q or Form 10-K, no event or condition exists or has occurred which has required or would require the Company to file a current report on Form 8-K pursuant to the Securities Exchange Act of 1934, as amended, except for any such event or condition which has been disclosed in writing to the Banks by delivery to the Banks of a Form 8-K. Section 4.07. Litigation. Except as set forth in the attached Schedule 4.07, to the best of the knowledge of the Borrowers, there is no pending or threatened action or proceeding affecting any of the Borrowers or any Material Subsidiary before any court, Governmental Authority or arbitrator, which could reasonably be expected to cause a Material Adverse Change or which purports to affect the legality, validity, binding effect or enforceability of this Agreement, any Note, or any other Credit Document. Additionally, to the best knowledge of the Borrowers, there is no pending or threatened action or proceeding instituted against any of the Borrowers or the Material Subsidiaries which seeks to adjudicate any of the Borrowers or the Material Subsidiaries as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property. Section 4.08. Use of Proceeds. The proceeds of the Advances will be used by the Borrowers for the purposes described in Section 5.08. None of the Borrowers is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the -39- meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation T, U or X. Section 4.09. Investment Company Act. None of the Borrowers is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.10. Taxes. All federal and all material state, local and foreign tax returns, reports and statements required to be filed (after giving effect to any extension granted in the time for filing) by the Borrowers or any member of the Controlled Group (hereafter collectively called the "Tax Group") have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and all taxes (which are material in amount) and other impositions due and payable have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for non-payment thereof except where contested in good faith and by appropriate proceedings and after providing adequate reserves therefor in accordance with GAAP. Section 4.11. Pension Plans. No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code. No material "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code. To the knowledge of any Responsible Officer of each Borrower, no Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code. The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits in any amount that would reasonably be expected to cause a Material Adverse Change. None of the Borrowers nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any material withdrawal liability. As of the most recent valuation date applicable thereto, none of the Borrowers nor any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Based upon GAAP existing as of the date of this Agreement and current factual circumstances, none of the Borrowers has any reason to believe that the annual cost during the term of this Agreement to such Borrower or any of its Subsidiaries for post-retirement benefits to be provided to the current and former employees of the Borrower or any of its Subsidiaries under welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably be expected to cause a Material Adverse Change. Section 4.12. Condition of Property; Casualties. The material Properties used or to be used in the continuing operations of the Borrowers and each of their Subsidiaries, taken as a whole, are (a) in substantially the same or better repair, working order, and condition as such Properties were as of September 30, 2001, normal wear and tear excepted and (b) in such repair, working order and condition to permit the Borrowers and their Subsidiaries to operate such Properties in substantially the same or better manner as operated as of December 31, 2000. Neither the business nor the material properties of the Borrowers and each of their Subsidiaries, taken as a whole, has been affected as a result of any fire, explosion, earthquake, flood, drought, -40- windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by a Governmental Authority, riot, activities of armed forces or acts of God or of any public enemy, which affect would reasonably be expected to cause a Material Adverse Change. Section 4.13. Insurance. Each of the Borrowers and their Subsidiaries carry insurance with reputable insurers in respect of such of their respective Properties, in such amounts and against such risks as is customarily maintained by other Persons of similar size engaged in similar businesses or, self-insure to the extent that is customary for Persons of similar size engaged in similar businesses. Section 4.14. No Burdensome Restrictions; No Defaults. (a) None of the Borrowers nor any of their Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which would reasonably be expected to cause a Material Adverse Change. None of the Borrowers or their Subsidiaries is in default under or with respect to any contract, agreement, lease or other instrument to which such Borrower or Subsidiary is a party and which would reasonably be expected to cause a Material Adverse Change. To the knowledge of a Responsible Officer of the Borrowers, none of the Borrowers nor any of their Subsidiaries has received any notice of default under any contract, agreement, lease or other instrument to which any Borrower or its Subsidiaries is a party which is continuing or which, if not cured, would reasonably be expected to cause a Material Adverse Change. (b) No Default has occurred and is continuing. Additionally, no event of default under any financing agreement, material contract or instrument to which any Borrower is a party has occurred and is continuing which could reasonably be expected to result in a Material Adverse Change. Section 4.15. Supply Agreement. Except as disclosed to the Agent, the Supply Agreement has not been amended, modified, supplemented or terminated, and the Supply Agreement is in full force and effect and no notice of termination or cancellation has either been given by or delivered to either the Company or Philip Morris thereunder. Section 4.16. Environmental Condition. (a) Except as set forth on Schedule 4.16, each of the Borrowers and its Subsidiaries, taken as a whole, (i) have been and are in compliance with all material requirements of applicable Environmental Laws of which the failure to comply would reasonably be expected to cause a Material Adverse Change; (ii) have not received notice of any violation or alleged violation of any Environmental Law the violation of which would reasonably be expected to cause a Material Adverse Change; and (iii) are not subject to any actual or contingent Environmental Claim, which Environmental Claim would reasonably be expected to cause a Material Adverse Change. (b) Except as set forth on Schedule 4.16, to the best of the Borrowers' knowledge (i) none of the Borrowers has ever caused the release of any Hazardous Substances into the -41- Environment in violation of applicable Environmental Laws which would reasonably be expected to result in a Material Adverse Change, (ii) none of the Borrowers' currently or previously owned Property has been subjected to the release of or is contaminated by any Hazardous Substances which would reasonably be expected to result in a Material Adverse Change, and (iii) none of the Borrowers has ever received notice of and have ever been investigated for any violation or alleged violation of any Environmental Law which has not been remedied in accordance with applicable Environmental Laws and which is reasonably likely to cause a Material Adverse Change. Section 4.17. Liens and Encumbrances. None of the Property of the Borrowers or any of the Material Subsidiaries is subject to any Lien other than Liens permitted by Section 6.01. ARTICLE V AFFIRMATIVE COVENANTS So long as the Notes or any amount under any Credit Document shall remain unpaid, or any Bank shall have any Commitment hereunder, the Borrowers agree, unless the Majority Banks otherwise consent in writing, to comply with the following covenants. Section 5.01. Compliance with Laws, Etc. Each of the Borrowers will comply in all material respects with all Legal Requirements except where the failure to so comply could not reasonably be expected to cause a Material Adverse Change. Without limiting the generality and coverage of the foregoing, the Borrowers shall comply in all material respects with all applicable Environmental Laws, and all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrowers do business except where the failure to so comply could not reasonably be expected to cause a Material Adverse Change; provided, however, that this Section 5.01 shall not prevent the Borrowers from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings. Section 5.02. Maintenance of Insurance. Each of the Borrowers will maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrowers operate; provided that, the Borrowers may self-insure to the extent and in the manner normal for similarly situated companies of like size, type and financial condition that are part of a group of companies under common control. Section 5.03. Preservation of Corporate Existence, Etc. Each of the Borrowers will preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its Properties and where failure to qualify could reasonably be expected to cause a Material Adverse Change; provided, however, that nothing herein contained shall prevent any transaction permitted by Section 6.02. -42- Section 5.04. Payment of Taxes, Etc. Each of the Borrowers will pay and discharge before the same shall become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, that the Borrowers shall not be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with Applicable Accounting Rules have been provided. Section 5.05. Reporting Requirements. The Borrowers will furnish to the Agent and the Banks: (a) Defaults. (i) As soon as possible and in any event within three Business Days after a Responsible Officer of a Borrower becomes aware of the occurrence of a Default known to any of the Borrowers which is continuing on the date of such statement, a statement of an authorized officer of the Company setting forth the details of such Default and (ii) within ten Business Days after a Responsible Officer of a Borrower becomes aware of the occurrence of such Default, a statement of an authorized officer of the Company setting forth the actions which the Borrowers have taken and propose to take with respect thereto; (b) Quarterly Financials. As soon as available and in any event not later than 50 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, SARL, LTR Industries S.A., PDM Industries S.N.C. and Papeteries de Mauduit S.A.S., Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C., Schweitzer-Mauduit Spain, S.L., Schweitzer-Mauduit do Brasil S.A., Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C., and their Subsidiaries, the consolidated and consolidating (and, where applicable, combined) balance sheets of such entities as of the end of such quarter and the consolidated and consolidating (and, where applicable, combined) statements of income, changes in owners' equity and cash flows of such entities for the fiscal quarter then ended and for the period commencing at the end of the previous year and ending with the end of such fiscal quarter, all in reasonable detail and duly certified with respect to such statements (subject to year-end audit adjustments) by an authorized financial officer of the Company as having been prepared in accordance with GAAP; (c) Audited Annual Financials of the Company. As soon as available and in any event not later than 105 days after the end of each fiscal year of the Company, copies of the annual audit report for such year for the Company, including therein a consolidated balance sheet of the Company and consolidated statements of income, changes in owners' equity and cash flows for such fiscal year, in each case certified by Deloitte & Touche L.L.P. or other independent certified public accountants of nationally recognized standing or otherwise reasonably acceptable to the Agent and the Majority Banks and including any management letters delivered by such accountants to the Company in connection with such audit together with a certificate of such accounting firm to the Agent and the Banks stating that, in the course of the regular audit of the business of the Company, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof; -43- (d) Unaudited Annual Financials of Certain Entities. As soon as available and in any event not later than 105 days after the end of each fiscal year of the Company, SARL, LTR Industries S.A., PDM Industries S.N.C. and Papeteries de Mauduit S.A.S., Papeteries de Malaucene S.A.S. and Malaucene Industries S.N.C., Schweitzer-Mauduit Spain, S.L., Schweitzer-Mauduit do Brasil S.A., Papeteries de Saint-Girons S.A.S. and Saint-Girons Industries S.N.C., and their Subsidiaries, copies of the unaudited, consolidated and consolidating (and, where applicable, combined) balance sheets of such entities and unaudited, consolidated and consolidating (and, where applicable, combined) statements of income, changes in owners' equity and cash flows for such fiscal year for such entities, together with a certificate of an authorized financial officer of each such entity certifying that such consolidated statements having been prepared in accordance with GAAP; (e) Audited Annual Financials of Certain Entities. To the extent prepared for any fiscal year of SARL, LTR Industries S.A., PDM Industries S.N.C., Malaucene Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Malaucene S.A.S., Schweitzer-Mauduit Spain, S.L. (by the July 31st following the end of the applicable fiscal year), Schweitzer-Mauduit do Brasil S.A., Papeteries de Saint-Girons S.A.S., Saint-Girons Industries S.N.C., and their Subsidiaries, as soon as available and, except as noted above, in any event not later than 105 days after the end of such fiscal year of the applicable entity, copies of the annual audit reports for such year for such entity, including therein a consolidated balance sheet of such entity and consolidated statements of income, changes in owners' equity and cash flows for such fiscal year, in each case certified by Deloitte & Touche L.L.P. or other independent certified public accountants of nationally recognized standing or otherwise reasonably acceptable to the Agent and the Majority Banks and including any management letters delivered by such accountants to the applicable entity in connection with such audit together with a certificate of such accounting firm to the Agent and the Banks stating that, in the course of the regular audit of the business of the applicable entity, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof; (f) Certain French Financial Statements. (i) As soon as available and in any event not later than 105 days after the end of each fiscal year of SARL, a copy of the unaudited, consolidated balance sheet of SARL as of the end of such fiscal year and the consolidated statements of income and owners' equity and cash flows of SARL for the period commencing at the end of the previous fiscal year and ending with such fiscal year end, all in reasonable detail and duly certified with respect to such statements by an authorized financial officer of SARL as having been prepared in accordance with French Accounting Rules and (ii) as soon as available and in any event within 135 days after the end of each fiscal year, the French tax returns (referred to as the "liasse fiscale") of SARL, LTR Industries S.A., PDM Industries S.N.C., Malaucene Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Malaucene S.A.S., Papeteries de Saint-Girons S.A.S., Saint-Girons Industries S.N.C., and their Subsidiaries; (g) Compliance Certificates. (i) Within 45 days of each fiscal quarter end for the first three fiscal quarters of each fiscal year and (ii) within 90 days of each fiscal year end, a Compliance Certificate in the form of the attached Exhibit E for such fiscal quarter or fiscal year then ended indicating compliance with Sections 6.06 through 6.09; -44- (h) Securities Law Filings. Promptly and in any event within 15 days after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrowers or any of their Subsidiaries sends to or files with the United States SEC or sends to any shareholder of any Borrower; (i) Termination Events. As soon as possible and in any event (i) within 30 days after any Responsible Officer of any Borrower knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 days after any Responsible Officer of any Borrower knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the chief financial officer of such Borrower describing such Termination Event and the action, if any, which such Borrower or such Affiliate proposes to take with respect thereto; (j) Termination of Plans. Promptly and in any event within ten Business Days after the knowledge of any Responsible Officer of any Borrower of receipt thereof by such Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by such Borrower or any such member of the Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (k) Other ERISA Notices. Promptly and in any event within ten Business Days after the knowledge of any Responsible Officer of any Borrower of receipt thereof by any Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by any Borrower or any member of the Controlled Group concerning the imposition of withdrawal liability pursuant to Section 4202 of ERISA in an amount that could reasonably be expected to cause a Material Adverse Change; (l) Disputes, etc. Prompt written notice of any claims, proceedings, or disputes, or to the knowledge of any Responsible Officer of any Borrower threatened, or affecting such Borrower, or any of its Subsidiaries in which there is a reasonable possibility of an adverse result which could reasonably be expected to cause a Material Adverse Change; (m) Material Changes. Prompt written notice of any condition or event of which a Responsible Officer of any of the Borrowers has knowledge, which condition or event has resulted or may reasonably be expected to result in a Material Adverse Change; (n) Supply Agreement. Prompt written notice of (i) any nonrenewal of the initial term or any renewal term under the Supply Agreement, (ii) any event or condition which results in, or could be expected to result in, an early termination or cancellation of the Supply Agreement, and (iii) any default by the Company or, to the knowledge of the Company, Philip Morris under the Supply Agreement; and (o) Other Information. Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrowers as the Agent may from time-to-time reasonably request. Section 5.06. Maintenance of Property. Each of the Borrowers and their Subsidiaries shall (a) maintain their material owned, leased, or operated property, equipment, buildings and fixtures in substantially the same or better condition and repair as the condition and repair as of -45- September 30, 2001, normal wear and tear excepted and (b) not knowingly or willfully permit the commission of waste or other injury, or the release of Hazardous Substances on or about the owned or operated property in violation of applicable Environmental Laws that would reasonably be expected to cause a Material Adverse Change. Section 5.07. Inspection. From time-to-time upon reasonable notice, the Borrowers shall (i) permit the Agent (at the request of any Bank) or after an Event of Default has occurred, the Banks, to examine and copy their books and records, (ii) permit the Agent and the Banks to visit and inspect their Properties, and (iii) permit the Agent and Banks to discuss the business operations and Properties of the Borrowers with their officers and directors. Section 5.08. Use of Proceeds. The Borrowers shall use the proceeds of Advances to refinance existing Indebtedness under the Existing Credit Agreement and for general corporate purposes. The Borrowers will not engage in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation T, U, or X. Section 5.09. Status of Obligations. The Company shall cause all of its obligations under this Agreement, the Notes and the other Credit Documents to rank at least pari passu in right of payment with all other unsecured Debt of the Company. SARL shall cause all of its obligations under this Agreement, the Notes and the other Credit Documents to rank at least pari passu in right of payment with all other unsecured Debt of SARL. Section 5.10. Nature of Business. None of the Borrowers nor any of the Subsidiaries shall engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Company and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Subsidiaries on the date of this Agreement. ARTICLE VI NEGATIVE COVENANTS So long as the Notes or any amount under any Credit Document shall remain unpaid, or any Bank shall have any Commitment, the Borrowers agree, unless the Majority Banks otherwise consent in writing, to comply with the following covenants. Section 6.01. Liens, Etc. None of the Borrowers nor any Material Subsidiary will create, assume, incur or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrowers and the Material Subsidiaries may create, incur, assume or suffer to exist: (a) Liens securing the Obligations; (b) Liens for taxes, assessments or governmental charges or levies on Property of the Borrowers to the extent not required to be paid pursuant to Sections 5.01 and 5.04; -46- (c) Liens securing Debt set forth in Schedule 6.01 attached hereto and refinancings of such Debt; provided that, the aggregate principal amount of such Debt shall not be increased; (d) carrier's, warehousemen's, mechanic's, materialmen's, repairmen's or other like Liens arising in the ordinary course of business (whether or not statutory) which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, for which a reserve or other appropriate provision, if any, as shall be required by Applicable Accounting Rules shall have been made; (e) Liens arising in the ordinary course of business in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, leases, subleases, licenses, sublicenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (g) Liens on Property of Persons which become Subsidiaries of the Company after the date of this Agreement securing Debt permitted hereby; provided that, such Liens are in existence at the time the respective Persons become Subsidiaries of the Company and were not created in anticipation thereof; (h) Liens resulting from progress payments or partial payments under United States government contracts or subcontracts; (i) Liens arising from legal proceedings, so long as such proceedings are being contested in good faith by appropriate proceedings diligently conducted and so long as execution is stayed on all judgments resulting from any such proceedings; (j) Liens arising in the ordinary course of business out of pledges or deposits under workers' compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of the Borrowers; (k) Liens existing on Property acquired by the Borrowers in the ordinary course of business prior to the Borrowers' acquisition of such Property; and (l) purchase money Liens or purchase money security interests upon or in any fixed assets acquired or held by the Borrowers in the ordinary course of business to secure the purchase price of such fixed assets or to secure indebtedness incurred solely for the purpose of financing the acquisition of such Property; provided that the aggregate principal amount of the Debt secured by the Liens permitted by this paragraph (l) shall not, on the date such Lien is granted and after giving effect thereto, exceed an aggregate amount equal to 30% of the Company's Tangible Net Worth at any time. -47- Section 6.02. Merger or Consolidation; Asset Sales. None of the Borrowers nor any of the Material Subsidiaries will (a) merge or consolidate with or into any other Person or (b) sell, lease, transfer, or otherwise dispose of any of its Property (other than the sale of inventory in the ordinary course of business) except that so long as after giving effect thereto no Default or Event of Default shall exist: (i) Any corporation may merge or consolidate with any of the Borrowers or the Material Subsidiaries provided that such Borrower or Material Subsidiary shall be the continuing or surviving corporation; (ii) Any Material Subsidiary (other than a Borrower) may merge with any other Subsidiary of the Company; (iii) Any Borrower or Material Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to (A)(I) in the case of any Borrower, any other Borrower and in the case of a Material Subsidiary, any Borrower or any other Material Subsidiary or (II) any other Person who guarantees the obligations hereunder of the Borrower or Material Subsidiary making such sale, lease, transfer or disposition or (B) with the consent of the Agent (not to be unreasonably withheld), any other Person if such sale or disposition is in the ordinary course of such Borrower's or Material Subsidiary's business and the net proceeds received from such sale or other disposition equal or exceed (in the reasonable opinion of the Board of Directors of the Company) the fair market value of the Property transferred to such Person; and (iv) Any Borrower or Material Subsidiary may sell, lease, transfer or otherwise dispose of any assets which constitute fixed assets if the net book value of the asset being sold does not exceed $10,000,000 (or the Dollar Equivalent thereof); provided that, all such asset sales permitted by this clause (iii) shall not exceed $45,000,000 (or the Dollar Equivalent thereof) in the aggregate; provided further that the assets which Philip Morris has the right to recover under the terms of the Amended and Restated Addendum to Amended and Restated Fine Papers Supply Agreement and the Coated Tobacco Paper Development Agreement are excluded from the limitations set forth in this Article 6.02. Section 6.03. Investments. None of the Borrowers will make or permit to exist any loans, advances or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person, except for (a) loans, advances, capital contributions or investments in (i) any other Borrower, (ii) Schweitzer-Mauduit Spain, S.L., (iii) any Subsidiary which is organized under the laws of the Republic of France, or (iv) any other Subsidiary in an aggregate outstanding amount not to exceed $10,000,000 except otherwise permitted by 6.03(c), (b) Liquid Investments, (c) cash investments in Subsidiaries and joint ventures and, subject to the terms of Section 6.02 hereof, non-cash investments in Subsidiaries and joint ventures, and (d) the acquisition by the Company or any of its Subsidiaries, in a single transaction or any series of related transactions, of any Person or the business or all or substantially all of the assets of any Person, or any division of any Person, whether through investment, purchase of assets, merger or otherwise, including, but not limited to, in any transaction pursuant to which any Person that was not theretofore a Subsidiary of the Company, becomes a Subsidiary of the Company and is consolidated with the -48- Company for financial reporting purposes; provided however, in the case of any transaction subject to this clause (d), that, giving effect to such transaction on a pro forma basis, there exists no Default or Event of Default. Section 6.04. Transactions With Affiliates. None of the Borrowers shall, directly or indirectly, enter into or permit to exist any transaction or series of transactions (including, but not limited to, the purchase, sale, lease or exchange of Property, the making of any investment, the giving of any guaranty or the rendering of any service) with any of their Affiliates other than the Company or a wholly-owned Subsidiary of the Company unless either (a) such transaction or series of transactions is on terms no less favorable to such Borrower than those that could be obtained in a comparable arm's length transaction with a Person that is not such an affiliate, or (b) such transaction has been approved by a majority of the disinterested members of the Company's Board of Directors or (c) such transaction or series of transactions between Schweitzer-Mauduit Spain, S.L. and Schweitzer-Mauduit do Brasil S.A. in the ordinary course of business. Section 6.05. Compliance with ERISA. None of the Borrowers or any Material Subsidiary will (a) terminate, or permit any Affiliate to terminate, any Plan so as to result in any material (in the reasonable opinion of the Majority Banks) liability of such Borrower or Material Subsidiary or (b) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the reasonable opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan. Section 6.06. Tangible Net Worth. The Company will not permit its Tangible Net Worth as of the last day of any fiscal quarter to be less than (a) $181,337,000 plus (b) on a cumulative basis, for each fiscal quarter of the Company beginning with the fiscal quarter ending September 30, 2001 for which Net Income is a positive number, 50% of Net Income for such fiscal quarter. Section 6.07. Net Debt to Equity Ratio. The Company will not permit its Net Debt to Equity Ratio as of the end of any fiscal quarter to be greater than 0.80 to 1.0. Section 6.08. Net Debt to Adjusted EBITDA. The Company will not permit the ratio of the Company's (a) Net Debt as of the end of any fiscal quarter to (b) Adjusted EBITDA as of the end of any fiscal quarter for the four-fiscal quarter period then ending to be greater than 2.0 to 1.0. Section 6.09. Debt. The Company will not permit (a) LTR Industries S.A., (b) PDM Industries S.N.C., (c) Malaucene Industries S.N.C., (d) Papeteries de Mauduit S.A.S., (e) Papeteries de Malaucene S.A.S., (f) Schweitzer-Mauduit Spain, S.L., (g) Schweitzer-Mauduit do Brasil S.A., (h) Papeteries de Saint-Girons S.A.S., (i) Saint-Girons Industries S.N.C. or (j) any of their Subsidiaries (other than SARL) to incur any Debt except for: (i) intercompany Debt owing by any such Person to either its Subsidiaries or to any of the other Borrowers; (ii) Debt arising under any employee benefit plan sponsored by LTR Industries S.A., PDM Industries S.N.C., Papeteries de Mauduit S.A.S., Malaucene -49- Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Saint-Girons S.A.S., Saint-Girons Industries S.N.C., or any of their Subsidiaries; (iii) Debt of LTR Industries S.A. in an aggregate principal amount not to exceed 5,000,000.00; (iv) Debt of PDM Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Saint-Girons S.A.S, Saint-Girons Industries S.N.C., Papeteries de Malaucene S.A.S., Malaucene Industries S.N.C., and their Subsidiaries in an aggregate principal amount not to exceed 6,000,000.00; (v) Debt of Schweitzer-Mauduit Spain S.L. and Schweitzer-Mauduit do Brasil S.A.S. in an aggregate principal amount not to exceed $7,500,000; and (vi) other Debt of any such Person of the type permitted to be secured by Section 6.01(l). Section 6.10. Special Provisions for Material Subsidiaries of SARL. Notwithstanding any of the provisions of this Article VI, none of the Material Subsidiaries of SARL shall be under any obligation pursuant thereto. However, SARL shall procure that any and all of its Material Subsidiaries shall comply with Sections 6.01, 6.02, 6.05 and 6.09; provided, that (i) such commitment of SARL shall have the same legal effect as a "promesse de porte-fort" as provided for under Article 1120 of the French Civil Code and (ii) the "promesse de porte-fort" shall be deemed to have been breached upon the occurrence of any act or omission of any of the Material Subsidiaries of SARL or any situation relating to such Material Subsidiaries which does not comply with any of the provisions of this Article VI. Section 6.11. Stock Purchases. The Company will not purchase, redeem or otherwise acquire any shares of its capital stock except that the Company may purchase (a) up to $20,000,000 of its capital stock in any fiscal year, (b) its capital stock in connection with its employee 401(k) retirement plan, and (c) its capital stock sold in connection with a cashless exercise of stock options granted under the Company's equity participation plan. ARTICLE VII REMEDIES Section 7.01. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under any Credit Document: (a) Payment. Any of the Borrowers shall fail to pay (i) any principal of any Note when the same becomes due and payable, or (ii) any interest on the Notes or any fee or other amount payable hereunder or under any other Credit Document within five Business Days after the same becomes due and payable; (b) Representation and Warranties. Any representation or warranty made or deemed to be made by any of the Borrowers (or any of their officers) in this Agreement or in any other -50- Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; (c) Covenant Breaches. Any of the Borrowers shall (i) fail to perform or observe any covenant contained in Sections 5.05(a), 5.08 and Article VI (other than Section 6.01) of this Agreement, (ii) fail to perform or observe the covenant contained in Section 5.05(n) if such failure shall remain unremedied for 30 days after written notice of such default shall have been given to any of the Borrowers by the Agent or any Bank, or (iii) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Credit Document which is not covered by clauses (i) or (ii) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 10 Business Days after written notice of such default shall have been given to any of the Borrowers by the Agent or any Bank; (d) Cross-Default. (i) Any Borrower or any Material Subsidiary shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $5,000,000 (or the Dollar Equivalent thereof) individually or when aggregated with all such Debt of the Borrower and its Material Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt which is outstanding in a principal amount of at least $5,000,000 (or the Dollar Equivalent thereof) individually or when aggregated with all such Debt of the Borrower and its Material Subsidiaries so in default (but excluding Debt evidenced by the Notes), and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt (but excluding Debt evidenced by the Notes) shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) Insolvency. Any Borrower or Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Borrower or Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against a Borrower or Material Subsidiary, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or any Borrower or Material Subsidiary shall take any corporate action to authorize any of the actions set forth above in this paragraph (e); (f) Judgments. Any judgment, decree or order for the payment of money shall be rendered against any Borrower or any Material Subsidiary in an amount in excess of $10,000,000 (or the Dollar Equivalent thereof) if rendered solely against the Borrowers and/or their Subsidiaries, or for which such Borrower's or Material Subsidiary's allocated portion of which (net of any amounts (i) as to which the applicable insurance company has acknowledged coverage or (ii) covered by a third party indemnity from an indemnitor with a net worth, income, -51- or other financial means reasonably acceptable to the Agent under which such indemnitor has acknowledged responsibility) exceeds $10,000,000 (or the Dollar Equivalent thereof) and either (i) such judgment, decree or order remains unsatisfied and in effect for a period of 60 consecutive days or more without being vacated, discharged, satisfied or stayed or bonded pending appeal or (ii) enforcement proceedings shall have been commenced by any creditor upon such judgment, decree or order; (g) Change of Control. The Company shall cease to own, either directly or indirectly, all of the shares of common stock in SARL and the other Material Subsidiaries necessary to maintain the ownership percentages held by the Company in SARL and the Material Subsidiaries on the date of this Agreement; (h) Termination Events. Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to any Borrower by the Agent, (i) such Termination Event shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by an amount that would reasonably be expected to cause or to have a Material Adverse Change (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); (i) Plan Withdrawals. Any Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount that could reasonably be expected to cause or to have a Material Adverse Change; (j) Guaranty. Any of the guaranty provisions in this Agreement shall for any reason cease to be valid and binding on the Company or the Company shall so state in writing; (k) Material Adverse Change. A Material Adverse Change shall have occurred and be continuing; or (l) Philip Morris. During any fiscal year of the Company (i) the total net sales recorded by the Borrowers and their Subsidiaries during such year from Philip Morris and its Affiliates shall constitute less than 50% of the net sales recorded by the Borrowers and their Subsidiaries during the immediately preceding fiscal year from Philip Morris and its Affiliates, and (ii) the total consolidated net sales of the Company for such year decline by greater than 10% compared to the immediately preceding fiscal year, excluding unfavorable exchange rate impacts. Section 7.02. Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event the Agent (i) shall at the request of, or may with the consent of, the Majority Banks, by notice to the Borrowers, declare the obligation of each Bank to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request of, or may with the consent of, the Majority Banks, by notice to the Borrowers, -52- declare the Notes, all interest thereon, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest, and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest or further notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrowers; Section 7.03. Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur the obligation of each Bank to make Advances shall immediately and automatically be terminated and the Notes, and all other amounts payable under this Agreement shall immediately and automatically become and be due and payable in full, without presentment, demand, protest or any notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrowers. Section 7.04. Non-exclusivity of Remedies. No remedy conferred upon the Agent is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise. Section 7.05. Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent, if any, specified by Section 7.02 to authorize the Agent upon the consent of the Majority Banks to declare the Notes and any other amount payable hereunder due and payable pursuant to the provisions of Section 7.02 or the automatic acceleration of the Notes and all amounts payable under this Agreement pursuant to Section 7.03, each Bank is hereby authorized at any time and from time-to-time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrowers against any and all of the obligations of the Borrowers now or hereafter existing under this Agreement, the Notes, and the other Credit Documents, irrespective of whether or not such Bank shall have made any demand under this Agreement, the Notes, or such other Credit Documents, and although such obligations may be unmatured. Each Bank agrees to promptly notify the Borrowers after any such set-off and application made by it, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. ARTICLE VIII THE GUARANTY Section 8.01. Guaranty. The Company hereby unconditionally and irrevocably guarantees the punctual payment of the Guaranteed Obligations when due, whether at stated maturity, by acceleration or otherwise, and agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Agent and the Banks in enforcing any rights under this Section 8.01. Without limiting the generality of the foregoing, the Company's liability shall extend to all amounts which constitute part of the Guaranteed Obligations and are owed by the Company even if they are declared unenforceable or not allowable due to the -53- existence of a bankruptcy, reorganization or similar proceeding involving SARL. The Company will pay to the Banks all amounts due and payable under this Section 8.01 in Euros or Dollars, as applicable, in immediately available funds one Business Day after demand from the Agent. Section 8.02. Guaranty Absolute. The Company guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Credit Agreement and the Notes, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Bank with respect thereto. The guaranty provided for in Section 8.01 is a guaranty of payment, not of collection and the Company's obligations thereunder are primary, not secondary. The obligations of the Company under Section 8.01 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against the Company to enforce such obligations, irrespective of whether any action is brought against SARL or any other Person or whether SARL or any other Person is joined in any such action or actions. The liability of the Company under Section 8.01 shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any other provision of the Credit Agreement, the Notes or any other Credit Document; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other liabilities, or any other amendment or waiver of or any consent to departure from the Credit Agreement, the Notes or any other Credit Document, including, without limitation, any increase in the Guaranteed Obligations or any other liabilities resulting from the extension of additional credit to SARL or otherwise; (c) any taking, exchange, release or non-perfection of any collateral (if any), or any taking, release, amendment or waiver of or consent to departure from any other guaranty for all or any of the Guaranteed Obligations or any other liabilities; (d) any manner of application of collateral (if any), or proceeds thereof or of collections on account of any other guaranty to all or any of the Guaranteed Obligations or any other liabilities, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other liabilities or any other assets of SARL; (e) any change, restructuring or termination of the corporate structure or existence of SARL; or (f) any other circumstances which might otherwise constitute a defense available to, or a discharge of, SARL or a guarantor (other than the defense of prior payment). Section 8.03. Waiver. The Company hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and the guaranty provided for in Section 8.01 and any requirement that the Agent or any Bank protect, secure, perfect or insure any security interest or other Lien or any property subject thereto or exhaust any right to take any action against the Company or any other Person or any collateral. Section 8.04. Subrogation. (a) Until such time as the Guaranteed Obligations are paid in full, the Company irrevocably waives any and all rights to which it may be entitled, by operation -54- of law or otherwise, by making any payment hereunder or otherwise to be subrogated to the rights of the Agent and the Banks against SARL or any other Person with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by SARL or any other Person in respect thereof. If any amount shall be paid to the Company on account of such subrogation in violation of the preceding sentence, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited against and applied upon the Guaranteed Obligations, whether matured or unmatured, in such order as may be determined by the Majority Banks. (a) The Company agrees that, to the extent that any Borrower makes payment to the Agent or any Bank, or the Agent or any Bank receives any proceeds of collateral, and such payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, or otherwise required to be repaid, then to the extent of such repayment the Guaranteed Obligations shall be reinstated and continued in full force and effect as of the date such initial payment or collection of proceeds occurred. The Company shall defend and indemnify the Agent and the Banks from and against any claim or loss under this subsection 8.04 (including reasonable attorneys' fees and expenses) in the defense of any such action or suit, but excluding any such losses, liabilities, claims, damages, or expenses incurred by reason of the gross negligence, bad faith or willful misconduct of the Agent and the Banks. ARTICLE IX THE AGENT Section 9.01. Authorization and Action. Each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. Section 9.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken (including the Agent's own negligence) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence, bad faith or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrowers), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or -55- representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Borrowers or their Subsidiaries or to inspect the property (including the books and records) of the Borrowers or their Subsidiaries; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 9.03. The Agent and Its Affiliates. With respect to its Commitments, the Advances made by it and the Notes issued to it, the Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrowers or any of their Subsidiaries, and any Person who may do business with or own securities of the Borrowers or any such Subsidiaries, all as if the Agent were not an agent hereunder and without any duty to account therefor to the Banks. Section 9.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 9.05. INDEMNIFICATION. THE BANKS SEVERALLY AGREE TO INDEMNIFY THE AGENT (TO THE EXTENT NOT REIMBURSED BY THE BORROWERS), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE AGENT'S OWN NEGLIGENCE), PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY UPON WRITTEN DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING REASONABLE COUNSEL FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE AGENT IS NOT -56- REIMBURSED FOR SUCH EXPENSES BY THE BORROWERS. UPON THE REQUEST OF ANY BANK, THE AGENT SHALL SUPPLY DOCUMENTATION REASONABLY EVIDENCING SUCH EXPENSES. Section 9.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrowers and may be removed at any time with or without cause by the Majority Banks upon receipt of written notice from the Majority Banks to such effect. Upon receipt of notice of any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent subject to, if an Event of Default has not occurred and is not continuing, the consent of the Company, which consent shall not be unreasonably withheld. If no successor Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent then the retiring Agent may, on behalf of the Banks and the Borrower, appoint a successor Agent, which shall be a commercial bank meeting the financial requirements of an Eligible Assignee. Upon the acceptance of any appointment as Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement and the other Credit Documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Credit Documents. ARTICLE X MISCELLANEOUS Section 10.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks and the Borrowers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Banks and the Borrower, do any of the following: (a) increase any Commitment of the Banks, (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document, (c) postpone any date fixed for any scheduled payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (d) change the number of Banks which shall be required for the Banks or any of them to take any action hereunder or under any other Credit Document, (e) amend Section 2.12 or this Section 10.01, (f) release the Company from its obligations under Article VIII; or (g) amend the definition of "Majority Banks"; and provided, further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Banks required above to take such action, affect the rights or duties of the Agent under this Agreement or any other Credit Document and (ii) no waiver of any of the conditions specified in Article III shall be effective against any Bank not executing such waiver. Section 10.02. Notices, Etc. All notices and other communications shall be in writing (including telecopy or telex) and mailed, telecopied, telexed, hand delivered or delivered by a nationally recognized overnight courier, if to the Company or any other Borrower, at its address -57- as set forth on Schedule 1; if to any Bank, at its U.S. Lending Office specified opposite its name on Schedule 1; if to the Agent, at its address for notices set forth in Schedule 1; and if a Notice of Borrowing or a Notice of Continuation to the Agent as to Tranche A2 or Tranche B2 at the U.S. Lending Office of the Agent and, as to Tranche A1 or Tranche B1 to the Agent at its Paris lending office or if different, the Applicable Lending Office for the Agent specified opposite its name on Schedule 1 or, as to each party, at such other address or teletransmission number as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telexed or hand delivered or delivered by overnight courier be effective: upon receipt, if mailed, when telecopy transmission is completed, when confirmed by telex answer-back or when delivered, respectively, except that notices and communications to the Agent pursuant to Article II or IX shall not be effective until received by the Agent. Section 10.03. No Waiver; Remedies. No failure on the part of any Bank or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. Section 10.04. Costs and Expenses. Each of the Borrowers agrees to pay on demand all reasonable and documented out-of-pocket costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other Credit Documents including, without limitation, the reasonable fees and out-of-pocket expenses of Bracewell & Patterson, L.L.P., counsel for the Agent, and with respect to advising the Agent as to its rights and responsibilities under this Agreement, and, after the occurrence of an Event of Default, all reasonable out-of-pocket costs and expenses, if any, of Agent and each Bank (including, without limitation, reasonable counsel fees and expenses of the Agent and each Bank) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other Credit Documents. Section 10.05. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrowers and the Agent, and when the Agent shall have, as to each Bank, either received a counterpart hereof executed by such Bank or been notified by such Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrowers, the Agent and each Bank and their respective successors and assigns, except that none of the Borrowers shall have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Bank. Section 10.06. Bank Assignments and Participations. (a) Assignments. Any Bank may assign to one or more banks or other entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, and the Notes held by it; provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank's rights and obligations under this Agreement, (ii) the amount of the Commitments and Advances of such Bank being assigned in the various facilities evidenced hereby pursuant to -58- each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or 5,000,000, as the case may be (or if less, the amount of such Bank's remaining Commitments) in the aggregate, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, (v) each Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to the Agent a $3,500 administrative fee, and (vi) the Agent shall retain, until the occurrence of an Event of Default, aggregate Commitments which constitute at least 15% of the total Commitments of the Banks. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (b) Term of Assignments. By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Register. The Agent shall maintain at its address referred to in Section 10.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Advances owing to, each Bank from time-to-time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the -59- Borrowers, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Bank at any reasonable time and from time-to-time upon reasonable prior notice. (d) Procedures. Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Tranche A1 Notes, Tranche A2 Notes, Tranche B1 Notes, or Tranche B2 Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrowers. Within five Business Days after its receipt of such notice, the applicable Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Tranche A1 Note, Tranche A2 Note, Tranche B1 Note, or Tranche B2 Note, a new Tranche A1 Note, Tranche A2 Note, Tranche B1 Note, or Tranche B2 Note to the order of such Eligible Assignee in an amount equal to the Tranche A1 Commitment, Tranche A2 Commitment, Tranche B1 Commitment and Tranche B2 Commitment assumed and Tranche A1 Advances, Tranche A2 Advances, Tranche B1 Advances and Tranche B2 Advances purchased by it pursuant to such Assignment and Acceptance and, if such Bank has retained any Commitments hereunder, a new Tranche A1 Note, new Tranche A2 Note, new Tranche B1 Note, or new Tranche B2 Note to the order of such Bank in an amount equal to the Tranche A1 Commitment, Tranche A2 Commitment, Tranche B1 Commitment, Tranche B2 Commitment, Tranche A1 Advances, Tranche A2 Advances, Tranche B1 Advances and Tranche B2 Advances, respectively, retained by it hereunder. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibits B-1, B-2, B-3, and B-4. (e) Participations. Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, and the Notes held by it); provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitments to the Borrowers hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrowers, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not require the participant's consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest, or extending the Maturity Date. Each of the Borrowers hereby agrees that a Bank may pass through to any of its participants the same rights under Sections 2.08, 2.09, 2.11(c), and 10.07 to the extent of their respective participations, provided that no participant shall be able to collect in excess of amounts payable to the Bank selling to such participant under such Sections in respect of the interest sold to such participant or to collect any such amounts from the Borrowers. (f) Confidentiality. Each Bank may furnish any information concerning the Borrowers and their Subsidiaries in the possession of such Bank from time-to-time to assignees and participants (including prospective assignees and participants); provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall, in order to -60- preserve the confidentiality of any confidential information relating to the Borrowers and their Subsidiaries received by it from such Bank, promptly execute and deliver to the Agent and the Borrowers a Confidentiality Agreement in the form of the attached Exhibit G. (g) Compliance with Securities Laws. All transfers of any interests in the Notes shall be in compliance with all applicable Federal and state securities laws. Section 10.07. INDEMNIFICATION. EACH OF THE BORROWERS SHALL INDEMNIFY THE AGENT, THE BANKS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWERS OR ANY AFFILIATE OF THE BORROWERS OF THE PROCEEDS OF ANY ADVANCE, (II) ANY BREACH BY THE BORROWERS OF ANY PROVISION OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, (III) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO THE FOREGOING BROUGHT BY ANY PERSON OTHER THAN A BORROWER, OR (IV) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED PROPERTIES, OR THE OPERATIONS OR BUSINESS, OF THE BORROWERS OR ANY OF THEIR SUBSIDIARIES, AND EACH OF THE BORROWERS SHALL REIMBURSE THE AGENT AND EACH BANK, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED'S OWN NEGLIGENCE, BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES INCURRED BY REASON OF THE GROSS NEGLIGENCE, BAD FAITH OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED, OR IN THE CASE OF CLAUSE (IV) ABOVE, CAUSED BY THE AFFIRMATIVE ACT OF THE AGENT OR SUCH BANK. Section 10.08. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement may be executed and delivered by telecopier. Section 10.09. Survival of Representations, etc. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Banks, none of which investigations shall diminish any Bank's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.08, 2.09, 2.11(c), and 10.07 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 10.10. Severability. In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. -61- Section 10.11. Usury Not Intended. It is the intent of the Borrowers and each Bank in the execution and performance of this Agreement and the other Credit Documents to contract in strict compliance with applicable usury laws, including conflicts of law concepts, governing the Advances of each Bank including such applicable laws of the State of New York and the United States of America from time-to-time in effect. In furtherance thereof, the Banks and the Borrowers stipulate and agree that none of the terms and provisions contained in this Agreement or the other Credit Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Rate and that for purposes hereof "interest" shall include the aggregate of all charges which constitute interest under such laws that are contracted for, charged or received under this Agreement; and in the event that, notwithstanding the foregoing, under any circumstances the aggregate amounts taken, reserved, charged, received or paid on the Advances, include amounts which by applicable law are deemed interest which would exceed the Maximum Rate, then such excess shall be deemed to be a mistake and each Bank receiving same shall credit the same on the principal of its Notes (or if such Notes shall have been paid in full, refund said excess to the Borrowers). In the event that the maturity of the Notes are accelerated by reason of any election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the Maximum Rate and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the applicable Notes (or, if the applicable Notes shall have been paid in full, refunded to the Borrowers of such interest). In determining whether or not the interest paid or payable under any specific contingencies exceeds the Maximum Rate, the Borrowers and the Banks shall to the maximum extent permitted under applicable law amortize, prorate, allocate and spread in equal parts during the period of the full stated term of the Notes all amounts considered to be interest under applicable law at any time contracted for, charged, received or reserved in connection with the Obligations. The provisions of this Section shall control over all other provisions of this Agreement or the other Credit Documents which may be in apparent conflict herewith. Section 10.12. Global Effective Rate. Because the interest rates applicable to certain Types of Advances are variable, it is not possible to calculate the "taux effectif global" of the credit facility made available to SARL in accordance with Articles L.313-1 and L.313-2 of the French "Code de la Consommation". SARL hereby acknowledges that the Agent has notified SARL of the effective all-in cost of the credit facility pursuant to a "taux effectif global" letter delivered on or before the date hereof. Section 10.13. Judgment Currency. The obligations of the Borrowers hereunder and under the Notes to make payments in Dollars or in Euros (the "Obligation Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Obligation Currency except to the extent to which such tender or recovery shall result in the effective receipt by the Banks of the full amount of the Obligation Currency expressed to be payable hereunder and under the Notes, and accordingly such obligations of the Borrowers shall be enforceable as an alternate or additional cause of action for the purpose of recovery in the Obligation Currency of the amount (if any) by which such effective receipt shall fall short of the full amount of the Obligation Currency expressed to -62- be payable hereunder and under the Notes and shall not be affected by judgment being obtained for any other sums due under this Agreement and the Notes. Section 10.14. Governing Law; Consent to Jurisdiction. (a) THIS AGREEMENT AND EACH OF THE OTHER CREDIT DOCUMENTS SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. (b) Any litigation based hereon, or arising out of, under, or in connection with, this Agreement or any other Credit Document, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Borrowers, the Agent or the Banks relating to this Agreement or any other Credit Document may be brought and maintained in the courts of the State of New York sitting in the County of New York or in the United States District Court for the Southern District of New York. Each of the Borrowers, the Agent and the Banks hereby expressly and irrevocably submits to the jurisdiction of the courts of the State of New York sitting in the County of New York and the United States District Court for the Southern District of New York for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation. To the fullest extent permitted by applicable Legal Requirements, each of the Borrowers, the Agent and the Banks further irrevocably consents to the service of process, by registered mail, postage prepaid, or by personal service within or without the State of New York. Each of the Borrowers, the Agent and the Banks hereby expressly and irrevocably waives, to the fullest extent permitted by Legal Requirements, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in an inconvenient forum. To the extent that any of the Borrowers, the Agent or the Banks has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, each of the Borrowers, the Agent and the Banks hereby irrevocably waives, to the fullest extent permitted by applicable Legal Requirements, such immunity in respect of its obligations under this Agreement and the other Credit Documents. Section 10.15. Confidentiality. All information and documents concerning the Borrowers or their respective Subsidiaries supplied by the Borrowers to the Banks pursuant to this Agreement which are not otherwise in the public domain shall be held in confidence by the Banks and the Banks shall not disclose such information and documents to any other Person, except that the Borrowers hereby authorize the Banks to disclose any information obtained pursuant to this Agreement (i) to any independent auditors of a Bank, (ii) to any Person who is an Eligible Assignee and executes and delivers a confidentiality agreement to the Company and the Agents that is otherwise consistent with this Section 10.16 (solely for the purpose of evaluating such proposed participation or assignment) whereby such Eligible Assignee agrees, for the benefit of the Borrowers, in writing, to be bound by the same confidentiality obligations as those imposed on the Banks hereunder, and, in the event that such financial institution does not enter into any proposed participation, such financial institution agrees to return to the furnishing Bank all information furnished to it hereunder, (iii) to an Affiliate of the Bank making -63- the disclosure and to any employees of such Bank or such Affiliate on a need to know basis, and then only to the extent that such Affiliate and employees have agreed for the benefit of the Borrowers to be bound to the foregoing confidentiality provisions, and (iv) to all appropriate governmental regulatory authorities to the extent requested or subpoenaed in accordance with all applicable notices and procedures, but only to the extent permitted by applicable laws and regulations, including those applying to classified material. Upon receipt of a request, demand, or subpoena to disclose any information to any Person other than governmental bank examiners and independent auditors of a Bank, the affected Bank will promptly notify, to the extent not prohibited by applicable law, regulations, or court order, the Borrowers and the Agent of such request. -64- EXECUTED as of the 31st day of January, 2002. BORROWERS: SCHWEITZER-MAUDUIT INTERNATIONAL, INC. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- SCHWEITZER-MAUDUIT FRANCE S.A.R.L. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- AGENT: SOCIETE GENERALE By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- BANKS: TRANCHE A1 COMMITMENT SOCIETE GENERALE 4,651,893.13 TRANCHE A2 COMMITMENT By: $3,488,919.85 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 11,629,732.83 TRANCHE B2 COMMITMENT $10,456,759.54 TRANCHE A1 COMMITMENT BANQUE DE CHINE PARIS 1,158,997.36 TRANCHE A2 COMMITMENT By: $869,248.02 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 2,897,493.41 TRANCHE B2 COMMITMENT $2,607,744.07 TRANCHE A1 COMMITMENT NATEXIS BANQUES POPULAIRES 4,340,000.00 TRANCHE A2 COMMITMENT By: $3,255,000.00 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 10,850,000.00 TRANCHE B2 COMMITMENT By: $9,765,000.00 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE A1 COMMITMENT BNP PARIBAS 1,040,000.00 TRANCHE A2 COMMITMENT By: $780,000.00 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 2,600,000.00 TRANCHE B2 COMMITMENT By: $2,350,000.00 ------------------------------------------ Name: ---------------------------------------- Name: ---------------------------------------- TRANCHE A1 COMMITMENT CAISSE REGIONALE DE CREDIT 1,448,746.70 AGRICOLE MUTUEL DU FINISTERE TRANCHE A2 COMMITMENT By: $1,086,560.03 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 3,621,866.76 TRANCHE B2 COMMITMENT $3,259,680.08 TRANCHE A1 COMMITMENT SUNTRUST BANK 4,346,240.11 TRANCHE A2 COMMITMENT By: $3,259,680.08 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 10,865,600.28 TRANCHE B2 COMMITMENT $9,779,040.25 TRANCHE A2 COMMITMENT CREDIT LYONNAIS NEW YORK BRANCH $1,500,000.00 TRANCHE B2 COMMITMENT By: $4,500,000.00 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE A1 COMMITMENT CREDIT LYONNAIS 2,000,000.00 TRANCHE B1 COMMITMENT 5,000,000.00 By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE A1 COMMITMENT CREDIT COMMERCIAL DE FRANCE 1,014,122.69 TRANCHE A2 COMMITMENT By: $760,592.02 ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TRANCHE B1 COMMITMENT 2,535,306.73 TRANCHE B2 COMMITMENT $2,281,776.06 EX-21.1 5 g74537ex21-1.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF SCHWEITZER-MAUDUIT INTERNATIONAL, INC. The subsidiaries of the Company at December 31, 2001 were as follows:
JURISDICTION OF INCORPORATION OR NAME ORGANIZATION - ---- -------------------------- Schweitzer-Mauduit Canada, Inc.................................... Manitoba Province (Canada) Schweitzer-Mauduit Spain, S.L..................................... Spain - LTR Industries S.A.......................................... France - Schweitzer-Mauduit do Brasil, S.A........................... Brazil - Schweitzer-Mauduit France S.A.R.L........................... France - Papeteries de Saint-Girons S.A.S....................... France -- Saint-Girons Industries S.N.C.................. France - Papeteries de Mauduit S.A.S............................ France -- PDM Industries S.N.C........................... France -- Papeteries de Malaucene S.A.S.................. France -- Malaucene Industries S.N.C.................. France
EX-23.1 6 g74537ex23-1.txt INDEPENDENT AUDITORS' CONSENT 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, No. 33-99848, and No. 333-74634 of Schweitzer-Mauduit International, Inc. and subsidiaries on Form S-8 of our report dated January 25, 2002 (January 31, 2002 as to Note 5), appearing in the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. and subsidiaries for the year ended December 31, 2001. DELOITTE & TOUCHE LLP Atlanta, Georgia March 7, 2002 EX-24.1 7 g74537ex24-1.txt POWERS OF ATTORNEY EXHIBIT 24.1 POWERS OF ATTORNEY POWER OF ATTORNEY The undersigned, Claire L. Arnold, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, her true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ CLAIRE L. ARNOLD ------------------------- Claire L. Arnold POWER OF ATTORNEY The undersigned, Alan R. Batkin, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ ALAN R. BATKIN ------------------------- Alan R. Batkin POWER OF ATTORNEY The undersigned, K.C. Caldabaugh, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ K.C. CALDABAUGH ------------------------- K.C. Caldabaugh POWER OF ATTORNEY The undersigned, Laurent G. Chambaz, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ LAURENT G. CHAMBAZ ------------------------- Laurent G. Chambaz POWER OF ATTORNEY The undersigned, Richard D. Jackson, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ RICHARD D. JACKSON ------------------------- Richard D. Jackson POWER OF ATTORNEY The undersigned, Leonard J. Kujawa, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/LEONARD J. KUJAWA ------------------------- Leonard J. Kujawa POWER OF ATTORNEY The undersigned, Jean-Pierre Le Hetet, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ JEAN-PIERRE LE HETET ------------------------- Jean-Pierre Le Hetet POWER OF ATTORNEY The undersigned, Larry B. Stillman, hereby constitutes and appoints John W. Rumely, Jr. and Paul C. Roberts, or either of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit International, Inc. for the fiscal year ended December 31, 2001, 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 28th day of February, 2002 /s/ LARRY B. STILLMAN ------------------------- Larry B. Stillman -----END PRIVACY-ENHANCED MESSAGE-----