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 view of the financial strength of the
counterparties. Management of foreign currency transactional exposures was not
changed during 2001, and the Company does

29

not expect any significant change in such exposures or in the strategies it uses
to manage such exposures in the near future. As of December 31, 2001, a ten
percent unfavorable change in the exchange rate of the functional currencies of
the Company and its subsidiaries against the prevailing market rates of
non-local currencies involving the Company's transactional exposures would have
resulted in a net pre-tax loss of approximately $2 million. These hypothetical
gains or losses on foreign currency contracts and transactional exposures are
defined as the difference between the contract rates and the hypothetical
exchange rates. While the Company believes the above loss resulting from the
hypothetical unfavorable changes in foreign currency exchange rates would be
material to the Company's results of operations, the Company reduces this risk
by selectively hedging its exposure when it is practical and economical to do
so.

Interest Rate Risk -- The Company holds a combination of variable- and
fixed-rate debt consisting of short and long term instruments. The Company
selectively hedges its exposure to interest rate increases on its variable rate
long term debt when it is practical and economical to do so. The Company
utilizes various forms of interest rate hedge agreements, including interest
rate swap agreements and forward rate agreements. Most often the Company
utilizes variable-to-fixed interest rate swap agreements, typically with
contractual terms no longer than 24 months. The Company's strategy to manage
exposure to interest rate changes did not change during 2001, and management
does not expect any significant changes in its exposure to interest rate changes
or in how such exposure is managed in the near future. Various outstanding
interest-bearing instruments are sensitive to changes in interest rates.
Interest rate changes would result in gains or losses in fair market value of
fixed-rate debt due to differences between current market interest rates and the
rates governing these instruments. With respect to the Company's fixed-rate debt
outstanding at December 31, 2001, a ten percent change in interest rates would
not result in a material change in the fair market value of such debt. With
respect to the Company's variable-rate debt, a ten percent change in interest
rates would impact the Company's future annual pre-tax earnings by approximately
$0.4 million.

Commodity Price Risk -- The Company is subject to commodity price risk, the
most significant of which relates to the price of wood pulp, which is the
Company's largest single component of cost. The per ton cost of wood pulp is
cyclical in nature and more volatile than general inflation. The Company
consumed approximately 105,000, 116,000 and 107,000 metric tons of wood pulp in
2001, 2000 and 1999, respectively. During the period from January 1999 through
December 2001, the U.S. list price of northern bleached softwood kraft pulp, a
representative pulp grade used by the Company, ranged from a low of $470 per
metric ton in September 2001 to a high of $710 per metric ton in the latter half
of 2000 and in January 2001. Selling prices of the Company's paper products are
influenced, in part, by the market price for wood pulp, which is determined by
worldwide industry supply and demand. Generally, over time, the Company has been
able to increase its selling prices in response to increased per ton wood pulp
costs and has generally reduced its selling prices when wood pulp costs have
significantly declined. Increases in prices of wood pulp could adversely impact
the Company's earnings if selling prices are not increased or if such increases
do not fully compensate for or trail the increases in wood pulp prices.
Derivative instruments have not been utilized by the Company to manage this
risk. With respect to the Company's commodity price risk, a hypothetical ten
percent change in per ton wood pulp prices would impact the Company's future
annual pre-tax earnings by approximately $5 million, assuming no compensating
change in the Company's selling prices. The Company believes that, while its
exposure to commodity price risk is material to its results of operations, such
risk is understood by its customers and over time changes in the price of wood
pulp are typically reflected in selling prices.

General Inflation

Due to competitive pressures, the Company is not always able to pass along
its cost increases through increased selling prices. The Company's main costs
impacted by general inflation are wages and salaries, energy, chemicals,
employee benefit costs, primarily medical and pension expenses, and costs of
insurance, particularly property insurance.

Seasonality

Sales of the Company's products are not subject to seasonal fluctuations,
except in the United States and Brazil. In the United States, customer shutdowns
typically occur in July and December and typically have resulted in reduced net
sales and operating profit during those two months. Additionally, the U.S. mills
shut down equipment to perform additional maintenance during these months,
resulting in higher product costs and

30

reduced operating profit. In Brazil, customer orders are typically lower in
December due to a holiday season through much of January and February.

Environmental Matters

The Company is subject to federal, state, local and foreign environmental
protection laws and regulations with respect to the environmental impact of air,
water and other emissions from its mills as well as its disposal of solid waste
generated by its operations. The Company believes it is operating in compliance
with, or is taking action aimed at ensuring compliance with, such laws and
regulations. While the Company has incurred in the past several years, and will
continue to incur, capital and operating expenditures in order to comply with
these laws and regulations, these costs are not expected to materially affect
the Company's business or results of operations. The Company, or its
predecessor, is currently named as a potentially responsible party at one
hazardous waste disposal site, the liability for which was previously recorded
and the remainder of which is not material. However, there can be no assurance
that a material adverse effect on the Company's financial statements will not
occur at some future time as a result of environmental matters. Additional
information concerning environmental matters is disclosed in Note 12 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein.

Legal Proceedings

Information concerning legal proceedings is disclosed in Note 11 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein. In addition, the Company and its subsidiaries are involved
in legal actions and claims arising in the ordinary course of business.
Litigation is subject to many uncertainties and, while it is not possible to
predict the outcome of the litigation pending against the Company and its
subsidiaries, management believes that such actions and claims will be resolved
without a material adverse effect on the Company's financial statements.

Reliance on Significant Customers

Most of the Company's customers are manufacturers of tobacco products
located in more than 90 countries around the world. Two such customers have
accounted for a significant portion of the Company's net sales in each of the
last several years, and the loss of one or both such customers, or a significant
reduction in one or both of these customers' purchases, could have a material
adverse effect on the Company's results of operations. See Note 14 of the Notes
to Consolidated Financial Statements.

Tobacco Products and Governmental Actions

In recent years, governmental entities around the world, particularly in
the United States, have taken or have proposed actions that may have the effect
of reducing consumption of tobacco products. Reports and speculation with
respect to the alleged harmful physical effects of cigarette smoking and use of
tobacco products have been publicized for many years and, together with actions
to restrict or prohibit advertising and promotion of cigarettes or other tobacco
products and to increase taxes on such products, are intended to discourage the
consumption of cigarettes and other such products. In the fourth quarter of
1998, the major U.S. cigarette manufacturers reached agreement with all 50 U.S.
states and several commonwealths and territories to settle health care cost
recovery and other claims. In anticipation of these settlements and as a direct
result of these settlements, most of the U.S. cigarette manufacturers increased
prices of cigarettes significantly. Domestic cigarette consumption has declined,
in part due to these price increases which, in turn, decreases demand for the
Company's products. During 1999, the U.S. Department of Justice filed a multi-
billion dollar civil suit against the tobacco industry. In addition, litigation
is pending against the major manufacturers of consumer tobacco products seeking
damages for health problems allegedly resulting from the use of tobacco in
various forms and for alleged violations of antitrust laws. It is not possible
to predict the outcome of such litigation or what effect adverse developments in
pending or future litigation may have on the tobacco industry, its financial
liquidity or relationships with its suppliers.

31

Also in recent years, certain governmental entities, particularly in the
United States, have considered or proposed actions that would require cigarettes
to meet specifications aimed at reducing their likelihood of igniting fires when
the cigarettes are not actively being smoked. The state of New York has enacted
a law directing that such a set of requirements be implemented and scheduled to
take effect beginning in mid-2003. Cigarette manufacturers are in varying stages
of development of cigarettes with such characteristics. Philip Morris and the
Company previously announced the joint development of a banded cigarette paper
that may make a cigarette less likely to ignite certain fabrics and have entered
into a licensing and royalty agreement covering future commercialization of this
new paper. While the joint development effort with Philip Morris was undertaken
in advance of legislative initiatives in certain states to make cigarettes less
likely to ignite certain fabrics when left unattended, the banded cigarette
paper product that resulted from the joint development program, marketed under
the name "Paper Select" by Philip Morris, is directed toward the same objective
as the legislation. This joint development effort is also discussed in Part I,
Item 1 herein under the caption "Philip Morris Supply Agreement." The Company
also has patents related to alternative means for addressing ignition control
and continues to work on other possible innovations with other customers and on
its own as the cigarette industry faces these evolving requirements.

It is not possible to predict what additional legislation or regulations
relating to tobacco products will be enacted, or to what extent, if any, such
legislation or regulations might affect the consumer tobacco products industry
in general.

During 2001, 91 percent of the Company's net sales were from products used
by the tobacco industry in the making and packaging of cigarettes or other
tobacco products. Management is unable to predict the effects that the
above-described legal and governmental actions might have on the Company's
results of operations and financial condition.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, particularly in the foregoing
discussion regarding the "Outlook" of the Company, "Critical Accounting
Policies" and "Factors That May Affect Future Results", constitute
forward-looking statements, generally identified by, but not limited to, phrases
such as "the Company expects" or "the Company anticipates", as well as by use of
words of similar effect, such as "appears", "could", "should", "may" and
"typically". This report contains many such forward-looking statements,
including statements regarding management's expectations of future selling
prices for the Company's products, the Company's anticipated market shares,
future market prices for wood pulp used by the Company, expected sales volumes
trends, new product introductions, anticipated energy, compensation, benefit and
insurance costs, anticipated financial and operational results, anticipated
capital spending, anticipated tax and other governmental actions, contingencies,
anticipated common stock share repurchases and other expected transactions of
the Company. Forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the Company. There
can be no assurances that such events will occur or that the results of the
Company will be as estimated. Many factors outside the control of the Company
also could impact the realization of such estimates. The above-mentioned
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause the Company's actual
results for 2002 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.

32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Schedules have been omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.

33

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements

34

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

35

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

See Notes to Consolidated Financial Statements

36

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

See Notes to Consolidated Financial Statements

37

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 1. BACKGROUND

Schweitzer-Mauduit International, Inc. is headquartered in the United
States of America ("United States" or "U.S."), and together with its
subsidiaries ("SWM" or the "Company") is a diversified producer of premium
specialty papers and the world's largest supplier of fine papers to the tobacco
industry. The Company's principal products include cigarette, tipping and plug
wrap papers used to wrap various parts of a cigarette, reconstituted tobacco
leaf for use as filler in cigarettes, reconstituted tobacco wrappers and binders
for cigars and paper products used in cigarette packaging. The Company was
formed as a result of a tax-free spin-off from Kimberly-Clark Corporation
("Kimberly-Clark") at the close of business on November 30, 1995 by distribution
of all the outstanding common stock of SWM (the "Distribution") to
Kimberly-Clark stockholders. Effective at the close of business on November 30,
1995, the Company became an independent, publicly owned company as a result of
the Distribution. As used herein, the Company means SWM, SWM and its several
subsidiaries or, as determined by the context, one or more or its several
subsidiaries.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities reported, disclosure of contingencies at the date of the
financial statements and amounts of revenues and expenses reported for the
periods. Actual results could differ from these estimates.

These financial statements are presented on a consolidated basis and
include the accounts of SWM and all its majority-owned subsidiaries. The
Company's wholly-owned direct subsidiaries are Schweitzer-Mauduit Canada, Inc.
("SM-Canada") and Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a holding company
organized under the Spanish holding company regime and the primary foreign
investment holding company for SWM. The Company indirectly through SM-Spain has
subsidiaries in France and Brazil. SM-Spain owns directly 100 percent of
Schweitzer-Mauduit France S.A.R.L., a French corporation ("SMF"), and 72 percent
of the issued and outstanding shares of LTR Industries S.A., a French
corporation ("LTRI"). SMF, directly or indirectly, owns 100 percent of three
principal French operating subsidiaries, Papeteries de Mauduit S.A.S. ("PdM"),
Papeteries de Malaucene S.A.S. ("PdMal") and Papeteries de Saint-Girons S.A.S.
("PdStG"). SM-Spain also owns directly 99.99 percent of the issued and
outstanding shares of Schweitzer-Mauduit do Brasil S.A., a Brazilian corporation
("SWM-B"). All material intercompany transactions and balances are eliminated.
The Company does not have any unconsolidated subsidiaries, joint ventures or
special purpose entities.

Revenue Recognition

Sales are recognized when ownership of the product and all risk of loss are
transferred to the customer. Deferred revenue represents advance payments from
customers which are earned based upon a mutually agreed-upon amount per unit of
future product sales.

Foreign Currency Translation

The income statements of foreign entities are translated into U.S. dollars
at average exchange rates prevailing during the periods. The balance sheets of
these entities are translated at period-end exchange rates, and the differences
from historical exchange rates are reflected in a separate component of
accumulated other comprehensive income (loss) as unrealized foreign currency
translation adjustments. Foreign currency gains

38

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

and losses arising from settlement of transactions in non-local currencies and
remeasurement of non-local currency denominated monetary assets and liabilities
are included in other income, net.

Earnings Per Share

Basic net income per common share is computed based on net income divided
by the weighted average number of common shares outstanding. The average number
of common shares outstanding used in the calculation of basic net income per
common share for 2001, 2000 and 1999 were 14,777,200, 15,224,100 and 15,805,700,
respectively. Diluted net income per common share is computed based on net
income divided by the weighted average number of common and potential common
shares outstanding. The average number of common and potential common shares
outstanding used in the calculation of diluted net income per common share for
2001, 2000 and 1999 were 15,038,300, 15,272,400 and 15,807,200, respectively.
Potential common shares are those related to stock options and restricted stock
outstanding and directors' accumulated deferred stock compensation during the
respective years. See Note 8 for a reconciliation of the average number of
common shares outstanding used in the calculation of basic net income per share
to the average number of common and potential common shares outstanding used in
the calculation of diluted net income per common share.

Cash and Cash Equivalents

Cash and cash equivalents include cash, time deposits and readily
marketable securities with original maturities of three months or less. The
recorded amount reported in the balance sheet approximates fair value.

Inventories

Most U.S. inventories are valued at cost on the Last-In, First-Out ("LIFO")
method. The balance of the U.S. inventories and inventories of entities outside
the United States are valued at the lower of cost, using the First-In, First-Out
("FIFO") and weighted average methods, or market.

Property and Depreciation

Property, plant and equipment are stated at cost. Depreciable property is
depreciated on the straight-line method for accounting purposes. When property
is sold or retired, the cost of the property and the related accumulated
depreciation are removed from the balance sheet, and any gain or loss on the
transaction is included in income. The depreciable lives for the principal asset
categories are as follows:

Capitalized Software Costs

The Company accounts for costs incurred in connection with software
developed for internal use in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" issued in March 1998 by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants. The Company
capitalizes certain purchases of software and software design and installation
costs in connection with major projects for software development for internal
use. These costs are included in Deferred Charges and Other Assets on the
consolidated balance sheet and are amortized on the straight-line method for
accounting purposes over the estimated useful life not to

39

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

exceed seven years. The balances of unamortized capitalized software costs on
the Company's consolidated balance sheet were $10.5 and $12.6 as of December 31,
2001 and 2000, respectively. Costs associated with business process redesign,
end-user training, system start-up and ongoing software maintenance are expensed
as incurred.

Environmental Spending

Environmental spending is capitalized if such spending qualifies as
property, plant and equipment, substantially increases the economic value or
extends the useful life of an asset. All other such spending is expensed as
incurred, including fines and penalties incurred in connection with
environmental violations. Environmental spending relating to an existing
condition caused by past operations is expensed. Liabilities are accrued when
environmental assessments or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, timing of these accruals coincides with
completion of a feasibility study or commitment to a formal plan of action.

Impairment of Assets

The Company periodically assesses the likelihood of recovering the cost of
long-lived assets based on its expectation of future profitability and
undiscounted cash flow of the related operations. These factors, along with
management's plans with respect to the operations, are considered in assessing
the recoverability of property and purchased intangibles.

Income Taxes

Income tax expense and deferred income tax assets and liabilities are
determined under the asset and liability method. Deferred income taxes have been
provided on the differences between the financial reporting and tax basis of
assets and liabilities by applying enacted tax rates in effect for the years in
which the differences are expected to reverse.

In France, SMF and its subsidiaries form a consolidated income tax group,
while LTRI separately files its own income tax returns.

Stock Compensation

Compensation cost for stock options is measured based on the intrinsic
value method under Accounting Principles Bulletin ("APB") No. 25, "Accounting
for Stock Issued to Employees" (see Note 8). Payments in the form of shares of
the Company made to third parties, including the Company's outside directors,
are recorded at fair value based on the market value of the Company's common
stock at the time of payment.

Derivative Financial Instruments and Hedging Activities

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The statement requires
that all derivative financial instruments, whether designated in hedging
relationships or not, be recognized as either assets or liabilities on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in current period earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income (loss) and are recognized in the income statement when the hedged item
affects earnings. Changes in the fair value of derivatives not designated as
hedging instruments or that do not qualify for hedge treatment, as well

40

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

as the ineffective portion of a particular derivative instrument designated and
qualifying as a hedge, must be recognized currently in the income statement.

The Company selectively hedges its interest rate and foreign currency
exposures when it is practicable and cost-effective to do so. The Company uses
derivative instruments only for risk management purposes and not for trading or
speculation. All derivative instruments used by the Company are either exchange
traded or are entered into with major financial institutions in order to reduce
credit risk and risk of nonperformance by third parties. The Company also enters
into contracts with certain customers and vendors in which prices for the
Company's normal sales and purchases may be fixed for periods of time, or may
have automatic price adjustment features related to changes in costs of raw
materials or other components. Based on the terms of these contracts, which
provide for sale or purchase of items, other than a financial instrument or
derivative instrument, that will result in physical delivery of such items in
quantities expected to be sold or used by the Company over a reasonable period
in the normal course of business, such contracts are deemed to meet the normal
purchases and normal sales exceptions of SFAS No. 133 and, therefore, are
neither considered to be nor accounted for as derivative financial instruments.

The Company's only outstanding derivative financial instruments designated
as hedges as of January 1, 2001, were foreign currency forward rate contracts,
with fair values approximately equal to their carrying value. As a result, the
Company recorded no cumulative effect of adopting SFAS 133. During the first
quarter of 2001, the Company entered into interest rate swap agreements to fix
the variable rate component of certain of its variable rate long-term debt (see
Note 5). There were no other new derivative contract agreements entered into by
the Company during 2001 other than foreign currency forward rate contracts which
are summarized in Note 9.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method of accounting. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS No. 142, which will be
effective for the Company beginning January 1, 2002. The Company expects no
material effect on its financial statements as a result of these new accounting
standards.

Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement is effective for the Company's
financial statements for the period beginning January 1, 2003, with earlier
application encouraged. The Company expects no material effect on its financial
statements as a result of this new accounting standard.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Although SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", it retains most of the concepts of that
standard, except that it eliminates the requirement to allocate goodwill to
long-lived assets for impairment testing purposes and it requires that a
long-lived asset to be abandoned or exchanged for a similar asset be considered
held and used until it is disposed, i.e. the depreciable life should be revised
until the asset is actually abandoned or exchanged. Also, the new standard
includes the basic provisions of Accounting Principles Board Opinion ("APB") No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for presentation of discontinued operations in the
income statement but broadens that

41

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

presentation to include a component of an entity rather than a segment of a
business, where that component can be clearly distinguished from the rest of the
entity. This statement is effective for the Company's financial statements for
the period beginning January 1, 2002, with earlier application encouraged. The
provisions of this new statement generally are to be applied prospectively. The
Company expects no material effect on its financial statements as a result of
this new accounting standard.

NOTE 3. RESTRUCTURING CHARGE

In 2001, the Company recorded a pre-tax charge of $5.1 related to changes
in business conditions of the Company's Brazilian business and the resulting
decision to exit the printing and writing uncoated papers market in Brazil and
shut down one of its paper machines and associated equipment. Non-cash
write-downs of equipment represented $4.1 of the pre-tax charge. The balance of
the charge was primarily for employee termination and severance costs and
write-downs of related spare parts and machine clothing. Substantially all of
the costs were incurred by December 31, 2001, leaving less than $0.1 of reserve
as of that date.

NOTE 4. SUPPLEMENTAL DISCLOSURES

Supplemental Balance Sheet Data

Analysis of Allowances for Doubtful Accounts and Sales Discounts:

42

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Total inventories included $25.6 and $23.7 of inventories subject to the
LIFO method of valuation at December 31, 2001 and 2000, respectively. If LIFO
inventories had been valued at FIFO cost, net income would have been decreased
by $0.3 in 2001, would have been increased by $0.9 in 2000 and would have been
decreased by $0.5 in 1999.

Supplemental Cash Flow Information

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

(1) The SMF consolidated tax group paid only nominal amounts of minimum required
income taxes in all periods presented due to net operating loss
carryforwards retained in the Distribution.

NOTE 5. DEBT

As of December 31, 2001, the Company had an unsecured credit agreement (the
"Credit Agreement") with a group of banks which provided term and revolving
loans totaling 57.2 million euros (or approximately $51 at December 31, 2001 and
$54 at December 31, 2000) to SMF and PdM Industries S.N.C., a subsidiary owned
99 percent by PdM and one percent by SMF, (the "French Credit Facility") and
term and revolving loans totaling $60 to the Company (the "U.S. Credit Facility"
and, together with the French Credit Facility, the "Credit Facilities"). The
French Credit Facility consisted of a term loan to SMF in the amount of 38.1
million euros (or approximately $34 at December 31, 2001 and $36 at December 31,
2000) (the "French Term Loan Facility") and a renewable 364-day revolving credit
facility available to both SMF and PdM Industries in an amount of up to 19.1
million euros (or approximately $17 at December 31, 2001 and $18 at December 31,
2000) (the "French Revolving Credit Facility"). Borrowings under the French
Credit Facility

43

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

were guaranteed by the Company. The U.S. Credit Facility consisted of a term
loan to the Company in the amount of $45 (the "U.S. Term Loan Facility", and,
together with the French Term Loan Facility, the "Term Loan Facilities") and a
renewable 364-day revolving credit facility available to the Company in an
amount of up to $15 (the "U.S. Revolving Credit Facility" and, together with the
French Revolving Credit Facility, the "Revolving Credit Facilities"). Loans
under the Term Loan Facilities were payable in three equal semi-annual
installments on January 31, 2002, July 31, 2002 and January 31, 2003, however
the Company has refinanced the Credit Agreement effective January 31, 2002.

Effective January 31, 2002, the Company entered into new unsecured credit
facilities with a group of banks ("New Credit Agreement") refinancing the
amounts outstanding under the Term Loan Facilities and extinguishing its
obligations under the Credit Agreement. The terms of the New Credit Agreement
are similar to the prior Credit Agreement, except that it (i) provides for
five-year revolving loans in place of the Term Loan Facilities, which gives the
Company the flexibility to utilize cash balances to pay down the five-year
revolving loans and subsequently draw on those facilities again when needed,
(ii) provides somewhat higher available amounts for the euro facilities, (iii)
extends the maturities of the five-year revolvers to January 31, 2007 and (iv)
renews the Company's short-term revolving loans to January 30, 2003.

As a result of the New Credit Agreement, SMF has five-year and 364-day
revolving loan facilities available totaling up to 70 million euros (or
approximately $62 using the December 31, 2001 currency exchange rate) (the "Euro
Credit Facility") and the Company has five-year and 364-day revolving loan
facilities available totaling up to $60 (the "New U.S. Credit Facility" and,
together with the Euro Credit Facility, the "New Credit Facilities"). The Euro
Credit Facility consists of a five-year revolving credit facility available to
SMF in the amount of up to 50 million euros (or approximately $44 using the
December 31, 2001 currency exchange rate) (the "Five-Year Euro Revolver") and a
renewable 364-day revolving credit facility available to SMF in an amount of up
to 20 million euros (or approximately $18 using the December 31, 2001 currency
exchange rate) (the "364-Day Euro Revolver"). Borrowings by SMF under the Euro
Credit Facility are guaranteed by the Company. The Company also has the ability
to borrow under the Euro Credit Facility although it does not currently
anticipate doing so. The New U.S. Credit Facility consists of a five-year
revolving credit facility to the Company in the amount of up to $45 (the
"Five-Year U.S. Revolver", and, together with the Five-Year Euro Revolver, the
"Five-Year Revolvers") and a renewable 364-day revolving credit facility
available to the Company in an amount of up to $15 (the "364-Day U.S. Revolver"
and, together with the 364-Day Euro Revolver, the "364-Day Revolvers").

As of December 31, 2001, the Company included the first $15 scheduled
installment of its U.S. Term Loan Facility in Current Portion of Long-Term Debt
on its consolidated balance sheet, with the remainder classified as Long-Term
Debt, since the remainder was subsequently refinanced under the New Credit
Agreement. As of December 31, 2001, the Company classified the first two
scheduled installments of the French Term Loan Facility totaling 25.4 million
euros (approximately $22.6 using the December 31, 2001 currency exchange rate)
in Current Portion of Long-Term Debt on its consolidated balance sheet, in
accordance with the terms of the existing French Term Loan Facility, with the
remaining 12.7 million euros (approximately $11.3 using the December 31, 2001
currency exchange rate) installment classified as Long-Term Debt, since the
remainder was subsequently refinanced under the New Credit Agreement.

On January 31, 2002, the Company retired the full amount outstanding under
its U.S. Term Loan Facility and borrowed $30 under the Five-Year U.S. Revolver.
Also on January 31, 2002, SMF drew 15 million euros under the Five-Year Euro
Revolver and repaid the entire 38.1 million euros of its obligations under the
French Term Loan Facility. Under the Five-Year Revolvers, the Company and SMF
are not required to repay any portion of the balances outstanding prior to
January 31, 2007, however, the Company and SMF have the flexibility to make
earlier repayments of all or a portion of the outstanding balances. While

44

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

such plans may change, the Company and SMF do not currently plan to repay the
outstanding balances under the Five-Year Revolvers prior to the January 31, 2007
maturity date.

Under the New Credit Agreement, the interest rate under the Five-Year U.S.
Revolver is the sum of (a) either 0.70 percent per annum or 0.80 percent per
annum (the "Applicable Margin"), determined by reference to the Company's Net
Debt to Equity Ratio (as defined in the New Credit Agreement) plus (b) the
London interbank offered rate for U.S. dollar deposits ("LIBOR"). Under the New
Credit Agreement, the interest rate under the Five-Year Euro Revolver is the sum
of the Applicable Margin plus the euro zone interbank offered rate for euro
deposits ("EURIBOR"). The interest rates under the U.S. and Euro 364-Day
Revolvers are determined using the same formula for the respective Five-Year
Revolvers except that the Applicable Margin is either 0.65 percent per annum or
0.75 percent per annum, determined by reference to the Company's Net Debt to
Equity Ratio (as defined in the New Credit Agreement).

The New Credit Agreement contains representations and warranties which are
customary for facilities of this type and covenants and provisions that, among
other things, require the Company maintain certain defined financial ratios (a
minimum Tangible Net Worth, a maximum Net Debt to Equity Ratio and a maximum Net
Debt to Adjusted EBITDA Ratio, all as defined in the New Credit Agreement). At
December 31, 2001, the Company's Tangible Net Worth was approximately $30 above
the minimum permitted amount while Net Debt was approximately $93 less than the
maximum permitted amount under the most restrictive covenant. The Company does
not currently anticipate any change in business conditions of a nature that
would cause the Company to violate its covenants under the New Credit Agreement.

The Company selectively enters into interest rate hedge agreements with
respect to its variable rate long-term borrowings under its credit facilities to
manage its exposure to interest rate increases when it is practicable and
cost-effective to do so. During the first quarter of 2001, the Company entered
into interest rate swap agreements to fix the variable rate component of certain
of its variable rate long-term debt. The combination of these interest rate swap
agreements began with a notional amount of $45, declining to $30 effective
January 31, 2002, and declining again to $15 effective July 31, 2002 through the
remainder of the contract terms ending January 31, 2003. These interest rate
swap agreements fix the London interbank offered rate for U.S. dollar deposits
at 5.42 percent. This had the effect of fixing the Company's interest rate
including margin at 5.72 percent on $45 of its debt through January 31, 2002,
the effective date of the New Credit Facilities, 6.12 percent on $30 of its debt
from February 1, 2002 through July 31, 2002, and 6.12 percent on $15 of its debt
from August 1, 2002 through January 31, 2003. These interest rate swap contracts
were designated as cash flow hedges and the Company applied the short-cut method
treatment under SFAS No. 133. As such, the Company assumed there was no
ineffectiveness of these hedge contracts, and accordingly, no gain or loss was
recorded in the income statement relative to the changes in fair value of these
interest rate swap contracts, but instead the changes in fair value of the
contracts were reflected in other comprehensive income (loss). There were no
other interest rate-related derivative contract agreements entered into by the
Company during 2001. The weighted average effective interest rates on the Term
Loan Facilities for the years ended December 31, 2001, 2000 and 1999 were 5.2
percent, 5.7 percent and 4.5 percent, respectively.

At both December 31, 2001 and 2000, long-term debt other than the Term Loan
Facilities primarily consisted of obligations of the French operations related
to government-mandated profit sharing. Each year, representatives of the workers
at each of the French businesses can make an election for the profit sharing
amounts from the most recent year ended as to whether to invest the funds in a
financial institution or to invest the funds with their respective employer. To
the extent that funds are invested with the Company, these amounts bear interest
at the five-year treasury note rate in France (5.85 percent and 6.0 percent at
December 31, 2001 and 2000, respectively) and are generally payable in the fifth
year subsequent to the year the profit sharing is accrued.

45

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Following are the balances of long-term debt obligations as of December 31:

Following are the scheduled maturities for these long-term debt obligations
as of December 31, 2001, except that the scheduled $15 maturity of the U.S. Term
Loan Facility has been reflected as maturing in 2007 as a result of the
Company's refinancing of that balance with the Five Year U.S. Revolver under the
New Credit Agreement effective January 31, 2002:

2002........................................................ $41.4
2003........................................................ 3.4
2004........................................................ 3.9
2005........................................................ 4.0
2006........................................................ 3.2
Thereafter.................................................. 41.9
-----
$97.8
=====

Under the New Credit Agreement, the Company pays commitment fees on the
unused portion of its Five-Year Revolvers at an annual rate of .35 percent and
may cancel all or a portion of the unused facilities without penalty at any time
prior to their expiration.

At December 31, 2001, the U.S. and French operations of the Company
together had approximately $32 of 364-day Revolving Credit Facilities available,
all of which was unused. These facilities permit borrowing at competitive
interest rates and are available for general corporate purposes. The facilities
available at December 31, 2001 were scheduled to expire January 25, 2002 and
following their expiration were renewed to January 30, 2003 (see 364-Day
Revolvers above). The Company pays commitment fees on the unused portion of
these 364-Day Revolvers at an annual rate of .25 percent and may cancel all or a
portion of the unused facilities without penalty at any time prior to their
expiration.

The Company also had other bank credit facilities available totaling
approximately $26, of which $5.1 was outstanding at December 31, 2001. No
commitment fees are paid on the unused portion of these facilities.

At December 31, 2001 and 2000, the estimated fair value of the Company's
long-term debt and short-term debt approximated the carrying amount. These fair
values were based on quoted market prices for the same or similar debt or on
current rates offered to the Company for obligations with the same maturities.

46

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 6. INCOME TAXES

An analysis of the provision (benefit) for income taxes for the years ended
December 31, 2001, 2000 and 1999 follows:

Income before income taxes included income of $49.6 in 2001, $49.2 in 2000
and $56.9 in 1999 from operations outside the United States.

A reconciliation of income taxes computed at the U.S. federal statutory
income tax rate to the provision for income taxes is as follows for the years
ended December 31, 2001, 2000 and 1999:

The provision for income taxes in 2001 compared with 2000 was impacted by a
decrease in the French statutory corporate income tax rate from 37.7 percent for
2000 to 36.3 percent for 2001, which had been enacted in December 2000. The
provision for income taxes in 2000 was impacted by several items, including a
$1.0 favorable adjustment to reduce Spanish deferred income tax valuation
allowances, a favorable $0.4 tax benefit related to settlement of a prior-period
claim, a favorable $0.4 tax benefit related to an equity-related payment from
Brazil and $0.8 of income tax benefits associated with treatment of certain
repatriations during the year. Excluding the effects of these four items, the
effective income tax rate for 2000 would have been 37.0 percent.

47

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

In addition to the several items mentioned above, the provision for income
taxes in 2000 compared with 1999 was impacted by a decrease in the French
corporate income tax rate from 40.0 percent for 1999 to 37.7 percent for 2000
and a decline in the Brazilian corporate income tax rate from 37.0 percent for
most of 1999 to 34.0 percent for most of 2000. The effect of the changes in the
French corporate income tax rate enacted in 2000 had a nominal favorable effect
on the deferred income tax provision in 2000 related to the net balances of
deferred income tax assets and liabilities.

The provision for income taxes in 1999 was impacted by an increase in the
effective statutory income tax rate enacted in France in December 1999 for years
beginning in 2000 from the scheduled rate of 36.7 percent to 37.7 percent. The
favorable effect of $0.2 on the deferred provision for income taxes was due to
the increased value of deferred income tax assets, primarily attributable to the
tax benefits from net operating loss carryforwards ("NOLs") of the SMF tax group
estimated to be realizable in future years, net of the increased value of
deferred income tax liabilities.

The Company considers the undistributed earnings of certain foreign
subsidiaries to be indefinitely reinvested or plans to repatriate such earnings
only when tax-effective to do so. Accordingly, no provision for U.S. federal and
state income taxes has been made thereon. Upon distribution of those earnings in
the form of dividends, loans to the U.S. parent, or otherwise, the Company could
be subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to foreign tax authorities. Determination
of the amount of unrecognized deferred U.S. tax liability is not practicable
because of the complexities associated with its hypothetical calculation.

Deferred income tax assets (liabilities) as of December 31, 2001 and 2000
were comprised of the following:

In the 2001 presentation, the net noncurrent deferred income tax asset
relates to the Spanish and Brazilian tax jurisdictions and the net noncurrent
deferred income tax liability relates to the U.S., Canadian and French tax
jurisdictions. In the 2000 presentation, the net noncurrent deferred income tax
asset relates to

48

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

the Spanish tax jurisdiction and the net noncurrent deferred income tax
liability relates to the U.S., Canadian, French and Brazilian tax jurisdictions.
Total deferred income tax assets were $39.1 and $44.0 at December 31, 2001 and
2000, respectively. Total deferred income tax liabilities were $50.2 and $53.1
at December 31, 2001 and 2000, respectively.

Under French tax law, NOLs incurred through December 31, 1994 by SMF
subsidiaries unrelated to the businesses distributed to the Company, which were
distributed to Kimberly-Clark prior to the Distribution, were retained by SMF as
of January 1, 1995. In addition to SMF's remaining NOLs, NOLs were obtained in
the acquisition of the predecessor of SWM-B and were generated during 1998 by
SWM-B, and during 1998 through 2000 by SM-Spain.

The following summarizes the changes in the Company's NOLs and the related
noncurrent deferred income tax asset and valuation allowance for the years ended
December 31, 2001, 2000 and 1999:

Under current tax laws governing the tax jurisdictions in which the Company
has NOLs, remaining NOLs in France and Brazil carry forward indefinitely, NOLs
in Spain expire the later of ten years subsequent to the year generated or ten
years subsequent to the first year of taxable income in Spain (which was 2000).
Of the $77.8 of NOLs still available at December 31, 2001, $4.2 will expire in
2010 if not utilized against taxable income in Spain. The remaining $73.6 of
NOLs have no expiration date. Valuation allowances totaled $9.3 as of December
31, 2001, reducing the related net deferred tax asset to an amount which is
estimated to be realizable through utilization of the NOLs. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax asset will be realized. However, that amount could change if, among
other considerations, estimates of future taxable income or income tax
regulations or interpretations change during the carryforward periods.

In addition to the NOLs above, the Company has generated foreign tax
credits in excess of the amount of foreign tax credits utilized in its U.S.
federal income tax returns, as well as federal research credits, certain state
credits, primarily for investments in fixed assets in those states, and federal
alternative minimum tax ("AMT") credits. The amount of cumulative excess foreign
tax credits through the Company's U.S. federal income tax return for the year
ended December 31, 2000, the most recent year filed, and including estimated
excess credits expected to be generated in 2001, totaled $5.4. These credits
carry forward five years from the date generated, however, because the Company
does not currently foresee being able to realize the benefit of these credits
prior to their expiration, the assets are fully reserved with a valuation
allowance of $5.4. The federal research credits and various state tax credits
are estimated to total $1.9 as of December 31, 2001, of

49

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

which the Company has estimated that approximately $0.9 of these credits will be
realized prior to their expiration and thus has a valuation allowance of $1.0 at
December 31, 2001. The Company's federal AMT credits, related to its filed 2000
and prior year tax returns, and including estimated federal AMT expected to be
paid related to its 2001 tax return, totaled $1.2 at December 31, 2001. These
federal AMT credits carry forward indefinitely.

Along with numerous other companies and banks in France, PdM was subject to
a tax claim with respect to its purchase of certain bonds in 1988 which were
represented by the two selling banks as carrying specific tax benefits. The
French taxing authority challenged the use by PdM of those benefits. In 1999,
the French taxing authority reduced its claim against PdM to exclude an "abuse
of law" penalty and to include instead a "bad faith" penalty. In November 2000,
the Administrative Court of Rennes rendered a decision granting PdM relief of
the "bad faith" penalty but maintaining the principal and interest portions of
the claim. The total claim by the French taxing authority, excluding the "bad
faith" penalty and including interest was $0.6 as of December 31, 2000, which
was fully reserved by PdM. PdM appealed this most recent decision with respect
to its maintaining the principal and interest portions of the claim, however in
2001, PdM was required to pay the $0.6 balance of the assessment. Since the
claim against PdM by the French taxing authority related to a period prior to
PdM joining the SMF consolidated tax group, the unfavorable outcome could not be
offset with the NOLs of the consolidated tax group. PdM had filed claims against
each selling bank on the basis of their misrepresentation of certain facts. The
Company's claim against one of the banks was rejected by a trial court in 1996
and the Company appealed this decision. In 1997, the case against the other bank
was stayed until the claim filed by the French taxing authority against PdM was
resolved. PdM will continue to appeal the decisions of the courts, however,
there is no remaining risk of loss.

NOTE 7. POSTRETIREMENT AND OTHER BENEFITS

North American Pension Benefits

The Company and its subsidiary in Canada have defined benefit retirement
plans which cover substantially all full-time employees. Retirement benefits are
based on years of service and generally on the average compensation earned in
the highest five of the last 15 years of service. Retirees as of the
Distribution remained participants of their respective Kimberly-Clark plans.
Employees as of the date of the Distribution retained credit for prior service
while employees of Kimberly-Clark.

Effective July 1, 2000, the Company amended its defined benefit retirement
plan for U.S. employees to include a cash balance benefit formula that covers
all salaried employees hired on or after July 1, 2000 and all salaried employees
as of July 1, 2000, except those salaried employees who were "grandfathered" and
chose to retain retirement benefits under the terms of the plan prior to this
amendment. Salaried employees who, as of July 1, 2000, had either attained the
sum of their age plus years of vesting service equal to 65 or more, or attained
the sum of their age plus years of vesting service equal to 60 or more and had
at least 15 years of vesting service were grandfathered under the plan and could
elect either the new cash balance benefit formula or to retain retirement
benefits under the terms of the plan prior to this amendment. For employees
under the cash balance formula, the Company will annually credit to the
employee's account balance a retirement contribution credit, which is a
percentage of the employee's earnings with the percentage varying based on the
years of vesting service in the plan, and an interest credit, based on the
average yield for 30-year treasury bills.

The Company's funding policy is generally to contribute assets that, at a
minimum, fully fund the accumulated benefit obligation, subject to regulatory
and tax deductibility limits. Plan assets are invested in a diversified
portfolio consisting primarily of equity and debt securities.

50

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

The components of net pension expense for U.S. employees for the years
ended December 31, 2001, 2000 and 1999 were as follows:

The assumed long-term rate of return on pension assets for purposes of
pension expense recognition for the U.S. employee plans was 10.0 percent for
each of the years 2001, 2000 and 1999. Transition adjustments for these plans
are being amortized on the straight-line method over 14 to 18 years. The
discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the U.S. employee pension plans were 7.25
percent and 7.5 percent at December 31, 2001 and 2000, respectively. The assumed
long-term rate of compensation increases used to determine the projected benefit
obligations for these plans was 3.5 percent for both December 31, 2001 and 2000.

The funded status of the U.S. employee pension plans as of December 31,
2001 and 2000 were as follows:

51

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

The projected benefit obligation and accumulated benefit obligation for
U.S. pension plans with accumulated benefit obligations in excess of plan assets
were $72.5 and $63.6, respectively, as of December 31, 2001, and $1.9 and $1.7,
respectively, as of December 31, 2000. As of December 31, 2000, the supplemental
executive plan, which is unfunded and therefore has no plan assets, was the only
U.S. plan for which the accumulated benefit obligation exceeded plan assets.

French Pension Benefits

In France, employees are covered under a government administered program.
In addition, the Company's French operations sponsor retirement indemnity plans
which pay a lump sum retirement benefit to employees who retire from the
Company. The Company's French operations also sponsor a supplemental executive
pension plan which is designed to provide a retirement benefit equal to between
50 and 65 percent of final earnings, depending upon years of service, after
considering other government and Company sponsored retirement plans. Plan assets
are principally invested in the general asset portfolio of a French insurance
company.

The Company's net pension expense for the French pension plans was $1.4,
$1.7 and $1.5 for the years ended December 31, 2001, 2000 and 1999,
respectively. The assumed long-term rates of return on pension assets for
purposes of pension expense recognition for the French plans were 5.0 percent
for 2001, 4.5 percent for 2000, and 6.5 percent for 1999. Transition adjustments
for these plans are being amortized on the straight-line method over 19 to 20
years. The discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the French plans were 5.75 percent and 6.0
percent at December 31, 2001 and 2000, respectively. The assumed long-term rates
of compensation increases used to determine the projected benefit obligation for
these plans were 3.0 percent and 2.5 percent at December 31, 2001 and 2000,
respectively.

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the French pension plans were $18.4, $12.5 and $7.0,
respectively, as of December 31, 2001, and $16.3, $8.6 and $5.7, respectively,
as of December 31, 2000. The Company's net accrued pension liability for the
French plans was $6.8 and $3.9 at December 31, 2001 and 2000, respectively. At
December 31, 2001, the net accrued pension liability balance included an
additional minimum pension liability of $3.7 million, which balance is also
reflected net of tax in the balance of accumulated other comprehensive income
(loss) on the consolidated balance sheet.

Brazilian Pension Benefits

In Brazil, employees are covered under a government-administered program.

Postretirement Healthcare and Life Insurance Benefits

The Company and its subsidiary in Canada have unfunded healthcare and life
insurance benefit plans which cover substantially all retirees of the Company.
Eligibility for benefits under the Company's plans is based on years of service
and age at retirement. Retirees as of the Distribution remained participants of
their respective Kimberly-Clark plans. Employees as of the date of the
Distribution retained credit for prior service while employees of
Kimberly-Clark. The Company's plans are noncontributory for certain long service
employees when they retire, but are contributory for most other future retirees.

Effective July 1, 2000, the Company amended its postretirement healthcare
and group life insurance coverages for U.S. salaried employees, except certain
grandfathered employees. Grandfathered employees will continue to receive
retiree healthcare coverage and life insurance coverage at rates subsidized by
the

52

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Company. For all other U.S. salaried employees, future retiree healthcare
coverage access will be offered at full cost to the retiree.

The components of U.S. employee postretirement healthcare and life
insurance benefit costs were as follows for the years ended December 31, 2001,
2000 and 1999:

The components of the unfunded U.S. employee postretirement healthcare and
life insurance benefit obligation included in other noncurrent liabilities as of
December 31, 2001 and 2000 were as follows:

For purposes of measuring the benefit obligation at December 31, 2001, a
6.0 percent annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2002. The rate was assumed to decrease to 5.0
percent for 2003 and remain at that level thereafter. For purposes of measuring
the benefit obligation at December 31, 2000, a 6.5 percent annual rate of
increase in the per capita cost of covered healthcare benefits was assumed for
2001, with the annual rate declining to 5.0 percent for 2002 and thereafter.
Discount rates of 7.25 percent and 7.5 percent were used to determine the
postretirement benefit obligations at December 31, 2001 and 2000, respectively.

A one-percentage point increase or decrease in the healthcare cost trend
rate would have a nominal effect on the total of the service and interest cost
components of the postretirement benefit obligation at December 31, 2001. A one
percentage point increase in the healthcare cost trend rate would increase the
total postretirement benefit obligation by $0.1 at December 31, 2001. Likewise,
a one percentage point decrease in the healthcare cost trend rate would decrease
the total postretirement benefit obligation by $0.1 at December 31, 2001.

53

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Other Benefits

Substantially all of the Company's U.S. employees have been given the
opportunity to participate in a voluntary retirement savings plan. Under the
plan, the Company matches a portion of employee contributions. Employees may
reallocate their respective account balances, including any balances in the
Company's common stock, amongst any number of the available investment choices
under the plan provisions once each calendar quarter. The Company's cost under
the plan reflected in the accompanying consolidated income statements was $0.9
for each of the years 2001, 2000 and 1999. At December 31, 2001 and 2000,
500,000 shares of the Company's Common Stock were reserved for issuance under
the plan, none of which had been issued as of December 31, 2001. The shares may,
at the Company's option, be used to satisfy the Company's liability for its
matching contributions.

Beginning in 2000, the Company also provides U.S. executives, certain other
key personnel and its directors the opportunity to participate in deferred
compensation plans. Those participating employees can elect to defer a portion
of their salaries and certain other compensation. Those participating directors
can elect to defer their meeting fees, as a cash deferral, as well as their
quarterly retainer fees, as deferred stock unit credits. The Company's liability
balance under these plans totaled $0.9 and $0.5 at December 31, 2001 and 2000,
respectively, which is included on the consolidated balance sheet in Other
Noncurrent Liabilities. In connection with these plans, as well as the Company's
supplemental executive retirement and executive severance plans, the Company
also established a grantor trust during 2000 into which the Company contributed
funds toward its future obligations under the various plans. Grantor trust
investments are primarily in company-owned life insurance policies. The balance
of grantor trust assets totaled $0.8 and $0.5 at December 31, 2001 and 2000,
respectively, which is included in Other Assets on the consolidated balance
sheet.

In accordance with French law, certain salaried employees in France may
accumulate unused regular vacation and supplemental hours of paid leave that can
be credited to an individual's Compte Epargne Temps ("CET"). The CET account may
grow over an individual's career and the hours accumulated may be withdrawn upon
retirement or under other special circumstances at the individual's then current
rate of pay. The balance of the Company's liability for this program reflected
in the accompanying consolidated balance sheets was $2.6 and $2.5 at December
31, 2001 and 2000, respectively.

NOTE 8. STOCKHOLDERS' EQUITY

The Company's Certificate of Incorporation authorizes the issuance of up to
100,000,000 shares of Common Stock, par value $.10 per share, and 10,000,000
shares of Preferred Stock, par value $.10 per share. Each share of presently
outstanding Common Stock and each share of Common Stock issued after the date of
this report will have attached to it, one right to purchase from the Company one
one-hundredth (1/100) of a share of a series of Preferred Stock designated as
the Series A Junior Participating Preferred Stock (the "Series A Preferred
Stock") (a "Right"). Each Right entitles a shareholder to purchase from the
Company one one-hundredth (1/100) of a share of the Series A Preferred Stock at
a price of $65 per one one-hundredth (1/100) of a share, subject to certain
anti-dilution adjustments. The Rights, however, become exercisable only at such
time as a person or group acquires, or commences a public tender or exchange
offer for, 15 percent or more of the Company's Common Stock. The Rights have
certain anti-takeover effects since they may cause substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Company's Board of Directors. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors since
they may be redeemed by the Company at $.01 per Right at any time until a person
or group has obtained beneficial ownership of 15 percent or more of the voting
stock. The Rights will expire at the close of business on October 1, 2010,
unless redeemed earlier by the Company.

54

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

The Series A Preferred Stock will be non-redeemable and, unless otherwise
provided in connection with the creation of a subsequent series of preferred
stock, will be subordinate to any other series of the Company's preferred stock.
Each share of Series A Preferred Stock will be entitled to receive when, as and
if declared, a quarterly dividend in an amount equal to the greater of $1 per
share or 100 times the cash dividends declared on the Company's Common Stock. In
addition, the Series A Preferred Stock is entitled to 100 times any non-cash
dividends (other than dividends payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock) declared on the Common
Stock, in like kind. In the event of a liquidation, the holders of the Series A
Preferred Stock will be entitled to receive a liquidation payment in an amount
equal to the greater of $100 per share or 100 times the payment made per share
of Common Stock. Each share of Series A Preferred Stock will have 100 votes,
voting together with the Common Stock. In the event of any merger, consolidation
or other transaction in which common shares are exchanged, each share of Series
A Preferred Stock will be entitled to receive 100 times the amount received per
share of Common Stock. The rights of the Series A Preferred Stock as to
dividends, liquidation and voting are protected by antidilution provisions.

Changes in the components of other comprehensive income (loss) are as
follows for the years ended December 31, 2001, 2000 and 1999:

The Company's Equity Participation Plan provides that eligible employees
may be granted stock options which, when exercised, give the recipient the right
to purchase the Company's Common Stock at a price no less than the "fair market
value" (as defined in the Equity Participation Plan) of such stock at grant
date. Options awarded under the Equity Participation Plan only become
exercisable after specified periods of employment after the grant thereof (30
percent after the first year, 30 percent after the second year and the remaining
40 percent after the third year). Generally, such options expire ten years
subsequent to the date of grant.

SFAS No. 123 "Accounting for Stock Based Compensation" defines a fair value
based method of accounting for stock compensation, including stock options, to
employees. This statement provides entities a choice of recognizing related
compensation expense by adopting the fair value method or to measure
compensation using the intrinsic value method under APB No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to continue to measure
compensation cost for stock compensation based on the intrinsic value method
under APB No. 25. Payments in the form of shares of the Company made to third
parties, including the Company's outside Directors, are recorded at fair value
based on the market value of the Company's common stock at the time of payment.
Under APB No. 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. SFAS No. 123 requires presentation of pro
forma net income and earnings per share as if the Company had accounted for its
employee stock compensation under the fair value method of that statement. For
purposes of the pro forma disclosures, the estimated fair value of the stock

55

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

compensation is amortized to expense over the vesting period. Under the fair
value method, the Company's net income and earnings per share would have been
the pro forma amounts indicated below:

The valuation under SFAS No. 123 was based on the Black-Scholes option
pricing model with the market value of the stock equal to the exercise price, an
estimated volatility over the ten year option term of 33 percent for the 2001
awards, 30 percent for the 2000 awards and 27 percent for the 1999 awards, a
risk-free rate of return based upon the zero coupon government bond yield and an
assumed quarterly dividend of $0.15 per share. At both December 31, 2001 and
2000, 1,500,000 shares of the Company's Common Stock were reserved under the
Equity Participation Plan. At December 31, 2001 and 2000, there were 172,960 and
261,360 shares, respectively, available for future awards.

The following stock options were outstanding as of December 31, 2001, 2000
and 1999:

56

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

The following table summarizes information about stock options outstanding
at December 31, 2001:

Effective December 2, 1999, the Company established a Restricted Stock Plan
which is intended to promote the long-term financial success of the Company by
attracting to the Company and retaining outstanding executive personnel and to
motivate such personnel by means of restricted stock grants. The Compensation
Committee of the Company's Board of Directors selects participants and
establishes the terms of any grant of restricted stock. The Company's Restricted
Stock Plan provides that such a grant immediately transfers ownership rights in
shares of the Company's Common Stock to the recipient of the grant, including
the right to vote the shares and to receive dividends thereon, at a share price
established by the Compensation Committee in its discretion. The recipient's
continued ownership of and right to freely transfer the restricted stock is
subject to such conditions on transferability and to such risks of forfeiture as
are established by the Compensation Committee at the time of grant, which may
include continued employment with the Company for a defined period, achievement
of specified management performance objectives or other conditions established
by the Compensation Committee. The number of shares which may be issued under
this Restricted Stock Plan is limited to the lesser of 200,000 shares or the
number of treasury shares held by the Company as of the date of any grant. No
single participant may be awarded, in the aggregate, more than 50 percent of the
shares authorized to be issued under the Restricted Stock Plan. As of December
31, 2001, 50,000 restricted shares had been issued under the Restricted Stock
Plan which will not vest until four years of service from the date of the grant.
The number of shares available for future awards is limited, as of December 31,
2001, to 150,000.

A reconciliation of the average number of common shares outstanding used in
the calculations of basic and diluted net income per share follows (in 000's):

57

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

There were stock options outstanding that were not included in the
calculation of diluted net income per share because their exercise price was
greater than the average market price of the Company's common stock during the
respective periods, as summarized below(shares in 000's and $ are per share
amounts):

NOTE 9. FOREIGN CURRENCY

Foreign currency losses have arisen from settlement of transactions in
non-local currencies and the remeasurement of non-local currency denominated
monetary assets and liabilities into the currency of the country in which the
operation is domiciled. Such gains (losses) included in other income (expense),
net were $0.6 in 2001, ($0.6) in 2000 and were nominal in 1999.

Foreign currency risks arise from transactions and commitments denominated
in non-local currencies. These transactions and commitments may include the
purchase of inventories or property, plant and equipment, the sale of products
and the repayment of loans.

Management selectively hedges the Company's foreign currency risks when it
is practicable and cost effective to do so. The instruments are purchased from
well-known money center banks, insurance companies or government agencies
(counterparties). Usually the contracts extend for no more than 12 months,
although their contractual term has been as long as 24 months. Credit risks with
respect to the counterparties, and the foreign currency risks that would not be
hedged if the counterparties fail to fulfill their obligations under the
contracts, are minimal in view of the financial strength of the counterparties.

Gains and losses on instruments that hedge firm commitments are deferred
and included in the basis of the underlying hedged items. Premiums paid for
options are amortized ratably over the life of the option. All other gains and
losses are included in period income or expense based on the period-end market
price of the instrument.

At December 31, 2001, there were outstanding forward contracts, which were
held for purposes other than trading, maturing at various dates in 2002, to
purchase $16 of various foreign currencies. At December 31, 2000, there were
outstanding forward contracts, which were held for purposes other than trading,
maturing at various dates in 2001, to purchase $9.2 of various foreign
currencies. These contracts were designated as cash flow hedges of foreign
currency transactions to fix the Company's local currency cash flow. These
contracts had not given rise to any significant net deferred gains or losses as
of December 31, 2001 and December 31, 2000, and their fair values approximately
equaled their carrying value.

NOTE 10. COMMITMENTS

Operating Leases

Future minimum obligations under non-cancelable operating leases having an
initial or remaining term in excess of one year as of December 31, 2001 are less
than $1.5 annually over the next five years. Rental expense under operating
leases was $4 for each of the years ended December 31, 2001 and 2000, and $4.3
for the year ended December 31, 1999.

58

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Other Commitments

During 1998, PdM entered into an agreement with one of its vendors in
connection with PdM's purchases of calcium carbonate, a raw material used in the
manufacturing of some paper products. The vendor agreed to construct and operate
an on-site plant at the Quimperle, France mill. The cost to construct the
necessary building and equipment was approximately 40 million French franc ($5.4
at December 31, 2001 exchange rate). PdM agreed to annual minimum purchase
commitments at prices which will vary according to quantities consumed. Under
the terms of the agreement, which is currently scheduled to expire at the end of
2009, the annual minimum contractual commitment is at a quantity and price which
would require $1.8 of calcium carbonate purchases. If PdM buys less than the
minimum purchase commitments, the vendor can terminate the contract and require
PdM to pay to the vendor the then net book value of the building and equipment,
determined using a straight-line method of depreciation over the life of the
agreement, which amount was approximately $4.3 at December 31, 2001.

Similarly, a vendor of SWM-B operates a calcium carbonate plant on-site at
the Pirahy, Brazil mill. Under that agreement, which will expire in 2006, the
net raw material prices vary according to the quantities produced, however,
SWM-B is committed to pay at least the monthly fixed costs of the calcium
carbonate plant which are less than $0.1 per month.

Under each of the above agreements, the net raw material prices expected to
be paid are less than the net prices at which the raw material could otherwise
be purchased, and thus the commitments are not expected to result in losses.
Additionally, PdM's and SWM-B's current annual levels of calcium carbonate usage
exceed their respective annual contractual minimum commitments.

The Company enters into certain other immaterial contracts from time to
time for the purchase of certain raw materials. The Company also enters into
certain contracts for the purchase of equipment and related costs in connection
with its ongoing capital projects which, at December 31, 2001, totaled
approximately $6.6.

NOTE 11. LEGAL PROCEEDINGS

On December 27, 2000, SWM-B received two assessments from the tax
authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre
Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax,
consisting of unpaid ICMS taxes from January 1995 through November 2000,
together with interest and penalties in the total amount of approximately $13.6,
based on the foreign currency exchange rate at December 31, 2000 (collectively,
the "Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS
tax credits generated from the production and sale of certain non-tobacco
related grades of paper sold domestically that are immune from the tax to offset
ICMS taxes otherwise owed on the sale of products that are not immune. A portion
of the Assessment, estimated at December 31, 2000 at approximately $6.9, related
to tax periods that predated the Company's acquisition of Pirahy and is covered
by an indemnification from the sellers of Pirahy ("Assessment 1"). The second
assessment pertains exclusively to periods that SWM-B owned the Pirahy mill
("Assessment 2"). While SWM-B is primarily responsible for the full payment of
the Assessment in the event of an ultimate unfavorable outcome, SWM-B is not
aware of any difficulties that would be encountered in obtaining reimbursement
of that portion of any payment resulting from Assessment 1 from the previous
owner under the indemnification.

SWM-B contests the Assessment based on Article 150, VI of the Brazilian
Federal Constitution of 1988, which grants immunity from ICMS taxes to papers
used in the production of books, newspapers and periodicals ("immune papers")
and the raw material inputs used to produce immune papers. SWM-B further
contends that the statutory provision relied on by the State of Rio de Janeiro
to argue that ICMS tax credits generated in the course of the production of
immune papers must be reversed rather than applied to other ICMS taxes owed
violates the Brazilian Federal Constitution and the legal principle of
"non-cumulativity" for

59

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

ICMS tax set forth in Article 155, Section 2, II, of the Brazilian Federal
Constitution of 1988. Additionally, SWM-B contends that the statutory provisions
relied on by the government do not address "immunity" from the incidence of the
ICMS tax, but are addressed to "exception" from the tax. This distinction is
central to SWM-B's further contention that the only exceptions permitted to the
constitutionally mandated principle of non-cumulativity are for exemptions from
tax and no exceptions from this principle are permitted in cases of immunity
from tax.

Administrative appeals were filed on the Assessment, and in April 2001 and
August 2001 decisions were rendered on these administrative appeals. The State
of Rio de Janeiro tax authorities denied the appeal of Assessment 2 in its
entirety and reduced the original amount of Assessment 1 by approximately $1.6
based on SWM-B's argument that Assessment 1 covered periods barred by the
applicable statute of limitations. Following these decisions at the
administrative level, judicial actions to annul the tax and to enjoin
enforcement of the Assessment pending adjudication were filed in Rio de Janeiro
on behalf of SWM-B. The courts issued injunctions, which were upheld on appeal,
against enforcement of the Assessment without the requirement for any bond or
posting of other collateral by SWM-B, pending final determination of SWM-B's
action to annul the tax debts. SWM-B continues to vigorously contest the
Assessment and believes that the Assessment will ultimately be resolved in its
favor. However, the final resolution of this matter will most likely entail
judicial proceedings up to and including presentation of the matter to the
Supreme Court of Brazil and is not likely to be finally resolved for several
years. Based on the foreign currency exchange rate at December 31, 2001, the
Assessment, as reduced in August 2001, totaled $10.8 as of December 31, 2001, of
which approximately $4.7 is covered by the above discussed indemnification. No
liability has been recorded in the Company's consolidated financial statements
for the Assessment based on the Company's evaluation that SWM-B is more likely
than not to prevail in its challenge of the Assessment under the facts and law
as presently understood.

In December 2000, SWM-B suspended the further accrual and application of
ICMS tax credits generated on immune products to reduce its possible exposure to
future ICMS tax assessments due to the punitive nature of penalties associated
with such assessments and SWM-B's plans to transition from immune products to
other non-immune products. A reserve of $1.1 was recorded for the entire asset
balance of unused ICMS tax credits as of December 31, 2000. Subsequently during
2001, SWM-B exited the Brazilian market for printing and writing uncoated
papers, which includes the immune papers.

Under the belief that the ICMS tax audit of SWM-B discussed above was
closed, during February 2001, SWM-B revised its prior-period ICMS treatment
related to consignment pulp purchases. As a result, SWM-B decreased the asset
and corresponding reserve on its books associated with these ICMS tax credits
from $1.1 to $0.2, still fully reserving this remaining asset balance of unused
ICMS tax credits. SWM-B took this action to eliminate the risk of a new ICMS tax
assessment while it awaited the final outcome of its challenge to the
Assessment.

In April 2001, SWM-B received a third ICMS tax assessment for penalty only
in the amount of approximately $0.2 related to its revised treatment of the ICMS
tax credits relating to consignment pulp. The State of Rio de Janeiro tax
authorities informed SWM-B that its February 2001 action revised its position on
the credits associated with consignment pulp in response to an open tax audit
and was therefore subject to penalties. This assessment was paid in December
2001.

The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without a material adverse effect on the Company's
consolidated financial statements.

60

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 12. ENVIRONMENTAL MATTERS

The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims and its obligation to participate in the
remediation or the monitoring of certain hazardous waste disposal sites, will
not have a material adverse effect on the Company's financial condition or
results of operations. However, future events, such as changes in existing laws
and regulations, or unknown contamination of sites owned, operated or used for
waste disposal by the Company (including contamination caused by prior owners
and operators of such sites or other waste generators) may give rise to
additional costs which could have a material adverse effect on the Company's
financial condition or results of operations.

The Company assumed responsibility to administer a July 25, 1994 landfill
closure permit between Kimberly-Clark and the Massachusetts Department of
Environmental Protection ("MDEP") governing the post-closure care of the Willow
Hill Landfill in Lee, Massachusetts. Pursuant to an amended Comprehensive Site
Assessment Landfill Post-Closure Maintenance and Monitoring Permit issued to the
Company by MDEP dated May 15, 1996 (the "Permit"), groundwater and landfill gas
monitoring tests were conducted from which it was determined that landfill gas
levels at and beyond the property boundary exceeded the statutory maximum of 25
percent of the lower explosive limit ("LEL"). Based on these findings, on
January 24, 1997, the Company and MDEP entered into an Administrative Consent
Order ("ACO") pursuant to which the Company was required to reduce
concentrations of landfill gases at the landfill property line to specified
levels by September 15, 1998. Compliance with the ACO was predicated on the
Company demonstrating that landfill gases were at or below the LEL for one full
year at 26 gas monitoring wells. The Company achieved full compliance with the
ACO effective October 2, 2001. The ACO is now closed and the Company will
henceforth perform its continuing obligations for the post-closure care of the
landfill set forth in the terms of the Permit. The Permit incorporates standard
statutory requirements for the ongoing maintenance and care of closed
non-hazardous landfills. The Company does not believe that this matter will have
a material adverse effect on the Company's business or financial condition.

At Distribution, the Company assumed Kimberly-Clark's liabilities as a
potentially responsible party ("PRP") under the provisions of the U.S.
Comprehensive Environmental Response, Compensation and Liability Act and
analogous New Jersey statutes in connection with the Global Landfill Reclaiming
Corporation ("Global Landfill") waste disposal site in Old Bridge, New Jersey.
The Company continues to participate in the remediation of the Global Landfill
as a member of a group of PRPs that entered into a consent decree with the state
of New Jersey in 1993. The Company previously recorded its pro-rata portion of
the estimated liability for remediation of this site, the remainder of which is
not material.

The Company incurs spending necessary to meet legal requirements and
otherwise relating to the protection of the environment at the Company's
facilities in the United States, France, Brazil and Canada. For these purposes,
the Company incurred total capital expenditures of $1.6 in 2001, and anticipates
that it will incur approximately $4 to $5 in 2002 and $1 to $2 in 2003, none of
which is the result of environmental violations. The major projects included in
these estimates are $2.7 toward upgrading wastewater treatment facilities and
$1.1 for installation of ink solvent treatment equipment in France. The
foregoing capital expenditures are not expected to reduce the Company's ability
to invest in other appropriate and necessary capital projects and are not
expected to have a material adverse effect on the Company's financial condition
or results of operations.

61

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 13. BUSINESS SEGMENTS AND GEOGRAPHY

Business Segment Reporting

The Company is operated and managed based on the geographical location of
its manufacturing operations: the United States, France and Brazil. These
business segments manufacture and sell cigarette, plug wrap and tipping papers,
used to wrap various parts of a cigarette, reconstituted tobacco products and
paper products used in cigarette packaging. While the products are similar in
each segment, they vary based on customer requirements and the manufacturing
capabilities of each location. Sales by a segment into markets primarily served
by a different segment occur where specific product needs cannot be
cost-effectively met by the manufacturing operations domiciled in that segment.

Tobacco industry products comprised 88 to 91 percent of the Company's
consolidated net sales in each of the years 2001, 2000 and 1999. The Company's
non-tobacco industry products are a diverse mix of products, certain of which
represent commodity paper grades produced to maximize machine operations.

Consolidated Operations by Segment

For purposes of the segment disclosure in the following tables, the term
"United States" includes operations in the United States and Canada. The
Canadian operations only produce flax fiber used as raw material in the U.S.
operations. Elimination of intercompany sales of products between segments are
referred to in the following table as intersegment sales. Expense amounts not
associated with segments are referred to as unallocated items. Assets reported
by segment represent assets which are directly used by that segment.
Eliminations and unallocated items include receivables from other segments and
immaterial balances of the Company's international holding company in Spain.

62

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

Consolidated Operations by Geographic Area

Long-lived assets, excluding deferred income tax assets and certain other
deferred charges, were $157.1 $120.3 and $20.7 in the United States, France and
Brazil, respectively, as of December 31, 2001, and $108.8, $123.9 and $29.3 in
the United States, France and Brazil, respectively, at December 31, 2000.

For purposes of the geographic disclosure in the following table, net sales
are attributed to geographic locations based on the location of the Company's
direct customers.

NOTE 14. MAJOR CUSTOMERS

Two of the Company's customers have accounted for a significant portion of
the Company's net sales in the periods presented in the financial statements,
and the loss of one or both such customers, or a significant reduction in one or
both of these customers' purchases, could have a material adverse effect on the
Company's results of operations. Net sales to Philip Morris Incorporated
("Philip Morris"), together with its affiliates and designated converters,
accounted for approximately 32 percent of total consolidated net sales for the
year ended December 31, 2001 and approximately 30 percent in each of the years
ended December 31, 2000 and 1999. Net sales to B.A.T. Industries PLC ("BAT"),
together with its affiliates and designated converters, accounted for
approximately 18 percent, 17 percent and 18 percent of consolidated net sales
for the years ended December 31, 2001, 2000 and 1999, respectively. Each of the
Company's segments reported sales to these customers for each of the respective
periods reported above.

The Company had sales to the minority shareholder of LTRI of $18.7, $19.1
and $24.2 in 2001, 2000 and 1999, respectively.

The Company's consolidated accounts receivable at December 31, 2001 and
2000 included balances from Philip Morris and BAT, together with their
respective affiliates and designated converters. The percentage of these
customers' balances of consolidated accounts receivable is less than each of
their respective percentages of consolidated net sales.

63

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

The Company performs ongoing credit evaluations on all of its customers'
financial condition and generally does not require collateral or other security
to support customer receivables. A substantial portion of the Company's
consolidated accounts receivable are due from companies in the tobacco industry
which has been and continues to be under substantial pressure from legal,
regulatory and tax developments. It is not possible to predict the outcome of
such litigation or what effect adverse developments in pending or future
litigation, regulatory actions and additional taxes may have on the tobacco
industry, its financial liquidity or relationships with its suppliers. Nor is it
possible to predict what additional legislation or regulations relating to
tobacco products will be enacted, or to what extent, if any, such legislation or
regulations might affect the tobacco products industry in general.

64

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 15. UNAUDITED QUARTERLY FINANCIAL DATA AND COMMON STOCK INFORMATION

The Company's Common Stock is listed on the New York Stock Exchange under
the ticker symbol "SWM". As of December 31, 2001, there were 5,472 stockholders
of record of the Company's Common Stock. This number does not include shares
held in "nominee" or "street" name.

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

(1) 2001 results included pretax restructuring charges of $4.6 and $0.5 in the
second and third quarters, respectively, in connection with the Company's
exit of the Brazilian printing and writing uncoated papers market and the
resulting shutdown of a paper machine in the Company's Brazilian operations.
The net income effect of these charges were ($3.1) and ($0.3), or ($.21) and
($.02) per share, respectively, in the second and third quarters.

65

SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Schweitzer-Mauduit International,
Inc.:

We have audited the accompanying consolidated balance sheets of
Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 2001, 2000
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Schweitzer-Mauduit
International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years ended December
31, 2001, 2000 and 1999 in conformity with accounting principles generally
accepted in the United States of America.

/s/ Deloitte & Touche LLP
Atlanta, Georgia
January 25, 2002 (January 31, 2002 as to Note 5)

66

SCHWEITZER-MAUDUIT INTERNATIONAL INC. AND SUBSIDIARIES

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of Schweitzer-Mauduit International, Inc. is responsible for
conducting all aspects of the business, including the preparation of the
financial statements in this Annual Report. The financial statements have been
prepared using accounting principles generally accepted in the United States of
America considered appropriate in the circumstances to present fairly the
Company's consolidated financial position, results of operations and cash flows
on a consistent basis. Management also has prepared the other information in
this Annual Report and is responsible for its accuracy and consistency with the
financial statements.

As can be expected in a complex and dynamic business environment, some
financial statement amounts are based on management's estimates and judgments.
Even though estimates and judgments are used, measures have been taken to
provide reasonable assurance of the integrity and reliability of the financial
information contained in this Annual Report. These measures include an effective
control-oriented environment in which a company-wide internal control program
plays an important role, an Audit Committee of the Board of Directors which
oversees the financial reporting process, and independent audits. As part of
that responsibility, the Audit Committee recommended to the Board of Directors
the selection of the Company's independent public auditors, Deloitte & Touche
LLP.

One characteristic of a control-oriented environment is a system of
internal control over financial reporting and over safeguarding of assets
against unauthorized acquisition, use or disposition, designed to provide
reasonable assurance to management and the Board of Directors regarding
preparation of reliable published financial statements and such asset
safeguarding. The system is supported with written policies and procedures and
contains self-monitoring mechanisms. Appropriate actions are taken by management
to correct deficiencies as they are identified. All internal control systems
have inherent limitations, including the possibility of circumvention and
overriding of controls, and therefore, can provide only reasonable assurance as
to financial statement preparation and such asset safeguarding. Management
believes the Company's system of internal control maintains an appropriate
cost-benefit relationship.

The Company has also adopted a code of conduct which, among other things,
contains policies for conducting business affairs in a lawful and ethical manner
in each country in which it does business, for avoiding potential conflicts of
interest, and for preserving confidentiality of information and business ideas.
Internal controls have been implemented to provide reasonable assurance that the
code of conduct is followed.

The financial statements have been audited by Deloitte & Touche LLP. During
their audits, the independent auditors were given unrestricted access to all
financial records and related data. Management believes that all representations
made to the independent auditors during their audits were valid and appropriate.

During the audits conducted by the independent auditors, management
received minor recommendations to strengthen or modify internal controls in
response to developments and changes. Management has adopted, or is in the
process of adopting, all recommendations which are cost-effective.

/s/ Wayne H. Deitrich
Wayne H. Deitrich
Chairman of the Board and Chief Executive Officer

/s/ Paul C. Roberts
Paul C. Roberts
Chief Financial Officer and Treasurer

January 25, 2002

67

PART II, CONTINUED

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The section of the Company's Proxy Statement dated March 14, 2002 (the
"2002 Proxy Statement") captioned "Certain Information Regarding Directors and
Nominees" under "Proposal 1. Election of Directors" identifies members of the
Board of Directors of the Company and nominees, and is incorporated in this Item
10 by reference.

See also "Executive Officers of the Registrant" appearing in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION

The information in the section of the 2002 Proxy Statement captioned
"Executive Compensation" is incorporated in this Item 11 by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information in the sections of the 2002 Proxy Statement captioned
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Holders" is incorporated in this Item 12 by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the section of the 2002 Proxy Statement captioned
"Certain Transactions and Business Relationships" is incorporated in this Item
13 by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report.

(1) and (2) Financial Statements and Financial Statement Schedules:

See the Index to Financial Statements included in Item 8 of Part II
under the caption "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".

Schedules have been omitted because they were not applicable or
because the required information has been included in the financial
statements or notes thereto.

(3) Exhibits:

See the Index to Exhibits that appears at the end of this document
and which is incorporated by reference herein.

(b) Reports on Form 8-K

The registrant did not file any reports on Form 8-K during the fourth
quarter of 2001.

68

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

By: /s/ WAYNE H. DEITRICH
---------------------------------------
Wayne H. Deitrich
Chairman of the Board and
Chief Executive Officer
(principal executive officer)

Dated: March 7, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

69

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

INDEX TO EXHIBITS

70

INDEX TO EXHIBITS -- CONTINUED

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

* Filed herewith.
+ Exhibit has been redacted pursuant to a Confidentiality Request under Rule
24(b)-2 of the Securities Exchange Act of 1934.

71

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

(1) Audit Committee
(Chairman - Leonard J. Kujawa)

(2) Compensation Committee
(Chairman - Richard D. Jackson)

(3) Nominating Committee
(Chairman - Larry B. Stillman)

72

CORPORATE
INFORMATION

CORPORATE HEADQUARTERS
100 North Point Center East
Suite 600
Alpharetta, GA 30022-8246
Phone -- 800-514-0186 or 770-569-4200
Facsimile -- 770-569-4275
http://www.schweitzer-mauduit.com

STOCK EXCHANGE
The Common Stock of
Schweitzer-Mauduit International, Inc. is
Listed on the New York Stock Exchange.
The ticker symbol is SWM.

TRANSFER AGENT/REGISTRAR
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
Phone -- 800-937-5449 or 718-921-8200
http://www.amstock.com

INDEPENDENT AUDITORS
Deloitte & Touche LLP
191 Peachtree Street, Suite 1500
Atlanta, GA 30303

INFORMATION REQUESTS
Schweitzer-Mauduit International, Inc. welcomes inquiries from stockholders and
other interested parties. Requests for information should be made in writing and
sent to the Investor Relations Department at the Corporate Headquarters.

ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Thursday, April 25, 2002, at
11:00 a.m. at the Company's Corporate Headquarters located at 100 North Point
Center East, Suite 600, Alpharetta, Georgia.

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