SCHWEITZER MAUDUIT INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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:

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)
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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.

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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.

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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

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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.

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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

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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.

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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.

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The U.S. business does not calculate or maintain records of order backlogs.
Philip Morris, its largest customer, provides forecasts of future demand, but
actual orders for Cigarette 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.

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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:

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:

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.

- ---------------

(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)

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)

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

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 v